Wednesday, July 31, 2013

SEC Charges Another SAC Capital Portfolio Manager

The Securities and Exchange Commission charged the tipper of confidential information to a S.A.C. Capital portfolio manager who has been charged with insider trading. The SEC amended its complaint against Richard Lee, who was charged last week, to additionally charge Sandeep Aggarwal, a sell-side analyst who tipped Lee in advance of a July 2009 public announcement about an Internet search engine partnership between Microsoft and Yahoo. 

The SEC alleges that Lee purchased large amounts of Yahoo stock in the S.A.C. Capital hedge fund that he managed as well as in his personal trading account on the basis of the inside information. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Aggarwal, who lives in India but recently returned to the U.S. | SEC Charges Tipper of Confidential Information to S.A.C. Capital Portfolio Manager

Tuesday, July 30, 2013

On Au

Greg Mankiw has a cool New York Times article and blog post, "On Au" analyzing the case to be made for gold in a portfolio, including a cute problem set. (Picture at left from Greg's website. I need to get Sally painting some gold pictures!)

I think Greg made two basic mistakes in analysis.

First, he assumed that returns (gold, bonds, stocks) are independent over time, so that one-period mean-variance analysis is the appropriate way to look at investments. Such analysis already makes it hard to understand why people hold so many long-term bonds. They don't earn much more than short term bonds, and have a lot more variance. But long-term bonds have a magic property: When the price goes down -- bad return today -- the yield goes up -- better returns tomorrow. Thus, because of their dynamic property (negative autocorrelation), long term bonds are risk free to long term investors even though their short-term mean-variance properties look awful.

Gold likely has a similar profile. Gold prices go up and down in the short run. But relative prices mean-revert in the long run, so the long run risk and short run risk are likely quite different.

Second, deeper, Greg forgot the average investor theorem. The average investor holds the value-weighted portfolio of all assets. And all deviations from market weights are a zero sum game. I can only earn positive alpha if someone else earns negative alpha. That's not a theorem, it's an identity. You should only hold something different than market weights if you are identifiably different than the market average investor. If, for example, you are a tenured professor, then your income stream is less sensitive to stock market fluctuations than other people, and that might bias you toward more stocks.

So, how does Greg analyze the demand for gold, and decide if he should hold more or less than market average weights? With mean-variance analysis. That's an instance of the answer, "I diverge from market weights because I'm smarter and better informed than the average investor." Now Greg surely is smarter than the average investor. But everyone else thinks they're smarter than average, and half of them are deluded.

In any case, Greg isn't smarter because he knows mean-variance analysis. In fact, sadly, the opposite is true. The first problem set you do in any MBA class (well, mine!) makes clear that plugging historical means and variance into a mean-variance optimizer and implementing its portfolio advice is a terrible guide to investing. Practically anything does better. 1/N does better. Means and variances are poorly estimated (Greg, how about a standard error?) and the calculation is quite unstable to inputs.

In any case, Greg shouldn't have phrased the question, "how much gold should I hold according to mean variance analysis, presuming I'm smarter than everyone else and can profit at their expense by looking in this crystal ball?" He should have phrased the question, "how much more or less than the market average should I hold?" And "what makes me different from average to do it?"

That's especially true of a New York Times op-ed, which offers investment advice to everyone. By definition, we can't all hold more or less gold than average! If you offer advice that A should buy, and hold more than average, you need to offer advice that B should sell, and hold less than average.

I don't come down to a substantially different answer though. As Greg points out, gold is a tiny fraction of wealth. So it should be at most a tiny fraction of a portfolio.

There is all this bit about gold, guns, ammo and cans of beans. If you think about gold that way, you're thinking about gold as an out of the money put option on calamitous social disruption, including destruction of the entire financial and monetary system. That might justify a different answer. And it makes a bit of sense why gold prices are up while TIPS indicate little expected inflation. But you don't value such options by one-period means and variances. And you still have to think why this option is more valuable to you than it is to everyone else.

Saturday, July 27, 2013

UBS Pays $885 Million Dollar Mortgage Fraud Penalty

UBS has agreed to pay an $885 million fine to U.S. mortgage regulators to settle allegations it defrauded the government. UBS is the third of 18 banks sued by the Federal Housing Finance Agency (FHFA) to settle but the first whose fine payment is known. Citigroup and General Electric paid undisclosed amounts to resolve FHFA litigation earlier this year.


