Tuesday, March 15, 2011

SEC Press Release: Hedge Fund Fraud

SEC Charges Hedge Fund Managers with Fraud
The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that it had 
charged a hedge fund investment advisory firm and its two founders with orchestrating a multi-faceted scheme to defraud clients and failing to comply with fiduciary obligations.
The founders, Verzili and Rodriguez of Juno Mother Earth Asset Management LLC allegedly misappropriated client assets by using these assets for the fund’s operating costs including payroll, rent, travel, meals and entertainment. They also allegedly inflated assets under management and filed false information to the SEC. Here are the SEC Complaint and the Litigation Release No. 21886.

Wednesday, March 9, 2011

SLCG Research: Modeling Autocallable Structured Products

SLCG released today ‘Modeling Autocallable Structured Products’.

A callable structured product is a note that is callable by the issuer. The note is linked to an underlying asset, or ‘reference asset.’ If the reference asset reaches the call price during the term of the note, the note is called and note holder receives a pre-specified return. If the reference asset never reaches the call price during the term of the note, the note is never called and the note holder simple receives the face value of the note at maturity. This face value reflects the value of the reference asset – if the reference asset depreciates, so does the face value of the note. A callable structured product is economically equivalent to i) owning a stock and selling a call on the stock and ii) owning a reverse convertible. Callable structured product is branded as autocallable structured product, the primary difference being that the autocallable structured product has typically longer maturity.

In this paper, we present a Partial Differential Equation (PDE) framework used to value callable structured products. We then use this framework to value some callable structured products and compare them with a benchmark, an identical structure product without the call feature.

We conclude that the callable structured product is worth less than their benchmark and that the call feature on a plain-vanilla structured product generates incremental costs to investors.

Thursday, March 3, 2011

SEC Press Release: Life Settlement Fund Fraud

SEC Charges Former UBS Financial Adviser With Defrauding Life Settlement Fund Investors

The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that 
charged a former financial adviser at UBS Financial Services LLC with misappropriating $3.3 million in a scheme that included bilking investors in a private investment fund he established.
Kobayashi of UBS, Walnut Creek office, California, established Life Settlement Partners LLC, a pooled investment fund that invested in life insurance policies. Kobabyashi stole the investors’ money that was intended for the fund for personal uses. He then liquidated other clients’ securities to funnel the money back to the investors and the fund. Here are the SEC Complaint and the Litigation Release No. 21872.

Wednesday, March 2, 2011

SEC Press Release: Securities Fraud Scheme

SEC Charges Former Officer of Colonial Bank for Role in Securities Fraud Scheme

The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that it had
charged a former vice president at Colonial Bank who was the head of its mortgage warehouse lending division with conducting a $1.5 billion securities fraud scheme.
Under Kissick, the former vice president at Colonial Bank and head of the mortgage warehouse lending division, the bank bought “fictitious and impaired mortgage loans and securities” from Taylor, Bean & Whitaker Mortgage Corp. (TWM). Kissick, along with Farkas and Brown of TWM, created the fictitious loans and mortgage-backed securities to conceal TWM’s overdrawing of its line of credit with the bank when TWM faced liquidity problems. Kissick also falsely reported to the investing public that the mortgage loans and securities held by the bank were “high-quality, liquid assets.” The SEC Complaint can be found here.