Change at the SEC: A Question of Who and What

by Jacob Zamansky on November 26th, 2008 at 10:39 am : Comments 000

Throughout his two-year presidential campaign, President-elect Barack Obama’s constant theme was a promise of change.  And nowhere are we in more need of it than in the regulation of our capital markets.  Therefore his nominee to head the SEC is naturally a focal point.

The most recent names rumored include William Brodsky, CEO of the Chicago Board Options Exchange, former SEC Commission Harvey Goldschmid, AFL-CIO Associate General-Counsel Damon Silvers and Mellody Hobson, president of Ariel Capital Management.  Others include Robert Pozen, Fidelity Investments Vice Chairman Robert Pozen and FDIC director Martin Gruenberg.

And of course no list would be complete without the ubiquitous Goldman Sachs alum.  This time it’s Gary Gensler, a current partner that also served as a Treasury Department Undersecretary.

I’ve been on record advocating that President-elect Obama’s advisors need not look any further than among a deep bench of state regulators.  Candidates that immediately come to mind are New York State Attorney General Andrew Cuomo, Massachusetts Secretary of State William Galvin and Karen Tyler, North Dakota Securities Commissioner and former president of the North American Securities Administrators Association (NASAA).

These individuals have shown an understanding of sophisticated financial instruments as well as the ability to identify problems and put into action meaningful, lasting solutions.  They have also shown that investor confidence and securities enforcement are not mutually exclusive concepts.  And they have taken on Wall Street’s legions of highly paid lawyers - and won.

President-elect Obama’s nomination needs to send a message: that the industry serves the investors, not vice-versa.  Naming any of these individuals or someone similar would be change investors can believe in.

Perhaps a more instructive conversation is to examine the issues and how a future SEC chairman can approach them from an investor’s standpoint.

However the financial regulation structure is modeled, an investor czar should be appointed who is singularly focused on ensuring proper disclosure and protection for all products sold to retail investors.  If Wall Street wants to sell ”microwave ovens” (as Merrill Lynch described its push to unload illiquid auction rate securities), they need to be regulated as such.

In addition to a czar, enforcement needs to be overhauled.  Penalties for Wall Street firms have become just a cost of doing business.  Fines and suspensions need to become meaningful enough to prevent wrongdoing.  Overhauling the securities arbitration process is another must.  FINRA must eliminate the industry arbitrator to make securities arbitration fairer for investors.

An overarching theme for the incoming SEC chair should be transparency and disclosure.  More transparency is needed in the credit default swaps market and in hedge fund transactions in particular. The SEC should regularly have the ability to examine hedge fund holdings and leverage to determine systemic risks.

Given the destruction we saw in the financial equities market, new regulations regarding short selling are also in order.  I strongly believe a short seller should be required to own a security (and not just stocks given hedge funds short any number of instruments) he or she wants to short.  And the SEC should reinstitute the up-tick rule at least until a more comprehensive understanding of its affect is reached.

Wall Street has fundamentally changed over the past 12 months and regulatory oversight must adjust as well.  If ever there was a silver lining, a great many  hucksters have been forced out and no longer pose a threat.  That’s good news for the market and the SEC.  But the incoming SEC leaders still have a monumental task ahead.

I am confident that with the right person in place, afforded with the right powers, a new and improved financial market is in our future.

Filed under FINRA, Fed, Institutional Investors, Investment Banking, Investment Fraud, SEC, Subprime Crisis, Wall Street
and FINRA, Obama, Regulation, SEC, Wall Street Bail-out

Securities Arbitration vs. Class Action: The Choice is Easy

by Jacob Zamansky on November 25th, 2008 at 3:36 pm : Comments 000

I’m often asked whether aggrieved investors are better off joining a class action suit or pursuing their own individual FINRA arbitration claims.  The answer invariably depends on the individual’s circumstances and the depths of the financial pockets of the company engaged in wrongdoing.

Let’s take Enron for example given the similarity of the cases and that the legal costs would have far outweighed any potential recovery, it would have made more sense to join a class.

However, if you are an individual investor, particularly one with a conservative or risk-adverse profile, who was talked into purchasing dubious Wall Street products such as Lehman Brothers Principal Protected Notes by UBS and other brokers, you would be much better off filing an individual claim.

