Two New York-based hedge funds have been ensnared by a U.S. Commodity Futures Trading Commission investigation into their sale of illegal foreign currency futures contracts. Also in the crosshairs is the man behind both Century Maxim Fund Inc. and AJR Capital Inc., one Alexsander Efrosman, AKA Alex Besser (always got to wonder about those AKAs).

Given this guy's past history I can't imagine anyone doing business with him again (fleeing thr country for fear of prosecution is never a good sign). However, given what we do for a living, I guess I shouldn't be surprised. The original CTFC complaint was filed (and sealed) back in September '05 but as of January 24 the seal is off and the word is out.

More via Cattlenetwork.com (yes, of course I read Cattle Network!):

CFTC Charges Two Staten Island Hedge Funds In Foreign Currency Scheme

January 30, 2006
Cattlenetwork.com

The U.S. Commodity Futures Trading Commission (CFTC) announced today that it filed a federal injunctive action against Alexsander Efrosman, a/k/a Alex Besser, of Staten Island, New York, and two hedge funds under his control, Century Maxim Fund Inc., and AJR Capital Inc., charging them with fraud in the sale of illegal foreign currency (forex) futures contracts.

Specifically, the CFTC alleges that, between April 2004 and June 2005, defendants fraudulently solicited and obtained more than $5 million dollars from as many as 110 customers for the purpose of trading managed accounts in forex futures contracts that were not, as required, traded on a registered entity. The complaint alleges that defendants misappropriated the funds.

Efrosman was previously indicted for mail and wire fraud relating to foreign currency trading in a different scheme, and fled the country. He subsequently was extradited from France to face trial, and in November 2000, pleaded guilty to nineteen counts of mail and wire fraud before the U.S. District Court for the Southern District of New York, and was sentenced to a term of three years of imprisonment.

The CFTC’s complaint alleges that shortly after his release from prison, Efrosman engaged in a new forex scheme through purported hedge funds Century Maxim Fund and AJR Capital. Allegedly, he fraudulently solicited customers to trade forex through Century Maxim Fund, which, Efrosman falsely represented as a hedge fund that had attracted investments from a large number of high net-worth individuals. The complaint also alleges that Efrosman fraudulently solicited customers for forex trading through AJR Capital, which, Efrosman represented to be an opportunity for customers of more modest means to profit from forex trading. According to the complaint, Efrosman misappropriated more than $300,000 from Century Maxim Fund investors and more than $4.9 million from AJR Capital investors.

The complaint also alleges that Efrosman provided his customers with fictitious Century Maxim and AJR Capital account statements reflecting trades that did not actually occur, and profits that did not exist. According to the complaint, the fictitious statements were instrumental in the propagation of the fraud and the solicitation of new customers. Finally, the complaint alleges that all the purported forex trading Efrosman solicited customers to undertake was illegal, as the contracts he solicited were futures contracts that could only be traded on a registered entity.

The CFTC filed its complaint on September 30, 2005. On that same day, court orders were entered which, among other things, froze defendants’ assets and sealed the complaint. The court’s seal was lifted on January 24, 2006. In its complaint, the CFTC is seeking preliminary and permanent injunctive relief, a freeze of defendants’ funds, restitution for defrauded customers, civil monetary penalties, and disgorgement of ill-gotten gains.

The original article appears here.

-- MDT

Labels: CFTC

Via BusinessWeek:

More Heat On Hedge Funds - Regulators are probing trades by managers with inside access

BusinessWeek
February 6, 2006
By Emily Thornton with
Amy Borrus in Washington
and Stanley Reed in London

As if there weren't enough controversy surrounding hedge funds, now the Securities & Exchange Commission is investigating suspicions that fund employees are engaging in insider trading. It's not the typical heard-it-from-a-friend-at-the-company stuff, either. In the last decade hedge funds have ventured into the deepest reaches of finance. They've gone from trading stocks and bonds to making loans, participating in private placements, sitting on bankruptcy committees, and agitating for positions on corporate boards. In the process they've obtained all sorts of nonpublic information -- and regulators are worried that many have been mismanaging it at best and illegally profiting from it at worst.

The SEC, NASD, and Financial Services Authority in London have launched a flurry of probes. So far the inquiries have resulted in only a handful of insider-trading charges against hedge fund managers. But regulators expect the improper handling of insider information to be a big focus of enforcement actions in 2006. "Hedge fund assets have grown significantly, and there is a lot more competition for returns," says Scott W. Friestad, an associate director at the SEC's Enforcement Div. "In this situation people sometimes cut corners. We are devoting substantial resources to these investigations." Steve Luparello, an executive vice-president for market regulation at NASD, agrees. "Hedge funds misusing nonpublic information is a growing issue," he says.

Perhaps the easiest avenue of abuse: private placements, or restricted shares of public companies that are sold directly to investors. Regulators are cracking down on funds that participate in private placements and then take advantage of the information they glean. The biggest case thus far has been that of Hillary L. Shane, the manager of hedge fund FNY Millennium Partners LP. The NASD and SEC charged her in May with fraud and insider trading for allegedly agreeing to buy unregistered shares as part of a private placement in Maryland security systems outfit CompuDyne Corp. (CDCY ) and then short-selling the registered stock, betting that it would fall in value.

Investment bank Friedman, Billings, Ramsey Group Inc. (FBR ) invited Shane to participate in the placement on the condition that she treat the information as confidential. Shane has paid a $1.45 million fine to settle charges brought by the SEC and the NASD. She never admitted or denied wrongdoing. Shane's lawyer declined to comment.

TIP OF THE ICEBERG

There's likely to be much more fallout from the CompuDyne case. NASD says it's still investigating individuals and entities. Regulators haven't accepted FBR's offer to pay $7.5 million to settle charges that it aided the hedge fund manager. FBR declined to comment.

Meanwhile, an investigation into Van D. Greenfield, the 60-year-old principal of New York-based broker-dealer Blue River Capital LLC, has brought the issue of mishandling of nonpublic information obtained from bankrupt companies' creditor committees to the forefront. In November, Greenfield paid the SEC $150,000 to settle charges that he failed to guard sufficiently against the potential for misuse of insider information he obtained while serving on the bankruptcy committees of WorldCom, Adelphia Communications, and Globalstar Telecommunications.

Greenfield had agreed to keep all information confidential and informed his employees that he couldn't trade in the securities of those issuers. But the Chinese wall separating him from his traders was porous. Greenfield frequently walked through his firm's trading room -- which consisted of four desks on the ground floor of his New York City townhouse -- and asked employees for stock quotes for Adelphia and WorldCom securities, according to the SEC complaint. Greenfield did not admit or deny the charges. And "there was no finding of any misuse of material nonpublic information," says Greenfield's attorney, Arthur S. Linker of Katten Muchin Rosenman LLP. "There was no finding of insider trading."

Nevertheless, the settlement has spurred other industry veterans to lodge complaints of possible insider trading by hedge funds and other creditor committee members. "We have heard that there's more insider trading and misrepresentation to get on creditors' committees than had been reported to us," says Alistaire Bambach, chief bankruptcy counsel in the SEC's Enforcement Div. "We are very concerned about these activities."

In London, the Financial Services Authority is investigating abuse of confidential borrower information. The case everyone is talking about: a probe into whether a trader at GLG Partners LP, a London hedge fund, improperly used information provided by Goldman, Sachs & Co. (GS ) in advance of a security offering by Sumitomo Mitsui Financial Group Inc. in 2003. "The FSA is concerned about any instances where parties who are made insiders then use that information to trade in related securities," says spokesman David Cliffe. The crackdown is just beginning.

The original article appears here.

-- MDT

Labels: Financial Services Authority, insider trading

What happens when your due diligence checklist isn't long enough? You end up (potentially) having to explain away hundreds of millions in bogus oil trades you claim to know nothing about...

Probe under way into oil scandal company

January 27, 2006
The Royal Gazette
(Bermuda)

Finance Minister Paula Cox said yesterday that an inquiry was under way into the Bermuda company highlighted by the Mid-Ocean News last week as being a sham used to mask the movement of hundreds of millions of dollars of African oil revenues. Ms Cox said she was satisfied that vetting and due diligence procedures carried out by regulatory body the Bermuda Monetary Authority had been properly carried out in the case of Sphynx (Bermuda) Ltd.

A case in London's High Court exposed the company's role as one of a chain of companies controlled by Denis Gokana, president of the Republic of Congo's state oil company the SNPC, which, according to the judgment of Mr. Justice Cooke, were used to hide oil assets from creditors. "While the Ministry does not comment on specific cases, I have no doubt that the vetting in respect of Sphynx (Bermuda) Ltd. was conducted in the usual thorough manner," Ms Cox told the Mid-Ocean News. "As to what will transpire with respect to this company, the Ministry anticipates having the results of an internal inquiry to hand very shortly and will act on any adverse findings as required by law"...Even though Mr. Gokana is a special adviser to the Republic of Congo – rated by watchdog Transparency International as a country of "rampant corruption" – and he was named as Sphynx's principal in incorporation documentation, the company passed the BMA's vetting procedure. Ms Cox argued that the BMA's due diligence process was sound and she described how it worked.

