FinancialCounsel

Brookstreet Securities Corp And Stanley Brooks Charged With Defrauding Customers In Sales Of Risky Mortgage-Backed Securities (CMOs)

The Securities and Exchange Commission has charged Brookstreet Securities, its President and CEO Stanley Brooks with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals.  The fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse. Previously, the SEC had charged 10 Brookstreet registered representatives with making misrepresentations to investors related to the sale of risky CMOs (Collateralized Mortgage Obligations).

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of CMOs to more than 1,000 seniors, retirees, and others for whom they were unsuitable.  The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were "dangerous" investments that could become worthless overnight. One trader even called Brookstreet's program a "scam." Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses. 

The SEC's complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 thereunder.  The Commission seeks permanent injunctive relief against both defendants, and disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Brooks.

Source:  SEC Press Release 2009-260

Oppenheimer Pays $20 Million To Settle 529 Plan Lawsuit Over Oppenheimer Core Bond Fund

OppenheimerFunds has reached a $20 million settlement on a lawsuit over heavy losses in Oregon's 529 college savings plan. The New York-based fund company announced the agreement in principle to settle the lawsuit brought by Oregon.  The settlement will divide the $20 million among about 45,000 account holders based on how heavily individual accounts were invested in the OppenheimerFunds Core Bond Fund, according to The Wall Street Journal. The suit alleges that Oregon 529 plan college savers, primarily those invested in the Core Bond Fund, lost at least $36.2 million as a direct result of the company's negligence and breaches of contract and fiduciary duty.  Oppenheimer Core Bond Fund was part of five age-based portfolios in the Oregon College Savings Plan.  The character of the Core Bond Fund changed in 2007 and 2008, the lawsuit alleged, and yet neither the state nor investors were alerted that the fund had become significantly more aggressive and risky.

Source: fa-mag.com

SNSFE Investigates John Leonard, High Net Worth Strategies And Workman Securities Corp.

Lawyers at SNSFE have commenced an investigation into the activities of John M. Leonard who has done business as High Net Worth Securities located in Illinois and Florida.  Mr. Leonard formerly was associated with Workman Securities Corp.  Specifically, SNSFE is investigating the propriety of investment recommendations for investors of Provident Royalties, Gulfstar, Mountain Energy, Naples Lubbock, and Advantage Office Suites, as well as any other limited partnership interest sold during the last five-year period.

SNSFE Investigates 2010 Glide Path Exchange-Traded Funds (ETFs) As Well As Inverse And Leveraged ETFs For Failure To Disclose Risks

SNSFE is investigating exchange-traded funds, known as ETFs.  Both the regulators and class action lawyers are paying close attention to that category of exchange-traded funds that are known as leveraged or inverse.  These funds made heavy bets either on the direction of an index or through the use of leverage and many have suffered dramatic losses.  To date, approximately nine class actions have been filed and SNSFE continues to investigate.  The defendants so far have included ProShares as well as Direxion.

On another front, exchange-traded funds that are so-called 2010 "glide-paths" also have experienced losses.  Indeed, in a recent Morningstar report, Morningstar pointed out that there is a great disparity in the glide-paths -- which is the ratio of stocks to bonds that is held by a target-date series as it changes over time -- between funds each labeled 2010.  The glide-paths for the 2010 funds have diverged sharply.  At the upper end, two fund families have more than 70% of their 2010 funds' assets placed in equities. Conversely, three families have fewer than 30% of their 2010 investments in stocks. This divergence in asset allocation resulted in a wide difference in performance during the dramatic 2008 market, when losses in the 2010 category ranged from a modest 9% to a breathtaking 41%.  Query whether investors in those funds, and unfortunately whether employees who held these funds in their 401(k) plans, adequately were disclosed the risk of holding such funds.

SNSFE continues to investigate this fund category and other later series.

Source:  Morningstar

Non-Traded REITs May Hurt Independent Broker-Dealers That Were The Biggest Sellers To Investors

The real estate boom and bust is hanging over many independent broker-dealers and their financial advisers as the market for non-traded REITs soured this year.  According to an InvestmentNews article, investing largely in commercial real estate, many of the largest non-traded real estate investment trusts have had a tough year, slashing dividends to investors and shutting redemption programs.  Some independent broker-dealers and their registered representatives have significant exposure to the non-traded REITs, which are illiquid, high-commission products.

An analysis of leading independent broker-dealers shows that non-traded REITs accounted for as much as 12% of a handful of firms' revenue last year.  Some independent broker-dealers didn't sell the product, according to a listing in an industry publication, while non-traded REITs accounted for 2% to 6% of other firms' gross revenue last year.

REITs are designed to pay investors a dividend, which in the past has averaged 6% to 7%.  Stock sell-offs in the broader market don't lower the value of shares during the life of the investment.  That changed this year according to InvestmentNews, as some of the biggest and most prominent non-traded REITs cut dividends.  Among the largest that have made the cuts are Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust and Piedmont Office Realty Trust.  Some of the REITs are even more illiquid than usual, worth perhaps 30% to 40% less than their price, and dividends have gone down the drain, many observers said.

Commonwealth Financial Network is one of the biggest sellers of non-traded REITs among independent broker-dealers.  Revenue from non-traded REITs accounted for about 2% of its gross revenue of $519 million last year. 

REITS that have too much debt also could struggle, industry observers said. Holding on until better days will be more difficult for highly leveraged REITS, especially those with debt maturing over the next two to three years.

Regulators have taken an interest in the product.  In March, the Financial Industry Regulatory Authority reviewed broker-dealers' sales and promotion of non-traded REITs, and asked firms for a variety of information, including descriptions of sales contests and cash and non-cash incentives.  To date, FINRA hasn't taken any enforcement action based on that information, according to a spokesman.

SNSFE continues to investigate non-traded REITs. 

Source:  InvestmentNews

Risks Of Reg D Deals Such As Provident Royalties And Medical Capital Worry Securities Regulators And Others As Deals Implode

Risky Reg D deals worry state regulators according to a recent InvestmentNews article.

The collapse of two high-risk private placement deals over the summer has shed light on the process by which broker-dealers bring these deals to market.  Many are questioning the due diligence performed on private placements - known as "Reg D" offerings because of how they are filed with the SEC - as well as the fees earned by broker-dealers for such work.

Broker-dealers often leave the actual analysis of the offerings to outside, third-party due-diligence firms. Those shops typically consist of attorneys who are paid by the issuer to write a report that evaluates the viability of the issuer's deal.

In addition to a possible conflict arising from receiving fees from the companies they analyze, due-diligence firms often produce superficial reports that provide only the most cursory review of the issuers and their finances, say industry executives and lawyers.

The concept behind broker-dealers being paid a due diligence fee, usually 1%, when they sell the deal, is for "time spent and to read the report and to ask questions," according to an industry source.  The reality is often different, he added, echoing other brokerage executives.  "A lot of firms don't even bother reading the due-diligence reports."

Despite such concerns, both the market and investors' appetites for such deals have ballooned.  According to the Alabama Securities Commission, 26,485 Reg D offerings were filed last year with the SEC which requires scant information about the private placements.  That compares with more than 11,000 such offerings in 1996.  According to a report this year from the SEC, the division of corporate finance identified total estimated offerings last year of $609 billion. 

What's more, private deals are expensive, lack liquidity and carry risk - while being lightly regulated and receiving little oversight.  More deals are showing signs of stress, brokerage insiders and securities regulators say, particularly real estate deals and some involving oil and gas that could be harmed by the weak overall economy.

The types of Reg D offerings and private placements are all over the map, and they have had a history of problems.  Brokerage executives still recall with dread the disastrous Prudential Securities private placements.  In the late 1980s, more than 100,000 investors put $1.4 billion into Prudential Securities limited partnerships that wound up being worth almost nothing. 

And Reg D offerings aren't the small potatoes that the SEC perhaps imagined back in 1982.  For example, Stanford International Bank filed its certificates of deposit offerings with the SEC under Reg D.  In 2007, the bank filed a $2 billion offering with the agency.  In February, the SEC said that the bank's parent company, Stanford Financial Group, which claimed to have $8.5 billion in assets, was running a "massive Ponzi scheme" based, in large part, on publicizing and promising phony returns on its CDs.  In July, the SEC charged two firms with fraud relating to large private-placement deals with an estimated value of $2.7 billion.

