Cleaning up Wall Street Corruption

One of the givens of Las Vegas is that the odds are always stacked in favor of the house.  But to the credit of Nevada’s gaming commission, aggressive measures are taken to ensure that only individuals with squeaky clean records are allowed to operate casinos.  Just associating with someone of questionable repute can lead to a revocation of a casino license.

The arrest yesterday morning of 14 more individuals accused of insider trading serves as yet another reminder as to why Wall Street must be regulated with the same aggressiveness and diligence as state-licensed casinos.  With more than three decades of experience representing individual investors who were deceived or cheated by Wall Street firms I can say with considerable authority that unmitigated greed and dishonesty is rampant in the securities industry.   While Federal prosecutors are to be commended for collaring nearly 24 alleged cheaters connected with Galleon Group for trading on inside information, they simply don’t have the resources to root out the legions of crooks that permeate the stock marts.

The latest arrests include yet another well known hedge fund and an attorney from a prestigious law firm and underscore how insider trading activity typically involves a tangled web of conspirators who often work at well known and seemingly respectable organizations.  What is especially alarming is that Galleon founder Raj Rajaratnam and some of his accused cohorts have allegedly been involved in other questionable and possibly illegal activities but nonetheless were allowed to continue to operate unfettered.   Rajaratnam’s earlier problems with the SEC and the IRS quite possibly could have prevented him from getting a Nevada gaming license, but it didn’t stop him from taking in institutional assets and being one of Wall Street’s most active players.

Contrary to what some economists and academics theoretically argue, insider trading amounts to criminal theft and it is not a victimless crime.  For every buyer of a stock there has to be a seller, and if someone has material inside information about a company, he or she has a decided advantage determining an appropriate price for the security.  Insider trading is somewhat akin to card counting - a practice that will get you permanently barred from Las Vegas casinos.  It cannot be allowed or tolerated in the securities industry.

What is needed on Wall Street is a suitability rule to determine who is qualified to work in the securities business.  Demonstrating character should be a major criterion and repeated SEC and other regulatory violations should be grounds for a permanent ban.  I appreciate that a character standard would forever bar countless Wall Street executives, but we need to dramatically raise the securities industry’s admission bar to facilitate meaningful change and ensure a level investor playing field.

The regulation of state casinos is admirably above politics, as state elected officials understand and appreciate that if character standards aren’t required and enforced, organized crime will ultimately gain control of the gaming industry.  It’s high time that both parties in Congress come to realize that Wall Street is rife with corruption and a task force should be created to figure out how best to clean it up. The SEC clearly isn’t up to the task.

President Obama promised us “Change We Can Believe In,” and the Democrats control Congress.  Ironically, Senate Majority Leader Harry Reid is a former chairman of the Nevada Gaming Commission whose unwillingness to be compromised by a gangster was featured in the Martin Scorsese film Casino.  Mr. Reid has since been accused of some personal ethical lapses, but he could easily redeem himself if he used his gaming regulation expertise and spearheaded a movement to take on Wall Street’s powerful lobby and create a no-nonsense regulatory agency akin to the Nevada Gaming Commission.

Now that would be real change we could believe in.

PRESS RELEASE: Former Citigroup FA CAP Participants Have until Thursday, October 8th to Have State Law Claims Included in the Class Action Lawsuit

Citigroup financial advisors whose earned wages were used to purchase stock or options in the Voluntary FA Capital Accumulation Program (FA CAP) have until Thursday October 8^th at 5 pm to be added to a class action lawsuit filed on behalf of Citigroup employees who participated the FA CAP, so that state law claims can be asserted.

Last month, Zamansky & Associates was appointed one of the co-lead counsels for the class action lawsuit, Brecher et al. v. Citigroup, Inc. et al. 09-cv-606, prior to its transfer to the United States District Court in the Southern District of New York.The class alleges, among other things, that Citigroup made misrepresentations about its financial condition and subprime-related holdings which resulted in damages to FA CAP stock and options, and that the vesting and forfeiture provisions of FA CAP stock and options may be unlawful under local state laws which protect earned wages.

If you are a former Citigroup employee whose earned wages were used to purchase FA CAP stock or options from November 2006 to November 2008, you have just two days to be added to the class. If you wish to be added, we urge you to contact Zamansky & Associates immediately.

To contact Zamansky & Associates visit www.Zamansky.com or call (212) 742-1414.

The U.S. Vs. Cioffi & Tannin: A Curtain Raiser

The first criminal trial stemming from the subprime mortgage crisis will begin on Oct. 12 as former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin go on trial for securities fraud in federal court in Brooklyn, N.Y. The two were indicted a year ago on charges that they lied to investors and that at least one of them participated in insider trading. Many experts argue that this ultimately led to the collapse of Bear Stearns and the near meltdown of Wall Street.

On a number of levels, this case has significant implications for future criminal prosecutions on Wall Street.

First, this represents one of the first cases involving criminal charges that could result in hedge fund managers going to jail for losing sophisticated, high-net-worth investors’ money. Typically, only civil claims seeking monetary damages are filed.

Second, this is the first criminal prosecution relating to the near Wall Street meltdown, thus making it a proxy for indictments to come. Already, reports are surfacing that the government may bring charges against Joseph Cassano, head of AIG’s Financial Products unit, as well as senior executives at Lehman Brothers.

