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In 2012, Global Economy ‘A Tale Of Two Worlds’

by Jillian Berman on December 24, 2011

Huffington Post…

LONDON (Reuters) – Europe faces another year of dismal economic performance in 2012 that will weigh on global growth, but emerging markets and the United States should at least keep the world economy moving in the right direction. There are several reasons why next year may be nothing to look forward to, according to Reuters polls from the last few months. Many of the world’s biggest developed economies are heading into recession, global stock markets look set to recoup only a fraction of their heavy losses in 2011, oil prices will head lower, and asset managers are unsure where best to invest. And these could be the best-case scenarios. Most economists base their assumptions on the hope that the euro zone’s sovereign debt crisis will not boil over into a new global economic crisis, having already dented growth in major exporters to Europe. Still, most of the major emerging market economies like Brazil and China should pick up speed later next year. All of them have suffered from slowing economies in recent months, caused mainly by tightening monetary policy in the face of high inflation. “It’s important to stress the world economy is still growing. But it’s a tale of two worlds,” said Gerard Lyons, chief economist at Standard Chartered Bank. “The storyline for 2012 is that Europe drags the world down in the first half of the year, and China drags it up in the second half of the year.” Enormous political risks cloud the outlook further, with elections and leadership changes in the most powerful countries and the prospect of continuing turmoil in the Middle East. Still, there are glimmers of hope. The United States’ economy has performed better than most had hoped over the last quarter, and Reuters’ polls of economists show it growing around 2.2 percent in 2012, compared with zero growth in the euro zone. “The big unknown in Europe and the U.S. is that big companies, with balance sheets in good shape, have the ability to invest at home if they want. It’s more likely that will take place in the U.S. rather than Europe,” said Lyons. THE EURO ZONE QUESTION European Union leaders took a historic step towards greater fiscal integration earlier in December, but economists have been clear that this would not ease a debt crisis entering its third year and still hogging the headlines in 2012. Reuters polls show real concern that leaders are doing far too little to stimulate growth, with the likes of Spain and Italy destined for long and painful recessions. The euro zone as a whole, meanwhile, is probably in a moderate recession right now that will last midway into 2012. “The euro area continues to be a source of economic and financial instability for the rest of the world,” said Juan Perez-Campanero, economist at Santander, in a research note. “We could be facing a more permanent and lasting decline in growth capacity in developed economies and, particularly, the euro area.” Whether Spain and Italy will need to seek funding from the euro zone’s bailout facility next year is open to question, with a very slim majority of economists polled this month – 27 out of 56 – saying not. And a November survey of 20 top economists and former policymakers in academia and respected research institutes showed 14 of them do not expect the euro zone to survive in its current form. Even in Japan, where economists have downgraded growth forecasts relentlessly, the economy is expected to pick up in the fiscal year from April and expand 1.8 percent. Japan should narrowly avoid a recession, but polls show little hope it will emerge from deflation any time soon. ASSESSING THE ASSETS The severe uncertainty surrounding 2012 is perhaps best reflected by Reuters’ asset allocation poll of more than 50 leading investment houses in the United States, Europe and Japan. Investors raised their cash balance to the highest in a year in December as they prepared for a jittery 2012, although they also moved back into cheap equities, Reuters polls showed on Monday. The euro zone crisis was the key concern of asset managers polled, hence the increased preference for cash as well as moves into British and Asian shares rather than European ones. Similarly, the last quarterly stock markets poll suggested emerging markets will easily outperform European share indexes in 2012, which will struggle to bounce back to end-2010 levels, never mind end-2011. With Europe heading into a recession, oil prices look set to fall from here. Brent crude will average $105 a barrel next year, not far below this year’s record high average near $111. “We expect a mild recession across the OECD next year to put a damper on demand and consequently prices,” David Wech from Vienna-based consultants JBC Energy said. “Nevertheless, the risk to oil prices is definitely on the upside given a still troubled geopolitical environment.” Economic growth is likely to slow among the Gulf’s wealthy oil exporters next year, but governments will remain able to spend to counter the impact of any global slump, a Reuters poll showed on Wednesday. Respondents cited the euro zone debt crisis and signs of slowing growth in China as reasons for the darkened economic outlook in the Gulf. DELAYED CHINESE CHEERS Whatever the euro zone’s future, the effects of the debt crisis have already been felt across the world. The European Union is China’s biggest export market, and manufacturing data there show dwindling levels of foreign new orders. Indeed, the Chinese economy is now growing at its weakest pace since 2009. In an effort to support it the central bank cut reserve requirements at the end of last month for the first time in three years. Economists polled by Reuters after this move, however, said the People’s Bank of China will refrain from more aggressive stimulative policies unless growth falls sharply to below 8 percent. Similarly, India has been suffering from a pronounced slowdown in growth and Reuters polls suggest its central bank will also slacken monetary policy by mid-2012 to counter this, despite stubbornly high inflation. It could be in for a difficult year. “Looking ahead, the economy faces the lagged effects of monetary tightening,” said Leif Eskesen, economist HSBC in Singapore. “Moreover, administrative hurdles and domestic policy paralysis are holding back investments and hurting sentiment.” Brazil’s central bank on Thursday cut its 2011 growth estimate to 3.0 percent, versus its previous estimate of 3.5 percent, and said 2012 would see growth of 3.5 percent. Compared with previous years where growth averaged near double-digit rates, that would be a disappointment, although still a fair improvement on the anaemic rates of most developed peers. Overall, even the slightly depressed growth rates from these developing economic powers will power world growth next year. “It is positive growth, but the picture does vary considerably – not just in terms of the first and second half of the year, but also depending on which part of the world you look at,” concluded Lyons from Standard Chartered. (Analysis by Sumanta Dey in Bangalore, Additional reporting by Anooja Debnath in Singapore, Zaida Espana and Peter Apps in London; Polling by Reuters Polls Bangalore, Editing by Hugh Lawson) Copyright 2011 Thomson Reuters. Click for Restrictions .