The suits, filed in 2011, accuse banks and other mortgage underwriters of misleading Fannie Mae and Freddie Mac, two FHFA agencies, about pooled mortgages totaling over $200 billion in value. The firms systematically overstated the financial health of the pooled loans when selling them, the suits allege. UBS sold Fannie Mae and Freddie Mac a total of over $6 billion worth of mortgage-backed securities. Citi, GE, and UBS account for a relatively small portion of the total amount in question, at around $10 billion combined. Other firms whose alleged fraud was much larger are likely to continue fighting the lawsuits. Bank of America is on the hook for over $40 billion worth of misrepresentations to the government because of its purchase of Merrill Lynch and Countrywide.


For more information - Big Bank Pays $885 Million Fine For Mortgage Fraud

Friday, July 26, 2013

From Livestock to the Stock Exchange

From Livestock to the Stock Exchange. © Sally Cochrane All Rights Reserved

Artist's description: This is a brief visual history of trade, reading left to right. The first "money" was cattle, represented by the cheese. Ancient Mesopotamians kept track of their cattle exchanges on cuneiform tablets like receipts (we have some at the Oriental institute of Chicago!). The root of the word "pecuniary" comes from the root "pecu" meaning "cattle." Cowrie shells were another early form of currency for trade, and beaver fur, which was very valuable, was used in barter when Europeans discovered the New World. The coins and stock ticker tape represent the modern end of the history. July 2013. 8"x 16" oil on canvas.

Original here with many other sizes.

Sally says the beaver fur was inspired by a Russ Roberts EconTalk podcast, interviewing Timothy Brook on his book Vermeer's Hat. "Part of the book talked about how valuable beaver fur was for making hats that ended up in the Netherlands during Vermeer's lifetime." I don't know how many other artists listen to EconTalk while painting...

Thursday, July 25, 2013

SAC Capital Indicted - Why Bother?

Well the other shoe has dropped. The US Attorney announced the filing of criminal charges against Steven Cohen's firm, SAC Capital. The 41-page indictment that includes four counts of securities fraud and one count of wire fraud, prosecutors charged the fund and its units with carrying out a broad insider trading scheme between 1999 and 2010.

While the government apparently cannot prove that Mr. Cohen had knowledge of the trading, since only an administrative proceeding has been filed against him, the case seeks to attribute certain criminal acts of employees to the company itself, claiming that the fund “enabled and promoted” the illicit behavior.Corporations are "legal persons," capable of suing and being sued, and capable of committing crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To be held liable for these actions, the government must establish that the corporate agent's ations (i) were within the scope of his duties and (ii) were intended,at least in part, to benefit the corporation.

But why bother? There is no jail in which to place a corporation, what is gained, other than headlines? There are a couple of reasons, but principally one - to put the entity out of business. While it is theoretically possible to hold corporate officers liable for the crimes committed by the entity, in reality that is extremely difficult. The goal here is undoubtedly to shut down SAC Capital, not to put it in jail.

The indictment will undoubtedly cause problems for the firm. Many investors do not like publicity, and in partular did not want to be associated with an entity that has been indicted. So, the firm loses investors, and thus capital. In addition, the indictment may trigger termination clauses in the firm's investment and financial agreements triggering termination of important financiing agreements.

There is also the financial penalties available in a criminal case. in the indictment, the government is seeking forfeiture of "all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses" which are set forth in the indictment under Title 18, United States Code, Section 981(a) (1) (C), and Title 28, United States Code, Section 2461. Given the fact that the indictment alleges hundreds of millions of dollars in profits, the forfeiture provisions post a significant threat to SAC Capital's continued existence.

SAC Capital Is Indicted
Enhanced by Zemanta

Tuesday, July 23, 2013

The Value of Public Sector Pensions

The unfunded promises of public sector pensions are in the news, with the Detroit bankruptcy. Josh Rauh at Stanford and Hoover has a nice blog post on the subject titled "Public Sector Pensions are a National Issue''. (Josh and Robert Novy-Marx wrote a very influential paper (ssrn manuscript) alerting us to the size of the state and local pension bomb.)

