possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings

TO BE NOTED: From the NY Times:

"2 Men Accused by S.E.C. in Insider Trading Case

By ZACHERY KOUWE

The Wall Street salesman sounded cryptic: “You’re listening to my silence, right?”

But those few words, spoken to a valuable client in 2006, over a recorded telephone line, have now led to a landmark case of insider trading.

Winks and nods are common currency on Wall Street, but this case, disclosed Tuesday by the Securities and Exchange Commission, is significant because it is the first to focus on the vast, murky market for credit-default swaps, considered by some to be among the most dangerous instruments of the financial crisis.

The S.E.C. claims Jon-Paul Rorech, a salesman at Deutsche Bank, tipped off a money manager at a prominent hedge fund, Millennium Partners, about a deal involving the company that controls Nielsen Media, the television ratings service. Based on that information, the money manager, Renato Negrin, then bought credit-default swaps that rose in value when the deal was made public, eventually earning him a $1.2 million profit, the S.E.C. claims.

“Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of C.D.S. to the detriment of investors and our markets,” Scott W. Friestad, the deputy director of the S.E.C.’s Division of Enforcement, said in a statement.

Mr. Rorech, 36, through his lawyer Richard M. Strassberg of the law firm Goodwin Procter, denied violating any securities laws. He has been placed on paid leave pending the results of the investigation, which the S.E.C. said was continuing.

Mr. Negrin, 45, through his lawyer, Lawrence Iason, of the law firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, denied receiving insider information and said he would fight the charges.

“We have a zero-tolerance policy toward insider trading and Millennium requires every employee to certify annually that they are aware of and in compliance with our policies,” said Israel Englander, the founder of Millennium, which manages $11 billion. The firm has agreed to put the profits in escrow until the case is resolved.

Deutsche Bank said it would continue to look into the matter in cooperation with the S.E.C.

According to the S.E.C., the trouble began in July 2006, when Mr. Rorech, seeking to curry favor with Mr. Negrin, an important client, alerted the money manager to a coming bond offering. The deal was to finance the leveraged buyout of VNU, the Dutch media conglomerate that controls Nielsen. Many financial companies record the telephone calls of employees, and so the conversations were picked up. The men also spoke via cellphone, the S.E.C. said.

Mr. Negrin then bought credit-default swaps — instruments that serve as insurance policies on the bonds, in the case of default — and profited when the deal was announced a week later, the S.E.C. said.

Regulators also claim that Mr. Rorech was prohibited by Deutsche Bank from soliciting trades for credit-default swaps on VNU and other companies before he called Mr. Negrin. While this is the first time credit-default swaps have been the focus of an S.E.C. insider-trading investigation, regulators have recently called for increased transparency and regulation of the market.

The case also raises questions about the possible abuse of inside information by hedge funds and investment banks that have delicate information about new bond offerings and trade credit-default swap contracts. The contracts are primarily bought and sold through private negotiations between investors instead of on a public exchange, and typically bring in hefty fees for investment banks.

The S.E.C. has been examining trades of credit-default swaps since at least 2007 after Ben S. Bernanke, the Federal Reserve chairman, urged regulators to take action to prevent abuses in the market."

If needed, big banks and other financial institutions should be broken up in those instances

TO BE NOTED: From the NY Times:

"FDIC's Bair Calls for 'Systemic Risk Council'

By THE ASSOCIATED PRESS

Filed at 10:33 a.m. ET

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that pose financial risks to the economy, an authority that could be shared by the FDIC and other regulators.

In testimony at a Senate hearing Wednesday, FDIC Chairman Sheila Bair called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new ''systemic risk council'' set up to monitor large institutions and potential risks to the system.

Bair stressed again that the ''too big to fail'' policy used by the government in the financial crisis must end.

''Our current system has clearly failed in many instances to manage risk properly and to provide stability,'' Bair said.

She maintains that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.

''We're talking about a resolution and not a bailout,'' Bair told the Senate Banking Committee. If needed, big banks and other financial institutions should be broken up in those instances, she said.

Policymakers are trying to craft a new system of financial rules to replace the ''too big to fail'' stamp put on federal policy in the financial tumult, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.

