Monthly Archives: February 2009

Hedge fund managers Paul Greenwood and Stephen Walsh lived the life of Riley – and they did it on investors’ money. Lavish mansions, horse farms, paintings, cars, even a rare collection of Steiff teddy bears were bought courtesy of a decade-long con game that has left investors, pension funds and universities out millions of dollars.

On Feb. 25, the swindle came to an end with the arrest of Greenwood and Walsh by federal agents for allegedly misappropriating $550 million from investors. The two men face charges of conspiracy, securities and wire fraud charges.

In addition, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against the pair. In its complaint, the CFTC says that beginning in 1996, Greenwood and Walsh fraudulently solicited approximately $1.3 billion from individuals and entities through their Westridge Capital Management and WG Trading Investors, LP hedge funds.

The arrest of Greenwood and Walsh comes just days after the Iowa Public Employees’ Retirement System reported that nearly $340 million in Iowa pension funds had been frozen following the suspension of Greenwood and Walsh’s trading privileges by the National Futures Association (NFA). 

From at least 1996 through February 2009, federal authorities believe Greenwood and Walsh operated a fraudulent commodities trading and investment advisory scheme using WG Trading as their front. The two men reportedly enticed investors with promises of a conservative trading strategy called “enhanced stock indexing,” which they claimed had outperformed results of the S&P 500 Index for 10 years. 

A number of institutional investors, including the Sacramento County Employees’ Retirement System, the Iowa Public Employee’s Retirement System, the University of Pittsburgh and Carnegie Mellon University took the bait and invested more than $668 million. In exchange for their investment, investors received promissory notes that Greenwood and Walsh said would pay interest at a rate equal to the investment returns earned by their enhanced stock indexing strategy.

However, a February 2009 audit conducted by the National Futures Association shows approximately $812 million on the books of WG Investors, with more than $794 million claimed as receivables due from Greenwood and Walsh and investments in entities that they two men controlled.

Instead of investing money, Greenwood and Walsh are believed to have spent more than $161 million on “personal expenses,” including purchases of lavish mansions, rare books, horses and horse farms, a $3 million residence for Walsh’s ex-wife and Steiff teddy bears costing as much as $80,000.

Greenwood and Walsh remain out of jail on a $7 million bond. If convicted, both men face up to 20 years in prison on each of the fraud counts and five years for conspiracy. 

Strangled by the tentacles of toxic subprime mortgages and structured investment vehicles (SIVs), the Florida Local Government Investment Pool (LGIP) is finding itself unable to pull in deposits from once-burned, twice-shy municipalities. 

Florida’s LGIP is used much like a money-market fund by nearly 1,000 school districts, counties and cities in the state Florida. At one time, the fund had $27 billion in assets. Today, the Florida LGIP is down to $5.7 billion after revealing it held billions of dollars worth of below-investment-grade securities. Upon learning that the LGIP had invested in the same kinds of securities responsible for crippling financial institutions and producing $1 trillion of write-downs, investors quickly withdrew more than $13 billion from the fund.

So far, Florida’s LGIP hasn’t lost money. The fund did, however, suspend withdrawals on Nov. 29, 2007, following credit rating downgrades on toxic debt that ultimately reduced its assets by 44%. 

The fund also placed a month’s interest in a reserve account in the event of a future cash shortfall. That move eventually caused a number of municipalities to move their money in rapid fire sequence into banks, Treasuries and private municipal funds. As depositors transferred their assets, another pool for local governments – the Florida Surplus Asset Fund Trust – grew 60% to $255 million in a single year.

The Florida LGIP has since brought in new leadership to shore up its financial and PR issues. Under a reorganization plan created by New York-based BlackRock Inc., the Florida LGIP has eliminated two-thirds of its bad debt, replaced managers and increased oversight. Even those actions, however, appear to be having little impact on restoring investor confidence. 

Missouri Secretary of State Robin Carnahan had harsh words for the brokerage firm Stifel, Nicolaus & Company and its plan to give investors holding auction-rate securities only $25,000, or 10%, or their frozen savings. 

