What The Kids Know About Wall Street

Below is a recent article published by Securities Attorney Jake Zamansky on Forbes.com:

Boisterous protests on Wall Street over the past few weeks clearly show that the Street’s “me-first” culture of greed is wearing thin with the American public.

No doubt, the mainstream media is not enjoying the show and wants these kids to go away. Protesting at the American center of money and power is simply too messy. The conservative, business-is-always-right crowd at Fox News and elsewhere want to dismiss the protests, claiming the “Occupy Wall Street” crowd is just a bunch of kids too lazy or too high to get jobs or stay in school. But if you listen carefully, you’ll realize that these protestors are giving voice to real anger and real concerns that many people from Main Street, USA share.

So what if the kids camping in downtown Manhattan are not smooth and sophisticated? Who cares if some don’t know the minutiae of complex derivatives or couldn’t tell you what RMBS stands for?

What the kids know is powerful, and they feel it in their guts and bones. What the kids know is that the present culture of Wall Street is pernicious. They know, without a doubt, that the traders and brokers from some of the whitest of the white shoe firms in New York and London are not to be trusted with a nickel of their parents’ hard-earned income or retirement savings.

Wall Street’s traditional culture of putting the client first has vanished. Greed has overwhelmed it. Investors know that, so they stay from stocks and stand on the market’s sidelines. And the kids know it too, so they march.

Each so-called “storied” firm has had its recent example of cultural decline. We could write about any of them, but UBS is once again hogging the spotlight.

Last month, a UBS trader in London was arrested for an illicit trading scheme that cost the firm $2.3 billion in losses. As James Stewart of the New York Times pointed out, the trader was instantly called a “rogue,” implying that he was acting alone without any involvement by management.

What utter nonsense.

Mr. Stewart then tallied up the recent string of failures at UBS, placing the London trader in the cultural context of the firm’s recent flood of failures to put their clients ahead of greed.

In 2008, the firm settled charges with New York that alleged the firm misled investors when they sold them auction rate securities (“ARS”). UBS said it would repay $19.4 billion to investors along with a $150 million fine for its role in misleading customers in connection with this market that eventually froze and failed. Its global head of municipal securities was accused of selling out the ARS from his personal account just before the market collapsed and later settled insider-trading charges for $2.75 million.

This year, it paid $160 million after admitting its employees conspired to rig bids in the municipal bond derivatives market.

And then there was the firm’s tax-evasion scheme for its richest clients that that resulted in a $781 million fine.

As Mr. Stewart noted: “This doesn’t look like a sequence of rogue behaviors—it’s a pattern.”

The new kids on Wall Street understand that self-serving, greed-driven behavior is a pattern repeated up and down the Street. They are mad as hell that bankers can take multi-billion-dollar risks with other people’s money, then leave taxpayers holding the bag when their trades go south. And that’s why they protest.

Disclosure: Zamansky & Associates represents investors in arbitration cases and federal and state court actions against most Wall Street firms, including UBS.

Read article on Forbes.com

Risk Control: Wall Street’s Achilles’ Heel

Below is a recent article published by Securities Attorney Jake Zamansky on Forbes.com:

A 31-year-old trader just cost UBS $2.3 million and its CEO. Jerome Kerviel collared Societe Generale with losses of $7.2 billion with his so-called “rogue” trading. In March 2008, 100-year-old investment bank Bear Stearns collapsed, its stock price falling from $160 to $2 per share. In 2007-2008, Citigroup’s enormous undisclosed subprime exposure eventually caused its share price to fall from $60 all the way down below $3. And lastly, UBS deceptively sold over $1 billion of Lehman structured products to unsuspecting retail customers and has been pummeled in arbitration hearings.

What do these financial disasters have in common? Inadequate risk controls, lax supervision and shoddy training.  State-of-the-art risk controls and professional supervision comprise the basic safety net investors and regulators expect from Wall Street. Unfortunately, in recent years both have been borderline nonexistent.

The Bear Stearns Hedge Funds that went belly-up in the summer of 2007 had touted to investors their superior “risk controls” as part of their sales pitch. In reality, the lack of meaningful controls appears to have sunk the funds, resulting in a total loss to investors.

