Browsing November 29th, 2010

Like Pornography, You Know Insider Trading When You See It

The recent high profile federal government probe of insider trading raises some significant legal and policy questions that have serious consequences for the big money hedge fund industry.

I don’t want to recount the Feds’ probe, which began in earnest last year with the Galleon hedge fund case. Instead, let’s take a quick look at the phenomenon of insider trading, how to detect it, and how the current investigation is yet another ugly example of the need for increased investor protection.

First, where is the line between legal and illegal conduct?

In my mind, insider trading is like the tried and true definition of pornography-you know it when you see it.

Sam Waksal (who served 7 years in prison for insider trading) was convicted of trading on “inside” or non-public highly valuable information that the FDA would reject approval of a cancer drug for his biotech company, ImClone. The stock plummeted immediately upon the FDA announcement, but Waksal’s family and friends had already sold and pocketed millions.

Then there is selling information about a public company’s earnings release prior to the announcement. That’s clearly an illegal activity akin to “stealing” valuable information resulting in profitable stock trades.

What about railroad workers observing a “bunch of suits” visiting the rail yard and surmising that the company was a takeover target? Believe it or not, this is an actual case heading to the US Supreme Court for decision.

The key is the confidential information of an “insider” which is “tipped” for a payment. There really is no bright line test. But, we may get some clarity from the Feds’ crackdown on hedge funds.

Next, are the feds’ methods, such as FBI raids on hedge funds and consultants and wiretapping too heavy handed?

The feds have decided to use the same investigative techniques in the spate of insider trading cases that they use in combating organized crime and drug trafficking. The federal judge overseeing the Galleon insider trading case has approved the use of wiretapping in the case observing that most insider trading schemes are conducted on the phone so the feds need to wiretap.

Many on Wall Street and at Greenwich, CT hedge funds are crying into their tumblers of single malt scotch or glasses of French Chardonnay over the Feds’ crackdown. They are claiming excessive government force is being used against legitimate businesses. Boo hoo hoo.

I say, if you have nothing to be concerned about you shouldn’t worry. Of course, the opposite is true.

Finally, is the high profile insider trading sting good public policy?

The “little guy” investor has been burnt so many times in the last decade that most investors I speak to around the country tell me the market is rigged in favor of insiders and the little guy doesn’t stand a chance.

I commend the Feds’ show of force-with one big caveat. The Feds must throw the guilty in jail and not settle for a wrist slap fine with no admission of liability.

Otherwise, it’s back to business as usual on Wall Street.

Angelo Mozilo’s Victims

There is a seedy underbelly of the mortgage market that is being totally ignored.  It was rife with fraud and companies like Countrywide, now owned by Bank of America, knew or should have known about it.

Countrywide’s alleged participation in the Long Island fraud committed by investment advisor Peter Dawson is a perfect example.  Mr. Dawson’s now well chronicled scam was to solicit homeowners who already had their homes paid off or who had substantial equity in their homes, to take out new mortgages so that he could steal the proceeds.  He had dozens of victims which my firm represents.

In at least three instances, Countrywide gave loan proceeds directly to Mr. Dawson instead of to the homeowners.  This is obviously a major red flag that Countrywide chose to ignore.  In at least one instance, the mortgage broker, who dealt directly with Countrywide, was a convicted felon who previously served jail time for fraud.  Moreover, closings were held late at night, once even in an out of town hotel room.

As if those alarm bells weren’t loud enough, the homeowners, supposedly vying for the loans, were elderly retirees.  In other words, these folks should never have received the loans in the first place (if anything they should have received reverse mortgages), nor should money have been transferred anywhere except to their personal accounts.

Clearly, in this case,  Countrywide had no concerns for standard practices and, at a minimum, turned a blind eye while a multi-million dollar fraud ruined the lives of dozens of honest people.  In fact, in sworn testimony, Mr. Dawson said that Countrywide and its mortgage broker assisted his fraud.

It was this type of lending practice, in part,  that allowed Countrywide CEO Angelo Mozilo to award himself half a billion dollars.  And thanks to the SEC, he’s able to keep most of it while victims of his company’s gross negligence struggle to pay their heating bills.

While plenty of people bear responsibility for taking on too much debt, many were simply victims of fraud.

Goldman Sachs Class Action

Zamansky & Associates has filed a class action complaint against Goldman Sachs and certain of its directors and officers for failing to disclose material information to shareholders. The complaint alleges that Goldman Sachs caused its stock to trade at artificially inflated prices during the period between January 2, 2007 and April 16, 2010 by failing to disclose material information regarding its ABACUS 2007-ACI CDO.  The complaint further alleges that Goldman Sachs and its directors and officers failed to disclose that it received a Wells Notice from the SEC in approximately July 2009 regarding the SEC’s investigation into Goldman Sachs’ role in structuring the ABACUS CDO.

Investors who purchased Goldman Sachs common stock between January 2, 2007 and April 16, 2010 may be able to participate in the class and are urged to contact us using the form below. A copy of the complaint can be found here.

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Goldman’s More than a Wall Street Toll Collector


The Perils Of Letting A Relative Manage Your Money

In journalism they say three makes a trend and regretfully my office has identified a disturbing one relating to investors who let a family member manage their money.  During the past few months we’ve been contacted by various individuals whose accounts were grossly mismanaged by a family member, including a father whose son put him into some investments that were patently unsuitable for his risk tolerance.  The father has a compelling case, but he’s torn about filing a case against his own flesh and blood.

In theory, choosing a relative to manage your money makes sense on the belief that a relative is more likely to act in one’s best interest.  Brokerage firms prey on this perception; when a broker enters the business he or she typically is instructed to contact family members to attract assets to the firm and build his or her book of business.  It’s tough saying no to young Johnny or Jane when they politely hit you up for some assets to manage at the outset of their careers.

But it’s dangerous to assume that a family member always can –or will — serve a relative’s best interests.  Brokers are under tremendous pressure to push commission-based products and often even they are not fully informed — and sometimes misled — by their bosses about the securities their firms are pressuring them to peddle.  Auction rate securities and structured notes are but two egregious examples where brokers were pressured to sell products to clients without them fully understanding the risks.

Another risk is that brokerage firms don’t properly monitor the accounts brokers manage on behalf of relatives with the same diligence as regular accounts.  Indeed, there have been several instances where brokers engaged in insider trading tried to avoid detection by parking securities in the accounts they managed on behalf of relatives.  Even if a family member isn’t doing anything untoward, it’s best that your account be subject to the customary firm due diligence to ensure your goals and objectives are being followed.

But perhaps the biggest risk of all is that most investors are incredibly reluctant to sue a family member for mismanaging an account because it could potentially cause a major rift in the family.  But I predict this is going to change, as the dramatic downturn in the market in 2008 dramatically eroded the life savings of  many individual investors. Mark my words, there are going to be some rather extraordinary cases being filed in the months ahead involving parents and their children and other close family members.

Based on what I’m increasingly hearing, if you value the intimacy of holiday gatherings and special occasions, it’s best to keep family and money management separate.

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Cases We Are Investigating