Here’s why:

-       Depending on the circumstances, aggrieved investors can potentially recover 100 percent of their losses, plus damages - far greater than 2-5 cents on the dollar that is typical in a class.

-       Many investors believe that they must invest a lot of time and money into an arbitration claim when the truth is, it takes a lot less time and if you work with an attorney on a contingency basis, you only pay legal fees in the event of a recovery.

-          Arbitration claims can typically be filed and adjudicated within a year to 18 months; class action cases usually drag on for many years.

-       Class action attorneys must prove that everyone they represent is equal. Arbitration highlights the merits of individual cases.

If you joined a Lehman Protected Notes class action suit your unique circumstances would never be heard. Many investors that we have spoken with never even received a prospectus much less knew that the “protection” on the notes was only good if Lehman survived to make good on the commitment.

UBS and the other Wall Street firms that sold the Lehman notes will almost certainly argue that investors may have headed the risks if they had read the fine print in the prospectus. That argument may hold legal sway in a class action suit involving thousands of investors, however in an arbitration, an investor’s entire circumstances are taken into consideration.

If your broker failed to abide by his or her fiduciary responsibility to only recommend “suitable” products or failed to mention the associated risks of certain products an arbitration panel could award a rescission of the product and possibly damages.

Over the past few months investors have hired Zamansky & Associates to file claims from $100,000 to several millions of dollars. In some cases, brokers put their customers’ entire nest eggs at risk.

The merits of filing an arbitration claim are compelling.

Filed under Securities Arbitration, Wall Street
and class action, Lehman Brothers Principal Protected Notes, Securities Arbitration, structured products

Citigroup’s CSO Fund Bets the Farm and Investors Lose

by Jacob Zamansky on November 19th, 2008 at 3:07 pm : Comments 000

A long festering feud between Citigroup and some of its most valued clients has now approached the boiling point.  The feud is likely to lead to securities arbitration claims and Zamansky & Associates is launching an investigation on behalf of investors.  The clients and fund in question is Citigroup’s Corporate Special Opportunities Fund, also known as CSO Partners, which is a small hedge fund based in London’s Berkeley Square.

Unlike other fund collapses, investors aren’t only likely to file claims based on suitability; future claims with regard to Citigroup’s CSO Fund could include gross negligence, and a breach of basic investment protocol and fiduciary responsibilities.  This is also another likely example of the phenomenon known as “style drift,” which I have blogged about regularly before.

Investors in the CSO Fund are legitimately angry.  Not only have they been inappropriately prevented from redeeming their funds, but fund manager John Pickett allegedly placed a “bet the farm” investment that was entirely too risky.  In June of 2007, the Wall Street Journal reported that Mr. Pickett purchased a bundle of loans in a private auction on behalf of a German Media company; which represented more than half of CSO Funds’ assets of roughly $700 million.  Led by Morgan Stanely, seven banks ran the auction.  Needless to say, investors didn’t sign up for this type if risk and its unclear if the transaction even met Citigroup’s internal controls.

Arguing that the terms of the deal had changed, John Pickett tried to back out, but after a significant amount of legal wrangling with Morgan Stanley, Citigroup/CSO Partners settled.  Under the deal, according to the Journal, CSO Partners would purchase about $746 million of the loans at face value which had already deteriorated significantly as well as the other side’s legal expenses.  Obviously the term “settled” is used loosely here.

CSO Partners fund manager John Pickett resigned and reportedly accused his bosses who negotiated the settlement of conflicts of interest - both of which were previously employed by Morgan Stanley.  Had Citigroup not settled and paid the legal costs, according to the story CSO Partners allegedly would have reported a modest positive return for 2007 - not a 10.9 percent loss.  Investor redemptions came flooding in and the fund froze out investors immediately.  Ever since, they’ve watched their holdings in Citigroup’s CSO Fund dwindle down to ten cents on the dollar.

At its peak, the CSO Fund managed almost $4.2 billion and had a net asset value of about $58 million and debt of about $880 million according to the Financial Times.  That’s a huge amount of leverage.  Way too much for executives reminiscent of the Keystone Cops.  They bungled their way to huge losses and in all likelihood were paid handsomely to do so.  As Douglas McIntyre of 24/7 Wall Street put it, “taking the value of assets down that much in such a short period requires as much skill as showing an increase of a similar size.  In other words, it’s extraordinary.”

