Wednesday, June 29, 2011

SEC Press Release: Auction Rate Securities

SEC Charges Raymond James for Auction Rate Securities Sales Practices 

The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that it had
charged Raymond James & Associates Inc. and Raymond James Financial Services Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers.

According to Registered Rep., Raymond James has agreed to repurchase $300 million of ARS from customers who bought ARS prior to the collapse of the ARS market in February 2008 within the next 30 days. The firm had been accused of misleading investors into thinking that ARS were safe and liquid alternative investments to money-market funds.

Auction rate securities (ARS) are long-term floating rate securities whose coupon payments are determined at auctions that are typically held every 7 to 35 days and are issued widely by a diverse range of institutions such as closed-end mutual funds, municipalities and student loan trusts. They are therefore long-term securities with potentially short-term rates. Broker dealers marketed ARS as liquid, short-term cash equivalents. However, ARS auctions failed en masse in February 2008 and proved to be illiquid and unsellable in the short-term.

SLCG was recently hired by North Carolina Department of the Secretary of State to work out liquidity solutions to those ARS that are still illiquid and unredeemed. SLCG has also published an in-depth study on ARS at our dedicated website.

Wednesday, June 22, 2011

SEC Press Release: Morgan Keegan fined in connection with CDOs

Morgan Keegan to Pay $200 Million to Settle Fraud Charges Related to Subprime Mortgage-Backed Securities 

The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that
Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. Two Morgan Keegan employees also agreed to pay penalties for their alleged misconduct, including one who is now barred from the securities industry.
Here is SEC’s Order.

The Financial Industry Regulatory Authority (FINRA) also issued a press release today on the same matter. The settlement is detailed in the FINRA AWC No. 2007011164502. Morgan Keegan allegedly misrepresented facts relating to the Intermediate Fund, did not provide an adequate basis concerning facts about the fund, did not provide a fair and balanced view of the fund, and did not disclose how the market conditions of 2007 might have impacted the fund’s performance and value.

According to Registered Rep., Regions Financial Corporation, the parent of Morgan Keegan, has retained Goldman, Sachs & Co. to explore ways in which Morgan Keegan can be sold and to manage the company’s capital in the wake of the settlement agreement.

A mortgage backed security (MBS) is a debt security whose cash flows come from the principal and interest payments of borrowers on the mortgage loans. The pooling of mortgages into a debt security is called securitization and is performed by a trust. Mortgages are originated by public and private agencies, then they are securitized into MBS by a trust, and then the MBS is issued to public investors by the trust.

There are different types of MBS. A pass-through MBS gives the investor a pro-rata share of the principal and interest payments on the mortgage loans. A collateralized mortgage obligation (CMO) divides the security into classes, or tranches, representing different levels of claims on the share of the principal. Each tranche will have its own share of principal, coupon rate and maturity. SLCG has written a paper describing the market and history of CMOs in the wake of the collapse of Brookstreet Securities and two Bear Stearns hedge funds.

Investors can use our dedicated website in which we offer explanations and pricing about a wide range of structured products.

Tuesday, June 21, 2011

SEC Press Release: JP Morgan Fined in Connect with CDOs


J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market

The U.S. Securities and Exchange Commission (SEC) issued a press release today announcing that
J.P. Morgan Securities LLC will pay $153.6 million to settle SEC charges that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back.
The SEC alleges that J.P. Morgan did not inform investors that the CDOs sold to the investors were selected in part by a hedge fund that acted as the counterparty to the investors. If the CDOs defaulted, the investors stood to lose while the hedge fund stood to gain financially. Here is SEC’s Complaint v. J.P. Morgan Securities LLC.

Monday, June 13, 2011

SEC Press Release: Efficacy of Registration Statements

Stop Order Proceedings Instituted Against China Intelligent Lighting and Electronics, Inc., and China Century Dragon Media, Inc.

The Securities and Exchange Commission (SEC) issued a press release today announcing that
it has instituted proceedings to determine whether stop orders should be issued suspending the effectiveness of registration statements filed by two companies – China Intelligent Lighting and Electronics Inc. (CIL) and China Century Dragon Media Inc. (CDM).
The press release provides the SEC Order in the Matter of CIL and the SEC Order in the Matter of CDM.

