FinancialCounsel

SNSFE Investigating Astounding Failure Of Highly Paid Institutional Consulting Firms To Detect 12-Year $500 Million Fraud By Paul Greenwood, Stephen Walsh, WG Trading And Westridge Capital Management

The SEC has charged two New York residents for misappropriating more than $500 million in an investment scheme.  According to the SEC's complaint, filed in federal court in Manhattan, the SEC alleges that Paul Greenwood and Stephen Walsh have been orchestrating a fraudulent investment scheme through their affiliated entities since at least 1996. 

Those entities are WG Trading Investors, an unregistered investment vehicle; WG Trading Company, which is a registered broker-dealer; and, Westridge Capital Management, which is a registered investment adviser located in California.

Amazingly, this scheme has been orchestrated since at least 1996.  Now before we start talking about how the SEC has failed in its duties, tune in for what happened with respect to consultants who've been touting the firm accused of fraud for many years, and as a result, have caused pension and endowment clients to become invested in the fund and lose money.

The SEC alleges that the criminal defendants solicited a number of institutional investors, including educational institutions and public pension and retirement plans, by promising to invest their money in an "enhanced equity index" strategy that involves purchasing and selling equity index futures and engaging in equity index arbitrage trading. 

However, according to the SEC, Greenwood and Walsh have been misappropriating hundreds of millions of dollars of investor funds for their personal use instead of investing the money in the enhanced equity index strategy.  In fact, Greenwood and Walsh misappropriated as much as $554 million of the $667 million that Westridge clients invested.  Greenwood and Walsh have provided some of the investors' money to their spouse and ex-spouse, respectively, who are also named as defendants in the SEC's complaint.

The Wall Street Journal reports today that the consulting firms include Wilshire Associates, Cambridge Associates and Mercer.  Though the Westridge firm wasn't huge - it said in public filings that it managed $1.8 billion - and its roster of pension and endowment clients was impressive.

A spokesman for Mercer has declined to comment, citing policy related to individual clients.  However, The Wall Street Journal reports that Mercer, "performed a thorough review of Westridge and WG Trading and rated them highly," leading the Sacramento County Employees' Retirement Systems, for example, to make a multi-million-dollar investment. 

Wilshire, of Santa Monica, California, did thorough due diligence on Westridge, reviewing audited financial statements, regulatory filings and bank account records before recommending Westridge to its clients, said a spokesman for the firm.  Wilshire considered the experience of Westridge investment managers and the success of its trading strategies, she said.

A spokesman for Cambridge said just one of its current clients still has an investment in Westridge and that was based on Cambridge's recommendation.  However, in the past, Cambridge did recommend Westridge to other clients, according to investment committee meetings obtained by The Wall Street Journal.

Experience?  Walsh Greenwood, a firm that this pair ran previously, faced regulatory issues.  In 1985, the American Stock Exchange fined the firm $10,000 for alleged past options-trading irregularities.  The following year, the SEC accused the company of violating federal securities law. The SEC allegations included that the firm used more than $6 million in customers' securities as collateral for some of its own bank loans, and failing to maintain accurate records of the securities' location. 

It simply is astounding that these highly paid consulting firms would have failed since 1996 to detect the fraud! They share equal blame with the SEC, and SNSFE attorneys are investigating their conduct. 

Sources:  The Wall Street Journal, SEC Press Release

SNSFE Investigating Claims Of Equity Overconcentration And Inappropriate Losses At Fisher Investments

Attorneys at SNSFE have begun to investigate Fisher Investments, the largest independent investment advisory firm in the country.

Claims have arisen that Fisher Investments overallocated investors' money in to stocks as well as underallocated investors' money in fixed-income and cash.  This has led to losses more extraordinary than appropriate and more extraordinary than what would have happened had the investors been in a balanced portfolio.

SNSFE Fielding Inquiries As Wells Fargo Will Pay No Retention Bonus For Wachovia Reps

On Friday, February 20th, it was announced that Wachovia Securities brokers will not be getting a retention bonus from Wells Fargo.  In a conference call that day, Wachovia Securities chief executive Danny Ludeman said the deal was off, and he explained that it wouldn't look right given that client account values are down 20%, 30% and 40%.  In addition, he said that Wachovia Securities will be renamed Wells Fargo Advisors beginning in May.

