Tag: SEC

Cross posted from The Stars Hollow Gazette

Naked capitalism‘s Yves Smith appeared in RT news Boom/Bust to discuss the risky business and abuses of private equity in the real estate rental market. Her segment starts at 3:45.

In her article, Yves also noted this piece from an article on private equity from Friday’s Bloomberg News:

PE Slump

Private-equity transactions overall have fallen 22 percent to $53 billion through April, data compiled by Bloomberg show, led by the drop in buyouts of public companies. The value of those leveraged buyouts declined to $3.2 billion compared with an average of $34 billion in the 10 years through 2013.

The peak for buyouts came before the financial crisis, when U.S. funds struck $659 billion of deals from 2005 through 2007, including the purchases of HCA Inc., Hilton Worldwide Inc. and Biomet Inc., the data show. Buying inexpensive public companies was generally easier for the funds than carve-outs are, said Raymond Lin, a mergers and acquisitions attorney at Latham & Watkins LLP.

“The easy days for private-equity buyers are over when they profited from buying undervalued companies,” he said. “Carve-out deals require a lot of up-front work that would incur additional costs and could affect returns.”

The Standard & Poor’s 500 Index, which reached a record this week, trades at 17.4 times reported profit, the highest level since 2010, according to data compiled by Bloomberg.

PE’s Limits

While high valuations haven’t scared off dealmaking between companies, buyout firms are motivated by different factors, said Gordon Caplan, chairman of the private-equity practice group at law firm Willkie Farr & Gallagher LLP.

“If business growth slows, companies have to buy things,” he said. “Private-equity buyers can’t create synergies like company mergers can in most cases.”

Corporations are more willing to spin off divisions as management continues to clean up underperforming businesses and pay down debt following the financial crisis, said Tom Franco, a partner at Clayton Dubilier.

SEC Official Describes Widespread Lawbreaking and Material Weakness in Controls in Private Equity Industry

Posted on May 8, 2014 by Yves Smith

At a private equity conference this week, Drew Bowden, a senior SEC official, told private equity fund managers and their investors in considerable detail about how the agency had found widespread stealing and other serious infractions in its audits of private equity firms.

In the years that I’ve been reading speeches from regulators, I’ve never seen anything remotely like Bowden’s talk. I’ve embedded it at the end of this post and strongly encourage you to read it in full.

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers. [..]

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways. Naked Capitalism readers may recognize that this arrangement is similar to the position mortgage servicers are in: they control the relationship with the funds source, and they are also responsible for records-keeping and remitting money to investors. And as we’ve chronicled at considerable length, servicers have shown remarkable creativity in lining their wallets and investors have been unable to discipline them. [..]

Needless to say, this overly cozy arrangement has proven to be a ripe breeding ground for illegal conduct.

Cross posted from The Stars Hollow Gazette

What was should have been an open and shut case against a mid-level executive with Citibank over the banks’s sale of risky collateralized debt obligations (CDO) somehow was lost by Security and Exchange Commission lawyers.

The Securities and Exchange Commission had accused Brian Stoker, a former midlevel Citigroup executive, with negligence related to his role in creating exotic mortgage securities known as collateralized debt obligations, or C.D.O.’s. In a lawsuit filed last October, the government said that Mr. Stoker, who prepared sales materials for C.D.O.’s, knew or should have known that he was misleading investors by not disclosing that Citigroup helped select the underlying mortgage securities in the C.D.O. and then placed a large bet against it.

The jury rejected the S.E.C.’s case, concluding that Mr. Stoker was not liable under the securities laws. In addition to handing up its verdict, the jury also issued an unusual statement.

“This verdict should not deter the S.E.C. from investigating the financial industry, to review current regulations and modify existing regulations as necessary,” said the jury’s statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the two-week trial in Federal District Court in Manhattan.

Citibank has already entered an agreement to pay $285 million to settle a civil suit filed by the SEC about the CDO’s. As part of the agreement, Citibank would not have to admit to any wrong doing. Judge Rakoff has rejected that deal and told the parties to prepare for a trial. That ruling is being appealed.

