A Beantown Slugger Worthy of Yankee Pinstripes

The New York Yankees these days have overtaken the Boston Red Sox as decidedly the best team in baseball.  There is, however, one bright spot in Beantown - a homerun regulatory slugger who is having a “career year.” His name is William Galvin.

Galvin, Massachusetts’ chief financial regulator, has established an impressive track record serving the best interests of investors.  His list of accomplishments is too numerous to mention here, but suffice it to say that he has been at the forefront of investigating and aggressively pursuing Wall Street wrongdoing, sometimes recovering as much as 100 percent of the losses sustained by Massachusetts investors. As I’ve repeatedly noted, Galvin’s complaint against Merrill Lynch regarding the firm’s marketing of auction rate securities ranks among the best primers on how Wall Street firms routinely put their interests ahead of their clients.

Galvin now has set his sights on Goldman Sachs’ weekly trading huddles, which I wrote about earlier this week. As reported by the Wall Street Journal, Goldman analysts routinely hold a weekly “trading huddle” to give “tips” to the firm’s traders and 50 most-favored clients, including SAC Capital Advisors and Citadel Investment Group.  Some of these tips are reportedly at odds with the published recommendations of Goldman’s widely disseminated research reports.

Galvin is the real deal and he already has some insight as to how Goldman treats its less-than-favored customers.  His agency has reached a settlement with Goldman regarding its peddling of auction rate securities, though the details are still being finalized.

It is my hope that in addition to examining the trading huddles, Galvin’s investigation will include the entire range of services Goldman provides its biggest clients and the criteria these firms use to evaluate these services.  Hedge funds have a fiduciary obligation to get the best execution on their trades and it might behoove Galvin and his people to investigate whether that is in fact happening.

As the saying goes, where there is smoke there is often fire, but that’s not always true.  If, after investigating Goldman’s huddles, Galvin concludes that no wrongdoing occurred, investors can take comfort in knowing that the practice was properly vetted.  Sadly, the same probably can’t be said about the investigations of the SEC and FINRA.

Will Goldman Get off Scot Free?

Update on the Fiserv Class Action Case

The New York Times’ Diana Henriques wrote an excellent account of Fiserv’s potential liability for investor losses in several unrelated Ponzi schemes. As you may recall, Zamansky & Associates filed a class action lawsuit in federal court in Colorado on behalf of Madoff investors who were instructed to use Fiserv as their custodian for their IRA accounts.

The article clearly shows that Ponzi schemes almost always have large financial institutions supporting them in one way or another. In this case, Fiserv, one of the largest IRA service providers in the country, may be held accountable for $1 billion in investment losses.

I wrote a blog when I first filed the complaint in April which provides detailed information on the Madoff/Fiserv case. There is also a contact form on my website for investors who wish to provide my office with their contact information.

SEC Enforcement: The More Things Change…

In my last post I was downright jubilant that Wall Street endorsed the fiduciary standard for brokers. And don’t get me wrong, this is a major development. But, as they say, one step forward…two steps back.  To wit, I read with great dismay two recent cases where the SEC enforcement division levied fines equivalent to a love tap for what appears to be serious wrongdoing.

In what I’m sure was a delight to Morgan Stanley’s PR office, the first case was buried in the Wall Street Journal in a five paragraph blurb on page C4. So allow me to give you some background.

Morgan Stanley was recently censured a paltry $500,000 by the SEC for allegations that one of its former financial advisors misled his clients and failed to disclose conflicts of interests. According to the SEC, William Keith Phillips, who was based in a Nashville, Tennessee branch of Morgan Stanley, breached his fiduciary duty when he allegedly recommended “unapproved” money managers to clients.  Under the terms of a proprietary program, Morgan Stanley would provide custody, execution, performance reporting, and, importantly, due diligence on money managers for their clients.

The SEC alleged that Mr. Phillips had a financial incentive to recommend these three money managers, after developing a relationship with them and negotiating $3.3 million in commissions.  Moreover, two of the unapproved money managers convinced some clients to open advisory accounts with the Morgan Stanley Nashville branch, generating an additional $200,000 in fees and commissions, a portion of which was paid to Morgan Stanley.

Investors harmed by this will no doubt file arbitration cases.  And while I’m sure Morgan Stanley wasn’t happy to sign a check to the United States Treasury for $500,000, I’m pretty sure they did the math a realized they were still ahead.

