Source: https://corpfraud.typepad.com/corporate_fraud_blog/securities_fraud/
Timestamp: 2019-04-22 01:06:29+00:00

Document:
Our firm recently announced an investigation into potential fraud claims against TeleNav Inc. (Nasdaq: TNAV) relating to its May 13 initial public offering. We have now received information that leads us to believe that a strong case exists, worthy of consideration by investors. At the same time, the Second Circuit just issued a decision in Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., that favorably clarifies the applicable law.
TeleNav provides cell phone carriers with navigation applications for their cell phones. Sprint Nextel Corp. provided TeleNav with more than 55 percent of its revenues. TeleNav's major competitors include Google, Garman and other companies providing their own navigation services.
Just three months after the IPO, TeleNav revealed it was renegotiating a key contract with Sprint that would likely lead to substantially lower revenues. TeleNav's stock immediately plummeted nearly 40 percent.
"Our current agreement with Sprint expires on December 31, 2011; however, our right to be Sprint’s exclusive provider of Sprint Navigation expires on December 31, 2010. Commencing on December 31, 2010, Sprint may terminate its agreement with us at any time by giving us 30 business days prior written notice. Our failure to renew or renegotiate this agreement on favorable terms or at all, a termination of our agreement by Sprint or our failure to otherwise maintain our relationship with Sprint would substantially reduce our revenue and significantly harm our business, operating results and financial condition."
“Competitors could begin offering (location-based services) that have at least equivalent functionality to ours for free. For example, Google offers free voice guided, turn by turn navigation as part of its Google Maps product for mobile devices based on the Android 1.6 and higher operating system platform, and Nokia announced its latest version of Ovi Maps on its smartphones, which also provides turn by turn navigation functions. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these (location-based services) to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services, or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful.
Mighty strong risk disclosures, right? Wrong! This is where MF Global and our investigation come in to play.
Suppose the facts show that prior to the IPO, TeleNav was so concerned about the upcoming contract negotiations with Sprint and the competition, that it wanted to go public before Sprint pulled the plug on their relationship. If TeleNav knew nothing more than the risk disclosures above, it is doubtful that they could be held liable for not disclosing their fears and belief so long as they said nothing about their fears and belief.
Suppose, however, that TeleNav knew before the IPO that Sprint was complaining about the resources it devotes to TeleNav's product – called "Sprint Navigation" – and told TeleNav management that it was in favor of Google's free navigation services instead of TeleNav's on Sprint's Android devices. Further, suppose Sprint told TeleNav it would not pre-load TeleNav’s product on Sprint's Android devices, but that TeleNav could sell their own services through Sprint Zone, forcing TeleNav to start its own branding efforts.
Investors are interested in issuer statements only insofar as those statements bear on the future. While it is true that predictions about the future can represent interpretations of present facts (and vice versa), there is a discernible difference between a forecast and a fact, and courts are competent to distinguish between the two.
A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction.
The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking and thus insulated by the bespeaks-caution doctrine -even while statements or omissions as to the operations in place (and present intentions as to future operations) are not.
Thus, the Court found that characterizations of MF Global's risk-management system-that the system was “robust,” for example - invited the inference that the system would reduce the firm's risk. It went on to find that bespeaks caution did not apply insofar as those characterizations communicate present or historical fact as to the measures taken. Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired.
So too with TeleNav, the key question will be whether the "bespeaks caution" doctrine applies to TeleNav's description of its contract with Sprint, the expiration of that contract and the threat of the competitors. Our investigation causes us to believe that the risk of renegotiation of the Sprint contract was not just a possibility, but a current reality in which TeleNav's management knew they were in trouble. It was not a future risk, but one that had already transpired by the time of the IPO.
I have lectured to corporate executives over the last 20 some years about this classic type of IPO fraud. It's often the one chance in a lifetime to cash in on millions by selling stock to the public. The temptation to hide or ignore bad news is great and accompanied by the mantra, “just get it done.” Risk disclosures are often written with this in mind, and the lawyers who draft them do a great disservice to their clients and the investors when the risks have already begun to manifest.
Hagens Berman continues to investigate this matter, and to represent investors who purchased TeleNav stock before July 30, 2010. You may read more on the Hagens Berman website here, or read the press release here. To be eligible to be a lead plaintiff you must move by November 2, 2010. Contact Reed Kathrein at 510-725-3030 for a consultation or email Hagens Berman at tnav@hbsslaw.com .
United States investors who buy or sell securities outside the US, cannot sue in the US or use US law, to recover against foreign fraudsters! Nor can foreign investors trading abroad who are victims of fraud perpetrated in the US by US corporate fraudsters! This dilemma is the new result of the United States Supreme Court's opinion in Morrison v. National Australia Bank. As a result, US investors will now be sent overseas, to forums which are not as investor friendly, to seek recovery.
Over the past 40 years, Courts have followed the "conduct" and "effects" test to exercise jurisdicition over securities fraud if a major portion of the fraud occurred in the US or if foreign conduct produced immediate and substantial effects in the United States. Justice Scalia, writting for the court, held that their was no affirmative indication that the Exchange Act was intended to apply extraterritorially. Its focus in not on where the deception originated, but on purchases or sales of securities in the US.