The problem is that retention bonuses historically have been used to compensate brokers for the disruption caused by a merger.  One rep interviewed said some guys will be leaving.  And we have no doubt - attorneys at SNSFE negotiate the deals and have been in contact with Wachovia individuals planning to move.  Other firms will be more willing to pay money associated with the transition.

Source:  InvestmentNews

SNSFE Continues To Probe Investment Entities That Referred Investors to Thomas Petters, In Custody Charged With Crimes

Attorneys at SNSFE continue to investigate and field investor questions regarding Tom Petters.  Petters' business entities are in receivership and bankruptcy as the result of a government investigation into allegations of a massive investment fraud that Petters denies existed.  He has been charged with conspiracy, fraud and money laundering, and is in federal custody pending trial.

Specifically, SNSFE is investigating those that referred business to Petters, including Acorn Capital Group, Richie Capital Management and Colossus Capital Fund, among numerous others.  Already, third parties have been sued.  For example, McGladrey & Pullen has been sued in relation to its work for Petters.

SNSFE Fielding Inquiries Regarding Eight Shocking Mutual Fund Losses In The Past 12 Months

MorningstarAdvisor has published "Eight Shocking Losses of the Past 12 Months" by Russel Kinnel, and it's worth revisiting. 

December finished on a note of optimism, but January was a return to the markets grinding lower amid grim economic news.  A tidal wave of layoffs has everyone talking about depression, and we've gotten more losses in the mutual fund world.

Today, I'll look at some of the funds with the most surprising losses over the 12 months ended in January.  I'll skip over high-risk, high-cost funds where losses really aren't a surprise.  ProFunds UltraLatin America, Frontier MicroCap, and Third Millennium Russia lost 86%, 76%, and 76%, respectively, but that's not a shock.  After all, we had these funds on our Analyst Pans list.  Instead, I'll focus on those that few would have guessed could lose as much as they did and some of the lessons learned.

1. Helios Select Intermediate Bond, negative 85%

2. Helios Select Short/Term Bond, negative 78%

3. Helios Select High Income, negative 79%

These are the funds formerly known as Regions.  They got burned by subprime and debt from banks and other financial issuers.  Before last year, cases of a bond fund losing more than half its value were extremely rare.  But their returns show just how brutal a combination of a bad bet, vanishing liquidity, and heavy redemptions can be.  In July 2008, management of the funds switched to Hyperion Brookfield from Regions, but the funds are still suffering.  Select Intermediate lost 15% just in January.  Ninety-nine times out of 100, panicking is the worst thing that you can do.  But in this case, panicking and redeeming at any price was the right thing to do because redemptions and sickly portfolios put these funds in a nasty downward spiral.

4. Touchstone Institutional Value, negative 78%

5. Touchstone Large Cap Value, negative 75%

In the 2000-2002 bear market, value held up so well that some investors misinterpreted the results and thought that value was a safe place to be in bear markets and recessions.  Yes, it was that time, but historically value can be as treacherous as growth.  Combine that with a focused portfolio and you have the potential for a rough ride.  Yes, this fund's losses due to extreme exposure to housing and subprime aren't likely to be repeated at most value or concentrated funds, but it is sobering.  Three years ago this would have seemed like a normal concentrated fund.  So, the lesson is that value funds have big downsides, too, and with high-risk strategies such as focused funds, it's important to only go with the very best managers.

6. Oppenheimer Champion Income, negative 78%

This high-yield fund's losses really  make me wince because so many people owned the fund.  The gist of it is that the managers tried to make a killing in mortgages by scooping them up at depressed prices in January 2008.  Not only was that a really bad bet, but it was made much worse by the use of tremendous leverage.  Eric points out that it wasn't easy for shareholders to see that their fund had just become much more risky.  The first lesson is that leverage kills.  The second is that chasing yield by buying a fund with a big payout is a bad idea.  Instead, look for a diversified fund run by the best managers that you can find in a low-cost vehicle where management doesn't need to take big risks to stay competitive.