A ''council'' of regulators would be better equipped than a single agency to exercise that oversight, writing rules and collecting data on large institutions that pose potential risk to the system, Bair said.

For taking over and resolving financial institutions, Bair said the FDIC is well equipped to do so. She suggested Congress could give the agency the authority to resolve bank holding companies like Citigroup or Bank of America -- now under the supervision of the Fed. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.

Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator."

defrauded investors out of hundreds of millions of dollars

TO BE NOTED: From the NY Times:

"S.E.C. Charges California Money Manager With Fraud

The Securities and Exchange Commission has temporarily frozen assets controlled by Danny Pang, a money manager in Newport Beach, Calif., who the agency contends defrauded investors out of hundreds of millions of dollars in a scheme that began in 2003.

In its complaint on Monday, the S.E.C. said Mr. Pang, who ran an investment firm called the Private Equity Management Group, or the PEM Group, lied to his clients about the value of investments he made in life insurance policies and real estate timeshares. He promised investors steady returns of 5.25 percent to 7 percent annually from buying life insurance policies at a discount from elderly people, but he was ultimately unable to pay the premiums, investigators said.

Mr. Pang began using money raised from future clients, who invested in the real estate timeshares, to pay out purported profits to other investors, the S.E.C. alleged.

When investors raised questions about the value of one particular insurance policy, Mr. Pang ordered that its documents be altered to reflect a value of $107 million on the policy instead of the true $31 million value, according to the S.E.C. complaint.

The S.E.C. also charged that Mr. Pang raised money, mostly from Taiwanese investors, by claiming he was a former senior vice president and technology merger adviser at Morgan Stanley and had an advanced business degree from the University of California at Irvine. Both claims were false, according to the complaint.

A federal judge granted the S.E.C.’s request for emergency relief for investors including the appointment of a receiver to safeguard the assets of the Private Equity Management Group. Mr. Pang was also required to turn over all of his passports and repatriate money that was sent overseas.

It’s unclear if Mr. Pang, 42, is in the United States or not. He stepped aside as chief executive a few weeks ago pending an internal investigation into allegations of fraud by several Taiwanese banks. The S.E.C. said its investigation is continuing.

A spokesman for the Private Equity Management Group declined to comment on the case.

– Zachery Kouwe"

to mortgage originators who made complex loans to those who could not afford them

TO BE NOTED: From the NY Times:

---

April 27, 2009, 4:28 pm

How Not to Regulate

If you don’t want a job done, hire someone who thinks the job should not be done.

That sounds perverse, but it is exactly what happened at the Securities and Exchange Commission in the later years of the Bush administration.

I’m not sure that applies to Chris Cox, the Bush administration’s final chairman. But he came in with a mandate to achieve consensus with the other Republican members of the commission, after his predecessor, Bill Donaldson, had worked with the Democratic members to overcome ideological opposition from at least one of the Republican members.

To get that consensus, Mr. Cox agreed to throw up a series of procedural hurdles in the way of the enforcement staff investigating and settling cases. Some former enforcement directors thought Linda Thomsen, the enforcement director Mr. Cox inherited, should have quit in protest. Had she done so, the result might have been an enforcement director who did not believe in enforcement. So she stayed, and took much of the blame.

Mary Schapiro, the new chairwoman of the Securities and Exchange Commission, has removed those hurdles, and put in a new enforcement director who we can assume actually thinks the job he has been hired to do is worth doing.

In a speech today to the Society of American Business Editors and Writers conference in Denver, Ms. Schapiro named some causes of the financial crisis. I have emphasized the two parts that I found most interesting.

How we got to where we are today is a question that many will debate for years to come. But it is clear to me that the responsibility lies with many:

• from the institutions that cobbled together and aggressively sold risky financial instruments
• to ratings agencies that allowed the integrity of ratings to take a back seat to their business interests
• to mortgage originators who made complex loans to those who could not afford them
• to regulators that didn’t fully embrace the need for regulation or didn’t appreciate the significant risks building throughout the entire system
• or, in the case of the S.E.C., simply didn’t hew faithfully to the mission of investor protection — whether because of a lack of resources or because of philosophy

Ms. Schapiro has not had time to prove that her S.E.C. will restore the agency’s reputation. But it is refreshing to have an S.E.C. run by someone who thinks regulation is a good idea."

