Fiduciary Responsibility: Likely the New Standard for Brokers

by Jacob Zamansky on June 25th, 2009 at 3:06 pm : Comments 000

In my some thirty years as a securities arbitration attorney, never in my wildest dreams did I imagine that one day the political winds might blow in favor of individual investors.  But the Obama Administration, to its credit, has advanced a proposal that would dramatically curtail the ability of Wall Street firms to rip off their clients.

The little noticed proposal in President Obama’s regulatory overhaul would require that brokers be held to a “fiduciary” standard when peddling products rather than the “suitability” standard that is currently in place.  The proposed change isn’t mere semantics: It means that brokers will have to put their clients’ interests ahead of their own - and if they don’t, they will be more easily held legally accountable.  Being held to a suitability standard has long been Wall Street’s worst fear, and you can safely bet your battered retirement savings their TARP-financed lobbyists will do everything they can to block the proposal.

Although Wall Street brokers like to fashion themselves as “financial advisers,” most of them are in fact just salesmen looking to push products that will generate the highest  fees and commissions for themselves and their firms, rather than serve the best interests of their clients.  Typically, the products generating the highest commissions are those manufactured in-house and the brokers are under considerable pressure to sell these often dubious products. Case in point: when Merrill Lynch was having trouble getting customers to buy the firm’s highly questionable auction rate securities, Frances Constable, a managing director responsible for overseeing Merrill’s auction rate securities desk, sent out an email admonishing brokers, “The gloves are off and we are not concerned about issuer perception of [Merrill Lynch's] abilities and the competition. Gotta Move these microwave ovens!!”  At the end the day, Wall Street pushes its products much the same way as Sears does its kitchen appliances.

Under the suitability standard, a Wall Street broker can sell a client a costly and powerful microwave oven regardless of whether there is a cheaper one available and without consideration of a client’s needs.  The suitability standard only requires that broker’s sell microwave ovens to clients who have a legitimate need for them; they aren’t required to sell the best-priced microwave ovens or ones with BTUs best suited for their clients.  That’s why most arbitration rulings are in favor of brokers; the suitability bar is set so low they barely have to lift a leg to step over it.

But under a “fiduciary” standard, brokers would have to not only sell their clients the best availably priced financial microwave oven, they would be required to ensure the microwave oven was of a proper size and power for their client’s financial pantries.  This requirement would make it considerably easier for individual investors who were snookered by their brokers into buying financial products, that ultimately were not in their best interests, to seek legal redress.

The SEC could adopt the Obama Administration proposed rule change on its own, or Congress on its own could pass legislation if the agency once again fails to fulfill its obligation to protect investors.   It’s heartening that newly appointed SEC chairwoman Mary Schapiro has publicly endorsed the Obama administration’s proposals and has gone so far as to say they are “not a panacea to deter all fraud against individual investors.”  That suggests to me that Ms. Schapiro might be in favor of imposing additional regulation to protect individual investors.

Still, the jury is not yet out on whether Ms. Schapiro and Congress can resist the formidable pressures that Wall Street will place on them to quash the Obama administration’s suitability proposal.  If they can, some good will finally result from Wall Street’s widespread wrongdoings that brought America to the brink of collapse.  Indeed, if the fiduciary standard proposal survives intact, it will be the most significant development on Wall Street since the passage of the Glass-Steagall Act of 1933.

Filed under Auction Rate Securities, Investment Fraud, Wall Street

Financial Regulatory Reform: The Good, The Bad, and The Ugly

by Jacob Zamansky on June 19th, 2009 at 2:48 pm : Comments 000

Regulation of the United States financial system throughout its history could be described as disjointed…at best.  In response to the current regulatory framework, the administration presented its plan to overhaul the system with an emphasis on consolidating a fractured system of multiple regulators.  It is in no way a guarantee that fewer individual regulators will translate into better regulation, but investors should feel cautiously optimistic that they will be better protected once the plan is implemented.

Of course the devils in the details, however on the surface the following provisions look promising: improved hedge fund regulation, derivatives oversight, elimination of the Office of Thrift Supervision and the creation of an agency that will oversee financial products targeted at consumers.