Justice Breyer concurred in part only so far as the complaint failed to allege that the purchases were "in connection with" either the purchase or sale of a security listed on a national securities exchange" or "any security not so registered" that was purchased or sold in the US. While there is nothing in the Securities Exchange Act that limits the second category to purchases or sales within the US, Breyer would apply the presumption against extraterritoriality.
Repudiating the Second Circuit’s approach in its entirety, the Court establishes a novel rule that will foreclose private parties from bringing §10(b) actions whenever the relevant securities were purchased or sold abroad and arenot listed on a domestic exchange. The real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are "the focus of the Exchange Act" and "the objects of [its] solicitude." ... In reality, however, it is the "public interest" and"the interests of investors" that are the objects of thestatute’s solicitude.
Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated thestock price—and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executivesgo knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomedsecurities. Both of these investors would, under the Court’s new test, be barred from seeking relief under §10(b).
The oddity of that result should give pause. For in walling off such individuals from §10(b), the Court narrows the provision’s reach to a degree that would surprise and alarm generations of American investors—and, I amconvinced, the Congress that passed the Exchange Act.Indeed, the Court’s rule turns §10(b) jurisprudence (andthe presumption against extraterritoriality) on its head,by withdrawing the statute’s application from cases inwhich there is both substantial wrongful conduct that occurred in the United States and a substantial injuriouseffect on United States markets and citizens.
Nevertheless, Justice Stevens follows the Court of Appeals decision in concluding that this case, in particular, does not have extensive links to or ramnifications in the US, but rather "has Australia written all over it."
The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it paysshort shrift to the United States’ interest in remedyingfrauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the resultthe Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under §10(b)toothless.” Stoneridge, 552 U. S., at 175 (STEVENS, J., dissenting).
So now what? As a firm we must now look abroad to protect our clients. While we have done so in the past, it will now become a primary function. Unfortunately, those laws are not as developed as well as those in the US, and access to the Courts is much more difficult.
Defendants actually and knowingly assisted in sham transactions that misrepresented the financial results of a public company.
Defendants had no duty to the investors of another company, nor did they make any public statements about the transactions.
Hence, investors did not rely on their conduct when making their investment decisions!!!!
And therefore, unless Congress says otherwise, the Defendants can now move on and help the next fraudster with impunity.
But, as Reuters also reported, Senator Chris Dodd, who helped lead the charge in 2004 and 2005 to make it more difficult to sue his campaign donators from the accounting and banking industry, has once again stood in the path of accountability. Dodd was instrumental in the passage of the Private Securities Litigation Reform Act that made it impossible to sue anyone who commits securities fraud unless you can get the facts usually soley in the possession of the fraudsters themselves. Now again, the Senate negotiators for the Financial Reform Bill rejected the amendments to reinstate liability in favor of a "STUDY." Reuters quotes Dodd as saying "The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point." So let's have a study.
This is probably the last chance to get such liability reinstated and Dodd well knows that a STUDY is the kiss of death. He is not really standing up for the little guy in protecting his friends. The lawyers, accountants, bankers, who act as gatekeepers cannot be allowed to assist fraud and line their pockets. The main culprit often has too few resources to pay the damages, is bankrupt, or otherwise judgment proof. Even the SEC cannot recover damages from those who aid and abet. In large part that is why we have the financial/banking mess we have now.
Now is the time, if ever, for Congress to pass legislation that would reinstate aiding and abetting liability for accountants, lawyers, and others who help corporate executives commit securities fraud that harm investors. The public is outraged from watching all those who assisted in the market meltdown walk away with their huge bonuses.
Senator Arlen Specter, introduced Senate Bill 1551 on July 30, 2009, seeking to do just that. The Bill called the"Liability for Aiding and Abetting Securities Violations Act of 2009," is currently co-sponsored by Edward Kaufman [D-DE], John Reed [D-RI] and Sheldon Whitehouse [D-RI]. The Bill seeks to amend the SEC Act of 1934 subject to liability in a private civil action any person that knowingly or recklessly provides substantial assistance to another person (aids and abets) in violation of that act. The Senator's goal is to restore the ability to sue third parties in securities fraud lawsuits as freely as you could before the U.S. Supreme Court's ruling in Stoneridge v. Scientific Atlanta (Supreme Court docket).
For purposes of any private civil action implied under this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of this title to the same extent as the person to whom such assistance is provided.’.
Mr. President. I have sought recognition to urge support for the legislation I just introduced, the Liability for Aiding and Abetting Securities Violations Act of 2009. My legislation would overturn two errant decisions of the Supreme Court--Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 1994, and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 U.S. 148, 2008, by amending the Securities Exchange Act of 1934 to authorize a private right of action for aiding-and-abetting liability.
Act's main anti-fraud provision, §10(b), makes it "unlawful for any person, directly or indirectly," to commit acts of fraud "in connection with the purchase or sale of any security." Nearly fifty years ago the Court implied a private right of action under §10(b). The result was that investors could recover financial losses caused by violations of 10(b) and the companion regulation issued by the SEC commonly known as "Rule 10b-5."