"The vetting and due diligence process is a rigorous and coherent process that is applied to all incorporations by the BMA," she said. "You may recall that KPMG considered that the BMA's vetting of proposed beneficial ownership put it at a high level of compliance that substantially exceeded the minimum requirement. "Let me illustrate, for the benefit of the public. In conducting its due diligence in the matter of company incorporations, the BMA utilises online information sources such as Lexis/Nexis and Dow Jones. "Assistance is sometimes sought from law enforcement services, overseas regulatory authorities and the Commercial Crime Services of the International Chamber of Commerce. "The Lexis/Nexis and Dow Jones checks cover all shareholders and beneficial owners notified to the BMA. Other checks are generally made where the initial check highlights an issue of concern or indicates a need for further investigation." Two local businessman, Trevor Williams and Arthur Jones, both of Consolidated Service Ltd., were hired to act as directors for the company from the time of its incorporation in February 2002 until they resigned in April 2005.

Both denied knowing anything about the $472 million in bogus oil trades that had passed through the company, nor did they even know the location of the company's bank account. Ms Cox also addressed the question of whether directors should be required to take their responsibilities more seriously. She said it was an issue of corporate governance that was a "burning issue" world-wide.

"That is why we have rules and regulations," Ms Cox added. "My general sense is that Bermuda's rules and regulations work fairly well and I noted a report today that attributed a positive remark about Bermuda's regulatory standards to Lord Levene, the current chairman of Lloyd's of London. "Let me conclude by saying that not every scandal requires a government or a regulatory response. To do so would be uneconomic because it would require substantially more resources that would add to the cost of doing business...

How long is your due diligence checklist. Longer, we can hope than what one finds in Bermuda. The full article appears here.

-- MDT

Labels: KPMG

51 SEC investigations between 1999 and 2004 and 30 some odd cases brought mean one thing for the hedge fund industry industry....increased regulation. But already many have come forward saying the soon-to-take-effect SEC regs of hedge funds are a joke, with enforcement and oversight capacities sadly lacking...206 will tell the tale.

Via the FT.com:

Deadline looms as SEC turns screw on hedge funds

By Andrew Parker in New York,
Stephen Schurr in London and
Francesco Guerrera in Hong Kong
The Financial Times

The chief US financial regulator is flexing its muscles again, both at home and abroad. The Securities and Exchange Commission has set a deadline of Wednesday for many US and foreign hedge fund managers to register with it. They must provide the regulator with information about their businesses and brace themselves for the possibility of inspections.

The extension of the SEC's supervisory work to hedge funds, where wealthy investors put their money, represents a big expansion of its powers and responsibilities. However, intense controversy and uncertainty surrounds the regulator's flagship project. A federal appeals court was asked in December to strike down the SEC's rule requiring hedge fund managers who advise more than 14 investors to register with the regulator.

Phillip Goldstein, a New York-based hedge fund manager, says he is "cautiously optimistic" that the court will support his argument that the SEC did not have the authority to draw up the rule in October 2004.

William Donaldson, the SEC's Republican chairman at the time, had to rely on the support of the regulator's two Democratic commissioners to get the rule approved. He insisted the rule was necessary for the SEC to gain a full understanding of the traditionally secretive hedge fund industry, which controls assets worth $1,200bn. More than 1,000 hedge fund managers had registered with the SEC before the rule was approved. Some did so voluntarily, while others had to if they were advisers to mutual funds, for example.

But the SEC estimated that a further 1,000 hedge fund managers would have to register following the rule. Mr Donaldson said the growth of hedge funds had been accompanied by increasing instances of fraud. He highlighted 51 SEC investigations into hedge fund managers accused of fraud between 1999 and 2004. Since then the SEC has brought a further 30 cases, including against Samuel Israel III, founder of the Bayou group of hedge funds, where investors had put $450m.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.Today, concerns about the SEC's registration rule focus on compliance costs, and the risk they will be passed on to investors in the guise of reduced returns. Hedge fund managers, for example, must appoint chief compliance officers at their businesses. But Ernst & Young, the accountants, last month published a survey of 109 managers that found 85 per cent thought the annual costs to be $500,000 or less, which was "generally below market projections".

Some hedge fund managers appear to be taking steps to avoid having to register with the SEC by Wednesday. Managers do not have to register if after February 1 they do not take additional money from existing clients or accept contributions from new investors. They also do not have register if they bar clients from withdrawing their investments for more than two years.

SEC officials say the UK and Hong Kong are the most significant overseas jurisdictions for hedge fund managers. By the end of last Thursday, 113 hedge fund managers based outside the US were registered with the SEC. Of these, 68 are in the UK and seven are in Hong Kong.

In London, some hedge fund managers regard the SEC's oversight as unwarranted, given that the Financial Services Authority, the chief UK financial regulator, scrutinises their industry. "Outside the US, the feeling is that the FSA is completely on top of hedge funds, far more than anyone else in the world," says Philippe Bonnefoy, partner at Cedar Partners, a London-based fund that invests in hedge funds.

In Hong Kong, hedge fund managers say they expect the bigger players to register with the SEC, partly because it would help them improve their image. "They may not like it but they have little choice if they want to continue to attract US investors and not raise suspicions in the eyes of regulators," says the Hong Kong-based manager of a large hedge fund.

The original article appears here.

-- MDT

Labels: Bayou Group, Financial Services Authority

Exactly how they plan to do accomplish this is not exactly clear at this point...but no doubt we'll here more in the near future about the SEC's plans:

Via The Ely Times:

New SEC Guidelines Shield Shareholders

By ELLEN SIMON
AP Business Writer
28 January, 2006

NEW YORK - How can the Securities and Exchange Commission punish corporate crime without punishing shareholders? But even hundreds of millions of dollars in fines at the corporate level did little to compensate shareholders. At the beginning of January, the SEC issued a statement on financial penalties for corporations, saying it will look at "whether the issuer‘s violation has provided an improper benefit to shareholders, or conversely whether the violation has resulted in harm to shareholders. The guidelines are meant to bring "clarity, consistency and predictability" to the SEC‘s enforcement efforts, agency Chairman Christopher Cox said at a news conference.

Atkins called the SEC‘s statement "a more rational and systematic approach to deciding whether to impose penalties on shareholders." "The statement is so general, it really doesn‘t tell you much," said Peter J. Henning, a former senior attorney for the division of enforcement at the SEC who is now a law professor at Wayne State University in Detroit. "It‘s kind of what everyone knew already: If you cooperate, it‘s going to help you. If senior management were involved, it‘s going to be a problem. How extensive the wrongdoing was and what timeframe it covered will be considered." For investors, there is no punishment for corporate crooks that will make them whole.

The SEC imposed fines and restitutions totaling $715 million from Adelphia, but it didn‘t come close to pulling investors out of the red. The company‘s peak market cap, before the scandals and subsequent bankruptcy, was $8.4 billion. "I wish I knew," Henning said. "To this point, no one has come up with one. ... It‘s so much easier if someone steals your purse."

The original article appears here.

-- MDT

Labels: New York AG, Peter Henning

Via the WSJ:

Wait, Let Me Call My ChFC' - Your Stockbroker or Adviser Can Have Many Baffling Names; A New SEC Rule Might Help

By JEFF D. OPDYKE
Staff Reporter
THE WALL STREET JOURNAL
January 28, 2006

The only thing tougher than coming up with a financial plan is finding someone to do it for you. Investment advisers have developed a baffling array of titles and certifications to make themselves sound like pros. Most people have an idea of what a "broker" is, but what about a "ChFC" or a "CRPC"? (Chartered Financial Consultant, and Chartered Retirement Planning Counselor, respectively.)

In a small but important step to address concerns like these, starting Tuesday, the Securities and Exchange Commission is kicking off a new rule designed to make it easier for consumers to know what they're getting when they hire a financial professional.

The new rule mandates that stockbrokers who hold themselves out as financial planners must be clear about the role they're playing when dealing with clients. In other words, if they're clearly providing advisory services, then they're duty-bound to act in a customer's best interest, as are traditional financial planners. If they're acting as a broker -- in other words, essentially, a salesperson -- then they must be clear that's the role they're playing.

However, the new rules don't solve the larger problem: the more than 100 separate titles used by financial pros to imply expertise in everything from mutual funds to retirement planning to estates. No central regulator keeps tabs on the titles, and some can be earned simply by spending a few hours attending a training seminar in a hotel ballroom or taking a study-at-home course.

For investors, the alphabet soup creates confusion figuring out who does what -- and how qualified they are to do it. Some titles "are intentionally misleading," says Barbara Roper, director of investor protection for the Consumer Federation of America. Their goal: giving the consumer the impression that "they're dealing with an 'adviser,' rather than someone who's trying to sell them something."