Hedge funds have traditionally operated outside the regulators’ reach.  Unfortunately, it was only when hedge funds either collapsed or committed fraud that regulators got involved.  Because they now control such a huge swath of capital and are responsible for such massive trading volumes, hedge funds pose significant risks to the system.  Moreover, hedge funds are also big players in the commodities trading industry and have the capacity to impact food and energy prices.  Registration of these funds, which includes confidential disclosures about strategy and assets under management, would help regulators assess their stability and impact on the system.

Derivatives, to borrow Warren Buffet’s expression, are financial weapons of mass destruction.  Whether used to insure against losses, as an investment or as a hidden way to ramp up leverage, the use of derivative instruments needs to be controlled.  The new plan to introduce transparency into this opaque side of the financial industry is well overdue.  Exposure to these instruments, to recall, is what caused A.I.G. to collapse.

The elimination of the Office of Thrift Supervision will help guard against “regulator shopping.”  One central bank regulator makes a lot of sense.  And the creation of a special agency to oversee products targeted at consumers is certainly a good idea.  One concern however, is that this agency does not oversee securities sold to individual investors.  Rather, this new agency will focus on credit cards, loans and annuities.  As we’ve seen, Wall Street approaches the sale of securities in the same way the corner electric store sells microwave ovens; therefore they should be regulated as such.

Oversight of securities sold to investors remains with the SEC and FINRA.  While the SEC has made strides in the past few months, its ability to keep up with the mad scientists on Wall Street is questionable.  For example, the mass marketing of risky structured products such as reverse convertibles, principal protected notes and auction rate securities was left unchecked.  Individual investors were not adequately informed as to the risk of these instruments and ended up bearing the brunt of their losses while Wall Street earned fat commissions.

Increased responsibilities for the SEC should help in this regard.  The SEC will require more transparency and improvement in the timing and quality of disclosures regarding securities products and will be required to perform “field tests” to ensure investors understand the risks.  Perhaps the most important SEC-related provision is the establishment of a fiduciary responsibility for broker-dealers offering investment advice and to “harmonize the regulation of investment advisers and broker-dealers.”

Where the Plan Falls Short

Improvements, however, need to be made in the enforcement area.  It’s great to have more stringent regulations, but if Wall Street is allowed to ignore them and pay pithy fines it’s worthless.  The President’s plan supports ramped up efforts to ban crooked brokers and advisors from the industry, but seems to ignore the fines.  As I’ve written before, fines have become the cost of doing business on Wall Street.  They are viewed the same way as expenses for travel, office supplies and client entertaining.  This cannot continue.

Fines for wrong doing, especially when the accusations involve individual investors, should be damaging.  The multi-billion dollar auction rate securities debacle could have been prevented if Wall Street was more effectively policed when in 2006 regulators found impropriety.  Not only do fines need to be larger, they need to be felt, which is why instead of coming out of the general litigation budget, fines levied with regard to frauds committed against retail investors should come out of the bonus pool.  This is especially important for financial institutions that have received federal funds of late.  To pay a fine using tax payer money adds insult to injury.

There are undoubtedly areas of improvement, but like many investors, I’m cautiously optimistic.

Filed under Uncategorized
and investors, Obama, regulatory reform, taxpayers

Reverse Convertibles and the Cautionary Tale of Dr. Batlan

by Jacob Zamansky on June 16th, 2009 at 1:57 pm : Comments 000

Last July I wrote that I expected the business press to catch on to the fact that Wall Street has been targeting retirees with a particularly toxic form of security called a structured product.  Since then, numerous stories have been published, not to mention the story in today’s “Wall Street Journal, Reverse Converts: A Nest Egg-Slasher?” which features a client of Zamansky & Associates’, Dr. Lawrence Batlan, a retired radiologist.

Citigroup sold Dr. Batlan  ”ELKS,” which stands for Equity Linked Security.  The way it works is the investor receives interest payments not unlike a bond for a certain time period.  The interest payments are linked to a derivative stock. If the underling stock declines beyond a certain level during that time period, the investor is now the not-so-proud owner of stock on the decline.  It’s also called a reverse convertible.  In Dr. Batlan’s case, the ELKS were derived from Yahoo!, Cemex and Sandisk, which led to significant losses to his nest egg.

A popular sentiment, and one that was raised in today’s Wall Street Journal, is caveat emptor or buyer beware.  While that may be true for a sophisticated institutional investor, it’s not consistent with the rules.  By law, a broker can only recommend securities and investment strategies that are suitable for his or her client.  Therefore, a structured product, which coverts into a risky stock, is not suitable for a retiree who is not in the position to play craps with his retirement nest egg.