Until Central Bank, every circuit of the Federal Court of Appeals had concluded that §10(b)'s private right of action allowed recovery not only against the person who directly undertook a fraudulent act--the so-called primary violator--but also anyone who aided and abetted him. A five-Justice majority in Central Bank, intent on narrowing §10(b)'s scope, held that its private right of action extended only to primary violators.
When Congress debated the legislation that became the Private Securities Litigation Reform Act of 1995, PSLRA, then-SEC chairman Arthur Levitt and others urged Congress to overturn Central Bank. Congress declined to do so. The PSLRA authorized only the Securities and Exchange Commission, SEC, to bring aiding-and- abetting enforcement litigation.
It is time for us to revisit that judgment. The massive frauds involving Enron, Refco, Tyco, Worldcom, and countless other lesser-known companies during the last decade have taught us that a stock issuer's auditors, bankers, business affiliates, and lawyers--sometimes called "secondary actors"--all too often actively participate in and enable the issuer's fraud. Federal Judge Gerald Lynch recently observed in a decision calling on Congress to reexamine Central Bank that secondary actors are sometimes "deeply and indispensably implicated in wrongful conduct." In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d. 304, 318 n.15, S.D.N.Y. 2009. Professor John Coffee of Columbia Law School, a renowned expert on the regulation of the securities markets, has even laid much of the blame for the major corporate frauds of this [sic].
The immunity from suit that Central Bank confers on secondary actors has removed much-needed incentives for them to avoid complicity in and even help prevent securities fraud, and all too often left the victims of fraud uncompensated for their losses. Enforcement actions by the SEC have proved to be no substitute for suits by private plaintiffs. The SEC's litigating resources are too limited for the SEC to bring suit except in a small number of cases, and even when the SEC does bring suit, it cannot recover damages for the victims of fraud.
Last year's decision in Stoneridge made matters still worse for defrauded investors. Central Bank had at least held open the possibility that secondary actors who themselves undertake fraudulent activities prescribed by §10(b) could be "held liable as ..... primary violator[s]." Stoneridge has largely foreclosed that possibility. A divided Court held that §10(b)'s private right of action did not "reach" two vendors of a cable company that entered into sham transactions with the company knowing that it would publicly report the transactions in order to inflate its stock price. The Court conceded that the suppliers engaged in fraudulent conduct prescribed by §10(b), but held that they were not liable in a private action because only the issuer, not they, communicated the transaction to the public. That remarkable conclusion put the Court at odds with even the Republican Chairman of the SEC.
My legislative response would take the limited, but important, step amending of the Exchange Act to authorize a private right of action under §10(b) (and other, less commonly invoked, provisions of the Act) against a secondary actor who provides "substantial assistance" to a person who violates §10(b). Any suit brought under my proposed amendment would, of course, be subject to the heightened pleading standards, discovery-stay procedures, and other defendant-protective features of the PSLRA.
If you have seen my posts on Madoff, you can tell that I am curious about the criminal mind. With normal securities fraud I have always subscribed to the thought that people simply get caught up in little lies, which get bigger, and then out of control. It mostly happens as a series of events, gets covered up, until bad economic situations cause the fraud to be revealed. But rarely have I seen the two lives these people live as we have seen with such highly regarded individuals as Madoff, and now Marc Drier.
570 Lexington Ave., 45 th Fl.
Please consider this letter in connection with my sentencing on July 13, 2009.
I know of course that no words can diminish the harm I have caused to so many people. Those who were victimized by my bogus loans lost millions of dollars. Clients of my law firm lost escrow funds they entrusted to me. The attorneys and staff at my firm who put their faith in me lost their jobs. My friends and colleagues have been tainted by their association with me. And the families of all these people have no doubt shared in the suffering — as has my own family. My children have lost the father they knew, as well as their good name and the happiness they deserve. I have betrayed the people I care about most, and I suffer every day from the shame and self-loathing and regret with which I will always have to live.
My crimes are inexcusable. I expect and deserve a significant prison sentence.
Nevertheless, I am writing to give some context to what I did — certainly not to minimize my crimes but to try to explain how a person with my background and advantages came to do the unconscionable. Perhaps in learning how I made these terrible decisions which have ruined my life, others may avoid such mistakes. I have requested that my attorneys file this as an open letter, available in the public record, in the hope that it may do some good as a warning to others not to follow in my path.
in school. I attended Yale College and Harvard Law School. After law school I spent 20 years in several prominent law firms, first as an associate, then as a partner. I performed well, but I was achieving less satisfaction and recognition than I expected. Colleagues of mine and certainly clients of mine were doing much better financially and seemingly enjoying more status. By my mid-forties I felt crushed by a sense of underachievement.
So I started my own firm in 1996. My intention was to try to attract lawyers who, like myself, were dissatisfied with large firms and were looking for a more gratifying way to have a sophisticated practice. I had virtually no cash and very few clients. but I was able to grow the firm modestly over the next few years by investing my life in it.
