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Archive for June, 2009


Madoff Sentenced to 150 Years

Convicted swindler Bernard Madoff was sentenced to 150 years in prison Monday for fraud so extensive that the judge said he needed to send a symbolic message to those who might imitate his fraud and to victims who need relief.

Applause broke out in the crowded Manhattan courtroom after U.S. District Judge Denny Chin issued the maximum sentence to the 71-year-old defendant, who said he sought no forgiveness and knew he must live “with this pain, this torment, for the rest of my life.”

Chin rejected a request by Madoff’s lawyer for leniency and said he disagreed that victims of the fraud were seeking mob vengeance.

“Here the message must be sent that Mr. Madoff’s crimes were extraordinarily evil and that this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll,” Chin said.

The judge said the estimate that Madoff has cost his victims more than $13 billion was conservative because it did not include money from feeder funds.

“Objectively speaking, the fraud here was staggering,” he said.

Before Chin announced the sentence, Madoff, wearing a dark suit, white shirt and a tie, sat and listened as emotional witnesses described how he spoiled their security.

The jailed Madoff already has taken a severe financial hit: Last week, a judge issued a preliminary $171 billion forfeiture order stripping Madoff of all his personal property, including real estate, investments, and $80 million in assets his wife Ruth had claimed were hers. The order left her with $2.5 million.

The terms require the Madoffs to sell a $7 million Manhattan apartment where Ruth Madoff still lives. An $11 million estate in Palm Beach, Fla., a $4 million home in Montauk and a $2.2 million boat will be put on the market as well.

Before Madoff became a symbol of Wall Street greed, he had earned a reputation as a trusted money manager with a Midas touch. Even as the market fluctuated, clients of his secretive investment advisory business — from Florida retirees to celebrities such as Steven Spielberg, actor Kevin Bacon and Hall of Fame pitcher Sandy Koufax — for decades enjoyed steady double-digit returns.

NH Pursues UBS – Lehman Principal Protected Notes

Mark Rufo said he thought he had found a “good conservative investment” for his 88-year-old mother when, in 2007, he put $26,000 of her money with UBS Financial Services in Concord.

The Nashua lawyer bought Asian Currency Basket Principal Protected Notes. Asian currencies appeared stable at the time, especially compared with the debacle of a decade earlier. In addition, Rufo said, he was assured by both the name of the investment and his broker that the principal would be protected.

Last Sept. 10, as the stock market started heading south, he checked with his broker, who he said assured him that he wasn’t exposed. Two days later, he learned about Lehman Brothers was facing bankruptcy.

“Boy, I’m glad I’m not tied up with Lehman Brothers,” Rufo said he told to himself. Minutes later, his broker told him that actually he was – or at least his mother was – because it was Lehman that was backing the principal.

Rufo said he asked the broker how much was left in the currency basket that he had purchased, and he said he was told, “There aren’t really any Asian currencies in the basket. There are derivatives.”

When the broker couldn’t adequately explain to Rufo the nature of these derivatives, Rufo said he replied, “If a year ago, if you said, ‘Mark, I want you go buy something I don’t understand, I wouldn’t have bought it.”

Multiply the Rufo case – which is in Merrimack County Superior Court – by 42, and you have the cease and desist order case filed June 4 by New Hampshire Bureau of Securities Regulation against UBS.

The bureau alleges that state investors lost $2.5 million in various structured products backed by Lehman Brothers, which filed for bankruptcy on Sept. 13, 2008. By not adequately disclosing these risks, UBS engaged in “dishonest and unethical business practices,” the bureau charges.

“UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions,” said Jeff Spill, the bureau’s deputy director for enforcement. “The safety of these products was exaggerated. We believe UBS engaged in unfair and unlawful sales practices when presenting these investments.”

UBS, however, said in a disclosure that it did point out the risk in the prospectus and “followed all regulatory requirement, well-established sales practices and client disclosure guidelines.”

According to the bureau’s complaint, UBS, through its “structured product working group,” developed the idea behind the products and put them out to bid to companies like Lehman. In addition, UBS acted as an agent for Lehman-issued structured products.