Last year, securities regulators in Massachusetts cracked down on firms touting "certified senior advisers" specializing in retirement planning. The state found that CSA holders earned the designation after taking a three-day home-study course and a multiple-choice exam. The state found that CSAs steered investors toward high-commission investments "unsuitable for many older investors" because of the fees and the long-term nature of some of the annuities being sold. Pennsylvania issued a cease-and-desist order against a firm pitching the CSA designation as "credentials you can trust."

Last month, the North American Securities Administrators Association issued a warning urging investors to "carefully check the credentials of individuals holding themselves out as 'senior specialists.' "

There are ways to avoid pitfalls like these. The National Association of Securities Dealers has a page on its Web site (nasd.org) that charts dozens of designations. (Under the investor information tab, click "professional designations.") Information about Certified Financial Planners, who rank among the most reputable advice providers, can be found at cfp.net.

Most financial designations aren't subject to state or federal regulation, but are still highly regarded because of the steps needed to earn those initials. Many also are accountable to professional organizations that set ethical standards on members.

The certified financial planner, or CFP, designation is considered the gold standard in this crowd. CFPs are required to be knowledgeable about financial-planning topics including insurance, employee benefits, investments, taxes, and retirement and estate planning. They must also have at least three years of experience, pass a 10-hour exam, and starting next year, hold a bachelor's degree. The ChFC designation, given by American College, a Bryn Mawr, Pa., institution dedicated to financial-services professions, is also well regarded.

Other professionals whose credentials mean something include the certified financial analyst (CFA), who provides portfolio management and investment strategy, among other things. Getting the CFA designation takes on average four years of preparation in accounting, quantitative analysis, fixed-income and securities analysis, portfolio management, economics and ethics.

For tax services, the professional to go to is a certified public accountant. CPAs who hold the additional designation of personal financial specialist are experts in personal financial planning. A chartered life underwriter, or CLU, is an expert in life-insurance matters. But you might also go to them for issues of income-replacement, estate planning and wealth transfer.

Generally, only two types of titles are scrutinized by regulators, and therefore offer consumers legal protections: broker-dealers and registered investment advisers. Broker-dealers (think: stockbroker) serve primarily as stock-market order-takers, facilitating trades on Wall Street and in the bond market. They report to the NASD, the brokerage industry's self-regulatory arm. Registered investment advisers (think: financial planners), which report to the SEC, primarily provide services such as building a financial plan or offering tax- and estate-planning advice.

Broker-dealers and advisers are held to different standards when dealing with clients. Brokers must abide by so-called suitability rules requiring they "know the customer" and offer investments suitable to a client's needs.

The concept of "suitability" can be murky, however, and brokers aren't obligated to act solely in your best interest. The NASD has been strengthening suitability rules in recent years. Still the organization last year fined the industry a record $125.4 million for transgressions including inappropriate sales of annuities and mutual funds.

By contrast, registered investment advisers are subject to a so-called fiduciary duty, a legal standard mandating they act solely in your best interest. Advisers also are subject to disclosure rules requiring they provide to clients Form ADV listing potential conflicts of interest, compensation practices and disciplinary proceedings.

An adviser's Form ADV can be found on the SEC's Web site (sec.gov) under "Check out Brokers & Advisers." Information on a broker's disciplinary actions is available at nasd.org under "NASD BrokerCheck."

State securities regulators can provide information as well. The North American Securities Administrators Association, an organization of state and provincial securities regulators, provides links to state regulators at nasaa.org; look for "contact your regulator."

The new SEC rule deals with situations in which a broker also holds himself out as a financial planner. In such cases, the broker must also register with the SEC as an investment adviser, which means he then has a fiduciary duty to the client.

Individuals and firms are all free to set their own fee structure, which makes it important to ask upfront whether you are paying commissions, by the hour, or a flat fee. In general, fee-only and by-the-hour charges are often the best option when seeking financial-planning advice. The reason: It removes the incentive to try to sell you a product that isn't right for you, but which provides extra fees to the seller.

With a brokerage account, investors who trade a lot or who require a variety of services are generally best suited for so-called wrap accounts that charge a single, annual fee. People who trade infrequently should stick with a commission-based account (in which you pay per transaction), since that approach will often be cheaper in the long run.

The original article appears here.

-- MDT

Via the WSJ Law Blog...

Another Lawyer Indicted

January 26, 2006
Posted by Peter Lattman

Daniel Adkins, an in-house lawyer at Internet pharmacy outfit Xpress Pharmacy Direct, was indicted this week in Minnesota on federal charges that he helped the company obtain narcotics and hid assets for its founder. Federal authorities shut down Xpress in May. The company’s founder, Christopher Smith, was indicted in August...

Read the rest here.

--MDT

Direct from Davos and the ongoing World Economic Forum comes new rcommedations on how best to deal with the growing international dilemma of computer fraud. On the scene was FBI director Robert Muller who spoke up for greater information sharing and standardization of regulations to help law enforcement track, combat and prosecute fraud across national boundaries. Via the ever venerable Financial Times:

FBI chief urges exchange on computer fraud data

By Peter Thal Larsen in Davos
The Financial Times
January 26 2006

...Speaking at the World Economic Forum in Davos on Thursday, Mr Mueller said there was no need to create a global agency to battle computer fraud, but added: “There can be standardised regulations and rules relating to data retention and secondly a mechanism for the swift exchange of information.”

His comments come amid signs that computer security and the risk of online fraud are an increasing risk for both companies and consumers. A survey of large companies by Swiss Re shows computer-based risks as their main concern, ahead of other worries such as corporate governance and natural disasters. Meanwhile, research by Visa International, the credit card network, shows that identity theft and fraud is the main concern of consumers around the world...

...The FBI has worked together with other law enforcement agencies to track down hackers who co-ordinate attacks on US companies but are based in other countries. However, Mr Mueller stressed that common regulations in areas such as data retention would make it easier for investigators to track down the perpetrators...

The full article appears here.

-- MDT

Labels: identity theft

So says the Washington Post, in part of their on-going (and going... and going...) coverage of the Enron case:

Opportunity for Corporate Fraud Has Shrunk -- but It's Still There

By Carrie Johnson and Ben White
Washington Post Staff Writers
Thursday, January 26, 2006; D01

Four years after the collapse of Enron Corp. spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain.

Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives, board members and investor advocates, agreed to fill out a corporate governance report card on the eve of the Enron trial.

The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders, some of which remain today. Former executives Kenneth L. Lay and Jeffrey K. Skilling go to trial Monday on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia Communications Corp., Tyco International Ltd. and WorldCom Inc.

But in a sense, the government efforts may have backfired, inspiring a dangerous overconfidence among investors...

If you want to know what follows THAT cliff-hanger, click here for the rest of the article.

-- MDT

Labels: Department of Justice, Enron, Tyco

It's not quite "Have a Coke and a Smile"...the details, via BusinessWeek:

"Killer Coke" Or Innocent Abroad? Controversy over anti-union violence in Colombia has colleges banning Coca-Cola

January 23, 2006
By Dean Foust and Geri Smith,
with Elizabeth Woyke
The Corporation

It's early monday morning, but Ray Rogers has the full attention of some 70 students in a Rutgers University classroom. For nearly half an hour, the 61-year-old labor activist rails against Coca-Cola Co. (), taking the beverage giant to task for allegedly turning a blind eye as eight employees of Coke bottlers in Colombia were killed and scores more were threatened or jailed on trumped-up terrorism charges over the past decade.

"The reality is that the world of Coca-Cola is a world of lies, deceptions, corruption, gross human rights and environmental abuses!" thunders Rogers, a legendary union activist who cut his teeth organizing a highly publicized campaign against textile maker J.P. Stevens & Co. in the 1970s. He slams his hand on a desk. "But this is where it's going to stop! We're going to put an end to this once and for all! How many of you will stand up against Coke?" One by one, roughly half the students lift their hands. In response to Rogers' charges, a Coke spokeswoman says the activist "has no facts to support his claims."

Despite the vast generation gap and Coke's rebuttals, Rogers' diatribes are starting to resonate on campuses from New Haven to Ann Arbor, where his "Killer Coke" campaign has become the latest cause célèbre among student activists -- "the new Nike," as one puts it. At dozens of schools, small but feisty groups of students have demonstrated against the company -- like the ones who staged a "die-in" during a 2004 Yale University speech by then-CEO Douglas N. Daft. Already, about 20 colleges in the U.S. and abroad have halted sales of Coke on campus, in part over the Colombia controversy.

In December, Rogers bagged his two biggest victories to date when New York University and the University of Michigan banished Coke. For two years, NYU student activists had demanded an independent investigation of worker conditions in Colombia. "The students felt it has been two years, and nothing's been done," says Arthur Tannenbaum, a faculty spokesman at NYU. In response, a Coke spokesperson says the company would accept an outside review, but only if the findings aren't admissible in a lawsuit filed in Miami by the International Labor Rights Fund on behalf of the slain Colombian workers -- a condition the ILRF has not accepted.