I had planned poorly. however, for the expenses. I couldn't get bank loans without better credit or collateral, so I was funding the firm partially with advances from some clients but primarily through "factors" who charged exorbitant fees and interest and were highly intrusive in monitoring the firm's accounts. By 2001 I was deeply in debt.
In January 2002, my wife sued for divorce. I had been married for 15 years. We have two children. We entered into a settlement agreement under which I took on financial obligations to her and our children which were actually far more than I could afford. I believed that my fledgling law firm could not survive a contested divorce.
All of this left me feeling overwhelmed — by my debt, by a disappointing career, by a failed marriage. And so, incomprehensibly, in 2002 I started stealing. First, I invaded some settlement proceeds due a client. Then I arranged a few bogus investments with some individuals. And soon I stumbled upon the brazen idea of arranging fictitious loans from hedge funds, ostensibly to my principal client (the real estate developer referenced in the Indictment), and diverting the loan proceeds to myself.
As I sit here today, I can't remember or imagine why I didn't stop myself. It all seems so obviously deplorable now. I recall only that I was desperate for some measure of the success that I felt had eluded me. I felt that my law firm was my last chance to make a mark for myself, and I was fearful of seeing it fail. I know of course that this amounted to nothing more than self pity, but this was my state of mind when I became a criminal. I gave in to being overwhelmed by the anxieties of life that we are all expected to cope with every day, and most people do, but I just could not manage to do so. I had no one close to me with whom I could talk. I had isolated myself, both personally and professionally. I lost my perspective and my moral grounding, and really, in a sense, I just lost my mind.
At the beginning, I spent most of the money on growing the law firm. Much of the money also went to servicing the "debt" itself. But, as time went on, I was more and more self-indulgent.I bought extravagant things — a beach house, an apartment, a boat, expensive art. Obviously, other men suffer through divorce and "mid-life crisis" and manage not to steal. And, other people grow their business without resorting to crime. I just wasn't in control of myself.
It is hard to explain how my crimes in 2002 reached the level that they did by 2008. Certainly I never intended when this began to steal on the scale I eventually did. I took the first money thinking that I could and would repay it shortly with revenue derived from the law firm. Soon, however, I exhausted the money, and it was evident not only that I would be unable to repay the initial "loans" but that I would need more. I had stepped in a quicksand of spending. By 2008 I had hired over 250 lawyers and opened additional offices in Los Angeles. Pittsburgh and Connecticut. The expenses were more and more uncontrollable, and the "loans" became more and more expensive. As the credit markets worsened, hedge funds were demanding much higher interest rates and, in many cases. substantial discounts to principal. In some cases, when I desperately needed new money to pay back loans becoming due, I was selling loans for 60-65 cents on the dollar, meaning that I was paying back far more principal than the hedge funds were actually paying me, which obviously was dramatically deepening the hole I was in.
In this way, without ever actually planning to. I found myself running a massive Ponzi scheme with no apparent way out. No doubt as is typical in Penn schemes, there was always the unrealistic expectation, or at least the hope, that I could use the "borrowed" money to eventually make it all work out. Obviously, and predictably, I was unable to do so.
new ones, I placed a few other fictitious loans, in much the same manner, by using instead as the purported borrower a Toronto pension fund that I had once represented. Finally, when there were no loans I could invent, I began to pull money again from a few of the firm's escrow accounts, knowing of course that it was terribly wrong but still thinking that I could somehow restore the funds in short order. Typically, I did restore this money, but in early December 2008 I was unable to restore about $40 million to one such client account as the due date for its disposition was nearing. As a result, I engaged in the most desperate and irrational act yet - impersonating an attorney from the pension fund in Toronto in order to "close" a loan from a hedge fund which would have given me the funds to return the escrow money. I knew very well that this time I would most likely be caught. I was caught, and that escrow money was not restored.
scrambling every day to sustain the charade. I had three "full time" jobs: First, I was managing a large active law firm, with all the daily challenges that come with such responsibility. Second, I was head of the firm's litigation department, with a very heavy active practice and caseload of my own. Finally, I was managing a huge portfolio of fraudulent loans, which required me to constantly prepare and update bogus financial statements and loan documents, field inquiries from lenders and prospective lenders, arrange payments of principal and interest on existing loans, obtain new loans as old ones matured, and do all that was necessary to keep the scam a secret. At the same time, I was trying to spend as much time as possible caring for my son, who lived with me full-time, and my daughter, who lived about half the time with each parent. It was all I could do to get through each day, and each day it got harder. It was a frantic life which I had created for myself, and it left me exhausted and impaired.
