Only days after ex-Quest CEO Joe Nacchio was indicted on insider trading charges another former exec from the telecom company has been forced to pay the piper...

Via BusinessWeek:

Ex-Qwest exec pleads guilty to wire fraud

By JON SARCHE
Associated Press Writer
December 28 2005

Former Qwest Communications executive Marc Weisberg pleaded guilty Wednesday to wire fraud and agreed to cooperate with federal prosecutors trying to convict other company officials of wrongdoing, including former Chief Executive Joseph Nacchio.

Weisberg, a former senior vice president who oversaw investments, mergers and acquisitions for Denver-based Qwest Communications International Inc., pleaded guilty to a single count of fraud. He had faced eight counts of wire fraud and three counts of money laundering.

Prosecutors declined comment through U.S. Attorney's spokesman Jeff Dorschner. Weisberg's attorneys did not immediately return calls. He faces a March 3 sentencing hearing.

More here.

-- MDT

Labels: insider trading, Joe Nacchio, money laundering, Quest

Blogging remotely from the great state of Louisiana...

Via Reuters:

NASD collects record $125 million in fines in 2005

December 27, 2005
By Jonathan Stempel
Reuters

The NASD on Tuesday said it collected a record $125.4 million of disciplinary fines this year, 21 percent more than in 2004, for violations including abuses in sales of mutual funds and variable annuities.

The Washington, D.C.-based regulator also said it filed 1,412 enforcement actions in 2005, up 1 percent, and barred or suspended 737 people from the securities industry, down 12 percent. It closed 9,150 arbitration cases and 1,700 mediation cases.

NASD fines are typically small relative to the profits that its regulated firms, including Wall Street's biggest names, generate. But the regulator often successfully pressures these firms into adopting reforms to thwart further wrongdoing.

"While the numbers appear fairly flat from last year, we've seen firms make a tremendous effort to comply with rules," said Mary Schapiro, the NASD vice chairman, in an interview. "The costs and reputational risks from noncompliance have risen, and firms appreciate that."

Issues the NASD will examine in 2006 include variable annuities, 529 college savings plans, over-the-counter equities, and new products, especially as retail investors show more interest in hedge funds, Schapiro said. The NASD also plans to modernize its examination programs, and push firms to use the Internet to make streamlined mutual fund disclosures.

In 2005, mutual funds were a major area of disciplinary activity for the regulator, which was once known as the National Association of Securities Dealers.

Twenty-six retail firms paid nearly $55 million in fines to settle charges that they provided favored treatment for select mutual funds in exchange for brokerage business. In the largest settlement, Ameriprise Financial Inc. (AMP.N: Quote, Profile, Research) agreed to pay $12.3 million.

The NASD fined American Express Financial Advisors, now known as Ameriprise; Chase Investment Services (JPM.N: Quote, Profile, Research), Citigroup Global Markets (C.N: Quote, Profile, Research), Linsco/Private Ledger Corp., Merrill Lynch & Co. (MER.N: Quote, Profile, Research) and Wells Fargo & Co. (WFC.N: Quote, Profile, Research) more than $40 million for selling unsuitable Class "B" and "C" fund shares. Such shares can have higher fees than other classes.

In variable annuities, Waddell & Reed Financial Inc. (WDR.N: Quote, Profile, Research) agreed to pay a $5 million fine and $11 million in restitution to settle charges that it improperly pressured thousands of customers to exchange the products. People often buy annuities as retirement investments, with taxes deferred until withdrawal.

The NASD regulates 5,144 brokerages with about 106,400 branches and 663,000 registered representatives. It works with the U.S. Securities and Exchange Commission and New York Stock Exchange in overseeing U.S. financial markets.

The original article appears here.

-- MDT

Labels: Louisiana

And seasons greetings to all the rest. I hope you find yourself in the company of family and friends.

Updates will be intermittent over the next few days. TDC will be back to a regular schedule after the start of the new year.

-- MDT

Via Wallstreetandtech.com:

NASD Goes on a $19.4 million Tear, ABA Endorses Searchspace, and more

By WS&T Staff
Wall Street & Technology
December 22, 2005

The NASD announced that it has levied fines totaling $19.4 million against the investment management firms Merrill Lynch, Pierce, Fenner & Smith, Wells Fargo Investments and Linsco/Private Ledger Corporation. The fines were for violations involving the sales of Class B and Class C mutual fund shares.

Merril Lynch received the bulk of the penalties with a $14 million fine. Wells Fargo was fined $3 million and Linsco was penalized $2.4 million. The amount of the charges approximate the additional commissions the firms received by selling Class B or Class C mutual fund shares rather than Class A shares.

NASD alleged that the three firms recommended Class B or Class C shares of mutual funds without adequate disclosure to their customers that an equal investment in Class A shares would generally be a more advantageous decision.

"In recommending mutual funds with different share classes, brokers must understand, consider and disclose information about which particular share class would be most beneficial for the customer from an expense perspective," said Barry Goldsmith, NASD executive vice president and head of enforcement, in release.

The investigation conducted by NASD examined transactions processed between January 2002 and July 2003. Each firm will implement a remediation plan to compensate its affected customers. NASD reports more than 29,000 households were affected.

The fines are part of NASD's ongoing investigation into mutual funds sales practices. Similar charges were settled earlier this year against Citigroup Global Markets, American Express Financial Advisors and Chase Investment Services...

Check out the full article here.

-- MDT

Via Reuters:

SEC says hedge fund manager Sacane pleads guilty

December 22, 2005
Reuters

The U.S. Securities and Exchange Commission said on Thursday that hedge fund manager Scott Sacane has pleaded guilty to criminal investment adviser fraud in a case being prosecuted by the U.S. Attorney's Office in New Haven, Connecticut.

Sacane, 39, was sued by the SEC in October over related civil allegations that he manipulated the stock of medical products maker Aksys Ltd. and Esperion Therapeutics Inc., a choleterol drug therapy company since acquired by Pfizer Inc., the SEC said...

...A U.S. District Court judge in Connecticut has scheduled sentencing for April 28. Sacane faces a maximum sentence of 5 years in prison and a fine of up to $250,000, the SEC said.

The U.S. Federal Trade Commission in September ordered Sacane to pay a $350,000 fine over charges involving the acquisition through Durus of large stakes in Aksys and Esperion.

Click here for the full article.

-- MDT

Vi Reuters:

2 hedge funds settle SEC case, to pay over $35 mln

December 22, 2005
Reuters

Two hedge funds, their investment adviser and two executives agreed to pay more than $35 million to settle charges of fraudulent market timing and late trading in mutual funds, the U.S. Securities and Exchange Commission said on Thursday.

Veras Capital Master Fund; VEY Partners Master Fund; their investment adviser, Veras Investment Partners LLC; and its managing members, Kevin Larson and James McBride agreed to settle without admitting or denying the SEC's findings.

The original article appears here.

-- MDT

Perhaps it is more important to call this one a "phoney" hedge fund, as it doesn't appear the proprietors of HMC, Robert Massimi and Bret Grebow had any intent to do anything but fund their own retirement. Curiously...news of the SEC action hasn't yet made it to the top of the heap on HMC's "news page."

