22 octobre 2011 Recognizing Frauds.
When is it “too good be true” and what to do if it is.
Typical ways to cheat, and why they don’t work, at least in the long run.
Insider trading. SEC rules, 10(b)5. Anything you pick up in a publication should not
be insider information. No need to worry about it.
Rule 10b-5: Employment of Manipulative and Deceptive Practices”:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security.”
Elements of the offense:
In order to establish a claim under Rule 10b-5, plaintiffs (including the SEC) must
show (i) Manipulation or Deception; (ii) Materiality; (iii) “In Connection With” the
purchase or sale of securities; and (iv) Scienter. Private plaintiffs have the additional
burden of establishing (v) Standing - Purchaser/Seller Requirement; (vi) Reliance;
(vii) Loss Causation; and (viii) Damages.
In a case for insider trading, anyone who uses insider information can be held liable.
A tippee can be liable if the tipper breached a fiduciary duty and the tippee knew or
had reason to know that the tipper was breaching the duty.
Beware information from people who actually work for the company involved, they
might know, or leak, something which is still confidential. Don’t act on it.
Ponzi Schemes: First guy’s money is used to pay the above average return to the
second guy, the second to the third, and so on. It is a bit like a chain letter. Madoff
only one of the latest of many. What his case shows is how little investigation of
their own real experts end up doing. It is always much easier to rely on their friends.
Simple ripoff. Find out “Who are these guys?” What credentials, recommendations.
Look at their website, their literature, and see if they really are what they claim to
be, MBA, JD, admitted to the bar in some state. It is rare, but not unheard of, for an
attorney to get involved with such things, because they will certainly lose their
license in the long run. It is not worth it. “Never steal less than a million dollars.”
Brokerage rigs the deal: Citigroup to Pay Millions to Close Fraud Complaint NY
Times, last week.
By EDWARD WYATT
WASHINGTON — As the housing market began its collapse, Wall Street firms and
sophisticated investors searched for ways to profit. Some of them found an easy
method: Stuff a portfolio with risky mortgage-related investments, sell it to
unsuspecting customers and bet against it.
Citigroup on Wednesday agreed to pay $285 million to settle a civil complaint by the
Securities and Exchange Commission that it had defrauded investors who bought
just such a deal. The transaction involved a $1 billion portfolio of mortgage-related
investments, many of which were handpicked for the portfolio by Citigroup without
telling investors of its role or that it had made bets that the investments would fall
in value.
In the four years since the housing market began its steady descent, securities
regulators have settled only two cases related to the financial crisis for a larger sum
of money. This is also the third case brought by the S.E.C. accusing a major Wall
Street institution of misleading customers about who was putting together a
security and about their motive. Goldman Sachs and JPMorgan Chase & Company
both settled similar cases last year.
The settlement will refund investors with interest and include a $95 million fine — a
relative pittance for a giant like Citigroup. On Monday, the company reported that in
the third quarter alone it earned profits of $3.8 billion on revenue of $20.8 billion.
The settlement may also have trouble getting approval from Jed S. Rakoff, the
federal district judge in New York who must ultimately sign off on the fine and who
has taken a hard line on S.E.C. settlements. Neither the S.E.C. nor the Justice
Department would say whether the case raised questions about whether Citigroup
had been involved in any criminal wrongdoing. But the case highlights a growing
frustration felt by foreclosed homeowners, investors and Wall Street protesters
alike that few, if any, senior banking executives have faced criminal charges for
losses growing out of the financial crisis.
Citigroup has settled one case stemming from the crisis. Last year, it agreed to pay
$75 million to settle federal claims that it hid from investors vast holdings of
subprime mortgage investments that were losing value during the crisis and that
ultimately prompted the federal government to rescue the bank.
“The securities laws demand that investors receive more care and candor than
Citigroup provided” to investors in the security, said Robert Khuzami, director of the
S.E.C.’s enforcement division, referring to Wednesday’s action. “Investors were not
informed that Citigroup had decided to bet against them and had helped to choose
the assets that would determine who won or lost.”
The complex amalgamation of investments known as Class V Funding III produced
$126 million in profits for Citigroup’s brokerage subsidiary, and another $34 million
in fees for putting it together. All of that, including interest and the $95 million fine,
will now be going back to the investors; the government will not receive anything.
In a statement, Citigroup noted that the S.E.C. did not charge it with “intentional or
reckless misconduct.” Rather, it settled charges that its actions were negligent and
misleading to investors. Despite its profits on the current deal, over all Citigroup lost
tens of billions of dollars on its holdings of mortgage-related investments.
“We are pleased to put this matter behind us and are focused on contributing to the
economic recovery, serving our clients and growing responsibly,” the company said
in a statement. “Since the crisis, we have bolstered our financial strength,
overhauled the risk management function, significantly reduced risk on the balance
sheet and returned to the basics of banking.”