On July 7, the SEC charged Provident Royalties LLC and a number of its related entities with operating a fraud and a Ponzi scheme in the sale of $485 million of preferred stock and limited-partnership offerings in oil and gas deals.  The deals were sold from 2006 to 2009.  About a week later, the SEC charged Medical Capital Holdings with fraud in the sale of $77 million of private securities in the form of notes.  Since then, a court appointed receiver has said that $543 million worth, or about 87%, of all the accounts receivable Medical Capital controlled are nonexistent.  In total, Medical Capital sold $2.2 billion in notes from 2003 to 2008.

Registered reps and advisers typically earn an extremely high commission when they sell Reg D private placements, which often deliver commissions of 5% to 8%.  By comparison, in a mutual fund transaction, a rep can earn between 1% and 4% of the sale.  There's no way to tally the potential cost to broker-dealers who sold clients the Provident and Medical Capital deals.  Investors have begun to file arbitration claims against the firms who sold the private placements, with plaintiff's lawyers looking for a windfall.

Investors beware of private placement problems.

Source:  InvestmentNews

Frank Bluestein And GunnAllen Financial Investigated By SNSFE In the Wake Of SEC Ponzi Scheme Allegations

Attorneys at SNSFE have launched an investigation into the relationship between Ponzi scheme operator Frank Bluestein of Michigan and his last brokerage firm, GunnAllen Financial. 

In the news, the SEC charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme after convincing many of them to refinance their home mortgages.

The SEC alleges that Bluestein acted as the single largest salesperson in the Ponzi scheme operated by Edward May and his company, E-M Management Company LLC.  The SEC previously has filed charges against May and E-M in connection with the fraudulent scheme.

The SEC alleges that Bluestein specifically targeted potential investors who were retired or elderly and conducted so-called "investment seminars" in Michigan and in California to lure them into investing in E-M securities. 

The SEC's complaint, filed in the U.S. District Court for the Eastern District of Michigan, alleges that Bluestein facilitated May's fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period.  Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.

As part of that five-year period, between March 2005 and October 2007, GunnAllen Financial employed Bluestein.  GunnAllen Financial had a duty to supervise the activities of Bluestein and had a duty to detect and to deter outside business activities such as this Ponzi scheme.

Source:  SEC Litigation Release 21223

SNSFE Investigates Non-Listed REITs Such As Inland American Real Estate Trust As Being Unsuitable For Most Investors

Attorneys at SNSFE have begun to investigate non-listed REITs, including Inland American Real Estate Trust, Piedmont/Wells, Inland, Behringer, Harvard, Cole, Desert Capital, Dividend Capital, Grubb & Ellis, Whitestone, and KBS.  SNSFE is investigating whether these were high risk, expensive, illiquid investments not suitable or appropriate for many retail investors, especially those who were elderly or retired. 

Financial advisers at firms like LPL Linsco Private Ledger, Merrill Lynch, Citigroup Smith Barney, Raymond James, ING and Morgan Stanley might have sold these non-traded REITS to retail investors.

Following SEC's Halting Of $77 Million Offering Fraud By Medical Capital, SNSFE Launches Investigation Of Brokerage Firms That Introduced Investors To Medical Capital

SNSFE lawyers are investigating whether brokers inappropriately referred investors to Medical Capital Corporation following what it calls a $77 million offering fraud.  On August 3, the Securities and Exchange Commission obtained an emergency court order halting the $77 million offering fraud perpetrated by defendants Medical Capital Holdings, Medical Capital Corporation, Medical Provider Funding Corporation VI, Sidney Field, and Joseph Lampariello.  The SEC's complaint, filed in federal court in Orange County, alleges that the defendants defrauded investors by misappropriating about $18.5 million of investor funds and by misrepresenting to investors that no prior offerings had defaulted on or been late in making payments to investors on principal and/or interest.

The SEC's complaint alleges that since 2003, these defendants have raised over $2.2 billion through offerings of notes in various offerings. As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to another entity.  The complaint alleges that these fee payments were contrary to representations made in the original offering documents which stated that administrative fees would not be paid out of proceeds from the sale of notes. 

In addition, the SEC's complaint alleges that defendants defrauded investors by misrepresenting in the offering documents that none of the affiliated entities had defaulted on or been late in making payments of principal and/or interest to their respective investors.  In fact, two of the entities did begin defaulting on interest and/or principal payments in the same month that the offering began to be sold to investors.  And recently, two other entities have defaulted or been late in making interest payments.

Brokerage firms have a duty to investigate investments before they recommend them to investors.  We are investigating whether brokerage firms breached this duty. 

Source:  SEC Litigation Release 21165

SNSFE Seeks Information As It Brings Claims Against Morgan Keegan For Fraud In The Marketing And Sale Of Auction Rate Securities As Alleged By The SEC

SNSFE attorneys are investigating Morgan Keegan & Company following SEC charges that the firm committed fraud in the marketing and sale of auction rate securities to customers.  The SEC indeed has filed a complaint in the U.S. District Court for the Northern District of Georgia against Morgan Keegan & Company, a Tennessee-based broker-dealer, for misleading investors regarding the liquidity risks associated with auction rate securities, known as ARS, that the firm underwrote, marketed, or sold.

The SEC's complaint alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money-market funds.  According to the complaint, in 2007 and early 2008, Morgan Keegan was aware that the ARS market was deteriorating.  Specifically, the complaint alleges that investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan collectively indicated that the risk of auction failures had materially increased.  The SEC alleges that Morgan Keegan sold approximately $925 million of ARS to its customers between November 1, 2007, and March 20, 2008, but failed to inform its customers about liquidity risks for ARS, even after the firm decided to stop supporting the ARS market in February 2008.

While the SEC's complaint seeks certain relief, SNSFE attorneys are investigating in order to bring claims to redress the wrongs that Morgan Keegan has committed upon investors. 

Source:  SEC Litigation Release No. 21143

Beware Of CDOs Of Loans, The First Of Which Is Coming To Market By Morgan Stanley

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind.

Morgan Stanley is selling $87 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody's Investors Service, according to marketing documents obtained by Bloomberg News.  The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group and managed by Greywolf Capital Management, an investment firm based in Purchase, NY.

Two years after the credit markets began to seize up, costing the world's biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so-called structured finance securities and turning them into new debt investments with top credit ratings.  While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks. 

A lot of banks and insurers "cannot buy anything but AAA," said a principal at R&R Consulting.  "You're manufacturing AAA out of non AAA, therefore allowing those people who have AAA written on their forehead to buy."

Investors beware.

Source:  Bloomberg.com

Rydex, Direxion And ProShares Subject To Regulators' Probe As To Sales Practices For Leveraged ETFs

The Massachusetts Secretary of State is investigating the sales practices of leveraged exchange-traded funds, or ETFs.  William Galvin is looking into the sales materials of Rydex Investments, Direxion Funds and ProShares.

Galvin is assessing what these firms tell brokers to sell to customers in selling the products.  FINRA, the Financial Industry Regulatory Authority, previously has cautioned its members over leveraged ETFs and that has been covered on this site.

Investors beware.

SNSFE Investigates Gregory Bell And Lancelot Management As The SEC Files Fraud Charges Alleging A $2 Billion Feeder Fraud

The SEC announced fraud charges and an asset freeze against a Highland Park, IL-based hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.  The SEC's complaint, filed in U.S. District Court for the District of Minnesota, alleges that Gregory Bell and Lancelot Management LLC invested more than $2 billion in hedge funds assets with Petters and pocketed millions of dollars in fraudulent fees at the expense of investors in the funds.  The SEC's complaint also charges Petters with fraud for perpetrating the massive Ponzi scheme through the sale of notes related to consumer electronics.  When Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.

According to the SEC's complaint, Petters carried out his Ponzi scheme from as early as 1995 through September 2008, promising investors that proceeds from the notes they were sold would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to "Big Box" retailers including such well-known chains as Wal-Mart and Costco. Instead, the "purchase order inventory financing" business was a complete sham, and the vendors secretly returned most investor money back to Petters, who diverted billions of dollars for his own purposes. 

SNSFE continues to investigate Petters as well as the role of feeders such as Lancelot Management. 

Source:  SEC Press Release 2009-156

Ameriprise Financial Nailed In Fraudulent Scheme To Obtain And To Conceal Undisclosed Compensation For Selling REITs To Customers

The SEC announced an enforcement action against Minneapolis-based broker-dealer Ameriprise Financial Services, for receiving millions of dollars in undisclosed compensation as a condition for offering and selling certain real estate investment trusts (REITs) to its brokerage customers.  Ameriprise has agreed to pay $17.3 million to settle SEC's charges.

