Via the International Herald Tribune:

Federated settles late-trading charges

By Danielle Kost
Bloomberg News
November 29, 2005

Federated Investors, a U.S. money manager, said Monday that it had agreed to pay $100 million to settle regulatory allegations that it allowed traders to buy and sell mutual funds in ways that hurt long-term investors.

Federated will pay $35 million in restitution, $45 million in penalties and cut fees by $20 million over the next five years under agreements with the U.S. Securities and Exchange Commission and the New York State attorney general, Eliot Spitzer, Spitzer said in a statement. Federated did not admit to or deny regulators' findings as part of the settlement, the securities regulator said.

The Pittsburgh company is the 14th investment company to resolve claims of improper trading in the $8.1 trillion fund industry. The announcement comes after two setbacks for Spitzer's office, including a decision last week to drop charges against a former Canadian Imperial Bank of Commerce executive who was indicted in connection with alleged improper fund trading...

More in the full article, including details of two recent setbacks for Eliot Spitzer's office.

-- MDT

Labels: Eliot Spitzer, New York AG

Via Bloomberg.com:

U.K. Enron Bankers Say New Evidence Prevents Their Extradition

By Megan Murphy
November 28, 2005
Bloomberg

Three British bankers fighting extradition to the U.S. on Enron Corp.-related fraud charges accused the U.S. government of failing to disclose evidence that ``fundamentally undermines'' its case against them.

David Bermingham, Giles Darby and Gary Mulgrew, former executives at Royal Bank of Scotland Group Plc unit Greenwich NatWest, today told the High Court in London that the judge that authorized their extradition didn't know that Greenwich NatWest has acknowledged it didn't lose any money in the alleged fraud, which involved the sale of an Enron off-the-books partnership...

A U.S. federal court in Houston indicted the three men on seven counts of wire fraud in 2002. Prosecutors claim they misled Greenwich NatWest over the sale value of its stake in ``Swap Sub,'' an off-balance-sheet entity used to hedge Enron's investment in Internet service provider Rhythms NetConnections, gaining $7.3 million in the deal...

Read the full article here.

-- MDT

Labels: Enron, NatWest Three

Ahold has reached a billion dollar settlement with shareholders bringing to an end a securities fraud class action lawsuit that had plauged the firm. The food retail behemoth behind your friendly neighborhood Giant and Stop & Rhop stores, Ahold had been facing accusations of securities fraud in relation to the company's announcement in 2003 that it had overstated profits by as much as $1billion. The settlement should work out to just about $1 per share for investors.

Details via Reuters.

-- MDT

Check it out for a month-by-month recap of the big moves on Wallstreet over the last year.

-- MDT

Via The Virtual Chase:

ChoicePoint Drops Ad Claim

(22 Nov) According to its competitor, Aristotle International, ChoicePoint quietly dropped advertising claims about an age verification product that has been approved by several State Attorney Generals. If true, the product would help businesses, such as wine merchants, determine if a potential buyer meets the age requirements.

"In fact, some of the same state law enforcement officials who were said to have supposedly endorsed ChoicePoint's products are actually investigating the company's management practices, securities trading, and contracts...

Click on over to read the full post, with linked articles aplenty.

-- MDT

In his new colum Bloomberg regular John Wasik shares his doubts regarding the effectiveness of the SEC's upcoming regulation of hedge funds. Wasik's conclusion? To avoid putting your money in the hands of the next Bayou Management, seek outside assistance from your financial advisor and corporate private eyes:

Regulators May Never Police Hedge Fund Conflicts

By John Wasik
November 28, 2005
Bloomberg

The U.S. Securities and Exchange Commission is trying hard not to look like the bumbling film detective Inspector Clouseau in advance of its hedge-fund registration deadline in February. Already managers of the 8,000 funds that control $1 trillion in assets have found ways of avoiding registration. And it's unlikely the agency's inspection of the advisers will be too extensive, either.

As with many other investment products, you will have to be your own cop to ferret out conflicts at hedge funds and funds of funds, which package several hedge products. "Conflicts of interest -- they're everywhere,'' said Gene Gohlke, associate director of the SEC's Office of Compliance Inspection, who was speaking at a Fund of Funds Forum in New York on Nov. 14. "And they're particularly prevalent in the investment advisory business.''

The SEC is being honest about its inability to adequately supervise a huge, growing and sometimes unruly industry... The agency will only be able to conduct 1,200 to 1,500 inspections a year with 450 staff members. This team also tries to monitor 8,000 mutual funds from 1,000 fund groups... The odds are against the SEC collaring the next Bayou Capital, a $440 million hedge fund that collapsed in August and is under investigation for fraud...

You needn't be discouraged by the regulatory gap and can hire someone to be your watchdog... Hiring someone like an accountant, lawyer or financial planner to vet funds or funds of funds for you makes eminent sense... Some oversight of hedge funds is better than none, although the way the system is now, you will have much better protection if you do it yourself or hire someone akin to a private eye.

Indeed. Much more of interest in the full piece, regarding the February '06 hedge fund SEC filing deadline and the hurdles that still remain for the SEC before it can perform an adequate job in policing funds.

-- MDT

Labels: Bayou Group

Via Motleyfool.com:

Joe Nacchio: CEO or Secret Agent?

By Tim Beyers
November 22, 2005
Motley Fool

...Authorities have made [ Quest CEO, Joe] Nacchio the centerpiece of a federal investigation into an accounting scandal that forced the telco to restate its 2000 and 2001 earnings, which were found to be inflated by an aggregate of $2.2 billion.

Nacchio has long denied any wrongdoing in the case, but some might argue he was somewhat more fortuitous in his timing of sales of Qwest stock than your average Joe or Jane Oddlot. Nacchio's defense has been that he established a regular program of pruning to diversify his portfolio and that his hyperbolic public statements that touted the company were nothing more than optimistic puffery grounded in a naive belief that the business was just humming along. Call it the "I didn't know someone else was cooking the books" defense, if you like.

It now appears the story has changed. According to yesterday's edition of The Wall Street Journal, Nacchio's so-called pumping was motivated by the knowledge that the firm had landed secret national security contracts and was expecting to receive more. In other words: By day, he was a mild-mannered spreadsheet-touting CEO. By night, he was a back alley negotiator brokering secret deals with government spooks promising to increase sales and earnings for years. Call it the "I could tell you but I'd have to kill you" defense...

More here.

-- MDT

Labels: Joe Nacchio, Quest

Via The Guardian, UK:

Fraud inquiry starts into shell firm's missing millions

Simon Bowers
November 26, 2005
The Guardian

The Serious Fraud Office has been asked to investigate a suspected fraud at what was thought to be the biggest cash shell on the junior Aim market, Langbar, after it emerged that forensic accountants were "unable to establish the existence" of bank deposits previously said to be worth £365m.

It is by far the biggest suspected fraud to hit Aim, which has been relatively free of scandal since it was set up in 1995. The Stock Exchange said yesterday: "Clearly we are taking this matter very seriously and are working closely with other authorities involved." These include the Financial Services Authority - the City watchdog - City of London Police and, very recently, the SFO.

Concern first arose last month after it was disclosed that Langbar's Monaco-based founder Mariusz Rybak had made £2.5m from a series of share sales in October, selling shares at between 55p and 65p a share when the company was said to have cash deposits in Brazil and the Netherlands worth 220p a share. Trading in shares was suspended on October 12.

In a statement yesterday, the company, which until recently had been known as Crown Corporation, said forensic accountants from investigators Kroll Associates had found it "likely that the company has been subject to a serious fraud"...

You don't say? The article continues here.

-- MDT

Labels: Kroll

I hope everyone is fat and happy after yesterday's indulgences. I for one, can claim consumption of three separate types of pie. Speaking of gluttony...BusinessWeek, just before the holiday, gave a run-down of the current happenings in the major corporate scandals of moment:

Status of high-profile corporate scandals

November 23, 2005
By The Associated Press

A look at some of the high-profile corporate scandals of recent years and the status of legal action in each.