Mr. Stoker’s lawyer depicted him as a “scapregoat” who was merely doing what he was told. Stoker knew full well that the CDO’s were very risky but failed to warn investors who lost over a billion dollars, but he was following instruction from the higher ups. Seriously? The Nuremberg defense is now acceptable?

As Yves Smith observes the SEC showed abject incompetence in prosecuting Stoker:

The SEC’s performance in the case at issue, SEC v. Stoker, was such a total fail that the odds are high that any motivated member of the top half of the NC readership would have done a better job of arguing this case pro se than the SEC did. Even though this case was argued before a jury (ooh, scary! They might go into My Eyes Glaze Over mode on CDO details), the basic issues were simple. The CDO squared that Citigroup director Brian Stoker marketed to investors was presented as having its assets selected by an independent asset manager. This is crucial. Just as investors in mutual funds understand they are hiring a fund management firm, and they compete on track records, so to were managed CDOs sold on the notion that the managers were serving the interests of the investors. And this is particularly important for CDOs, since the fact that the final asset list is made available shortly before closing makes it pretty much impossible for investors to evaluate a CDO on their own even if they had the skills and motivation. [..]

So what did the SEC’s strategy appear to be? This seems to have been a parallel to the approach in the Goldman suit against Goldman’s Fabrice Tourre: to target an non-executive and get him to roll the higher ups. But Tourre and Stoker were both enough made men to be willing to fight. Stoker had a $2.2 million guarantee for 2007. Guys like that do not want to lose their access to the industry meal ticket.

So what was Stoker’s defense? That he was being scapegoated, and Citi should really be on trial. Huh? In prosecutions, whether other parties are being charged is irrelevant. The question at hand is: did the party on trial engage in the conduct in question or not? Saying, “I was only the car driver in the robbery, I didn’t enter the convenience store” does not get you off of being an accessory to a crime. It’s pretty bloomin’ obvious that Stoker misrepresented the deal to investors. He had held securities industry licenses; he knew what the standards were.

It’s fairly obvious from day one of this entire case against Citibank that the SEC was trying very hard to let them off the hook. It is past time that the SEC was staffed with people who are more willing to regulate the banks and up hold the law. I have some heavy doubts that will ever happen under this administration or any other, now or in the future.

Cross Posted from The Stars Hollow Gazette

Last week Congress passed the Jump Start Our Business Startups Act (pdf), the JOBS Act, which is set to be signed into law with much fanfare by President Obama despite the fact that it will in all probability create an explosion of financial fraud. The act rolls back many of the regulations that were passed under Sarbanes-Oxley in 2002. Professor of economics and law at the University of Missouri-Kansas City, Bill Black wrote an outstanding article for the New Economic Perspectives that was cross posted at naked capitalism, explaining with clarity how the jumpstart Obama’s Bucket Shops Act is just another in a long series of fraud-promoting legislation. He closed with this analysis:

We have trashed a regulatory system that was the envy of the world. It helped bring us prosperity, far greater economic stability, fewer and less severe recessions, and reduced income inequality. It made freer enterprise possible because the regulatory cops on the beat helped limit the Gresham’s dynamic in which bad ethics drives good ethics out of the marketplace. When frauds prosper honest businesses are among the victims. The three de’s have brought us recurrent, intensifying financial crises, the end of any material gains by the middle class, losses for the working class, the expansion of poverty and extreme inequality, and the domination of our political system by crony capitalism. Elite fraud and corruption are now common in America.

The entire article is a must read.