Your Honor has rightfully observed that as a lawyer I have dishonored the legal profession, and I am very painfully ashamed of that. My whole ambition in life was to be a lawyer who would distinguish himself and honor the profession. Over the course of 33 years of practice, I represented many clients well and devotedly. I made my work as a lawyer the center of my life.
my offense. I am shamed by these letters. During the time I was committing my fraud. I tried to convince myself that I was hurting only "institutions' . and not "individuals - (as if that were less contemptible), because I was borrowing almost entirely from hedge funds. I knew of course then and I know now that this was all nonsense - my fraud devastated "real people" in a very real way. The letters from these individual victims show their suffering first-hand. I will only add that I believed these individuals would not be harmed. because I always made certain that there were sufficient funds still available to repay them when their money came due. At the time of my arrest, there were in fact sufficient funds in the firm's account (over $10 million) to repay all f these individuals. After my arrest, while I was jailed in Toronto, I instructed the controller of the firm to transfer $10 million to a separate non-law firm account, believing that by doing so I could shield the money owed to these individuals from any competing claims until I returned to New York. As I understand it now, however, several individuals remain unpaid in the wake of the firm's collapse, and these individuals who trusted the firm I controlled have been terribly harmed. I never intended for them to lose their money, but obviously I am responsible for even he unintended consequences of my wrongdoing.
Since my arrest, I have done whatever little I can to start to make amends for my crimes.
From the outset I acknowledged my guilt. I never considered putting my victims through the burden of a trial. I have also cooperated fully with the Receiver and Trustees appointed by the ourt. In numerous meetings and discussions I have tried to help them identify and recover funds and other assets to start to compensate those who are owed money.
More than that, I can only explain to the people I betrayed how I came to make these mistakes and express my profound remorse. In the brief time I may have to speak at my sentencing, I hope to express my remorse to those I have hurt. Perhaps at least they will feel some degree of my shame, which I will have to live with for the rest of my life.
For rne, the punishment that I receive from this Court will only be part of my sentence. I have already been disgraced beyond anything I could ever have imagined. Despite whatever good I once accomplished in my life, and what I had hoped to accomplish, I will always be remembered as a thief. I have lost all my friends. I have lost my law firm, my law license and all that I ever owned. 1 have seen my family suffer the unimaginable. I have lost my past and y future. I have lost everything a man can lose. And now I will lose my freedom as well, and rightly so.
All that I have left in my life is the prospect of still sharing in my children's lives, both while I am in prison and, I pray, for some time thereafter. My son is 19; my (laughter is 17. We are very close. I have devastated their lives, and unfortunately nothing I do now can diminish that. I can only try to be there for them to whatever extent I can.
whatsoever for what I have done. I have explained it the best I can. 1 will try to learn from this, and hopefully others will as well.
Fixing the Financial Regulatory System: Geithner and Schapiro Ignore the Need for Mutual Fund Reform I waited for March 26, 2009, in great anticipation that we might see meaningful change in protecting investors. I pray that my retirement years are not stolen from me as they have been from those who we represent - those who trusted Charles Schwab, OppenheimerFunds, MassMutual and Madoff. However, March 26 came and went with little recognition of why and how this happened by those our new President entrusted to help steer these changes. Both Timothy Geithner (Secretary of Treasury) and Mary L. Schapiro (SEC Chair) testified today on improving our financial regulatory system. Geithner spoke to Barney Frank and his House Committee on Financial Services, and Schapiro spoke to Christopher Dodd's Senate Committee on Banking, Housing and Urban Affairs. Geithner's testimony can be found here, and Schapiro's here.
Before I start in on my criticism, let me say that I understand that both Geithner and Schapiro are long time industry/regulatory insiders. Change comes slow to those who have been part of the system and failed to step forward early. Certainly, it is better to talk about "failures" than to admit that they were asleep at the switch. It is better to talk in the abstract with little criticism that might incite a lynch mob.
Reading both testimonies, I am dumbfounded at how little attention is paid to the mutual fund industry that took investors' money and started pouring it into any asset available regardless of its objectives.
"[W]eaknesses in our consumer and investor protections harm individuals, undermine trust in our financial system, and can contribute to systemic crises that shake the very foundations of our financial system."
"Innovation and complexity overwhelmed the checks and balances in the system. Compensation practices rewarded short-term profits over long-term return. We saw huge gains in increased access to credit for large parts of the American economy, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations they did not understand and could not sustain. The huge apparent returns to financial activity attracted fraud on a dramatic scale. Large amounts of leverage and risk were created both within and outside the regulated part of the financial system."
It's almost like the financial services industry wrote his words: "Tim, throw in words that make it look like 'things' caused us to commit fraud, and then put the blame on the 'many Americans with obligations they did not understand...'"
Let's pretend our mess was caused by poor consumers who did not know what they were buying, instead of the greed; greed of financiers who "created" packages of garbage loans, and dumped them on retirees for huge fees, profits and commissions. This slight of hand makes my blood boil.
Geithner completely leaves out the crimes of our mutual fund industry. Instead, he focuses on Money Market Funds that broke the buck. Big deal. This cost the American people a tad of what was lost in mutual funds by companies that sold "conservative," "stable" investments to retirees following the models that touted moving to bonds in your retirement years to preserve capital and earn income. The Reserves money market fund, when all is said and done, lost about three percent. Oppenheimer's Champion Income Fund lost 79 percent. Schwab's Ultra Short Term Bond Fund lost more than 50 percent.