PICKING UP STEAM
Coke officials maintain that the company has been unfairly tarred by union activists who have distorted the facts about Colombia. Perpetuating "urban myth is more exciting [for activists] than knowing what the facts are," says Edward E. Potter, a longtime corporate labor lawyer who joined Coke as global labor relations director last March. Coke officials say only one of the eight workers was killed on the premises of the Coke bottling plant owned by Bebidas y Alimentos de Urabá. Also, they say, the other deaths -- which all occurred off-premises -- were byproducts of Colombia's four-decade-long civil war among leftist guerrillas, government forces, and paramilitaries, which has resulted in at least 35,000 deaths, including 2,500 trade unionists since the mid-1980s alone.

What's more, an important global coalition of labor unions has refused to support Rogers' anti-Coke crusade, which seeks reparations for the families of victims. "We have no evidence of complicity by Coke in the killing of workers," says Ron Oswald, general secretary of the International Union of Foodworkers in Geneva, whose members include tens of thousands of Coke workers worldwide. Some government and union leaders believe that the militant union leading the crusade, SINALTRAINAL, a Colombian union of food-industry workers known for its socialist views, has zeroed in on Coke as a way to get the broader issue of union violence heard around the world. "Out of one killing they built up a campaign," says Colombian Vice-President Francisco Santos Calderón. "In the end they're hurting Colombia" by making it seem like a dangerous place to do business...

Read the rest here.

-- MDT

But don't week for the fine folks at Choicepoint. According to this recent article from MSN Money, their revenue in 2005 exceeded $1 billion., with projections for 2006 looking to be up 7 to 9%. More on the FTC fine, via Business Week:

FTC Fines ChoicePoint Over Data Breach

January 26, 2006
BusinessWeek
By Harry R. Weber
AP Business Writer

The Federal Trade Commission said Thursday that data warehouser ChoicePoint Inc. will pay $15 million to settle charges that its security and record-handling procedures violated consumers' privacy rights and federal laws. The FTC said it had fined the Alpharetta, Ga.-based company $10 million -- the biggest the agency has ever imposed -- and that Choicepoint would pay an additional $5 million that will be used to compensate consumers.

Company shares sank nearly 7 percent on a day it also reported a more than 29 percent decline in its fourth-quarter profit. Choicepoint had revealed last year that its massive database of consumer information was accessed by thieves. The data breach involved thieves posing as small business customers who gained access to ChoicePoint's database, possibly compromising the personal information of 145,000 Americans. The FTC said the number now stands at 163,000. The company discovered the breach more than four months before disclosing it to the public in February 2005. ChoicePoint has said authorities asked it to keep the information secret initially.

Authorities have said at least 750 people were defrauded in the scam that has fueled consumer advocates' calls for federal oversight of the loosely regulated data-brokering business. The FTC said the number of victims now stands at about 800, but ChoicePoint has noted that charges brought in Los Angeles against one of the thieves involve only 16 victims. The company also is a defendant in several lawsuits and complaints arising from the breach, and several government agencies are investigating.

"The message to ChoicePoint and others should be clear: Consumers' private data must be protected from thieves," Deborah Platt Majoras, chairman of the FTC, said Thursday in a statement. The $10 million fine is the largest ever levied by the FTC, Majoras said during a news conference. Previously, the largest FTC fine was for $7 million against medical device maker Boston Scientific Corp. related to competition issues, she said. "This is an important victory for consumers," Majoras said.

The settlement requires ChoicePoint to implement new procedures to ensure that it provides consumer reports only to legitimate businesses for lawful purposes, to establish and maintain a comprehensive information security program and to obtain audits by an independent third-party security professional every other year until 2026.

The company, which is also is the subject of a pending Securities and Exchange Commission probe, did not admit to any wrongdoing in the FTC probe. ChoicePoint collects data on individuals, including Social Security numbers, real estate holdings and current and former addresses. It has about 19 billion records, and its customers include insurance companies, financial institutions and federal, state and local agencies.

The SEC is examining stock trades by Derek Smith, ChoicePoint's chief executive officer, and Doug Curling, chief operating officer. Curling and Smith made a combined $16.6 million in profit in the months after the company learned of the data breach and before the breach was made public. ChoicePoint has said the stock trading was prearranged and approved by the company's board.

Company officials said Thursday they continue to cooperate with the SEC probe. They did not give details of the status of the probe. The settlement came hours after the company reported its fourth-quarter profit fell to $27.68 million, or 30 cents a share, in the quarter ended Dec. 31 compared to a profit of $39.22 million, or 43 cents a share, for the same period a year ago. The results missed Wall Street expectations.

Excluding one-time expenses related to the data breach announced in February 2005, ChoicePoint said it earned $39.74 million, or 44 cents a share. On that basis, analysts surveyed by Thomson Financial were expecting earnings of 45 cents a share. Revenue rose 11 percent to $257.85 million, compared to $232.46 million a year ago.

For all of 2005, ChoicePoint said it earned $140.66 million, or $1.53 a share, compared to a profit of $147.96 million, or $1.62 a share, for the same period a year ago. Twelve-month revenue rose to $1.06 billion, compared to $918.71 million in 2004.

ChoicePoint said it expects 2006 full-year internal revenue growth to be in the 7 percent to 9 percent range, exclusive of any acquisitions. ChoicePoint shares fell $3.10, or 6.7 percent, to $43.20 in midday trading on the New York Stock Exchange.

The original article appears here.

-- MDT

Labels: data breech, database

Securities fraud litigation seems unlikely to reach the volume of it's late 1990s boom period, but as long as companies have bad quarters and execs keep covering it up (or just appear to do so), no doubt, the cases will continue. This Boston Business Journal article offers reflection and speculation from several industry heavy hitters, all of whom seem to be of the opinion that '05's relative slump won't necessarily be repeated in '06:

Via the Boston Business Journal:

Shareholder suits down, but a new wave may be near

Sheri Qualters
Journal Staff
Boston Business Journal
Legal notebook

The number of securities class action lawsuits filed in the United States fell off last year, but experts say it's not time for companies to relax yet because a rising number of corporate restatements could harbinger a new wave of such suits. Securities fraud class actions suits slid 17 percent last year to 176 filings from 213 in 2004, according to the Stanford Law School Securities Class Action Clearinghouse. The clearinghouse also says 2005 filings are off 10 percent from the average of 195 suits between 1996 and 2004.

Investor losses also dropped sharply last year. According to the clearinghouse's disclosure, dollar loss index -- which measures the decline in the market capitalization of a company being sued during the period covered by the class action suit -- dropped 33 percent to $99 billion in 2005 from $147 billion in 2004. Losses were also down roughly 50 percent from 2001 and 2002 numbers. Although Stanford's findings are dramatic, observers in the legal community say filings have always seesawed from year to year.

The one-year decline is consistent with the alternating pattern, said Jordan Hershman, a partner in the securities and corporate governance litigation group at Bingham McCutchen LLP. What's more, Hershman said, case filings aren't driven by the amount of actual fraud. But the U.S. stock market's relative stability last year, which registered its lowest volatility since 1996, could be a factor, he said.

"Plaintiffs' class action lawyers continue to control this type of litigation, and they are driven predominantly by their own greed," Hershman said. Speaking from the other side, Glen DeValerio of Berman DeValerio Pease Tabacco Burt & Pucillo said it's too soon to tell if the one-year drop is a trend. The Boston-based firm, which represents plaintiffs in class action cases nationwide, is still plenty busy, DeValerio said.

"You could have significant frauds going on right now that have been going on over the last year (and) haven't been revealed," DeValerio said. "Enron went on for several years until the truth came out." Even one of the deans of the securities class action plaintiffs bar, William Lerach of Lerach Coughlin Stoia Geller Rudman Robbins LLP in San Diego, has been widely quoted as saying it's difficult to draw conclusions from the recent data. "The ocean comes in, the ocean goes out," said Lerach in published reports. "It doesn't feel any different to me.''

But rising earnings restatements foreshadow future lawsuits, said Bruce Carton, vice president of securities class action services at Institutional Shareholder Services Inc. of Rockville, Md. "The fact that you're getting a flurry of restatement of 2005, if it hasn't already led to lawsuits, probably will in the future," Carton said.

Investment research and advisory firm Glass Lewis & Co. LLC of San Francisco reportedly counted 1,031 restatements through the end of October 2005, compared with 650 in 2004 and 270 in 2001. Many recent restatements can be traced back to the requirements of the Sarbanes-Oxley Act of 2002, but following the new rules doesn't make companies immune to lawsuits, he said. "SOX fuels restatements, which fuels lawsuits," Carton said...

More in the full article, which can be found here. Bruce Carton also maintains a fine blog that if you are reading this post you are probably already well aware of. but just in case you're not, you can find his Securities Litigation Watch here.

-- MDT

Labels: Enron, Standford Securities Class Action Clearing House

Biggest cause of consumer complaint...problems moving an account from broker to broker:

US SEC's Glassman says brokers top '05 complaints

January 25, 2006
Reuters.com

Brokerages were the focus of more investor complaints to the U.S. Securities and Exchange Commission in fiscal 2005 than any other type of business, said SEC Commissioner Cynthia Glassman on Wednesday.