Speech by SEC Chairman:
Address to the Society of American Business Editors and Writers

by

Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

SABEW Annual Conference 2009
Denver, Colorado
April 27, 2009

Thank you. And, thank you to Diana (Henriques) for that very kind introduction.

It's an honor to be here with you today because in so many ways we share the same goal. We all strive to achieve an "informed citizenry."

Through your reporting and writing, you help to make Americans smarter and wiser — not just about business in general, but about the financial markets in particular.

And, that actually makes our job at the Securities and Exchange Commission easier.

For me — and for the SEC — it is all about investors. The more high-quality, honest information investors have, we believe the better off they are.

Since becoming Chairman a few short months ago, my focus has been revitalizing the one agency whose primary responsibility is to protect investors.

The Birth of the Investors' Advocate:

As many of you know, the SEC grew out of a tumultuous time in our nation's financial history. Following the Great Crash of 1929, Congress passed two significant pieces of legislation whose goals were clear — protect investors and restore investor confidence.

It was 75 years ago this very day that the House Committee reported out the bill that created our agency.

That Committee report — from April 27, 1934 — references the words of President Roosevelt himself.

At the time, the President was concerned with what he called naked speculation — or investments with significant risk. He said such "speculation has been made far too alluring and far too easy for those who could and for those who could not afford to gamble."

And he talked about his concern that workers were risking their pay checks or meager savings on transactions that they barely understood — or in his words investments "with whose true value they were wholly unfamiliar."

That is why President Roosevelt urged passage of the legislation — legislation he said was "for the protection of investors, for the safeguarding of values, and, so far as it may be possible, for the elimination of unnecessary, unwise, and destructive speculation."

A few weeks later the Exchange Act of 1934 passed. And, the SEC was born.

It wasn't long before one of the early Chairmen, declared the agency the "investors' advocate." And, for 75 years, the agency has largely been known by that moniker. But not unfailingly, and that is part of what I want to talk to you about today.

Now, More than Ever:

It is perhaps stating the obvious to note that given the current state of our economy, the value of our pensions and 401k's, our aging demographic and the complexity of financial transactions, that there has never been a time when investors have needed a strong advocate more than they do today. They understandably lack confidence in the markets as vehicles to support their financial security.

The SEC must play a central role in restoring that confidence for a simple reason: Until investors believe that they are not powerless pawns in the financial markets, until they believe in the basic integrity of financial markets, they will put their money in mattresses rather mutual funds — in bread boxes rather than bonds. And, that only serves to further undermine our economy.

As all of you in this room understand, investments fuel our economic growth. They help the factory down the road hire more workers. They make it possible for a recent college graduate to start up a small business. They enable manufacturers to innovate. And, they allow municipalities to build roads, bridges and hospitals.

How we got to where we are today is a question that many will debate for years to come. But, it is clear to me that the responsibility lies with many:

• from the institutions that cobbled together and aggressively sold risky financial instruments
• to ratings agencies that allowed the integrity of ratings to take a back seat to their business interests
• to mortgage originators who made complex loans to those who could not afford them
• to regulators that didn't fully embrace the need for regulation or didn't appreciate the significant risks building throughout the entire system
• or, in the case of the SEC, simply didn't hew faithfully to the mission of investor protection — whether because of a lack of resources or because of philosophy

Reforming the Landscape:

As a result, there is significant debate about regulatory reform — not about whether it should happen, but about what form it will take. You might say the train has left the station, but no one quite knows for sure where it will come to stop.

Whatever form it takes, I support the view that there is a need for system-wide consideration of risks to the financial system and to create mechanisms to reduce and avert such systemic risks.

But, at the same time, I believe that any reform must not — and cannot — compromise the quality of our capital markets or the protection of investors.

If we cannot show investors that we are looking out for their interests as much as the interests of the financial institutions — then we will have little success in restoring confidence.