The proceedings were instituted after the independent auditor of the companies allegedly resigned and withdrew its audit opinions. The SEC’s Department of Enforcement alleges that the auditor left CIL as a result of accounting fraud including forged bank statements and accounting records, while the auditor left CDM due to “discrepancies noted on customer confirmations and the auditor’s inability to directly verify the Company’s bank records.” The Department of Enforcement therefore alleges that CDM’s registration statements are materially misleading and deficient.

Stop orders on a company prevent the company and its shareholders from selling shares if the registration statements are materially misleading and deficient. They are intended to protect the investing public.

Thursday, June 9, 2011

SEC Press Release: Reverse Mergers

SEC Issues Bulletin on Risks of Investing in Reverse Merger Companies

The Securities and Exchange Commission (SEC) announced in a press release today announcing that it had “issued an Investor Bulletin about investing in companies that enter U.S. markets through so-called ‘reverse mergers’.” The purpose of the Investor Bulletin, according to SEC’s Office of Investor Education and Advocacy’s, is to educate investors on the potential risks of investing in the stock of reverse merger companies.

Reverse mergers, or reverse takeover, is when a private company goes public through the acquisition of a public company, allowing the private company to obviate the often arduous and time-consuming process of going public the conventional way. Specifically it requires the private company to take control of and then merge with a ‘shell company’, which is a company with only an organizational structure but with little to no assets or operations.
SEC Charges Investment Adviser With Defrauding Investors in Two Upstate New York Real Estate Funds 

The Securities and Exchange Commission (SEC) issued a press release today announcing that it had 
charged a Monticello, N.Y.-based investment adviser with fraudulently offering and selling securities in two upstate New York real estate funds he managed.
The press release also provides the SEC Complaint and the Litigation Release No. 21968

According to the SEC, Lloyd v. Barriger allegedly made misleading claims regarding the Gaffken & Barriger Fund (G&B Fund) by claiming that it was a safe and liquid investment and by guaranteeing a minimum annual return of 8 per cent. Moreover, Barriger allegedly raised money from investors in Campus Capital Corp. “to prop up the ailing G&B Fund without disclosing that was how their money was actually being used.” Barringer allegedly used the funds from Campus Capital Corp. to redeem investors of the G&B Fund at the guaranteed return of 8 per cent since the G&B Fund was collapsing. 

The SEC seeks to “[enjoin] Barriger from future violations of the foregoing provisions and ordering him to pay civil penalties and disgorgement of ill-gotten gains with prejudgement interest.”

Wednesday, June 8, 2011

SEC Press Release: Microcap Stock Fraud

SEC Suspends Trading in 17 Companies in Proactive Effort to Combat Microcap Stock Fraud

The Securities and Exchange Commission (SEC) issued a press release today announcing that it had
suspended trading in 17 microcap stocks because of questions about the adequacy and accuracy of publicly available information about the companies, which trade in the over-the-counter (OTC) market.
The Order of Suspension of trading can be found here.

SEC’s regional offices, Office of Market Intelligences, and Microcap Fraud Working Group collaborated together when making the suspensions. The purpose of the suspensions is to protect the investing public from losses resulting from fraudulent activities of insiders and promoters.

Microcap stocks are stocks of public companies with low capitalization. They often trade in low volumes and the price volatility is usually very high. Because of its low price, low trade volume and high volatility, fraud in the trading and promotion of microcap stocks can happen in many different forms. The SEC describes a suspect example of Kore Nutrition Inc. A research report set a target price of $10.50 for Kore which caused the company’s stock to spike in August 31, 2010. This research report was company-paid. Furthermore, the company then announced “new distribution agreements to market its energy drinks” when no such agreement was stated in its quarterly report. Other forms of fraud involve the continued trading and external promotion of a company stock after the company has already announced its dissolution.