For the year ended Sept. 30, about 31 percent of all complaints lodged with the SEC concerned brokerages. There were fewer complaints about corporations, mutual fund companies, investment advisers and transfer agents, she said.

"Unfortunately, it is not an anomaly but rather is consistent with complaint data from earlier years," she added in prepared remarks to be given at a conference in California. In most cases, she said, brokerages could avoid complaints by spending more time and effort educating investors.

The most frequent complaint, tallied 622 times, involved "transfer of account problems," such as an investor who has switched brokerages being unable to transfer a proprietary fund from the old brokerage into a new account, she said.

Second most common, at 533, were complaints about unauthorized transactions, such as an investor telling the SEC that a broker traded in an account without permission. Often these complaints involve permissible margin calls, she said.

"The real issue here is that the customer doesn't understand the practical ramifications of a margin account," said Glassman, who has championed investor education in her nearly four years as an SEC commissioner.

There were also complaints from investors about problems with closing accounts, unsuitable investment recommendations and errors and omissions in account statements. "What I hear is that often it is extremely difficult for customers to decode their statements," she said.

"The statements themselves might not have any errors or omissions, but if the customers do not understand the information in the statements, they conclude that the statements are somehow deficient," she added.

The original article appears here.

-- MDT

Which means? No more strippers.

Via UndertheCounter.net.

-- MDT

The latest word in this still-volatile story... Verizon has been charging hard against online vendors who have obtained Verizon customer records either through bribes or through fraudulent pretexts meant to dupe low-level Verizon employees into giving up the goods. Is this technically illegal at the present time? Well, not exactly... Given all the publicity, state and/or federal action on this issue is surely to come:

Verizon sues to block data theft

Physorg.com
January 24, 2005

Verizon Tuesday boosted its fight to protect customer privacy by filing suit to block Web-site owners from obtaining information under false pretenses.

Verizon claims several companies have fraudulently attempted to obtain customer records by calling Verizon customer-service centers posing as Verizon employees needing access to confidential customer information.

In its lawsuit filed in federal court in New Jersey, Verizon Wireless is seeking injunctions against Data Find Solutions Inc. and one of the company's principals, James Kester, 1st Source Information Specialists and principal Steven Schwartz, and operators of several data broker Web sites.

Verizon is suing to prevent them from obtaining confidential customer information through fraud and deception and to prohibit advertising and selling the information.

Steven Zipperstein, general counsel and vice president of legal and external affairs at Verizon, said, "Verizon Wireless will continue litigating aggressively against these illegal attempts to obtain and traffic in our customers' private information.

"We applaud the recent focus on these issues from public officials, privacy advocates and law enforcement," Zipperstein said. "Together we can shut this down once and for all."

The original article appears here.

--MDT

Note the quote-love for friend of The Daily Caveat, Peter Henning of Wayne State University:

Via the Ashville Citizen Times:

...Ingles announced in December 2004 that the SEC was investigating it, and last year the company restated results for its 2002 and 2003 fiscal years and part of FY 2004. The problems, the company said last year, involved the timing of reporting of certain payments from vendors. Vendors sometimes give retailers money or credits for advertising, certain displays of their products or other considerations.

The legal purpose of a Wells Notice is to allow a company to offer information or arguments in its favor before the SEC acts, but it also often triggers negotiations for a settlement, two experts in securities law said.

“As a general rule, when a Wells Notice comes, the staff has decided,” said Mark Astarita, who practices securities law in New York and New Jersey.

Astarita and Peter Henning, a law professor at Wayne State University in Detroit and former attorney at the SEC, said it is rare for information that arises once a Wells Notice is filed to change the SEC staff recommendation...

Check out the full article here...and navigate on over here to find Mr. Henning's fine blog devoted to daily happenings in the world of white collar crime.

Labels: New York AG, Peter Henning

The Daily Caveat has posted previously about Bristol-Myers Squibb's continuing legal issues. This week saw a notable settlement in securities class action case brought against the pharmaceutical giant in relation to the never marketed hypertension drug Vanlev. Word of the settlement first appeared months ago but only recently have the exceedingly interesting details been made public.

The plaintiffs alledged in the case that BMS did not play straight with investors when reporting potential problems with BMS's long-in-the pipeline supposed high-blood-pressure uber-drug, Vanlev. While BMS had seemed willing to take this case to trial, Bruce Carton at Securities Litigation Watch called it correctly back in June'05 when he predicted that the case would settle out. The suit, brought on behalf of Amalgamated Bank settled for $185 million dollars.

Potentially severe side-effects and the drug’s ultimately ho-hum performance relative to products already on the market meant that Vanlev would never make it to the street. But according to attorneys at lead plaintiff firm Labaton Sucharow, that didn’t stop BMS from coasting for a few quarters on the good word of mouth Vanlev had been getting. Their complaint alledged that BMS withheld negative findings in early 2000, prior to the announcement that the drug was DOA.

Now what makes this case and the terms of this settlement more intriguing than your usual run of the mill securities investigation is the product involved. Bristol-Myers Squibb doesn’t make some obscure techno-widget that fits inside your computer, toaster or flat-screened television - they manufacture the drugs that are designed to make and keep us all well. Thus, not half so interesting as the high dollar figure are the other mandates of the settlement, to which BMS will be bound for the next decade.

Along with the close-to $200 million dollar figure involved in the settlement, the court has mandated a variety of new procedures for BMS's drug development and disclosure process that go beyond simply censuring overzealous execs. While you won't find hide nor hair of any mention of a legal settlement on BMS's website, what you will now find is a publicly accessible database for their clinical trial disclosures, warts and all which will include any and all drugs approved for marketing to the public.

BMS is bound to the terms of this agreement for ten years and, get this, any change that could potentially reduce the level of disclosure must be approved by the former lead plaintiffs in the case, Amalgamated Bank. Again, not that you will find mention of this on BMS's website. They do tout their Clinical Trial Communication Commitment they just don't happen to mention that their "commitment" was apparently court-mandated.

View the Labaton press release on Vanlev settlement terms.

-- MDT

Labels: database

Interesting article that offers some balanced, ground-level thoughts on both the excesses and necessities of the secutities litigation industry. Keep reading for some interesting stats on recent trends and how attorneys, shareholders and targeted companies fared over the last year.

Via The Denver Post:

Investor suits down, yet lawyers reap

By Al Lewis
Denver Post Staff Columnist
January 22, 3006

First, Qwest's former management got rich. Now, it's the lawyers' turn. Of the $400 million Qwest has agreed to pay shareholders to settle civil-fraud allegations, the lawyers representing shareholders are expected to ask for as much as $101.2 million, according to documents filed this month in U.S. District Court in Denver. That includes 24 percent of the settlement, or $96 million, plus $5.2 million for expenses. The money would go to investor-lawsuit king William Lerach and his 160-lawyer firm, Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego. Qwest shareholders, meanwhile, will get about 19 cents on the dollar.

I wasn't able to get ahold of Lerach last week, but members of his firm have previously said they may not ask for the full amount. I don't know why they would do this, being such shrewd negotiators. Are they worried about the objections from a few Qwest shareholders? "I'm going to be right in their face arguing that these attorneys' fees are obscene - that this is just gluttony," said Curtis Kennedy, an attorney representing retirees of Qwest predecessor US West.

Last year, Kennedy filed a similar objection regarding a $50 million settlement that Qwest reached with shareholders over a dividend cut. In that case, a state judge ruled that Lerach's firm and others were entitled to up to 30 percent, or $15 million, saying such fees were customary. Bear in mind, it's also customary for Fortune 500 CEOs to pay themselves as much as $10 million a year. Perhaps some class-action lawyers hope to be worth at least as much as the people they sue.

Legal fees in class-action lawsuits commonly run between 20 percent and 33 percent, said Joseph Grundfest, a former Securities and Exchange commissioner and now director of Stanford Law School's Securities Class Action Clearinghouse. Perhaps, like outrageous CEO pay, it doesn't have to be this way. "In a small percentage of these cases that involve very large dollar amounts and have sophisticated institutional investors as lead plaintiffs, (shareholders) can negotiate (legal) fees of 10 percent or less," Grundfest said.

Imagine Lerach's firm asking for only 10 percent. What's wrong with $40 million? Well, frankly, it's not $100 million. Besides, where would we be without class-action lawyers? Auditors and securities regulators slept through the 1990s. When the market tumbled, all investors could do was sue. Lawyers, including Lerach's firm, bore most of the costs of litigation. Now they are reaping the rewards.

Today, class-action shareholder lawsuits remain a vibrant, albeit declining, industry. From 1996 through 2004, shareholders filed an average of 195 lawsuits a year, according to a recent study by the Securities Class Action Clearinghouse and Cornerstone Research. Those cases were associated with an average annual loss in market capitalization of $127 billion among all the companies sued.

