Galleon Group Hedge Funds

Zamansky & Associates has launched an investigation into Raj Rajaratnam and hedge fund giant Galleon Group as well as its partners and affiliates on behalf of the firm’s clients who are concerned about the status of their investments.  Galleon Group has been besieged with investor redemption requests after Mr. Rajaratnam as well as other related parties were arrested for insider trading allegations.

Federal investigators allege that Mr. Rajaratnam participated in the largest insider trading scheme ever in the hedge fund market, which netted the firm approximately $20 million.  Zamansky & Associates is investigating recovery against Galleon Group principals as well as with other financial institutions and corporations that may have aided and abetted the alleged insider trading.

We are considering bringing individual and/or class action claims based on the fraudulent conduct.

If you are someone you know was invested in one of Galleon Group’s funds, please contact Zamansky & Associates by clicking here or by calling (212) 742-1414.

Galleon Group…Tip of the Iceberg?

by on October 20, 2009

One of the reasons hedge funds have commanded their stratospheric fees is the widely held belief that the people overseeing them are decidedly more brilliant than run-of-the mill institutional or individual investors.   But it has become increasingly clear in recent years that many of the supposedly legendary investor titans aren’t quite as smart as they purported to be.  Turns out, many have figured out a way to rig the system and see everyone else’s proverbial cards before playing their own.

To a layman, this is known as cheating.  On Wall Street, it’s called insider trading.

Trust me on this, the arrest of hedge fund mogul Raj Rajaratnam for allegedly netting $20 million trading on non-public information is just the tip of the iceberg.  Other major hedge funds also have been implicated in insider trading allegations and suspicions have surfaced about some very prominent Wall Street executives.  It’s well known that if you are a big trading macher on Wall Street, you gain access and insight that just isn’t available to even mid-sized institutional investors.  You get Wall Street’s equivalent of the Glengarry Glen Ross real estate leads: the Goldman Sachs weekly “huddle.”

There is sometimes a very fine line between market “color” and “inside information,” and based on the allegations against Rajaratnam and his indicted cohorts, on the surface there appears little doubt that the government has a very compelling case of criminal wrongdoing.  Indeed, the wiretap evidence reveals that some of Rajaratnam’s co-conspirators were clearly aware they were breaking the law; one of them openly feared she would end up like Martha f….g Stewart.”    The U.S. Attorney’s Office is to be commended for bringing this case, and let’s hope that if the accused get convicted, they get put away for considerably longer than the measly 22 months of incarceration meted out to legendary insider trader Ivan Boesky.

Unfortunately, the U.S. Attorney’s office has finite resources and therefore must focus its efforts solely on bringing Rajaratnam and his co-conspirators to justice. What’s needed is a far-reaching Congressional investigation examining how hedge funds garner their information.  Even if you take Goldman Sachs at its word that its weekly “huddle” is merely an exchange of market “color” for the firm’s best customers, the fact remains that hedge funds generating the highest volume of trading commissions invariably get access to the best analysis and insight.  It would be interesting to know if Rajaratnam, or someone from his firm, participated in Goldman’s weekly “huddle”.  If that proves to be the case, then Rajaratnam’s supposedly $20 million of ill-gotten gains likely helped him achieve tens of millions more in “legitimate” profits.

The current laissez-faire treatment of hedge funds by Congress and regulators is reminiscent of what led to the Wall Street Crash of 1929.  All sorts of fraudulent acts were committed by the unregulated banking industry and it wasn’t until Ferdinand Pecora and his famous Pecora Commission exposed the rampant, ongoing fraud that laws were reformed and the SEC itself was created.  Later in his memoirs, Mr. Pecora wrote about the lack of disclosure that led to the crash: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”

We need a modern day equivalent of the Pecora Commission.  The indictment of Raj Rajaratnam badly underscores the fact that wrongdoing on Wall Street today is likely far more pervasive than ever before.

(Double) Talk From Chuck

by on August 20, 2009

Charles Schwab, the San Francisco-based brokerage pioneer, has done a lot for individual investors. Chuck, as he apparently prefers to be called, revolutionized Wall Street nearly 40 years ago when he introduced discount brokerage trading and dramatically undercut the exploitive trading costs charged by the major brokerage houses.  Discount brokerage was a major breakthrough for individual investors, and Schwab’s innovation decidedly ranks as one of the watershed moments in Wall Street history.