Tuesday, June 7, 2011

SLCG Study on Competitiveness of Canadian Market for Securities

Investment Industry Association of Canada Releases SLCG Study on Competitiveness of Canadian Market for Securities Data

SLCG was recently hired by the Investment Industry Association of Canada (IIAC) to investigate and write a report about the competitiveness in the market for securities data in Canada.

Canadian securities data costs have more than doubled since the mid-1990s. The IIAC alleged that these costs increases were not due to any improvement in technology or quality. SLCG investigated this market and analyzed the cost structure for data, comparing the Canadian market to other similar markets around the world.

For more information, see press coverage of the release of SLCG’s expert report in the Financial Post article and the Globe and Mail article.

Thursday, June 2, 2011

Joint SEC and FINRA Press Release: Structured Products

The SEC and FINRA Issue Joint Press Release on Structured Products
The Security and Exchange Commission (SEC) issued a press release today jointly with the Financial Industry Regulatory Authority (FINRA) dealing with structured products with “principal protection” – so called “principal protected notes.” This press release announced that an investor alert had been issued to educate and warn investors about the substantial risks associated with investing in structured products.

FINRA’s press release can be found here and its investor alert can be found here.

Structured products with “principal protection” have grown exponentially in the past few years and are substantially more complicated investments than many investors are led to believe. Many of these products offer a “principal protection” in the sense that they guarantee to return of at least the principal to the investor at the end of the holding period. Structured products often have high fees, high transaction costs, and are priced well above their fair market price, see for example Henderson and Pearson (2011). Moreover, structured products depend on the solvency of the issuer, as was very clear when Lehman Brothers collapsed. SLCG has written several papers on the topic including a paper that describes structured products after the collapse of Lehman Brothers.

SLCG warns investors of the hidden costs and risks to structured products and encourages investors to carefully understand such products – such as their payoff structures, associated fees, liquidity and credit risks – before committing to purchase them.

SLCG has written several papers on structured products including a paper that describes structured products after the collapse of Lehman Brothers and a paper on principal protected absolute return notes. Investors can use our dedicated website in which we offer explanations and pricing about a wide range of structured products.

In the News: Auction Rate Securities Purchased by US Airways

Forbes’ blogger Bill Singer narrates the story of US Airways. Registered with Lehman Brothers at the time, three individuals were ordered to pay US Airways $15 million in damages for making unsuitable recommendations and unauthorized purchases of auction rate securities (ARS) and for the failure to provide proper supervision over the transactions of ARS made on behalf of US Airways.

ARS are long-term floating rate securities whose coupon payments are determined at auctions that are typically held every 7 to 35 days. ARS are long-term securities with short-term floating rates. Broker dealers marketed ARS as liquid, short-term cash equivalents. However, when the ARS auctions failed en masse in February 2008, ARS proved to be illiquid and unsellable in the short-term. There are ARS holders who are still unable to redeem their securities even today.

SLCG has a written an in-depth paper on ARS, what they are, how their auctions worked and how they failed.

FINRA Press Release: Collateralized Mortgage Obligations

FINRA Fines Northern Trust Securities, Inc. $600,000 for Inadequate Supervision of Sales of Collateralized Mortgage Obligations and Certain High-Volume Securities Trades

The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that
it has fined Northern Trust Securities $600,000 for deficiencies in supervising sales of collateralized mortgage obligations (CMOs) and failure to have adequate systems in place to monitor certain high-volume securities trades.
The settlement is detailed in the FINRA AWC No. 2009018771601. Northern Trust failed to properly monitor concentration levels of CMOs, suitability of trades, trading volume and mark-up levels in customer accounts while it systematically excluded from review, through an ‘exception reporting system’, 43.5% of its accounts.

CMOs are a type of mortgage backed security that is divided into classes, or tranches, representing different levels of claims in the share of the principal which is especially important when there are principal losses. The sensitivity of CMOs to interest rate changes can be witnessed in the fallout of CMOs in 1994 when there was a substantial increase in interest rates. SLCG has written a paper describing the market and history of CMOs in the wake of the collapse of Brookstreet Securities and two Bear Stearns hedge funds which precise invested in CMOs. Investors can use our dedicated website in which we offer explanations and pricing about a wide range of products.