During a panel discussion on Up with Chris Hayes, Prof. Black and Alexis Goldstein of Occupy the SEC “educated” Democratic Representative Carolyn Maloney, who represents the the Upper East Side constituency of top Wall Street earners, on just how bad this bill is. As Yves Smith observes, “it is pretty hard to imagine that Carolyn Maloney would do anything that would seriously inconvenience her constituency”:

You need to watch the full segment to get the effect, but Maloney starts out by saying that the JOBS Act probably won’t create many jobs, but she was nevertheless getting complaints about how costly it was for “small” businesses to hire auditors (earth to base, if they are public, they would not qualify as “small” in most people’s book). Goldsmith devastates Maloney with her command of the bill, pointing out that it covers companies of up to $1 billion in revenues, that the tech companies its backers keep invoking have VC firms ready and willing to invest, and the new format well be used by PE firms flipping companies they had taken private back to public investors. By the end, Maloney is telling Goldsmith to send her suggestions for improved legislation and she’ll put it forward (I’ll believe her sincerity when I see action).

Yves is right, Alexis shreds Carolyn. Watch this segment, it is a thing of beauty.

Prof. Black also explains “stump & dump” scams and “cloud financing” that can cause devastating losses and won’t create any jobs.

Cross posted from The Stars Hollow Gazette

Recently Federal District Court Judge Jed Rackoff rejected the $285 million settlement that Citibank had negotiated with the SEC over $1 billion in mortgage securities fraud that would also have exonerated the bank of guilt. The SEC acceptance of “neither admit nor deny” language that has been considered “boilerplate” in these settlements has now been, not only rejected by the courts, but dropped by the SEC in securities fraud cases:

The Securities and Exchange Commission, in a fundamental policy shift, said Friday that it would no longer allow defendants to say they neither admit nor deny civil fraud or insider trading charges when, at the same time, they admit to or have been convicted of criminal violations.

The change is the first time that the S.E.C. has stepped back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing. The new policy will also apply to cases where a company or an individual enters an agreement with criminal authorities to defer prosecution or to not be prosecuted as part of a settlement.

Robert Khuzami, the director of enforcement at the S.E.C., said the agency would continue to use the “neither admit nor deny” settlement process when the agency alone reached a deal with a company in a case of civil securities law violations. Those types of cases make up a large majority of S.E.C. settlements.

As David Dayen at FDL so rightly notes, “This is a first step to stopping this travesty of allowing companies to get off the hook and pay their way out of fraud violations without even admitting they did anything wrong. And this never happens without the work of Jed Rakoff.”

Cross posted from The Stars Hollow Gazette

Bloomberg News is reporting that a NY Federal Judge has rejected the $285 million settlement that Citibank had negotiated with the SEC over $1 billion in mortgage securities fraud that would also have exonerated the bank of guilt. Citibank Citibank had led investors to believe that the mortgage investments were safer than they actually were, leading to a financial loss of around $700 million.

U.S. District Judge Jed Rakoff rejected the settlement in an opinion released today. The judge has criticized the agreement for permitting New York-based Citigroup to settle without admitting or denying liability in the matter. [..]

“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” Rakoff wrote in the opinion.

Rakoff consolidated the case with another SEC suit involving former Citigroup employee Brian Stoker and scheduled the combined case for trial on July 16, 2012. The parties may try to reach a revised settlement, which must be approved by Rakoff to take effect.

From Think Progress:

The “judge wrote that there is an overriding public interest in knowing the truth about the financial markets. He set a July 16 trial date for the case.”

The SEC should have fined them twice the losses, not that it would have deterred Citibank from doing it again.  

Cross posted from The Stars Hollow Gazette

Former New York governor and attorney general general, now CNN talk show host Eliot Spitzer appeared on Anderson Cooper’s “360” with “Rolling Stone” editor and blogger, Matt Taibbi discussing the two year investigation of the financial institutions that “plunged the U.S. economy into a painful recession”. The Senate subcommittee’s 650 page report that was released on April 13th is a scathing indictment of cover-ups,  lies, the conflict of interest of regulators and the cozy relationship with ratings agencies. During the discussion, Spitzer challenged Attorney General Eric Holder to either prosecute Goldman Sachs or resign:

SPITZER: Senator, I’m going to take a leap. I’m going to say it out loud. Very directly.

