Tuesday, May 24, 2011

Nuveen Fined $3 Million Over Marketing of Preferred Shares - By Christopher Condon at Bloomberg.com

Nuveen Investments Inc., the largest manager of closed-end funds, was fined $3 million by the Financial Industry Regulatory Authority for misleading customers on the safety of auction-rate securities before the market for those investments collapsed in February 2008.

The Chicago-based company “failed to adequately disclose liquidity risks” for auction-rate preferred shares issued by its closed-end funds in marketing material used by brokers to sell the securities, the self-regulatory body known as Finra said in a statement today.

“Nuveen was aware of the facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction-rate securities yet failed to revise their marketing brochures,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

Closed-end funds used to sell preferred shares on the auction-rate market to increase the amount of money they could invest by as much as 50 percent, boosting returns for common shareholders. Preferred-share investors treated the securities as a highly liquid alternative to money-market funds until the market collapsed during the early stages of the credit crisis. The events left preferred shareholders unable to sell.

Redeemed $14.2 Billion

Regulators forced eight broker-dealers, including Citigroup Inc. (C) and UBS AG (UBS), to buy back about $45 billion of auction-rate securities. Some auction-rate bonds and preferred shares remain frozen.

Nuveen’s funds had $15.4 billion in preferred shares outstanding when the market crumbled. The company has since redeemed $14.2 billion, freeing those investors by selling alternate forms of debt or preferred shares to replace leverage provided by the frozen shares.

“We are pleased to put this matter behind us so that we can continue to focus our efforts on refinancing the Nuveen closed-end funds’ remaining auction-rate preferred shares,” Kathleen Cardoza, a Nuveen spokeswoman, said in a separate statement.

The company, along with New York’s BlackRock Inc. (BLK) and Calamos Asset Management Inc. (CLMS) in Naperville, Illinois, was sued in 2010 by investors for allegedly harming common shareholders through those refinancing moves.

Nuveen, owned by Chicago-based private-equity firm Madison Dearborn Partners LLC, “neither admits to nor denies Finra’s allegations,” the company said its statement.

Monday, February 21, 2011

The Tipster Calls: Do You Take the Money and Run?

Your friend who works at ABC Company tells you that the company is about to be acquired for more than it's worth by XYZ Company, and that the stock price of ABC is likely to double. You trust your friend's tip because he's an executive at ABC and he or she is doubling down on the buyout.

Question: As a retail investor, what would you do based on your friend's tip? Do you call your broker and buy up as much ABC as you can afford? Or do you betray your friend, contact the Securities and Exchange Commission and volunteer to be a wire-wearing whistle blower hoping to bag a big, fat reward?

Like many Wall Street operators -- especially if you're a hedge fund manager -- you have been given inside information, which translates into money and power. But now you're faced with an ethical dilemma. You read the newspapers and financial blogs and you are well aware of two things: insider trading is illegal, and yet it is an often-used business model with a long and inglorious history.

What exactly is insider trading? Basically, it is the practice of buying or selling stock or other assets by corporate officers, other insiders or ordinary investors on the basis of information that is not public and is supposed to remain confidential. Insiders can buy or sell stock based on information they report to the Securities and Exchange Commission, thus making the public aware of the good, bad or perhaps the ugly data on a company's balance sheet.

Reporting this information to the SEC presumably gives the average investor a break, a level playing field upon which to make informed decisions. Fair enough. But if you are a major player or a hedge fund magnet, giving ordinary investors a break isn't your concern. To pull down those hefty hedge fund fees you need to offer an edge, and that edge often amounts to inside knowledge played close to the chest and out of public view.

So if the "whales" of Wall Street constantly are in search of inside tips, despite the legal and ethical pitfalls, why shouldn't you cash in on your friend's possibly profitable tip?

The February 13 edition of the Washington Post business section features a story by David S. Hilzenrath and Jea Lynn Yang headlined "The federal dragnet on Wall Street's inside game" which explores the insider trading business model and the government's all-out push to put a stop to it.

Insider trading has grown in recent years, the reporters conclude. But is this a growing epidemic enhanced by digital technology and unique ways of tracing cons? Or has technology merely exposed a practice that has been at work for generations?

My experience brings me down on the side of the latter. Wall Street is not the Land of the Fair Deal. Indeed, insider trading is a means of taking advantage of ordinary investors and making a killing in the dark. For example, those insiders privy to special, non-public knowledge can -- and often do -- sell investors stock that is teetering on the edge of the cliff. The insiders sell you on the upside while betting the farm on the inevitable collapse. For example, hedge fund billionaire John Paulson recently worked with Goldman Sachs to produce a derivative made up of bad mortgage loans. Paulson bet against this so-called Abacus package, knowing in advance that it was built to crash, while Goldman sold it to clients as a bullish move. Paulson made out big-time, as did Goldman, while unsuspecting investors took the fall.

