SEC Fraud

Reuters reports that the SEC voted unanimously to go on a path that could force US companies to use international accounting rules, rather than the current U.S. Generally Accepted Accounting Principles (GAAP), to report financial information by the year 2014. International rules, specifically the International Accounting Standards Board (IASB), are less flexible and more clearly defined, part of the reason why the SEC hopes to adopt it. The SEC has stated they will evaluate the international financial reporting standards (IFRS) by 2011 and decide on whether they will mandate their use.

The SEC’s timeline, or so-called road map, complements a global plan to converge U.S. GAAP and international accounting standards — a move that the accounting industry has been clamoring for.

SEC Chief Accountant Conrad Hewitt called the proposed road map significant to the future of high-quality accounting standards.

For years, U.S. accounting rule maker the Financial Accounting Standards Board and the IASB have been simultaneously working on a plan to speed up the convergence of U.S. and international accounting rules.

They are expected to soon release a plan so that all major capital markets are able to operate from one set of standards by 2013.

At the moment, a hundred countries use or plan to use the IFRS reporting standard.

Reporting fraud to the SEC is quite easy and, unlike many government agencies, the SEC makes it really easy for you to report fraud.

Online form: If you want to report a complaint of some kind, you can use their online form. This can be anything from a problem with your brokerage firm or broker to cold calls to outright “fraud in the marketing of a securities trading course, program or similar product.” They have nearly all the bases covered.

Email: If you’re not sure that fraud is occurring, you can simply email enforcement@sec.gov with your concerns. If you received SPAM, you can forward it to enforcement@sec.gov and they will deal with it.

Paper form: Finally, if you don’t want to use the online form, you can always print out a paper form or write a letter and mail it to: SEC Complaint Center, 100 F Street NE, Washington, D.C. 20549-0213. You can also send a fax to 202-772-9295.

For more information, check out SEC Center for Complaints and Enforcement Tips.

The SEC charged Maria Sladich, a 50 year old ticket taker and usher at the Meadowlands Sports Complex in New Jersey (home of the New York Jets and New York Giants), with conducting a Ponzo scheme. It’s alleged that Maria Sladich and Kay Services, a purported real estate investment company, duped at least a thousand people to the tune of $10 million! Kay Services was wholly owned by the 50 year old scam artist and she targeted members of her own church, the Family Federation for World Peace (also known as the Unification Church or Moonies), for marks.

Allegedly investors were investing in domestic and international real estate and could expect 100% returns over the course of a year, with a minimum investment of $3000. With a $3000 investment, you could expect to see $500 monthly payments for 12 months.

Ticket-Taker Faces SEC Fraud Charges [Wolters Kluwer Financial Services]

The SEC announced today that they have reached a settlement with Merrill Lynch that would help investors recover up to $7 billion by selling mortgage backed securities to the giant financial company.

The largest U.S. brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors. Under that deal, announced Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2.

In addition to this settlement, Merrill also agreed to pay a $125 million fine to state regulators.

Merrill Lynch settlement with SEC worth up to $7B [Associated Press]

John Bogle, founder of The Vanguard Group, believes in index fund investing. Warren Buffett, one of the pre-eminent investors of our time, advocates index funds for the average investor. The Motley Fool estimates that the vast majority of actively managed funds do not beat index funds (they say the market but for all intents and purposes, index funds are the market). Two of our generations’ most brilliant investment minds and one of the most well known and well respected financial sites in the world all advocate the simplest investment vehicles out there, but that alone isn’t a good reason to do it. Why should you invest in index funds?

They Are Cheap

Index funds are passively managed, meaning a manager isn’t heading up a large research group trying to figure out which investments to make. Index funds match the investments and percentages of their associated index and do so quite cheaply. The Vanguard 500 Index (VFINX) is Vanguard’s S&P 500 tracking index and it has an expense ratio of 0.15%. The Fidelity Spartan 500 Index (FSMKX) has an expense ratio of 0.10%. The expense ratio of an actively managed fund can range anywhere from 1-2%. That’s a significant difference especially if you consider each percent will erode your investments growing potential.

They Are The Benchmark

Think of all the actively managed mutual funds… so many are benchmarked against one index or another. The S&P 500 is the most popular but you’ll see the Russell 2000 or other popular indices from time to time. The Motley Fool, in studying empirical data, has seen that most actively managed funds don’t beat their benchmarks and often don’t beat the market. So, why not take the sure thing? Those index funds will get market returns minus the fees, which for the Vanguard 500 Index is 0.15% and the Fidelity Spart 500 Index is a mere 0.10%. Over the long haul, those dependable guaranteed returns of the market,

More Tax Efficient

Actively managed funds trade often and so they are not as tax efficient at index funds. Index funds tend to change only when the index itself changes, which doesn’t happen very often. Fewer trades mean fewer capital gains and losses, which means lower taxes. The bottom line is that you keep more of your gains.