"Our capital requirements go a long way to ensuring that customer funds entrusted with a broker-dealer are safe in the event the broker-dealer gets in financial trouble. Again, our focus is not to insulate broker-dealers from competition and the risks of failure, but to protect investors in the event that failures do occur. We conduct examinations of these firms to assess their compliance with laws and regulations. And when we find violations or deficiencies, we direct that corrective action be taken."
Think Bernie Madoff Investment Service (a broker dealer regulated by the SEC). Ahhhhh! Capital requirements? Protect? Examinations? Compliance? Of course note the disclaimer; "And WHEN we find..."
"I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets. The list of certifying firms would be publicly available on the SEC's Web site so that investors can check on their own financial intermediary. In addition, the name of any auditor of the firm would be listed, which would provide both investors and regulators with information to then evaluate the auditors."
"As part of this effort, I expect to come to you in the near term with a request for authority to compensate whistleblowers who bring us well-documented evidence of fraudulent activity."
Madoff would be required to sign a certification - big help.
The auditors name would be public - oh, this helped the Oppenheimer Tremont Rye fund investors who received audit reports from KPMG and Ernst & Young who believe that they are isolated from liability because they can rely on certifications by Madoff's audit or shoeshine man.
The SEC could now pay whistleblowers who present "well documented evidence...because when Madoff's whistleblower Harry Markopolos came to the SEC for free the SEC could not believe that anyone would blow the whistle for free!
"Ultimately, capital comes from investors - people who invest directly in companies; people who invest in financial institutions that lend capital; people who invest in mutual funds and other pooled vehicles that in turn invest in America's businesses; people who buy municipal securities to help fund the operations of state and local governments; and people who look to the capital markets to save, put away money for their kids' education, and prepare for retirement. Markets that attract this capital are critical to America's economic future."
But Schaprio talks only about the past enforcement efforts and current regulations. As for future change, she talks only about money market funds. She apparently does not recognize that current regulations do not work for mutual funds.
The Courts have recently thrown out the private rights of action under the Investment Company Act, which regulates the fund industry. Because of the structure of the funds, purported independent trustees ( who often sit on the boards of 10, 20 and even 40 funds offered by the same investment adviser), and trust agreements, even state law claims are impossible to bring. That leaves the paltry resources of the SEC to enforce those laws for an industry with more than $9 trillion in assets.
Mutual Funds are sold primairly over the phone or with glossy web pages and/or brochures containing smiley faces, impressive graphics and a sales pitch. To the extent that disclosures can be found, they are impossible to read, dispursed in a staggering array of documents with indecipherable names, never actually delivered until after the purchase, and even then rarely. The funds' advisers retain near unlimited power to change their focus overnight...if it brings in more profits. The industry is driven by a need to do what it takes to attract capital, not the interests of the investor.
Neither Geithner nor Schapiro seem to recognize these issues, nor seem to care.
Dear, dear. The more things change the more they stay the same.
Famous Madoff Qoutes: "I Suppose You Could Program a Computer To Violate A Regulation, But We Haven't Gotten There Yet"
Famous Madoff Quotes: "I Suppose You Could Program a Computer To Violate A Regulation, But We Haven't Gotten There Yet", 60 million people retire next ten years? "Good Luck " and "I'm very close to the Regulators...my niece married one."
As we proceed to work our way through the Madoff litigation, we tend to focus on those cases where we believe we can best find a source of recovery for our clients. To date that has been principally the Tremont Rye Funds which were controlled by Oppenheimer and Massachusetts Mutual, audited by two of the Big Four accounting firms, KPMG and Ernst & Young, and supposedly had a custodial bank, Bank of New York Mellon. We have focused also on the feeder funds to the Tremont Rye Funds, such as Spectrum, Future Select, Austin and Meridian. Others crop up every day. Nevertheless, these stories, at this point, are rather dry and our minds still drift over to how Madoff pulled this off. A video of Bernie Madoff discussing his business has surfaced on the internet, and helps lead us there.
"Now, no one is going to run a benefit for Wall Street, so whenever I go down to Washington and meet with the SEC and complain to them that the industry is either over-regulated or the burdens are too great, they all start to roll their eyes, just like all of our children do whenever we talk about the good old days."
Today, basically the big money on Wall Street is made by taking risks. Firms were driven into that business, including us, because you couldn’t make money charging commissions, primarily because the rates were lowered and because of the regulatory infrastructure you had to have dealing with clients.
"There are so-called Chinese Walls that are required to be established at every brokerage firm. They’re called Information Barriers—a term most people would understand—to sort of wall off a brokerage firm from taking advantage of information that he has as to what clients are basically going to trade or not going to trade. There are separate divisions within the firms and it is very carefully enforced and surveilled. It doesn’t mean there are not abuses, for sure, but by and large in today’s regulatory environment, it’s virtually impossible to violate rules. This is something that the public really doesn’t understand. If you read things in the newspaper and you see somebody violate a rule, you say well, they’re always doing this. But it’s impossible for a violation to go undetected, certainly not for a considerable period of time. And when you consider the volumes of trading, the trillions of dollars of trading that go on today in Wall Street—I mean, our firm, for example, we trade an excess of $1 trillion dollars a year and that’s one firm—and you look at what we would consider to be the infractions, they’re relatively small, primarily because of all the regulation. Most firms do try to comply with that."
