SEC Fraud

Britain’s Financial Services Authority announced this week that it was levying an $11 million fine on Greenlight Capital, a hedge fund run by noted manager David Einhorn. In handing down the fine, the FSA charged Einhorn and Greenlight Capital with using insider information to trade shares of Punch Taverns, a United Kingdom chain of pubs. The hedge fund allegedly saved itself several million dollars in losses through the transaction.

In a conference call with investors, Einhorn steadfastly denied that any impropriety had occurred. He said that all conversations with Punch Taverns were made under the explicit understanding that the company would not disclose to Greenlight any confidential information. Therefore, he did not appreciate that any information gained from one such meeting may have contained insider knowledge. Einhorn went on to rebuke the regulator for broad and misguided policies. The agreement to pay the fine, he stressed, stemmed out of a desire to avoid a protracted court battle.

The case stems from a June 2009 conference call between Einhorn and the managers of Punch Taverns, the latter in which Greenlight Capital owned a significant stake. During the call, Einhorn was told that Punch Taverns was planning to issue new shares of its stock, a move that would likely reduce its stock price. Greenlight then sold a considerable percentage of its shares in Punch after the call, a move that regulators stress was clearly based upon insider information.
Greenlight Capital is based in New York and manages around $8 billion worth of assets. The company generated news and a large following when it short-sold on Lehman Brothers stock in 2008, just months before the bank collapsed. Since then, Greenlight and Einhorn have amassed considerable money and influence by betting on equities and corporate debt.

While the $11 million fine is certainly not an insignificant one for Einhorn and Greenlight, the fund has years of grow and high-profile gains to carry it through. The real question is whether the fine will take a hit to Einhorn’s reputation. By paying and avoiding a court date, he certainly hopes to insure that it does not.

This week, the Securities and Exchange Commission decided to press forth with a first of its kind lawsuit against SIPC, the Securities Investor Protection Corp., for its unwillingness to pay investors who lost money in an alleged Ponzi scheme.
The Ponzi scheme was orchestrated by R. Allen Stanford, an investor who is accused of falsely promising high returns to people who bought certificates of deposit from Stanford International Bank Ltd. The CDs were worthless and Stanford invested the money in various unprofitable business ventures. It is alleged that he misused $7 billion of investor capital in this manner.
The SIPC is a federally-authorized agency that provides compensation to investors who lose money in a failed brokerage firm. When such an investment is lost due to misuse, illegal activity, or systematic failure, an individual can receive up to $500,000 dollars in SIPC compensation.
According to the SEC, this compensation entitlement should apply to Stanford’s misled investors. Although the Ponzi scheme revolved around the worthless investments made in CDs, these CDs were purchased through Stanford Group, a brokerage firm and a SIPC member. Since there is indeed a failed and deceitful brokerage at the heart of the Stanford crisis, the SEC believes that SIPC is liable to get involved.
But SIPC maintains that Stanford’s did not lose their money in a failed brokerage firm. Rather, they bought bank-issued CDs that they still possess; even though these CDs are worthless, it is not the responsibility of SIPC to act in such situations.
The SEC and SIPC have been negotiating in recent months to settle the dispute outside of court. But SIPC’s final offer – a maximum payment of up to $250,000 for each Stanford victim – was rejected by the members of the SEC.
In light of recent events, the two groups are acting with starkly different interests in mind. The SEC is motivated, in large part, by the fallout from the Bernard Madoff Ponzi scheme – a colossal investment scam that the SEC failed to catch. On the other hand, SIPC needs to answer to the Securities Industry and Financial Markets Association, a group that supports its reserve fund and is strongly opposed to any expansion of SIPC protection. Even if SIPC is forced to pay, then, it is determined not to do so without a fight.
R. Allen Stanford denies the charges against him. It appears, for all parties involved, that a good deal of litigation sits on the horizon.

A GlaxoSmithKline subsidiary Stiefel Laboratories has been been charged by the US Securities and Exchange commission with defrauding shareholders out of more than 100 million dollars. Formed in 2000, GlaxoSmithKline is a global pharmaceutical and health care company and is third in the industry behind Johnson and Johnson and Pfizer. The company employees more than 90,000 people worldwide. GlaxoSmithKline acquired Stiefel Laboroties in 2009 for the price tag of $2.9 billion.