The WSJ story also doesn’t point out that Dr. Batlan’s Citigroup broker allegedly purchased approximately $300,000 of ELKS, without first obtaining the Batlan’s authorization. To fund these purchases, the broker sold off other holdings that were yielding 6-7% in interest.  Adding insult to injury, Dr. Baltan paid a hefty commission fee to the broker.

Dr. Batlan’s case is a cautionary tale for many investors.  Wall Street rarely, if ever, acts out of the kindness of its heart.  It’s always heads I win, tales you lose.

Filed under Securities Arbitration, Structured Products Arbitration
and citigroup ELKS, Dr. Batlin, reverse convertible, structured product

Lehman Structured Notes Sold by UBS Gets a Regulator’s Attention

by Jacob Zamansky on June 4th, 2009 at 5:54 pm : Comments 000

“We believe ‘principal protection’ meant one thing to investors, but something entirely different to UBS”- Kevin Moquin, Staff Attorney, New Hampshire Bureau of Securities Regulation

In a big win for investors of Lehman Structured Notes, New Hampshire’s securities regulator will seek an undisclosed penalty as well as restitution for New Hampshire investors. The move is a clear win for investors in New Hampshire but also bodes well for all investors in Lehman Structured Notes.

When the New Hampshire regulator begins to probe UBS’ selling practices of Lehman Structured Notes, it will likely uncover a wealth of evidence such as e-mail records, telephone conversations, etcetera, that might be used by other investors in their individual securities arbitration cases.

The New Hampshire regulator alleges that UBS sold structured products, such as the Lehman Principal Protected Notes, to investors without sufficiently explaining the risks involved. Investors in Lehman Structured Notes (aka Lehman Principal Protected Notes) were largely risk adverse and only looking for moderate returns on their investments. The standard pitch by brokers at UBS and several other large financial institutions was that investors’ principal was “100 percent protected.” Of course, left out of the pitch was that the investments were only protected so long as Lehman Brother’s did not fail.

Brokers earned substantial commissions on the sale of Lehman Structured Notes. In fact, according to the New Hampshire complaint, the average commission on structured products was often higher than for other similar securities offered by UBS.

This isn’t the first time UBS has been investigated by New Hampshire. During the Auction Rate Securities scandal last year, the New Hampshire regulator filed a complaint against UBS on behalf of the New Hampshire Higher Education Loan Corporation (NHHELCO). UBS allegedly advised the NHHELCO to remain in the ARS market while at the same time removing its assets before the market froze. The NHHELCO lost millions and was unable to front scholarships for thousands of students. UBS eventually was part of a global settlement and paid a hefty fine.

Perhaps UBS will begin to see the error of its ways and begin reforming how it does business. New Hampshire’s Director of Securities regulation isn’t so optimistic. He said, “UBS has not been proactive at addressing regulatory issues at either the state or federal level…[and] that other regulators have experienced similar inflexibility”.

I’m hopeful after this latest spat with the New Hampshire regulator, UBS will become more transparent with investors but I won’t hold my breath.

Filed under Investment Fraud, Investor's Bill of Rights, Securities Arbitration, Subprime Crisis, Wall Street, fraud
and lehman brothers structured notes, lehman structured notes, New Hampshire, principal protected notes, principle protected notes, UBS

Is Supreme Court Justice Nominee Sonia Sotomayor a Champion of Individual Investors?

by Jacob Zamansky on May 27th, 2009 at 11:30 am : Comments 000

President Obama ended the speculation and nominated Judge Sonia Sotomayor of the United States Court of Appeals for the Second Circuit for the Supreme Court position left vacant by soon-to-be departed Justice David Souter. 

In Judge Sotomayor, the President has nominated what some consider an “activist” judge.  For me, that label doesn’t make a whole lot of sense because a judge’s job is to interpret the law.  Disagreeing with the status quo doesn’t necessarily make a judge an “activist” in my opinion.  

But more importantly, in Judge Sotomayor, are investors getting a champion of their rights?

Without a doubt, the current make-up of the Supreme Court has become far too business friendly and far too anti-investor.  Two of the most impactful decisions of late include “StoneRidge” and “Tellabs,” a one-two punch in the gut to investors which I have posted about often.  The Court is in desperate need of a voice that does not represent the interests of Corporate America.