Via Reuters:

SEC charges hedge fund managers with fraud

December 22, 2005
Reuters

U.S. financial regulators charged the founders of a $12.9 million (7.4 million pound) hedge fund with fraud on suspicions they stole roughly half of the money from roughly 80 investors to spend on themselves.

The U.S. Securities and Exchange Commission said it filed an emergency enforcement action charging that Robert Massimi and Bret Grebow, who founded HMC International, raised the $12.9 million through a "fraudulent offering of investments." The government also charged the pair misappropriated more than $5.2 million for their own use. The fund, based in Montvale, New Jersey, collapsed this fall when the pair could not return money to several investors who wanted to leave.

On their Web site, the team said the fund was a pure stock trading fund and that its trading strategy made the investments relatively "insensitive to world events, overall market events and such events as corporate fraud or terror warnings."

The SEC also charged Jaime Elliott, Massimi's wife, because Massimi diverted some money to her after investors and the government began probing the fund. This is the latest in a series of fraud cases involving funds in the $1 trillion hedge fund industry.

The original article appears here.

And in happier times, here's a snippit from shaggy-maned HMC co-honcho Bret Grebow bragging in the Wall Street Journal about his big-spending ways (quote originally from the WSJ and found here):

"A year ago, Bret Grebow, a 28-year-old who runs hedge fund HMC International, was taking cheap flights on JetBlue Airways and keeping a lid on his spending. But his fund's investment portfolio surged nearly 40 percent last year, and Grebow says he's confident that the market has regained its footing. So two months ago he bought a new $160,000 Lamborghini Gallardo. He says it was his first "treat" in months.

These days when Grebow and his girlfriend travel between his Highland Beach, Fla., home and his New York office, he charters a catered plane with a bar, paying as much as $10,000 for the three-hour flight. Last weekend he spent more than $12,000 to fly himself and some friends on a Learjet 55 to the Super Bowl."

Comments sure to haunt him.

-- MDT

Labels: Bret Grebow, HMC International, Robert Massimi

A little Happy Holidays! from Federal Prosecutors for the former Quest CEO...

Via ABCNews.com:

Former Qwest CEO Joe Nacchio Is Indicted

By Don Mitchell
The Associated Press

DENVER Dec 20, 2005 — Joseph Nacchio, the former chief executive of Qwest Communications during its multibillion-dollar accounting scandal, was indicted Tuesday on 42 counts of insider trading accusing him of illegally selling off more than $100 million in stock.

The indictment includes the first criminal charges against Nacchio in the government's nearly four-year-old investigation into accounting practices at Qwest Communications International Inc., the Denver-based primary telephone service provider in 14 mostly Western states.

Nacchio, 56, was in custody and his initial court appearance was expected later Tuesday, said Jeff Dorschner, a prosecution spokesman. Nacchio's attorneys said he would plead not guilty "with perfect confidence in his exoneration"...

More here.

-- MDT

Labels: insider trading, Joe Nacchio, Quest

While the folks behind this Newsday article may still be a bit behind the times (example: far more than 15% of P.I.s are women - at least in the ranks of corporate investigators) it is nice to occaisionally see that the long running stereotypes about our industry are slowly being dispelled.

Companies like our own Caveat Research produce a highly technical, extensively detailed work product that demands a broad range of skills and institutional knowledge. Our clients, quite frankly, are not sultry dames, cuckolded spouses or long lost relatives, but rather attorneys and business-persons of the highest level of sophistication. They demand timely and accurate informational resources to support their decision-making.

Some clips from Newsday.com:

Professionalization of private eyes- Gumshoes are being replaced by high-tech wizzes, many employed by companies to prevent stealing of intellectual property

By James Bernstein, Staff Writer
Newsday
December 19, 2005

...Gone, both private eyes and security industry experts say, are the days of the trench-coated, fedora-wearing investigator, who always had a cigarette in his mouth - yes, it was almost always a he - and a line on a sure-bet horse.

"These days, there's no smoking in our office," said Francis Shea, president of Melville-based Alpha Group, an investigative agency that hired Gatta to spy on Nancy Kissel. "We look for a more educated individual and somebody who can sit in a boardroom instead of a bar," said Shea, who spent 15 years as a New York City police officer before starting the firm.

"I think [private investigators] have a long way to go because many of them are still saddled with that old image," said Vincent Henry, also once a city cop and now a professor of homeland security at the Southampton campus of Long Island University. "But in the last decade, there have been a lot of changes" in the industry. Technology and the Internet are now as much a part of the job as the old Yellow Pages and notepad...

...Kroll Inc. of Manhattan, now one of the country's largest investigative firms, has about 3,600 employees worldwide, up from 300 as recently as 1997, said Jeremy Kroll, the company's managing director and son of the founder, Jules Kroll...."It's a much more legitimate, mainstream corporate service" that agencies are providing these days, Jeremy Kroll said.

Indeed. Check out the full article here.

-- MDT

Labels: Kroll

Via the venerable FinancialTimes:

FT briefing: Italian insider trading scandal

by James Fontanella
December 16 2005

Arrest orders issued by investigative magistrates from Milan’s court of justice, obtained by the FT, accuse Gianpiero Fiorani, former president of Banca Popolare Italiana (Bpi), of criminal association related to financial fraud.

Together with Mr Fiorani, four other people have been charged: Gianfranco Boni, Financial director of Bpi; Silvano Spinelli, external consultant and former BPI manager; Paolo Marmont du Haut Champ, advisor to Bipielle Suisse; and Fabio Conti advisor to Bipielle Suisse.

The arrest orders contain revelations made by the suspects during preliminary interrogations as well as information obtained by the magistrates.

The investigation focuses on suspected irregularities concerning BPI’s takeover bid for Banca Antonveneta, and numerous other suspect transactions allegedly overseen by Mr Fiorani, other BPI executives and investors close to Mr Fiorani.

In addition, the magistrates are looking at the role played by Antonio Fazio, governor of the Bank of Italy, in alleged insider trading conducted by the suspects. On Friday, sources at the Milan courthouse said Mr Fazio was under criminal investigation for the alleged insider trading...

Read the full breifing here.

-- MDT

Labels: insider trading

Via the WashingtonPost.com:

Court Overturns $10 Billion Verdict Against Philip Morris

By David A. Vise
Washington Post Staff Writer
December 16, 2005

Philip Morris USA won a legal victory yesterday when the Illinois Supreme Court reversed a $10.1 billion lower-court verdict that held the company, and its parent, Altria Group Inc., liable for allegedly misleading consumers about the risk of developing cancer from smoking its "light" cigarettes.

By a vote of 4 to 2, the court threw out the ruling against the nation's biggest cigarette manufacturer. The court's majority said in a written opinion that Philip Morris did not violate the law because its marketing of low-tar Marlboro and Cambridge cigarettes using the term "light" had the blessing of the Federal Trade Commission...

No doubt the Illinois Supreme Court will be getting holiday cards from Phillip Morris this season. Extensive additional details on the case and the verdict at the Post.

--MDT

According to interviews conducted by MarketWatch.com, some hedge funds are planning to side-step the planned Februaru 2005 registration deadline with the SEC - either by declining new investments after the end of January or by taking advantage of other exemptions for money already under their control (hedge funds routinely lock-down investor funds for a lengthy term - up to two years).

Of course, no one wants expanded federal regulation in their operating space, and it should be entirely expected that hedge funds would take advantage of whatever lee-way the new SEC regs allow. As to the law itself questions remain, and court challenges are still pending as to its efficacy.