The apparent disregard Citigroup has for its client’s is shocking.  After such poor management, they still refuse to make their CSO Fund customers whole leaving them little option but to seek legal recourse.

Filed under Hedge Funds
and Citigroup CSO Fund, Corporate Special Opportunities Fund, CSO Partners, John Pickett

Principal Protected Notes: Heads Wall Street Wins, Tails Investors Lose

by Jacob Zamansky on November 6th, 2008 at 2:10 pm : Comments 000

It’s often said that no one buys structured products, but rather they are sold to individual investors. A rational investor would never seek to buy a risky and costly derivative security with limited upside potential and lots of downside risk. Most investors prefer to buy relatively risk-free stocks based on a fundamentally simple investment principal, “Buy low, sell high.” Unfortunately, brokers earn paltry commissions buying and selling stocks. Hence they prefer to sell products that line their pockets, not their clients.

And therein was the rationale for the creation of highly toxic securities known as “Principal Protected Notes.”

Principal Protected Notes were structured securities concocted by Lehman Brothers, Morgan Stanley, Merrill Lynch, Goldman Sachs, and other Wall Street firms that supposedly allowed investors to get above-average market returns tied to the performance of an underlying index such as the S&P 500. Investors were led to believe these securities were virtually risk-free as their principal was always “protected” and would be returned when the notes matured. The closest thing to a sure thing, you might say.

But as always is the case with Wall Street’s dubious structured products, the risk is always buried in the fine print. For starters, investors who bought principal protected notes were limited to how much upside return they could realize. The return on the index of stocks they purchased was based on the value of the index, not the index’s total return, which would include incurred dividends. Experts I’ve spoken with insist that in terms of upside return, investors would almost always do considerably better simply buying a low-cost index fund rather than buying a principal protected note, which — Surprise! Surprise! - paid a lucrative broker’s commission.

Here is some of the fine print that investors were never warned about. In the event the underlying index declined before maturity, the value of the underlying note fell accordingly. The biggest attraction of structured notes was the supposed assurance that investors would receive their entire principal back once the notes matured. But there were a host of hidden conditions attached to these obligations, such as a requirement that if the index fell below a certain level, investors were required to double up on their investment in order to get their principal back.

Lehman Brothers was the biggest seller of structured notes and investors who bought the bankrupt firm’s paper have lost all their money. Had these investors simply bought the S&P index, they would be bruised but not financially annihilated. Buyers who bought the structured notes of the other Wall Street firms are faring better, but regardless they, too, were unquestionably exploited by their brokers.

Wall Street benefited mightily from peddling structured notes. Issuing these dubious securities allowed them to raise non-secured capital from their own customers. The firm underwriting the notes was typically paid an investment banking fee of about six percent. And the brokers who unloaded the notes on their unwitting customers were rewarded with hefty commissions. A good and lucrative time was had by all - except the customers who bought the notes!

I never cease being amazed how Wall Street firms systematically rip-off their customers.

Filed under Financial Stocks, Institutional Investors, Investment Banking, Investment Fraud, Jake Zamansky, Structured Auction Rate Notes, Structured Products Arbitration, Wall Street
and lehman principal protected notes, lehman structured notes, principal protected notes arbitration, principal protected notes claims UBS, structured product claims UBS, Structured Products Arbitration, Structured Products litigation, UBS principal protected notes, UBS structured notes, UBS structured products

Lehman Brothers Principal Protected Notes Not So Protected

by Jacob Zamansky on October 27th, 2008 at 5:57 pm : Comments 000

Although this story is still relatively nascent, I have to imagine the next big scandal to engulf Wall Street will involve Lehman Brothers principal protected notes.  Lehman Brothers principal protected notes were drummed up behind Wall Street’s closed doors and used as a way to dupe investors and raise capital without diluting shareholder equity.

See, over the past few months Wall Street had trouble selling traditional bonds at attractive interest rates.  So instead, as sub-prime losses mounted, they concocted structured products that masked the risk by tying them to other securities, indexes or some other basket of stocks or bonds.  Indeed, Lehman Brothers was one of the most prodigious issuers of principal protected notes and UBS was one of the biggest brokers selling them.