Because the Second Circuit Court of Appeals’ jurisdiction includes Wall Street, it hears a large number of cases involving investors, so Judge Sotomayor has amassed a track record on investors-rights issues that we can study. Based on some of Judge Sotomayor’s rulings thus far, investors may have a fighting chance.

For example, in Dabit v Merrill Lynch, a securities class action involving state law securities claims Sotomayor reversed an earlier court decision and allowed Dabit to re-plead because it was “conceivable that claims based on wrongfully-induced holding could be pleaded.” The effect of Judge Sotomayor’s ruling would have been to allow the class action to go forward despite Merrill Lynch’s argument that federal law preempted plaintiffs’ ability to sue for securities violations under state law. Unfortunately, her decision was later reversed by the Supreme Court in a unanimous 8-0 decision. 

She also joined a 2-1 decision conferring class-action status in Visa Check, 280 F.3d 124 (2001), a class action brought by merchants challenging the fees that Visa and Mastercard charged for using their debit and credit cards. Judge Sotomayor ruled that “a motion for class certification is not an occasion for examination of the merits of the case.” The power of the Visa Check decision was later undermined by an amendment to the Federal Rules of Civil Procedure, though, and the Second Circuit - including Judge Sotomayor - has ruled that trial judges should make a more searching examination of the merits of a case when deciding whether to certify a class.

 Like most appellate judges with a long track record, Judge Sotomayor’s record on investors’ issues is mixed.  In a 2006 decision, In re IPO, 471 F.3d 24, she voted to decertify a class action alleging that big banks had manipulated the prices of tech-sector initial public offerings and collected huge fees from investors in connection with the manipulation.  The opinion reversed a lower-court ruling, raised a hurdle in front of investor classes trying to recover for investment banks’ wrongful conduct and scuttled a $1 billion settlement that had been reached.

 While there’s always the potential for her nomination to be derailed, certain aspects of Judge Sotomayor’s record provide a glimmer of hope for investors who have been thoroughly ignored by the Supreme Court.

Filed under Investor's Bill of Rights, Supreme Court
and Obama, Sotomayor, supreme court nomination

Bank of America: “Bank of Opportunity for Convicted Fellons” Part 2

by Jacob Zamansky on April 30th, 2009 at 1:59 pm : Comments 002

We’ve discovered that it’s no accident that Bank of America is the “Bank of Opportunity” for convicted felons. The bank’s modus operandi  is to “See No Evil, Hear No Evil, Speak No Evil.”

As outlined in the class action suit we filed last month, Bank of America (NYSE:BAC), the nation’s largest bank, substantially assisted Nicholas Cosmo’s $400 Ponzi scheme and played a major role in the loss of investor funds. The evidence is substantial that Bank of America knew, or should have known, that Cosmo was committing fraud. Cosmo was indicted earlier this week for mail and wire fraud. 

Our investigation has progressed and in the amended complaint we filed yesterday, we allege that Bank of America not only opened the proverbial barn door to Cosmo’s victims, the bank personally guided them through the barn.

Cosmo is a convicted felon who after completing a nearly two year stint in federal prison founded Agape World, Inc., a Long Island company specializing in making short-term “bridge” construction loans carrying high interest rates. Through a network of about a dozen brokers, Cosmo gathered some $400 million from investors who wanted to realize the attractive rates of returns. Unbenounced to the investors, Cosmo re-sold the same interests hundreds, if not thousands, of times. 

Although Bank of America ostensibly has “know your customer” rules and procedures, our complaint alleges that employees were routinely pressured to ignore obvious red flags such as a customer whose rap sheet includes securities fraud. 

Once upon a time BoA had a special unit based in Boston dubbed the “High Risk Group” whose mandate was to ferret out fraudsters like Nick Cosmo.  But we’ve learned that in 2006 Bank of America summarily shut the unit down because conscientious employees were resisting pressure to circumvent the bank’s purported “know your customer” rules.

Bank of America’s shuttering of its “High Risk Group” might also explain how in 2008 Florida fraudster Andy Bowdoin managed to use Bank of America as a conduit for his Ponzi scheme.   At Bank of America revenues apparently supersede all other obligations and considerations.

Our amended lawsuit also alleges that Bank of America apparently provided Cosmo access to information about the cash balances of Agape investors who had accounts with Bank of America.  Agape investors routinely received aggressive solicitations from Cosmo when their balances swelled.  So much for client confidentiality. 