Josh's baseline number for the value of underfunded pensions: $4 trillion. Why so big, and why is this a surprise? Because many governments calculate their funding by assuming they will earn 8% per year. Discounting a riskless liability (pensions) at a risky rate is a basic error in finance. It's made all the time. University presidents are notorious for demanding their endowments "reach for yield" in order to "make our rate of return targets."

Reading this piece sparks a few thoughts about the risks posed by pensions and other unfunded liabilities.

Let's report risks

How to make the error clearer? Perhaps focusing on present values and arguing about discount rates obfuscates the issue. Let's talk about risk. Maybe it would clear things up if pensions had to report a "shortfall probability" or "value at risk" calculation like banks do. OK, you are assuming an 8% discount rate because you're investing in stocks. What's the chance that your investments will not be enough?   Coincidentally, when I saw Josh's piece I was putting together a problem set for my fall class that illustrates the issue well.

Here is the distribution of how much money you will have in 1, 5, 10, and 50 years if you invest in stocks at 6% mean return, 20% standard deviation of return. I added the mean in black, the median (50% of the time you earn more, 50% less) and the results of a 2% risk free investment in green. (The geometric mean return is 4% in this example.)
(Note: there is a picture here. I've noticed this blog is getting reposted here and there in text-only form. Go to the original if you want the pictures)

The mean return looks pretty good. After 50 years, you get $20 for every dollar invested, or contrariwise an accountant discounting a promise to pay $20 of pensions in 50 years reports that the present value of the debt is only $1. But you can see that stock returns (these are just plots of lognormal distributions) are very skewed. The mean return reflects a small chance of a very large payoff.

In these graphs the chance of a shortfall is 54, 59, 62, and 76% respectively. As horizon increases, you are almost guaranteed not to make the projected (mean) return! The median returns -- with 50% probability of shortfall, in red -- are a good deal lower. And the modal "most likely" return is below the riskfree rate in each case.

How is it that people get this so wrong? Let's look at the distribution of annualized returns in each case. Remember, these are exactly the same situations, we're just reporting a different number.

In these pictures, the distribution of annualized returns is symmetric, the mean and median are the same, and the distributions get narrower and narrower for longer horizons.

Comparing the two graphs, you see that annualized returns are profoundly misleading about the risks you're taking. Annualized returns have a standard deviation that goes down at the square root of horizon. But the actual return has a standard deviation that goes up at the square root of horizon, and exponentiating makes it skewed with the larger and larger chance of underperformance. Money matters, not annualized returns.

So as usual, when arguments are getting nowhwere, perhaps we need to shift the question: please report your shortfall probabilities. And your plans for what you do with shortfalls.

In  many of those cases, the plan for shortfall  comes down to "the Federal Government bails us out" (or ERISA bails out private plans.) Well, if that's true, then we have a different and interesting discounting question. Maybe 8% is the right number if someone else pays the losses!

Finance also teaches us to think about "state contingent payoffs." What does the whole world look like in the bad events? If cities and states can't pay their pensions, this very likely because stocks have performed badly, and because we've had 20 years of sclerotic growth, no growth in tax revenues, to fund the pensions. Stock returns are not uncorrelated with other aspects of state, municipal, and corporate finance. Investing in stocks to fund pensions is like selling fire insurance on your house, rather than buying it. If the house burns down, then you pay the insurance company.

What debt really matters?

Even $4 trillion is not all that huge in the grander scheme of things.  The official Federal debt is $18 trillion. But if you add the present value of unfunded pensions, social security, medicare, Obamacare, and so on you can get numbers like $50 trillion or more. Which, it should be perfectly obvious, are not going to get paid, especially if we stay on the current slow growth trajectory.  But how important is this present-value observation?  Should we routinely add up all the unfunded promises, discount them properly using the Treasury yield curve, and report the grand total?

I worry most about runnable debt. Promises to pay people trillions in the far off future are a different thing than rolling over marketable debt every year. If it looks likely we won't be able to pay pensions in 20 years, there's not all that much pensioners can do about it. If it looks like we won't pay off formal short-term debt, markets can fail to roll over, leading to an immediate financial crisis.