The news of the indictment against CEO Charles Stiefel and Stiefel Laborities comes as the SEC continues to up its effort to crack down on insider trading and other corporate crimes. Earlier this year, hedge fund manager and Galleon Group founder Raj Rajaratnam was accused of an insider trading scheme worth $63 million. This was just one of many in the past few years. Investigators have been aided by new software that is able to calibrate patterns from a vast database of financial information. The SEC uses such technology to see if any suspicious trading activity transpires before major mergers, company announcements, or huge share purchases.

In the case of Stiefel, FEDs allege the crime reared on deliberately mis-valued stock and deceitful business practices. When GlaxoSmithKline bought Stiefel Labs in 2009, the family-owned company was the largest private dermatology manufacturer in the world. Mr. Stiefel had recently bought 800 shares valued at $16,494 a piece. After it was acquired by GSK, these same shares were honored at $68,000 a share, gaining 300% profitability. This was just the first in a series of similar transactions during that time frame. In other words, between 2006 and 2009 CEO Charles Stiefel bought back shares at prices that undervalued the stock and failed to alert shareholders of the higher potential value. He also directly lied to shareholders by telling them that the company would remain family-owned while actively leveraging the company for sale to GSK

The SEC plans to retrieve the money that was defrauded, a process known as disgorgement, and prevent Charles Stiefel from ever serving as a corporate officer. According to a brief statement, Stiefel will contest the charges. The SEC seems poised to prosecute to the full extent of the law, saying “Private companies and their officers must understand that they are not immune from the federal securities laws…” With the recent stigma attached to corporate corruption and the public outrage over high-finance malfeasance, it’s likely this case will not be taken lightly.

Kweku M. Adoboli is about as dangerous of a white collar criminal as you can find. Charged last Thursday in British court with one count of fraud and two counts of false accounting, don’t let the seemingly small crimes fool you. Mr. Adoboli may very well be responsible for costing his former employer UBS their entire profits for the whole of the business quarter. His outright criminal actions are not the makings of what brought the economic system crashing down back in 2008, but his risk-taking behavior and the evident ease in which he operated (the charges against him go back to the beginnings of the recession) brings back bad memories of the past. Big banks have barely begun to regain the level of public respect they held prior to the fall of 2008. Actions such as those committed by Mr. Adoboli further diminishes the low-hanging opinion about banks held by the overwhelming majority of the people.

If news of major internal banking scandals based on risky behavior could come at the least optimum time for big banks, now would be it. United States lawmakers are expected to start introducing legislation over the course of the next several months written to impose strict regulations on banks that built their wealth and equally lost most of it due to the practice of proprietary lending. The behavior, which basically entails a bank making massive bets for the benefit of themselves rather than customers, was a leading cause of the corrosion that led to the financial collapse of 2008. There’s big government incentive to rid the banking system of the risks involved in this practice through stiff no-nonsense regulations.

The voices of big banks claim that such regulations would be detrimental to their ability to take the necessary steps to recover the losses sustained over the last several years. Essentially, their argument is that such laws are impossible to write to include everyone, and only lead to further centralization of risk due to the inability of more institutions to engage in the practice. The main target of their offensive, the Volcker Rule named after former Federal Reserve chairman Paul A. Volcker, was written specifically to prevent banks from speculative betting with their own money. It’s obvious then why they aren’t interested in this becoming law.

But none of these proposed regulations and new laws are written to stop the kind of criminal behavior Mr. Adoboli is currently sitting in a London cell for possibly perpetrating. They’re simply compliance measures, meant to curtail the sorts of risk-taking that contributed to the 2008 financial collapse. In order for regulations and penalties to be put in place to keep people like Mr. Adoboli from continuing to individually put the future of banks and businesses at risk, someone will have to cause a financial crisis by committing it.

Mr. Adoboli got shockingly close.

William A. Marovitz is the husband of Christie Hefner, the former chief executive of Playboy, and he was accused of trading on insider information learned from his wife. He is said to have gained $100,000 and he agreed to pay $168,000 in penalties, disgorgement and interest to settle the case.

“Despite instructions from his wife that he should not trade in shares of Playboy and a warning from the general counsel of Playboy about his buying or selling Playboy stock, Marovitz bought and sold shares of Playboy in his own brokerage accounts between 2004 and 2009 ahead of public news announcements,” said the complaint.