Last year, the number of class-action lawsuits declined to 176, with market-cap losses of $99 billion. That represents a 17 percent decline from the 213 cases in 2004, when $147 billion was lost. Grundfest said it's too early to tell if this is the beginning of a trend, but he attributes the decline to three factors: 1) The boom and bust that led to most of these lawsuits is over. 2) There's better corporate governance now. 3) The stock market "became less volatile in 2005 than at any time since 1996," so fewer investors are losing money.

Most shareholder claims involve misrepresentations made in financial documents and in statements from company officials about business prospects, the study said. Yet the decline in shareholder litigation comes amid a sharp increase in corporate financial restatements. Last year, there were 1,107 financial restatements at U.S. companies, up from 514 in 2004 and 330 in 2003, according to Glass Lewis & Co., an investor advisory firm. The surge in restatements comes amid tough new reporting requirements.

"Not every earnings restatement is the result of fraud," said Grundfest. "It's hard for some people to believe, but sometimes there are honest accounting errors that need to be fixed." And when the errors are less than honest? Well, we can always count on the lawyers to work for a piece of the action.

The original article appears here.

-- MDT

Labels: Standford Securities Class Action Clearing House

Tang Wanxin, founder of China's D'long conglomerate, which was once China's largest stockholder is going on trial for various alledged illegalities. Wanxin first fell into trouble in 2004 when creditors began demanding repayment of laons for which Wanxin had pledged equity in various companies in collateral. Up to ten others, including Wanxin's brother Tang Wanli, may also face charges in the alledged fraud. The China Standard has further details.

-- MDT

Labels: China

In a new wrinkle of a story whose momentum will, I think, continue to grow, online brokers dealing in fraudulently obtained cell phone records, the Chicago Sun Times points out that said data not only reveals who customers are calling but also where the are calling from. Check out the brief article here.

-- MDT

Via Forbes:

The SEC: Beyond Disclosure

Forbes.com
By Luician Bebchuk
January 19, 2006

Tuesday’s Securities and Exchange Commission vote in favor of expanded disclosure of executive pay arrangements is a necessary and very useful step. But we should harbor no illusion that it would be sufficient by itself to fix the problems of U.S. executive compensation.

Reforming the disclosure of executive compensation is necessary because companies have for too long taken advantage of "holes" in existing disclosure regulations to "camouflage" large amounts of performance-insensitive compensation. Firms should not be permitted to fail to provide investors with a complete, accurate and transparent picture of pay packages.

But while improved disclosure is necessary, it is also insufficient. In explaining the rationale for improving disclosure of pay arrangements, SEC Chairman Christopher Cox stressed that "the market for executive talent is no different" from other markets and, like other markets, will perform better with more information. The problem, however, is that the market for executive talent has been operating quite differently from other markets.

Executives' pay is not set by companies' owners, but rather by companies' boards. Insulated from shareholders by existing legal arrangements, boards have not been setting pay arrangements solely with shareholder interests in mind. Indeed, notwithstanding the limitations of current disclosure requirements, some significant flaws of existing pay arrangements have been evident for some time. Given investors' limited power, however, these flaws have persisted...

Click through to Forbes.com for more info.

-- MDT

Via BusinessWeek.com:

Ex-Qwest exec settlement said collapsed

THE ASSOCIATED PRESS/DENVER
By SANDY SHORE
AP Business Writer
January 19, 2006

A tentative settlement has collapsed for a former Qwest chief financial officer in a civil case arising from the telecommunications company's multibillion dollar accounting scandal, her attorney said Thursday.

Robin Szeliga's attorney provided no details during a court hearing about the Securities and Exchange Commission's case against Szeliga and other former Qwest executives. Szeliga announced in June she had agreed to settle the civil case.

"That settlement ultimately did not occur," attorney Mark Drooks told Magistrate Judge Craig B. Shaffer. SEC attorney Robert Fusfeld declined comment outside the courtroom...

Check out the full article for more on the probably fate of Nacchio and the five other Quest execs fingered in the fraud.

-- MDT

Labels: Joe Nacchio, Quest, Robin Szeliga

Signs of a healthy market? Tell it to the investors...

Hedge fund failures on the rise as market grows

By Pratima Desai
Reuters
January 17, 2006

A record number of hedge funds went bust last year, and the failure rate is likely to keep accelerating, but unfazed investors see this as a sign of health in a growing market. Chicago-based data provider Hedge Fund Research estimates that around 5.7 percent of the total of more than 8,500 hedge funds closed in 2005, compared with 3.6 percent of around 7,500 in 2004. The previous high was 5.5 percent of around 5,500 in 2002.

Over the next five years the casualty rate could rise to 10 percent or higher as more hedge funds enter the market to meet growing demand from institutional investors such as pension funds and insurance companies, investors say.

"More people are aware of how institutional allocations have changed," said Gavin Rankin, head of investment analysis in Europe at Citigroup Private Bank. "There is more demand. You will see many more hedge funds starting up.

"It's likely there will be more failures," he added. "But that doesn't necessarily mean blow-ups ... In most of those cases, the reason will be disappointing returns."

Institutions looking for a way to preserve their capital and diversify away from traditional assets such as stocks and bonds. have piled into hedge funds since the 2000 equity bubble burst.

Hedge funds are estimated to manage more than $1 trillion, and analysts expect that number to double to $2 trillion at least within five years. Last year 1,580 hedge funds went into business, compared with 1,406 in 2004, 1,156 in 2003 and 1,222 in 2002, HFR said.

TRACTION

Meanwhile, according to industry estimates, hedge funds on average returned less than 7 percent last year, compared with around 9.5 percent in 2004 and more than 15 percent in 2003. Data compilers do not publish hedge fund performance tables, because returns are reported to them under strict conditions of confidentiality. This makes it impossible to work out which are likely to succeed and which fail.

Looking at money flooding into the industry and tempted by the high fees that hedge funds earn -- typically 2 percent management fees and up to 20 percent performance fees -- many bank traders have jumped on the bandwagon. However, without access to the huge volumes of information available at major investment banks, many managers have struggled to satisfy return expectations.

HFR estimates the number of hedge fund closures last year at 484, 267 in 2004, 238 in 2003 and 297 in 2002. "There were a lot more guys coming out of banks setting up hedge funds over the last couple of years ... Some of them were not getting any traction," said Saleem Siddiqi, a partner at Tapestry Asset Management, a U.S.-based fund of hedge funds manager. Analysts estimate that hedge funds need to gather between $75 million and $100 million by the end of their first year to ensure long-term survival.

"They are now going back to banks, which have recently started re-hiring traders," Siddiqi said.

"Hedge fund closures are healthy for the industry," he said. "Our space is Darwinistic, and it's about the survival of the fittest ... It's about producing high risk-adjusted returns, (which) many of them weren't able to do."

Siddiqi said an analysis of the funds that closed last year would probably show that they had managed a small percentage of the total money invested in the industry. "Looking (only) at the absolute number of funds that closed is missing the point." Estimates for how much money had been managed by the failed funds are not available.

COSTS

Part of the reason for higher failure rates is the increasing involvement of institutions. According to French business school Edhec, European institutions have an average of around 7 percent of their assets invested in hedge funds.

European institutions, unlike their U.S. counterparts, have been slow to invest in hedge funds but are expected to catch up over the next few years. Some see the allocation rising to as high as 15 percent, while others think it could be 20 percent.

"Institutional investors demand a higher level of operational strength," said Mark Barker, co-chief investment officer at Pioneer Alternative Investment Management.

"A one-man band will not get the money anymore ... Today you've got the manager, probably a chief operating office maybe coupled with a chief financial officer ... It has become a lot more expensive to set up a hedge fund."

Also a rising tide of regulation of the industry adds to legal and compliance costs. Most hedge funds are registered in offshore, lightly regulated, low-tax centers such as the Cayman Islands. But in most major financial centres managers now also have to be registered with the local regulators. Hedge funds complain most about the costs and restrictions of new registration rules in the United States.

Check out hte original piece here.

-- MDT

The Press Release:

SPX Completes Sale of Vance International, Inc.

January 18, 2005

CHARLOTTE, N.C. -- SPX Corporation (NYSE: SPW) today announced that it has completed the sale of Vance International, Inc., its global investigation and security firm, to Garda World Security Corporation (TSX: GW) for $67.25 million in cash. On November 28, 2005, SPX announced it had signed a definitive agreement to sell Vance to Garda. The transaction is effective as of December 31, 2005.

Chris Kearney, President and CEO of SPX said, "We are focused on growing our three core growth platforms -- flow technology, test and measurement, and thermal equipment and services. As a result of this transaction, we will reduce our non-core assets and Vance will become part of a business with complementary services and expertise."

Garda is a leading provider of security and cash handling services. The company, known for its Total Security Solutions approach, provides physical security, investigation, employment background checks and electronic security services. The company is headquartered in Montreal, Canada and has nine locations in the United States.