The elite group within AIG that once raked in billions by selling insurance on corporate debt bragged that it wouldn’t lose a dollar on its credit default swaps. The group was so confident that its senior managers didn’t even require the traders to hedge their risk. A few weeks later, it took a $5 billion writedown and needed the first installment in a seemingly never-ending lifeline just to survive.

Firms up and down Wall Street-household names, blue-chip banks-leveraged themselves 30:1 chasing outsize profits and massive paydays. Most blew up and survived only with serial bailouts.  We are now, in the words of Meredith Whitney, in a world populated by “zombie banks.”

Wall Street’s leading firms cast aside the industry’s cardinal principle in the industry: strong risk controls and proper supervision and training of brokers. The rest of us paid the price with hundreds of billions in taxpayer-funded bailouts, a cratering economy, intractable unemployment and now the threat of a “double-dip” recession.

But rather than recognizing the roots of the current fiasco and shouldering some blame, Wall Street’s main objective now is to repeal or roll back the Dodd Frank rules put in place just a couple of years ago to correct the problems that led to the 2008 financial meltdown, and hopefully prevent a repeat.  They are spending millions on lobbyists to convince Congress that Dodd Frank is too burdensome, too strict and won’t allow them to come up with the next great “financial innovation.”

Here’s an idea: spare us from the brand of creativity that brought us mortgage-linked synthetic CDOs last time around and nearly caused another Great Depression. Get back to the basics of stringent risk controls and strict supervision.

On Wall Street, some people just never seem to “get it.”

Disclosure: Zamansky & Associates represents investors in arbitration cases and federal and state court actions against most Wall Street firms, including UBS and Citigroup.

Read Article on Forbes.com

Angelo Mozilo’s Victims

The Questionable Activities of For-Profit Schools

Federal prosecutors in Manhattan and Georgia last week scored a major Medicare fraud bust with the indictments of 44 members of an Armenian-American crime syndicate who billed Medicare for more than $100 million of treatments that were never performed or received. The group reportedly succeeded in stealing $35 million in Medicare reimbursements, making it the largest Medicare fraud operation conducted by a single group to result in criminal fraud charges.

“With 118 phantom clinics and over $100 million in bogus billings, this group of international gangsters allegedly ran a veritable fraud franchise,” Preet Bharara, the United States attorney in Manhattan, said in a statement announcing the charges. “As charged, they stole taxpayer dollars earmarked for the elderly and infirm and got away with it, until now.”

If Bharara and his federal colleagues are genuinely concerned about misuse of taxpayer money, it is my sincere hope that they are taking a close look at the GAO’s allegations that many of the nation’s leading for-profit schools engaged in equally deceptive practices involving taxpayer dollars.

As someone who has investigated Wall Street for more than three decades, I’ve seen an incredible amount of wrongdoing. However, the activities of for-profit education schools appears to take the cake. Most Wall Street wrongdoing involves firms or brokers simply ripping off their customers; there is considerable evidence suggesting that for-profit education companies may have systematically defrauded the Department of Education, ruined, possibly forever, the finances of already hard-pressed low-income students, and deceived investors about the true condition of their business. The extent and the magnitude of the wrongdoing could possibly rival the sub-prime mortgage debacle.

The GAO reported in August that undercover tests at 15 for-profit colleges found that all made “deceptive or otherwise questionable statements” to the agency’s undercover applicants. One admissions representative told an applicant to fraudulently remove $250,000 in savings on a financial aid form. A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value, but the GAO said the same certificate from a local community college cost $520. Recruiters at these schools also frequently engaged in aggressive marketing tactics to pressure these students, who had few options and limited financial flexibility, into enrolling. To review the extent of the alleged wrongdoing, here’s a link to the GAO report. Warning: the accompanying video will make your blood boil.

My firm represents investors who bought for-education stocks that were aggressively touted by their brokers. The clients were told that for-education stocks would prosper in the wake of the downturn because millions of people would seek vocational retraining. The investors, of course, were never told that for-education companies were boosting their financials using questionable sales and marketing practices. The stocks of these companies have plummeted.

President Obama has repeatedly been bashing Wall Street for its greed and unscrupulous practices but so far his rhetoric rings hollow. The SEC remains as ineffective as ever under his administration, merely meting out wrist slaps to alleged fraudsters like Goldman Sachs and Angelo Mozilo. I say alleged because despite agreeing to pay fines of $550 million and $67.5 million respectively, they weren’t required to admit any wrongdoing.

