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Archive for February, 2010

Madoff Executive is Charged in Ponzi Scheme

The long-time director of operations for convicted Ponzi schemer Bernard Madoff’s defunct firm was arrested and charged criminally Thursday with allegedly directing that false accounting entries be made in the firm’s books to conceal Mr. Madoff’s fraud.

Prosecutors from the U.S. Attorney’s Office in Manhattan charged Daniel Bonventre, former operations director at Bernard L. Madoff Investment Securities LLC, with conspiracy, securities fraud, falsifying books and records of a broker-dealer, false filings with the U.S. Securities and Exchange Commission and four counts of filing false federal tax returns.

A lawyer for Mr. Bonventre declined to comment Thursday.

Bonventre, 63 years old, is expected to appear before a U.S. magistrate judge in Manhattan later Thursday. He faces as much as 20 years each on the fraud, falsifying-books-and-records and false-filings charges.

He is the sixth person to be charged criminally in the case, including Mr. Madoff himself.

The SEC also separately brought civil accounting fraud charges against Mr. Bonventre, alleging he helped disguise Mr. Madoff’s fraud and financial losses at the Madof firm by misusing and improperly recording investor money to create the false appearance of legitimate income.

Charges Settled for Former UBS Broker who Sold Auction-Rate Securities

David Shulman, the former UBS executive who was suspended by UBS in July 2008, has agreed to pay a $2.75 million fine over insider trading charges connected to auction-rate securities sales and be suspended from employment by a broker or dealer until next January.

“While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman – one of the company’s top executives – used insider information to take the money and run,” said New York Attorney General Cuomo in a press statement. “From the start, our prime goal has been to get investors their money back. But let there be no mistake – when corporate executives unlawfully take advantage of their positions, we will hold them accountable.”

Cuomo announced the settlement with Shulman on Feb. 18, 2010 Shulman is the second UBS executive to settle with Cuomo’s office thus far. To date, Cuomo’s investigation into auction-rate securities has reached agreements with 13 broker/dealers and produced more than $60 billion in repurchases of investors’ ARS holdings.

Shulman was accused of selling off $1.45 million of his personal investments in auction-rate securities in December 2007 after he learned that UBS’ own auctions were hitting a snag. On Dec. 11, 2009 one of Shulman’s employees emailed him that the group was “very concerned” about certain issues related to UBS’ student loan auction-rate program and its continuing support for that program. In that e-mail, the employee stated that “the auction product is flawed.”

On Dec. 12, 2009 records show that one of Shulman’s employees forwarded an email to Shulman with a subject line of “stud loans,” and warned Shulman that “the auction product does not work … our options are to resign as remarketing agent or fail or ?” In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’ student loan auctionrate securities, “the entire book needs to be restructured out of auctions.” Finally, on Dec. 13, Shulman instructed his broker to immediately sell his holdings in student loan auction-rate securities, before the upcoming auctions could occur. Later that day, Shulman’s ARS holdings were sold via inter-auction directly to the UBS Short Term Trading desk.

Coincidentally, the Short Term Trading desk was under Shulman’s supervision. Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter- auction.

Collapsing Hedge Funds Halt Investor Redemptions

The hedge-fund community is in crisis mode after crashing and burning in the aftermath of the global credit crisis. 1861 Capital Management, ASTA/MAT, Tontine Partners LP, and The Ospraie Fund, are just a few of the hedge funds who have suffered a fate tied to investor redemptions and illiquid assets, which ultimately has left thousands of individual investors, charities and pension fund holders facing some huge and unforeseeable financial losses.

The past year has seen hundreds of hedge funds go out of business. In 2008, some 920 funds were shuttered – a figure that eclipses the prior record set in 2005 when 848 hedge funds closed down. On average, hedge funds lost more than 18% last year. The previous worst performance by hedge funds occurred in 2002, posting a loss of 1.5%. In 2007, hedge funds returned 9.9%. As hedge funds literally fought for survival in 2008, many would lose the battle altogether.