Investors need to see that we are going after those who engage in wrongdoing. They need to see that we are forcing companies to be truthful and transparent in their reporting. They need to see that we are limiting risk in areas where substantial risk is not what they're buying. And, they need to see that we're rooting out fraud.

In short, they need an agency that's there for them — and primarily them. They need an independent agency that exists not just to protect Wall Street, but to protect Main Street.

By offering that to investors, we can help to restore confidence.

The SEC — Independent and Experienced:

When Congress created the SEC they understood not only that this new agency would be protecting investors, but that it would be advocating for individuals who were disparate in their views and not cohesive in force.

So, Congress ensured we were an independent regulator — one that could champion those who otherwise did not have a voice. A regulator that was not afraid to take on the most powerful interests in the land.

Our job is to promote efficiency, competition and fairness around each and every dollar invested.

• We do this by regulating the exchanges and clearing agencies that make our markets work.
• We do this by helping to reduce transaction times to a nanosecond — and by reducing the costs of trades to just pennies.
• We do this by fostering information that is accurate, meaningful, and timely through thousands of disclosure reviews each year.
• We do this through rules that make mutual and money market funds — which hold over $9 trillion of assets — operate for the benefit of investors and only investors.
• We do this by overseeing 5500 broker-dealers and over 11,000 investment advisers.
• And we do this through vigorous enforcement of the law.

Glancing Back, But Moving Forward:

All this is not to imply that every one of our 75 years has been stellar. Or that we've done all that has been expected of us. No, the past year, in particular, has certainly proven that not to be the case.

In real ways, the SEC has not been where investors most needed it, addressing their most pressing issues, responding to the changing world, in a way that should epitomize a world class regulator.

But that doesn't mean we should let ourselves continue to be defined by what we fail to do, rather than by what we can do. We owe it to the American public to do better. And, that is my commitment.

I spent six years at the SEC — as a Commissioner — in the late 80s and early 90s — under three great chairmen who understood the power of an SEC that keeps its eyes firmly on its mission of investor protection. An SEC with an agenda that puts investors first — not just through an aggressive enforcement program — though that is essential — but also through effective rulemaking, market structure changes and creative use of the bully pulpit — can be a powerful force for good in our financial society.

In the short time I've been Chairman, I have begun the efforts to revitalize the agency. I've looked at things we can do differently. And, I have let it be known far and wide that things must change. But I am fortunate in discovering — with just three months on the job — that there is a deep current of enthusiasm and commitment to public service on the part of the staff — ready to be tapped. We are a small agency, but there is no reason why we can't reclaim our position in the pantheon of federal regulators, as one of the toughest.

Enforcement:

In the area of enforcement, I have brought on a new director with more than a decade's experience as a federal prosecutor.

He understands my desire to bring meaningful cases that have the greatest impact and send a strong message. He understands that it is essential to speed up investigations so that cases are brought when they will have the greatest deterrent effect — meaning, right away.

He understands my insistence on removing the stove-piped approach that inhibits information sharing and prevents one office from knowing what another office has already learned. And, he is considering structural changes so that our limited resources are used smarter and more efficiently.

We are both committed to working in partnership with the criminal authorities, state regulators and the Special Inspector General for TARP to leverage the resources of all of the enforcement authorities.

In addition, I have streamlined our enforcement procedures by no longer requiring full Commission approval to launch an investigation. And, I've eliminated the need for full Commission approval before negotiating a settlement with a corporate defendant.

Before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.

Additionally, I brought on a consulting firm to assess and revamp the way we handle the nearly 1 million tips and complaints we get each year. Because we do not have unlimited resources we cannot pursue every lead — we get about 2,000 every day. But we can do a better job ensuring that each tip lands on the right desk and that the person reviewing it has the necessary skills.

Further, we are looking at improving our training programs and hiring new skill sets — from financial analysis to experts in complex trading strategies. It's all an effort to keep pace with the fraudsters and the ever-changing financial concoctions of the day.

For me, the progress cannot be fast enough.

When I review the pipeline of cases I see how much we are confronting.