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In 2012, Global Economy ‘A Tale Of Two Worlds’

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Bank Of New York Mellon Backs Off From Its Plans For Deposit Fee

by on November 26, 2011

Huffington Post…

(JED HOROWITZ, Reuters) – Bank of New York Mellon Corp, which was derided for a plan to charge some of its large corporate and investment management clients for holding their deposits, appears to have flinched. The bank has not assessed a penny since warning clients about the possible deposit fee in early August, officials told Reuters, although it remains burdened by cash that it cannot profitably redeploy at rock-bottom interest rates. The fee of 0.13 percent was to have taken effect on August 8 for accounts with more than $50 million that had soared well above their monthly averages as clients fled short-term investments for the safety of U.S. banks. “My guess is that the backlash was pretty stringent and they decided not to do it,” said William Gerber, chief financial officer of TD Ameritrade Holding Corp, a cash-management client of Bank of New York. “I can see their problem but I’m not that empathetic considering all the fees we’ve been waiving.” He was referring to hundreds of millions of dollars of money-market mutual fund fees that financial companies have waived over the past two years lest investors realize negative returns on their fund holdings. Unlike Bank of America, which was shamed into withdrawing a plan to charge its customers $5 for debit card transactions after a torrent of articles ridiculing the proposal, Bank of New York said that its super-sized version of its deposit fee is not dead. “We haven’t charged any clients to date, and the policy remains in place as markets remain unsettled and interest rates remain at historic lows,” BNY Mellon spokesman Ron Sommer wrote in an email. The fee, he added, was aimed at “a small number of clients with extraordinarily high and volatile deposit levels.” In its August letter, the bank urged clients to consider cash investment options “to minimize any effect” of the mooted fee. ANXIETY DROVE DEPOSITS The plan was prompted by a flood of deposits from companies, money-market funds and other clients fleeing short-term investments that exposed them in late July to the then-unfolding Greek financial crisis and from U.S. government securities amid a Congressional impasse over raising the U.S. debt ceiling. A source said Bank of New York’s deposits swelled about 39 percent in a period of two weeks in late July and early August to about $250 billion, underscoring the fragility of the global financial system at any sign of panic and creating balance-sheet management challenges for the bank. At the end of September, deposits were 45 percent higher than a year earlier, Chief Financial Officer Todd Gibbons said in discussing third-quarter earnings, though he said the influx had stabilized since earlier in the quarter. Sommer declined to discuss the deposit levels. Bank of New York continues to attract a heavy flow of cash since it has higher ratings from Moody’s Investor Services than trust bank competitors such as State Street Corp and Northern Trust Corp, another official said. Those banks did not match Bank of New York’s deposit fee announcement, although some commercial banks with larger lending businesses that fund loans with deposits have been passing FDIC fees to some of their small-business customers. The policy was initiated under former Bank of New York Chief Executive Robert Kelly, who was ousted in early September and replaced by Gerald Hassell, a 30-plus-year veteran of Bank of New York who some insiders said was more sensitive to client relationships. Kelly took the top role when the New York bank combined in 2007 with Pittsburgh-based Mellon Financial Corp, which he led. “I believe they are backing away from the strategy, Gerard Cassidy, an analyst at RBC Capital Markets, wrote in an email. “Not certain if it is customer backlash or a rethinking of strategy under new CEO.” Custody banks make most of their money from holding securities and other assets for clients worldwide and ensuring that they are properly accounted for and exchanged when clients demand. Bank of New York swapped its 338 retail branches and small business banking businesses in 2006 for JPMorgan Chase & Co’s corporate trust business and $150 million in cash. The deal helped Bank of New York avoid some of the credit problems that continue to depress earnings of more traditional banks, but deprives it of the ability to negotiate on loans and other businesses in return for winning custody activities. Because rates are so low, many custody banks today are less eager to attract new business or are more aggressive about insisting that clients offset the low-return deposit business by using other services, said Anthony Carfang, head of Treasury Strategies, a Chicago-based consulting firm. (Reporting by Jed Horowitz; Editing by Tim Dobbyn) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Bank Of New York Mellon Backs Off From Its Plans For Deposit Fee