If President Obama truly cared about curbing Wall Street’s reckless and ruinous behavior, he’d be at the forefront calling for a public investigation of for-profit companies and criminal prosecutions for defrauding any government program, not just Medicare.

Angelo Mozilo’s SEC Victory

Angelo Mozilo must be feeling pretty good these days. The guy with the perpetual tan earned well over a half billion dollars transforming Countrywide Financial into one of the nation’s leading mortgage lenders and then ran it into the ground by saddling the company with dubious mortgages that nearly led to the country’s ruin. And what is his SEC punishment for alleged insider trading and misleading shareholders?

A $67.5 million fine, of which about one-third will be paid by Countrywide’s acquirer, Bank of America, along with his legal fees. What’s more, Mozilo didn’t even have to admit any wrongdoing. In Wall Street parlance, he made one heck of a trade.

Yes, Mozilo also was banned for life from serving as an officer or director of a company, but given his track record and the fact he’s 71, his career working at public companies was pretty much over to begin with. Managing his hefty billion dollar portfolio should keep him pretty busy, particularly if Mozilo wants to judiciously avoid public companies managed by greedy executives like himself who put their interests ahead of shareholders.

By any measure, Mozilo’s penalty amounts to a wrist slap and will hardly serve as a deterrent. And the sad truth is the SEC can hardly be faulted for letting Mozilo off virtually scott free. The agency simply doesn’t have the resources to take on companies or individuals with extensive means. Prosecuting Mozilo would have been a formidable and high risk challenge; even if the agency garnered a win in court — and a victory was far from assured — he has the means to file appeals and drag the case on for years. Ditto for Goldman Sachs, which the SEC let off for a measly $550 million fine for securities fraud and no required admission of wrongdoing.

Admittedly, Mozilo still reportedly faces possible criminal charges and federal prosecutors have the talent and wherewithal to go the distance with Mozilo’s legal army. If prosecutors do bring charges, let’s hope they do a better job convincing a jury than they did prosecuting Ralph R. Cioffi and Matthew M. Tannin.

In the meantime, Mozilo can continue enjoying the good life with his Wall Street enablers. Sadly, there is no public shame being accused of wrongdoing by the SEC. Despite charges that ultimately led to a $6 million fine and a two-year ban from the securities industry for his role in a pay-to-play scandal involving New York State’s pension fund, former Quadrangle Group head Steven Rattner was feted last week at a reception attended by an impressive bevy of bold-faced names.

People with power on Wall Street don’t take the SEC all that seriously. The Goldman and Mozilo settlements give them ample reason not to.

Is Education the New Subprime?

Stop me if you’ve heard this one before: Publicly traded corporations accused of wrongdoing countering critics by saying they are helping low-income Americans achieve the American dream.

No, this isn’t the subprime loan debacle all over again.  It’s the for-profit higher education industry, which is currently reeling from plummeting stock prices and shareholder unrest due to a government investigation that found potentially fraudulent practices and a need for new regulations.

Indeed, on August 3, 2010, the U.S. Government Accountability Office (GAO) issued a report which concluded that for-profit educational institutions had “encouraged fraudulent practices” designed to recruit students. The GAO investigated for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington, D.C. Recruiters at all 15 colleges studied by the GAO were found to have, “made some type of deceptive or otherwise questionable statement to undercover applicants, such as misrepresenting the applicant’s likely salary after graduation and not providing clear information about the college’s graduation rate. Other times our undercover applicants were provided accurate or helpful information by campus admissions and financial aid representatives.”

Zamansky & Associates has been investigating a number of these publicly held corporations purporting to offer accredited higher education including: The Apollo Group (APOL), Corinthian College (COCO), ITT Education Services Inc. (ESI), among more than a dozen others.  A full list of corporations our investigation is focusing on can be viewed here.  These corporations’ recruitment practices call into question whether they engaged in false and/or misleading statements and failed to disclose information to investors such as their accurate growth prospects and true financial results.

The actions of these companies has been detrimental to shareholders, but, like the subprime scandal before it, there is a human toll as well.  On June 24, 2010 Yasmine Issa, a 25 year-old single mother of 3 year-old twins, testified at a Senate hearing that she paid $32,000 to learn to become an ultrasound technician, believing she would receive marketable skills and job placement services.  Instead, after exhausting her savings, and taking on $20,000 of debt, she couldn’t find a job, and the so called placement services were of no help.  Unfortunately, this sad story is a common one.