The SEC's order finds that neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of REIT shares, or the conflicts of interest these additional payments created.  The SEC's order also finds that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue sharing payments that appeared to be legitimate reimbursements for services provided by Ameriprise.

Source:  SEC Press Release 2009-155

SNSFE Investigating Provident Royalties Fraud And Brokerage Firms That Sold Those Securities As SEC Obtains Asset Freeze

SNSFE attorneys are investigating Provident Royalties, LLC after the Securities and Exchange Commission obtained an emergency asset freeze.  The SEC alleges a $485 million offering fraud and Ponzi scheme orchestrated by three Dallas businessmen through Provident Royalties.

The SEC alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent securities offerings involving oil and gas assets through 21 affiliated entities to more than 7,700 investors throughout the United States.  Provident's entities made some direct retail sales of securities, but primarily solicited retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.

It is against those retail broker-dealers that SNSFE is investigating.

According to the SEC's complaint filed in the U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. In fact, the SEC alleges that less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.

Source: SEC Press Release 2009-151

SEC Informs State Street Bank And Trust Co. That It Could Face Charges For Securities Violations Tied To Investments In Sub-Prime Mortgages

State Street Corp. disclosed on Monday in a regulatory filing that the Securities and Exchange Commission could bring civil charges against its main subsidiary for possible securities violations tied to past investments in subprime mortgages.

State Street Bank and Trust Co. received a so-called "Wells" notice from the SEC tied to the ongoing investigation by the SEC into disclosures and management of the bank's fixed-income investments during 2007 and earlier periods.

In 2007, ahead of the collapse of the housing market, State Street's fixed-income investment unit increasingly invested in securities and bonds backed by subprime mortgages -- loans given to customers with poor credit history.  As the housing market unraveled in late 2007 and defaults on mortgages began to skyrocket, the value of those investments plummeted leading to losses in the investment funds.

The losses led some investors to file lawsuits, questioning whether State Street's investments fit strategies consistent with those of more traditional fixed-income funds.  During the fourth quarter of 2007, State Street established a reserve fund of $625 million to settle claims.

About two-thirds of the fund has been spent settling claims since then.  As of March 31, there was about $207 million remaining in the reserve fund.

The Wells notice indicates the possibility of an enforcement action and allows for the trust bank to provide its perspective on the investigation before any formal proceedings begin.

Source:  AP

SNSFE Investigating Michael Regan And Regan & Company Of Massachusetts Following SEC Ponzi Scheme Fraud Charges

SEC charges Massachusetts-based money manager in multi-million dollar Ponzi scheme. 

The SEC alleges that Michael Regan and his firm Regan & Company fraudulently obtained at least $15.9 million from dozens of investors nationwide by selling securities in his now defunct River Stream Fund. Regan provided fake account statements and tax forms to investors showing artificially inflated account balances and concealing that he did no securities trading at all for several years and suffered substantial losses on investments that he did make.  Regan falsely claimed that he earned an MBA from a major New York university and promoted a phony track record of successful securities trading and investment expertise.  Regan is not registered as an investment adviser with the SEC or any other securities regulator.

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Regan misrepresented to investors that because of his trading expertise and successful investment track record, they could expect annual returns averaging 20 percent with minimal risk to their principal.  He promised investors that their money would be pooled into a "fund" that he would invest on their behalf in securities using a conservative, low-risk trading strategy that he claimed was based upon "short-term price trends."

The SEC alleges that Regan actually used less than half of the funds entrusted to him for trading purposes.  Instead of protecting the investors' principal and delivering the promised returns, Regan misappropriated millions of dollars in investor funds to satisfy withdrawal requests from some investors.  He used at least $2.4 million for his personal expenses, including support payments to various family members.

Separately, the U.S. Attorney's Office for the Eastern District of New York announced criminal charges against Regan for the same misconduct alleged in the SEC's complaint.

SNSFE lawyers are investigating this matter, including those entities and individuals who might have referred clients to Michael Regan and his firm Regan & Company. 

Source:  SEC Press Release 2009-143

SNSFE Continuing To Investigate As New Hampshire Securities Regulator Sues UBS Over Sales Of Principal Protected Notes

The New Hampshire Bureau of Securities Regulation has filed a Cease and Desist order against UBS Financial Services alleging unfair sales practices and unsatisfactory supervisory procedures and for recommending unsuitable investments to more than 40 New Hampshire investors.  The action relates to products underwritten by the now defunct Lehman Brothers and sold to the public by UBS.  Over $2.5 million is at risk for New Hampshire investors.

The products in question are complicated investment vehicles, so-called "structured products," many of which were sold promising principal protection.  These are notes connected to complex derivatives that are linked to various investments, such as Asian and other foreign currencies.  In theory, if the market value of the investment declined at maturity, Lehman Brothers Bank would ensure that each investor receives his or her initial investment back.  However, because Lehman Brothers declared bankruptcy in September 2008, investors who held these notes stand to lose much if not all of their principal.

According to Jeff Spill, Director of Securities Regulation for Enforcement, "UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.  The safety of these products was exaggerated.  We believe UBS engaged in unfair and unlawful sales practices when presenting these investments."

Putting the action in context, Director of Securities Regulation, Mark Connolly, explained, "The Bureau believes UBS sold these products to New Hampshire investors without adequately explaining the potential for loss. UBS also failed to alert customers as to the declining financial condition of Lehman Brothers, which would affect the principal protection on the investment.  The Bureau believes UBS wrongly sold complex products to investors in our State.  The company violated a long standing legal requirement that a broker must recommend investments which meet the goals of the investor and are within his or her tolerance for potential gains and losses."

"We believe that 'principal protection' meant one thing to investors, but something entirely different to UBS," Kevin Moquin, staff attorney for the Bureau said.  "New Hampshire investors would never have invested in derivative-based investments had they understood what they were buying."

Connolly stated, "UBS has not been proactive in addressing regulatory issues at either the Federal or State level.  We understand that other regulators have experienced similar inflexibility.  We publicly encourage UBS to examine how it conducts its securities business.  Changes need to be made."  Connolly summarized, "The environment has changed and the system will not tolerate insufficient standards for suitability and supervision."

SNSFE continues to investigate the actions and inactions, representations and misrepresentations made by UBS in connection with principal protected notes. 

Source:  New Hampshire Securities Regulation Press Release

SNSFE Investigates James Putnam And Wealth Management LLC Of Wisconsin Following Charges Of Fraud And Kickbacks Filed By The SEC

A past NAPFA President has been charged in a kickback scheme.

A former president of the National Association of Personal Financial Advisors has been charged with taking kickbacks from unregistered investment pools in which his Wisconsin advisory firm placed $102 million in client assets.

James Putman, founder, majority owner and CEO of Wealth Management LLC in Appleton, Wisconsin and Simone Fevola, the firm's former president, a minority owner and chief investment officer, each accepted $1.24 million in undisclosed payments derived from investments made by the unregistered investment pools, according to a civil complaint filed by the Securities and Exchange Commission.  Putman could not be reached for comment on the charges by press time.

The SEC announced that it obtained an emergency court order freezing Wealth Management's assets because the firm is charged with engaging in a kickback scheme and other fraudulent conduct involving six unregistered investment pools it managed.  The SEC also alleges that Wealth Management, Putman and Fevola misrepresented the safety and stability of the two largest investment pools and placed clients into these investments even though they were inconsistent with some clients' objectives.

The ADV for Wealth Management LLC lists seven funds for which Wealth Management is a partner, manager or advisor, with a total value of approximately $104 million and minimum investments ranging from $50,000 to $1 million.  The largest of these funds is the WML Gryphon Fund, with $38 million in assets, and the WML Watchstone Partners fund with $50 million in assets.

According to the SEC's complaint, Wealth Management, Putman and Fevola caused clients to invest in the pools from May 2003 through August 2008, and Wealth Management claims to currently have approximately $102 million of its clients' assets invested in these pools.  The SEC's complaint alleges that the pools' assets are largely illiquid, the reported values of their assets appear to be substantially overstated, and Wealth Management and Putman have been providing redemptions to investors based on likely overstated valuations.

The SEC's complaint charges each of the defendants with violations of the antifraud provisions of the federal securities laws, and Putman and Fevola with aiding and abetting Wealth Management's violations.  In addition to seeking emergency relief, the SEC's complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants. 

The SEC's investigation is continuing as well as SNSFE's investigation. 