   Goldman Sachs, you lied to the public. You lied to your clients. You’ve got a problem. You come on the show. Sue me. I don’t care. You lied to the public, you should be prosecuted.

   I’m going to say it right now. And I hope they are.

It isn’t surprising that the “powers that be” went after Spitzer because this is the man who should be the US Attorney General.

Cross posted from The Stars Hollow Gazette

Oh, wouldn’t this be lovely? Now lets see if Timmy and Bill can convince Eric that there is nothing to see here.

Goldman Sachs Misled Congress After Duping Clients, Levin Says

Goldman Sachs Group Inc. (GS) misled clients and Congress about the firm’s bets on securities tied to the housing market, the chairman of the U.S. Senate panel that investigated the causes of the financial crisis said.

Senator Carl Levin, releasing the findings of a two-year inquiry yesterday, said he wants the Justice Department and the Securities and Exchange Commission to examine whether Goldman Sachs violated the law by misleading clients who bought the complex securities known as collateralized debt obligations without knowing the firm would benefit if they fell in value.

The Michigan Democrat also said federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

Goldman criticised in US Senate report

By Tom Braithwaite in Washington and Francesco Guerrera and Justin Baer in New York,

Financial Times

April 14 2011 00:15 | Last updated: April 14 2011 00:15

US Senate investigators probing the financial crisis will refer evidence about Wall Street institutions including Goldman Sachs and Deutsche Bank to the justice department for possible criminal investigations, officials said on Wednesday.

Carl Levin, Democratic chairman of the powerful Senate permanent subcommittee on investigations, said a two-year probe found that banks mis-sold mortgage-backed securities and misled investors and lawmakers.

“We will be referring this matter to the justice department and to the SEC (Securities and Exchange Commission),” he said. “In my judgment, Goldman clearly misled their clients and they misled Congress.”

Last year, Goldman paid $550m to settle SEC allegations that it defrauded investors in Abacus, a complex security linked to subprime mortgages.

Naming Culprits in the Financial Crisis

By Gretchen Morgenson and Louise Story

New York Times

A voluminous report on the financial crisis by the United States Senate – citing internal documents and private communications of bank executives, regulators, credit ratings agencies and investors – describes business practices that were rife with conflicts during the mortgage mania and reckless activities that were ignored inside the banks and among their federal regulators.  

The 650-page report, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” was released Wednesday by the Senate Permanent Subcommittee on Investigations…

…

…The result of two years’ work, the report focuses on an array of institutions with central roles in the mortgage crisis: Washington Mutual, an aggressive mortgage lender that collapsed in 2008; the Office of Thrift Supervision, a regulator; the credit ratings agencies Standard & Poor’s and Moody’s Investors Service; and the investment banks Goldman Sachs and Deutsche Bank.

“The report pulls back the curtain on shoddy, risky, deceptive practices on the part of a lot of major financial institutions,” Mr. Levin said in an interview. “The overwhelming evidence is that those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.”

Remember how we were all told that by installing new regulation oversight on the banks would fix what is wrong with the economy?

Remember how the same guys who broke the financial economy and stole trillions stood before the world and declared that they now know how to fix it?

Well … one thing is for sure … The Fix Is In!

In case you missed it the stock market lost about a 1000 points a few days ago — all in a matter of minutes.

It was in “free fall” — market traders were bailing left and right.

With the Greek Euro Debt crisis, serving as a back-drop — Stock Prices in rapid decline, was the last thing Institutional Fund managers wanted to see.  Kind of makes you want to sell ‘before it’s too late’ too.

Many of them did.  

But then almost magically, the stock market fall slowed, paused, and then begun a similarly rapid return.  The bungee chord dynamic, reached its limit — and thankful — rebounded.

But what if next time, the Market gets spooked like that, and goes into a cascade of frenzied selling … what if the next time …

It just keeps falling ?    say goodbye to those 401k and Pension funds     [if you haven’t already, that is].