Among them: The Ospraie Fund, which posted nearly a 40% loss in2008. An even worse performance came from the Tontine Partners LP hedge fund, which ended the year down an astonishing -91.5%. Other funds such as Tudor Investment Corp. and Citadel Investment Group LLC have been forced to limit investor redemptions or risk implosion. Earlier this month, Citadel, whose flagship hedge fund lost 55% in 2008, announced plans to resume payouts to investors. Investors’ access to their money, however, will occur no sooner than April 1.

Hedge funds that trade municipal bonds also are experiencing a rough time these days. As reported Feb. 29, 2008, by MarketWatch, problems with bond insurers and other disruptions borne out of the global credit crunch have pushed yields on municipal bonds close to, or above, those of comparable Treasury bonds. For hedge funds that try to make money from the difference, called the spread, between the yields, the end result translates into the likelihood of margin calls.

That’s exactly what happened to hedge funds like Citigroup’s ASTA/MAT hedge funds. In using a municipal arbitrage strategy, the funds ultimately were forced to sell their positions at fire-sale prices, causing significant losses to investors. The dismal performance of hedge funds has continued into 2009. One of the most recent hedge funds to shutter is the Highland CDO Opportunity Fund, which encountered massive losses from its holdings of high-risk collateralized debt obligations (CDOs). In October, similar circumstances forced Highland to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund.

The shocking upheaval in the hedge fund industry is casting new light on the largely unregulated world of hedge funds. Registration with the Securities and Exchange Commission (SEC) is done on a voluntary basis only. At the same time, investments in hedge funds have grown astronomically. At their peak, approximately 10,000 hedge funds managed nearly $2 trillion in assets. Today, the figure is closer to $1 trillion.

According to Senators Chuck Grassley and Carl Levin a new bill introduced to the Senate has been designated to improve the carelessness and transparency of the hedge fund industry. Introduced on January 29, 2009 the Hedge Fund Transparency Act of 2009 (S. 344) would make it mandatory for hedge fund managers to register with the SEC and open up their books to government examiners. Following their original statement Senators Grassley and Carl Levin also described the bill as an “attempt to address securities law loopholes that enable hedge funds to operate under a cloak of secrecy.”

State Regulators vs. The Securities and Exchange Commission – Who Best Regulates Your Assets?

There is an ongoing debate regarding the role of state regulators in financial product oversight as Congress mulls over a proposal to expand the range of state oversight. Currently, financial advisors with under $25 million in assets are regulated by state regulators, with anything over that amount being regulated by the Securities and Exchange Commission (SEC). Congress is considering increasing state oversight to include firms with up to $100 million in assets, effectively stripping the SEC of some oversight.

The timing of this change is directly related to the apparent failure of the regulation system in the United States following an explosion of long operating fraudulent schemes being uncovered over the past year. There has been finger pointing, calls for greater reform, and an apparent lack of consensus on the issue. The answer which no one seems to be able to answer is, how do we best split regulation between state and federal departments?

Texas Securities Commissioner Denise Voigt Crawford has been a vocal advocate of giving more power to state regulators. State regulators were stripped of many powers under the National Securities Markets Improvement Act of 1996, powers which Ms. Crawford believes should be reinstated. “The naivete behind the view that markets are always self-correcting now seems apparent,” she said. “But clearly, reliance by the investing public on federal securities regulators, self-regulatory organizations (SRO) and `gatekeepers’ in the years preceding the crisis and in its midst to detect and prevent even the most egregious of frauds and deceit was equally naive.” This sentiment is not shared by many, however, who see the idea of giving state regulators more power as potentially damning to investors and the U.S. financial market as a whole.

Joseph Borg, director of the Alabama Securities Commission, recently spoke on the matter at the Financial Services Institute’s OneVoice 2010 Broker-Dealer Conference in New Orleans. When asked if states would be able to handle the increased work load, Borg stated, “Some yes, some no.” He offered a solution by which states would be allocated more resources and interstate cooperation would increase.

It remains to be seen if Congress will increase the threshold on state regulation, but the good news for investors is that meaningful discussion on the topic is happening, and hopefully, good law making will follow.


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