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Tom Hayden: Let Wall Street Beware a Risen People

October 3, 2011

The Occupy Wall Street protests begin in Los Angeles today. The Mayor and City Council should acknowledge the justice of their cause. The LAPD should treat them with courtesy. The financial powers should consider that their day of reckoning. Of course the protests might come and go like a gust in the wind. But the wind is here to stay. The organizers are coming to fan it along, through the October 6 demonstrations and the American Dreamers meeting in DC next week. No one can know where the wind will blow. The protests which are spreading are so far thin in numbers, organization and outreach. But sometimes the wind blows sparks. This is no Seattle, where 70,000 trade unionists were assembled, where the clear and creative goal was to stop the functioning of secretive World Trade Organization for a week. This is not Wisconsin, where the present stirrings began, and where tens of thousands of people occupied the freezing Capitol grounds for months against the Tea Party’s plan to strip away political and economic democracy. And this is most definitely not Cairo, though Cairo is an inspiration. The sit-ins of 1960 were the invention of young black students, but it was also a year that celebrated the independence of twenty African states. If the only response of the establishment to this spreading protest is to send in the police with pepper spray, batons, dragging nets, and undercover informers and provocateurs, that bankrupt act on behalf of the filthy rich could inflame hundreds of thousands to respond. Virtually every inner city uprising (riot, call them what you will) of the late 1960s began with a specific incident of police brutality, for example, an assault on a Newark cab driver in 1967. That’s all it took, and it could happen again. Unlikely? Yes, of course. But the future begins by surprise, by accident. It is not the business of the police to protect the lawbreakers of Wall Street or carry out the suppressive counter-intelligence agenda of the FBI. It should not be the role of the police to provoke a new cycle of law-and-order politics to benefit those who already have all the benefits. The police instead should look carefully at Wisconsin where, in a rare act of union solidarity, the police and firefighters took the side of the teachers, students and public employees in spite of the governor’s policy of exempting them from his assault on collective bargaining. A traditional confrontation between police and protesters was averted in Wisconsin. Instead, the forces of “law and order” there aided and abetted the daily occupation of the Capitol by singing, chanting nonviolent occupiers. That’s a possibility of solidarity the rich and powerful of Wall Street need to fear. It is true that candles and fires inevitably burn out. The question may be what sparks are carried on the next wind, or how the embers are tended. Some may want to prove that there’s only one righteous torch, one holy vanguard of fire carriers. We shall see. But the Wisconsin movement shows the example of many torch carriers blazing many paths. Not everyone can camp out around the one fire. Those who encamp also have to make a long march through the institutions, in the long ago words of Rudi Dutschke. Sparks differ from words. Sparks ignite passion in others. Words engage the multitudes who are paying attention, who will do their part, if they feel this is about them. Words like: end these wars, invest in jobs, regulate and tax Wall Street, protect the future. In just six months, next May, both sparks and words may matter very greatly when the powers of NATO and the G-8 will gather in Chicago for five days. Think of it: all those responsible for the long wars, the financial crisis, the growing unemployment and budget cuts, and the erosion of the planet’s life support systems… all of them. Think of the possibilities, a global protest of global power. Could this be where the winds are blowing?

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How Casual Is Too Casual During the Summer?

August 5, 2011

From Inc.: About three-quarters (74 percent) of employees think it’s acceptable for both men and women to dress “more casually” during the summer, according to a recent report. What does “more casually” mean? It depends on who you’re asking. (Hint: Perhaps not surprisingly, men are in favor of women wearing less.)

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New York Post Staff Told To Preserve Documents That May Relate To Phone Hacking

July 30, 2011

LOS ANGELES — New York Post staffers have been told to preserve any documents that may relate to phone hacking or payoffs to officials, as News Corp. prepares for a probe into its U.K. operations to reach across the Atlantic. Post editor Col Allan sent a memo to staff Friday asking them to comply with the request from company lawyers. Allan wrote that as the scandal at News Corp.’s News of the World tabloid unfolded in the U.K. “we knew that as a News Corporation tabloid, we would be looked at more closely.” U.S. Attorney General Eric Holder plans to meet on Aug. 24 with some 9/11 family members about an FBI inquiry into allegations that News of the World journalists attempted to bribe a former New York City policeman to get phone records of Sept. 11 victims. The FBI probe is in its preliminary stages and it is unclear if it will look at News Corp. properties beyond the U.K. tabloid. A News Corp. spokeswoman declined to comment further. Allan told Post employees that the request was made “in light of what has gone on in London at News of the World, and not because any recipient has done anything improper or unlawful.” In a separate communication, News Corp.’s lawyers told Post staffers that “given what has taken place in London, we believe that taking this step will help to underscore how seriously we are taking this matter.” On Friday, the chair of the British parliamentary committee investigating the scandal said he was writing to News Corp.’s deputy chief operating officer, James Murdoch, as well as two former employees to gain clarity on a dispute over Murdoch’s testimony last week. The dispute centered on when Murdoch, the son of News Corp. CEO Rupert Murdoch, was made aware of an email that indicated the practice of intercepting voicemails was widespread at the News of the World, which the company closed two weeks ago. Murdoch said he wasn’t aware of the email until late 2010. But two former News Corp. employees dispute his claim. Over the last few weeks, details emerged that indicated the phone-hacking was much more widespread than once thought, and targeted not only celebrities and politicians but also a 13-year-old murdered girl. On Thursday, a charity co-founded by Sara Payne, the mother of an 8-year-old girl murdered by a pedophile in 2000, said that Payne was also a target of a private detective employed by the shuttered tabloid, who was jailed for the hacking in 2007. News Corp. owns the New York Post and The Wall Street Journal in the U.S., the Sun and Sunday Times in the U.K., more than 140 papers in Australia, as well as Fox News Channel, TV stations and the 20th Century Fox movie studio.