Bank of America’s privacy problems are particularly alarming because back in July of 2007, the bank settled a lawsuit with the Utility Consumers Action Network, who alleged Bank of America disclosed consumers’ personal, private, confidential information to third parties without consumers’ consent. As part of the multi-million dollar settlement Bank of America made changes to its various privacy policies, it’s Web site and its procedures

Generating revenues to the detriment of customers is quite common on Wall Street. One of the best documented examples is the Commonwealth of Massachusetts’ complaint against Merrill Lynch regarding that firm’s peddling of auction rate securities.   ”Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients,” the administrative complaint charged.

Bank of America acquired Merrill Lynch earlier this year.  When it comes to customer exploitation, it’s a marriage made in heaven.

Filed under Agape World, Bank of America, cosmo, fraud
and Agape World, Bank of America, cosmo, fraud

John Bogle’s “Croupiers”

by Jacob Zamansky on April 28th, 2009 at 12:14 pm : Comments 000

The current outrage over the New York State pension fund and the use of placement agencies reminds me of comments I read a few months ago made by John Bogle, the legendary investor advocate and founder of Vanguard Mutual Fund Group.

Bogle argued that a silver lining to the financial crisis is that it will root out a cottage industry of middle men who earn huge fees without providing any value.  In a Forbes op-ed Mr. Bogle wrote:

Last year a substantial sum, $620 billion by my rough calculation, poured into a system that supports the money shufflers and middlemen, whom I call the “croupiers,” of the financial services industry. That’s a lot to pay for financial intermediation.

“…I do not wish suffering on the people of New York City. But maybe we should be grateful for any shrinkage in a system that has too many people engaged in shuffling the assets owned by the rest of us.

It’s as if Attorney General Cuomo read Mr. Bogle’s October 2008 op-ed and decided to do something about it.  Placement agents like those involved in his investigation and those that employed them, including The Carlyle Group and Quadrangle Group, allegedly bought and sold access to public pension funds.  The fees come directly out of the pocket of individual investors and contributing employees.

Another form of Mr. Bogle’s “croupiers” are the so called feeder funds, also known as fund-of-funds.  Feeder funds are suppose to conduct due diligence on investment managers and make tax-concious decisions on behalf of their well-healed clients.  As the Madoff Ponzi scheme has taught us, many of these funds allegedly ignored their responsibility to conduct due diligence and/or lied to investors about their diversification strategies.

In actuality, Bernie Madoff’s “logitament” business falls into this category.  This is how Fortune Magazine described the business:

Rather than taking a fee for trading stocks, as NYSE specialists did, Madoff paid firms like Charles Schwab and Fidelity a penny or two a share for their orders, a practice known as “payment for order flow.” In those days, there was a prevailing spread of at least 12.5¢ between the price that a “market maker” like Madoff’s firm paid to buy shares and the price at which it would sell the same shares.

Sadly, this is perfectly legal.

So Bernie’s days are gone, the feeder funds have been forever tarnished and Mr. Cuomo’s taking care of the placement agents.  Where else do the croupiers do business?

The municipal finance industry is ripe with these sorts of operators.  A popular way for former government officials to earn fees is to help Wall Street investment banks gain access to government debt issuers.  Others include specialist stock traders, commodity futures speculators and even proxy advisory firms.

Basically, on Wall Street, whenever a large sum of money is transacted, or wherever important decisions are made, croupiers are lurking.

Filed under Wall Street

Fiserv, TD Ameritrade, and the Bernie Madoff Fraud

by Jacob Zamansky on April 2nd, 2009 at 5:23 pm : Comments 000

The investment scams of Peter Dawson, Nicholas Cosmo, Andrew Bowdoin, and Bernard Madoff are generally referred to as Ponzi schemes, but the respective wrongdoings have a fundamental difference than the fraud committed by the eponymous Charles Ponzi:   Whereas Mr. Ponzi acted alone, Dawson, Cosmo, Bowdoin, and Madoff had the implicit support and involvement of major financial institutions.

In Dawson’s case various well known mortgage companies figure prominently, including Countrywide Home Loans, and Washington Mutual.

Cosmo relied heavily on Bank of America for banking services, as well as MF Global and other commodities brokers who blindly let him squander investor money without clarifying the source of his funds.  Bowdoin also heavily relied on Bank of America for his fraud.