The Abacus scam made headlines in the wake of populist outrage directed at the 2008 market meltdown. It was a sexy example of greed and insiders feeding at the public trough. The Street shrugged it off. It was by all accounts business as usual.

It now appears that the Obama Administration is determined to crack down on such insider deals. The Department of Justice (DOJ) is focusing on a wide circle of expert network firms which feed inside information to financial management companies, matching various company insiders to stock traders. Wall Street argues there's nothing wrong with this practice, that it is part of due diligence. The trouble with this argument is that the public isn't connected to the process and is often enough victimized by it.

DOJ is now trolling for insiders willing to wear wires to help build cases against billionaire hedge funds and those who feed them insider information.

If there is honor among thieves, DOJ is proving the opposite is true. If stock and bond traders can't cash in using legal practices, they can always snitch and pick up whistle blower awards granted by regulators that are often equal to, and at times exceed, the bonuses given to top financial executives.

So where do you come down on my initial question? Do you call DOJ or do you take your insider tip and run straight to your broker?

Critics of insider trading say the "integrity" of the market depends on your answer. Yet these same critics are challenged to find -- let alone protect -- the integrity they are so eager to preserve.

Tuesday, February 1, 2011

Portfolio Mysteries Do You Know What's in Your 401K?

Portfolio Mysteries:
Do You Know What’s In Your 401(K)?
By Phil Trupp author of Ruthless

“Brokers! It’s a crime what these guys do to you,” exclaimed a frustrated chief financial officer at a recent meeting here in Washington.

It may seem strange that a CFO constantly had to go the mat with his brokers to determine how much junk they were dumping into the portfolio of his non-profit organization.

“No matter how much you pay them,” the CFO complained, “you’re still stuck having to go in behind them and clean up the mess.”

The CFO, like many others in his position, are preoccupied with administrative duties and have little time to play stock analyst. Yet they are forced by circumstance to clean up behind their brokers who lack of diligence is a constant headache. And if it’s messy for CFOs, the problem is much more dicey the ordinary “retail” (non-professional) investor who is saving for retirement.

Since becoming a day-trader in 1979, I have dealt with countless stock and bond brokers. I can count on one hand those who actually cared about anything other their own bottom line when it came to making recommendations for their retail clients. Most investors desperately want to trust their brokers, to believe they are acting in their clients’ best interests. Unfortunately, this is a sad and ultimately heartbreaking act of magical thinking.

So I again ask, respectfully: Do you know what’s in your 401(K)? Most likely you don’t.

If you’re like millions of other savers who don’t have time to do your own analysis, you probably assume those managing your account is a guru or rare collection of financial wizards know what exactly what they’re doing, and that they are doing it in your best interests.

Think again. Mostly likely those 401(K) managers have only one goal in mind: the fees that pad their bottom line. After all, no one does you a favor by selling you risk, and that’s exactly what most brokers are all about.

Don’t get me wrong. There are good brokers in the mix. I have seen them in action. But they are rare creatures, indeed. Most brokers are there for one thing only: making commissions.

This is a situation now under examination by the Securities and Exchange Commission. Under Section 913(g) Title 10 of the www.Dodd-Frank Reform and Consumer Protection Act of 2010, the SEC is required to conduct a study to evaluate the effectiveness of standards for brokers who service retail investors. The study is decades overdue.

At this writing, the Commission is essentially leaning toward making brokers into virtual analysts of the financial products they sell. You expect your plumber to know what he or she is doing, and stand behind their work; why not the same standard for those in the financial services industry.

The SEC is writing a code for a universal “fiduciary standard,” demanding that the client’s interest—and not the broker’s bottom line—must be the guiding ethical responsibility of broker-dealers who invest your 401(K) and other equity retail portfolios made up of stocks, bonds and derivatives. I’m all for it!

At present, most broker-dealers are held to a much lower standard: it’s called a “suitability requirement.” This “suitability” phrase of art is so wishy-washy that it is next to impossible to find any two regulators who can agree on what it really means. I define it this way: Your broker calls with a “hot” new financial product; if you buy it, it’s considered “suitable”; it fits your idea of what’s basically just okay. In my opinion, it sets the bar disastrously low.

But if the brokers and regulators can’t agree on a solid definition of suitability, what’s an ordinary investor to do? It forces most of them to rely on their brokers and defer to their judgment, and that is not exactly a prudent move.