Source: SEC Release 2009-119

Morgan Keegan Faces Possible SEC Action Over Its Failure To Disclose Risks Associated With Auction-Rate Securities

Regions Financial may face SEC charges.

The U.S. Securities and Exchange Commission may launch a civil proceeding against the Morgan Keegan & Co. brokerage unit of Regions Financial Corp. 

In its quarterly report filed with the SEC, Regions said the regulator filed a "Wells Notice" in March against Morgan Keegan.  Such a notice indicates that civil action is possible, and gives the recipient a chance to mount a defense.

Regions said the SEC is investigating the adequacy of Morgan Keegan's disclosures of liquidity risks associated with auction-rate debt, and whether it sold a large volume of the debt after its ability to support the auctions was diminished.  It said Morgan Keegan has cooperated with the SEC, and is buying back auction-rate debt it sold to retail customers.

Rates on auction-rate debt reset in periodic auctions.  Regulators say brokerages misled investors into believing the debt was safe and the equivalent of cash.  After the $330 billion market seized up in February 2008, many investors could not sell the debt or could sell it only at a loss.

Lawyers at SNSFE continue to investigate the auction-rate debacle. 

Source:  Reuters

SEC Charges Attorneys And Others In Connection With Issuing Bogus Rule 144 Opinion Letters As Part Of A Legal Opinion Mill

The Securities and Exchange Commission has charged attorneys for fraudulent legal opinions used by promoters in Pump-and-Dump scheme:

The SEC alleges that attorneys Albert Rasch, Jr. and Kathleen Novinger together with Sandra Masino and her company 144 Opinions, Inc. drafted and executed at least 24 legal opinion letters that fraudulently induced the removal of restrictive legends on unregistered shares of Mobile Ready Entertainment Corp.  As a result, certificates representing more than 22 million shares of Mobile Ready were sold to the public in violation of Rule 144, which governs the conversion of restricted stock that otherwise cannot be sold to the public.  The SEC previously charged Mobile Ready and two of its officers in connection with the fraudulent pump-and-dump scheme that was made possible, in part, by the bogus opinion letters.

"The market relies on lawyers to act as gatekeepers who exercise their function in good faith," said Katherine Addleman, Regional Director of the SEC's Atlanta Regional Office.  "As alleged in our complaint, these defendants disregarded the investing public by operating a legal opinion mill of fraudulent letters that misrepresented critical facts and cited to non-existent documents."

The SEC's complaint, filed in the U.S. District Court for the Northern District of Georgia, alleges that after the fraudulent letters were prepared and issued, Masino and 144 Opinions made further false statements to a transfer agent to induce the removal of the restrictive legends on the respective shares of Mobile Ready.  The fraudulent legal opinion letters contained false and misleading statements about the origin of the securities at issue, the existence of adequate public information concerning Mobile Ready, the existence of agreements between Mobile Ready and the relevant shareholders, and the applicability of Rule 144 promulgated under the Securities Act of 1933 to the restricted shares identified in each of the Mobile Ready Legal Opinions.

Source:  SEC Press Release 2009-103

SEC's Mary Schapiro Finds Target Date Funds' Returns Troubling And Outlines SEC's Response To The Problem

Recently, SEC Chairman Mary Schapiro addressed the Mutual Fund Directors Forum Ninth Annual Policy Conference. 

Ms. Schapiro commented that investor confidence has been deeply shaken, and that restoration of investor confidence is an essential element to moving the nation's economy forward.  She outlined several steps that the SEC is taking to help restore investors' confidence.

Among those steps concerned what the SEC is doing with respect to target date funds.  She said:

Another area the SEC is examining for the benefit of fund investors is target date funds.  As you are aware, target date funds generally invest in a mix of equities, fixed income securities and other instruments.  The proportionate percentages of these asset classes change over time, so that as a fund approaches its "target" date, its asset allocations move toward a more conservative allocation.  The shift in allocation is often referred to as a fund's "glide path."

Target date funds have become quite popular.  Over the past three years, target-date fund assets have increased from $66 billion at the end of 2005 to $152 billion in March, after peaking at $178 billion in 2007.  Growth in target date fund assets is likely to continue since these funds can be default investments in 401(k) retirement plans under the Pension Protection Act of 2006.  More than 60 percent of employers now use target date funds as a default contribution option, compared with just 5 percent in 2005.

However, target date funds have produced some troubling investment results.  The average loss in 2008 among 31 funds with a 2010 retirement date was almost 25 percent.  In addition, varying strategies among these funds produced widely varying results.  Returns of 2010 target date funds ranged from minus 3.6% to minus 41 percent.

One explanation put forward for these outcomes is that many target date funds underlying retirement plans actually establish their "glide paths" based on the assumption that investors will continue to maintain their investments, and partially live off the proceeds, for a number of years following retirement.  If that is the case, it must be plainly disclosed to investors.  A target date fund underlying a college investment or so-called 529 plan, on the other hand, would need to more closely track its target date since it is far more likely that investors would need access to their investment at or near the fund's target date.

I can assure you that SEC staff is closely reviewing target date funds' disclosure about their glide paths and asset allocations.  The staff also is examining whether the same target date funds underlie both retirement and college savings plans.  The staff has been working closely with the Department of Labor in light of target date funds' prevalence in participant-directed retirement plans.  This important issue has also been an area of focus for Chairman Kohl and the Senate Special Committee on Aging.

I challenge those of you who are directors of target date funds to carefully review your funds' asset allocations and investments.  Consider, in particular, whether your target date funds' asset allocations and investments are consistent with investor expectations.  Are they consistent with your own expectations of how a fund with a "target date" of 2010, 2015, or 2020 should invest?

While you do your part, we at the SEC will do ours.  We will consider whether additional measures are needed to better align target date funds' glide paths and asset allocations with investor expectations.  Among other issues, we will consider whether the use of a particular target date in a fund's name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund's name.  As we pursue this analysis, we will have a special focus on the expectations of the millions of everyday Americans who use target date funds to invest for retirement and educational needs.

Source:  SEC - Speech: Conference Address on Critical Issues for Investment Company Directors

 

SNSFE Investigates Reserve Primary Fund As SEC Files Fraud Action Against The Fund And Its Officers For Providing Misleading Information

The Securities and Exchange Commission has charged operators of the Reserve Primary Fund with fraud.

The Reserve Primary Fund "broke the buck" on Sept. 16, 2008, when its net asset value fell below $1 per share, meaning investors in the money market fund would lose money.

The SEC alleges that the Reserve Management Company (RMCI), its Chairman Bruce Bent Sr., its Vice Chairman and President Bruce Bent II, and Resrv Partners, Inc., failed to provide key material information to investors, the fund's board of trustees, and rating agencies as Lehman Brothers filed for bankruptcy protection on September 15.

The fund, which held $785 million in Lehman-issued securities, became illiquid on September 15 when the fund was unable to meet investor requests for redemptions.

According to the SEC's complaint, the defendants misrepresented that RMCI would provide the credit support necessary to protect the $1 net asset value of the Primary Fund when, in fact, RMCI had no such intention.

The SEC alleges that RMCI significantly understated the volume of redemption requests received by the fund and failed to provide the trustees with accurate information concerning the value of Lehman securities.  Because of these misrepresentations and omissions, the fund was unable to strike a meaningful hourly net asset value as required by the fund's prospectus.

Attorneys at SNSFE continue to investigate the Reserve Primary Fund. 

Source: SEC Press Release 2009-104

SNSFE Investigates The SEC's Sanctioning Of Hennessee Group For Its Failure To Conduct Adequate Due Diligence, To Monitor And To Otherwise Protect Clients From The Bayou Fraud

The Securities and Exchange Commission has announced that it has charged New York-based investment adviser Hennessee Group and its principal Charles Gradante with securities law violations for failing to perform their advertised review and analysis before recommending that their clients invest in the Bayou hedge funds that were later discovered to be a fraud.

In a settled administrative proceeding, the Commission issued an order finding that Hennessee Group and Gradante did not perform key elements of the due diligence that they had represented they would conduct prior to recommending investments in the Bayou hedge funds.  The SEC also finds that they failed to conduct a reasonable investigation into red flags concerning Bayou.  Hennessee Group and Gradante routinely represented to clients and prospective clients that they would not recommend investments in hedge funds that did not satisfy all phases of their due diligence evaluation.

"As the Commission found, these investment advisers failed to honor the representations they made to their clients and did not disclose these material departures from their advertised services," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "The advice that clients receive from hedge fund consultants is especially critical when the hedge funds are neither regulated nor transparent."