• We have approximately 150 active hedge fund investigations, some of which include possible Ponzi schemes, misappropriations, and performance smoothing.
• We have about two dozen active municipal securities investigations possibly involving offering frauds; arbitrage-driven fraud; public corruption; and price transparency.
• And, we have more than 50 current investigations involving Credit Default Swaps, Collateralized Debt Obligations and other derivatives-related investments.

… and that's just a small slice.

Policies/Rules:

Enforcement has been the most visible program at the SEC in recent history. But the financial crisis teaches us that there are policy and regulatory gaps that the SEC must also address.

Again, if investors are to have confidence in the ratings assigned to securities, that corporate boards are working on behalf of stockholders, that investment advisers are not running Ponzi schemes, that money market funds won't break the buck, then the SEC needs to be pushing forward a real agenda of reform.

Let me just highlight a few of these:

Money Market Funds:

Nearly $4 trillion are invested in money market funds. When the Reserve Fund broke the buck last fall, it called into question the stability of all funds and has led us to ask how we can bolster the resilience of these funds that have become so important to our economy and to investors.

This June, we will propose enhancements to the rules governing the credit quality, maturity and liquidity provisions that currently apply to money market funds. In addition, we are reviewing whether more fundamental changes are needed to protect investors from runs on the funds, including floating rate net asset values.

Custody:

In response to major investment scams — such as Madoff — and a rash of Ponzi schemes, we will be considering two proposals as part of a package of initiatives designed to better assure the safekeeping of investor assets.

In short order, the Commission will consider a proposal to strengthen the controls applicable to investment advisers with custody of client funds and securities. I anticipate that this proposal will include a consideration of "surprise" examinations by a certified public accountant, and a requirement that investment advisers undergo third-party compliance audits.

Also, as part of this package, I have asked the staff to draft a Commission requirement that a senior officer from broker-dealers and investment advisers with custody certify that controls are in place to protect investor assets.

Proxy:

Finally, the Commission will be considering a proposal next month to remove the barriers that make it costly and difficult for a company's owners to nominate directors. I believe such proxy access is in no small measure about making boards more accountable for the risks undertaken by the companies they manage.

We want to ensure that any procedural requirements for access are rational, and not a means to thwart effective investor participation, yet we want to act expeditiously to resolve these longstanding issues.

In addition to these we are looking at expanding the pay-to-play rules, better disclosure regarding municipal securities; regulating hedge funds and seeking whistleblower authority. These are of course just a few of the many proposals we are considering in the interest of investors.

While much has changed since I was last a Commissioner at the SEC, what hasn't changed is the commitment I see on the faces of every employee. We all were drawn to the SEC because we believe we can make a difference — in the lives of investors and in the strength of America's capital markets and economy.

The economic situation has impacted most every American. And it has profoundly affected the confidence of investors. They deserve to know that the SEC is working to restore that confidence and protect their interests. And I pledge to them that is my mission.

Thank you.

http://www.sec.gov/news/speech/2009/spch042709mls.htm

Other cases that resulted in big settlements involved allegations of conflicts of interest and suspicions of a Ponzi scheme

TO BE NOTED: From the NY Times:

"Last year, the Securities and Exchange Commission faced criticism that it had been lax in its duties as a financial enforcer. This year, under its new chairwoman, Mary L. Schapiro, it appears to be working to change that impression. It is picking up the pace of financial settlements.

Skip to next paragraph

The New York Times

In the first quarter of 2009, the S.E.C. reached 182 new financial settlements, according to NERA Economic Consulting. That compares with 157 in the year-ago period and 123 in the previous quarter.

The largest S.E.C. settlement, for $200 million, involved UBS, accused of facilitating tax evasion. The second largest, for $177 million, involved Halliburton and a former unit, KBR, which were accused of bribing foreign officials. (The companies also settled with the Justice Department in these cases.)

Other cases that resulted in big settlements involved allegations of conflicts of interest and suspicions of a Ponzi scheme. PHYLLIS KORKKI

Next Article in Business (16 of 24) » A version of this article appeared in print on April 26, 2009, on page BU2 of the New York edition."