Traditionally, the law firms Hogan Lovells and Skadden, Arps, Slate, Meagher & Flom have provided counsel to News Corporation. However, in spite of four decades of previous service, the Rupert Murdoch media conglomerate chose to hire Williams & Connolly, including its high-profile litigator, Brendan V. Sullivan Jr., to handle the current legal crisis News Corporation is facing.

Although Murdoch stated last week that Joel I. Klein, an experienced Washington lawyer, would be managing investigations regarding News Corporation’s allegations of phone hacking, the recent hiring of Williams & Connolly seemingly undermines his new role.

However, Klein’s employment at News Corporation was never meant to be focused on legal matters regardless. Klein may have worked as one of President Clinton’s top antitrust lawyer in his Justice Department, but it was his position as chancellor of New York City Pubic Schools that acquired him the position at News Corporation where he was to develop “entrepreneurial ventures” which were centered around education.

When phone-hacking allegations surfaced last week, Murdoch was without general legal counsel and was forced to ask Klein to switch his focus from education to legal matters.

Regardless of who is now handling News Corporation’s legal matters, the company can expect to deal with legal troubles rising at an exponential rate. Problems are no longer reserved for Britain anymore. Once news hit the United States, criminal investigations, civil suits, and government probes all quickly followed. The Federal Bureau of Investigations even began a preliminary inquiry on Thursday to determine if News Corporation had in fact tried to retrieve the phone record of September 11th victims.

Due to the allegations, Senator Frank R. Lautenberg of New Jersey even suggested that U.S. government authorities should consider beginning a formal investigation of their own considering the possible violations of the Foreign Corrupt Practices Act.

While firms Hogan Lovells and Skadden, and individuals such as Klein, may be upset by Murdoch’s choice to hire Sullivan, there is no question as to why he chose to do so. Klein has represented high-profile clients including former senator Ted Stevens, New York Stock Exchange’s Richard Grasso, and Oliver North during the Iran-Contra affair.

Hogan has long been tied to News Corporation, and been the one of the company’s first choices when it comes to outside counsel. None of the lawyers within Hogan have commented on News Corporation’s choice; however, the tension is apparent especially since Williams & Connolly was started by Hogan’s leading lawyer of 1967, Mr. Edward Bennett Williams.

To mark one of the most significant legal actions against a Wall Street bank since the economic downfall, JPMorgan Chase has agreed to pay $153 million to settle allegations of securities fraud.

The Securities and Exchange Commission stated on Tuesday that it believed JPMorgan mislead investors, and didn’t tell them that the hedge fund, which helped establish the mortgage investment in question, also bet that the investment would fail. The failure of the investment cost investors over $100 million with the list of losing investors including a religious nonprofit group in Minneapolis, multiple Asian financial firms, and General Motors Asset Management.

JPMorgan isn’t the first Wall Street Bank to come under fire. Last year, Goldman Sachs agreed to pay $500 million for similarly misleading investors. Head fund guru, John Paulson, sold a mortgage investment with Goldman Sachs knowing and betting that it would fail.

JPMorgan created its mortgage investment deal with hedge fund Magnetar Capital. The SEC believes that Magnetar Capital played a “significant role” in creating the portfolio and knew it was “to benefit” fro the deal’s demise.

“JPMorgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests,” stated Robert Khuzami, the SEC enforcement director. “What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection.”

The downfall of the Squared deal is to be predominately blamed on the failing housing market. By 2007, JPMorgan had lost $40 billion on the portfolio, and attempted to unload the deal by launching “a frantic global sales effort.” During this campaign is when unlikely investors, such as the Thrivent Financial for Lutherans, were brought into the deal.

The Squared CDO deal’s marketing materials are what caught the attention of the SEC. The materials stated that the investment advisory branch of the GSC Capital Corporation created the portfolio. What the materials failed to mention was that Magnetar choose many of the assets included in the portfolio and then bet $600 million against the deal.

Magnetar has stated that it is “not a party to the settlement nor a defendant in this case, and was not involved in the marketing of the securities.”

Although evidence suggests that JPMorgan knowingly misled investors, the bank has neither admitted nor denied any wrongdoing. JPMorgan did, however, stat that it “sustained losses of nearly $900 million in connection with” the investment.

As part of the settlement agreement, JPMorgan has agreed to repay all investors and restructure the way it reviews mortgage deals.