According to the Commission's order, approximately 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after the Hennessee Group recommended those investments.  Most of the money was lost through trading or dissipated by Bayou's principals, who defrauded their investors by fabricating Bayou's performance in client account statements and year-end financial statements.  The SEC charged the managers of the Bayou hedge funds with fraud in 2005.

The Commission's order finds that Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients.  Instead of analyzing Bayou's results and processes through a review of Bayou's historical trading methods to determine whether the fund was, in fact, successfully executing its purported day-trading strategy, Hennessee Group and Gradante decided not to perform any analysis after Bayou refused to produce its trading data.  They relied entirely on Bayou's uncorroborated representations about its strategy and its purported rates of return.

The Commission's order also finds that despite conflicting reports from Bayou about the identity of their independent auditor, Hennessee Group and Gradante failed to verify Bayou's relationship with its auditor.  In fact, the accounting firm that purportedly conducted Bayou's annual audit was a non-existent entity fabricated by one of Bayou's principals, who was identified in publicly available state accountancy board records as the registered agent for the bogus accounting firm.

According to the Commission's order, Hennessee Group and Gradante also failed to respond to red flags concerning Bayou that came to their attention while they were monitoring Bayou on behalf of their clients.  In particular, they failed to inquire or investigate when Bayou provided contradictory responses regarding the identity of its auditor or to adequately inquire about a rumor that one of Bayou's principals was affiliated with Bayou's purported outside auditing firm.

The Commission's order finds that Hennessee Group and Gradante violated Section 206(2) of the Advisers Act.  The order requires Hennessee Group and Gradante to pay $814,644.12 in disgorgement and penalties, and to cease and desist from committing or causing further violations.  The parties also are required to adopt policies to ensure adequate disclosures in the future and to provide copies of the Commission's Order to all current and prospective clients for a period of two years.

SNSFE continues to investigate this matter. 

Source:  SEC Press Release

Fifth Third Securities Fined And Must Offer Restitution To Customers Who Bought Or Exchanged Variable Annuities

The Financial Industry Regulatory Authority announced that it has fined Fifth Third Securities $1.75 million for a series of violations related to variable annuity sales and exchanges. FINRA found that Fifth Third Securities made 250 unsuitable sales and exchanges to 197 customers through 42 individual brokers.  FINRA also found that the firm's supervisory systems and procedures were inadequate for policing the firm's variable annuity sales and exchanges.

In addition to the fine, FINRA ordered the firm to pay more than $260,000 in restitution to 74 customers to compensate them for surrender charges incurred in the unsuitable transactions.  The firm must also offer all 197 customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase plus interest and any surrender charges required, adjusted for any withdrawals made.

SNSFE attorneys continue to investigate this matter as well as other unsuitable variable annuities transactions. 

SNSFE Continues Its Investigation Of Fisher Investments' Asset Allocation Decisions For Clients

Fisher Investments has proclaimed that there is a difference.  One difference between it and other advisory firms is what it calls Dynamic Asset Allocation.  "We strive to protect your assets in a bear market.  If we predict a bull market, we emphasize stocks.  However, if we see a bear market unfolding, we take a defensive approach.  For example, we might move you into bonds or cash, or use other tools in an effort to reduce risk.  We have a long history of forecasting bear markets, and reacting quickly and decisively."

Fast forward to March 13, 2009.  On that day, Mr. Fisher writes to clients, "Again in recent months, as in late last year, I and my firm have failed to correctly see the market's short-term direction at a time of nearly unprecedented market downturn in terms of size and speed."

In his book, The Only Three Questions That Count, in a section called "Curb Your Overconfidence," Mr. Fisher concedes,"I know there will be times when I am mostly wrong. And that's okay."  Okay? That's not okay for investors to whom attorneys at SNSFE have spoken.

SNSFE continues its investigation of Fisher Investments and the asset allocation decisions that it made for investors. 

Merrill Lynch Socked With $39.8 Million Arbitration Award

Merrill Lynch has been socked with a $39.8 million arbitration ruling.  In one of the single largest securities arbitration awards ever, Merrill Lynch & Co. has been ordered to pay $39.8 million to a group affiliated with the Freemasons.

The arbitration award, handed down by a three-member panel of the New York and Washington-based FINRA, ruled March 16th that Merrill Lynch of New York is liable for $30.6 million in compensatory damages - plus interest - to the Trustees of the Masonic Hall and Asylum Fund in Utica, NY.

The interest on the claim dates back to November 2005 and totals $9.2 million.

The fund alleged that Merrill Lynch and its subsidiary broker-dealer Advest Inc. of Hartford, CT, committed negligence, breached their contract and fiduciary duty, and also misrepresented information about the SPhinX Managed Futures Index Fund LP.

SPhinX was a privately held fund of a business unit of the defunct commodities trader Refco of New York and was one of a group of funds that promised investors returns tied to the performance of the Standard & Poor's Hedge Fund Index, according to published reports.

Merrill Lynch's acquisition of the Advest Group in 2005 at the time was widely reported as one of the most difficult and contentious deals in recent years, with Advest brokers leaving in droves.

Source:  InvestmentNews

Regulator Penalizes Morgan Stanley For Imprudent Retirement Advice Given To Eastman Kodak And Xerox Corporation Early Retirees

Recently, Morgan Stanley was fined $3 million and ordered to pay more than $4.2 million in restitution to 90 retirees, to resolve charges that its supervisory system failed to detect and prevent brokers from persuading Eastman Kodak Company and Xerox Corporation employees to take early retirement.  These pitches were based upon unrealistic promises of consistently high investment returns and by espousing unsuitable investment strategies.  In settling these matters, neither Morgan Stanley nor the individual brokers admitted or denied the findings, but consented to the entry of FINRA's findings.

Unrealistic promises of consistently high investment returns on the one hand, and unsuitable investment strategies on the other hand, present great risk for retirees.  SNSFE continues to investigate all types of cases involving retirees who retired too early based upon such misrepresentations. 

SNSFE Investigates The Nutmeg Group And The Gouldings

Shaheen, Novoselsky, Staat, Filipowski & Eccleston is investigating the Chicago area investment adviser, The Nutmeg Group, for defrauding clients. 

The SEC has charged The Nutmeg Group, owner and managing member Randall Goulding, and chief compliance officer David Goulding for misappropriating client assets, making misrepresentations to their clients, failing to comply with Nutmeg's custodial obligations, and failing to keep required books and records. 

According to the SEC's complaint, Northbrook, IL-based Nutmeg serves as the general partner or investment adviser to 15 unregistered investment pools and claims to have assets under management of more than $32 million.  Nutmeg and the Gouldings misappropriated more than $4 million in client assets by transferring them to third parties, and did not fully document the funds' investments, according to the SEC complaint. 

The SEC alleges further that they improperly commingled fund assets and cannot value the funds' holdings.  As a result, net asset and other investment values have been incorrectly reported to investors.  Nutmeg also has failed to keep required books and records or keep assets with qualified custodians, which has further put client funds at risk.

SNSFE's Continued Investigation Of Principal Protected Note Investments Turns To Firms Such As Neuberger Berman

SNSFE continues to investigate Principal Protected Notes and other structured products that have surprised many investors across the country now facing losses when they understood that their principal would be protected. 

The investigation of this market - which is some $114 billion, of which $40 billion worth is held by individual investors - continues to focus on major firms, such as UBS, Merrill Lynch, Morgan Stanley, and Goldman Sachs, but has also turned to focusing on smaller firms, such as Neuberger Berman.

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 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

7th Circuit Court Of Appeals Cautions Institutional Funds To Retain Securities Lawyers To Monitor And To Collect From Class Action Lawsuits Involving Securities That They Have Owned

A U.S. Court of Appeals sent a strong message earlier this year to institutional investors that they are expected to have procedures and policies in place to monitor securities class actions in which they have a financial interest and viable claims.  In Larson vs. J.P. Morgan Chase & Co., the $40 billion Colorado Public Employees' Retirement Association, Denver, sought to intervene in a securities class action after being notified of a proposed settlement that failed to include a recovery for certain claims worth several million dollars to the pension fund, according to the case in the 7th Circuit U.S. Court of Appeals, Chicago, in June.  The disputed claims were initially part of the class action, but were dismissed during an earlier stage of the litigation.