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Daniel Dicker: Strategic Petroleum Reserve Release Under Fire — For Being Effective

June 24, 2011

Argue all you want about the release of 60 million barrels of crude oil from the International Energy Agency, including 30 million barrels from our own Strategic Petroleum Reserve, but one thing you can’t argue is the level of its effectiveness — it is killing the speculators and dropping prices like a stone, at least for now. A lot of pushback from market analysts and oil mavens has emerged in the 24 hours since the IEA decision — that President Obama’s decision was politically motivated for one. Other pundits are convinced that the announcement was coordinated with the Bernanke speech that noted the slowdown in growth acceleration since the start of the recovery. Others are calling the SPR release a new “stimulus” plan, being used because so little is left to be done and the Federal Reserve is holding off on fresh monetary loosening, at least for the present. Argue all the rationales you like, a different QE3, a way for Obama to get ahead of the 2012 elections, I don’t know — but whatever you do, don’t argue how incredibly effective it’s been and how much it will drop gasoline prices, even if only in the short term. Crude oil dropped more than 6% on Thursday alone, despite the fact that the SPR release will represent a literal drop in the bucket — that 60 million barrels is equivalent to 16 hours of global demand, nothing more. The downward move in prices that this release has created, considering how small it is, is nothing less than stunning. It strikes at the heart of the speculators who have been flooding into the oil trade since the start of the year and particularly since the Egypt unrest. It is signalling, whether rightly or wrongly, that sovereign nations are going to use some pretty unorthodox tools to getting at and getting out some of that spec money with no connection to oil other than the desire to make money from a rising price. Along with margin hikes in the past month, this tool should scare the bejeezus out of the hedge fund players and prop desks — the White House intimated that this release should not be considered a “one time only” event. As a market player, you’ve got to be nervous holding long positions with the influence of an SPR release being held over your head. The timing also couldn’t have been better — It is when markets are under pressure that bearish news has the biggest impact. That’s why the argument that oil prices were already coming down and the release was therefore unnecessary was misguided — for full effectiveness, you’d want to release it as a straw to break a camel’s back. With oil streaking higher, a release of reserves would have had far less impact. Will more releases happen? Will this release “do the job” fully? Will it drop prices for the long-haul? Was it a misuse of the SPR and the reason it was created? Is this a political short-term answer to a mismanaged long-term energy policy? All good questions, worthy of answers. But for now, there’s no need to argue how much it has helped, if you’re in favor of lower prices — it’s helped a lot .

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ECB President: Global Imbalances One Of World’s ‘Main Challenges’

June 19, 2011

KIEL (Germany) – European Central Bank President Jean-Claude Trichet on Sunday raised concern about widening global imbalances after the financial crisis, calling them one of the main challenges for the global economy. Global imbalances were blamed for contributing to and aggravating the financial crisis and recession that struck the global economy in 2008 and 2009. “A concern is that after some partial reduction induced by the crisis, global imbalances are starting to widen again,” Trichet said according to a speech text for a ceremony, in which he was awarded the Global Economy Prize 2011 by the Institute for World Economy in the northern German city of Kiel. Such imbalances raise challenges for international monetary and fiscal cooperation, Trichet said, referring to global imbalances as “one of the main challenges facing the global economy and the world community.” Finance ministers of the world’s major economies reached a fudged accord in February on how to measure such imbalances after China prevented the use of exchange rates and currency reserves as indicators. The United States and other western countries accuse Beijing of keeping the yuan artificially undervalued to boost its exports, hence accumulating massive foreign currency reserves that they say distort the world economy. Trichet said the euro zone does not contribute to global imbalances, pointing to projections by the International Monetary Fund which see the euro area current account broadly balanced this year and the next, up to 2015. He pointed out that “the euro area has a significant stake in effective global re-balancing, notably through sounder domestic policies worldwide which, in turn, would contribute to global external stability.” GOVERNANCE The euro zone is struggling with a severe debt crisis, facing its toughest test as it tries to prevent Greece defaulting. The ECB is at odds with governments, including Germany, over a rescue package for Greece, and in particular over the terms of any moves to draw private sector lenders into the bailout operation. Trichet criticized the currency bloc’s policymaking process, saying governance was lacking. “Governance of the economic union is insufficient,” he told an audience in the northern German city of Kiel after receiving the Global Economy Prize. “We are not responsible for governance in the economic union,” he added, referring to the role played by the ECB. “In this domain we act as an adviser.” “We have very hard work today, and improving governance today is exactly what is being negotiated between the council, the … parliament and the commission,” Trichet said. “We are pushing this trialogue … the lessons to be drawn from the present situation are pushing us in the direction of bold changes in governance,” he said. Trichet did not explain what these changes could be, saying it is “work in progress.” (Reporting by Eva Kuehnen; Editing by David Hulmes) Copyright 2011 Thomson Reuters. Click for Restrictions .