The SEC has said they believe the investors who were bilked by R. Allen Stanford’s Ponzi scheme may be entitled to compensation from the Securities Investor Protection Corporation (SIPC). The SIPC fund typically pays out to investors of failed brokerages and the SIPC does not believe investors are covered in this case, at least that’s what it ruled two years ago.

.“SIPC’s board will review the referral and analyze the S.E.C.’s underlying documentation as quickly as possible,” SIPC’s chief executive, Stephen P. Harbeck, said in a statement.

It will be interesting to see how this plays out. Swindled investors are typically not protected by SIPC and this opens the door for a lot of other cases (Madoff, anyon?).

Fund Could Cover Ponzi Losses [The New York Times]

Insider trading has been a growing concern among many in the private sector and business alike. Whether our prosecution of these offers is effective or adequately proportionate is one question worth asking but Zvi Goffer has added his name to the list. He was nicknamed Octopussy because he, seemingly, had his arms in such a vast array of information sources. Many are touting this as a victory for the government in its latest crackdown on hedge funds and their systemic insider trading practices.

Mr. Goffer was found guilty last Monday by a jury of twelve. Alongside Mr. Goffer his two conspirators, Emanuel Goffer and Michael A. Kimelman. The trail took about five days to complete deliberation at a Federal District Court in Manhattan. Each person faces up to 25 years in prison but won’t face sentencing till later this year. All three are currently free on bail.

Prosecution officials who worked on the case said that wiretaps were essential in securing the convictions and are just one example of forty-nine different convictions. These secretly recorded telephone conversations showed Mr. Goffer and fellow traders swapping confidential information about coming mergers and acquisitions. This conviction came on the heals of a case against Raj Rajaratnam, a hedge fund tycoon and co-founder of the Galleon Group. This group, just last month, was found guilty of one of the largest insider trading cases in years.

Despite the evidence and verdict against the defendants Goffer’s lawyer, William R. Barzee, stated officially, ” We’re disappointed in the verdict. It was a difficult trial and we plan on appealing.” The case seemed more lowbrow as the evidence emerged. Mr. Goffer received his corporate secrets from low-level associates at corporate law firms. All of these associates have also pleaded guilty to passing information to Mr. Goffer. He would deliver his kickback payments in envelopes filled with cash.

This issue isn’t going away and seems to be keeping law enforcement officials busy as more and more individuals are tried and convicted of insider trading. With each conviction information comes to light as to how interconnected this issue can be. One person links to another and another. Though Mr. Goffer was convicted it begs the question as to how many are guilty of insider trading that the public is unaware of?

Insider trading has been a proverbial “bad word” that’s entered the popular lexicon through high profile indictments of many major public icons. Every so often the media reports on someone who’s been accused of using the system to their own benefit while millions of other consumers are left trying to muddle through the daily ups and downs of the stock market. Recently Senator Charles E. Grassley, R-Iowa, has announced that he will be examining the hedge fund SAC Capital Advisors for 20 different stocks trades the company has made recently. This is in the same vein of potential fraud that has lawmakers, as well as consumers, up in arms about the predatory and unfair practices of insider trading.

This is just another example and the inquiry was set in motion as a result of correspondence sent to the Senator this past April. On the 26th, the Financial Industry Regulator Authority sent a letter about, what they called the, “potential scope of suspicious trading activity.” This is a huge slam against the SAC hedge fund that’s currently run by billionaire investor Steven A. Cohen.

The firm, led by Mr. Cohen, is one of the largest hedge funds in the world. To date no official charges have been made against Mr. Cohen or the group that he heads but a spokesman for the group said that they were “outraged” by the conduct of their portfolio managers. Many officials believe that charges will be filed shortly. Similar allegations have been made against Raj Rajaratnam, the head of the Galleon Group, that did result in conviction and similar accusations have been made against Noah Freeman and Donald Longueuil. These hedge fund giants have been industry leaders and it begs the question how epidemic the issue of insider trading is inside the financial community.

Wile specific hedge funds, such as SAC Capital itself, aren’t being charged; similar allegations have raised serious questions about the corporate culture that seems to possess a huge current running through our financial system. The government has been playing catch-up for years in their attempts to create a fair and balanced playing field. Senator Grassley has taken an aggressive approach towards this issue and it’s the hope that the legal system will start taking a more vigilant approach in its pursuit of Wall Street perpetrators. Though insider trading remains a huge issue, it is still unclear as to the efficacy of government regulation and indictment on this pervasive issue.