The Northeast consultant for the structured product group acted as a consultant out of the Manchester and Concord offices of UBS, according to the securities bureau.

UBS’ local offices were “pushing” the sale of such products, selling 65 products to 42 investors, according to the complaint. UBS continued to “push” the sale, even after the near failure of Bear Stearns earlier in 2008 made it clear how risky such products were when backed by companies with large subprime loan portfolios.

Lehman went on to report billions of dollars in losses, and e-mails circulated in UBS’ Maine and New Hampshire offices noted in June that “Lehman is smelling a bit to me.”

The bureau said it was told by UBS’ structured sales consultant that agents were told to make clear the risks involved with Lehman Brothers, but a local branch manager in New Hampshire said the office never received such instructions, according to the complaint.

The complaint also says that sales reps were rewarded with bonuses for the sales of such products, and the average commissions were sometimes three times the amount that on regular securities sales.

In addition to a potential cease and desist order, the company faces a $2,500 fine for each violation.‘Pattern’ of investments
This is the second securities action taken by New Hampshire securities regulators against UBS in as many years.

In 2008, the bureau alleged UBS had been advising the New Hampshire Higher Education Loan Corporation – the state’s largest student loan provider — to stay in the failing auction rate securities market at the same time UBS was preparing to extract itself from the market prior to the market’s collapse.

When UBS and other banks decided to stop supporting auctions in February 2008, the market froze and investors were unable to access their money, the bureau alleged. As a result, NHHELCO lost a large sum and was unable to provide loans for thousands of students, according to the bureau.

In April 2008, New Hampshire was part of a global settlement in which UBS paid $22.1 billion to repurchase auction rate securities from damaged investors or provide liquidity to the market. In addition, UBS paid $150 million in fines.

In a letter to the UBS chief executive Oswald Grubel, securities bureau director Mark Connolly charged that both allegations were part of a “pattern” of presenting volatile investments as safer than they actually were to investors. Connolly asked Grubel to intervene and settle the matter.

UBS has until July 3 to formally contest the charges, which could result in a hearing. In its statement, after the allegation, UBS said it would “defend itself vigorously in this matter.”

That’s two days after the July 1 hearing scheduled in Rufo’s case. UBS is arguing that the case go to mediation, Rufo said, but that process was “pretty much a racket controlled by the big brokerage houses.” Rufo said that when he first talked to UBS officials, all he wanted was his mother’s principal back, but in reality it was more a matter of principle.

“The money isn’t going to make any difference to her, because I can take care of her, but maybe there is some other 88-year-old mother out there who doesn’t have a son as a lawyer. I wouldn’t be able to do this if I wasn’t in the profession. If I went to a lawyer who charged by the hour, it wouldn’t be practical.”

The Sentencing of Bernard Madoff

Bernard Madoff’s lawyer has told a judge scheduled to sentence the disgraced financier next week that 12 years in prison will be sufficient punishment for the man who swindled tens of billions of investor’s dollars in one of history’s biggest frauds.

Attorney Ira Sorkin also said in court papers made public Tuesday that his 71-year-old client “will speak to the shame he has felt and to the pain he has caused” when U.S. District Judge Denny Chin sentences him on Monday.

“We seek neither mercy nor sympathy,” Sorkin wrote. But he urged Chin to “set aside the emotion and hysteria attendant to this case” as he determines the sentence.

Madoff faces up to 150 years in prison after pleading guilty on March 12 to 11 felony counts including securities fraud and perjury. He admitted operating a massive Ponzi scheme for decades.

Sorkin said a sentence of a dozen years in prison would acknowledge Madoff’s voluntary surrender, full acceptance of responsibility, meaningful cooperation efforts and the nonviolent nature of his crime.

Still, the lawyer added that a prison term of 15 to 20 years would not disproportionately punish Madoff compared to sentences given other white collar criminals.

“Indeed, such a range will appropriately eliminate concerns for disparate treatment among similarly situated nonviolent offenders,” he wrote.

The lawyer included in his submission to the court late Monday an analysis of sentences given to defendants in fraud-related cases between 1999 and 2008 that concluded the average sentence when leniency was not provided was 15.3 years in prison.