ADELPHIA COMMUNICATIONS CORP. -- Michael Rigas, a son of the founder of Adelphia Communications Corp., pleaded guilty on Wednesday to a charge of making a false entry in a financial record, eliminating the need for his retrial on securities fraud and bank fraud charges in a scandal that forced the cable giant into bankruptcy. John Rigas and his son Timothy were convicted in federal court last year of conspiracy, bank fraud and securities fraud. On June 20, John Rigas was sentenced to 15 years in prison, and Timothy Rigas to 20 years. They are free pending appeal. A fourth executive, Michael Mulcahey, was found not guilty of conspiracy and securities fraud. Last month, John and Timothy were indicted in Philadelphia on charges they and other family members didn't pay $300 million in taxes.

WORLDCOM INC. -- Bernard Ebbers, who as CEO of WorldCom oversaw the largest corporate fraud in U.S. history, was sentenced on July 13 to 25 years in prison. The sentence was handed down in Manhattan three years after WorldCom collapsed in an $11 billion accounting fraud, wiping out billions of investor dollars. A judge ruled in September that Ebbers can stay out of prison while he appeals his conviction.

HEALTHSOUTH CORP. -- Former CEO Richard Scrushy was acquitted on June 28 on all 36 counts of conspiracy, false reporting, fraud and money laundering in an alleged $2.7 billion earnings overstatement at the rehabilitation and medical services chain over seven years beginning in 1996. He blamed the fraud on 15 former HealthSouth executives who pleaded guilty. Hannibal "Sonny" Crumpler, a former HealthSouth executive, the second person to stand trial in the fraud was convicted last Friday of conspiracy and lying to auditors for his role in the fraud.

TYCO INTERNATIONAL LTD. -- Former Chief Executive L. Dennis Kozlowski and Chief Financial Officer Mark H. Swartz were convicted June 17 on 22 of 23 counts of grand larceny, conspiracy, securities fraud and falsifying business records. Prosecutors accused the two of conspiring to defraud Tyco of millions of dollars to fund extravagant lifestyles. The two were sentenced Sept 19 to eight and one-third to 25 years in prison. A judge refused to release Kozlowski and Swartz on bail while they are appeal their convictions.

ENRON CORP. -- Enron founder Kenneth Lay, former CEO Jeffrey Skilling and former top accountant Richard Causey are scheduled to go to trial in January on federal fraud and conspiracy charges. Former CFO Andrew Fastow pleaded guilty in January 2004 to two counts of conspiracy, admitting to orchestrating schemes to hide the company's debt and inflate profits while pocketing millions of dollars. He agreed to serve the maximum 10-year sentence, which will begin in July 2006, after he testifies against his former bosses.

Fastow's wife, Lea Fastow, completed a yearlong sentence in July on a misdemeanor tax charge for failing to report her husband's kickbacks. Former Enron treasurer Ben Glisan Jr. is serving a five-year sentence for his role in the scandal. And two former Merrill Lynch & Co. executives were sentenced to short prison terms for their roles in a bogus Enron sale of power barges.

CREDIT SUISSE FIRST BOSTON -- The company's former investment banking star, Frank Quattrone, was convicted in May 2004 on federal charges of obstruction of justice, after his first trial ended in a hung jury. Quattrone, who made a fortune taking Internet companies public during the dot-com stock boom, was sentenced to 18 months in prison. He is free on bail, appealing the conviction.

MARTHA STEWART: The founder of the homemaking empire was released March 4 after serving five months in prison, and finished serving an additional five months and three weeks of home confinement at the end of August. She was convicted in federal court last year of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems Inc. stock. Her former broker at Merrill Lynch, Peter Bacanovic, served a five-month sentence and was released June 16. He still faces five months of home confinement. Stewart's conviction was not related to the company she founded, Martha Stewart Living Omnimedia Inc.

CENDANT CORP.: Former Cendant Corp. Vice Chairmen E. Kirk Shelton was convicted in January of conspiracy and securities, wire and mail fraud. He was sentenced on August 3 to 10 years in prison and ordered to pay full restitution for his role in an accounting scandal that cost investors and the company more than $3 billion. Shelton was ordered to pay $3.27 billion to Cendant including an initial "lump sum" payment of $15 million last month. Shelton delivered cash, company stock and company-funded insurance policies, a combination that Cendant said is at least $2.4 million short and fluctuates daily. Shelton stood trial with former Cendant Chairman Walter Forbes, whose case ended in a mistrial and will be retried. Four other former executives have already pleaded guilty.

Pass the indictment...and the giblet gravy.

The original article appears here.

-- MDT

Labels: 2006, Andy Fastow, Cendant, Dennis Kozlowski, Enron, Health South, money laundering, Tyco

Today’s business section looks remarkably similar to yesterday’s business section. That it is Thanksgiving seems immaterial. The stories are fresh and different, but plenty report grim news despite this day of good cheer and gratitude. We learn that General Pinochet, the former military dictator of Chile, was arrested on tax fraud (among other things). The arrest has something to do with allegations that he kept secret bank accounts in the United States under false names. Did he have contacts at these banks? We also learn that federal prosecutors have charged David Pajcin, a former securities broker, with insider trading. Apparently, he may have illegally obtained copies of Business Week before it hit the stands and used business-related information from the magazine to make deals. There’s even something new about Adelphi to report. One of Adelphi’s royal family (the other son) has pleaded guilty to a charge of making a false entry in a company record. If any of these people are actually guilty, the consequences of their actions have certainly harmed innocent bystanders. And, of course, these people have families and friends who have suffered from the reverberations, as well. This is all depressing.

Perhaps though there is good in this news. It is a reminder that there are those out there working to catch the bad guys in corporate America. Law enforcement, prosecutors, confidential sources, witnesses, lawyers, judges, paralegals, clerks, and the occasional reporter are all trying to bring justice. And, there are even corporate private investigators (not just Caveat Research) in the mix attempting to do their part.

On this day of thanks, here’s a toast to everyone making notable strides at putting away the financial crooks of our day.

--TB

Labels: insider trading

Recently we had the opportunity to discuss the challenges of hedge fund due diligence with the fine folks at Risk Magazine, the world's leading fianancial risk management journal. The story has just appeared on the web and is also featured in the magazine's November 2005 issue. Following is a clip:

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

The full article appears here.

-- MDT

Labels: Bayou Group, Refco

In their November 21, 2005 issue Business Week has a long-form article on hedge fund due dilligence, recounting many of the familiar horror stories of the last few weeks. While there is nothing earth shattering to learn in the piece, it is worth a read for some insights into the process of investigation as well as for some first pre-investigative steps that clients can undetake before bringing in an investigator for a more thorough check. The message is simple, doing your homework pays off. Spend a little to save a lot. Here's the lead:

Hedge Fund Sleuths

November 21, 2005
Business Week

"For sizable fees, they put secretive investment partnerships under a microscope"

The recent high-profile blowups of two hedge funds, Bayou Management and Wood River Capital Management, have raised an important question: What can hedge fund investors do to avoid getting burned by unscrupulous managers? The answer: Quite a bit, as long as you're willing to spend time or money vetting these investments...

Read on, here....or save time and just give Caveat a call.

-- MDT

Labels: Bayou Group, John Whittier, Wood River Capital

The AHI case appears to be a bit of a perfect storm for investigators, with several well known players in Milberg's orbit all having a role in the lawsuit. Several key participants in the case have been granted immunity including frequent Milberg lead plaintiff, Melvyn Kinder, whose attorney has acknowledged that Kinder is assisting investigators.

Other familiar names involved in the case that will ring a bell for one following the Milberg kickback probe include:

Government informant Stephen G. Cooperman was involved in bringing the case to Milberg's attention. Cooperman offered up info on Milberg Weiss in the hopes of reducing the decade-long sentence he was facing on insurance fraud charges.