The selling points of Lehman Brothers principal protected notes were that the principal was “100 percent guaranteed” and they had “uncapped appreciation potential.”  This was as close - investors were told by their brokers - to a “sure thing” that ever comes along.  But the problem was that the guarantee was only good so long as the issuer remained solvent.  And we now know how that story goes.

The market for Lehman Brothers principal protected notes and structured products is extremely large and estimated to be around $114 billion.  And much of that was created over the past year during a period when Wall Street was in dire need of capital and writing down sub-prime losses.  In the past twelve months alone, brokers sold $70 billion worth of these securities.  Naturally, three-fifths of the market was consumed by retail investors and based on the ones that have contacted Zamansky & Associates, they were risk-averse retirees who needed their savings to get by.

While holders of Lehman Brothers principal protected notes have fared the worst, we are also hearing from investors that have been left holding principal protected notes including “Suns” (Stock Upside Note Securities), “Prudents” (Prudential Research Universe Diversified Equity Notes) as well as Merrill Lynch’s “Mitts” (Merrill’s Market Index Target - Term Securities), Citigroup’s “Sequins” (Select Equity Indexed Notes) and Morgan Stanley’s Propels (Protected Performance Equity Linked Security).

Lehman Brothers principal protected note investors have experienced extraordinary losses and are filing claims for misrepresentation, omission of material facts, unsuitability and negligence.  In some cases, investors have claimed they were not even sent a prospectus.  Instead, they got a link to the SEC’s website.

Obviously, losses were severe when Lehman Brothers declared bankruptcy.  This raises some questions about one of the biggest concerns on the minds of regulators at the Federal Reserve and Department of Treasury: counterparty risk.  But who actually is considered counterparty?  Apparently financial regulators hold little regard for counterparties when they are individual investors on the other side of a Lehman Brothers transaction.

Look for Lehman Brothers principal protected notes to be a headline grabber in the weeks to come.  If you have lost money in a Lehman structured note, or principal protected note or structured product issued by another brokerage firm please call Jake Zamansky for a free consultation.  For contact information, click here.

Filed under Securities Arbitration, Structured Products Arbitration
and Lehman Brothers Principal Protected Notes, principal protected notes, structured products

The Perils Of Peddling Faulty Microwave Ovens

by Jacob Zamansky on October 10th, 2008 at 10:57 am : Comments 000

Retail investors historically have had very short memories. I’d crash your computer if I recounted all the scams and cons I’ve seen in the three decades I’ve represented individual investors, yet somehow Wall Street’s systemic fraud and dishonesty never seems to lead to a shortage of customers. Even the dot.com fraudulent research scam didn’t lead to a massive client exodus.

But Wall Street might have exploited its customers one time too many. According to a survey by Prince & Associates, a whopping 81% of investors with $1 million or more of investible assets plan to change investment advisers. An even larger number, 86%, plan to tell other investors to avoid their adviser. A mere 2% of investors plan to recommend their broker to other investors. So much for those client referrals…

Admittedly, not all “investment advisers” are brokers at the big Wall Street firms, but “wealth management” has been one of their major focus areas these past few years. And $1 million in investible assets wouldn’t even get you a meeting with the receptionist at the top-tier multifamily offices.

I suspect one of the tipping points might have been the marketing of auction rate securities, which Wall Street sold as cash equivalents but were in fact quite risky. Amazingly, these securities were aggressively sold to Wall Street’s most wealthy - and profitable — customers. Brokers were under considerable pressure to move those microwave ovens.

One of the few growth businesses in the months ahead will be conflict free multifamily offices with established and unblemished track records serving the interests of their clients. Indeed, marketing tools multifamily offices might want to consider are the state attorney general ARS complaints against the big brokerage firms, such as Massachusetts’ARS lawsuit against Merrill Lynch. These easy-to-understand complaints unquestionably offer some of the most impressive insight into the conflicted workings of Wall Street ever written.