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The Wake-Up Call: McConnell Slams EPA During Speech To Coal Group

June 2, 2011

• In a speech before a coal industry group in Kentucky on Wednesday, the U.S. Senate’s top Republican accused the Environmental Protection Agency of declaring war on the coal industry and blamed the Obama administration and Democrats for pushing regulations that he claimed kill jobs and increase energy costs. “Of course, the EPA’s real goal here is not to see the Kentucky coal industry comply with its boatload of regulations and red tape,” said Senate Minority Leader Mitch McConnell (R-Ky.) in his speech to the Kentucky Coal Association . “It is to see the Kentucky coal industry driven out of business altogether.” McConnell is the top recipient in Congress of campaign contributions from the coal-mining industry, having collected $485,000 during his time in office — almost twice as much as the number-two recipient. Saying that “it’s time for Congress to rein the EPA in,” McConnell criticized the agency for its interpretation for regulations, which he claimed made it more difficult for new mines to open. He said that the EPA’s proposals to regulate carbon dioxide emissions from coal plants were tantamount to a “backdoor” energy tax. McConnell expanded his critique, slamming Democrats for pushing a “train wreck” of rules and regulations that he claimed are raising prices and stalling much-needed economic growth in the wake of the recession. • The lobbying blitz over the implementation of financial regulatory reform continues to swamp Washington. About 488 companies, trade associations, unions and other groups reported lobbying on financial reforms in just the first quarter of 2011, compared to 501 groups that lobbied the reforms throughout all of 2009, according to a Center for Responsive Politics study . Among the most heavily lobbied agencies were the Commodities Futures Trading Commission, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which all saw “more lobbying activity during the first quarter of 2011 by groups interested in the Dodd-Frank regulations than in any other quarter since Obama took office.” • Despite mounting evidence of the potential dangers of BPA (the chemical bisphenol-A found in many consumer products), plastics manufacturers have embarked on a public relations and lobbying blitz aimed at “obscuring or confusing the results of research,” say the authors of a new white paper by the Center for Progressive Reform. “There’s a lot scientists don’t know about BPA,” says CPR Member Scholar and white paper co-author Thomas McGarity, a law professor at the University of Texas. “But what they know for sure gives ample reason to limit the use of BPA. Simply put, the chemical is ubiquitous in commerce and in Americans’ bodies as a result. Rather than seeking to confuse and mislead Americans about BPA, the plastics industry should acknowledge the danger and eliminate it.” Among the findings in the report: industry advocates promote the myth of a scientific consensus on the safety of BPA. “In fact, scientists say that BPA is a known endocrine disruptor and that it therefore presents many risks.” • The Obama administration ceded leadership and management responsibilities in the wake of last year’s devastating oil spill to BP, according to a new House Oversight Committee report . In addition, many Gulf residents and local leaders believe that the oil giant is not living up to its obligations. President Obama had to choose between federalizing the response to the oil spill under the Stafford Act or allowing BP to lead the effort under federal oversight under the authorities of the Oil Spill Act. While BP would have been financially responsible for clean-up costs under either scenario, President Obama chose the option of letting BP lead and make critical decisions on recovery efforts under the authority of the Oil Spill Act. Many Gulf Residents and Local Leaders Believe BP is not Meeting its Obligations Failure to fund removal of clean-up equipment debris, uncertainty surrounding mental health services, and frustration associated with the compensation process are among the concerns of affected Gulf Coast residents. Many believe BP is not meeting its obligations and the federal government has abdicated its responsibility to intervene. • Talk about awkward. A man considered an “enemy of the state” found himself face to face last week with the nation’s top law enforcement official, Attorney General Eric Holder, at the Apple Store in Baltimore. The case of Thomas Drake, a National Security Agency whistleblower charged with unauthorized possession of classified documents, has aroused concern among former government security officials and free-speech advocates and was detailed in a recent New Yorker story . Drake says he was working his shift at the store when he noticed Holder walk in with his FBI detail and approached him. “I’m Thomas Drake, the former National Security Agency official who’s been in the news,” Mr. Drake told Mr. Holder. “Do you know why they have come after me?” he asked the attorney general. Mr. Holder replied: “Yes, I do.” To which, Mr. Drake responded: “But do you know the rest of the story?” Without a word, Mr. Holder turned and walked out of the store. Asked for comment, the Justice Department would only say that Holder is a “fan of Apple products.” • House Republicans are fighting a series of public health proposals , including nutritional standards for school lunches and tobacco regulation, reports the Washington Post . The Republicans have used an agriculture appropriations bill to send several messages: They don’t want the government to require school meals that are more nutritional but also more expensive, they don’t want the government to prod food companies to restrain marketing to children, and they don’t want the Food and Drug Administration to regulate any substance based on anything but “hard science.” Rep. Denny Rehberg (R-Mont.) wants to block the FDA from issuing rules or guidance unless its decisions are based on “hard science” rather than “cost and consumer behavior.”