So, much as I value Josh's calculation, and zinging those who want to minimize the necessity of ever paying off debt, it does seem there is a difference between marketable debt that needs to be rolled over every year and promises to pensioners and social security that may eventually be defaulted on, but can't cause an immediate crisis.

The cash flows do matter. If the government has promised to make pension and other payments that on a flow basis drain all its revenues, something has to give. As it has in Detroit.

A too-clever thought

A good response occurred to me, to those cited by Josh who want to argue that underfunding is a mere $1 trillion. OK, let's issue the extra $1 trillion of Federal debt. Put it in with the pension assets. Now, convert the pensions entirely to defined-contribution. Give the employees and pensioners their money now, in IRA or 401(k) form. If indeed the pensions are "funded," then the pensioners are just as well off as if they had the existing pensions. (This might even be a tricky way for states to legally cut the value of their pension promises)

I suspect the other side would not take this deal. Well, tell us how much money you think the pension promises really are worth -- how much money we have to give pensioners today, to invest just as the pension plans would, to make them whole. Hmm, I think we'll end up a lot closer to Josh's numbers.


I used a geometric Brownian process, dp/p = mu dt + sigma dt with mu = 0.06 (6%) and sigma = 0.20 (20%). The T year arithmetic return is then lognormally distributed R_T = exp( mu - 1/2sigma^2)T + sigma root T e) with e~N(0,1). It has mean E(R_T) = exp(mu*T)=exp(0.06*T), median exp[mu-1/2sigma^2)T] = exp(0.04*T) and mode exp[(mu-3/2*sigma^2)T] = exp(0)=1.

FDIC Head Favors Bank Breakup Bill

FDIC placard from when the deposit insurance l...
The Senate's latest proposal to break up the big banks faces an uphill battle, but senior regulator Thomas Hoenig still says it could have a major impact on the movement to separate big banks' commercial and investment activities. Hoenig, the vice chairman of the Federal Deposit Insurance Corp., has long argued that the nation's largest banks should become smaller, simpler and less risky. Last week he threw his support behind a new bipartisan bill that would reinstate the Glass-Steagall law that once barred commercial banks from trading and other capital markets activities. The so-called 21st Century Glass-Steagall Act was introduced this month by senators including Elizabeth Warren and John McCain.
Glass-Steagall Bill Deserves Healthy Debate : FDIC s Hoenig | Financial Planning
Enhanced by Zemanta

Monday, July 22, 2013

Are we prepared for the next financial crisis?

This is the title of a very well-prepared video made by Hal Weitzman, Dustin Whitehead and the Booth "Capital Ideas" team, based on interviews with many of our faculty. Direct link here (Youtube)

Friday, July 19, 2013

Health Insurance and Labor Supply

I just ran across an interesting paper, "Public Health Insurance, Labor Supply, and Employment Lock" by  Craig Garthwaite,  Tal Gross and my Booth colleague Matthew Notowidigdo.

They study an interesting event
... In 2005, Tennessee discontinued its expansion of TennCare, the state’s Medicaid system. ... Approximately 170,000 adults (roughly 4 percent of the state’s non-elderly, adult population) abruptly lost public health insurance coverage over a three-month period.
The result was
a large and immediate labor supply increase....we find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage. 

They call the phenomenon "employment lock." This is different from "job lock," people with preexisting conditions who stay with jobs they didn't want in order to keep health insurance. "Employment lock" is the choice by healthy people to work at all in order to get  insurance, or put in academic prose, "strong work disincentives from public health insurance that are unrelated to strict income-based eligibility limits."

The converse is a new danger for the ACA
Additionally, our estimates may provide useful guidance regarding the likely labor supply impacts of the ACA...