Broker-dealers regulated by the industry-backed Financial Industry Regulatory Authority www.finra.org. now stick to the suitability standard. Those regulated by the SEC are required to operate under the fiduciary standard, according to the Dodd-Frank regulations. The Dodd-Frank regulations want to make bring all brokers under the fiduciary umbrella.

The SEC is leaning toward Dodd-Frank position, which favors the investor, because it calls for all brokers to take on a hard and fast ethical and professional responsibility. The logic put forth by Dodd-Frank assumes that a uniform fiduciary standard will accommodate most existing business models and fee structures.

The proposed universal fiduciary requirement has generated much controversy, especially among those who subscribe to Wall Street’s take-the-money-and-run ethic—a position which has driven millions of retail investors out of the market. The 2008 financial meltdown revealed cowboy economics at its worst, and caused the most spectacular collapse of the economy since the Great Depression.

In my own financial dealings, I have learned the hard way to rely on myself, to be on my own analyst. With microscopic intensity I find it prudent to thoroughly vet even the recommendations made by brokers I trust. This is an unavoidable chore, but it is one I whole heartedly recommend to any investor, at any level of sophistication. If we learned nothing else after 2008, it is that when Wall Street gurus say “trust me,” it holds no more weight than a pick up line in a singles bar.

An industry-wide fiduciary standard, with brokers being held accountable legally and ethically to their clients, is a good first step in rebuilding shattered investor confidence. It isn’t the perfect solution. In a world of greed and cunning, nothing is perfect and never will be.

Bottom line: you, the investor, must do your own homework and stay on top of your broker—and that includes those unseen “experts” managing your 401(K) retirement accounts. Never forget it’s your money the broker takes to the casino. You had better be looking over his or her shoulder when the cards are dealt.

Full disclosure: On one occasion I failed to fact-check a broker; as a result, I found myself embroiled in the $330 billion auction-rate securities scandal www.ars.com. I wrote a book about that mistake. Thankfully there was a happy ending. I did get my money back. But it did reinforce the bitter truth of how one instant of innocent trust on Wall Street can turn your life upside-down.

Please check out on my book on the subject at my website: www.beruthless.net. It’s so much about money as it is about the human toll of broken and misplaced trust, and what can happen if you let your guard down.

Monday, December 27, 2010

Financial Regulators Scramble Ahead of WikiLeaks

Not since former Treasury Secretary Henry Paulson pulled off a $700 billion raid of taxpayer dollars to shore up Wall Street have Washington regulators scurried so quickly to ferret out evidence of collusion between the feds and the nation's major banks and other financial services firms.
The last minute push by regulators comes ahead of a threatened WikiLeaks data dump.
According to WikiLeaks founder Julian Assange, the soon-to-be-released materials will focus on a major American bank -- possibly Bank of America. Mr. Assange claims to have enough incriminating evidence to force the resignation of top bank executives.
But sources in Washington say they expect there will be very little surprising in the WikiLeaks disclosures, which were apparently taken from a computer hard drive.
"As far as any bank is concerned, we're probably in for another 'Casablanca' moment," said one source. He was referring to the famous film starring Humphrey Bogart in which a police inspector is "shocked" to discover gambling going on in Bogie's supper club.
"The [WikiLeaks] dump may turn up a few new cons, or some old ones. We know how the banks operate. The material may be embarrassing to a bank only because the media will make a big deal of it. But don't count on seeing lots of red faces in a shameless environment."
The federal regulators, however, do anticipate no small degree of harsh exposure. Especially sensitive to the possibility of embarrassment is the Securities and Exchange Commission (SEC) and its rumored links to Ponzi swindler Bernard Madoff. Both Mary Schapiro, current head of the commission, and former SEC Chairman Christopher Cox are in line for possible charges of conflict of interest or willful negligence.
The industry group formerly headed by Ms. Schapiro, the Financial Industry Regulatory Authority, also may be in the cross hairs for more than a few potential shockers, including the apparent insider sale of nearly $600 million in auction rate securities before the market crashed in February 2008.
Andrew Ross Sorkin, writing in The New York Times Dealbook, speculated that the big surprise would be that such "chicanery" was documented "and that regulators haven't found it yet -- or worse, they found it and did nothing about it."
"Imagine the public relations hassle," suggested one source. "How do explain away what's been there, right in front of you, in black and white, and yet you did nothing about it?"
Robert A. Mintz, a former public prosecutor, says much of the dumped information, when and if it is made public, will not be well understood by the public. And then there's the problem of the material as actual court-worthy evidence. WikiLeaks documents may not hold up as legally sound.
Attorney General Eric Holder, now at the helm of the somewhat embarrassing Project Broken Trust, has promised to investigate State Department documents released earlier by WikiLeaks. But General Holder has lost face running Project Broken Trust, which thus far has netted about 300 small time con artists and other swindlers while neglecting the $136 billion auction-rate securities fraud.
General Holder has remained relatively silent on WikiLeaks presumed financial disclosures.
"We don't know the details of the documents," a Capitol Hill source said. "It's possible much of the information will date back to the Bush years and the 2008 meltdown. If that's the case, republicans will have quite a mess to deal with."
For now, however, Mr. Assange holds the high ground, despite threats from General Holder to seek prosecution for the State Department leaks. None of this has shaken the determination of Mr. Assange, who promises to go public in early 2011 with the financial disclosures.

