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Archive for February, 2016


Your Asset Allocation and the Markets: 2016 Investor Losses Total More Than $1.5 Trillion

The stock market decline in 2016 has accounted for $2.3 trillion in investor losses from the market’s top last year and $1.5 trillion in net wealth just this year.

The giant companies that predominantly populate the Standard & Poor’s 500 have fallen an average of 8.9% this year. The S&P 500 is down 8% this year already — including another 2.2% Friday — in what’s been the worst start to a year ever. Since the market peak on May 21, 2015, the market has declined 11.7%.

On average, investors have lost a collective $57 billion per trading day this year.

The biggest losses in value, year-to-date, can be attributed to Amazon, which has seen a loss of $85.9 billion year-to-date, Bank of America with a loss of $64.2 billion, and Alphabet which saw $50.9 billion erased.

A portfolio’s asset allocation is the driving determinant in account performance.  The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.  By investing in more than one asset category, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.

The recent market volatility has exposed imprudent allocations in accounts that have resulted in significant losses to many investors. When asked about why account values have dropped, brokers often respond by blaming it on the market instead of recognizing that inappropriate allocations are actually to blame.

Aequitas investor losses mount

Oregon based Aequitas Capital Management appears to be in in a state of collapse.

On Saturday, the Oregonian detailed accusations from Chris Bean, principal of Redmond, Wash.-based Private Advisory Group, who accused the private equity and alternatives platform of “misleading him” with an optimistic portrayal of the company’s finances.

According to the Oregonian, investors had almost $600 million invested in Aequitas’s loans to troubled companies.

Through much of 2015, Aequitas appeared to be a healthy, growing firm, opening a new office in New York City and a new division to serve investment advisors. At it’s peak, it reported some $1.7 billion in managed assets.

The company even announced a plan for continued growth, and began seeking private equity to fund its vision, offering short-term notes through advisors paying 8-to-12 percent interest to lenders and a more than 2 percent commission to advisors. Then, in fall of 2015, it began telling investors that it was unable to refund the notes when they became due.

Shortly afterwards, TD Ameritrade severed its custodial relationship for Aequitas’s private notes, according to the reports.

In January, Aequitas announced a plan to reorganize and downsize, according to the Portland Business Journal.

Days later, the layoffs were expanded to include more than 80 of its approximately 100 employees, said the Oregonian.

As a result of the loans, Aequitas is allegedly under investigation by the U.S. Securities and Exchange Commission and the Consumer Finance Protection Board. The SEC has declined to comment on the status of its inquiry.

SEC Charges Oil and Gas Company and Founder with Fraud

The Securities and Exchange Commission charged Nathan Halsey and TexStar Oil, Ltd. in the United States District Court for the Northern District of Texas, with fraudulently offering securities through misleading investment materials and keeping funds from investors who believed they were investing in an entirely separate company.

The SEC’s complaint, filed in the U.S. District Court for the Northern District of Texan on February 17, 2016, alleges:

  • TexStar and its founder and CEO Halsey raised at least $1.1 million from investors in China and Southeast Asia in fraudulent securities transactions and distributed false promotional materials in an effort to raise more funds.
  • These false promotional materials described a successful, asset-rich company that held no profitable oil-and-gas assets, never drilled or produced any wells, and never generated investor returns.
  • Halsey invited Chinese investors to Texas, showed them an operating oil well owned by another company, raised funds for an alleged investment in that well, and then kept that money for TexStar, without telling investors.

The SEC’s complaint charges both defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint also charges Halsey with violating Section 16(a) of the Exchange Act by failing to make required SEC filings. The SEC’s complaint seeks permanent injunctions, civil penalties, disgorgement plus prejudgment interest, and other relief against both defendants, as well as a conduct-based injunction and an officer and director bar against Halsey.

United Development Funding raided by FBI

The FBI raided the office of United Development Funding IV, a Texas-based real estate investment trust (REIT), according to people familiar with the matter.

The stock fell more than 54% and was last trading around $3.20 per share.

NBC Dallas-Fort Worth reportsthat agents were seen carrying boxes away from the premises.

UDF is the latest short target of Texas hedge fund manager J. Kyle Bass, the founder of Dallas-based Hayman Capital Management.

Earlier this month, Bass launched a website that accuses the company of operating a “Ponzi-like real estate scheme.”

United Development Funding IV responded in statement that same day saying Bass’ website contains “multiple false and misleading statements.”

Wells Fargo laying off employees of securities unit

In the latest downsizing move by a big bank, Wells Fargo has started cutting jobs this week in its securities unit, including positions in Charlotte according to reporting by The Charlotte Observer.

The displaced employees include managing directors – high-level jobs that can draw seven figures in compensation, the sources said.

The Wells Fargo unit has become the biggest source of high-paying investment banking jobs in Charlotte, as Bank of America has shifted much of that activity to New York.

Wells Fargo Securities, which employs about 5,000 worldwide, offers Wall Street-style services to corporate clients, including merger advice and stock and bond offerings. Investment banks are known for cutting staff regularly, and turbulent financial markets have made the business more challenging entering 2016.