The court, in an opinion written by Judge Richard Posner, denied the Colorado pension system's motion to intervene as untimely because it found that the pension fund is a "sophisticated litigant with a large stake who had no good excuse for failing to seek intervention (or bring its own suit) years ago."  In reaching its decision, the ruling stated that "large pension funds have securities lawyers on retainer, and their lawyers would have known about and monitored the progress of the class action whether or not the fund trustees did."

Although not all institutional investors have securities lawyers on retainer to monitor their viable claims, the court's assumption was not surprising, as most recommended best practices and model shareholder's litigation policies make clear that institutional investors and fiduciaries should, at the very least, actively monitor ongoing litigation to ensure that they are fulfilling their duty to preserve viable claims, protect assets and recover funds lost as a result of securities fraud.

It is now well established that institutions, at a minimum, have a duty to recoup losses resulting from securities fraud, regardless of the origin or jurisdiction of the suit.

Since securities litigation reform was enacted by the federal government in 1995, $58.9 billion has been recovered through 2007 for injured shareholders, and an additional $9 billion is now in the "settlement pipeline," which includes settlements that have been agreed upon but funds not yet distributed.  Nevertheless, more than $12 billion went unclaimed.  That number is staggering, considering that most of the money is being left on the table by institutions, run by fiduciaries with a duty to collect it.  In fact, a recent study found that less than 30% of institutions with recoverable losses file the proof of claim forms necessary to collect their settlement proceeds.

As presupposed by the court in the Larson decision, many institutions have indeed turned to securities lawyers to help develop securities litigation policies and to facilitate class-action recoveries.  Typically, portfolio monitoring allows law firms to work in conjunction with custodians and investment advisers to ensure that institutions and fiduciaries are alerted to pending class actions and are kept informed of important events throughout the litigation.

Source: Pensions & Investments

SNSFE Investigating Oppenheimer Champion Income Fund And Oppenheimer Conservative Investor Fund After Steep Losses

SNSFE is investigating two Oppenheimer funds that have suffered steep losses this year.  The Oppenheimer Champion Income Fund is down 82% this year, and the Oppenheimer Conservative Investor Fund, which had 4% of its assets in the Champion Income fund, is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar.

Oppenheimer Champion Income changed the way it was investing in late 2006.  Since then, the fund gambled more with derivatives and they haven't paid off.  One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs.  In this case, the fund was betting the top-rated commercial mortgage-backed securities would rally this year.  Well, they didn't.

Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September.  CDSs are basically insurance contracts that protect investors against bond and loan defaults.  In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.

Selling CDSs can be a particularly risky proposition when insuring companies that are already struggling with credit problems.  Indeed, through September the fund was selling CDSs on troubled companies including Lehman Brothers Holdings, American International Group, General Motors Corp. and newspaper company Tribune.  Many of those firms have collapsed, filed for bankruptcy or otherwise have problems.

On top of that, the Champion Income Fund increased its stake in many mortgage bonds that have fallen this year.

Mortgage securities tied to Washington Mutual with a $9 million principal value were valued at only $3 million at the end of September, the last fund reporting date.  A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million.  Prospects for the mortgage market have dimmed since September, as defaults have been rising. 

Further, the fund erred with corporate bonds for struggling Wall Street houses.  The fund bought Lehman bonds between June and September with $29 million in principal value.  Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000.  It also added Morgan Stanley bonds with $13 million in principal during that same period.  They were valued at $8.3 million by the end of September.

Source:  The Wall Street Journal

Delray Beach Police & Firefighters Pension System Sues Citigroup And Smith Barney Asset Management For Improper Monitoring, Evaluation And Management

'Delray Beach Police & Firefighters Pension System estimated that it sustained at least $9 million in investment damages over alleged fiduciary breaches in the consulting work done by a Citigroup Global Markets unit, according to the lawsuit filed by the $120 million fund.

Smith Barney Asset Management, which was acquired by Citgroup in 1998 and also called Salomon Smith Barney, was the investment consultant to the Delray Beach, FL system from 1995 until it resigned in 2006.  The system's board of trustees has been investigating Smith Barney's consulting work since 2005.

The complaint, filed November 12 states that the "board is entitled to recover from SSB the value of the additional return on investment that the fund's investment portfolio would have achieved had the performance of that portfolio been properly monitored, evaluated and managed - an amount that the plaintiff estimates to exceed $9 million."  Plus the board is seeking recovery of fees paid to Smith Barney "and profits that SSB received from activities that placed it in an undisclosed conflict of interest with the fund." 

An estimate of the fees was not in the suit.  The suit also alleges SSB recommended managers that would use SSB as a broker to enable SSB to earn commissions on trades, a conflict of interest never disclosed to or authorized by fund trustees.  Among other claims, the suit alleges "SSB painted a rosier picture of the fund's performance than was actually true,"encouraging "the board to keep SSB in its position as the fund's pension consultant, which, in turn, enabled SSB to continue to engage in self-dealing...at the fund's expense."'

Source:  Pensions & Investments

SNSFE Investigates Entities That Sold Investors Bernard Madoff's Investment Funds, Including Tremont Capital Management and Greenwich Advisors, In View of Epic Ponzi Scheme Alleged By SEC

A top broker has been accused of a $50 billion fraud. 

Bernard Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme."

The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets.  "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew Calamari, associate director of enforcement in the SEC's New York office.

The 70-year old Mr. Madoff is the founder and primary owner of Bernard L. Madoff Investment Securities LLC.  The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares.  But Mr. Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

Mr. Madoff didn't enter a plea during a court hearing Thursday evening.  He was released after agreeing to post a $10 million bond secured by his Manhattan apartment. 

Earlier this month, the criminal complaint says, Mr. Madoff told one of his sons that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."  On Tuesday, the complaint alleges, Mr. Madoff added that he wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the sons met with Mr. Madoff at his office to ask about the bonus situation because he had appeared to be under "great stress" in prior weeks, they told the FBI.  Mr. Madoff refused to answer their questions and arranged to meet them at his Manhattan apartment, the complaint says.

Mr. Madoff "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the office, the complaint quotes one of the sons as saying.  At the apartment, Mr. Madoff confessed that his business was a fraud that that he was "finished."  He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."  He told them the firm was insolvent.

Mr. Madoff told them he planned to surrender to authorities, but before he did so, he wanted to pay certain employees portions of the $200 million to $300 million that was left. 

Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%.  In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.  Since its inception in December 1990, the fund averaged 10.5% annual return, according to fund documents.

Such returns sparked wide-spread skepticism for years on Wall Street.  News stories raised questions about his approach.  A number of traders suggested his firm could be buying shares for its own account just before it filed orders for customers, an illegal act called front-running.  In 2001, Mr. Madoff told Barron's that charges of front-running were "ridiculous."

An executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May, 1999 urging regulators to investigate Mr. Madoff.  Mr. Markopolos continued to pursue his accusations over the past nine years, he said in an interview and according to documents he sent to the SEC, which were reviewed by The Wall Street Journal.

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.

SNSFE attorneys are investigating.  Specifically, many investors gained exposure to Mr. Madoff through hedge fund of funds, including Tremont Capital Management, a major distributor of Mr. Madoff's fund, according to people familiar with the situation.  New York-based fund of funds Fairfield Greenwich Advisors, L.L.C., with $14 billion in assets under management according to its Web site, also had substantial funds with him and were big promoters of the fund.  A spokesman at Fairfield Greenwich declined to comment.  Likewise, a Tremont spokesman declined to comment.

None-the-less, SNSFE will be quite interested to investigate the roles and responsibilities and failure to monitor that might have occurred at both Tremont and Fairfield Greenwich. 

Source:  The Wall Street Journal

FINRA Investor Arbitration Statistics Reveal 49% Increase In Claims Filed

FINRA, the Financial Industry Regulatory Authority, has revealed its Dispute Resolution Statistics through October 2008.  As expected, the statistics show a surge in arbitration claims filed through October compared to October 2007. 

Notably, FINRA has experienced a 49% increase in claims in 2008 compared to 2007.  As one would expect, the leading charge is Breach of Fiduciary Duty followed by Misrepresentation, as well as Breach of Contract and Negligence.  Moreover, Mutual Funds are the #1 subject of disputes, however followed closely by Derivative Securities and Common Stock.  Auction-Rate Securities, a debacle that investors recently have witnessed, comes in at #4. 

For information regarding statistics, please contact FINRA at its website, www.finra.org. 