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The Most Dangerous Cities In America

May 25, 2011

Yesterday, the FBI trumpeted the news that violent crime dropped 5.5% in 2010 while reported property crimes fell 2.8% during the depths of the worst economic slowdown since the Great Depression. The news, though, is far from positive.

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Poker Is A Game Of Skill, Not Luck, Freakonomics Economist Finds

May 9, 2011

Proving poker is a game of skill, not luck, could be a huge win for the online industry revolving around it. And a new paper could do just that. University of Chicago economics professor Steven Levitt, famous for the best-selling Freakonomics series, has published a working paper alongside fellow University of Chicago professor Thomas Miles entitled “The Role of Skill Versus Luck in Poker: Evidence From the World Series of Poker.” In it, they attempt to answer the central question surrounding the legality of the online poker industry: is it a game of skill or luck? The hugely popular industry of online poker has been controversial for some time now. Despite efforts to curb the industry, most notably the 2006 Unlawful Internet Gambling Enforcement Act, still upwards of 10 million Americans play poker online for money. Just last month, three popular online poker sites — Full Tilt Poker, PokerStars and Absolute Poker — were shutdown by the FBI, and the federal government announced plans to recover $3 billion from them, according to the Los Angeles Times . The central question surrounding the legality of the industry, on which Americans consumers spend $6 billion annually, has been whether poker is a game or skill or luck. Despite this, the paper says, “[s]tate courts that have ruled on whether poker is a game of skill-versus-luck generally have done so in the absence of any statistical evidence[.]” To answer the question, Levitt and Miles looked at information made available by the 2010 World Series of Poker. The annual event, held in Las Vegas, includes 57 tournaments, 32,000 participants and $185 million prize money, including the “Main Event,” in which the grand winner earns almost $9 million. The duo found significant evidence that poker requires skill. Players assumed to be skilled earned 30 percent on their investment, compared to all other players, who lost 15 percent. In dollar terms, and even excluding the highly-skilled “Main Event,” high skill players earned an average of $350 per tournament, while other players lost $400 on average. To put that in perspective, Levitt and Miles compare the return on a poker investment with that common from the financial markets. “The observed differences in ROIs [return on investments] are highly statistically significant and far larger in magnitude than those observed in financial markets,” the paper says, “where fees charged by the money managers viewed as being most talented can run as high as three percent of assets under management and thirty percent of annual returns.” In human speak, that means the money of skilled players is better invested in a poker tournament than Wall Street, despite conventional wisdom that would indicate the opposite. In fact, the paper finds, “the high skilled player wins 54.9 percent of the match ups.” That compares more closely to what is witnessed in Major League Baseball than anything on Wall Street: “Since the year 2007, [baseball] teams that made the playoffs the previous season win 55.7 percent of their games in Major League Baseball against teams that failed to make the playoffs in the previous year. Thus, in some crude sense, the predictability of outcomes for pairs of players in a poker tournament is similar to that between teams in Major League Baseball. To the extent that baseball would unquestionably be judged a game of skill, the same conclusion might reasonably be applied to poker in light of the data.”

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Mayors To Washington: ‘We Need Money’