Via MarketWatch.com:

Hedge funds avoid new SEC rule - At least 25% aren't registering, hedge fund, lawyers say

By Alistair Barr
MarketWatch
December 15, 2005

SAN FRANCISCO - How do you regulate an industry when a quarter of the firms remain outside your reach? That may be a question nagging the Securities and Exchange Commission as the first, unofficial deadline of the agency's new project to oversee the hedge fund industry is reached on Thursday.

Hedge funds have traditionally been lightly regulated investment pools for rich investors and institutions. But the industry has grown rapidly in recent years and there are now an estimated 8,000 funds overseeing more than $1 trillion. That encouraged the SEC to introduce new rules this year that require hedge fund advisers to register with the agency as investment advisers.

Managers have to sign up by Feb. 1, but because the SEC needs time to process documents, hedge funds need to file by Dec. 15 to make sure they're registered. (Those that miss Thursday's deadline need not despair: the agency suggested earlier this month that it would try to process registrations that arrive as late as Jan. 9.)

The SEC hopes the project will give it a better insight into the hedge fund world, help it detect and prevent fraud in the industry and monitor the increased availability of these funds to less-sophisticated investors. But those goals - already the subject of much debate -- may be compromised by the fact that many hedge funds aren't signing up.

Hedge fund lawyers interviewed by MarketWatch said that at least 25% of their clients aren't registering. Some managers aren't accepting any new investments after the end of January to avoid the new rules. Many are locking up investors' money for two years to take advantage of an exemption. See full story on lockups.

"If SEC doesn't pick up a lot of the industry, it will certainly raise questions about whether the new rule is going to meet its intended purpose," said Barry Barbash, a partner at Shearman & Sterling and a former director of the agency's Division of Investment Management.

The SEC "invited" problems like this by including the two-year lockup exemption in its hedge fund rule, Barbash added. Originally intended to apply to private-equity funds, it has ended up exempting many hedge funds too, he explained.

About a quarter of Barbash's hedge fund clients aren't registering with the SEC, he said. Some managers are introducing two-year lockups and others already had them in place, he said.

That might not be a disaster though, Barbash noted. If the SEC manages to register between 75% and 50% of hedge funds, that may encourage the rest of the industry to register over the long term, he said...

Much more, here, in the full article.

-- MDT

The Daily Caveat has returned from a quick trip to the frigid streets of New York City. New posts to follow throughout the day. The most fascinating article I read on the train yesterday was this one.
Featured on the front page of the WSJ, (helpfully reprinted in full online by the Pittsbuirgh Post Gazette), the piece casts a new light on the notion of "activist" hedge funds. Jim Simon, scientist, scholar, smoker and uber-successful investor at the helm of Renaissance Technologies Corp. has set his sights on determining the cause and potential treatments for autism. Simon's daughter, Audrey, suffers from a mild form of the disorder.

A thrillingly interesting article.

More to come.

-- MDT

The American Funds group, a subsidiary of Capital Group Cos. is one of the United States' largest stock and ond holders. Seventy-five years into its existance the firm may be facing legal action. Now that new SEC boss Chris Cox has gotten a bit more comfortable in his chair some have surmised that the long brewing government probe into whether American's trades have run afoul of federal "best execution" requirements. And expectations are that if the three year investigations prompts legal action, Cox will quickly find himself in self in a very hot seat. American's alledged transgressions fall within a fairly murky area of securities law. If the SEC chooses to duke it out with the firm and clarify law via an attempted prosecution, things could get ugly.

For a much better primer on the issues in this case than I could possibly provide, take a look at this L.A. Times article.

-- MDT

The Daily Caveat has considerd writing about the continuing issues with the ongoing audit of the city of San Diego, primarily because investigative giant, Kroll has been active throughout as one of the prime contractors. But frankly, where to begin. The whole project has been plagued with semi-scandal for more than a year. In any event, the North County Times, the bill for the project may tripled previous best estimates:

Consultant bills triple for city

By: Wire Reports
December 11, 2005
North County Times

Bills for consultants hired to help the city dig out of its financial mess have tripled in some cases, it was reported today. The tab for the top four consultants hired to help San Diego unravel its financial mess has topped $17 million, the San Diego Union-Tribune reported.

Kroll Inc., a New York-based risk management firm, was hired to help get the city's overdue fiscal 2003 audit issued; it has billed the city $5.1 million so far. The New York-based law firm of Willkie, Farr and Gallagher, which works for Kroll, has billed the city $2.7 million so far. Accounting giant KPMG, which is working to complete the 2003 audit, has been authorized to spend $3.1 million for its work.

The Houston-based law firm of Vinson & Elkins, which no longer works for the city, was hired to investigate San Diego's pension system and disclosure practices and to represent the city in front of the Securities and Exchange Commission; it billed $6.3 million for its work over 18 months.

Those figures do not include billing for November, and the firms estimated that they may need additional $9 million to $11 million to finish their investigation of accounting errors and possible fraud, the Union-Tribune reported.

"It's not a way that I would prefer to do business," Mayor Jerry Sanders told the newspaper. "I believe that we should authorize expenditures before we spend the money. I hesitate to step in and stop everything right now. We need to move forward, but we also need to get complete control of this."

City Attorney Michael Aguirre called the spending "out of control. "It's chaotic, and Kroll has done nothing to help other than send us more bills," he said.

The original article appears here. And here's another glowing editorial, via Voice of San Diego.

-- MDT

Labels: KPMG, Kroll

Via CNNMoney.com:

Top hedge fund stories of 2005 -- Fines, proxy fights, rocky returns -- 2005 has proved a tricky year for hedge funds

December 12, 200
By Amanda Cantrell
CNN/Money staff writer

From fines to frauds to proxy fights to rocky returns, the press-shy hedge fund industry grabbed more headlines in 2005 than it has since 1998, when the spectacular blowup of a fund called Long Term Capital made "hedge fund" a household word. Since then, strong performance and other factors have helped these funds rack up $1 trillion in assets worldwide. The industry has swelled to an estimated 8,000 funds, attracting new investors such as endowments and pension plans along the way. Here are the top hedge fund stories of the year:

Bayou blows up

Bayou Group founder Samuel Israel III, scion of a New Orleans commodity trading family, and Daniel Marino, the fund's chief financial officer, pleaded guilty to defrauding investors of $450 million over several years simply by lying to them about how much money the funds were producing and setting up a phony auditor to sign off on the cooked books.

The tale produced news reports containing sordid details such as a six-page suicide note and confession from Marino, who didn't kill himself, and allegations that Israel had a drug problem and threatened his partner with a gun. While Israel and Marino await sentencing in January, investors are trying to get their money back. Numerous class-action suits are hitting court dockets, filed by investors suing third-party firms who invested in Bayou on their behalf.

Tough October; lackluster year

October proved to bethe worst single month for hedge funds in many years, with even typically strong performing managers posting losses in the high-single digits. For some, the month wiped out the modest gains managers have made in what has proved to be a difficult year for getting strong returns. "Performance was terrible," said Daniel Strachman, managing partner of financial services firm Answers & Company Group and the author of "Getting Started in Hedge Funds."