Supposedly, lawmakers are going to step-in and change the laws that govern how for-profit education corporations operate.  The Department of Education, for example, plans to enact a “gainful employment” rule that threatens to cut off federal student loan money to schools that allowed their students, after having lost their jobs during the recession,  to take on more debt than they could afford.

Just like lending institutions such as Countrywide Financial, who argued they were helping low-income families achieve the American Dream when in reality the company was bleeding them dry, for-profit education companies are on the offensive.  They have reportedly hired expensive lobbyists and consultants to sway government rule makers, while also taking out full-page ads at their shareholders’ expense.  Corinthian Colleges, Inc.’s “1,000,000 students don’t count?” campaign and its website www.mycareercounts.com is a prime example.

Wall Street made a fortune selling loans to people who couldn’t pay them back.  For-profit education companies similarly paid their executives millions, while making empty promises to students looking to better themselves.  And while there are many similarities between the two scandals, the for-profit education industry differs in one very important way: it’s not too late for regulators to act.

FINRA to Level the Arbitration Playing Field

Five years ago, I sent a letter to Congress advocating the elimination of the so-called “industry representative” from investor arbitration proceedings administered by FINRA. Since then, I’ve written several op-eds and numerous blog posts on the subject in the hope that FINRA would eliminate the requirement that a representative of the securities industry sit on all investor arbitration panels. Today, FINRA announced a proposal to permanently give investors the option of “all-public” panels, finally freeing them from Wall Street’s influence.

FINRA’s decision will assuredly help level the playing field for investors. Previously, securities industry representatives tended to side with Wall Street and their fellow brokers. The practice was akin to suing your chiropractor and arguing your case in front of another chiropractor.

Needless to say, this is an important step, however, there are other improvements FINRA could make to the arbitration system as well. Such as, a more diverse pool of panelists that is more reflective of the U.S. population.

Also, arbitration proceedings shouldn’t be so secretive. FINRA should consider allowing observers into arbitration proceedings. If journalists or other watchdogs were allowed to attend, investors could see for themselves how brokerage firms mistreat their own clients and important precedents could be set.

Having said that, FINRA deserves credit for listening to investors and their representatives. To be sure, this is a win for individual investors.

Attending the NASAA Conference

This afternoon I was in Baltimore, Maryland attending the National American Securities Administrators Association (NASAA) conference, where I took  part in a panel discussion entitled “Guiding Investors Through the New Market.” My comments focused on a number of key investor issues including the need for a fiduciary standard, the lack of uniform federal regulation and the general failure of the Dodd-Frank bill.

I also highlighted the imbalance between state and federal regulation. While state regulators are taking a stand on behalf of investors against large financial institutions such as Bank of America and Citigroup, federal regulators have consistently remained asleep at the wheel.

I’ve submitted a more detailed position paper detailing these issues into the conference record.  You can view the document here.

Mirror, Mirror On the Wall… Who’s the Culprit For My Financial Fall?

As an investor advocate, I’m always on the lookout for easy-to-understand materials that can readily explain why investors should be wary of stockbrokers, insurance salesmen, and other peddlers of financial products that are supposedly a “sure thing” or “totally risk free.”  One of the best legal documents on this subject is the fraud complaint Massachusetts’ securities head William Galvin filed against Merrill Lynch in connection with the sale of auction rate securities.  The document is rich in detail about how Merrill Lynch always put its interests ahead of its customers.

Neil Weinberg, a senior editor at Forbes and one of the most knowledgeable personal finance journalists in the business, earlier this month published a feature that decidedly is one of the most insightful articles I’ve read about Wall Street in recent memory. Weinberg candidly warns his readers that the markets are a “rigged game” and provides a litany of evidence showing how investors are constantly being duped and deceived.  Among his examples: Nearly three quarters of the tax-deferred annuities sold in the first quarter were placed in IRA and other retirement accounts.  Annuities are great products for insurance brokers because they carry whopping commissions; but for investors, they are pricey and “dim-witted” (Weinberg’s words) for a retirement account.