Wells Fargo on Wednesday said it eliminating positions in Charlotte and Fort Mill, as part of 581 layoffs nationwide. Wells and other banks have been trimming employees which they had bulked up during the financial crisis.

Wells Fargo Securities grew considerably in 2008 when San Francisco-based Wells bought Charlotte-based Wachovia, which had a larger investment banking and capital markets operation. The unit has its largest employee hub in Charlotte, with about 2,400 workers, and trading floors in uptown’s Duke Energy Center.

Overall, Wells Fargo had 264,700 total employees at year’s end, down 500 from the end of September. In the Charlotte area, it has more than 23,000 workers.

Super Bowl Tippee at Wedbush Charged with Insider Trading

In a less than festive recognition of Super Bowl weekend, the Securities and Exchange Commission last Friday charged a Wedbush Securities broker and two of his clients with insider trading.

While attending the 2011 Super Bowl between the Green Bay Packers and the Pittsburgh Steelers in Arlington, Texas, a client of Wedbush advisor Marc Winters learned about a forthcoming “strategic transaction” that e-commerce marketing company GSI Commerce was planning, according to an SEC lawsuit filed Friday in federal court in the Central District of California.

Less than two months later, eBay announced a $2.4 billion acquisition of GSI. Winters and his clients – Robert M. Munakash and Carlos A. Rodriguez – together made a profit of $226,000 through sales of stock across several accounts, including those of Munakash’s parents, the SEC alleged.

Munakash, who owns and operates three gas station/convenience stores in southern California,  learned about the forthcoming deal from a GSIC executive who attended the game with him, according to the SEC. Rodriguez is a manager of one of the gas stations. Mr. Rodriguez declined to comment. and Mr. Munakash could not be reached.

Winters, who has been with Los Angeles-based Wedbush Securities since 2004, declined in a phone call to comment. In August 2004, he was discharged from UBS for failing to provide accurate customer information relating to mutual fund sales, according to the Financial Industry Regulatory Authority’s BrokerCheck database.

Energy Related Bonds & Structured Notes – A Potential Wolf in Sheep’s Clothing?

As noted in a February 5, 2016 article in The Wall Street Journal (“The Oil Rout’s Surprise Victims”), the epic collapse in the price of oil, from more than $100 per barrel less than two years ago to below $30 last week, has “crushed investors in the futures market, energy partnerships, high-yield corporate bonds and the shares of oil and gas companies.”

But there is another sector of the energy market – short term bonds and structured notes issued by major investment firms whose returns are linked to the price of oil or other energy-related assets – that could also be decimated in the coming months unless there is a significant recovery in oil prices.

These securities, which have been sold to wealthy families and individual investors who want to limit the risk or amplify the return of more-conventional investments, often carry such alluring nicknames as “Phoenix,” “Plus,” “Enhanced Return” or “Accelerated Return.” They typically mature in two years or less and pay commissions of about 2% to the brokerages that sell them which has included units of Bank of America, Citigroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and UBS.

Unfortunately, they use intricate combinations of options contracts to skew the payoffs from changes in energy prices: investors can make a lot of money if oil goes up a little, and they can lose much or all of their money if it goes down a lot. At current prices, most of these securities are underwater and there will have to be a significant increase in the price of oil (estimated at 50% to 100%) for them to return to their original value.

There isn’t any significant secondary trading in most of these securities, meaning that the issuing bank may often be the only buyer which, more often than not, does not benefit the investors who own them.

If you are an individual or institutional investor who has any concerns about your investment in any energy related bonds or structured notes, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

SEC Completes Muni-Underwriter Enforcement Sweep

The Securities and Exchange Commission today announced enforcement actions against 14 municipal underwriting firms for violations in municipal bond offerings.  The actions conclude charges against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.  In all, 72 underwriters have been charged under the voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.

The MCDC Initiative, announced in March 2014, offered favorable settlement terms to municipal bond underwriters and issuers that self-reported violations.  The first enforcement actions against underwriters under the initiative were brought in June 2015 against 36 municipal underwriting firms.  An additional 22 underwriting firms were charged in September 2015.  All of the firms settled the actions and paid civil penalties up to a maximum of $500,000.

The initiative is continuing with respect to issuers who may have provided investors with inaccurate information about their compliance with continuing disclosure obligations.  The SEC’s2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking important information about their municipal bond holdings.

“The settlements obtained under the MCDC initiative have brought much-needed attention to disclosure obligations in municipal bond offerings,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “As part of the settlements, 72 underwriting firms – comprising approximately 96% of the market share for municipal underwritings – have agreed to improve their due diligence procedures and we expect that investors will benefit from those improvements.”

In today’s actions, the SEC found that between 2011 and 2014, the 14 underwriting firms sold municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The SEC also found that the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.

The 14 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future.  Under the terms of the MCDC Initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm.  In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.