Filed under Auction Rate Securities, Financial Stocks, Investment Fraud, Tech Bubble, Wall Street
and Auction Rate Securities, dot.com, high net worth individuals, investment advisors, Investment Fraud, multifamily offices, Tech Bubble, wealth management

Financial Stocks and Bonds: Dot.com Bust Redux

by Jacob Zamansky on October 7th, 2008 at 12:54 pm : Comments 000

Given that Wall Street peddles securities as if they were microwave ovens, it should come as no surprise that brokers are given aggressive sales pitches to constantly move inventory, regardless of whether it is in the best interest of their customers.  In the mid- to late 90s, the dubious inventory being unloaded was high technology and dot.com stocks whose share prices were artificially driven up by Wall Street’s conflicted and fraudulent research.  Most recently, financial and bank stocks were the touted “sure thing” and customers of the big Wall Street firms who bought the sales pitch have sadly come to realize they were duped once again.

Despite ample risk warnings, virtually all major Wall Street firms in recent months were actively peddling the stocks and bonds of now failed or troubled financial institutions, including Fannie Mae, Freddie Mac, Wachovia, Merrill, Countrywide, Washington Mutual and, of course, Lehman.  Although these companies had real businesses and posted sizeable revenues, they also had mounds of toxic mortgage-related assets hidden on their balance sheets.  Not surprisingly, the stocks of many of these companies are worthless, or worth just a fraction of what they were a year ago.  It has become clear that the earnings they reported - if I may borrow an infamous phrase from Lehman Brothers - “had no basis in fact.”

I garnered the first dot.com settlement from Merrill Lynch that prompted former New York Attorney General Eliot Spitzer to investigate Wall Street’s fraudulent research practices, so I speak with a certain authority about the wrongdoing from that era.  In the dot.com era retail investors were told to bulk up their technology holdings and have a disproportionate amount of their stocks in this sector because they had “nowhere to go but up.”  Similarly, I’m finding that retail investors were encouraged by their brokers to heavily load their portfolios with financial services stocks because they, too, were supposedly undervalued and carried little downside risk.

Sadly, Wall Street specifically targeted retirees and the elderly who were especially attracted to financial stocks because they carried considerably higher yields than those paid by municipal bonds, CD’s and money market accounts.  The preferred stocks of Fannie, Freddie, Wachovia, etc. carried yields as much as 8 to10%. Because they carried the “preferred” moniker, investors mistakenly were told that the securities were safer than common stocks and therefore inherently less risky.  In the case of Fannie and Freddie, investors also were erroneously led to believed that the stocks of these government sponsored entities had the full faith and backing of Uncle Sam.

The financial firms who were paying inordinately high yields on their preferred stocks and bonds were doing so for a reason: they badly needed capital to shore up their battered balance sheets.  But considerable doubt about the health of these institutions was already swirling in the marketplace, hence the reason they had to pay higher rates of interest on their paper.  The very fact that a firm must pay a comparatively higher rate of interest to attract capital is on its own a sufficient warning sign that its securities are inherently risky. Investors who were not told of these inherent risks, particularly those who list “preservation of capital” as their primary investment objective, may have viable legal claims against their stockbrokers.

I’ve also heard from investors whose brokers recently advised them to buy the common stocks of financial institutions and banks on the argument that they were badly undervalued.  Which leads to another issue Congress should investigate: the appallingly bad research that Wall Street peddles to its retail clients.  It’s astounding that nearly all of the analysts at major Wall Street firms failed to foresee the collapse of Lehman. The global $1.4 billion settlement that came in the wake of the dot.com collapse was supposed to ensure that Wall Street dramatically improve the quality of research it provided to retail investors.  There isn’t an iota of evidence to suggest that’s happened.

Filed under Financial Stocks, Jake Zamansky, Securities Arbitration, Uncategorized
and bank stock losses, preferred stock, retiree investment loss

Financial Institution Preferred Stocks Blow-Up: Individual Investor’s Next Nightmare

by Jacob Zamansky on October 1st, 2008 at 10:23 am : Comments 000

Based on the calls we are receiving, an alarming trend is emerging that equals - if not trumps - the magnitude of the auction rate securities scandal.  I’m referring to a growing number of investors with complaints that their broker improperly recommended purchasing preferred shares of financial firms over the past few months.

Financial institutions such as Fannie Mae, Freddie Mac, Washington Mutual, Merrill Lynch, AIG, Wachovia, among many others, issued preferred shares which offered significant dividend payments.  Brokers pitched them as a fixed-income equivalents which attracted retirees seeking stable investments to generate revenue for living expenses.  But after the credit crisis started in mid-2007, financial stocks turned obviously speculative.