The government’s case hinges upon its ability to prove that the defendants knew of an impending implosion of the subprime market, yet deceived investors with a different–much more positive–story. The defense will argue that the subprime meltdown was not predictable and the defendants were caught unprepared just like many others on Wall Street.

A significant piece of evidence for the prosecution is a series of e-mails between Cioffi’s Gmail account and Tannin’s wife’s e-mail account stating that “the subprime market looks pretty damn ugly … If we believe the [CDO's report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire subprime market is toast.

The two hedge fund managers then held an investor conference call on which they spun a completely different story. Tannin reportedly told investors on the call that “we’re comfortable with exactly where we are,” and that, “it really is a matter of whether one believes that careful credit analysis makes a difference, or whether you think that this is just one big disaster. And there’s no basis for thinking this is one big disaster.”

One cannot help but recall that e-mails led to the demise of Henry Blodget, the tech analyst who produced bogus research so that his employer, Merrill Lynch, could win investment banking business. The major difference in the Bear Stearns hedge fund case is that the e-mails were sent suspiciously from e-mail addresses outside of Bear Stearns’ purview.

Another major allegation is that Cioffi withdrew $2 million of his own money out of the fund because he was privy to insider information. The timing of the alleged insider sale is very important. According to the indictment, “on April 17, 2007, Cioffi allegedly met with one of the three largest investors in the funds. The investor, named Major Investor No. 1 in the indictment, allegedly told Cioffi that it was considering redeeming its approximately $57 million investment. In response, Cioffi allegedly told the investor that he and other portfolio managers had $8 million invested in the funds, while failing to inform the investor that he had recently withdrawn $2 million of his approximately $6 million investment in one of the funds.”

Prosecutors will allege that Cioffi’s motive was that his personal financial situation had significantly deteriorated due to a failing real estate investment deal and an extremely lavish lifestyle. Reportedly Cioffi had several vintage Ferrari’s, a multimillion-dollar beach house in the Hamptons and several country club memberships.

Here again, a previously established pattern emerges. It was Dennis Kozlowski’s lifestyle that eventually led to his conviction and 25-year jail term. The defense will likely ask the judge to not allow Cioffi’s personal spending to be discussed in the case, as it could prejudice the jury against him.

One significant development is a recent filing from the U.S. attorney’s office alleging that they have “direct evidence” of Cioffi’s wrongdoing. According to The Wall Street Journal, prosecutors said Cioffi fraudulently pledged assets in the hedge fund he ran as collateral for a real estate loan from Busey Bank. Executives at Bear Stearns Asset Management, the division that housed the fund, told prosecutors they denied Cioffi’s request to pledge part of his assets for the loan because it could create a “conflict of interest with other clients in the fund.”

This is important because the government will likely assert that the deterioration of the hedge fund’s assets led Cioffi to withdraw the $2 million and not the deterioration of his personal financial situation. Cryptically, the defense has proposed there is an innocent explanation for the withdrawal and loan issues.

And finally, there is the matter of a missing notebook and tablet PC that prosecutors allege included important evidence. The judge has not decided on whether the prosecution will be allowed to discuss this issue because it’s not part of the criminal charges.

Clearly this case has many complexities. Prosecutors must prove both fraud and intent. By the same token, there is a mountain of evidence for the defense to overcome in order to create a reasonable doubt in jurors’ minds.

The stakes are extremely high. Messieurs Cioffi and Tannin face a maximum penalty of 20 years in jail. This is the first case of its kind and, as such, will set the tone for how criminal cases involving securities fraud will be tried.

Needless to say, there will be a lot of other former Masters of Wall Street paying close attention as the trial moves forward.

Jacob H. Zamansky is a principal at the firm Zamansky & Associates. He is representing individual investors in claims against Bear Stearns and the firm’s High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Enhanced Leveraged Fund.

Cuomo Sues Merkin for Shifting $2.4 Billion to Madoff

The Madoff Fraud: Post-Fraud Fight for Cash

Possible Madoff Plea Deal in the Works

“Barks Like a Mouse and Bites Like a Flee”

Of all the blows dealt to the SEC this week by Madoff tipster Harry Markopolos in his Congressional testimony, that’s the one sound bite that will stick with me.  Mr. Markopolos gave a startling description of the ineptitude he faced at the SEC as he tried to expose Bernie Madoff as a scam artist.  He gave specific examples of the SEC’s failures - from conflicts of interest to infighting and from territorialism and apathy to outright ignorance.  Mr. Markopolos went so far as to name names, as they say.

Based on his testimony, new SEC Chairperson Mary Schapiro has no choice but to clean house.  She will also need to address a number of other challenges, namely, she needs to put an end to the SEC’s penchant for parallel investigations with the U.S. Attorney’s office.  The SEC doesn’t need to tag along to their cases.  They need to pursue their own cases and select ones that have broad impact, not these celebrity cases that grab a headline or two (Mark Cuban, Martha Stewart, etc.).

There’s no doubt we can expect a significant amount of new blood at the SEC.  That’s a good thing but these individuals need training, and a lot of it.  Volunteer oversight committees could be one solution.  Lawyers, investor advocates, watchdogs…and yes, even industry representatives (the honest ones), should visit monthly with the SEC and download the latest information in terms of technology, trading, investment products, scams, etc.  I, for one, would be more than happy to lend my time to such a worthy endeavor.

Congress got a huge wake-up call today.  Expect big changes at the SEC.