So we determined that the best thing for us to do was basically to take the human being out of the equation. That had two advantages in our industry. Number one, when you take the human being out of the equation, you solve your regulatory problems because the nature of any human being, certainly anyone on Wall Street, is the better deal you give the customer, the worse deal it is for you. You’re on the other side of the transaction. It’s like going into any store—the store sells you a television at a higher price, they’re going to make more money. They sell you the lower price, their profit goes down accordingly. As honest as you try and get people to be, there’s this normal, natural pole that you have to deal with. By taking the human being out of the equation to a great extent and turning it over to a computer to make your decision—I guess you could also program the computer to violate the regulations, but we haven’t gotten there yet.
"The future is silence. I don’t see a lot changing in the marketplaces. It’s hard to of course say that because everything always changes, but I cannot imagine what else we’d do, from an automation standpoint..."
"You know, this is a psychoanalytical group, I guess, right?... I’m sort of curious—maybe because no one got a chance to ask any questions about it yet—what are human beings contributing to the marketplace? Is there any change in their actions?
Madoff: The issue is, the way they tend to look at the industry if you’re making a profit there’s something wrong, even though intellectually they know that shouldn’t be.
"You know, my theory—and I’ve always said this even though we were one of the ones that started all this automated algorithmic trading—was that I never wanted to get into a cockpit of a plane and see there wasn’t a pilot sitting there...But more importantly, in our firm—and I don’t know that we’re unique, but I know there are other firms that do not operate this way—we have a group of traders that are watching the systems work and the results of the systems to make sure that from their sense of trading things look right. With all due respect to Josh and a lot of other people that we have with similar backgrounds, programmers—not that he’s a programmer—but people of his ilk can tend to believe too much in the math and in the model. They fall in love with it sometimes. Not so much Josh, which is why he’s with us, but we have a lot of people like Josh that we employ and deal with. They’re different. The thing that separates somebody that is a good algorithmic trader from somebody that is dangerous is somebody that just always believes the machine is right. There are people like that. It goes back to what Bob said about the joke of the dog. It’s supposed to make sure that nobody touches the machine. You always want to have the human factor involved in the process because that makes it better. At least that’s been our experience.
Audience: "My question is a little basic. It’s open for the whole audience. How do you feel that the baby-boomers retiring, starting this year, will affect the future of the stock market, considering there were probably about 60 million people who are going to retire in the next ten years?"
What is the take from this...its hard to tell. Here we have a man who created the NASDAQ, and took the human element out of the trading, and yet clearly likes to spend time with people. Maybe he was bored and needed the human touch. By playing the big man on campus, and spreading largess, he was the center of attention. As he states in minute 69...."The reason why is it’s quiet. When you went up to our firm you said, “Well, I’m surprised at how quiet it is.” I find it difficult to get used to that because I’m used to a lot of noise and screaming."
Clearly worst punishment for Bernie Madoff will be silence.
Often times securities fraud class actions felt like aiding a gambler who got cheated at the pool table. No tears were felt, but their were rules to be enforced and money returned. Today....it is not the same...in the Madoff matter and others. Today those who fled the tough and tumble of the public markets, and sought safety and security...investing in money market funds, cash, and trusted advisors, are telling us of having lost their entire savings and in too many cases, the funds needed to pay their medical bills and retirement. It is hard not to want to cry.
One of our clients had invested with a partnership pool almost 40 years ago, and that is where his money stayed and grew. Today he got the call where the caller revealed the "worst nightmare" ...all of the money had been invested with Madoff. 75% or his retirement gone! Shock does not describe his feelings...if any are left.
The SEC has now shut down Madoff's operations, including Bernard L Maddoff Investment Securities LLC, or BMIS. The freeze order can be found here. The SEC's complaint used to obtain the order can be found here.
But who else was involved, and where will investors be able to seek recovery?
Our investigation...in its early stages...leads use to believe that many were involved...and many knew or suspected. The investors we know invested in partnerships who invested with partnerships... who invested with Bernie M. And Bernie M. and some of the General Partners of these partnerships seem to have close relationships. We are trying to learn more about those partnerships and relationships...many of the partnerships seem to have less of a real presence than the 3 auditors of Bernie M's fund. At least they had a 12 by 18 foot office and showed up for 15 minutes a day in their tie dye T-shirts. We know that there was a group of funds or partnerships funneling money to Bernie M. But the pciture needs paint.
You can help us with our investigation. Help us define the web that allowed this Ponzi scheme to hurt so many. A description of our investigation is available here.
Is Cadence's Restatement Likely the Result of Fraud?
But often a good indicator of fraud is insider selling. However, insider sales have been very small over the last year, though James Miller, one of the executives who resigned, sold about $120,000 in September and an executive who did not resign, sold about $631,000 in February. Much more was sold in the last two quarters of 2007, before the revenue recognition problems, but it is always possible that the executives foresaw the upcoming income declines and sold before they needed to play revenue games.