He also noted that Madoff’s age would leave him with an average life expectancy of 12.6 more years.

Brokers and Their Fiduciary Duty

Investment advisers and consumer advocates have applauded President Obama’s proposal to establish a fiduciary duty for broker-dealers offering investment advice.
“We think it’s great,” said Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors in Arlington Heights, Ill. “There should be a fiduciary standard for all advisers.”

Richard Salmen, president of the Denver-based Financial Planning Association, agrees.

“I’m encouraged by the fact that the administration is proposing a fiduciary standard for all that provide advice to the public,” he said. “That’s a positive sign.”

The proposal was part of a historic reform package unveiled by the White House last Wednesday that is intended to overhaul nearly every aspect of Wall Street in order to prevent another financial crisis.

Both the FPA and NAPFA have been ardent proponents of requiring brokers offering investment advice to be brought under a fiduciary standard, which would require that they put their clients’ interests ahead of their own. Currently, brokers are required to meet a suitability standard, meaning the advice and products they offer have to be suitable for their clients

Institutional Investors Neglected in ARS Settlement

Settlement agreements that took place in the summer of 2008 when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses neglected to include thousands of institutional investors corporate investors that bought auction-rate securities on the premise they were cash equivalents. The settlement agreements were negotiated as a way to settle state and federal charges alleging misrepresentation of the instruments.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless.

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash.

In the midst of this, the list of individual lawsuits from institutional investors against companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all seem to be growing. In February 2009 a decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group for the unauthorized purchase of auction-rate securities, thereby setting a legal precedent for other investors who had money tied up in illiquid auction rate bonds.

New Hampshire Regulatory Action Against UBS Supports Investor Claims Filed by Aidikoff, Uhl & Bakhtiari

A regulatory action filed by the State of New Hampshire against UBS Financial Services, Inc on June 3, 2009 provides further evidence that investors were mislead by the brokerage firm in connection with the sale of a structured product known as Lehman Brothers Principal Protected Notes (“PPN”).

New Hampshire concluded that, “the methods by which UBS offered and sold the Lehman Brothers structured products to its clients constituted dishonest and unethical business practices,” according to the complaint filed by the Bureau of Securities Regulation.

The nationally recognized securities law firm of Aidikoff, Uhl & Bakhtiari has filed securities arbitration claims against UBS totaling more than $10 Million and is currently investigating others, according to Ryan K. Bakhtiari

“In selling structured products that purported to offer protection of principal, UBS touted them as products that had the potential for gains with little or no risk to principal,” said Philip M. Aidikoff, who also added that, “brokers were encouraged to sell PPN’s as a way to increase the bonuses they would be entitled to.”

New Hampshire concluded that UBS failed to adequately supervise its employees in the production, distribution, offering and sale of risky structured products and failed in its ongoing duty to assess the suitability of these investments.

Citigroup – ASTA/Mat update

Citigroup CEO Vikram Pandit seems to be caught in the crossfire of the banks misdoings and deservedly so. Investor lawsuits connected to the marketing and sale of a group of proprietary Citigroup hedge funds sold under the brand names ASTA and MAT were emerging at an alarming rate. Marketed to investors as safe fixed-income funds with losses not to exceed 5%, the hedge funds fell by a large amount in the midst of the credit crunch. Ultimately, the value of the funds suffered a loss of between 60% to 80% and many investors lost their life savings as a result.

Legal issues surrounding ASTA/MAT aren’t the only problems facing Pandit. Adding to his woes: $36 billion of net losses during the past six quarters.

More criticism was levied on Pandit courtesy of Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC). In a story appearing June 5, 2009 in the Wall Street Journal, it was reported that Bair’s office had been maneuvering to oust various members of Citigroup’s top executives. Specific individuals were not identified in the Wall Street Journal story, but Pandit’s name was rumored to be among those on Bair’s list.

Adding fuel to Citi’s management shake-up rumor mill is the apparent delay of a stock swap agreement between the U.S. Treasury Department and Citigroup. Announced in March 2009, the deal entails converting $53 billion of Citigroup preferred stock into common shares, giving the U.S. government a 34% stake in the bank.