April 30, 2011

CHICAGO — Near the end of a two-day summit here that brought together mayors and federal officials to talk about city design, the mood turned confrontational. It started when Philadelphia Mayor Michael Nutter , in the middle of a Friday discussion on the federal government’s role in city development, turned toward the Washington officials who were sitting with him on stage and expressed his disappointment. “Mayors could never get away with the kind of nonsense that goes on in Washington,” he said. “In our world, you either picked up the trash or you didn’t. You either moved an abandoned car or you didn’t. You either filled a pothole or you didn’t. That’s what we do every day. And we know how to get this stuff done.” That evidently hit a nerve, as cheers erupted through the Grand Ballroom of the Hilton hotel, where many in the audience were mayors. Manny Diaz, former mayor of Miami, who sat on stage with Nutter, gave an impromptu speech criticizing Washington lawmakers. Other mayors stood up and took the microphone during the question and answer session — not to ask questions, but to get things off their chests. The event, co-sponsored by the National Endowment for the Arts, the American Architectural Foundation and the U.S. Conference of Mayors, became, for a few minutes, a forum for mayors to express a difficult truth: Two-and-a-half years after the worst financial crisis since the Great Depression, the nation’s cities still struggle with chronic budget gaps that can’t easily be filled. Tax revenue has plunged as property values have fallen and payrolls have shrunk. Local governments, many of which are legally required to balance their budgets, have made cuts that a few years ago would have been unthinkable. Municipal budget woes stem partially from crises on the state level, which in turn aren’t helped by a lack of federal assistance. Federal dollars from the American Recovery and Reinvestment Act covered less than half of states’ combined budget shortfall during this fiscal year, according to a recent report from the nonpartisan Center for Budget and Policy Priorities . Come next fiscal year, which for many states begins this July, states’ combined shortfall will exceed $110 billion, with only $6 billion in federal aid available, according to the report. That leaves cities out in the cold, as states focus on solving their own problems. In Newark , aid from the state of New Jersey fell by 40 percent between 2008 and 2010, contributing to a budget crisis that eventually prompted the city, one of the country’s most dangerous according to FBI data, to lay off 13 percent of its police force late last year. In Milwaukee County , a community that has contended with a decade-long erosion of bus service, a transit cut in the coming state budget could deal a critical blow to the region’s public transportation. “We get the brunt of what the recession really entails. We’re also the last to come out of that,” Ed Pawlowski, the mayor of Allentown, Pennsylvania, said in an interview after the panel discussion. “While the economy is getting slowly better, cities are still struggling in a significant way.” Mayors want federal money. They say they can put it to quick and efficient use, creating jobs and helping improve the economy from the bottom up. Nutter gave an example: He closed Philadelphia’s crumbling South Street Bridge in 2008, initiating a two-year repair project that was completed on budget and a month early last fall, he said. But federal funds are running dry, as Washington lawmakers have become seemingly obsessed with a desire to cut the federal deficit. In April, lawmakers almost shut down the federal government as they argued over a few billion dollars in spending cuts. Now, some are saying they will not vote to increase the debt ceiling, and risk leading the nation into default, just to enforce budget austerity. The four federal officials who sat on stage during the discussion — Derek Douglas, special assistant to the president on the White House Domestic Policy Council; Roy Kienitz, under secretary for policy at the Department of Transportation; Salin Geevarghese, senior advisor at the Department of Housing and Urban Development; and Rocco Landesman, chairman of the National Endowment for the Arts — became punching bags. “You guys need to keep your day jobs. You’d make lousy mayors,” said Jennifer Hosterman, mayor of Pleasanton, California, addressing the federal officials as she stood on the ballroom floor. “To hear from the four of you all of your gyrations and concerns and discussion about how we communicate with local government — we at local government just have to make it happen.” The moderator, Carol Coletta, the former executive director of the NEA initiative the Mayors’ Institute on City Design, tried to ease the tension. “What are you asking them to do?” she said. “I mean, what is it that they’re keeping you from doing?” Hosterman talked about her efforts to come into compliance with California’s Global Warming Solutions Act. She described months of intense, focused efforts to make her city more efficient. She has specific goals in mind, she said, but she needs more resources. “Love the dialogue — thank you very much for that,” she said. “But we need money.” The audience laughed in assent, clapping loudly. The federal officials on stage were speaking in broad, theoretical terms. But the mayors wouldn’t stand for that. They knew what needed to get done, they said. What they wanted from Washington was the dollars to do it. “We should not be expecting or depending on top-down permission from the White House or Washington to have us advocate for this stuff,” said R. T. Rybak, mayor of Minneapolis, who stood up and addressed the other mayors. Earlier, Mayor Nutter had complained about the seeming hypocrisy of federal lawmakers who go to ribbon-cuttings and ground-breakings, even if they never supported the legislation for those projects. Rybak heartily commiserated. “I’ve seen those guys at the ribbon cuttings. And it pisses me off,” he said. “But I go out and organize at election time and tell people exactly who delivered and who did not.” Douglas, of the White House Domestic Policy Council, said federal officials are doing what they can to help. But political gridlock can muck up the process. “We do hear you,” he said. “If you look at the president’s budget proposal for FY12 and you go look at the transportation section that he proposed — this is what he’s asking for — the stuff you’re talking about is in there. That’s what he requested. Is he going to get what he requested?” “We can ask for everything under the sun,” Douglas added. “But just because we ask for it doesn’t necessarily make it so.” But the mayors were not satisfied. Diaz, the former mayor of Miami, said that the conversation in Washington is the opposite of what it should be. Instead of cutting spending, he said, lawmakers should be finding ways to support job-creation and help the economy grow. It’s the mayors, he said, who create jobs. But the mayors aren’t getting the federal support they need. “We’ve got to figure it out. All of us have very, very difficult budget times right now. But notwithstanding that, we have to figure out how to do it,” he said. “As a matter of fact, there’s a greater argument to move the country forward now, because we’re in the dumps, than when things were hopping five, 10 years ago.” Kienitz, of the Department of Transportation, suggested that Diaz run for U.S. Congress. “You could provide that leadership that we need,” Kienitz said. “Thanks,” Diaz replied, “but I don’t want a job in Washington.”

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Dick Grasso vs. Eliot Spitzer In Next Mayor Race?