On Feb. 11, Carnahan told Stifel it needed to immediately come up with an alternative solution that will buy back all frozen auction-rate securities from clients, many of whom have had their savings frozen since the collapse of the auction-rate market in February 2008.

Last August, a class-action lawsuit was filed against Stifel, Nicolaus & Company and its parent company, Stifel Financial Corp., by investors who claimed the companies deceived them about the investment risks of auction-rate securities and the auction market in which the securities were traded. Specifically, the lawsuit said that Stifel Financial and Stifel Nicolaus sold and represented auction-rate securities as “cash equivalents or better than money market funds.” 

Following the break-down of the auction-rate market one year ago, a number of Wall Street investment firms and banks agreed to buy back auction-rate securities for the prices their clients had paid for them. The buy-back settlements, which totaled more than $50 billion, put to rest state and federal charges that investment firms had improperly marketed and sold auction-rate securities to investors.

Stifel, the third-largest brokerage based in St. Louis, wasn’t part of the settlements, however. Until recently, the firm refused to buy back auction-rate securities from clients, claiming it did nothing wrong. Other regional brokerages, including Raymond James Financial, also have resisted ARS buy-back programs.

Those decisions have had a devastating effect on ARS investors like Glenn Linke, 80, and his wife, Norma, 73. As reported Jan. 11 in the St. Louis Dispatch, the elderly couple had decided to add a first-story bedroom to their house because they were no longer able to easily climb stairs. When the construction bills came due, they called their broker at Stifel Nicolaus, instructing him to sell some of their weekly CDs.

That’s when the Linkes’ were hit with news no investor wants to hear: Their money was frozen. The weekly CDs actually were auction-rate securities. 

The Linke’s story is typical of many investors stuck in auction-rate securities. Today, at least 33 formal complaints have been filed by Stifel’s auction-rate customers with the Missouri Secretary of State’s office. All report that they were promised auction-rate securities would be the “same as cash.”

On Feb. 11, after hearing Stifel’s plan for its auction-rate customers, one investor called Missouri’s Secretary of State to express his frustration. “Ten percent is nothing but an insult,” said the 60-year-old. “If it wasn’t for Stifel’s misleading sales tactics, I would have all of my savings right now.”

In a press statement released in response to Stifel’s auction-rate plan, Secretary of State Carnahan said the following:

 “After nearly a year, Stifel is finally beginning to address this issue but it is too little, too late for those who desperately need their frozen savings. It is time for Stifel to follow the lead of other major investment banks and give their customers the access to their money that was promised. In these uncertain economic times, my office will continue taking the necessary steps to help these investors get their savings back.”

First there was Bernie Madoff, now Texas financier Robert Allen Stanford is making a name for himself by running an alleged $8 billion fraud scheme. On Feb. 17, the Securities and Exchange Commission (SEC) filed a civil lawsuit against Stanford and three of his companies on charges of orchestrating a fraudulent, multibillion-dollar investment scam that involved an $8 billion certificates-of-deposit program.

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

According to the SEC’s complaint, Stanford lured investors with promises of big returns on certificates of deposit but instead poured money into illiquid real estate and private equity investments. The complaint also alleges Stanford used false historical performance data to add $1.2 billion in revenues to a “proprietary mutual fund wrap program” called Stanford Allocation Strategy.

On Feb. 17, federal authorities raided Stanford Financial Group’s offices in Houston. A sign outside the office now reads: “Under management of receiver.” Currently, Stanford’s whereabouts are unknown. Many believe the money manager may be hiding out in Antigua.

Stanford International Bank is operated by a small group of family and long-time friends, according to a Feb. 17 article by Forbes. The firm’s investment committee, which oversees the bank’s portfolio, is made up of Stanford; his father, James Stanford; Pendergest-Holt, who, the SEC says, had no financial services experience prior to joining Stanford Financial Group; and James Davis, Stanford’s college roommate.