Another black mark occurred for Citigroup on June 1, 2009 which signaled the bank’s final day on as part of the Dow Jones Industrial Average. On Monday, June 8 last year Citigroup was replaced by The Travelers Companies.

Following the initiation of the federal government’s Troubled Asset Relief Program (TARP), Citigroup was named a recipient of $45 billion in taxpayer funds after the bank began to watch its stock consistently deteriorate throughout 2008 and 2009. In mid-January 2009, Citigroup shares traded below $5 and on June 8, 2009 the stock closed at a shocking low of $3.42; by comparison, the price was reported at $20.48 per share one year prior at the same time.

UBS Misleads New Hampshire Investors about Lehman Securities

Securities regulators in New Hampshire have accused a unit of UBS AG, Switzerland’s largest bank, of recommending unsuitable investments to customers who put their money into complex securities underwritten by Lehman Brothers Holdings, Inc.

According to the New Hampshire Bureau of Securities Regulation, UBS allegedly represented the securities as “safe” investments to clients, guaranteeing them “principal protection.”

As it turns out, following the September 2008 bankruptcy filing of Lehman Brothers – which is the largest in U.S. history at more than $600 billion in debt – many of these same investors will likely lose the majority of their supposed principal-protected investment. Additionally, New Hampshire regulators also contend UBS failed to warn investors about the potential risks of the structured finance products once Lehman itself began to experience financial troubles. As reported June 4 by the Wall Street Journal, New Hampshire regulators filed the civil complaint against UBS on Wednesday, June 3.

In a statement, Jeff Spill, New Hampshire’s deputy director of securities regulation for enforcement, said UBS presented “the structured notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.

SEC Finalizes ARS Settlements With Bank of America, RBC and Deutsche Bank, Providing Over $6 Billion in Liquidity to Investors

The Securities and Exchange Commission announced that it has filed complaints in the United States District Court for the Southern District of New York against Banc of America Securities LLC and Banc of America Investment Services, Inc. (collectively, Bank of America), RBC Capital Markets Corporation (RBC), and Deutsche Bank Securities Inc. (Deutsche Bank) alleging that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed or sold. Without admitting or denying the Commission’s allegations, the firms consented to settle the actions. These settlements, combined, will provide or already have provided nearly $6.7 billion to approximately 9,600 customers who invested in auction rate securities before the market for those securities froze in February 2008.

According to the Commission’s complaints, Bank of America, RBC and Deutsche Bank misrepresented to certain customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms’ balance sheets. The complaints allege that Bank of America, RBC and Deutsche Bank failed to make their customers aware of these risks. In mid-February 2008, according to the complaints, Bank of America, RBC and Deutsche Bank decided to stop supporting the ARS market, leaving Bank of America, RBC and Deutsche Bank customers holding billions in illiquid ARS.

The settlements, which are subject to court approval, will restore approximately $4.5 billion in liquidity to Bank of America customers, $800 million in liquidity to RBC customers and $1.3 billion in liquidity to Deutsche Bank customers. Previously, on October 8, 2008, the Commission’s Division of Enforcement announced preliminary settlements with Bank of America and RBC.

FSA Investigates Lehman Structured Product Sales

The FSA and Financial Ombudsman Service said in a press release yeasterday they have jointly concluded that Lehman Brothers’ insolvency raises issues in the UK structured products market.

The release said: “As a result, while the Ombudsman has been investigating a number of individual complaints, the FSA has been actively looking at the wider issues raised in this market.”

The FSA and Ombudsman have agreed that the regulatory options available to the FSA would be one way of reducing consumer detriment, as well as potentially being able to deal with the concerns of more consumers than those who have complained to the Ombudsman.

Therefore, they have agreed that the FSA will now consider issues relating to Lehman-backed structured products under the “wider implications” process, in order to allow the FSA to explore all options to achieve the best outcome for consumers.

Many in the industry concede clients have not been well served by structured product providers, particularly in the retail market where fees are notoriously high. “As much as 80% of the structured products world doesn’t deliver good value to investors,” says Chris Taylor, chief executive of Blue Sky Asset Management, speaking to Wealth Bulletin last year.

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