Former Milberg partner Alan Schulman (now with Bernstein Litowitz) who since leaving Milberg has been openly hostile to the firm's conduct was the team leader on the AHI case. Schulman is known to be cooperating with investigators.

Also participating in the AHI case was John B. Torkelsen, a frequent Milberg expert witness who has had his own troubles with the law. Torkelson recently received a plea deal that was though to be related to his assisting federal prosecutors in their Milberg probe.

Check out the full LA Times article for a closer look the various players' connections to the AHI suit and how it all effects the ongoing government investigation into Milberg Weiss's alledged improprieties.

-- MDT

Labels: Bernstein Litowitz and Berger, Melvyn Weiss, Milberg, Milberg Weiss

Tony and Thea did a bang up job of keeping up appearances here at TDC and I'm hoping they'll continue to offer their opinions and insight on a regular basis. Otherwise, you'll be left with nothing but my continuing paltry efforts.

Now....some recent headlines, just a few, so I feel caught up from my week in the technology-free zone:

Refco Buyers, vultures? Matthew Goldstein at TheStreet.com takes a harsh look at the firms that have been circling since Refco's collapse.
Oh and....Bennett plead not guilty.

SEC Probes Firing of Wachovia Analyst...is a bigger scandal waiting to break on this one?

Kroll UK Directors Get Fat-Cash Following Takeover.

NYSE and the NASD joining forces - A new era in self-regulation?

SEC Compliance Office Prepping Hedge Fund Inspection Bootcamp.

Volkswagon hit by claims of sex junkets....sounds uncomfortable.

Whew...not I feel like I am fully back in blogging action. Back later with some interesting news on the status of the Milberg investigation, hedge fund sleuthing and the perils of reputational risk.

-- MDT

Labels: Kroll, Milberg Weiss, Refco

Despite a few close calls on the windy, winding mountain roads The Daily Caveat and wife have made a safe return to the States after a week in beautiful Scotland. The primary purpose of this trip was the attendance of a friend's nuptials in Edinburgh.

Prior to the ceremony, we made time to tour the Royal Mile and visit Edinburgh's impressive castle, situated in the center of the city atop the ridge of a long-extinct volcano. Ideal placement, as castles go.

The wedding, which took place at the lovely St. John's Church on Princes Street, was wonderful. Other than the wide variety of kilts on display, Irn Bru on tap at the bar and the grand guignol gesture of cutting the wedding cake with a sabre, I would observe that Scottish weddings are much like their American counterparts.

During the course of the reception, alongside the expected wedding tunes we were treated to some traditional Scottish music in the form of the song and dance number, Gay Gordons, which is, for all intents and purposes, the Scot equivalent of the Electric Slide.

Our wedding duties done, from Edinburgh we struck out west and north in our trusty Vauxhall Corsa (this picture actual size). We found driving on the left side of the road to be less intimidating that we anticipated.

Given her low opinion of my driving prowess, it was not surprising to me that my wife's anxieties on the subject of driving dissapated almost instantly after seeing me negotiate the right turns and roundabouts without incident.

Suddenly she was brimming with confidence...

Out first stop was the sleepy, whitewashed town of Inverary where we spent a night at The George, perhaps the coziest inn in Christendom. For the record The George was built in 1775, which makes it older than our entire country.

From Inverary we headed north and west on a foggy, wet morning through Glen Coe (the scenic drive here being quite spectacular) and out toward the western coast. Our destination was the tiny water-side town of Glenelg, where we were treated to the kind hospitality of Christopher Mains at his lovely Glenelg Inn.

Glenelg overlooks the Sound of Sleat as well as the Isle of Skye and is only accessible by boat or through the beautiful, if somewhat harrowing, Ratagan mountain pass.

On our way in to Glenelg, we were treated to fog and rain and zero visibility. On our far less white-knuckled drive out we had crystal-clear vistas and a fabulous view of Scotland's "Five Sisters of Kintail" mountain range.

After leaving Glenelg we turned again north to Dornie and a short stop at the Eilean Donan castle, which has been featured in dozens of films. Interestingly enough, the castle remains a private residence, its primary purpose since the current structure was rebuilt from ruins in the early 20th century.

After taking our fill of photos and being both chilled and soaked by a sudden shower we made our way accross the Shiel bridge and north-east through the beautiful, remote mountain views of Torridon.

Late that evening we crept into Inverness for a night at the quirky and charming Trafford Bank Guest House. After miles and miles of wilderness where the primary population seemed to be sheep seeing the bright lights of a city was quite welcome. We had dinner right on the banks of the fast flowing River Ness before turning in.

On our last day of traveling we headed south out of Inverness, following the eastern banks of Loch Ness. We were treated to miles and miles of beautiful scenery and a crisp, clear day in which to enjoy it.

We stopped long enough to enjoy the exquisite sunset views of the countryside from atop Stirling Castle, grabbed a bite at the adjacent Portculis Bar and then hit the road for our final leg back to Edinburgh and the flight home.

My thanks for your indulgence.

Now...back to business.

-- MDT

News agencies reported today that Walter Forbes, the former Chairman of Cendant, took the stand yesterday at his retrial on fraud charges. This story is long played out in the press and has been called the largest accounting scandal of the 1990s. The gist of the story is straightforward. Forbes denies charges that he inflated income at his company (CUC) prior to its 1997 merger with HFS. (CUC and HFS then formed Cendant.) According to Bloomberg News, “Cendant shares lost $20 billion in value in 1998 after the company disclosed the prior accounting problems at CUC.”

Yesterday Forbes testified that he was not involved in daily operations at the company (CUC), and that he relied on subordinates to prepare accurate financial statements. Isn’t that what they all say? Look, I am not working on this case. I don’t know all of the details. I don’t know Forbes and I never worked at Cendant. I am even willing to believe him. But, my experience in interviewing former employees who worked for people in senior leadership just like Forbes says that I should trust my gut. It’s almost impossible for me to believe that he was not involved in daily operations, did not see the numbers and did not know of any manipulations taking place.

At Caveat, we spend a lot of time working on matters that require identifying and interviewing former employees. In cases where the accusations are remarkably similar to those leveled against Forbes, we find over and over again that senior leadership is almost always involved in the day-to-day operations of the company. We learn this from former employees. We have conversations with people who used to work at the company. Administrative Assistants, middle managers, and VPs all offer a wealth of knowledge. And, it’s not always relayed to us in a mean-spirited, vengeful fashion because the person got laid off or carries some kind of grudge against the company.

For example, we often interview people who had wonderful experiences at their former company, but will tell us matter-of-factly that they always copied their boss on emails containing financial information. This revelation can be a goldmine if those same bosses (now Defendants) claim they never participated in daily operations or saw the numbers.

Formers typically tell us that their bosses were highly involved in operations and when things were going well at the company, these bosses boasted about the success and prided themselves on being hands on. Unfortunately, when things start tanking as they did at Cendant, these same bosses all seem to sing the same song … “I trusted those who reported to me!” “I did not need look at the numbers!” “If there was a manipulation, it happened at a level below me!” “I was busy doing ____!”

It’s worth finding and interviewing former employees. In fairness, on occasion we interview formers who tell us about a Forbes-like creature out there in corporate America who is so out of it and clueless, it would be impossible for he or she to participate in fraud because this leader truly has had no idea what is happening at their own company.

I hope Forbes is telling the truth and wish him well. But, in matters like these it’s a valuable exercise to talk to those who were really in the trenches.

Labels: Cendant

"You've got to know what you're getting involved with and analyze it, and if you don't know how, then you need to back off and learn. That's the function of due diligence." This was not said in context with a pending corporate business deal between two companies... or with regard to hiring a board member or senior executive...

This was said by Ray Alcorn, a commercial real estate investor and developer, who was quoted in Sunday's NYT. The article, Doing Your Homework Before Closing a Deal, is about conducting investigative research before investing in commercial real estate.

