Browsing August 17th, 2010
JPMorgan’s 64 Percent Note Shows Risks of Reverse Convertibles
Goldman Sachs’ Worst Nightmare: Adoption of a Fiduciary Standard
Though Goldman Sachs claims it merely acted as a market-maker for the ABACUS deal, they really acted much more like “issuer” with an obligation to disclose all pertinent facts and risks, including the fact that the architect who helped choose the underlying securities was betting they would fail. Goldman claims that there was no absolute certainty the ABACUS deals would implode and has repeatedly said that they lost more than $90 million by owning some of the securities themselves (the result of the firm failing to find enough suckers to sample it’s toxic cooking).
For a firm with no moral qualms about betting against its own clients, it comes as no surprise that Goldman Sachs is lobbying hard against Congress passing a so-called fiduciary standard that would require the firm to always act in the best interests of its clients. Kicking off what is sure to be a full-court press on Capital Hill, Goldman’s President and COO Gary Cohn has warned that if market makers were forced to adhere to a fiduciary standard, the markets would stop functioning.
I wholeheartedly agree. Imposing a fiduciary standard on market makers would not be wise legislation. However, better defining the roles of “issuer” and “market-maker” and imposing a fiduciary standard on “issuers” would serve the best interest of all investors. Had this been done years ago, it’s highly unlikely Goldman would have dared to unload the ABACUS transactions.
On regulatory reform, Wall Street is pitching a shut out against investors. Congress needs to step up to the plate.
Double Dealing: How UBS Profited From Lehman’s Accounting Duplicity
One of the recurring themes of my blog posts is that it’s nearly impossible to orchestrate financial wrongdoing of significant magnitude without the complicity of major financial institutions. Banks and brokerage firms almost invariably put their financial interests ahead of their clients, and any investor who believes otherwise should take the time to read this complaint by Massachusetts Secretary William Galvin alleging fraud in connection with Merrill Lynch’s sale of auction rate securities. While Galvin’s complaint relates to Merrill, the countless allegations about how that firm failed its customers are pretty typical of how Wall Street treats its clients.
The Lehman bankruptcy examiner’s report made public last week further documents how Wall Street firms are quick to aid and abet wrongdoing. To dress up its balance sheet, Lehman engaged in a myriad of “Repo 105″ transactions, a financial legerdemain that allowed the company to raise cash by parking assets at rival overseas firms and booking the sham swaps as “sales.” This accounting hocus pocus, while not permissible under U.S. rules, was deemed kosher in the UK providing that Lehman orchestrated repo transactions through its London-based subsidiary and with non-U.S. banks. The examiner’s report makes clear that the foreign banks that facilitated Lehman’s sham sales were very much aware of the firm’s “desperation” to create the illusion that it had significantly shed assets and reduced its leverage. For those not well versed in accounting, allow me to explain in simpler but cruder terms about what transpired: About a half dozen foreign banks played an active role in helping Lehman put some heavy duty lipstick on a pig.
One of Lehman’s most active beauticians was UBS. UBS reportedly transacted approximately $10 billion in Repo 105 deals with Lehman, likely garnering the firm tens of millions of dollars in interest payments relating to the sham sales. But UBS had another reason to help Lehman deceive investors about its flailing financial health. During the period Lehman was orchestrating its “Repo 105″ transactions, UBS’s retail brokers were aggressively peddling to their customers a product deceptively known as Lehman Brothers “100 Percent Principal Protected Notes.” Although UBS marketed these notes to investors as being “risk free,” they were in fact extremely risky unsecured IOUs whose repayment was entirely dependent on Lehman’s financial solvency. UBS paid its brokers high commissions to sell the risky Lehman notes to unsuspecting investors, which explains why the sales force successfully unloaded more than $1 billion of the paper. When Lehman collapsed, its notes instantly became nearly worthless.
UBS’s sale of the Lehman notes was questionable even before the bankruptcy examiner’s disclosure. New Hampshire’s securities regulator charged in a filing last June that UBS engaged in “dishonest and unethical” practices selling the Lehman notes, causing New Hampshire investors to lose $2.5 million. The North American Securities Administrators Association (NAASA) has said it was considering convening a task force on the Lehman notes, and it’s my understanding the SEC is also looking into the matter. I recently won a significant arbitration award on behalf of a client in South Carolina who bought Lehman notes from a UBS broker; it was the first arbitration decision relating to UBS’s sale of Lehman notes, and my office has more than a dozen pending.
Rest assured, UBS is going to have to account for why it continued to aggressively market Lehman notes to retail customers as highly conservative investments while on the institutional side facilitating transactions that were designed to mask Lehman’s troubled financial condition. Ernst & Young, Lehman’s auditor, also has some “accounting” to do; that firm, as it happens, also is UBS’s auditor. It will be interesting to learn how UBS booked the assets that Lehman “sold” the firm.
Individual investors owe Lehman bankruptcy examiner Anton Valukas a tremendous debt of gratitude. His report lays out in painstaking detail Wall Street’s fundamentally dishonest ways and makes clear the industry cannot be trusted to regulate itself. Individual investors also should note that in early 2007, the year Lehman began its financial shenanigans, Charles Schumer and Michael Bloomberg, respectively New York’s senior senator and Mayor, issued this report by McKinsey & Company saying that the U.S. markets were fast losing ground to the UK because they were overly regulated. As Lehman’s “Repo 105″ transactions were only permissible in the UK and not the US, we obviously shouldn’t be looking to that country for a regulatory model worth emulating.
Ironically, a significant number of investors who bought Lehman notes from UBS reside in the UK. Fortunately for them, they can file arbitration claims in the US to seek redress.
Lehman Brothers “100 Percent Principal Protected Notes”
Zamansky & Associates continues to file claims on behalf of investors of so-called “100 Percent Principal Protected Notes,” which were issued by Lehman Brothers. Investors were improperly sold 100 Percent Principal Protected Notes by brokers at major Wall Street firms including UBS, which sold as much as $1 billion worth of the product. As the name clearly suggests, Principal Protected Notes were marketed as “risk free” investments geared towards retirement accounts, but were rendered nearly worthless after Lehman Brothers collapsed in 2008.
Zamansky & Associates secured the first arbitration award relating to UBS’s sale of Lehman-issued 100 Percent Principal Protected Notes in December on behalf of an investor in South Carolina. In addition to ordering UBS to reimburse the investor for most of her losses, the arbitration panel also required UBS to pay interest, plus all related expenses, including attorneys’ fees. The implications of this case are far reaching and it could be a bellwether for cases moving forward not only against UBS but also against other Wall Street firms that improperly sold structured products.
Regulators including FINRA have launched investigations into how these products were sold and whether UBS and other brokerages failed to fully disclose the risks of these investment products.
If you suffered losses stemming from Lehman Brothers, contact Zamansky & Associates. We offer free consultations and ensure confidentiality.