7. Alpine International Real Estate, negative 70%

Many of the analyses we wrote of this fund included the word "aggressive," and they also discussed the fund's emerging-markets bet.  But I still feel sympathy for those who owned the fund and never thought that it could lose as much as it did.  Indeed, it rarely had any losses in past years.  The combination of an aggresive approach and a big bet on emerging markets really does tell the story though.  Most global real estate funds focus on developed-markets real estate, but this fund had nearly half its assets in emerging markets.  Put another way, this fund combined the two trendiest, most overheated investment stories in the world, and investors should have been wary in 2007.  The lesson is that if you consider buying because of huge recent returns, you are playing with fire.  At the least, take a look to see what risks lie beneath.

8. Fidelity Select Home Finance, negative 66%

Ok, maybe these kinds of losses in a fund with a very narrow sector focus aren't shocking.  With hindsight, it isn't surprising at all, because many subprime lenders inhabited this space.  But this was once a multi-billion dollar fund that for a long time had the best record of any in the 1990s.  The reason was simple.  Small banks and thrifts were crushed in 1989 and 1990, so this fund rode their dramatic rebound to great heights, and many investors took that as a sign that there was something remarkable about the fund's strategy or the manager who was behind it.  The manager was good but not that good.  The lesson is that these narrow funds aren't much more than a number on a roulette wheel.

Source: MorningstarAdvisor

SNSFE Investigating Fraudulent $8 Billion CD Investment Program Perpetrated By Robert Allen Stanford and His Affiliated Companies

The Securities and Exchange Commission has charged Robert Allen Stanford and three of his companies for orchestrating a fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program.

Stanford's companies include Antiguan-based Stanford International Bank, Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management.  The SEC also charged Stanford International Bank chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group, in the enforcement action.

"As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.  "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

The SEC's complaint, filed in federal court in Dallas, alleges that acting through a network of Stanford Group Company financial advisers, Stanford International Bank sold approximately $8 billion of so-called "certificates of deposit" to investors by promising improbable and unsubstantiated high interest rates.  These rates were supposedly earned through Stanford International Bank's unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.

The SEC's complaint also alleges an additional scheme relating to $1.2 billion in sales by Stanford Group Company advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy by using materially false historical performance data.  According to the complaint, the false data helped Stanford Group Company grow the Stanford Allocation Strategy program from less than $10 million in 2004 to more than $1 billion, generating fees of approximately $25 million in 2007 and 2008.  The fraudulent performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivized to reallocate their clients' assets to the CD program.

Source:  SEC Press Release Feb. 17, 2009

Lower-Producing Wirehouse Refugees May Find Home In Transitioning To Regional And Independent Firms

Recently, Investment News ran an article entitled, "Low-producers to exit wirehouses - Pay cuts likely to force thousands out the door."  According to the author, Dan Jamieson:

There will be a large migration of low producers from the wirehouses this year, industry observers predict.  While brokers at all production levels have been leaving to escape the turmoil at the big firms, cuts in pay for less productive brokers are expected to force out many representatives who produce less than $300,000.  Even $400,000 and $500,000 producers will be looking for new homes as they feel less welcome at the big firms, observers said. 

Production levels vary by firm, but an average 10% to 20% of reps at the major firms could be under $300,000, said a compensation consultant.  As a result, several thousand low-producers are feeling the effects of lower payouts this year.  And it's predicted, there "will be a tsunami" of movement out of the major firms this year and in the coming years.

Regional and independent firms are the likely new homes for many low-producing refugees.  But some regional firms are getting pickier.

Source:  Investment News

 

 

Tips To Weather Tough Financial Times

FINRA (the Financial Industry Regulatory Authority) has published, "Weathering Tough Financial Times: 9 Tips for 2009."  It is a helpful roadmap for saving, investing, and taking some precautionary measures to weather the tough times.  Let's examine the regulator's tips.

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Financial Advisers In Employment Transition: A Primer On The Protocol

In 2004, three financial services firms devised a way to ease the transition of financial advisers from one firm to another.  The three firms - Citigroup Global Markets (Smith Barney), Merrill Lynch, and UBS Financial Services - signed an agreement called the Protocol for Broker Recruiting (the "Protocol").  Since then, at least 75 financial services firms have signed the Protocol.  The result has been a profound increase in the number of transitions and an equally profound decrease in the number of T.R.O. litigation filings!

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