As alleged in a class action suit my office filed today in the U.S. District Court in Colorado, Bernie Madoff couldn’t have defrauded nearly 1,000 investors of their retirement money without the assistance of Fiserv (Nasdaq:FISV) and its affiliates.

Fiserv and its subsidiaries served as the exclusive custodian for any customer of Madoff Securities who invested through a retirement account such as an IRA or 401(k). The exclusivity was presumably mandated by Bernie Madoff himself as the highly unusual arrangement allowed him to raise some $1 billion in funds while avoiding detection.  Fiserv, in turn, earned lucrative fees and turned a blind eye to Madoff’s “investment” activities.

Retirement account custodians are mandated by the IRS to hold custody of their customer’s assets, even if they are self-directed, as was the case with the Madoff retirement accounts. Among the reasons for this requirement is to protect investors from having their retirement assets stolen.  And Madoff’s retirement account clients had go reason to believe that Fiserve had custody of their assets: If they wanted to increase their investments with Madoff, they were required to deposit their money with Fiserv; and if they wanted to withdraw their money, the checks were issued by Fiserv.  Fiserv also sent investors quarterly statements providing the value of their holdings.

But my office has confirmed that Fiserv never maintained custody of the assets supposedly managed by Madoff. The statements that Fiserve sent to Madoff investors were pure fiction.

TD Ameritrade Holding Corporation (Nasdaq: AMTD) in February acquired a portion of Fiserv’s Investment Support Services (ISS) business, including $10 billion held in 2,200 plans administered by 80 independent third party administrators.  Interestingly, TD Ameritrade excluded the Madoff Securities accounts from the transaction.  The Toronto Dominion Bank affiliate no doubt discovered Fiserv’s unusual Madoff arrangement while doing its due diligence and likely was concerned about assuming the liabilities of the business.

The U.S. Attorney’s office is actively probing the Madoff scandal and it is my hope it will investigate the Fiserv allegations contained in our lawsuit.  And given the involvement of prominent financial institutions in at least four Ponzi schemes, it’s high time Congress convened hearings and conducted a broad-based investigation.

Filed under Bernard Madoff, Investment Fraud, Jake Zamansky, Peter Dawson, Uncategorized
and Bernie Madoff, fiserv, IRA, retirement accounts

How Bank of America and MF Global Figure Prominently into the Agape Ponzi Scheme

by Admin on March 26th, 2009 at 9:49 pm : Comments 003

My office is actively investigating the Bernard Madoff and Nicholas Cosmo Ponzi schemes. Although our investigations are not yet complete, we’ve already established substantial evidence that Madoff and Cosmo didn’t act alone – some major publicly-traded companies figure prominently in their schemes. I’ll post my Madoff findings shortly, but here is what we’ve uncovered so far about Cosmo’s Ponzi scheme.

As outlined in the class action lawsuit we filed today, we allege that Bank of America (NYSE:BAC), the nation’s largest bank, and MF Global (NYSE:MF), a major commodities futures trading firm, substantially assisted Cosmo’s fraud and played a major role in the loss of investor funds. The evidence is substantial that Bank of America and MF Global knew, or should have known, that Cosmo was committing fraud.

Cosmo is a convicted felon who after completing a nearly two year stint in federal prison founded Agape World, Inc., a Long Island company specializing in making short-term “bridge” construction loans carrying high interest rates. Through a network of about a dozen brokers, Cosmo gathered some $400 million from investors who wanted to realize the hefty rates of returns. Unknown to the investors, Cosmo re-sold the same interests hundreds, if not thousands, of times. Most of Cosmo’s investors were blue-collar workers with limited investment understanding or experience.  One of the plaintiffs we represent is seriously ill with stomach cancer and his wife just gave birth to a child.

As I’ve noted earlier, Agape’s marketing materials listed Bank of America as the company’s “banking agent,” but the “Bank of Opportunity” provided more than routine banking services on behalf of Agape.  We’ve learned that a Bank of America employee maintained an office at Agape’s headquarters which was some thirty miles from the West Hempstead branch where she was based.  The employee regularly cut checks at Cosmo’s behest and performed other functions normally associated with those of a personal assistant. The Bank of America employee had a bird’s eye view of Cosmo’s financial transactions and knew first hand that the substantial inflow of funds was coming from investors and that most of the outflows were used to subsidize Cosmo’s lavish lifestyle or pay off his brokers.