While Alcorn was referring to his business, his wise advice could not be more sound or applicable to anyone who does business. Every day Caveat helps people do their homework. If you are planning to merge with another company, do you really know what you need to know about their leadership's backgrounds? If you are bringing in a new board member, are you sure there is not anything from that person's past that might embarass your company?

I hated doing my homework in school, but the results went a long way. It's same in business today. If you make the effort to learn, there is really no dollar value on your payoff.

--TB

Sitting in an internet cafe a blockoff the Royal Mile. Lovely city. Today, off to Inverary and points north. Photos faithfully promised upon my return. Be well.

-- MDT

Michael would kill me if The Daily Caveat did not have some follow-up on one of his favorite topics: Refco.

Labels: Refco

This afternoon The Daily Caveat begins a trek to Scotland for a week in the bonnie highlands. In my stead, you'll be treated to the talents and charm of Anthony Sartori and Thea Bournazian.

I shall be back at my post on Friday, November 18th.

-- MDT

If there's ever a move you want to take back, recommending a fraud-laden hedge fund to your clients is probably on the list. In this CNN article Hennessee Group, a prominent billion dollar investment advisory firm explains how, given all that we know now, they could have recommended Bayou Management to their circle of clients.

Some investors remain unimpressed with Hennessee's explanations and have their lawsits prepped and pending. Here's the lead. Click through to the full article for the complete story, including details on regulatory rumbles regarding the role of thrid party hedge fund marketers as well as advisory firms such as Hennessee.

Firm that pitched Bayou facing questions - After hedge fund blowup, advisory firm says it might have acted differently; others also under fire.

November 7, 2005
By Amanda Cantrell
CNN/Money, staff writer

NEW YORK (CNN/Money) - Hedge fund advisor Hennessee Group recommended Bayou to its clients. Now it's being sued. The firm says it regrets steering clients to Bayou but had reason to think at the time the hedge fund was legitimate.

Bayou's founder and CFO pleaded guilty nearly six weeks ago to charges that they raised more than $450 million from investors, lied about the fund's returns and formed a phony accounting firm to audit the firm's results.

Hennessee Group admits it should have done a better job of spotting red flags at Bayou, including the fact that Bayou wasn't using a well-known auditor. Hennessee recently spoke out about Bayou, acknowledging that the firm didn't catch the fraud, but defended its review process nonetheless.

"I can see why, in hindsight, it might seem like this was all very obvious, but it's important to realize how it appears when you are going through it real time," Leeana Piscopo, senior vice president and chief compliance officer at Hennessee, said in an interview...

Extensive additional details in the full article.

-- MDT

Labels: Bayou Group

Via Hedgeweek.com:

CFTC files fraud action against Lake Dow Capital and its hedge fund

November 8, 2005
Hedgeweek

A US Federal Court has frozen the assets of the Aurora Investment Fund and its operators Lake Dow Capital, LLC and Ty Edwards. The US Commodity Futures Trading Commission announced that the United States District Court for the Northern District of Georgia entered a restraining order freezing the assets of Lake Dow Capital, LLC and Ty Edwards in a CFTC action alleging fraud committed by those parties. The order also froze the assets of hedge fund Aurora Investment Fund.

Specifically, the CFTC’s complaint alleges that Lake Dow, a registered commodity pool operator and commodity trading advisor, and Edwards, a principal and registered associated person of Lake Dow, falsely represented to actual and prospective participants in the Aurora Fund commodity pool, a hedge fund operated by Lake Dow and Edwards, that Aurora Fund had consistently generated annual profits without a single losing month.

The complaint further alleges that Lake Dow and Edwards misrepresented to actual and prospective participants that they managed between USD 60 and USD 100 million, when funds in the Aurora Fund did not exceed USD 20 million. According to the complaint, Edwards also attributed to the Aurora Fund performance results that were not based upon any actual financial documents, actual performance, or any analysis thereof.

The complaint also alleges that Edwards failed to disclose to participants in the commodity pool the fact that he is a named defendant in a pending Commission civil injunctive action alleging fraud, CFTC v. Risk Capital Trading Group, Deron Baugh, Tyrone Edwards, et. al, Case No. 103 CV-2633 (N.D. GA 2003), and that he withheld material information from the National Futures Association (NFA) by willfully concealing the identity of certain participants in the pool.

The CFTC’s ongoing action seeks orders of preliminary and permanent injunction against the defendants, an accounting for all funds, disgorgement of benefits, repayment to injured participants, monetary penalties and other relief. The National Futures Association assisted the CFTC in its investigation of this matter.

The original article appears here.

-- MDT

Labels: CFTC

Here's a long feature from the Baltic Times on the continuing tale of two young traders from Estonian Investment Firm who alledgedly conspired to gain an advantage on trades by hacking into Business Wire's embargoed press release database and accessed not-yet-released announcements from U.S. public companies.

The firm in question, Lohmus Haavel, had previously suspended five traders including, Oliver Peek and Kristjan Lepik who have been previously named in the SEC probe. Rain Lohmus, a company founder, has also stepped down as his account was used in teh illegal trading. While the SEC probe against verious Lohmus employees is continuing, the company has reached an out-of-court settlement with the SEC. Full - and The Daily Caveat means FULL - details follow:

Investment firm reaches settlement with SEC, avoids lengthy investigation

November 11, 2005
By Kairi Kurm
Baltic Times

TALLINN - Lohmus, Haavel & Viisemann, the Estonian investment firm whose employees were accused by the U.S. Securities and Exchange Commission of using insider information on stock trades, reached an out-of-court agreement with the market watchdog and thereby avoided a possible embarrassing hearing that had been scheduled for Nov. 8.

“Last night an agreement was made to cancel the court session and ease the arrest of assets,” Rain Tamm, LHV Group board chairman, said on Nov. 8, adding that a U.S. judge would have to approve the settlement. Tamm stressed that the agreement did not automatically imply LHV’s guilt.

Piret Loone, an Estonian representing LHV through Shearman & Sterling in the U.S. court, released a statement saying that the agreement was an important step forward but didn’t guarantee that the company’s accounts, arrested last week by a U.S. court, would be freed up. LHV officials said they wanted to cooperate with both the Estonian Financial Supervisory Authority and the U.S. SEC in order to clarify all accusations related to the firm.

The SEC has claimed that the firm’s employees profited from trade on U.S. public companies by using more than 360 confidential press releases belonging to Business Wire, a real-time business news agency used by brokers and traders around the world. The watchdog believes that the traders may have racked up some $7.8 million in profits on the illegal trades.

The employment contracts of Kristjan Lepik, Oliver Peek and three other employees suspected in the illegal trades, have been suspended. Peek was a member of LHV’s investments services team, and Lepik an LHV partner and head of the bank’s trading department. Rain Lohmus, one of the firm’s founders, and whose account was reportedly involved in illegal trading, stepped down from his position as chairman of the firm’s council.

Many were surprised to learn that Lohmus had also been a client of Oliver Peek. “Usually we do not comment on our customers’ data, but we found that it was important to say [Lohmus was involved],” said Tonis Haavel, one of the firm’s founders. Lohmus left for Moscow on Nov. 2, the morning news of the scandal broke, and didn’t return before Nov. 4. Haavel couldn’t say if Lohmus had been aware of possible illegal trading.

According to one report, Lohmus opened a $2-million account with LHV Trader in April this year, with the money eventually being deposited with U.S.-based Interactive Brokers. As a result of subsequent transactions, the size of his account swelled to $8.3 million by November.

According to the SEC, the illegal trading activity involved five different accounts, including those of Peek and Lepik. Peek reportedly received $2 million and Lepik $200,000 in nine months this year. “The in-house investigation is ongoing, and we are giving [the SEC] the information they request. It is very voluminous,” Haavel told The Baltic Times.