The losses sustained by mom-and-pop investors could be staggering.  According to the Wall Street Journal, the combined market cap of the top 15 S&P financial companies was $1.3 trillion, which has been reduced to $1 trillion.  That’s an evaporation of about $300 billion, and it appears we haven’t hit bottom yet.  Many of the so-called experts don’t understand that for every shot-gun wedding or emergency liquidation the Federal government orchestrates on Wall Street, retail investors wake up to gaping holes in their retirement nest eggs.

At a minimum, these investors should have been told to diversify out of preferred shares of financial firms; the fact that some retirees were told to buy more in recent months is truly a horrifying breach of trust.

I can already hear the cat calls.

“Investors should have known better,” they like to say.

But I’ve seen this over-and-over again.  First it was the dot-com stocks, then it was auction rate securities; now its time to worry whether preferred shares of financial firms are next.

Filed under Financial Stocks, Securities Arbitration
and bank stock losses, Fannie Mae, Freddie Mac, preferred shares, Wachovia

The Paulson Plan…2.0

by Jacob Zamansky on September 23rd, 2008 at 4:34 pm : Comments 001

Two years ago, if you mentioned “The Paulson Plan,” you would be referring to Wall Street’s attempt to further deregulate themselves under the cloak of patriotism.

“We need less rules or else America will be less competitive,” they told us.

Today, we are again debating “The Paulson Plan,” and indeed, America’s competitiveness is at stake but this time, universally it is acknowledged that Wall Street’s unbridled greed put us here in the first place.  Secretary Paulson, with his $500 million Goldman Sachs pedigree, is unarguably a member of the club.

And so at this juncture, I believe it is appropriate that we ask ourselves, can we trust this man with a trillion dollar blank check when he’s singing such a different tune on regulatory reform?  Mind you, this is not a critique of the band-aid solutions Secretary Paulson has orchestrated to date - that’s what history books are for - but rather hand raised on behalf of investors.

As an investor advocate, I see nothing in this bail-out that addresses the systematic fraud that was committed against investors.  As I’ve written about before, many investors are still holding distressed securities that were pitched to them as cash equivalents, conservative long term securities and any number of other ways contrary to the truth. Therefore, as a condition to unloading toxic debt onto the taxpayers - as is The Paulson Plan 2.0 - Wall Street should be required to make their customers whole.  Whether its an investor that bought auction rate securities, Citigroup’s ELKS (derivatives), short-term bond funds, preferred stock of financial firms, hedge funds or whatever the case may be, if an investor was mislead they should get their money back.

Frankly, it’s shameful that investor protection is even still an issue after the tech-bubble destroyed millions of investors’ net worth.  The systemic problem can be summed up in an email uncovered from a Merrill Lynch executive as she prodded her brokers to sell more auction rate securities: “Let’s move these microwave ovens!!!” she said.

Well, if Wall Street considers its products like microwave ovens, then they deserve to be regulated as such.  Which is why I subscribe to the idea of a consumer protection agency for investors.  As Yale professor and predictor of the real estate bubble Robert Shiller suggests, the financial services industry should be “democratized.”  He recommends a consumer advocate akin to the Consumer Products Safety Commission to look after the little guy, ensure disclosures are prominent and clear, and perhaps most importantly identify inherent conflicts of interests.

I hear the cat calls…what about the SEC?  Isn’t that what they are there for?

The SEC was created in 1934 as a result of the stock market crash of 1929.  Given its performance since then, it’s only fitting that it should be replaced as the guardian of the individual investor in the midst of the greatest financial disaster since those dark days.

It’s also no coincidence that the phrase “white-collar crime” was coined during the Great Depression.  In the aftermath of every financial crisis, there are those that have paid the price for their roles.  This was true during the S&L crisis and the dot-com bubble. Similar fallout is justified today.

So a little comeuppance is in order for the Wall Street’s C-suite executives that either knowingly or unknowingly stuck their head in the sand while the American financial system was destroyed.  Lehman Brothers, for example, should not get a free pass for the rosy assessment of its balance sheet and for saying that short-seller David Einhorn’s comments about their valuations “had no basis in fact.”