Source: www.finra.org

Warnings About Derivatives Implosion Made In 1992

Derivatives.  Did the implosion of these financial products come as a surprise?  Or should Wall Street have known it all along?  That's the question Institutional Investor addresses in this month's issue.  In "Did II Say That?" from September 1992, the magazine states:

The market for interest rate swaps, currency swaps, options and other complex financial derivatives had grown eightfold in just four years, to a notional value of $4 trillion, when the New York Federal Reserve Bank completed a survey in which bankers admitted that they did not fully understand these financial instruments.  In "Derivatives: Just How Risky Are They?" Institutional Investor [in 1992] described the market as "a time bomb that could explode" and offered two scenarios that seem eerily prescient.  The first predicted that "derivatives trading itself could cause a major bank to fail."  The second warned that "derivatives, simply because they now invisibly permeate the entire financial system, could turn an ordinarily containable situation - one that isn't even caused by them - into a full-blown financial crisis."  The bomb did explode with the collapse of collateralized debt obligations and other mortgage-backed securities, ripping apart Wall Street and knocking out financial institutions across the U.S. and Europe.

Attorneys at SNSFE continue to investigate a plethora of abuses associated with derivatives investments.

Source:  Institutional Investor, October 2008

SNSFE Investigates Lehman Brothers' Principal Protection Notes

According to Bloomberg.com, Lehman Brothers' "100% principal protection" means pennies for notes. 

A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings in August, a month before the firm filed for bankruptcy, promised, "100 percent principal protection."  Buyers had "uncapped appreciation potential" pegged to gains in the Standard & Poor's 500 Index, the brochure said.  In the worst case, they would get back their $1,000-per-note investment in three years.  Only the last in a list of 15 risk factors mentioned the biggest danger:  "An investment in the notes will be subject to the credit risk of Lehman Brothers."

Lehman's September 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money.  The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs, all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher.  About three-fifths of the $68 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.

"Investors are going to be a lot more concerned about the credit of the issuers of these notes," said James Angel, an associate professor of finance at Georgetown University in Washington.  Until recently, "the buyers may have been mesmerized by the bells and the whistles," he said.

The market for structured notes - constructed by Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives - has mostly avoided fallout from the slump in sales of mortgage-backed collateralized debt obligations and auction-market preferred securities. 

SNSFE attorneys continue to investigate the sale of Lehman's 100% principal protection notes.

Source:  Bloomberg.com

SNSFE Continues To Investigate Complaints Against Reserve Management Funds

Massachusetts securities regulators have begun to probe complaints against Reserve Management Company, the New York asset manager that shook investors in September with news of a money-market fund loss.

The office of Massachusetts Secretary of the Commonwealth William Galvin has received some complaints about Reserve Management and is looking into them, said a spokesman for the office. Reserve Management didn't return calls for the Wall Street Journal article. 

Reserve Management announced September 16 that its flagship Primary fund had "broken the buck" -- that is, fallen below the money-market fund industry's $1-a-share standard.  The loss stemmed largely from its investment in short-term debt of Lehman Brothers Holdings, which has filed for bankruptcy protection. 

The news touched off a rush of withdrawals from Reserve Primary and throughout the money-fund world.  Those redemptions appear to have slowed recently.  Money-market fund assets increased by $49 billion in the week ended Tuesday to $3.388 trillion according to the Money Fund Report, which is published by iMoneyNet.

But in recent days, some investors have complained that they haven't been able to get their money out of Reserve Management's funds quickly enough.  The Primary fund, which had about $62 billion in early September, has redeemed about $10 billion.  Reserve Management, which received a temporary order from the SEC to postpone payment, has announced plans to distribute an additional $20 billion on a pro-rata basis in mid-October, and said other redemptions will follow when money becomes available as assets mature or are sold.  The firm also plans to liquidate its Government Fund.

Lawyers at SNSFE continue to investigate complaints against Reserve.

Source:  Wall Street Journal 10/09/08

SNSFE Investigating Funds And Other Investment Vehicles That Heavily Invested In Beaten-Down Fannie, Freddie, Lehman, AIG And Merrill

Investors owning shares in mutual funds ought to know what their exposure is to Fannie and Freddie.  According to MorningstarAdvisor report published recently, the top firms holding Fannie and Freddie are Fidelity Select Home, Touchstone, Morgan Stanley Financial Services and Schneider Value. 

Fidelity, for example, has 17% of its total holdings in Fannie and Freddie, followed by Touchstone with 11.79%.  If you look at fund families, you'll find that Schneider funds is the most heavily weighted in Fannie and Freddie with 6.5% overall invested in those companies, followed by Thompson. 

Now let's take a look at other stocks that have taken a beating - Lehman, AIG - Merrill.  What are the big holders of Lehman Brothers?  The top funds are Fidelity Select Brokerage, Morgan Stanley Financial Services, and Legg Mason Partners Aggressive Growth.  How about AIG?  Those mutual funds are Fidelity Select Insurance, which owns a whopping 16.7% of AIG, followed by Clipper and Fidelity Growth & Income.  In terms of Merrill Lynch, Natixis Harris Associates Large Cap Value leads the pack, followed by Morgan Stanley Financial Services and MassMutual Select Focused Value. 

Those investors suffering losses ought to take a look at the prospectus and see if this risk was adequately disclosed.  SNSFE continues to investigate mutual funds as well as other investment vehicles that invested in these financial stocks that have taken a beating.

Source:  MorningstarAdvisor

SNSFE Investigating Losses At Reserve Primary Fund

Attorneys at SNSFE are investigating the Reserve Primary Fund.  According to Wall Street Journal reports, more than a year before the Reserve Primary Fund "broke the buck" with losses that spread chaos through the financial system last week, the fund began loading up on a type of short-term debt that the money-market fund had long shunned.

Even as Bruce Bent, the fund's founder, told shareholders in a July 2008 letter that the fund had "unwavering discipline focused on protecting your principal," Reserve was gobbling up commercial paper.  By May of this year, 54% of the fund's holdings were in commercial paper compared to 0.9% about a year earlier.  Exposure to drab but safe certificates of deposit plunged.

When Lehman filed for bankruptcy, Reserve owned Lehman debt securities with a face value of $785 million.  It had to write that down to zero, which prompted the Reserve fund to break the buck, meaning losses pulled the fund's share price below the hallowed $1-a-share standard.

The fund had previously disclosed that it held Lehman paper, but investors paid little attention until the New York investment bank crumbled.

The Lehman holdings were part of a bigger push by the fund into commercial paper, which is short-term debt companies issue to finance their operations. 

In 2006, the fund changed its prospectus to allow investments in commercial paper, but queried whether adequate disclosure was made, especially in light of the comments made in July of this year.

Right now, those left in the Primary fund can't withdraw, according to postings on the firm's Web site.  The fund has frozen redemptions for an indefinite period.  Those trapped there include many individual investors, according to people familiar with the fund.

Source:  Wall Street Journal

SEC Charges Chicago Firm Wextrust Capital With Fraud

Two owners of a private equity firm that claimed to be profiting from investments ranging from real estate to diamond mines were arrested and charged with robbing more than $100 million from investors, many of them Orthodox Jews.

In a lawsuit filed in U.S. District Court in New York, the SEC alleged that Wextrust Capital owners Steven Byers and Joseph Shereshevsky diverted the funds into operating their business and paying off previous investors, essentially a classic Ponzi scheme.

The SEC froze the assets of the Chicago firm, and the U.S. Attorney in the Southern District of New York filed a criminal complaint against Messrs. Byers and Shereshevsky, triggering the arrests.  Mr. Byers, of Oakbrook, and Mr. Shereshevsky, of Norfolk, VA couldn't be reached for comment.

An outside spokesman for Wextrust said he had no information.  "This is one of the biggest affinity cases I have ever seen," said Andrew Calamari, an SEC associate director in New York.

According to the SEC's suit, Mr. Shereshevsky used extensive connections in the Orthodox Jewish community to raise more than $250 million from almost 1200 investors. 

SNSFE continues to investigate the Wextrust fraud.

Source:  Wall Street Journal

Ameriprise To Buy H&R Block Financial Advisory Unit

Ameriprise Financial, the wealth management firm spun off by American Express, will buy H&R Block's financial advisory service for $315 million to expand in Florida, Texas and California.

Ameriprise expects the transaction to be completed within six months and start adding to earnings in early 2010.  The purchase is the second announced in two months by Ameriprise, which is focused on expanding its investment and money-management services.  The H&R Block deal adds 376,000 clients with $30 billion in assets.  Ameriprise agreed last month to buy J&W Seligman & Co. for $440 million to bolster its hedge-fund business.