The firm LHV claims that young the men were trading as private individuals. In every statement, it emphasizes that the investment bank had nothing to do with any possible illegal trading of its former employees, and that the company has in no way profited from any such trading.

Still, the accusations have damaged the company’s reputation. Several customers have pulled their funds from LHV’s accounts, and Vilniaus Akropolis, Lithuania’s largest mall operator, cancelled its contract with LHV. Vilniaus Akropolis had been planning an IPO with the firm.

The SEC has frozen the accounts of about 180 LHV customers. Currently only those who used the LHV Trader investment services on the U.S. market through certain brokers cannot receive their money.

“Our lawyers have spoken to [the SEC]. The commission is in principle ready to unfreeze the accounts of our other clients. When it will happen, we don’t know,” Haavel said, adding that LHV has a total of 4,500 customers. “According to the securities’ act, companies like us keep clients’ assets totally separate.”

The firm’s partners have pledged to increase owners’ equity to $1 million if necessary to cover the claims. The SEC investigation was launched after a drug company, InKine, noticed a spike in trading on its shares on June 23, just before news was released about a planned merger. About 46 percent of the volume came from Estonian traders, who earned some $300,000 by selling the shares immediately after the merger was announced.

The same scheme was used in July when various earning announcements were released by eBay and Yahoo. In those cases, even larger sums were used. Business Wire made a statement defending the integrity of its data system, stating that traders could not have acquired secret access. Still, Tamm told the press that Peek and Lepik may have come across a security gap in Business Wire’s system.

Estonia’s Financial Supervision Authority has started a separate supervisory procedure into the matter. Meanwhile, a U.S.-based hedge fund manager, speaking on the condition of anonymity, told The Baltic Times that she had assumed on June 23 that whoever placed the order was related to InKine, Salix, one of the investment banks advising on the deal, or perhaps lawyers who had worked on the transaction.

“I just knew someone got very lucky that day, and I assumed it wasn’t luck that prompted them to take that big of a piece of some biotech firm in Philly no one had ever heard of before,” she said. “I had no idea who placed them. Just that someone sure was very timely and bold.” In the fund manager’s opinion, had the traders been “less greedy” on InKine, they never would have been caught, since the total share volume that day would have been within “normal” ranges.

She said that their other deals would have never aroused suspicion anywhere except among the inside compliance people of LHV and U.S. brokers Cyber Trader and InterActives. The latter are supposed to alert regulators if a client is making too many so-called “in-the-money-trades” ahead of major news stories, she said.

Jakob Frenkel, a former SEC enforcement lawyer and former U.S. federal criminal prosecutor, told The Baltic Times, “In cases like this, the SEC probably will demand penalties of $15 – 20 million, plus recovery of the profits from trading. But the SEC will first need to build its case and bring into the grasp of the U.S. courts the individuals charged.”

Frenkel, who is now with Shulman, Rogers, Gandal, Pordy & Ecker, added, “Of greater concern should be whether the SEC is working with U.S. federal or Estonian criminal prosecutors with the objective of criminal prosecutions and jail as the consequence. The allegations are of the type that would suggest the SEC will try to get criminal prosecutions too.”

The fund manager said that, if those traders cooperate, they might only pay a civil fine and avoid prosecution. “I think the Estonian securities regulators will deal with them, unless the Department of Justice wishes to make ‘examples’ of them.”

Other local investment bankers panicked about what the scandal could do to the industry’s reputation. Allan Martinson, managing partner of Martinson Trigon Venture Partners, said, “I can’t see a single person who won from this case. LHV lost, and the work of many years disappeared. Investors lost, Estonia lost, even the U.S.A. lost. This loss is a fact. What caused the loss, a crime or a work accident, is not that important. The effect of the LHV story is bigger than the conviction or justification of two boys,” he said.

As the U.S. fund manager said, “In a way, I respect how bright those boys were. I hope they cooperate - much more leniency is given to those who admit they made a mistake and clean up their act –at least over here [in the U.S.A.]. The regulators are overworked, and they hate it when people lie or refuse to cooperate. It makes them have to work much harder which means other matters get overlooked.”

The original article appears here.

-- MDT

Labels: database, Department of Justice, insider trading

Via Boston.com:

Hedge fund manager accused of defrauding clients

November 9, 2005
Associated Press

BOSTON --A civil complaint against a hedge fund manager alleges he defrauded about 75 investors by hiding losses and overstating the fund's value by about $29 million.

The complaint by the Securities and Exchange Commission also alleges Mark R. Conway tried to make up losses at his Waltham-based firm, Groundswell Partners LLC, by deviating from the fund's original investment strategy without telling investors.

The SEC alleges Conway, 44, of Waltham, altered documents sent to investors to cover up the alleged misrepresentations in violation of federal securities laws. Conway's attorney, John Carman, of Garden City, N.Y., declined to comment...

More in the original article.

-- MDT

Via the Evening Standard:

US watchdog probes CSFB role in Refco

Robert Lea
Evening Standard
November 9, 2005

INVESTMENT bank CSFB is under investigation by the US Securities and Exchange Commission over its role in the doomed float of commodities and futures broker Refco. Refco collapsed last month, just two months after it floated and raised nearly $600m (£345m).

Analysts have predicted that Refco's banking advisers could face claims of up to $200m in the scandal. CSFB was one of three banks that underwrote the Refco flotation. The others were Goldman Sachs and Bank of America. CSFB also handled the $600m sale of Refco junk bonds alongside Bank of America and Deutsche Bank.

New York-based Refco, which also has offices in London, collapsed after it emerged that its former boss, Philip Bennett, had hidden $430m of bad debts at the time of the float.

British-born Bennett was sacked a week before the firm filed for bankruptcy protection. While industry regulators say the collapse of Refco has damaged the derivatives brokerage industry, five bidders have lined up to pick over the broker's carcass, including Man Group, the London-based FTSE 100 hedge fund manager.

Shareholders have already begun legal actions against Refco's advisers including its auditors Grant Thornton. It has emerged that major accountancy firms KPMG and PricewaterhouseCoopers also advised Refco.

The original article appears here.

-- MDT

Labels: Grant Thornton, KPMG, Refco

Via Bloomberg:

Refco Bidder Alaron Has Been Ruled Out of Auction, CEO Says

Ann Saphir
November 9, 2005
Bloomberg

Alaron Trading Corp., one of five bidders to buy assets of bankrupt futures broker Refco Inc., has been ruled out of a bankruptcy auction, Chief Executive Steven Greenberg said in an interview today.

``The bottom line is we're not going to be able to bid,'' said Greenberg. ``We're disappointed.'' Alaron Managing Partner Gary Weber said in an interview that the auction was ``shrouded in mystery.''

Refco is selling assets after filing the 14th-largest bankruptcy in U.S. history following disclosure that former Chief Executive Officer Phillip Bennett hid $430 million of debt.

The original piece appears here.

-- MDT

Labels: Phillip Bennett, Refco

Investment banker John Torkelson served as an expert witness for Milberg Weiss throughout the 1990s. Last year, the U.S. Small Business Administration filed multiple civil suits against Torkelsen and his associates, accusing Torkelson of using his venture capital fund, Acorn Technology Fund to the SBA to swindle millions of dollars. And yet, despite his legal troubles, and Federal prosecutor's obvious interest in his former associates at Milberg, Torkelson had never cooperated with authorities.

The tide appears to have turned last year Torkelson's wife agreed to a plea deal last year on charges relating to their troubles at Acorn. She agreed to cooperate with investigators and Torkelson's tune has since changed as well. He was charged in September with one criminal count of making false statements to the SBA and processed in such a way that he bypassed a grand jury - something it is agreed only occurs when a plea deal is in place. The big question now is what Torkelson's apparent cooperation with prosecutors means for Milberg:

Via Law.com:

Former Expert Witness for Milberg Weiss Gets Plea Deal

Justin Scheck and Sarah Kelley
The Recorder
November 07, 2005

The most conspicuous thing about John Torkelsen's guilty plea Thursday was what it didn't include: an agreement to cooperate in the ongoing probe of the securities plaintiff firm Milberg Weiss and its former lawyers.