Cosmo also speculated heavily in commodities futures trading that resulted in more than $80 million in losses. Despite being a convicted felon and having been permanently banned by FINRA from the securities industry, Cosmo managed to open accounts at MF Global, where he did most of his trading, and other commodities firms.

MF Global isn’t known for its risk management and compliance. The firm last year suffered more than $140 million in losses because a trader made some ill-timed wheat-price bets that “substantially exceeded his authorized trading limits.” The company this week admitted at a UK trial to defrauding a former client after previously issuing repeated denials. It’s been reported that at least one MF Global rival refused to do business with Cosmo because he didn’t pass muster with the compliance department.

It will be interesting to see how Bank of America and MF Global publicly respond to our lawsuit.  On its website Bank of America proudly declares that “It is the policy of Bank of America to take all reasonable and appropriate steps to prevent persons engaged in money laundering, fraud or other financial crimes…” Given that Bank of America also figures prominently into another Ponzi scheme run by convicted felon Andy Bowdoin, I look forward to learning more about Bank of America’s supposed preventive measures.

As for MF Global, the company was quoted this week in connection with another fraud as saying that “MF Global’s corporate values require that all employees maintain the highest standards of ethics and integrity.  We have zero tolerance for anything but.” Apparently, opening an account for a felon convicted of securities fraud who was permanently banned from the securities industry doesn’t violate MF Global’s esteemed values.

Sadly, the SEC again has been found to be sleeping. The Agape wrongdoing was exposed by the U.S. Postal Inspection Service.  Underscoring the SEC’s chronic somnambulism, Agape’s website remains live where an application form is still prominently displayed.

Pleasant dreams, SEC.

Filed under SEC
and Agape World, Bank of America, MF Global

Congress’ Task: An Honest Debate over ‘Stoneridge’

by Jacob Zamansky on March 23rd, 2009 at 11:26 am : Comments 000

When a murder for hire crime is committed, two trials usually proceed.  The prosecutor’s office brings a criminal case and the victim’s family usually sues the defendant’s in civil court for monetary damages.  Unfortunately, it doesn’t work like that in the corporate world due to a Supreme Court ruling labeled, “The Stoneridge Decision,” which declared that “third-party liability” is limited to those that directly influenced investment decisions.  In other words, even though lawyers, investment bankers and auditors may have aided a corporate fraud, because a corporation interacts directly with shareholders, service providers don’t have any liability. I think there is something fundamentally wrong with this picture.

Lest anyone say the comparison I’ve just described is overly dramatic, I’ve excerpted below Federal Judge Gerald Lynch’s opinion regarding a fraud case he was forced to dismiss because of the crippling Supreme Court Stoneridge snub:

There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder - one who ‘counsels, commands, induces or procures’  but he is nonetheless liable as a principal for the commission of crime. Likewise, some civil accomplices are deeply and indispensably implicated in the wrongful conduct.

 The fraud case Judge Lynch is referring to involves Mayer Brown, a large law firm, which was one of the law firms that has been alleged to have helped Refco, a now defunct brokerage giant, hide over $1 billion in losses from shareholders.

In addition to shareholders, the Stoneridge Decision has a huge impact for investors that have fallen victim to Ponzi Schemes and fraudulent hedge funds.  In almost all these cases there is nothing left of the funds leaving penniless victims without any recourse, even if the individuals responsible for ripping them off had help from outside sources?

Unfortunately a law on the books as influential as the Stonebridge Decision doesn’t gain the attention it deserves compared with the A.I.G. bonuses, for instance, but this law’s implications are greatly felt on Main Street U.S.A.

In related news, Bernard Madoff’s accountant was arrested earlier this week and charged with aiding and abetting investment adviser fraud and four counts of filing false audit reports. He faces up to 105 years in prison if convicted.  Reportedly, the accountant received $186,000 a year in fees for audit work, bookkeeping and tax services.

These fees and other assets owned by the allegedly crooked accountant are likely out of the reach for investors who took his audits at face value.  Indeed, while the accountant is likely to be sitting in a warm jail cell, the victims are left out in the cold.

The next session of Congress is likely going to be focused on reforming regulation of the financial services industry.  An honest discussion over the consequence of the Stoneridge Decision needs to be at the forefront of the agenda. I urge Congress to take meaningful steps to addressing this immensely important issue.

Filed under Bernard Madoff, Congress, SEC, Wall Street
and fraud, stoneridge decision, third party liability