Vance, based in Oakton, Virginia, is a global investigation and security firm known for its expertise in managing risks. With over 3,700 employees who bring highly specialized solutions to its clients, Vance has more than twenty years of experience and is one of the most trusted investigation and security consulting firms in the world. Founded in 1984, Vance was acquired by SPX in 2002. SPX expanded the expertise and reach of the business through acquisition and today the business carries the combined expertise of Vance International, Decision Strategies, and The Fairfax Group...

View the full release here.

-- MDT

Labels: background checks

Via the Pahrump Valley Times:

For $153 million payment, securities fraud case settled

By PVT and THE ASSOCIATED PRESS
January 18, 2006

A former Las Vegas securities broker has agreed to pay $153 million to settle charges alleging he defrauded mutual fund investors through improper late trading and market timing, the Securities and Exchange Commission said Tuesday.

Under terms of the settlement, Daniel G. Calugar will relinquish $103 million in ill-gotten gains and pay a civil penalty of $50 million, the largest penalty regulators have imposed on an individual in a late trading and market timing case, SEC officials said.

Calugar, who now lives in Ponte Vedra Beach, Fla., has already paid $72 million to settle a separate class action lawsuit. The money will be used to compensate harmed investors, officials said.

Calugar, 51, agreed to the deal without admitting or denying the allegations. He also accepted a permanent ban on working for a brokerage firm as part of the deal.

The SEC complaint accuses Calugar and his former trader-broker Security Brokerage Inc., of using late trading and market timing schemes to bank $175 million dollars from 2001 to 2003.

"Daniel Calugar's late trading was phenomenally profitable to him and came at the expense of long-term mutual fund shareholders," Linda Chatman Thomsen, director of the SEC's enforcement division, said in a statement.

Calugar's attorney, Steve Scholes of Chicago, did not immediately return a call for comment.

The complaint says Calugar routinely traded mutual funds one or two hours after market closing without any legitimate reason. The funds were largely managed by New York-based Alliance Capital Management Holding LP and Massachusetts Financial Services, a division of Toronto-based Sun Life Financial, the complaint said. Regulators said Security Brokerage created false records to cover up the trades.

Regulators also alleged that from March 2001 to Sept. 2003 Calugar used rapid trading of Alliance and MFS funds to exploit changes in the market, even though those funds either prohibited or discouraged the practice.

The settlement must still be approved by a U.S District Court in Nevada.

The original article appears here.

-- MDT

Via NorthJersey.com:

Hedge fund to settle case with N.J. for $10M

Wednesday, January 18, 2006
Associated Press

Defunct hedge fund Canary Capital Partners LLC has agreed to pay the state $10 million to settle allegations it stacked the deck against ordinary investors, the New Jersey Attorney General's office said Tuesday.

Secaucus-based Canary, two of its units and managing principal Edward J. Stern were accused of trading after hours, when mutual fund prices are frozen, to reap profits from after-hours events that affect a stock's price the next day.

In addition, Canary and Stern were accused of engaging in market timing, or making trades into and out of funds to take advantage of short-term market fluctuations at the expense of long-term shareholders.

"The whole idea of our marketplace is that they're supposed to be fair and open and that everyone gets a fair shot," said Franklin Widmann, chief of the state Bureau of Securities.

"They weren't playing that way. They set up a situation where they concealed and disguised the nature of their trading."

Ron Simoncini, a spokesman for Canary Capital, said the company was not commenting Tuesday.

Stern - the youngest scion of the family that owns developer Hartz Mountain Industries - sparked a sweeping probe of the mutual fund industry when he struck a deal with New York Attorney General Eliot Spitzer in September 2003.

Stern paid $40 million to Spitzer's office to escape prosecution for illegal trading, and agreed to cooperate with the attorney general's investigation.

The probe shook the industry and resulted in scores of people fired and dozens of firms under scrutiny.

They paid out more than $1.5 billion in settlements.

Stern testified for the prosecution last year in the trial of Bank of America broker Ted Sihpol, who was accused of larceny, securities fraud and other charges related to mutual fund trading with Canary. Stern told a Manhattan court that his trading gave him an "unfair" edge over other investors.

A jury cleared Sihpol of 29 counts and the remainder were dropped.

Canary's payment to New Jersey is tied for the third-largest ever paid to the state to settle securities violations, said Peter Aseltine, a spokesman for the Attorney General's office.

As part of the settlement, Stern and Canary have agreed to be barred from acting as brokers or investment advisers for 13 years.

Last week, UBS Financial Services Inc. agreed to pay New Jersey nearly $25 million - the largest sum ever collected in a state securities matter - to settle allegations that it failed to properly supervise brokers who engaged in deceptive market-timing activities.

The UBS payment to New Jersey included a civil penalty of $12.75 million and an additional $12 million for investigative costs, investor education and other enforcement initiatives.

Staff Writer Hugh Morley contributed to this article.

The original appears here.

-- MDT

Labels: Eliot Spitzer, New York AG

Religion and investing, I wouldn't be the first to point out, seldom mix. So when a local church founder and self-professed "apostle" named Neulan Midkiff offers to sell you interest in foreign bank deposit programs and promises no risk and high yield, I would say, take a pass. Sadly more than a thousand well-meaning investors didn't. But the good news is that Midkiff, who denies wrong-doing, and his "prophetess" wife, Donna, are now on the hook for a multi-million dollar fraud:

'Apostle' was a swindler, SEC says - Forest Lake church founder accused of financial scheme

BY MEGAN BOLDT
Pioneer Press
Jan. 16, 2006

To many in the small congregation of Shiloh Family Church in Forest Lake, Neulan Midkiff is a man of God. He gave to those in need and even helped found the church. But federal regulators paint a different picture. In a lawsuit filed in U.S. District Court in Texas, the Securities and Exchange Commission accuses Midkiff and five others of participating in a high-yield investment scheme that offered monthly returns between 4 percent and 12 percent — without risk. The scheme allegedly brought in at least $36 million and possibly as much as $150 million.

Midkiff, 63, did not return messages left for comment. But he did deny wrongdoing to Mark King, a financial consultant for the firm that has court-ordered control of his and the other defendants' frozen assets.

The case could grow to affect about 1,500 people from across the country who put money into what authorities call a Ponzi scheme, which uses the contributions of newly recruited participants to cover extremely high returns promised to original investors — until the ploy crumbles.

Investigators claim Midkiff alone brought in more than 200 people who invested more than $2.6 million. Many of those were members of his congregation, and some took out second mortgages to raise their stake, said King, who works for Hays Financial Consulting in Atlanta, the court-appointed receiver.

"The people I talked to couldn't believe he did this," King said. " 'He's a minister.' 'He's Apostle Midkiff.' 'He was trying to build this church for the community.' They were shocked."

Wendy Goers, co-pastor at Shiloh Family Church with her husband, vehemently defended Midkiff and said he is wrongly accused. "I respect the man greatly," Goers said. "He would never do anything to hurt anyone. He's more likely to give someone the shirt off his back. He's a good Christian man."

The SEC alleges that Midkiff and the other defendants — who live in Texas, Atlanta and Australia — offered and sold interests in foreign bank deposit programs that they promised would yield high returns.

Investigators claim the money never went to the purported deposit programs, while the promised monthly returns haven't been paid since September. The civil complaint says the program has been going on since at least July 2004.

Religion seemed a recurring theme: According to court documents, some investors became aware of some defendants through churches or religious organizations. The alleged ringleader, Atlanta resident Travis Correll, portrayed himself as a "good Christian" and philanthropist who donates to charitable causes. "Midkiff may be parroting Correll's sales pitch to prospective investors," SEC staff attorney Ronda Blair said in a court document.

Several former neighbors in a Forest Lake neighborhood where Midkiff used to live said they were approached — or know people who were approached — to invest. Apparently, people who had invested with Midkiff would tell others about the plan and rave about the returns they were seeing. Some invested, trusting Midkiff because he was a minister, King said.

Records show Midkiff and his wife own two homes in Forest Lake, including a lakefront house purchased last June for almost $1.3 million. And they were the registered owners of four vehicles — including a Mercedes-Benz, according to Minnesota Department of Public Safety records retrieved in August.

Court documents allege Midkiff funneled about $2.6 million to Correll from Midkiff's own company, Joshua Tree, a limited liability company in Carson City, Nevada. "I'd say that's a conservative amount," King said.

Goers refused to talk about the case or give details about the church.
But neighbors said the congregation is small, with maybe 100 members. Midkiff was the "Apostle" leading Feast of Tabernacles Ministries, ac-cording to the group's now-defunct Web site. His wife, Donna, is its "Prophetess."

Shiloh Church was to be the beginning of the ministries' plan to plant a network of churches around the globe, the site said. Their mission: "to teach and preach the gospel of our Lord Jesus Christ as we seek and save the lost through bridges of outreach that span the gap between the Body of Christ and the world." The husband-and-wife team offered five-day "prophecy training" seminars, which cost $45 for individuals and $65 for families.