If such individuals could instead acquire affordable health insurance apart from their employer, many of them would exit the labor force entirely. As a result of employment lock, policies that expand access to health insurance apart from employers (such as the ACA) may have large labor market effects

... Using CPS data, we estimate that between 840,000 and 1.5 million childless adults in the US currently earn less than 200 percent of the poverty line, have employer-provided insurance, and are not eligible for public health insurance.Applying our labor supply estimates directly to this population, we predict a decline in employment of between 530,000 and 940,000 in response to this group of individuals being made newly eligible for free or heavily subsidized health insurance. 
They are quick to point out that this is not necessarily a bad thing."the effects do not necessarily imply a welfare loss for individuals choosing to leave the labor force after receiving access to non-employer provided health insurance." If people only work at a job they hate in order to get health insurance, then people may be better off not working. The policy world often just assumes more employment is always a great thing, which isn't true.

However, less employment is not necessarily a good thing either. These are childless adults. How are they supporting themselves if they don't work? Can it possibly be optimal for them to just sit around the house? We surely don't want to compare employer-provided health insurance with highly subsidized individual insurance for the unemployed-- that's a subsidy to leisure and obviously skewing the scales.

Most of all, low-income single people face extraordinarily high marginal tax rates and other disincentives to work. So, an artificial incentive to work in order to get health insurance may offset some of the otherwise irresistible incentives not to work. (A good calculation for Casey Mulligan!)

And whether the people are in the end better off working or staying home and receiving larger subsidies, the government and taxpayers are clearly worse off, as the people and their employers are not paying taxes any more.

In sum, academic caution aside, inducing a million childless adults to leave legal employment doesn't look like a good thing to me.  

The evidence is pretty cool. Here are some pictures lifted from the paper.

SEC Files Admin Proceeding Against Steven A. Cohen

Seal of the U.S. Securities and Exchange Commi...
After months of speculation, the SEC filed administrative proceedings against Steve Cohen, the founder of SAC Capital Advisors, one of the largest and most well known hedge funds in the country.The fact that they filed an administrative proceeding rather than a civil case in court, indicates that they do not believe they can prove that there was fraud involved in their investigation, and that they do not believe he was engaged in insider trading. If they thought they could prove insider trading, they certainly would have been a civil, if not criminal case.

The charges involve allegations that he failed to supervise his employees and to prevent them from engaging in insider trading. Specifically, the Commission alleges that on two separate occasions in 2008, two portfolio managers who reported to Cohen obtained material nonpublic information about three different publicly traded companies. The Commission alleges that both portfolio managers provided information to Cohen indicating that they may have had access to inside information to support their trading. Based on that information, both portfolio managers engaged in unlawful insider trading. 

That is a typical SEC-style allegation. The allegations are full of innuendo and speculation, and perfectly innocent statements and text messages presented as "evidence" of wrongful conduct. The Commission does NOT allege that the managers told Cohen that it was inside information, it alleges that the information indicated that they may have had access to inside information. Those two statements are very different, but undoubtedly intended by the Staff to imply that Cohen knew it was inside information.

Clearly that is not the case, or this would not be an administrative proceeding. I think we can confidently conclude that the Commission does not have any information that Cohen knew of the use of any inside information.

This becomes clear when the Commission alleges that "Cohen received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws."

Parsing the Commissions factual allegations there are far too many conclusions, such as "Cohen was aware" and implications to convince me that the Commission has a case. Clearly, if they had evidence that Mr. Cohen was in fact "aware" and allowed the trades to be placed he would be the subject of an insider trading case, not a failure to supervise case.

While this all makes for interesting reading and exploration to securities attorneys who are interested in insider trading cases, really is not fun and games. The Commission spent a significant amount of time investigating Mr. Cohen for insider trading, undoubtedly hoping to catch a career making big fish. Obviously there was no such case.

However, rather than closing the investigation, they file this administrative proceeding, which could have a significant impact on Mr. Cohen's ability to conduct business. Although the Commission did not ask for any specific relief in its complaint, in the press release they claim that they will be seeking financial penalties as well as a "supervisory and financial services industry bar."

We will continue to review the allegations, but at this point in time it appears that not only is the proceeding excessive, discussions of "financial services" bars are a flight of fantasy.

We will update as the case progresses.