The MCDC Initiative is being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit.  The cases announced today were investigated by members of the unit, including Michael Adler, Robert Barry, Joseph Chimienti, Kevin Currid, Peter Diskin, Robbie Mayer, Heidi Mitza, William Salzmann, Ivonia K. Slade, Jonathan Wilcox, Monique C. Winkler, and Deputy Unit Chief Mark R. Zehner, with assistance from Ellen Moynihan of the Boston Regional Office.

Barclays, Credit Suisse Charged With Dark Pool Violations

The New York Attorney General’s office is announcing parallel actions against the two firms.

Barclays agreed to settle the charges by admitting wrongdoing and paying $35 million penalties to the SEC and the NYAG for a total of $70 million.

Credit Suisse agreed to settle the charges by paying a $30 million penalty to the SEC, a $30 million penalty to the NYAG, and $24.3 million in disgorgement and prejudgment interest to the SEC for a total of $84.3 million.

“These cases are the most recent in a series of strong SEC enforcement actions involving dark pools and other alternative trading systems,” said SEC Chair Mary Jo White. “The SEC will continue to shed light on dark pools to better protect investors.”

“Dark pools have a significant role in today’s equity marketplace, and the firms that run these venues must ensure that they do not make misstatements to subscribers about their material operations,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “These largest-ever penalties imposed in SEC cases involving two of the largest ATSs show that firms pay a steep price when they mislead subscribers.”

According to the SEC’s order instituting a settled administrative proceeding against Barclays:

  • Barclays said that a feature called Liquidity Profiling would “continuously police” order flow in its LX dark pool and that the firm would run “surveillance reports every week” for toxic order flow.
  • In fact, Barclays did not continuously police LX for predatory trading using the tools it said it would, and it also did not run weekly surveillance reports.
  • Barclays did not adequately disclose that it sometimes overrode Liquidity Profiling by moving some subscribers from the most aggressive categories to the least aggressive.  The result was that subscribers that elected to block trading against aggressive subscribers nonetheless continued to interact with them.
  • Barclays at times misrepresented the type and number of market data feeds that it used to calculate the National Best Bid and Offer in LX.  For example, Barclays represented that it “utilize[d] direct feeds from exchanges to deter latency arbitrage” when in fact Barclays used a combination of direct data feeds and other, slower feeds in the dark pool.

“Barclays misrepresented its efforts to police its dark pool, overrode its surveillance tool, and misled its subscribers about data feeds at the very time that data feeds were an intense topic of interest,” said Robert Cohen, co-chief of the Market Abuse Unit.  “Investors deserve fair and equitable markets without this misbehavior.”

According to the SEC’s orders instituting settled administrative proceedings against Credit Suisse:

  • Credit Suisse misrepresented that its Crossfinder dark pool used a feature called Alpha Scoring to characterize subscriber order flow monthly in an objective and transparent manner.  In fact, Alpha Scoring included significant subjective elements, was not transparent, and did not categorize all subscribers on a monthly basis.
  • Credit Suisse misrepresented that it would use Alpha Scoring to identify “opportunistic” traders and kick them out of its electronic communications network, Light Pool. In fact, Alpha scoring was not used for the first year that Light Pool was operational. Also, a subscriber who scored “opportunistic” could continue to trade using other system IDs, and direct subscribers were given the opportunity to resume trading.
  • Credit Suisse accepted, ranked, and executed over 117 million illegal sub-penny orders in Crossfinder.
  • Credit Suisse failed to treat subscriber order information confidentially and failed to disclose to all Crossfinder subscribers that their confidential order information was being transmitted out of the dark pool to other Credit Suisse systems.
  • Credit Suisse failed to inform subscribers that the Credit Suisse order router systematically prioritized Crossfinder over other venues in certain stages of its dark-only routing process.
  • Finally, CSSU also failed to disclose that it operated a technology called Crosslink that alerted two high frequency trading firms to the existence of orders that CSSU customers had submitted for execution.

“Two Credit Suisse ATSs failed to operate as advertised, and failed to comply with numerous regulatory requirements over a multi-year period,” said Joseph Sansone, Co-Chief of the Market Abuse Unit. “The Commission’s action today sends a strong message that the agency will continue to scrutinize ATSs for compliance with the securities laws.”

The SEC’s order finds that Barclays violated Section 17(a)(2) of the Securities Act, Securities Exchange Act Section 15(c)(3), Rules 15c3-5(c)(1)(i) and 15c3-5(b) of the SEC’s Market Access Rule, and Rules 301(b)(2) and (10).  The order requires Barclays to pay a $35 million penalty, to cease and desist from these violations, censures Barclays, and requires Barclays to engage a third-party consultant to review its marketing of LX, its Market Access Rule compliance, and its compliance with certain requirements of Regulation ATS.

The SEC’s orders find that Credit Suisse violated Section 17(a)(2) of the Securities Act, Rules 301(b)(2), (5) and (10) of Regulation ATS, and Rules 602(b) and 612 of Regulation NMS.  The orders require Credit Suisse to cease and desist from these violations, censure Credit Suisse, and require Credit Suisse to pay $30 million in total penalties, disgorgement of $20,675,510.52, and prejudgment interest of $3,639,643.39. Credit Suisse consented to the SEC’s orders without admitting or denying the findings.

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