...It has long been thought that any plea deal between Torkelsen and prosecutors would hinge on his willingness to provide information to Los Angeles federal prosecutors. They've spent the past five years investigating charges that Milberg Weiss and former top partner William Lerach paid illegal kickbacks to lead plaintiffs in securities class actions. Lerach formed his own firm, San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins, last year.

A source familiar with the Torkelsen investigation said prosecutors last year were confident that they could put Torkelsen in jail for 10 to 15 years and that a plea deal for less than 10 could indicate cooperation. But the plea agreement detailed in a letter from D.C. Assistant U.S. Attorney John Griffith does not explicitly say whether Torkelsen is cooperating.

"There's nothing in this plea agreement that suggests cooperation," said Leo Cunningham, a former assistant U.S. attorney for the Northern District of California and a partner at Wilson Sonsini Goodrich & Rosati. "Then again, for those of us who can get crafty about it, it doesn't foreclose cooperation." Preston Burton, a D.C.-based partner at Orrick, Herrington & Sutcliffe and a former D.C. assistant U.S. attorney, agreed. "There is no way to determine from the language in this plea agreement whether he is or isn't," he said.

Cunningham, Burton and other former federal prosecutors said that plea agreements based on cooperation generally make that requirement explicit. But, they agreed, in cases where prosecutors don't want the names of cooperators to become public, they often go to lengths to keep such information under wraps...

The full Recorder article appears here.

Check out this early October piece for more background on Torkelson's Milberg connections. If you want the skinny on Torkelson's attempts to get over on the SBA, then this is the article for you. And by all means check out he sage wisdom offered on the case by friend of Caveat, Peter Henning at the White Collar Crime Prof Blog.

-- MDT

Labels: background checks, Melvyn Weiss, Peter Henning

See Excited Utterances for a great New Yorker cartoon.

-- MDT

In what is without doubt a strategic advance in the looming Microsoft / Google slapfight, the boys in Redmond have announced a deal to scan the 25 million book holdings of the British Library. Microsoft announced their intentions to enter the digital book club a few weeks back.

Already on this increasingly crowded dance floor are the aforementioned Google, Amazon, the Internet Archive, Yahoo, a group called the Open Content Alliance and well, the French.

Hat tip to the Law Librarian blog where I first read about the Microsoft / British library deal.

-- MDT

U.S. Representative Michael Oxley (yes, that Oxley) has announced he will not seek re-election.

Securities Law Blog has the details.

-- MDT

Via the Seattle Post Intelligencer:

Refco gets 5 bids for some operations

The Associated Press
November 7, 2005

NEW YORK -- Refco Inc., the troubled commodity-brokerage firm, Monday said it received five bids for its U.S., Europe and Asia operations. Friday, after the financial markets closed, Refco said it would not disclose the names of the bidders or any terms.

However, Man Group PLC of Britain said Monday that Man Financial, its brokerage business, has submitted a bid for parts of Refco, which filed for bankruptcy last month amid a scandal involving its former chief executive.

New York-based Refco said it is "extremely pleased" with the number and quality of the bids received and said it will notify qualified bidders by Monday at 5 p.m. The company also said an auction will be held Nov. 9 and the winning bid is expected to be presented to the court at a hearing Nov. 10. Bids for Refco's regulated commodities and futures arm were due Friday at 4 p.m.

The largest known bid was from Refco competitor Interactive Brokers Group LLC, which had offered $858 million. An $828 million rival bid was also expected from a Delaware corporation formed by the Dubai Investment Group and Yucaipa. Original bidder JC Flowers & Co. had dropped its $768 million offer after a U.S. bankruptcy court reduced the deal's break-up fee.

Refco and 23 affiliates filed for bankruptcy protection Oct. 17, after its former chief executive Phillip Bennett was charged with covering up a $430 million debt to the company.

The original article appears here.

-- MDT

Labels: Phillip Bennett, Refco

Via Reuters:

Hedge fund fraud less likely in Europe than U.S

Reuters
November 4, 2005
By Pratima Desai

LONDON - The risk that hedge funds will defraud investors is lower in Europe than in the United States, because most European hedge funds turn to independent administrators to value their books, hedge fund analysts said.

A lack of independent valuations contributed to the high-profile failure earlier this year of the U.S.-based Bayou Group hedge fund. Its founder and chief executive pleaded guilty to fraud by misrepresenting the value of assets, in a scheme prosecutors said cost investors $450 million.

"You should be wary of self-administered funds ... That's where the danger is," said Derek Stewart, a director of Mellon Global Alternative Investments.

In Europe there have been no major failures in recent years, because hedge funds normally use independent administrators, even though it is not a legal requirement. Over the years it has become a standard industry practice, which investors have come to expect.

"Hedge funds outside the United States without independent fund administrators are unlikely to have any serious investors," said Joe Seet, senior partner at Sigma Partnership, a specialist hedge fund advisory firm.

"Most hedge funds that collapse do not have fund administrators that are truly independent," he added.

The reputation of an independent administrator is also important, and that means being registered with a local regulator. In Dublin, for example, analysts estimate there are close to 40 fund administrators and that all are registered with Ireland's central bank. Hedge funds based in Asia have in the main taken their cue from Europe and use independent administrators to value their books, analysts say.

STARTING TO CHANGE

In the United States, new SEC rules requiring most hedge funds to be registered by February 2006 mean that funds are starting to change the way their books are valued and that more are turning to independent administrators. But many U.S. independent administrators do not yet have the specialist resources to properly value complex derivatives in hedge fund portfolios.

"Most of the really big hedge funds are still U.S.-based, and they are becoming more sensitive to issues about independent (valuations) ... independent fund directors and corporate governance," Seet said. Investors in hedge funds that trade liquid markets such as listed securities, government bonds or foreign exchange have less cause for worry.

Examples include managed futures funds that trade exchange-traded futures and equity funds that buy and sell stocks on major stock markets in London, New York or Tokyo, where prices are transparent and easily available.

Problems normally arise in less liquid instruments for which prices can be more easily manipulated, which include over-the-counter derivatives such as options, convertible bonds, private equity investments or loans.

"Valuation becomes more important with funds who have illiquid assets," said Doug Fulton, a principal at Westhall Capital. "If there is any reliance upon the fund manager for valuations or on (one) mainstream market source (bank or broker), then it's opaque."

Original article appears here.

-- MDT

Labels: Bayou Group

Via AccountacyAge.com:

PwC dragged into Refco controversy - Big Four firm's US arm advised futures brokerage on financial reporting ahead of collapse

Nicholas Neveling
Accountancy Age
Nov 7, 2005

PwC's US arm has been dragged into the controversy surrounding collapsed futures brokerage Refco after it emerged that the Big Four firm advised it about financial reporting when it changed from a private to public company.

According to the Financial Times PwC advised Refco on accounting issues and preparing more detailed financial statements. Prosecutors and regulators have not spoken to PwC, but Refco's other advisers, including auditors Grant Thornton, are facing shareholder lawsuits.

The FT reports that PwC was appointed in April last year to advise Refco on $600m (£343.2m) debt offering as part of a deal that saw private equity group Thomas H Lee pay $450m for a majority stake in Refco.

PwC is believed to have had one partner and three staff working for Refco. They advised the group on financial reporting and SEC filing requirements for public companies. Refco collapsed last month when CEO Phillip Bennett allegedly used a hedge fund to conceal a $430m debt from investors.

Original article appears here.