Strachman believes the mediocre performance has also affected funds of funds, or managers who invest in a portfolio of hedge funds on behalf of clients for an additional layer of fees. But a snap-back in November, coupled with what many believe will be a strong December, could lift hedge fund returns out of their doldrums. If that happens, it would be a repeat of 2004, in which many hedge funds racked up their gains for the year during the final quarter.

Rise of "activist" managers

Whatever you call them – shareholder activists, corporate raiders, saber-rattlers – hedge fund managers who battle corporate managements in the hope of boosting target companies' stock prices generated headlines and also cash as the hedge fund style du jour. And they're taking on big targets. Famed agitator Carl Icahn, who launched his hedge fund late last year, rounded up a cartel of investors, including fellow activists Jana Partners, to take on behemoths like Time Warner. (Time Warner is the parent company of CNNMoney.com) Meanwhile, Bill Ackman's activist fund Pershing Square Partners has taken on a corporate behemoth of its own in agitating for change at McDonald's.

The race to registration

While hedge funds have known for more than a year that many of them will be required to register with the Securities and Exchange Commission, some un-registered managers are evaluating their options for not having to comply with the rule, which takes effect in February 2006. The SEC is not requiring managers who "lock up" their investors' capital for two years or more to register and is also giving a pass to firms who agree not to take in new money.

Said Jedd Wider, a partner in the private investment fund practice at law firm Orrick, Herrington & Sutcliffe, "Most of our clients who are required to register have gone through the process already; others are giving very serious thought to extending their lockup periods or looking to close their funds to new investors."

Meanwhile, hedge fund manager Phillip Goldstein, who is suing the SEC on the grounds that the SEC exceeded its regulatory authority, got a short-term boost to his case Friday when U.S. appeals court judge Harry Edwards, one of three judges hearing arguments in the suit, told an SEC attorney the agency stretched the definition of "hedge fund clients" to make the registration proposal work, according to news reports. The panel will issue a verdict in about three months – after the rule will have already gone into effect -- Goldstein's attorney told the Chicago Tribune.

Overstock, Rocker Partners, and the "Sith Lord"

What started out as a brief, straightforward civil complaint rapidly spun into a circus sideshow as Patrick Byrne, chief executive of online closeout retailer Overstock.com, accused famed short-seller David Rocker of conspiring with independent research firm Gradient Analytics to drive down Overstock.com's share price. Byrne filed suit against both firms and their principals, but his bizarre publicity junket soon overshadowed the contents of the suit.

In a conference call to investors and reporters, Byrne launched into a rambling diatribe in which he accused hedge fund managers, journalists, and a well-known Wall Street figure, whom he would not name but instead dubbed the "Sith Lord, " of conspiring to drive the company's stock price down. Rocker and Gradient filed a motion to dismiss the suit, and Rocker founder David Rocker told Fortune he is preparing to file a countersuit.

Automaker downgrades lead to losses

When two bond-rating agencies this summer cut General Motors' corporate bonds to junk, some hedge funds, as well as some investment banks, suffered heavy losses. Particularly hard hit were funds that were shorting the common stock of GM and holding long positions in the underlying bonds. When the bonds got downgraded, investors were forced to try to sell into a market with no buyers; meanwhile, investor Kirk Kerkorian announced he would acquire a large stake in GM, causing a price spike in the stock. While the debacle did not force any large funds to unwind, the events sent jitters throughout the markets.

A once-dependable strategy falters

Once considered a safe, conservative strategy, convertible bond arbitrage, in which managers buy convertible bonds and short the underlying stock, proved to be the worst performing hedge fund strategy this year, and the plunge caused some large convertible arbitrage hedge funds to close, including Marin Capital Partners, which had $2.2 billion in assets at its peak, and Alta Partners, run by Creedon Keller & Partners, which had about $1.2 billion at its peak. The rout began late last year, when investors in these funds, unimpressed with a streak of lackluster returns, began asking for their money back. The redemption requests forced managers to sell into a market with no buyers, which drove returns even lower. Convertible arbitrage funds are down 2.69 percent for the year to date through November, according to Chicago-based hedge fund tracker Hedge Fund Research.

The original article appears here.

-- MDT

Labels: Bayou Group, Gradient Analytics, Patrick Byrne

Last week The Daily Caveat wrote about the looming court challenges to the SEC's new hedge fund regulations (between 1999 and 2004 the SEC brought 51 fraud cases relating to hedge funds) set to take effect in February 2006.

A hearing was held on Friday last, allowing both sides to courteously express their views on the merits or pitfalls of the proposed SEC rules. The Washington Post has the rather contentious details.

And now, the undignified scrapping:

Appeals Judges Question SEC's Hedge Fund Rule

By Carrie Johnson
Washington Post Staff Writer
Saturday, December 10, 2005; D01

Appeals court judges sharply questioned yesterday whether the Securities and Exchange Commission had a reasonable basis for adopting a controversial rule that requires hedge funds to register with the agency.

A divided SEC passed the rule in a 3 to 2 vote last year, citing evidence that the loosely regulated investment pools had become a breeding ground for fraud and trading abuses. But New York fund adviser Phillip Goldstein sued to stop the rule, arguing that the SEC had overstepped its authority and did not provide adequate foundation for the move.

Goldstein's case appeared to get a boost yesterday based on questions from two of the three judges on the U.S. Court of Appeals for the D.C. Circuit panel.

"You don't have authority to act simply because you exist," Judge Harry T. Edwards told Jacob H. Stillman, the SEC's lawyer.

A few moments later, Edwards said: "We have to test your thesis, and your thesis doesn't hold up."

Judge A. Raymond Randolph also expressed skepticism about the agency's arguments.

Legal experts cautioned that it is difficult to draw conclusions about how a court will rule based on questions asked by judges during oral arguments. The appeals court, however, has criticized the SEC's approach in a few recent cases.

Earlier this year, the court sent back for more research a rule mandating that mutual fund board chairmen be independent of management. The SEC retooled the rule, prompting a second, pending legal challenge by the U.S. Chamber of Commerce. That case is to be argued Jan. 6.

Last month, the court rejected a separate bid by agency lawyers to impose financial penalties on board members at an investment fund called the Rockies Fund Inc., ruling that the agency had levied the fines "arbitrarily and capriciously."

Former SEC Chairman William H. Donaldson made the hedge fund effort one of his central initiatives before he resigned in June. In recent years, the market has boomed to include more than 8,000 funds with over $1 trillion in assets. Average investors and pension funds increasingly are investing in the funds.

From 1999 to 2004, the agency filed 51 fraud cases involving hedge funds. Last week, Millennium Partners LP, a highflying New York fund, agreed to pay $180 million to settle trading abuse allegations lodged by the SEC and New York state Attorney General Eliot L. Spitzer. In September, two top officers at the Bayou Management fund pleaded guilty to criminal charges for engaging in a fraud that cost investors $450 million.

Stillman, the SEC's lawyer, stressed to the appeals court yesterday that the agency moved to register funds with more than 14 investors and $25 million under management to further its mission of protecting investors.

"Aren't they really getting at trying to enhance the government's ability to identify and prosecute fraud when it occurs?" Judge Thomas B. Griffith asked a lawyer for Goldstein. "That's really what's at the core of this."

