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.