Press Release:SEC Charges Steven A. Cohen with Failing to Supervise Portfolio Managers and Prevent Insider Trading

The Administrative Order Filing the Charges 

Related articles
Enhanced by Zemanta

SEC Charges Two Executives in Ponzi Scheme At Dallas-Based Medical Insurance Company

The SECcharged two executives at a Dallas-based medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleges that the two executives solicited investments for Global Corporate Alliance (GCA) by promoting it as a proven business with a strong track record of generating revenue from the sale of limited-benefit medical insurance. In reality, GCA was merely a start-up company with no operating history and virtually no revenue. As they raised investor funds, the executives used proceeds from new investors to pay returns to existing investors. Once they couldn’t find any new investors, the executives used a stall campaign of purported excuses to delay making any further payments to investors.

“[The executives] raised millions of dollars by lying to investors about their company’s business and history and their planned use of investor funds,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office.  “When they could no longer fuel their Ponzi scheme with money from new victims, they told more lies in a failed effort to prevent their scheme from unraveling sooner.”

David Peavler, Associate Director of the SEC’s Fort Worth Regional Office, added, “[The executives] created fake monthly statements to falsely portray GCA as a thriving health insurance company successfully enrolling thousands of premium-paying policyholders each month. In reality, they never had more than 40 policyholders, and half of those were GCA’s own employees.”

For more information, visit SEC Charges Two Executives in Ponzi Scheme At Dallas-Based Medical Insurance Company.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or  by email

Related articles
Enhanced by Zemanta

EC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The SEC charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.

The case is the latest from the SEC's Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S. The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People's Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company's chairman signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company's external auditor and an internal investigation ensued, the chairman attempted to pay off a senior accountant assigned to the case.

"Investor confidence in the representations made by publicly-traded companies is critically important to the proper functioning of our financial markets," said Antonia Chion, Associate Director in the SEC's Division of Enforcement. "China MediaExpress and [its chairman] falsely reported whopping increases in its cash balances and deceptively raised money from stock sales. Today's action demonstrates the Commission's commitment to policing financial fraud in the U.S. markets, regardless of whether it is perpetrated by persons who live here or abroad."

For more information, visit EC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case.


The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at
Enhanced by Zemanta

SEC Obtains Freeze on Proceeds from Unlawful Distribution of Biozoom Securities

Seal of the U.S. Securities and Exchange Commi...
The SECannounced charges against eight Argentine citizens who unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also obtained an emergency order to freeze assets in the U.S. brokerage accounts of the eight defendants and two other Argentine citizens who had Biozoom shares but had not yet sold them. The action follows last week’s suspension of trading in Biozoom due to concerns that some shareholders may be unlawfully distributing its securities.

Biozoom, formerly Entertainment Art, Inc., announced in April that it was changing its name and moving from producing leather bags to developing biomedical technology. The SEC’s complaint alleges that from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company’s total outstanding shares. In a one-month period beginning in mid-May, eight of them sold more than 14 million shares. The sales yielded almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze.

The SEC’s complaint, filed in U.S. District Court in Manhattan, charges the eight defendants along with two others who received shares but have yet to sell them.

“Today’s action, along with the SEC’s trading suspension order last week, demonstrate the SEC’s ability and commitment to act swiftly to halt ongoing illegal conduct and preserve assets,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement.

For more information, visit SEC Obtains Freeze on Proceeds from Unlawful Distribution of Biozoom Securities.


The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at

Enhanced by Zemanta

SEC Announces Compliance Outreach Program Regional Seminars for Investment Adviser and Investment Company Senior Officers

The SEC announced the schedule for its upcoming Compliance Outreach Program regional seminars in several cities around the country for investment adviser and investment company senior officers, including chief compliance officers (CCOs).

The SEC's Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement's Asset Management Unit are jointly sponsoring the regional seminars for investment companies and investment advisers. The seminars highlight areas of focus for compliance professionals. They provide an opportunity for the SEC staff to identify common issues found in related examinations or investigations and discuss industry practices, including how compliance professionals have addressed such matters.

The Compliance Outreach Program was created to promote open communication on mutual fund, investment adviser, and broker-dealer compliance issues. The program, formerly known as the CCOutreach Program, was redesigned in 2011 to include all senior officers, not just CCOs, underscoring the importance of compliance throughout a firm's business operations.

For more information on the Outreach Program, visit SEC Announces Compliance Outreach Program Regional Seminars for Investment Adviser and Investment Company Senior Officers.