Sunday, December 12, 2010


We're pleased that Justice Department investigators have rounded up more than 300 minor crooks and con artists who bilked honest citizens out of $8.3 billion. Justice was served. But with respect, sir, this is cold comfort to the victims who will not get their money back.

We are heartened that Robert Khuzami, director the Securities and Exchange Commission's enforcement division, assures us that the minor fraudsters are now in the crosshairs along with the major crooks on Wall Street. Earlier this week, Mr. Khuzami observed that fraud by high-profile players grab the biggest headlines, "but other scams are equally devastating to hardworking families and retirees."

Size matters. But is the size of a headline supposed to make us feel safer? I don't think so.

General Holder, perhaps we'd feel excited if you and the SEC ramped up your efforts to stop the epidemic of financial crime before more people lose their savings. We're happy you're showing a pulse (it's overdue) and slamming the smaller weasels. We don't mean to be pushy, but how about stopping the swindlers of all sizes before they've stripped their victims to the bone?

As you know, President Obama set up the federal Financial Fraud Enforcement Task Force, which ran Operation Broken Trust. The idea was to prevent another financial meltdown. We emphasis the word "prevent." The unfortunate fact is that Operation Broken Trust prevented only an expansion of certain ongoing financial shenanigans. It amounts to a glass half full. We need much more.

Operation Broken Trust is a step in the right direction, yet it has produced a disappointing outcome for a crime-fighting crew of 20 federal agencies, 94 U.S. attorney's offices, plus a wide variety of state and local law enforcement assets. Surely, Mr. Holder, we can do better.

We call your attention to Michelle Singletary's "The Color of Money" column in the December 9 edition of the Washington Post, in which she commented on Operation Broken Trust:

"It all sounds proactive," Ms. Singletary wrote. "In many cases, however, the fraud didn't just start recently. Some of the scams began well before the latest financial scandals."

The idea is to get in front of the swindlers before they get into the pockets of their victims. Is that too much to hope for?

We are pleased by your comment, General Holder, that "cheating investors out of their earnings and savings is no longer a safe business plan." There is a degree of nobility in your sentiment. Yet we wonder if it will shake up the major fraudsters on Wall Street. Will your words send the executives of Goldman Sachs, Pimco, Oppenheimer, Charles Schwab, Merrill Lynch, E*Trade and others in search of salvation? We don't think so.

Here's food for thought: A recent study by the Financial Industry Regulatory Authority (FINRA), an outfit owned and paid for by broker-dealers, revealed that most Americans are financially "irresponsible" and naïve about money. Out of a possible top score of five on a financial literacy scale, not one state in the Union scored above 3.5. That's pretty revealing. According to FINRA, the savviest citizens were found in New York and New Jersey. The lowest scores came from residents of Kentucky and Montana.

There are proposals in the House of Representatives designed to improve this sad situation. Both the Financial Education in the Classroom Act (H.R. 5165) and the Preventing Affinity Scams on Seniors Act (H.R. 6305) have promise. (An "affinity scam" is one in which a charismatic person uses his or her relationship to defraud trusting seniors.) Neither of these proposals appears to be going anywhere. Perhaps the DOJ might step in and give them a boost.

Another suggestion, General Holder: How about publicizing your website StopFraud.gov? Sorry to report that we can't find anyone who has ever heard of it. It's a fine website with lots of anti-fraud tips for consumers, and links to people who can actually step up and do something to stop an ongoing scam.

DOJ and SEC need to be more involved with the public. That means holding financial literacy workshops, advertising anti-fraud websites and other resources, reaching out to people before the weasels get to them.

Wednesday, September 22, 2010

ARS May Be Re-rated by Fitch

Fitch Rating Services is taking a look at ARS. Some may be downgraded to bbb. Others not.