In 2008, SIB promised clients 12-month certificates of deposit paying interest rates of 4.5%. That rate represented a 3.5% premium over two-year U.S. Treasury bonds (which were paying just below 1%). In June of 2005, SIB was offering CDs paying 7.45%.

According to the SEC’s complaint, SIB showed a 1.3% loss on its investments last year while the S&P 500 declined nearly 40%.

The parallels between Madoff and Stanford are uncanny. Like Madoff, Stanford’s fraud appears to have global implications, reaching from the Texas to Caribbean and around the world.  Stanford also lived a lavish lifestyle. Known as “Sir Allen” after being knighted by Antigua’s prime minister, the Texas financier owned private jets and spent millions on sport sponsorships and charities.

Also like Madoff, Stanford offered too-good-to-be-true investment opportunities. Law enforcement agencies questioned his investing strategies as far back as 1998 but, just like the Madoff case, nothing was done until it became too late.

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted investment losses.

Another chapter has been written in the saga on auction-rate securities – and this time it’s a win for institutional investors.  On Feb. 13, the Financial Industry Regulatory Authority (FINRA) ordered the Credit Suisse Group to pay STMicroelectronics NV more than $406 million to settle claims that the brokerage misled the semiconductor maker into buying auction-rate securities.

FINRA’s ruling may well provide additional legal fuel to kick start future auction-rate settlements, with institutional investors more likely to file claims and lawsuits for their own losses in the investments. Said Thomas Hargett, a partner at Maddox Hargett & Caruso PC, in a Feb. 13 article by Reuters:

“FINRA’s ruling is a clear signal that there are opportunities for corporate and individual investors to recover their losses from broker-dealers. The evidence is so compelling against the major broker-dealers that sold this garbage.”

In total, the FINRA arbitration panel ordered Credit Suisse Securities to pay $400 million in compensatory damages, and more than $6.6 million in legal costs, financing fees and interest.

STMicroelectronics’ win against Credit Suisse is the biggest ARS award to date for an investor not covered by last year’s regulatory settlements.

According to the Feb. 13 ruling, STMicro initially instructed Credit Suisse to invest in student-loan securities backed by U.S. government guarantees. Instead, Credit Suisse brokers invested into high-risk collateralized-debt obligations (CDOs), many of which turned out to be backed by toxic subprime real-estate loans. When the housing market ultimately collapsed, those CDOs plunged in value.

STMicroelectronics (NYSE: STM) is an Italian-French electronics and semiconductor manufacturer headquartered in Geneva, Switzerland.

To date, STMicroelectronics has been forced to take a $75 million charge stemming from losses tied to auction-rate securities. 

Investors may get a welcome shot in the arm if Florida’s attorney general and several state lawmakers have anything to say about it. On Feb. 11, Attorney General Bill McCollum joined Senator Garrett Richter and Representative Tom Grady to unveil a legislative proposal designed to strengthen Florida laws protecting securities investors.

According to the Florida Attorney General’s Office, the legislation – Senate Bill 1126 and House Bill 483 – would broaden the ability of state authorities to investigate and pursue securities fraud, as well as enhance registration requirements for investment advisors, dealers and other personnel.

In addition, the proposed legislation gives the Attorney General the ability to participate in civil investigations with the approval of the Office of Financial Regulation.

Grady, a securities attorney and expert in securities regulation, is the author and House sponsor of the bill. Richter, a banker and chairman of the U.S. Senate Banking & Insurance Committee, is sponsoring the bill in the Senate. The legislation is expected to be heard during the 2009 Legislative Session.

In recent months, thousands of Floridians have become victims of securities fraud, including the alleged $50 billion Ponzi scheme orchestrated by Bernie Madoff. On Feb. 11, the Securities and Exchange Commission (SEC) announced that a partial civil agreement had been reached with Madoff. Under the terms of the deal, Madoff cannot contest the SEC’s civil fraud allegations. Possible civil fines and restitution will be decided at a later date.

The civil proceeding is separate from the criminal case against the New York money manager. Today, Madoff remains free on a $10 million bond.