The rule is set to take effect in February. Critics fear the hedge fund rule could foreshadow inspections and other efforts to rein in the funds. Before it was adopted, the plan had been criticized by Treasury Secretary John W. Snow and Federal Reserve Board Chairman Alan Greenspan, among others.

A ruling is expected within the next several months, according Philip D. Bartz, a lawyer at McKenna Long & Aldridge LLP who represents Goldstein.

The original article appears here.

-- MDT

Labels: Bayou Group, Eliot Spitzer, New York AG

So much for what cooperating with federal prosecutors will get you. William T. Owens assisted the Feds in making their case against his fellow executives and for his trouble received the longest jail term meted out in relation to the Health South fraud.

Owen's assumed ace-in-the-hole were his recorded conversations with Health South top dog Richard Scrushy. Scrushy was recently acquitted but still faces a variety of other civil charges. Owens himself plead guilty to conspiracy to commit securities fraud, wire fraud and certifying a false financial statement.

Via the New York Times.

-- MDT

Labels: 2006, Health South

So says The Business Online:

No risk for Kroll leaving shadows

Rupert Steiner - City Editor
December 11, 2005
The Business Online

One of the few industries to benefit from Sarbanes-Oxley and the myriad of tighter regulations plaguing America’s Fortune 500 companies are the corporate detectives. The growth in corporate governance red tape serves as a coming of age for firms such as Kroll and Control Risks, who for years have carved a living out of analysing risk and restructuring businesses.

But still they hide in the shadows of big merger and acquisition deals to conduct their due diligence and data verification, despite being de rigueur among the entourage of lawyers, publicists and ­corporate financiers who follow around acquisitive chief executives.

Their work is a far cry from the old-fashioned gumshoe image that those working for purer professions still afford them. The change in laws and technology have made risk ­consulting companies a sophisticated and rapidly growing business.

Kroll is about to make a bid for IBAS Holdings, a Norwegian company valued on the Oslo stock market at £28m (E41.6m, $49m). It specialises in data recovery and computer forensic work. Risk businesses should use transactions like these as a turning point to be more open about the work they do. Customers should share what they unearth. This is important for corporate detectives who are finally becoming accepted and trusted in the business world.

Interesting. While it is true that corporate investigators are regularly called upon to assist in dealmaking decisions, I'd argue that Sarbox in specific has been a much greater boon to the big business consulting companies, which have turned SOX compliance into an nice little industry for themeselves.

If you want a front-line view of how investigators most often intersect with SOX protocols, check out last week's post from Caveat's own Thea Bournazian.

The original Business Online article appears here.

-- MDT

Labels: Kroll

Interesting article forwarded to us by the National Council of Investigations and Security Services, our industry lobbying group:

Fears over identity theft overblown:

US study – From Yahoo News

Thu Dec 8,12:37 AM ET
A new study suggests consumers whose credit cards are lost or stolen or whose personal information is accidentally compromised face little risk of becoming victims of identity theft.

The analysis, released late on Wednesday, also found that even in the most dangerous data breaches -- where thieves access social security numbers and other sensitive information on consumers they have deliberately targeted -- only about 1 in 1,000 victims had their identities stolen.

ID Analytics, the San Diego, California-based fraud detection company that performed the analysis, said it looked at four recent data breaches involving a total of 500,000 consumers. It declined to provide the names of the companies involved in the breaches, but Mike Cook, ID Analytics co-founder, said one of them was a top five U.S. bank.

After six months of study, comparing compromised information against credit applications, ID Analytics said it discovered something counterintuitive: The smaller the breach, the greater the likelihood the information was subsequently used by fraudsters to hijack the identity of victims.

"If you're in a breach of 100, 200 or 250 names, there's a pretty high probability that you're identity is going to be used," said Mike Cook, ID Analytics' co-founder.

"The reason for that is if you look at how long it takes a fraudster to use an identity, they can roughly use 100 to 250 in a year. But as the size of the breach grows, it drops off pretty drastically."

A study conducted earlier this year by Javelin Strategy and Research, which mirrored the methodology of an earlier Federal Trade Commission study, found that 9.3 million Americans said they had been victimized by identity thieves during the preceding 12 months.

ID Analytics said it discovered that identity thieves have a hard time using a stolen credit cards to hijack the identity of cardholders because the cards are usually quickly canceled -- and because piecing together an identity based on the information on the card is hard work. Not one of the card breaches it studied resulted in a subsequent identity takeover.

While the findings will provide some comfort to consumers whose credit cards are lost or lifted or whose sensitive information is compromised when, for instance, a laptop is stolen, as recently happened at Chicago-based Boeing Co.(NYSE:BA - news), some of ID Analytics' suggestions could be controversial.

The company suggests, for instance, that companies shouldn't always notify consumers of data breaches because they may be unnecessarily alarming people who stand little chance of being victimized.

That's likely to rankle consumer watchdogs, who are pushing Congress to enact a law, sponsored by Sen. Arlen Specter (news, bio, voting record), Republican of Pennsylvania, and Sen. Patrick Leahy (news, bio, voting record), Democrat of Vermont, that requires companies to implement tough data security standards and to notify consumers, law enforcement and credit-reporting agencies whenever there's a breach.

"As far as notifications, we think there are certain instances where businesses might want to notify consumers and certain instances where they might not to inform them," said Cook.

"For instance, if they lose data, and they don't know where it is, we think too many notices may not be a good thing. They should probably monitor that and spend dollars on consumers who are actually harmed, rather than spending dollars on 10 million consumers" most of whom won't be affected.

Labels: data breech, identity theft

Over the summer the business boogey-man du jour was identity theft. Like many other blogs The Daily Caveat rode that wave in part because the giant data aggregators who were some of the prime offenders are the most prominent vendors in our industry. But the business pages have subsequently moved on and identity theft concerns have filtered down to local newscasts sandwiched between lost dog stories and local politics. Hedge fund shenanigans have now taken their turn in the finance pages as the monster in the closet.

Frankly, there is good reason to be wary of the hedge fund market place. As fund managers are wont to point out, the alternative investment strategies they employ are not for the average investor. Their clientele has traditionally been made up of financially sophisticated, wealthy individuals who were able - at least theoretically - understand and assess the strategies employed by their advisors. But the marketplace for hedge fund investors has been changing for several years and by all accounts will continue to do so, as more institutional investors such as pension funds get in on the game.

With this undeniable change comes a not unreasonable desire for hedge funds to work well for everyone. Part of that process is educational. As with any investment decision, caveat emptor must be the rule and fund managers are right to suggest that any investor who does not do their homework is asking for trouble. Consequently companies like Caveat Research are more and more often being asked to assist clients in vetting hedge fund investment opportunities in the same manner we have traditionally assisted other due diligence matters.

But what else can be done structurally to adapt funds to the changing marketplace for their services? Already funds have become more "domesticated" as larger institutions have gotten in on the game. But the occasional bad actor or business strategy gone awry has repeatedly forced the public flogging of hedge funds in the press. Unfortunately as in all areas of business, the bad actors often overshadow the good. The debate over what regulatory changes are necessary, desirable or undesirable continues. Even as the SEC readies itself to take on regulation of some funds early next year, at least one shareholder activist is seeking to block the enactment of the new rule:

Via the Financial Times:

SEC hedge funds rule is challenged

December 08, 2005
Financial Times (MSN Money)

A prominent shareholder activist will on Friday urge a court to strike down the chief US financial regulator's flagship rule to supervise the hedge fund industry. Lawyers for Phillip Goldstein, New York-based head of hedge fund Opportunity Partners, will ask a federal appeals court to declare invalid the hedge fund registration rule drawn up by the Securities and Exchange Commission.