-- MDT

Labels: Grant Thornton, Phillip Bennett, Refco

Late last week the House Energy and Commerce Committee's Subcommittee on Commerce, Trade and Consumer Protection approved the Data Accountability and Trust Act (clever acronym alert - DATA). Amongst the elements in the bill, which is now headed towards a vote in the full committee, are:

* Direct the FTC to create rules requiring security for personal information. The FTC would have to take into account the size, nature, and scope of the person's activities, the current state of technology, and the cost of implementing security procedures.

* Require entities to have a security policy that explains the "collection, use, sale, other dissemination, and security" of the data they hold.

* Require entities to appoint and identify a person in the organization that is responsible for information security.

* Require any entity that experiences a breach of security to notify all those in the United States whose information was acquired by an unauthorized person as a result of the breach. Conspicuous notice on the breached entity's Web site is also required. The FTC must also be notified.

* Define "breach of security" as the unauthorized acquisition of personal information where it is reasonable to conclude there is significant risk of identity theft.

* Provide for an FTC or independent audit of an information broker's security practices following a breach of security. It permits the FTC to conduct or require audits for a period of five years after the breach, or until the commission determines security practices are in compliance with the act and are adequate to prevent further breaches.

* Prohibit costly and disruptive lawsuits by preempting state breach notification laws with private rights of action. It expressly preserves state consumer protection laws, as well as state trespass, contract, tort, and other state laws relating to fraud.

With the successful move out of the subcommittee has come another round of folks on both sides of the issue decrying the bill as going too far and alternatively, not going far enough. Meanwhile, Bob Sullivan at MSNBC's Red Tape Chronicles reminds us that 1 in 10 Americans received notification this year that their personal data could have been accessed illegally. And the Privacy Rights Clearinghouse cites eighty publicized data breaches since February. Heck just this morning. And, if you are a serious glutton for punishment, this story also received the Slashdot treatment over the weekend.

Of primary concern to your friendly neighborhood investigators at Caveat Research is the potential for the passage of this bill to impair ready access to the essential data we use in the course of serving our clients. The worry we face as an industry and as an individual company is that Congress, by seeking greater regulation of data aggregators, will impair the fundamental utility of the aggregators' legitimate services.

No one in our industry would seriously argue that the availability personal data should be and unregulated free-for-all. But rather, sensitive data should be restricted to those with proper licensing as well as an accountable and legitimate reason for requesting it. The National Council of Investigation & Security Services, the investigative community's congressional advocate describes the issue in this way:

...Social Security numbers should not be made accessible to everyone. We also believe that such personal data should only be made available for those with a legitimate need for it. We are asking members of the Energy and Commerce Committee to provide an exception from the limitation on the use of Social Security numbers for specific purposes as follows:

“to identify or locate missing or abducted persons, witnesses, criminals and fugitives, persons that are or may become parties to litigation, parents delinquent in child support payments, organ and bone marrow donors, pension fund beneficiaries, missing heirs and persons material to due diligence inquiries.”

Our role is risk mitigation in a business transaction. Without access to personal identifiers, such as social security numbers, we would face the nearly impossible task of separating one John Smith from the next and our essential role in facilitating business transparency would be undercut. Moreover the suggesed restrictions would in no way actively combat security lapses that brought aggregators into the public cross-hairs in the first place.

You can download the current version of the DATA bill here (PDF). The Senate is also considering a similar measure, the Personal Data Privacy and Security Act (notably, without a clever acronym) which you can review here (PDF).

-- MDT

Labels: data breech, identity theft

Via Marketwatch.com:

Millennium nears $100M fraud settlement - Hedge fund talking with Spitzer, SEC over $100M pact

By Alistair Barr
MarketWatch
November 3, 2005

SAN FRANCISCO - Millennium Partners LP, a $5 billion hedge-fund firm run by Israel Englander, is in talks with New York Attorney General Eliot Spitzer and the Securities and Exchange Commission about settling securities-fraud charges, the Wall Street Journal reported on Thursday.

The New York-based company could pay more than $100 million to settle charges that it traded mutual funds between 2000 and 2003 at improper prices after the close of trading, as well as charges that the firm tried to disguise its identity to help it trade the funds rapidly, the newspaper said, citing an unidentified person close to the talks...

The original article appears here.

-- MDT

Labels: Eliot Spitzer, New York AG

Via Finfacts:

Deloitte's failed BCCI case against Bank of England cost £100 million; Multinational bank was "the largest case of organized crime in history"

By Finfacts Team
November 3, 2005

The most expensive battle in English legal history ended on Wednesday when a £850m lawsuit brought by liquidators of Bank of Credit and Commerce International (known by many as the Bank of Crooks and Crime International) against the Bank of England was withdrawn leaving a £100m legal bill in its wake.

Lawyers for Deloitte, BCCI's liquidator, said the action was being ended after one of the High Court's most senior judges ruled that it was “no longer in the best interests of the creditors for the litigation to continue”.

BCCI collapsed in 1991 owing £10bn. The misfeasance claim, which was brought against the Bank of England in 1993, had accused senior officials of acting in bad faith and with deliberate disregard for depositors' interests over the supervision of BCCI.

Wednesday's ruling, was made in private by the judge who heads the Chancery Division and is understood to have followed a decision two months ago by BCCI's English creditors' committee that the costly litigation was no longer in the interest of all creditors...

Click here for the full article which offers more information on the now abandoned suit as well as a full review of the BCCI scandal.

-- MDT

Via The International Herald Tribune:

Legal fight looms after J&J threatens to drop plan to buy Guidant

By Barry Meier and
Andrew Ross Sorkin
The New York Times
November 3, 2005

Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.


NEW YORK Johnson & Johnson has threatened to abandon its plan to acquire Guidant, a troubled maker of heart devices, setting the stage for a financial and legal confrontation between the two companies over a deal valued at $25.4 billion.

The development, announced on Wednesday, was a stunning reversal for a deal that was applauded when it was announced in December as both a handsome payoff for Guidant shareholders and a way for Johnson & Johnson to enter the growing market for implanted heart devices.

But along the way, Guidant, the second-largest U.S. maker of heart devices, found itself ensnared by safety issues and product recalls that appeared to spin out of control.

Guidant disclosed in late May, for example, that one of its defibrillators had repeatedly failed because of an electrical flaw. That disclosure led to regulatory scrutiny, a string of product recalls and, most recently, a Department of Justice investigation.

In a statement, Johnson & Johnson, based in New Brunswick, New Jersey, said on Wednesday that it believed that the recalls and federal investigations had materially affected Guidant's "short-term results and long-term outlook."

Guidant, based in Indianapolis, responded that any impact from the recalls would be short-term and that Johnson & Johnson was legally obligated to complete the deal by Friday as originally negotiated.

Guidant's legal problems also grew more complex on Wednesday as the New York State attorney general, Eliot Spitzer, filed a lawsuit accusing the company of fraud in connection with sales of a defibrillator model that short-circuited in some cases. The lawsuit seeks to force Guidant to disclose device malfunction data and disgorge its profit from sales of the defibrillator.

The deal's breakdown could present a challenge to Johnson & Johnson's strategy of growth by acquisition.

Guidant and Johnson & Johnson did not rule out continuing talks, but with the original deal valued at $76 a share, any new agreement will depend on whether the two sides can compromise on a lower price. People involved in those talks described the latest moves by both companies as a high-stakes game, with neither particularly interested in walking away just yet.

But these people suggested that a gap remained between the price that Johnson & Johnson is now willing to pay and the price that Guidant is willing to accept. These people said Johnson & Johnson was hoping to pay no more than something in the mid-$60s a share, while Guidant was seeking a price in the low $70s.

While some analysts said Johnson & Johnson appeared to have the negotiating edge, other analysts said Guidant executives might choose to sue Johnson & Johnson because they believe that the company's stand-alone value is close to $60 a share. On Wednesday, Guidant closed at $60.40 a share, down 4.3 percent, or $2.70 a share.

"They are playing chicken, and right now it appears that J&J has the upper hand," said Joanne Wuensch, an industry analyst with Harris Nesbitt.