The attorneys at Sallah Astarita & Cox, LLC have decades of experience in compliance, regulatory audits and investigations. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at

Enhanced by Zemanta

SEC Obtains $13.9 Million Penalty Against Rajat Gupta

The SEC obtained a $13.9 million penalty against a former Goldman Sachs board member for illegally tipping corporate secrets to a former hedge fund manager.  The board member also is permanently barred from serving as an officer or director of a public company.
The SEC previously obtained a record $92.8 million penalty against the hedge fund manager for prior insider trading charges.

“The sanctions imposed today send a clear message to board members who are entrusted with protecting the confidences of the companies they serve,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.  “If you abuse your position by sharing confidential company information with friends and business associates in exchange for private gain, you will be prosecuted to the fullest extent by the SEC.”

In its complaint filed in late 2011, the SEC alleged that the board member disclosed confidential information to the former hedge fund manager about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs as well as nonpublic details about Goldman Sachs’ financial results for the second and fourth quarters of 2008.

Thursday, July 18, 2013

SEC Halts Texas-Based Forex Trading Scheme

The SECannounced an emergency asset freeze against an unregistered money manager and his companies in Plano, Texas, who are charged with defrauding investors in a foreign currency exchange trading scheme.

The forex market is a large and generally liquid financial market in which the risk of loss for individual investors can be substantial. The SEC has previously warned individual investors about the risks involved with forex trading.

The SEC alleges a forex trader raised more than $7.1 million from investors by touting a sophisticated low-risk forex trading strategy yielding astronomical returns. He advertised his purported "25-year Wall Street career." In reality, the forex trading has incurred losses of investor funds, and the forex trader actually spent only six years as a licensed securities professional in Houston before being barred by the New York Stock Exchange two decades ago. The forex trader also lied about his education. Meanwhile, he has siphoned away more than $1.7 million of investor money to pay personal expenses, finance expensive trips, and fund other unrelated and undisclosed businesses and investments.

"[The forex trader] and his companies brandished phony credentials and a can't-miss trading strategy to lure investors into a web of deceit," said David Woodcock, Director of the SEC's Fort Worth Regional Office. "In reality, [the forex trader] was suffering forex trading losses and putting investor money to other uses."

The Commodity Futures Trading Commission(CFTC) today announced parallel charges against the forex trader and his companies.

According to the SEC's complaint that was unsealed late yesterday in U.S. District Court of the Eastern District of Texas, [the forex trader] raised investor money through two entities that he owns and controls: KGW Capital Management and Revelation Forex Fund. KGW Capital purports to be "one of the world's leading private investment firms."

For more information, visit SEC Halts Texas-Based Forex Trading Scheme.


The attorneys at Sallah Astarita & Cox, LLC include veteran securities litigators and former SEC Enforcement Attoreys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at

Enhanced by Zemanta

SEC Freezes Assets Of Insider Traders in Onyx Pharmaceuticals

The SECobtained an emergency court order to freeze the assets of traders using foreign accounts to reap approximately $4.6 million in potentially illegal profits by trading in advance of the Sunday, June 30, 2013 announcement that Onyx Pharmaceuticals, Inc. had received, but rejected an acquisition offer from Amgen, Inc.

The SEC alleges that unknown traders took risky bets that Onyx's stock price would increase by purchasing call options on June 26, 27 and 28, the three trading days before the announcement. Through quick, cross country coordination between the agency's Los Angeles and New York offices, the SEC took emergency action to freeze the traders' assets before courts closed for the holiday.

"This action demonstrates that the SEC will not hesitate to freeze the assets of suspicious foreign traders when the timing and size of their trades indicate that they were misusing inside information, and use of foreign accounts will not dissuade us," said Michele Wein Layne, Director of the SEC's Los Angeles Regional Office.