It is the second legal challenge to SEC regulation masterminded by William Donaldson, the former chairman of the regulator, who stepped down in June. The US Chamber of Commerce is seeking to strike down the SEC rule that is supposed to improve mutual fund governance.

In a legal brief submitted to the court of appeals for the district of Columbia, lawyers for Mr Goldstein said the rule on hedge fund registration should be declared invalid "because the SEC does not have the statutory authority to extend its regulatory power to a hedge fund" under the 1940 investment advisers law.

The lawyers also claimed the SEC had acted in a "capricious and unreasonable" manner because it "vastly understated" the compliance costs stemming from the rule, which would be passed on to investors. The rule requires US-based hedge fund managers who control assets of more than $25m to register with the SEC by February 1 next year.

The 1940 law requires many investment advisers to register with the SEC, but it exempts those who have fewer than 15 clients and do not market themselves to the public. In 1985, the SEC said these private advisers could count each partnership into which investors put their money as a single client.

This decision enabled hedge funds, which typically operate as partnerships, to avoid registration even though they may have large numbers of clients. The new rule would require hedge funds to count each investor as a client and so most would have to register.

In its legal brief for the court case, the SEC said Mr Goldstein's challenge had "no merit". The SEC justified the rule by highlighting the rapid growth of hedge funds during the past five years, the rising interest of retail investors in them, and increasing instances of fraud in the industry. In its legal brief for the court case, the SEC said Mr Goldstein's legal challenge had "no merit".

The original article appears here.

Whether the SEC rule is adequate on its face is one thing. Whether they can muster the enforcement resources necessary to make it work is quite another. We shall see what the spring brings, or if these legal challenges gain traction enough to derail the new regulations before they start.

Meanwhile, if you were listening to drive-time NPR last night you probably heard a sympathetic piece on Marketplace, with fund managers decrying the overstated bad-rep their industry is getting. If you missed it, the story is worth a listen if only for a second opinion.

-- MDT

Labels: identity theft

According to estimates from regulators, the SEC dealt with more than 600 enforcement actions over the last year. Approximately 30% of these actions were related to financial fraud cases, making it the number one issue. "Revenue recognition" cases were named as the most frequent of financial frauds. All that and more in this interesting piece from Reuters:

More U.S. SEC book-cooking actions hit Fortune 500

By Kevin Drawbaugh
Reuters
Dec 7, 2005 4:33 PM ET

WASHINGTON - The U.S. Securities and Exchange Commission -- once hopelessly outgunned by big business -- each year is bringing more financial reporting actions involving the Fortune 500 corporate elite, officials said on Wednesday.

In fiscal 2005, 24 percent of SEC financial reporting actions hit Fortune 500 companies, their executives or those they do business with, like auditors and vendors, the SEC said. That proportion was up from 20 percent in 2004, 17 percent in 2003 and just 5 percent in 1998, it said.

"This increase is reflective of increased staff resources over the years, as well as our willingness and ability to take on some of the largest and most complex cases," SEC Enforcement Division Chief Accountant Susan Markel told Reuters.

The figures come at a time when corporate scandals are no longer splashed across the nation's front-pages as they were in 2001-2004 after the Enron scandal. Congressional pressure for greater SEC scrutiny of large companies has eased, as well. But the latest figures show a steady increase in SEC actions against the largest companies and related parties.

For instance, healthcare services group HealthSouth Corp. -- a Fortune 500 company until two years ago -- in June agreed to pay $100 million to settle an SEC action alleging a massive 1996-2002 accounting fraud.

Media giant Time Warner Inc. -- No. 32 on the 2005 Fortune list -- agreed in March to pay $300 million to settle SEC charges that, among other things, from 2000 to 2002 it overstated its AOL online advertising revenues.

Telecommunications group Qwest Communications International Inc. -- No. 154 on the 2005 list -- in October 2004 agreed to a $250-million fine to settle SEC allegations of fraudulently recognizing revenues between 1999 and 2002.

Increased frequency of SEC actions against major companies like these has more to do with the companies themselves than with the SEC, however, said Seth Taube, a partner at the law firm of Baker Botts and a former U.S. prosecutor and SEC attorney.

"In the post-Enron world, both the SEC and the Justice Department reward self-investigation and self-reporting," Taube said, referring to recent statements from both agencies on how companies can win the government's favor by voluntarily coming forward with problems and cooperating with investigators.

"That makes the job of the SEC easier because industry itself untangles the web and presents it neatly to the commission. This is a sign that corporate America has responded" to post-Enron legal reforms, Taube said.

In an example of how the SEC is widening its focus to take in more of what it calls financial reporting "gatekeepers," Big Four accounting firm KPMG in April agreed to pay $22 million to settle SEC charges over its 1997-2000 audits of Xerox Corp. , ranked No. 132 on the Fortune list.

In a similar action, Big Four firm Deloitte & Touche in the same month agreed to pay $50 million to settle with the SEC over past audits of cable company Adelphia Communications , No. 456 on 2002's list.

The SEC brought more than 600 enforcement actions in fiscal 2005. About 29 percent were financial fraud cases, making it the biggest class ahead of others like insider trading. Revenue recognition cases are the most common type of financial fraud.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, insider trading, KPMG

In a year where a record number of named hurricanes plowed into American and neighboring shorelines, we are reminded of all that we are unable to control. The consequences from these natural disasters left victims reeling from loss of life, property and perhaps faith that things will ever be the same again. The hurricane season is finally over offering a short reprieve.

In contrast and perhaps crass comparison, it seems as if there is no end in sight to the string of named accounting scandals that continue to come ashore and pummel investors. Unlike hurricanes, these scandals are 100% man-made. Scandal season remains open-ended.

At a recent AICPA event in Washington, D.C., SEC chairman Christopher Cox discussed his thoughts on these numerous accounting scandals. "Criminal conduct could be concealed in a thicket of detail." Further, he said, "Conformity to hundreds of technical rules became not a shield to protect investors, but a sword to be wielded against them."

According to Stephen Taub of CFO.com, “Cox also expressed concern about the dearth of competition among the major accounting firms. Big Four firms audit 80 percent of U.S. public companies, he observed, and their audit clients account for 99 percent of all U.S. public-company annual sales.”

Simplifying accounting rules and encouraging competition in the accounting field is a cogent and promising strategy. These measures offer some control to prevent fraud and investor losses. Cox and the SEC intend to continue the arduous process of making it easier for everyone to understand the financials of a public company. They also must make certain public companies actually implement their new guidelines.

At Caveat Research, much of our work involves investigating allegations of accounting fraud, which is usually committed by a company’s leadership. In layman’s terms, did they cook the books? Was there a pump and dump? Did senior executives encourage investors to buy all the while knowing their company’s numbers really had little promise of growth for the future?

Indeed, we often learn from interviewing former employees of a company under investigation that they were confused about how to report and forecast their numbers. The accounting process was layered and difficult even for accountants working with the numbers every day. Some formers tell us they trusted that company leadership was ethical and conformed to the accounting guidelines such as GAAP and Sarbanes-Oxley. Unfortunately, investors know all too well that this trust was sometimes misplaced.