Schwab now want to make U.S. bankers quake in their pinstripes.  His eponymous firm is offering customers a no-fee credit card that rebates two percent of all purchases, which seems like a pretty sweetheart of a deal.  Even better, the firm claims it will reimburse its customers the obscene service charges banks now levy for making withdrawals at someone else’s ATM.  If these products prove successful, the banking industry might have to dramatically reduce its high fees to remain competitive, just as the big Wall Street firms did.

But Schwab clients would be wise to be wary, as the firm is fast establishing a reputation for marketing products that are truly too good to be true. The first is the firm’s shameful Schwab YieldPlus account, which the firm aggressively marketed to customers as equivalent to a money market account.  In fact, Schwab YieldPlus was laden with toxic sub-prime mortgages and when that market blew up, Schwab’s customers lost as much as 30 percent of their money.  Schwab has refused to accept responsibility for its misleading sales practices and YieldPlus customers, including clients of Zamansky & Associates, have been forced to file lawsuits and arbitration claims in order to recover their money

Schwab also is refusing to accept responsibility for peddling auction rate securities to unsuspecting customers.  In an op-ed in yesterday’s Wall Street Journal, Schwab passionately argues that New York Attorney General Andrew Cuomo shouldn’t be holding the firm culpable for marketing these products to customers because “roughly 90% of the clients who invested in these securities came to Schwab asking us to locate and make available these investments for them.”

As regular readers of this blog know, auction rate securities were one of the most dubious Wall Street products in recent memory.  The interest rates on these securities reset at weekly or monthly auctions, and were typically slightly higher than investors could receive from a money-market fund. The little-understood risk was that the auctions were essentially fixed by the big Wall Street firms and when the economy tanked, they were no longer willing to artificially prop up the market.  As a result, investors, overnight, got stuck holding low-interest bonds with long-term maturity dates.

Schwab’s claim that some 90 percent of his customers who bought auction rate securities did so at their own behest is suspect.  The major Wall Street firms had to use aggressive sales tactics to unload their inventory - “Gotta Move these microwave ovens!!” — and it is rather incredulous that the vast majority of Schwab’s customers actively sought out these products on their own.  In any case, Cuomo has produced evidence that Schwab’s management definitely knew about the inherent risks of auction rate securities, but was focused “on public relations risks, not the implications to the market for auction rate securities.”

Moreover, Cuomo has made public considerable evidence that Schwab’s brokers actively positioned auction rate securities to customers as being equivalent in safety to traditional money market funds.  The AG also has impressively substantiated that Schwab’s brokers didn’t have even a remote understanding of the auction rate securities market and that ignorance caused great harm to Schwab’s clients.

Most of the major Wall Street firms involved in the auction rate securities debacle have agreed to make their clients whole, but as was the case with its YieldPlus accounts, Schwab refuses to do right by his customers.  Such hardened stances should make investors skeptical of products offered by Schwab’s brokers.

Caveat emptor: Talk is cheap, and when you “Talk to Chuck,” you do so at your own peril.

Wall Street Endorses the Fiduciary Standard

by on July 20, 2009

An utterly improbable thing occurred last week when Wall Street endorsed the fiduciary standard for brokers.  This is certainly a sea change for investors.  A fiduciary standard similar to that which governs so-called “financial advisors” is something I’ve advocated for years.  The new standard forces brokers to put customer interests ahead of their own, which seems logical enough even though up until now Wall Street fought against the issue tooth and nail.

But last week SIFMA, Wall Street’s lobbying group, got behind the idea which almost assuredly means Congress will turn it into a law.  It’s long overdue and Congress should quickly pass legislation, lest Wall Street gets cold feet.

The fiduciary standard goes to the core of the relationship between individual investors and Wall Street.  Wall Street is not just selling a product. There is a professional relationship.  The relationship is much less like a car salesperson and buyer as much as it is like a doctor and patient where the diagnosis is just as important as the prescription.

That is why applying a fiduciary standard to the broker-customer relationship is so important.  Wall Street enjoyed having it both ways, especially when it came to disputes.  It’s undeniably common sense that a retiree should never be recommended speculative tech stocks or auction rate securities and other structured products.  But if that retiree filed a case against the broker who recommended the bad investment, Wall Street wouldn’t deny that it was wrong, but would argue that technically the broker didn’t have to put his client’s interest above his own.  Going forward the onus is on the broker to defend the recommendation as meeting the fiduciary standard.  The burden of proof is back on Wall Street.

Earlier I posted about a recently leaked memo from SIFMA about their plans to improve Wall Street’s image.  Actions, such as adopting the fiduciary standard is an important first step and will go further than spin.  Much more action on the part of Wall Street is necessary before Main Street’s trust can be restored.