The second case involved Perry Corp., a $6.6 billion hedge fund managed by Richard Perry.  According to the SEC, Perry Corp. withheld a critical regulatory filing which serves to give the market notice when an investor has amassed more than a 5 percent stake in a public company.  The goal of the rule is to ensure investors understand if there is another investor that could influence company decision making.  In this instance, it is alleged Mr. Perry bought a 10 percent stake in Mylan Inc. in order to throw his weight behind a potential merger in which he stood to profit.

Representing Mr. Perry was William McLucas, who ran the SEC’s enforcement division for eight years before leaving the agency in 1998. When I say the there is a “revolving door” phenomenon between the SEC and Wall Street, this is precisely what I mean.  Mr. McLucas negotiated a measly $150,000 fine with his old employer.

Not surprisingly, Mr. Perry called the settlement a “satisfactory conclusion.” What is “satisfactory” to Mr. Perry most assuredly isn’t for other shareholders in Mylan Inc.  Nor will it likely deter anyone else from playing the same game.

On the other side, David Rosenfeld, associate director of the SEC’s New York regional office, who oversaw the case, said he “[hopes this] will deter others from engaging in this type of conduct.” I wish I could be so hopeful but I’m afraid the fines are a far cry from a deterrent.

What happened to “getting tough” on Wall Street?

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

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.

Greed is Back on Wall St.

Bank Of America’s Ponzi Problem

Bank of America Helped L.I. Ponzi Guy, Sez Suit

FINRA’s Arbitration Statistics a Bad Omen for Brokers

Earlier this month FINRA issued securities arbitration statistics for 2008 and, in my estimation, Wall Street should prepare for a wave of claims the likes of which we’ve never seen before.  This year marks the beginning of a ‘claim boom,’ resulting from the credit and housing crisis.  It is analogous to the spike in claims after the tech bubble rocked investors in 2000.  There are similarities between these two eras and there are also some stark differences; but the end result is the same: Wall Street’s incompetence, deceit, and outright greed manifested itself in the form of painful losses for investors.

Let me be clear, losses that investors have suffered as a result of the credit and housing crisis are dramatically worse than during tech bubble fallout.  And the number of investors who suffered losses is likely to be much higher too because the contraction occurred across nearly every asset class.

Therefore, based on how last year’s statistics relate to 2000, I fully expect that in 2009, the amount of claims filed will approximate 8,000. Not only that, the numbers will increase from there in subsequent years.

To wit, in 2007, 3,238 claims were filed.  Last year however, 4,982 investors filed claims, an increase of 35 percent.  Now, consider these statistics compared to the tech bubble era:

• 2000 (tech market begins to fracture): 5,559 claims filed
• 2001 (tech bubble collapses): 6,915 claims filed
• 2002 (investors begin to realize their losses and understand their rights): 7,704 claims filed
• 2003 (investor anger is at its apex): 8,945 claims filed
• 2004 (investors continue to lick their wounds): 8,201 claims filed

There is a six-year “eligibility” period during which investors can file arbitration claims against brokers.  This will give investors who currently don’t understand their full legal rights time to file claims.  In fact, we received calls from investors with losses in tech stocks as late as 2006.  Indeed, investors may still be filing arbitration claims related to the current crisis as late as 2014.

The Signs Were There

For me, the hardest aspect of the current era is that investment losses were easily foreseeable.  Brokers either turned a blind eye knowingly or were incredibly negligent. Either way, they failed their customers miserably. The list below reflects some huge red flags leading up to the credit crisis and throughout the past year. Any one of these events alone should have prompted brokers to adjust portfolios to minimize the destruction:

• Early 2007: Collapse of the sub-prime mortgage market surfaces with New Century and Countrywide facing bankruptcy
• June 2007: Two Bear Stearns hedge funds collapse - a seismic shock to the mortgage backed securities market
• September-December 2007: Financial services firms, including the nation’s largest brokerage and mortgage firms, begin writing down billions of losses due to exposure to failing mortgages
• March-June 2007: Wall Street firms tap sovereign wealth funds to shore up their battered balance sheets
• February 2008: The $330 billion auction rate securities market collapses, sending credit markets into turmoil
• March 2008: Bear Stearns collapses
• June 2008: Short seller David Einhorn publicly accuses Lehman Brothers of potentially fraudulent valuations of toxic debt
• August 2008: Fannie May and Freddie Mac enter into conservatership
• September 2008: Lehman Brothers collapses
• October 2008: The worst month in banking industry history

The point is, we were warned. Over this period the markets dropped an astounding 40-50 percent.

To be quite honest, I think my estimate of 8,000 arbitration claims is inaccurate.  The real number is likely to be much, much larger.

Ponzi Scheme Trifecta