Former employees tell us that updated accounting rules are helping, but it is still easy for senior executives to hide their fraudulent ways. We also hear that companies are slow to integrate the newer and easier accounting guidelines. When asked why the delays, formers say that the company was simply preoccupied by running their business. For example, the implementation and enforcement of new guidelines from Sarbanes-Oxley was unhurried—even outside accounting firms were slow to insist that the company change their ways.

For now, we have no control over the creation and force of a hurricane. And, we know that a greedy and amoral person in business will always try to find a way to beat the system. But, there is increasing hope for investors and all harmed by the fallout of accounting scandals if revised rules mandating transparency are established and importantly, enforced.

Via The Daily Telegraph:

New sleuth put on the trail of Langbar's £365m deposits

By Robert Miller
December 5, 2005
The Daily Telegraph

Serious Fraud Office lawyer Stephen Myers will take over as case controller today of the formal investigation into Langbar International, the suspended Aim-listed company. One of his first tasks is to meet senior officials from the Stock Exchange and the Financial Services Authority, who are working hard to limit the Langbar case damaging investor confidence in London's junior market.

At the heart of the investigation is what has happened to an estimated £365m-worth of cash deposits that Langbar and its newly installed chief executive, Stuart Pearson, told shareholders was held by the company in September.

Mr Pearson, a former Baker Tilly corporate financier, travelled to Brazil and met officials at the Banco do Brasil who, he said, confirmed in writing that the deposits existed. Subsequently he reported through the London Stock Exchange that $294m of this had been transferred to the Dutch bank ABN Amro and would be used to invest in Spanish and Portuguese property developments.

Until the cash verification notice, Langbar, which changed its name from Crown only this summer, had been a cash shell whose only assets were promissory notes and certificates of deposit. These had been issued by the Barcelona-based Lambert Financial Services, which had a 60pc stake in Crown paid for by a £142m certificate of deposit lodged at Banco do Brasil, after Crown announced it had won a contract from the Argentinian government to build public works.

Lambert, whose president is listed as Dr Rivka Meir with Abraham Avi' Arad as chief trustee, is an investment firm that manages money on behalf of some 2,000 wealthy Jewish settlers in Latin America and Israel.

When it was reported in September through the Stock Exchange that Langbar, whose share price was languishing at around 50p, had net cash assets of £300m or more it attracted a surge of investor interest, particularly on internet bulletin boards.

Some of the City's top fund managers now appear on the shareholder register including Gartmore, Merrill Lynch, Henderson and the Universities Superannuation Fund as well as thousands of private investors.

In October Mr Pearson asked the London Stock Exchange to suspend Langbar's shares and he appointed risk consultants Kroll Associaties to verify its cash deposits with Banco do Brasil and ABN Amro. Within weeks Kroll reported "it appears likely that the company has been subject to a serious fraud".

The SFO investigators must establish the whereabouts of Langbar's money. To do this they will need to make a formal request to the Brazilian authorities, where the money trail started as certificates of deposit and promissory notes at Banco do Brasil, and Bermuda where Lambert, like Langbar itself, is incorporated. The fraud office will also want to talk to Langbar's Spanish auditors Gironella Velasco.

Meanwhile, David Greene, of law firm Edwin Coe, who acted for private shareholders in the recent Railtrack court case, is heading an investors' action group. "We are seeking an urgent meeting with the company to understand what has happened. It is important to move swiftly to recover any assets we can.

The original article appears here.

-- MDT

Labels: Kroll

Via the Seattle Post Intelligencer:

Refco bondholders want access to data

THE ASSOCIATED PRESS
December 6, 2005

WASHINGTON -- An investor group that holds $487.5 million in Refco Inc. bonds asked a judge to grant it direct access to secret information being gathered by a committee of creditors investigating the company's financial collapse.

The group said Refco's official creditors committee, which last week won the right to subpoena a broad array of Refco records, can't be relied upon to decide fairly which creditors should get access to that information. The creditors committee won that right only after promising to limit who gets access to the records...

But the bondholders contended the committee is "hopelessly conflicted" about pursuing the divergent interests of Refco's creditors. Under the circumstances, they said in court papers late Monday, the bondholders can't be sure they'll be kept informed about the investigation. "Any disconnect in receiving information, even for a short period of time, could have serious consequences," they said...

More in the full article, which appears here.

-- MDT

Labels: Refco

Via WashingtonTechnology.com:

DHS taps Kroll for background investigation work

By Alice Lipowicz
Staff Writer
December 6, 2005

The Transportation Security Administration has awarded a contract to Kroll Government Services Inc. to perform preliminary background investigations of TSA screeners and other employees, the company announced today.

The indefinite-delivery, indefinite-quantity contract is for one year with four one-year options. It is potentially worth $17.2 million.

Kroll Government Services, a subsidiary of the risk consulting firm Kroll Inc. of New York, has done background checks for TSA airport personnel since 2003, when Congress made the checks mandatory...

More here.

-- MDT

Labels: background checks, Kroll

In what is being billed as the largest class action suit ever, the American Indian Trusts are suing the federal government for what they regard as mismanagement of fund owed to the trusts over the last 100 years. Last week legal experts and tribal reps from around the country met at Arizona State University to discuss the case and it's legal and financial implications.

According to the Department of Interior, the actual amount of money unpaid due to mismanagement is speculated to be somewhere around $13 billion. The plaintiffs are demanding that sum plus compound interest, bringing the total figure sought to $176 million:

Via Arizona State University's Webdevil.com:

"The problem has been neglected literally since the 19th century," said Kevin Gover, law professor at ASU. "That's when the mismanagement of Indian assets really began, and over time, everybody in line sort of passed it along to the next guy"...

...James Cason, associate deputy secretary for the Department of the Interior, said the department estimates about $13 billion over the last 100 years, but plaintiffs asserted $176 billion was owed. "If you make the assumption that we took in $13 billion over time, and we never paid out a dime, and you add compound interest to it then it's $176 billion," Cason said.

Cason called the assertion ridiculous, because no one would have let it go on that long. "It assumes a premise that our Indian beneficiaries were never clever enough to figure out they weren't getting money for over 100 years, and that we had 100 years worth of congresses that never caught on," Cason said. "That just doesn't happen"...

...Gover said they plan on having several more conferences because of the complexity of the issue and doesn't know when this will be resolved. "I don't know that it gets resolved," Gover said. "There's a push under way in Congress right now to really change the law around this issue. We knew that, and that's why we have people here that are going to discuss that legislation."

The United States generally deals poorly with his historical dirty laundery. It will be interesting to see what traction this case gets in the courts and in the court of public opinion.

The full Web-Devil article appears here.

-- MDT

Joseph Boyle, KPMG's "relationship partner" with Xerox from 1999-2000 has accepted a settlement with the SEC regarding his failure to disclose to KPMG's Xerox audit committee financial irregularities Boyle uncovered during his time as liason to the eponymous imaging company.

According to federal regulators, the accounting fraud at Xerox began in 1997 and amounted to one and a half billion dollars over the next four years. KPMG previously agreed to a $22 million settlement regarding their audit of Xerox.

Via Forbes.