The centerpiece of any legal fight will revolve around a single but complex issue: whether Guidant's product recalls and related events have had a materially negative impact on its future sales and profit. Not surprisingly, both companies on Wednesday staked out their positions. In its statement, Johnson & Johnson said it believed that developments had clouded Guidant's future prospects. For its part, Guidant characterized those effects as "near-term."

Courts have found that a significant negative impact must extend beyond the near term to qualify as grounds for terminating a contract. In 2001, a Delaware court ruled that Tyson Foods was not justified in terminating its merger deal with IBP, a beef processor. Tyson had argued that undisclosed financial problems at an IBP subsidiary had invalidated the deal.

Guidant's chief executive, Ronald Dollens, said in a statement, "We believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth."

Spokesmen for both companies declined to comment beyond their public statements or make executives available for interviews. Johnson & Johnson issued its statement immediately after the Federal Trade Commission on Wednesday gave it conditional approval to acquire Guidant.

It was in mid-December that Johnson & Johnson announced its plan to purchase Guidant, with the $25.4 billion deal representing the company's biggest acquisition by far. The move represented a decision by Johnson & Johnson to move into the market for implantable defibrillators and pacemakers, a field that is rapidly growing because of an aging population.

Defibrillators are devices that send out an electrical charge to disrupt a potentially fatal heart rhythm; a pacemaker controls a heart that is beating too fast or too slowly.

Spitzer's lawsuit, filed on Wednesday in New York State Supreme Court in Manhattan, accuses Guidant of fraud in connection with its failure to alert doctors about the electrical flaw in the defibrillator known as the Prizm 2 DR. In a statement, Spitzer said doctors needed safety information about implanted devices to determine which model was most appropriate for a patient.

"We would not permit this type of conduct in connection with the sale of cars or washing machines," said Spitzer, who last year sued drug companies to force them to disclose more clinical trial data. "It is simply unconscionable that it occurred with a critical medical device."

Late Wednesday, a Guidant spokesman, Steven Tragash, said the company had not seen the lawsuit. The company, however, has said repeatedly that it has done nothing wrong.

In a recent filing with the drug regulator, Guidant also said it planned to release more detailed data to doctors to show how many units of a particular model had failed because of severe malfunctions like a short circuit that prevented a unit from delivering therapy. The company has declined to say when it will begin disclosing that data.

The original article (which first appeared in the New York Times) can be found here.

-- MDT

Labels: Department of Justice, Eliot Spitzer, New York AG

Via The Economic Times Online:

SEC probing GE's hedge accounting

November 02, 2005
Reuters

A Securities and Exchange Commission probe into General Electric Co and its use of hedge accounting for derivatives was upgraded to a formal investigation in August, but GE delayed disclosure until its third-quarter financial statements last week.

In January the SEC's Boston district office began an informal investigation into GE's accounting for derivatives used to hedge risks, requesting that GE and its GE Capital division voluntarily provide documents and information.

But in its quarterly financial filing on Oct 24, GE said SEC staff in August advised the company that the commission had elevated the probe to a formal investigation, which means SEC staff are authorized to subpoena witnesses and documents.

GE officials could not be reached immediately for comment. GE, in the filing, said it believed the upgrade is "a common step in the process in such matters." The company said it has continued to voluntarily provide documents and information to the SEC Staff and "we intend to continue to cooperate fully with its investigation."

GE in May restated its earnings from 2001 through the first quarter of 2005 after an internal audit found that its accounting for currency and interest rate derivatives did not comply with accounting standards. The company at the time said the restatement resulted in a total non-cash increase of $381 million, or less than six tenths of 1 per cent of total earnings, for that period.

The original article appears here.

-- MDT

Via Reuters:

Estonian bank suspends staff at centre of SEC probe

November 2, 2005
By David Mardiste
Reuters

...The SEC on Tuesday charged Estonian company Lohmus Haavel & Viisemann (LHV) and two of its employees with fraud in relation to a scheme to steal corporate news release data from Business Wire in advance of the official release.
Estonia's financial watchdog told Reuters it also was mounting its own investigation into the allegations.

In a statement in Tallinn on Wednesday, LHV said it had suspended two employees pending the results of its inquiry. LHV Managing Partner Rain Tamm said his bank neither participated in nor authorised the scheme.

"We have suspended them (the employees) while conducting an internal investigation," Tamm said. "We are cooperating fully with the SEC in order to identify the cause of this situation and to resolve it."

The SEC statement said that Estonian citizens Oliver Peek, 24, and Kristjan Lepik, 28, were charged with the "electronic theft and trading in advance of more than 360 confidential press releases issued by more than 200 U.S. public companies".
Peek and Lepik could not be reached for comment.

According to the complaint, LHV became a Business Wire client in June 2004 and then used a programme to gain unauthorised access to confidential information contained in impending press releases.

LHV said its investment funds and trading accounts were not used in the scheme and that the internal inquiry was focused on five specific customer accounts on its products used by professional traders...

The full article appears here. You can read about the SEC investigation here.

--MDT

The SEC is seeking emergency action against the Lohmus Haavel & Viisemann. In a an admirably creative, if illegal scheme employees at Lohmus successfully hacked Business Wire's embargoed press release database to get a jump on market announcements. From the SEC press release:

"We acted today to stop a clever and pernicious securities fraud and to preserve funds for investors. This case highlights that even when fraudsters invent new ways to violate the securities laws, the Commission will track them down and stop them, wherever they are located," said Daniel M. Hawke, Associate District Administrator of the Commission's Philadelphia District Office.

The Commission's complaint alleges that, in June 2004, Lohmus became a client of Business Wire for the sole purpose of gaining access to Business Wire's secure client website. Once defendants had access, they surreptitiously utilized a software program, a so-called "spider" program, which provided unauthorized access to confidential information contained in impending nonpublic press releases of other Business Wire clients, including the expected time of issuance.

The complaint further alleges that the information fraudulently stolen by the defendants has allowed them to strategically time their trades around the public release of news involving, among other things, mergers, earnings, and regulatory actions. Using several U.S. brokerage accounts, the defendants have bought long or sold short the stocks of the companies whose confidential press release information they have stolen, and purchased options to increase their profits.

Named in the Commission's complaint are the following defendants.

Lohmus Haavel & Viisemann, headquartered in Tallinn, Estonia, is an investment bank established in 1999. Lohmus, which also has offices in Latvia and Lithuania, provides corporate financing, private equity, asset management, investment services, and structured financing services to the Eastern European market.

Oliver Peek, age 24, is a citizen of Estonia currently residing in Tallinn. Peek is employed by Lohmus and works for its investment services team.

Kristjan Lepik, age 28, is a citizen of Estonia currently residing in Tallinn. Lepik is a partner at Lohmus.

Read the rest here.

-- MDT

Labels: database

Annoying ambigous technical issues kept The Daily Caveat silent for most of today.

Back in action as of late this afternoon.

-- MDT

A confidentiality agreement has been signed. The prelude to something more? We should know by November 4th.

Via Sharecast.com:

Man Group in Refco talks

November 1, 2005
Sharecast

Man Group’s brokerage arm admitted today that it has agreed a confidentiality agreement, allowing it access to Refco's financial data. The agreement marks a key step for the Man Financial in agreeing a deal to buy all or parts of the bankrupt company.

Man said it was entering a non disclosure agreement with Refco, which plunged into bankruptcy last month amid a financial scandal after charges were levelled against its former CEO Phillip Bennett.

The fund manager is the latest suitor to access Refco's financial data, which it will use to consider submitting a formal bid, following Interactive Brokers Group last week while TradeLink is also thought to be interested.

Others also thought to be mulling a potential offer are a group consisting of Merrill Lynch, private equity firm Warburg and Susquehanna.

Bids for Refco are due on November 4.

The original article appears here.

-- MDT

Labels: Phillip Bennett, Refco