Mired in debt and still facing the nation’s largest municipal bankruptcy, Jefferson County, Alabama, has made little headway to solving its sewer debt crisis. At the center of controversy are members of the Jefferson County Commission, whom many say have let personal issues take a front seat to finding a solution for the ongoing sewer fiasco.

Problems for Jefferson County began seven years ago, when county commissioners entered into an ill-fated arrangement with Wall Street banks to refinance $3.2 billion worth of bonds for a sewer system overhaul. The deal involved highly complex interest-rate swaps that were supposed to protect Jefferson County from rising interest rates on its sewer bonds. Instead, the county faced double-digit interest rates and calls from creditors for the early repayment of the borrowed money. In the process, Jefferson County commissioners turned over $120 million in fees – six times the prevailing rate – to JP Morgan and other financial institutions.

With bankruptcy looming, Alabama Governor Bob Riley struck a deal with the county’s creditors in September 2008 to restructure the county’s $3.2 billion sewer debt at lower, fixed interest rates over a longer term.

Since then, however, a permanent solution to the county’s sewer issue has yet to emerge. Meanwhile, costs continue to climb.

As reported Feb. 12 in the Birmingham News, Jefferson County’s sewer system generates about $138 million a year from customers after paying for system operations. Under terms of the various deals, Jefferson County finance officials estimate they would owe $577 million in debt service this fiscal year alone. By comparison, the county estimated it would need just $125 million annually to cover debt service at the beginning of 2008.

In addition, the county has paid about $5 million for legal and financial advice since last February. Then there’s the cost to get out of those complex interest-rate swaps that the county used to protect itself against rising interest costs on its sewer debt. That has mushroomed to $608 million from about $180 million in March 2008.

As for Jefferson County residents, they’ve also paid the price for the sewer debacle and the fiscal bungling of elected public officials. Sewer rates have skyrocketed over the past decade in Jefferson County, rising more than four-fold. In late December, county commissioners wisely decided to veto yet another sewer-rate increase that would have gone into effect Jan. 1, 2009, and increased sewer charges by nearly 400%.

Meanwhile, the sewer problem continues. Instead of coming up with solutions, the Jefferson County Commission tried to hire a Washington, D.C. lobbying firm to the tune of $1 million to secure federal bailout dollars to pay down the county’s sewer debt. Perhaps in all their misplaced wisdom, commissioners didn’t hear that President Barack Obama takes a hard line on corporate lobbyists.

As it turns out, the lobbying outfit that commissioners wanted to hire, Book Hill Partners, walked away from the controversial contact last week.

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted investment losses. 

Only hours before money swindler Bernie Madoff was arrested on securities fraud charges, his wife pulled $15 million out of a brokerage account. According to a complaint filed Feb. 11 by Massachusetts Secretary of State William Galvin, Ruth Madoff withdrew $5.5 million on Nov. 25 and $10 million on Dec. 10 from Cohmad Securities. On Dec. 11, federal agents arrested her husband for allegedly running a $50 billion Ponzi scheme.

Cohmad Securities was founded by Madoff and friend and former neighbor Maurice “Sonny” Cohn some two decades ago. The company, whose name is combination of Cohn and Madoff, had offices in the same Manhattan building as Madoff’s so-called investment advising business, Bernard L. Madoff Investment Securities. 

As reported Feb. 11 in the New York Post, Cohmad Securities received millions of dollars in service fees and account maintenance from Madoff during the past eight years. According to documents from Massachusetts securities regulators, those payments totaled $67 million and made up 84% of Cohmad’s total income.

In December, both Cohmad Securities and its vice president, Robert Jaffe, were subpoenaed by Massachusetts authorities in connection with the federal investigation of Madoff.

Galvin is now trying to suspend Cohmad’s state license so that the company can no longer act as a broker in the state of Massachusetts.

Meanwhile, Madoff, the alleged mastermind behind the $50 billion Ponzi scheme, remains out of jail on a $10 million bond. So far, federal prosecutors have not charged Ruth Madoff – who’s been married to her husband for nearly 50 years – with any crimes.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.