Weinberg also quite possibly is the only mainstream financial journalist to appreciate the significance as to why Wall Street and the insurance industry fought so aggressively — and ultimately successfully — to eliminate a passage in the recent financial reform bill that would have held brokers and insurance salesmen as fiduciaries. Under this standard, brokers and insurance salesmen could be held liable for selling products that were not in the best financial interests of their clients. The upshot: bye, bye, 8 percent commissions for dubious annuities products. But Congress once again opted to put Wall Street’s interests ahead of investors.

Fortunately, there are signs that individual investors are getting wise to Wall Street’s shenanigans.  Merrill, Morgan Stanley, and Smith Barney last year controlled 25 percent of the industry assets under management in 2009, down from 32 percent in 2007, according to Cerulli Associates statistics cited in Bloomberg Businessweek.  Independent advisers and regional broker-dealers have increased their percentage of assets to 32 percent from 28 percent in 2007. That’s a comforting trend.

Merrill, now part of Bank of America, and Wells Fargo, the third-largest full-service U.S. brokerage, apparently are racking up some nice profits cross-selling banking services.  It might behoove investors to be wary of this cross-selling as big banks can no longer claim they adhere to a higher moral standard than brokerage firms.  A District Judge recently accused Wells Fargo of “gouging and profiteering” for changing its policies to process checks, debit card transactions and bill payments from the highest dollar amount to the lowest, rather than in the order the transactions took place. This, in turn, caused customer accounts to be overdrawn, thereby allowing Wells Fargo to pocket additional overdraft fees.  California also charged Wells Fargo with fraud for its aggressive sale of auction rate securities.

The warnings signs are as clear as day. As Weinberg pointedly tells readers: “Wall Street gets rich while you eke by. If you are looking for a culprit, look in the mirror.”

The SEC Needs a Win Against Mozilo

As a New York Times story suggested earlier this week, Federal Judges are no longer rubber stamping the SEC’s settlements with Wall Street. This has put the SEC in an almost impossible situation: drive harder bargains and risk facing off in court against Wall Street’s limitless legal resources or bow to their wishes and risk more rejected settlements.

It all started with Judge Jed S. Rakoff’s denouncement of the SEC’s settlement with Bank of America for allegedly misleading shareholders about losses pending at Merrill Lynch, which at the time was in the process of being acquired. Judge Ellen Segal Huvelle then refused to accept a settlement with Citigroup, which also was accused of misleading shareholders about tens of billions of dollars in potential losses.

Judges are frustrated that the SEC’s settlement patterns harm shareholders who actually bear the brunt of the fines. They also want the SEC to negotiate stiffer penalties holding executives personally liable for fraudulent acts.

There are many reasons why large Wall Street firms are able to negotiate such generous terms with the SEC. One reason is the so-called “revolving door,” where former SEC officials representing Wall Street sit across from their past colleagues who themselves might be eying lucrative Wall Street jobs. But another is that Wall Street knows that the SEC is at a disadvantage if push comes to shove and a trial is scheduled.

The SEC rarely argues cases in a courtroom and even more rarely prevails against large Wall Street banks. With a track record like that, Wall Street’s legal representatives have the leverage they need to protect senior management and continue practices that exploit investors.

But that could all change in October when the trial against former Countrywide Financial CEO Angelo Mozilo is scheduled to begin.

A settlement agreement has yet to be struck between the SEC and senior executives of mortgage giant Countrywide Financial, including Mr. Mozilo. The SEC has accused them of misleading investors about their lending standards. It’s conceivable that an agreement may prevent a trial or that a judge could dismiss the charges, but considering the judicial scrutiny of late, the terms of a settlement would not be favorable to Mr. Mozilo and his former colleagues. Thus, it certainly looks like a civil fraud trial will get started this October.

The symbolic importance of the trial has been noted by several experts including former SEC chairman Harvey Pitt, who said that the case is “significant because it is a reflection of the SEC’s commitment to go after people who have been involved in the financial meltdown.”

I agree with Chairman Pitt, and I’d take it a step further: a win for the SEC would provide its enforcement team with the leverage they need to negotiate stiffer terms for settlements. Future settlements could and should include admissions of liability, as well as personal financial liability of the wrongdoer and his or her manager if applicable.

For the SEC, this is a “bet the farm” lawsuit and one that could lay the groundwork for the future of enforcement on Wall Street.