"The acquisition of H&R Block Financial Advisors reinforces our growth strategy and underscores the strength of our financial position," said Ameriprise Chief Executive Officer Jim Cracchiolo in the statement.

Source:  Bloomberg

Massachusetts Securities Regulator Sues Merrill Lynch Over Auction-Rate Securities As SNSFE Continues To Counsel Investors

The Massachusetts securities regulator has accused Merrill Lynch of defrauding auction-rate investors.  According to Bloomberg:

Massachusetts Secretary of State William Galvin accused Merrill Lynch & Co. of fraud, claiming the investment bank sold auction-rate securities to investors while misleading them about the market's stability.

Merrill, based in New York, also "co-opted" its research department to help sell the securities, Galvin said in a statement.  The state's administrative claim asked the third-largest U.S. securities firm to "make good" on sales of now-frozen holdings, compensate investors who sold their bonds or shares at a loss and pay an unspecified fine.

"This company was aggressively selling" the securities "to investors and its auction desk was censoring the research analysts to make sure they downplayed" market risks, Galvin said in the statement.  "They knew the auction markets were in trouble, but the investors were the last to know."

Massachusetts filed a related complaint against UBS, Switzerland's biggest bank, in June after brokers abandoned their role as buyers of last resort for auction-rate securities, allowing the market to freeze.  A related investigation of Bank of America Corp. is "still going on," said Brian McNiff, Galvin's spokesman.

Merrill decided to stop supporting bids with its own money five days after one of its analysts told financial advisers the bonds represented "a good, conservative, reasonable investment," Galvin said. 

The securities firm, whose market value trails Goldman Sachs Group and Morgan Stanley, made about $90 million in profit during 2006 and 2007 from its auction-rate program, Galvin said in the statement.

"Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients," according to the complaint.

Source:  Bloomberg

Morningstar Alerts Investors To 7 Bear Market Horror Story Mutual Funds

In a recent Morningstar article, author Russel Kinnel discusses seven mutual fund bear-market horror stories.  He briefly mentions the hard-hit Legg Mason Value Fund LMVTX, as well as Schwab YieldPlus SWYPX and Regions Morgan Keegan, as those stories have been well-covered.  In this issue, he discusses some other hard-hit funds.

The first is the Eaton Vance Greater India fund, symbol ETGIX.  That fund is down negative 44.6%.  He says:

In the Morningstar FundInvestor annual guide on where not to invest, I said to be wary of Asia funds, particularly China and India funds.  I don't have any timing skill or special insight that this was the moment when China and India would take a tumble.  It's just that speculation was out of control and that makes markets vulnerable to a correction.  As it happens, it's the price of oil that turned those markets from euphoria to despair awfully quickly.  Some U.S. and European manufacturers are shifting production closer to home because fuel costs are negating the wage advantage of China and India and that's depressing the markets.  India now estimates that manufacturing production will slow to its lowest growth rate (2.9%) since 2001, and there are worries that oil prices will cause a spike in inflation which, in turn, could spur interest rates higher and hurt growth.

We've seen similar sell-offs in Mexico and Asian Tigers before, and one can make a case that China and India will rebound eventually.  That still leaves the problem that many India and China funds have absurdly high expense ratios, but at least the markets are getting to more-reasonable valuations now.

Mr. Kinnel then discusses Kinetics Market Opportunities, symbol KMKNX, which is down negative 30.7% this year.  He says:

First we saw the downside of an aggressive regional fund and now we're seeing the downside of an aggressive sector fund.  This fund smoked the competition last year with a 34% gain because of its very narrow focus on trading exchanges and asset mangers.  Now, you can see that focus comes with a price.  Big holdings in NASDAQ, CME, NYSE, and Legg Mason have pummeled the fund.  When I look at a sector fund, I want a true expert in the field, and I'm not sure that Kinetics has an edge in picking financials over the likes of Davis.

He next discusses Oppenheimer Rochester National Muni, symbol ORNAX.  It's down negative 12.6% this year.  He says:

Be wary when a bond fund doesn't just outperform -- it crushes the competition.  This fund's big weighting in tobacco bonds helped it to whomp everyone for more than 10 years.  When I wrote that I preferred Fidelity and Vanguard to Oppenheimer because Oppenheimer took some big risks, I got a number of angry e-mails.  They said that it obviously wasn't risky because it had been working for more than a decade.  In bond funds, most investors don't want to take big risks -- they want steady returns and income.  The good news is that tobacco bonds could rally.  The bad news is that the fund is now down more than 20% for the trailing year and it just lost a star -- it is down to 2 stars.  If that should begin to translate into outflows, there could be more pressure on the portfolio.

Finally, Mr. Kinnel selects Touchstone Large Cap Value fund, symbol TLCAX, which is down a negative 29.43% this year.  He says:

If you are squeamish, don't click through to the graph on this one.  The fund is off a horrific 52% for the trailing 12 months.  The story here is financials but not the same ones that are hurting the Kinetics fund.  Manager John Schneider tried to do some bottom-fishing, but the fund's huge exposure to mortgages has backfired.  Top holdings Fannie Mae FNM and Freddie Mac FRE are down 50% for the year, and the fund also owns Wachovia WB and Washington Mutual WM.  Even its forays outside financials have been brutal with names like Ford Motor F, Centex CTX, and Motorola MOT.  This shows how things can turn against a value portfolio that seems diversified and is full of recognizable names.  Just about any focused fund like this one runs the risk of taking a big hit, so you have to truly be long-term to get in.

SNSFE continues to investigate these and other funds. 

Source:  Morningstar Advisor

New York Attorney General's Complaint Against UBS Concerning Auction-Rate Securities Is the Second Of Two Bazooka Blasts Destroying Whatever Credibility UBS Has Left

New York Attorney General Cuomo’s complaint against UBS is the second of two (so far) bazooka blasts destroying whatever credibility UBS has left among its retail and institutional customers, its own financial advisers, and the issuers of auction-rate securities (ARS).

Following on the heels of the complaint (with “smoking gun” email attachments) filed by Massachusetts securities regulators, Attorney General Cuomo clearly demonstrates that there are (at least) three categories of VERY DECEIVED individuals and entities.  First, customers who bought ARS.  Among other things, UBS top executives unloaded their own ARS -- $21 million worth between November 1, 2007 and February 12, 2008 – when UBS became concerned, then worried, and indeed then panicked at its own precarious risk position due to holding increased ARS inventory resulting from its placing support bids in auctions for ARS which otherwise would have failed, all the way back to January, 2006.  Despite UBS’ concern, and insider sales, UBS kept ARS investors in the dark until the day that it announced that it no longer would support ARS auctions!

Equally deceived were UBS brokers.  According to the complaint, in August, 2007 “UBS felt tremors in the auction rate securities market that alerted it to potential liquidity concerns.”  In response to rising inventory, due to failed auctions, UBS executives devised a strategy to unload its inventory by convincing UBS financial advisers that they were great products for their customers.  As stated in an email by UBS’ Global Head of Municipal Securities, “We have encouraged our [Wealth Management] partners to mobilize the troops internally to focus on value so that we can move more [ARS] product through the system…this is our best and most effective way of hedging our exposure….”  Even in February, 2008, when UBS was considering exiting the ARS auction business, calling it a “complete loser”, UBS executives still were focused on increasing UBS customer sales, and misleading their own financial advisers.  In a conference call with advisers on February 8, 2008, UBS’ Trading Desk Manager told advisers, “The public auction market continues to clear hundreds of auctions daily, with lead broker-dealers frequently bidding to clear auctions when needed.  While broker-dealers are not obligated to bid in auctions, we do not have reason to change our current practice when UBS is lead underwriter.”  On February 13, 2008, UBS ceased supporting ARS auctions, which then immediately failed.

Last but not least are the issuers of ARS.  According to the complaint, “Following UBS discontinuing its support of auctions, UBS embarked on an effort to profit from its decision … by offer[ing] to restructure and refinance the auction-rate securities of the issuers into different products” for lucrative underwriting fees, of course.  UBS’ Global Head of Municipal Securities remarked in an email that this was “the single greatest opportunity in decades for us to leverage our banking relationships more now than ever as we embark on a journey to restructure a 300 bn [billion dollar] market in arcs [ARS]… This is a banker’s dream market.”

And a nightmare for UBS customers, UBS advisers and the issuers!

SNSFE continues to investigate and assist investors, as well as financial advisers and issuers, as they unravel this ARS debacle.