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Archive for July, 2008


FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels

The Financial Industry Regulatory Authority (FINRA) will launch a two-year pilot program later this fall that will allow some investors making arbitration claims to choose a panel made up of three public arbitrators instead of two public arbitrators and one non-public arbitrator, as is currently the norm.

Six firms – Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab – have volunteered to participate in the pilot program. The first five firms will contribute 40 arbitration cases each per year to the program and Schwab, with fewer cases in the forum, will refer 10 cases – meaning that over the course of the pilot, over 400 arbitration cases involving those firms can be heard by all-public arbitration panels. Only the investor making the arbitration claim can elect to participate in the pilot program; the firms will not decide which cases become part of the pilot. The pilot will be available to eligible claims filed on or after October 6, 2008.

FINRA is also reaching out to a wide range of other firms to join the pilot so that a variety of firm sizes and business models will be represented.

“This pilot will give investors greater choice when selecting an arbitration panel,” said FINRA CEO Mary Schapiro. “Additionally, this program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.”

Investors who choose to have their claims heard under the pilot program – and the firm they are making their claim against – will receive the same three lists of potential arbitrators that parties to standard arbitration disputes receive: a list of eight chair-qualified public arbitrators, a list of eight public arbitrators and a list of eight non-public arbitrators. Parties may strike up to four of the arbitrators from the chair-qualified and public arbitrator lists for any reason, then rank the remaining arbitrators on those lists according to preference. Parties participating in the pilot program may strike all eight names on the non-public arbitrator list and the next highest-ranked public arbitrator will be selected to complete the panel. This selection process “allows investor claimants to choose a non-public arbitrator if they prefer, or an all-public panel if that is their wish,” Schapiro said.

The pilot program will be evaluated according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. FINRA will compare the results of pilot and non-pilot investor cases, including the percentage of cases that settle before award (and how quickly they settle). FINRA will also study the length of hearings and the use of expert witnesses in pilot and non-pilot cases.

Evergreen CEO to Retire Amid Mutual Fund Closure

Evergreen Investments, the mutual-fund operation, will soon get new leadership.

The money-management unit of banking giant Wachovia Corp. told employees on Tuesday that Chief Executive Dennis Ferro, 63 years old, will retire at the end of this year, five years after assuming the top job. He will be succeeded by Peter Cieszko, 48, currently head of global distribution, who has been at Evergreen since July 2006.

The leadership changes come amid a troubled time for Evergreen. In the past year, the firm has been besieged with problems because of its funds’ mortgage- and asset-backed investments.

Evergreen’s money-market funds held some such securities, which eventually Wachovia had to step in and buy, in order to prevent the funds from breaking the buck — when their net asset value per share falls below the $1 money-market standard. Wachovia booked a loss of more than $40 million on the asset-backed securities it purchased from Evergreen’s money funds.

Last month, the unit announced the liquidation of one of its bond funds, Evergreen Ultra Short Opportunities Fund, after it lost half of its value in six months, thanks to subprime-mortgage investments.

Toxic CDOs Reincarnated as Re-Remics

They’re baaaaack. Those toxic and worthless colllateralized debt obligations (CDOs) that helped drive banks $400 billion into the red are finding new buyers under a different name: Re-Remics.

Due to the global credit crunch, CDOs sales fell from $227 billion in 2007 to $1 billion this year so Goldman Sachs, J.P. Morgan and at least six other brokerage firms are repackaging unwanted mortgage bonds into Re-Remics. Re-Remic stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds. Re-Remics supposedly has parts that are structured to guard against higher losses than most CDOs and would allow investors to sell or keep other parts at lower prices that can translate to potential yields greater than 20 percent. For example, a bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent.

Re-Remics are different from CDOs in some way. Re-Remics are composed of AAA-rated bonds backed by Alt-A mortgages issued to high quality borrowers instead of debt or credit-default swaps based on the lowest-ranking sub-prime mortgage-bond classes. And while CDOs are backed by more than a hundred bonds, Re-Remics typically combine fewer than a dozen which makes it easier and quicker for investors to separate the better debt from the riskier debt.

According to investment experts like Paul Colonna at GE Asset Management, these Re-Remics are just a different version of CDOs; the mechanics are the same but the valuation levels are different. Colonna said GE has considered buying the debt and might make some of its riskier bonds into re-remics. Analysts also think Re-remics may help revive the market for new home-loan debt by moving illiquid bonds to interested buyers.

Firms like Goldman Sachs, J.P. Morgan and Lehman Brothers all hold significant residential-mortgage securities on its books and this restructuring with Re-Remics could throw them a lifeline. These banks can increase the total credit quality of their assets by selling off lower-rated pieces and keeping the better pieces. So, banks are buying the lower-yielding senior pieces and some are also considering buying the bonds for their pension funds. Companies like Transamerica Life Insurance and Reliance Standard Life Insurance also bought Re-Remics this year.

In the first five months of 2008, more than $9.3 billion of Re-Remics were created – triple from a year ago. Re-Remics made up 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

AREI Offices in Redding Raided by Attorney General

Yesterday, the California Attorney General’s office raided Redding-based Asset Real Estate & Investment Co. (AREI) as part of their ongoing investigation of the firm. AREI is accused of defrauding investors and is the center of a flurry of investor lawsuits. Jim Koenig, who founded AREI in the late 1990s, is seeking bankruptcy protection and closing the firm.

AREI once controlled about two-dozen assisted senior living and memory care centers nationwide (including Sierra Oakdale Property Management and Oakdale Heights Senior Living in Redding) that offered tenants-in-common investments and tax shelter property exchanges.

Investors in some of the senior care centers have not received base rent since November and have faced foreclosure on their properties.  AREI also offered shares in a San Joaquin County golf course and a $55 million corporate note issued without collateral. The lawsuits are accusing AREI of the classic Ponzi scheme – it defaulted on the corporate note after issuing greater debt to pay off prior promises of a 12-percent annual return. The lawsuits also allege Koenig and his partners own at least a half-dozen other firms that charged investors processing fees, brokerage fees, loan processing fees, property operating fees and other fees without letting investors know they owned those firms.

The Attorney General’s office is asking any investors who lost funds to send copies of their documents to the agency’s Public Inquiry Unit. Documents should show the nature of the investment, what promises were made, where the sales occurred and how much was lost.

This is not the first time Koenig has ran into trouble with the law. In 1986, Koenig was sentenced to two years in prison and ordered to pay $5 million in restitution to investigators after he and two partners were convicted of fraud in a gold selling scam.

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