-- MDT

Labels: KPMG

You win some, you lose some. So far former Health South SEC, Richard Scrushy has done ok for himself. As a prime target in one of the most priminent corporate scandal prosecutions of the last few years, Scrushy managed to skate, despite sworn testimony from no less than five former officers who described Scrushy's involvement in fraudulent activites. Scrushy was found not guilty of criminal charges back in June and just last week had two fraud counts dismissed by the U.S. district court overseeing his case.

Still to contend with, however, are four other securities fraud counts and separate bribery charges. Add to that a civil suit, which had received an April 2007 . Other questions still unaccounted for but less likely to end up on the docket include how Health South company dollars went into the founding and funding of this pro-wrestling group. It would be funny if it wasn't true. The civil suit is gunning for Scrushy's $75 million personal fortune and along with the other charges still pending against him, should keep Scrushy's dance card quite full for the forseeable future.

-- MDT

Labels: 2006, bribery, Health South

Via Legaline.com:

Search terms as evidence of murder
December 4, 2005

In the days leading up to his wife's murder, Robert James Petrick used Google to search the terms "body decomposition," "rigor mortis," "neck" and "break." He also went online to research the depth, currents and underwater topography of the lake in which his wife's body was found....

[T]he case illustrates how police and prosecutors now routinely hunt for evidence among a suspect's online searches. And it is a practice that is causing concern among privacy advocates...

Click through to Robert's blog for further details and a link to the article which propted his comments.

-- MDT

Newish SEC chair Christopher Cox was only just getting comfortable in own his seat and now faces the highest profile of the many vacancies he will need to fill at America's security regulator.

Late last week SEC Gerneral Counsel, Giovanni Prezioso ammounced he would be stepping down. Here's a run-down of the major accomplishments of the GC's office under Prezioso's tenure, via CFO.com:

During Prezioso's tenure, the Office of the General Counsel reviewed and provided legal advice to the commission on more than 2,000 enforcement actions and more than 100 rulemaking proceedings, according to the SEC. His office was also responsible for coordinating the commission's implementation of the requirements of the Sarbanes-Oxley Act within the strict timeframes set by Congress. Further, the Office of the General Counsel drafted regulations under Sarbanes-Oxley that established the first formal commission standards of professional conduct for attorneys representing public companies.

Prezioso has said he intends to remain in the GC's office through the start of 2006 to assist in the transition process. While he has announced plans to return to the private sector, the big questions remain: who, what, when and where?

You can read the full CFO.com piece, by Stephen Taub, here.

-- MDT

Via Bloomberg:

Millennium Settles With Spitzer, SEC for $180 Million

December 1, 2005
Bloomberg
By Christopher Mumma & Katherin Burton

Millennium Partners LP, a $5 billion hedge fund company accused of improper mutual fund trading, agreed to pay $180 million in a settlement with New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission.

Millennium, run by Israel Englander, defrauded fund companies from 2000 to 2003 by rapidly buying and selling mutual fund shares, a practice known as market timing, which drove up costs for long-term investors, Spitzer and the SEC alleged. The New York-based firm set up more than a thousand accounts to hide its identity as it made more than $52 billion in trades, Spitzer said today in a statement.

The sanctions are the biggest against a hedge fund in the two-year investigation of improper mutual fund trading that regulators say hurt other investors. Millennium is one of more than 30 companies that have paid a total of about $3.7 billion since Spitzer got a tip in 2003 about Canary Capital Partners LLC, a now-defunct hedge fund. The SEC later started its own probe of the $8.6 trillion mutual fund business...

For the full details on Millennium's transgressions, check out the full article.

-- MDT

Labels: Eliot Spitzer, New York AG

Via the Minneapolis Star Tribune:

Ameriprise to pay $59.3 million in fines, restitution

Neal Gendler, Star Tribune
December 1, 2005

Ameriprise Financial Inc. and its brokerage arm, Ameriprise Financial Services Inc., have agreed to pay $59.3 million in fines and restitution to settle accusations by securities regulators that the businesses improperly favored some shareholders and mutual fund companies.

The Minneapolis-based company, which became independent from American Express in October, was accused of allowing some mutual fund shareholders to continue market timing after the company wrote a policy forbidding it. Regulators also said Ameriprise workers steered some customers to mutual funds that had paid Ameriprise undisclosed commissions.

Ameriprise did not admit to wrongdoing. The company said in a statement that it was "pleased to resolve these matters. Over the past few years, we have proactively enhanced our compliance policies to address them."...

More, here, in the original article.

-- MDT

The SEC has been mulling a move in the PIPEs (private investment, public equity) market for several months. Now it looks like at least one fund has found itself in the crosshairs.

Via Matthew Goldstein at The Street:

Cornell Capital Partners, a hedge fund that specializes in finance for ailing penny-stock companies, is being investigated by securities regulators for its trading activity in shares of nine companies.

The Jersey City, N.J.-based hedge fund, which has more than $200 million in assets, disclosed the investigation in its most recent audited financial statement, a copy of which was obtained by TheStreet.com. Copies of the hedge fund's 2004 financial statement were mailed to Cornell investors in late August.

Read on, here.

And while we're cribbing from Goldstein, you should also check out this piece, which has details on the continuing travails at Millinium Partners...including info on their $100 million settlement with the SEC and NY Attorney General, Eliot Spitzer.

Find out who's going free and who got fingered here.

-- MDT

Labels: Eliot Spitzer, PIPES

Distressed debt is big, big business. Of primary interest to the SEC is whether funds are accurately representing the size of their holdings in the distressed companies in order to gain access to sensitive, and potentially lucrative, data.

Via CFO.com:

Hedge Fund Bankruptcy Role Seen Probed

Stephen Taub
November 29, 2005
CFO.com

The Securities and Exchange Commission is investigating the increasing role played by hedge funds in bankruptcy proceedings and whether fund representatives are lying about the size of their stakes to gain critical, sensitive information, according to Bloomberg.

Hedge funds that specialize in investing in the securities of distressed companies often try to buy up a large portion of a senior class of bonds so as to gain a position on the creditors' committee of a company. That committee typically has a huge say in the company's ultimate restructuring and is privy to insider information.

The SEC is looking into whether fund representatives overstated their bond positions to gain membership on creditors' committees, according to Bloomberg. Hedge funds — loosely regulated private partnerships — are among the most aggressive investors in the paper of companies in financial distress.

"We're very actively interested in this area,'' Alistaire Bambach, chief bankruptcy counsel in the SEC's enforcement division, told the news services. "These official committees in bankruptcy cases get tremendous amounts of confidential information, and there's clearly a risk that they're not all trading cleanly and by the book."

The SEC has already brought an enforcement action against one hedge fund. Earlier this month, the commission accused Van Greenfield, who manages Blue River LLC, of fraudulently misrepresenting to the U.S. trustee overseeing the WorldCom bankruptcy case that Blue River owned $400 million in bonds in order to gain a seat on WorldCom's bankruptcy creditors' committee.

The SEC also asserted that Blue River failed to install written procedures to prevent the misuse of material, nonpublic information obtained by Greenfield, general securities principal of Blue River Capital, while he served as Blue River's representative on the bankruptcy committees of WorldCom, Adelphia Communications Corp., and Globalstar LP...

Check out CFO.com for the full story.

-- MDT

Labels: insider trading