According to the SEC's complaint filed in federal court in Manhattan, on June 30, 2013 Onyx announced that it had received, but rejected, an unsolicited proposal from Amgen to acquire all of Onyx's outstanding shares and share equivalents for $120 per share in cash. The Announcement also stated that Onyx's board of directors rejected Amgen's proposal and that Onyx had authorized its financial advisors to contact potential acquirers who may have an interest in a transaction with Onyx. Amgen's $120 per share price offer represented a 38% premium to Onyx's closing share price on Friday June 28, 2013. The complaint further alleges that as a result of the announcement, Onyx's share price increased from a close of $86.82 on over 51% on Monday July 1 compared with the prior trading day's closing price, and that the trading volume of its stock increased by over 900% that day. The complaint alleges that the traders, as a result of these well-timed trades, collectively earned a profit of approximately $4.6 million in just three days.

For more information, visit SEC Freezes Assets Of Insider Traders in Onyx Pharmaceuticals.


The attorneys at Sallah Astarita & Cox, LLC include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at

Enhanced by Zemanta

BNY Mellon Expanding Wealth Management

BNY Mellon Wealth Management is delivering on its plan to boost its sales force. Since announcing its long-term recruiting campaign in late May, the wealth manager has made a string of hiring announcements, the most recent of which include the addition of three sales directors in Miami, West Palm Beach and San Francisco.

BNY Mellon Wealth Management Adds Three More to Sales Force


The attorneys at Sallah Astarita & Cox  have decades of experience in securities litigation matters, including broker transition, bonus payments, employee forgiveable loans and employment agreements, as well as the negotiation and litigation of resignations and terminations. For more information contact Mark Astarita at 212-509-6544 or by email

SEC Charges San Diego-Based Promoter in Penny Stock Scheme

The SEC charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that the promoter artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What the promoter didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, the promoter paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today filed criminal charges against the promoter.

“[The promoter] tried to artificially inflate the price and volume of iTrackr shares to the detriment of retail investors who wouldn’t have known the real story behind the flurry of market activity,” said Michele Wein Layne, Director of the SEC’s Los Angeles Office. “Working with criminal authorities, we were able to stop [the promoter]’s misconduct before he could seriously impact the markets and harm investors.”

The SEC also has issued an order to suspend trading in iTrackr securities.

According to the SEC’s complaint filed in federal court in San Diego, the promoter set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. [The promoter] arranged for the dissemination of promotional material that overstated the likelihood of iTrackr’s success and future profits.

For more information, visit SEC Charges San Diego-Based Promoter in Penny Stock Scheme.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attoreys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or  by email

Enhanced by Zemanta

Wednesday, July 17, 2013

A Ray of Hope? Hospitals Post Prices

I was intrigued by news stories of an Oklahoma hospital posting prices for surgery -- prices far below those offered by its competitors. Here is the article and the surprisingly low price list.  Several competitors felt the pressure to slash and post prices.

A fascinating tidbit: "Surgery Center of Oklahoma does accept private insurance, but the center does not accept Medicaid or Medicare. Dr. Smith said federal Medicare regulation would not allow for their online price menu. They have avoided government regulation and control in that area by choosing not to accept Medicaid or Medicare payments."  Well, so much for the idea that regulations encourage competition and lower prices.

This is a ray of hope -- that the sort of competitive free market health care I envisioned in "After the ACA" can emerge as people abandon the complete dysfunctionality of the highly regulated system.

I had seen the emergence of "concierge medicine," and cash and carry doctors, who step off the highly regulated insurance and government treadmill. But if you get really sick, you need a hospital. And traveling abroad isn't always an option. So the emergence of US cash and carry hospitals is interesting and encouraging.

This innovation clearly undermines the regulated system. A healthy young person knowing there are doctors who post reasonable prices and take cash, and now similarly reasonable cash and carry surgery, might be well advised to pay the Obamacare tax and skip out of the whole system. A bit of savings or a catastrophe only policy is enough. 

But before you cheer that Obamacare will die of its own weight, look hard at the other side. The government needs everyone in the system, especially the relatively healthy and solvent customers of this hospital.  It also needs hospitals and doctors to take medicare patients. The emergence of a two-track system is a financial and political disaster. So, how long can it last before the government bans it? Other countries have banned private practice to support their government health systems.  Ours will likely go down fighting, and this is the obvious move. In addition, the hospitals that don't want to compete have strong political power to shut this down, and will make the same cherry-picking complaints that airlines and phone companies used to keep their protections in place. It will not survive easily. 

Readers: I'm back from a short vacation (national gliding contest), sorry for the silence.