Of course another incentive could be the need to raise cash for acquisitions such as the failed attempt to acquire Mentor Graphics announced in May 2008.
We will keep monitoring this story, and if you have any information, let us know. See our post on Meaningfuldisclosure.com.
The National Association of Securities and Consumer Law Attorneys has long fought for the protection of investor rights. But back in 1994, Christopher Cox, our current SEC chairman....the chairman under whose watch this current financial fraud crisis occurred, helped lead the charge to make it nearly impossible to bring a suit against big corporatations who were committing securities fraud. That law was innocently called the Private Securities Litigation Reform Act, or PSLRA.
Again, in 1998, Mr. Cox was part to the Congress who struck down state laws protecting investors with the passage of the the Securities Litigation Uniform Standards Act, or SLUSA.
One needs ask whether the current crisis is based on lax standards permitting fraud, misrepresentations and omissions to go unanswered as a result of these laws. Like the bust of the dot.com bubble a few years earlier (and the failures of Enron, Worldcom and Tyco ) which Wikepedia ( http://en.wikipedia.org/wiki/Dot-com_bubble ) defines as having been caused by a "canonical "dot-com" company's business model [which] relied on harnessing network effects by operating at a sustained net loss to build market share (or mind share)," the investment banks, General Electrics, etc. all relied on a similarly "comical" business model of lending (at unrealistic rates, or with cheap introductory rates) at a net loss to build assets whidh they could then sell or pawn off on cash rich investors. As with the dot.com's the "motto "get big fast" reflected this strategy." And also like the dot.coms, where "companies relied on venture capital and especially initial public offerings of stock to pay their expenses," and the "novelty of these stocks, combined with the difficulty of valuing the companies, sent many stocks to dizzying heights and made the initial controllers of the company wildly rich on paper, ' in the investment banks and other asset lenders relied on the Schwabs and Ameritrades, to funnel investor's hard earned cash into novel derivatives (mortgage backed securities and asset-back securities) which were impossible to value, and whose credit risk was unsupported.
“During the past two years, even while Wall Street firms were handing out tens of billions of dollars in bonuses to executives, many of these same firms had misrepresented the value of mortgage backed securities (MBS) and collateralized debt obligations (CDOs) held on their own books and sold to other investors. At the same time, the actual subprime mortgage loan originators misrepresented the strength and integrity of their lending policies and procedures. On Friday, Federal Reserve Chairman Bernanke said our problem stems from what in fact were ‘lax underwriting practices’ that were not truthfully disclosed. Had these corporations been honest about their practices and the true value of, and risks inherent, in these securities, the current crisis may never have developed as it did.
“These practices were not victimless excesses stemming from market exuberance. The calculated wrongdoing of many financial executives has now placed the hard won savings and retirements of the majority of Americans at risk. At risk are the pensions covering many of NASCAT’s clients including public school teachers, firemen, policemen, union workers and the individual retirement accounts and plans of tens of millions of more Americans.
“Recognizing this wrongdoing for what it was, state attorneys general, our frequent allies in the fight to uphold investor protection and recover fraud losses, had begun in 2003 to investigate the abusive and misleading practices of subprime mortgage lenders that they believed violated state laws. Had the efforts of state attorneys general not been halted by the Bush Administration’s federal preemption of the authority of state consumer protection law and law enforcement officers, the subprime mortgage based crisis now upon us might well have been averted. Certainly, there would be far fewer ‘bad’ sub-prime mortgages sold by loan originators to packagers and marketers of mortgage-backed securities that taxpayers are now being asked to buy.
-- The authority of federal and state regulators and state attorneys general should neither be diminished nor curbed by any new actions by the legislative or executive branches of our federal government in its effort to address this financial crisis in our capital markets.
-- As we face and work through a financial crisis of unknown magnitude, the SEC should halt its reckless push to shift America’s corporate accounting system from our proven U.S. rule-based Generally Accepted Accounting Standards and regulatory oversight to the more lax and less regulated International Accounting Reporting Standards. This is no time to endanger investor protection by giving corporate and financial institutions greater latitude in reporting their financial results.
-- Investor civil actions remain, in the Securities and Exchange Commission’s traditional words, ‘a necessary supplement to the Commission's efforts.’ In addition to helping police securities markets, private law suits provide the primary method for defrauded investors to recover their losses. It would be a tragic error to further dilute the rights of private investors to take actions against those who perpetrate fraud and abuse.
I would add to this list, to reform the PSLRA by dropping the pleading standard that requires evidence to be pled when it is secretly held by the corporation, bringing back aiding and abetting liability, creating private rights of action to sue mutual fund investment advisors under the provisions of the Investment Company Act of 1940, adding a private cause of action against conspirators, and eliminating SLUSA preemption of state law claims which touch upon fraud or misrepresentation....just as a start.

References: v. 
 v. 
 §10
 §10
 §10
 §10
 §10
 v. 
 v. 
 v. 
 §10
 §10
 §10
 §10
 §10
 §10
 §10
 §10
 §10