Investigators are examining whether Midkiff owned the church building, King said, as the court-appointed receiver tries to find and secure the defendants' assets and report them to the federal judge handling the case. Depositions will then begin to seek facts from all the purported players, he said. If the court finds any wrongdoing, the frozen assets could be used to pay back some of the money owed investors. "It's like a big jigsaw puzzle," King said. "It's going to take a while to piece together."

The original article appears here, via the Twin Cities Pioneer Press.

-- MDT

Labels: ponzi scheme

Seriously...a black eye for the industry, no doubt. This legislation will continue to be embarassing to the investigative community. There are legal ways to obtain cell phone records that don't involve funny voices or bribes of company employees. There are also less invasive ways to get at the same information through public records, interviews and plain old hard work. In the end any client is better off not having questionable actions undetaken in their name and on their dollar. As an investigator ones does not ever want to put your corporate or legal client in the position to explain how they got ahold of questionable data. Litigation like this is the inevitable result:

Devious Tactic Snags Phone Data

By Kim Zetter
Wired.com

Online information brokers pried thousands of private cell-phone records from Verizon Wireless by posing as speech-impaired customers and company employees, court documents show.

The charges, which appear in a civil suit filed by Verizon in Florida late last year, shed a rare light on the shadowy world of online phone-record vendors -- a cottage industry among private investigators that has operated below the radar for years but is now in the spotlight amid a flurry of private suits and calls for laws restricting phone-record sales.

According to the suit, online cell-phone record vendors placed hundreds of thousands of calls to Verizon customer service requesting customer account information while posing as Verizon employees from the company's "special needs group," a nonexistent department. The caller would claim to be making the request on behalf of a voice-impaired customer who was unable to request the records himself. If the service representative asked to speak with the customer directly, the caller would impersonate a voice-impaired customer, using a mechanical device to distort his voice and make it impossible for the service representative to understand him -- a variant of a widely used social-engineering technique known as the "mumble attack."

Rob Douglas, a private investigator turned privacy activist, says federal authorities have known about the sale of private phone records since at least 1998 but have done little to address the problem. In the absence of federal action, phone companies have been resorting to civil lawsuits to prevent sellers from obtaining and selling records.

"I would put (the sale of) cell-phone records No. 3 as the most invasive after banking and medical records, and the most fraught for harm," says Douglas, who operates PrivacyToday.com. "This stuff has life-or-death consequences and severe investigative consequences for law enforcement."

The case is the second Verizon has brought against entities selling its customers' cell-phone records. The first, filed last July, ended in settlements barring two sellers from calling Verizon again. Cingular Wireless won a similar result Friday in a suit filed in December against two companies operating at least four websites.

These sites have come under renewed scrutiny since November when a Canadian reporter showed Canada's privacy commissioner how easy it was to purchase records for her home and work phones. The records, obtained from a U.S.-based website, listed the phone numbers for all incoming and outgoing calls made over several months. Such records generally specify the date, time and duration of calls, making them invaluable to private investigators and attorneys, whom Douglas says drive the market for phone records.

"No one likes to talk about who uses these records the most," Douglas says, "but it's lawyers for the most part who created this market" and often claim ignorance of the ways in which the information they purchase is obtained. Journalists also purchase the records, as do criminals.

A criminal case brought the issue to the FTC's attention in 1999 when law enforcement authorities discovered that an info broker sold a Los Angeles detective's pager number to an Israeli mafia member who was trying to determine the identity of the detective's confidential informant.
Verizon spokesman Tom Pica said the phone company went after brokers this year with state anti-fraud laws in the absence of any other way to stop the sellers.
"There does not appear to be a clear criminal statute at work here," he said. "We're trying to protect our customers' privacy, and we're using whatever legal means are at our disposal. We're encouraging legislation that would make this a criminal offense."

Verizon, of course, isn't just concerned about harm to customers. Federal law requires phone companies to protect the confidentiality of their customer network information. Currently, to obtain a Verizon phone record a caller need provide only the last four digits of the account-holder's Social Security number -- data that one could purchase from an online info-broker.

Selling phone records is not illegal. But obtaining them under false pretenses -- called "pretexting" -- violates section 5 of the Federal Trade Commission Act, which deals with unfair and deceptive trade practices. Pretexting doesn't just occur with phone records; private investigators and others use it to obtain everything from financial records to medical files. The FTC prosecuted three companies in 2001 for using pretexting to obtain records from financial institutions, but since then has seemingly done little to address the pretexting of cell-phone records.

The FTC's Betsy Broder says the commission has prosecuted a large number of cases around privacy but wouldn't discuss whether it was currently investigating the sale of phone records.
"There are a large number of players out there, and we want to make sure we're reaching them regardless of how they're plying their trade," says Broder, assistant director in the FTC's division of privacy and identity protection. "We could spend all of our time prosecuting pretexting, but we want to make sure that our work has the right kind of impact. We hope that states are taking action when appropriate and that businesses are taking better approaches to protecting information so that it doesn't get out."

States have unfair-trade-practice laws under which pretexting could be prosecuted. But what's really needed, says Chris Hoofnagle, director of the Electronic Privacy Information Center's West Coast office, is an anti-pretexting statute that says, explicitly, "thou shalt not pretext," and addresses all types of private consumer records.

Recent publicity about the problem prompted the governor of Illinois to call for legislation addressing pretexting and the sale of records in his state, and lawmakers and attorneys general in other states are also discussing solutions. But Hoofnagle says a federal law would be better than piecemeal state laws since websites operate across state lines.

The federal Gramm-Leach-Bliley Act currently prohibits pretexting, but only of financial records. Last July, Sen. Charles Schumer (D-New York) promised to introduce legislation to address pretexting of all private records, but so far hasn't done so. Schumer's office didn't return calls for comment.

Legislation will only help deter brokers who care if they break the law. It won't halt identity thieves and others who defiantly sell information underground in private chat rooms and members-only websites. The Electronic Privacy Information Center last July petitioned the FCC to pressure phone companies to improve their procedures to protect customer records. EPIC also called on phone companies to establish an automated auditing process whereby customers are notified on their bill whenever someone requests their record.

Verizon and other phone carriers have so far rejected moves to scrutinize their practices.

The original article appears here.

-- MDT

Smoke is coming off of The Daily Caveat's keyboard and a busy work week is keeping me from this bully pulpit. Hopefully we'll be back in action later today. Stay tuned.

-- MDT

Some of the most satisfying investigative work I've done in my career concerned reparations issues and accusations. Whether the issue was art theft, stolen assets or war crimes exposure there is something uniquely fascinating about reaching back over the decades and utilizing a different set of investigative tools and methods to reveal as much as possible about the truth of what went on. For good or ill, we are all living in the world our parents (and their parents) made for us and never is that so clear than when working on matters such as this:

Heirs of Armenians file class-action lawsuit against German banks

ALEX VEIGA
Jaznuary 13, 1005
Associated Press

Heirs of Armenians killed 91 years ago in the Turkish Ottoman Empire sued Deutsche Bank A.G. and Dresdner Bank A.G. on Friday, claiming the German banks owe them millions of dollars and other assets deposited by their ancestors.

The class-action lawsuit was filed in Superior Court on behalf of seven Armenians living in Southern California. It is the latest bid by Armenians in the United States to recover assets they believe belonged to some 1.5 million Armenians who perished in a genocide beginning in 1915.

Litigation brought against New York Life Insurance Co. by Armenian descendants led to a $20 million settlement; French life insurer AXA has agreed to pay $17 million to settle a separate class-action claim. Both lawsuits made similar allegations.

The lawsuit against the German banks seeks to recoup unspecified millions of dollars for assets such as gold, cash and jewelry that the Armenian descendants claim were deposited by thousands of their ancestors at the banks' Turkish branches or otherwise looted by the Ottoman Turkish government and later transferred to European banks.

The banks also are accused of concealing and preventing the funds from being recovered by the account holders' heirs.

"After the genocide, you had two groups of people: You had families completely wiped out and you had families who simply escaped," said Los Angeles attorney Brian Kabateck, who also is an Armenian descendant. "Neither were able to get their assets out of the bank ... and 91 years later, we want to make it right."

A call to a Deutsche Bank spokeswoman in New York was not immediately returned Friday. Calls to European offices of Dresdner Bank rang unanswered.

Kabateck said the suit was brought in California because of the state's progressive rules governing class-action cases and statute of limitations. Southern California also is home to an estimated half-million Armenians.

Attorney Mark Geragos, who also is of Armenian descent, said there are no statute of limitations on claims to recover funds or property deposited in a bank. The attorneys compared their claim to attempts by Jewish victims of the Holocaust seeking reparations from Swiss banks.

Turkey rejects the claim there was an Armenian genocide, instead saying they were killed in civil unrest during the collapse of the empire. France, Russia and many other countries have declared the killings genocide. Turkish allies including the United States and neighboring Azerbaijan have not.

Turkey, which has no diplomatic ties with Armenia, is facing increasing international pressure to fully acknowledge the event as it seeks membership in the European Union.

The original article appears here.

-- MDT