The advantage that actively managed funds do give you is a chance to beat the market. Index funds will, by definition, never ever beat the market on their own. They will always give you market returns minus the fee, so it is mathematically impossible for you beat the market with an index fund.

The SEC announced today that IDEA, or Interactive Data Electronic Applications, will be the successor to the EDGAR database. The EDGAR database, which stood for Electronic Data Gathering Analysis & Retrieval, was an antiquated system investors could use to look up company filings and other pertinent financial data. If you wanted a government required form from a company, EDGAR was the fastest way to look up that information. EDGAR was slow to use with interface difficulties, difficulties that IDEA seeks to fix and build on.

“IDEA will ensure that the SEC continues to stay ahead of the needs of investors,” said Chairman Cox. “This new SEC resource powered by interactive data will give investors far faster, more accurate, and more meaningful information about the companies and mutual funds they own. IDEA’s launch represents a fundamental change in the way the SEC collects and publishes company and fund information – and in the way that investors will be able to use it.”

SEC Announces Successor to EDGAR Database [SEC]

Last week, the emergency temporary restrictions on naked short selling of 19 stocks expired and the Securities and Exchange Commission is looking to tighten up the rules for short selling. The temporary restrictions prevent naked short selling, meaning short sellers had to actually have the shares ahead of shorting them, and those rules applied to Fannie Mae & Freddie Mac, along with other financial institutions like Lehman, Goldman Sachs, Merrill, and many others. The idea was that this would help minimize the volatility at a time when volatility was at historic levels.

The government is not usually known for embracing new technology, so it’s very surprising that the SEC is using the hot new Web 2.0 microblogging platform Twitter.

If you’d like to follow them, they’re SEC_Investor_Ed and you’ll be joining, as of right now, 311 other followers.

When Zecco first opened its doors, it offered unlimited free trade with no minimum balance requirements. The idea was that you could make as many trades as you wanted and the business would be supported by advertising revenue. A little while later, they realized that was unsustainable and they went to ten trades a month with a minimum balance of $2,500. Some called it a bait and switch, others had already quit using the service because of its customer service woes, but overall they claimed that the vast majority of users never traded more than ten times.

At face value, Zecco was most appealing to day traders because it took away a major cost - commissions. Zecco stood for ZEro Cost COmmissions, too bad they reneged on that mantra a bit. Many thought Zecco was a scam, but further research showed that was a legitimate firm and entirely honest. To my knowledge, there has never been any reports of anything but honest dealings from that firm.

If they’re legitimate, are they worth it? When they offered unlimited free trades, I thought they were worth dealing with the customer service issues. Smart Money magazine to rated them the worst in customer service in 2008. However, when you take away the very meaning of your name, going from unlimited to 10 free trades a month, you leave a bad taste in my mouth. It doesn’t matter if I was never going to trade more than 10 times a month, Zecco promised free trades and no minimums to get me in the door. A bit of time passes and the minimum requirement is $2500 and the free trades are limited to ten a month.

Compared to other discount brokerage firms, Zecco’s offer is no longer compelling. If you were to work with discount broker veteran E*Trade, you pay $9.99 a trade. However, the funds that aren’t locked up in shares can earn 3.30% APY in their online savings account. The benefit of Zecco’s 10 free trades is worth $99.99 a month in that case.

However, let’s go with the newer firm TradeKing, named Smart Money’s Best Discount Broker in 2006 and 2007 (in 2008, they did away with the Best Discount Broker category). TradeKing charges you $4.95 a trade. That brings Zecco’s benefit down to $49.50 a month plus TradeKing has a ton of useful tools if you’re interested in trading options.

The bottom line is that Zecco is legit but not worth it when you have such powerful competitors with better offers (plus those brokers have kept those rates as long as I’ve known them, no bait and switch there).

The SEC announced today that it has frozen the profits from a trans-atlantic Pump and Dump scheme involving a company located in Washington, GHL Technologies, Inc. Its CEO, Gene Hew-Len, was also charged in the matter for issuing false press releases, and Francisco Abellan (aka. Frank Abel) for coordinating the scheme by mailing glossy brochures and mailings to two million US recipients.

GHL Technologies, later renamed to NXGen Holdings, Inc, installs GPS-based navigation equipment and its share price doubled after the promotional scheme. GHL also issued millions of shares to entities specified by Abellan and those entities sold their shares following the falsified report touting new contracts and millions in revenue.

The lesson here is that if you receive a promotional mailing tell you how awesome a stock is, chances are you should avoid it at all costs.

Following this concerted promotion campaign, GHL’s stock price doubled and trading volume spiked nearly 1,500 percent. Abellan and his entities sold their GHL stock holdings for profits in excess of $13 million. The stock, which reached a high of nearly $9 per share at the height of the scheme, now trades at under a penny.