Simply put, I’m not comfortable with the fact that financial services industry executives who have put the United States in grave danger should only have net-worths of $5 million instead of $500 million.  It would be one thing if these individuals put their own money at stake - something entrepreneurs should receive tax incentives for doing - but these people gambled with other people’s money and lost.

Its sometimes said that the best way to rob a bank is to own one.  Wall Street did that and much, much more.

Finally, there’s a lot of discussion about executive compensation on Wall Street.  You won’t get an argument from me that its out of control, but socializing incentives sets an awfully distressing precedent.  Rather, as I’ve advocated before, Wall Street should be compensated over prolonged periods during which time it can be assessed whether their performance had long-term benefit to shareholders.  Brokers and the mad-scientists behind the structured products movement would be measured according to how many customers filed arbitration cases.  Investment bankers would be held accountable for the client’s performance after an M&A transaction.  And CEOs would have to show sustained increases to shareholder’s equity.

These considerations arguably are only the beginning.  So again let’s ask ourselves, is the former CEO of Goldman Sachs who we want crafting the biggest financial bail-out in history?

Filed under CEOs, Uncategorized
and Paulson Plan, Wall Street Bail-out

Auction Rate Securities Hearing in Washington: Wall Street’s Comeuppance?

by Jacob Zamansky on September 18th, 2008 at 11:10 am : Comments 000

Today, House Financial Services Committee Chairman Barney Frank, Chairman Spencer Bachus and Ranking Member Paul Kanjorski will hold a hearing to examine the continuing crisis in the markets for auction rate securities and auction rate bonds. The witness list will be comprised of regulators, investment-service providers, dealers and issuers of auction rate securities. Specifically, the hearing cover potential solutions to the auction rate securities market, which continue to be frozen. 

Originally only large institutional investors bought auction rate securities.  But following a 2005 SEC advisory clarifying the way corporations could account for auction rate securities forcing them to stop including them as cash on the balance sheet, Wall Street targeted retail investors. The pitch, as we all know, is that they were an alternative to money market funds.

According to most reports, over 160 arbitration claims related to auction rate securities have been filed since March 2008 including many by Zamansky & Associates.  Four enforcement actions arising from auction rate securities investigations have been lined up for hearing. Credit Suisse is the latest financial institution to settle an auction rate probe, agreeing to buy back the securities from individuals, charities and small businesses with accounts valued up to $10 million.

But despite the fact that several major banks have agreed to repurchase auction rate securities from the retail investors, investors still hold billions of dollars worth of auction rate securities.  Moreover, investors that are included in auction rate securities buybacks will not be compensated for their significant consequential damages unless they file securities arbitration claims to recover these damages.

I’m quite sure the committee understands the scope of this issue. But just in case, they should read a recent Legal Times article: “The auction rate securities debacle is the largest bond market failure in U.S. history. Although the buyback agreements represent real progress, any suggestion that auction rate securities holders no longer have enough at stake to merit their continued representation by counsel would be misguided.”

Chairman Frank has shown himself to be a results driven regulator.  He urged that issuers of auction rate securities be permitted to bid in auctions for their own securities, and demanded fast action on pending requests from mutual funds seeking clearance to issue new auction rate securities.  

Still, here are some questions I hope he will address at the hearing:

• Why did the SEC allow the auction rate securities market to continue business as usual after investigators found impropriety in 2006?

• What training did retail brokers have before they were told to sell auction rate securities to investors?

• Given that many Wall Street managers bought auction rate securities themselves, did any of them sell their auction rate securities knowing that the market was soon to collapse?  If so, how will they be punished?

• Wall Street sold many auction rate securities as hybrids in the private market under names such as auction pass through trusts, auction market preferred stock, among other now dubious names.  Purchases of these securities were not included in the buy back settlements.  How will Wall Street be held accountable for fraudulently marketing these?

• Will the brokerage house executives who oversaw the sale of auction rate securities be fined or punished?

• Exactly how much revenue did Wall Street generate through the auction rate securities market and did the fines that were levied along with the settlements equate to those revenues?

No doubt, today’s hearing on auction rate securities is necessary and warranted; let’s just hope it’s productive.

Filed under Auction Rate Securities, Investment Fraud, SEC, Wall Street
and Add new tag, Auction Rate Securities