April 15, 2011

The race for the next Mayor of New York is really starting to heat up. Last night Dick Grasso, former chief of The New York Stock Exchange, made a “conditional declaration” of his candidacy during a speech at Wagner College on Staten Island. From The New York Times : Richard A. Grasso, the former chairman of the New York Stock Exchange, suggested on Thursday night that he would run for mayor of New York City in 2013 if his longtime nemesis, former Gov. Eliot L. Spitzer, entered the race and the city’s police commissioner sat it out. Grasso and former Democratic New York governor turned CNN host Eliot Spitzer, are longtime enemies after Spitzer, then New York Attorney General, sued Grasso over his $140 million dollar compensation package . Spitzer is also interested in a run for mayor. As the Daily Intel points out , Grasso’s caveat that he’ll only run if Spitzer runs as an independent suggests Spitzer might do as such, splitting the liberal vote and giving Grasso, who would likely run as a Republican, the win. Grasso’s other condition, that he’d run only if the city’s police commissioner Raymond Kelly does not, comes after reports that Kelly may be under consideration to head the FBI. Many Democrats have expressed interest in running for mayor, i ncluding New York representative Anthony Weiner ; City Council speaker, Christine C. Quinn; Comptroller John C. Liu; the public advocate, Bill de Blasio; and the Manhattan borough president, Scott M. Stringer, according to the Times .

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Eric Cantor: No Stopgap Spending Bill Beyond April 8

March 29, 2011

WASHINGTON — The No. 2 Republican in the House said Tuesday that the chamber won’t pass another short-term federal funding bill to avert a government shutdown if talks between the GOP and the White House fail to produce a 2011 spending agreement by an April 8 deadline. Majority Leader Rep. Eric Cantor of Virginia said “time is up” and that it’s up to Democrats controlling the White House and the Senate to offer significant spending cuts as part of legislation to fund the government for the rest of the budget year. “We’re going to need to see a deal struck where our members can go home and tell their constituents that we’re doing what we said we would do,” Cantor said. Cantor’s remarks to reporters suggest that Republicans could advance a stopgap bill if an agreement is struck between Democrats and the White House that would need time to draft into legislation and pass through House and Senate. Talks have mostly broken down, however, and the combatants are instead casting blame in a daily back-and-forth public relations battle. Democrats say that GOP leaders, fearing a tea-party rebellion, have pulled back from a near-agreement on an overall figure for spending cuts that would slash President Barack Obama’s budget requests for the current year by $70 billion or more. Republicans say Democrats have yet to offer sizable enough cuts and that some of the many conservative policy additions added in floor debate last month must be included in a final agreement. Current stopgap funding runs out April 8 and failure to act would precipitate a partial shutdown of every government agency, though essential workers such as military troops, FBI agents, homeland security workers and many others would remain on the job. Cantor’s comments signal that such a shutdown is increasingly likely next Friday unless the pace of negotiations accelerates sharply.

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Jury Hears Details Of Intel Leak In Insider Trading Case

March 22, 2011

NEW YORK (By Jonathan Stempel and Grant McCool) – A former Intel Corp executive testified that he shared company secrets with his friend, hedge fund founder Raj Rajaratnam, the central figure in the biggest Wall Street insider trading trial in decades. Rajiv Goel, the second friend-turned-government-witness to take the witness stand at trial in Manhattan federal court, told the jury on Tuesday that he tipped off the Galleon Group founder because they were close friends and “Mr Rajaratnam helped me financially a few times.” Sri Lankan-born Rajaratnam, 53, is the most prominent defendant in the largest U.S. hedge fund insider trading case in history. Prosecutors have accused him of illegally making $45 million based on tips from corporate insiders. The one-time billionaire has denied wrongdoing, and said his trades were based on his own research and publicly available information. He faces up to 20 years in prison if convicted of securities fraud. Twenty-six people have been charged in the probe, and 19, including Goel, have pleaded guilty. He has yet to be sentenced. The trial began March 8 with testimony from an FBI agent who monitored phone taps and from star government witness Anil Kumar, a former McKinsey & Co executive who was another longtime friend of Rajaratnam and who said he had leaked client secrets. Goel, who worked at Intel from 2000 until his arrest along with Rajaratnam and Kumar in October 2009, testified that he was obligated under company policy to keep information confidential. “I violated my obligations,” Goel said under questioning by federal prosecutor Reed Brodsky. He also said: “I shared it (company information) with Mr. Rajaratnam.” Indian-born Goel, 52, is expected to testify for two or three days and he will be cross-examined by one of Rajaratnam’s defense lawyers. Goel admitted in his plea proceeding last year and at trial on Tuesday that he tipped Rajaratnam about a big wireless network transaction involving Clearwire Corp. Also on Tuesday, a current Intel executive testified that confidential details about Clearwire were leaked before the announcement of the deal. Prosecutors argued that Rajaratnam, who is on trial on charges of trading on illicit stock tips, bought 125,800 Clearwire shares based on inside information. They contend that his March 24, 2008, purchase came two days before news reports of a possible 4G WiMax venture between Clearwire and Sprint Nextel Corp, involving $1 billion of capital from Intel. The venture was announced on May 7, 2008. In his second day of testimony, Intel Vice President Sriram Viswanathan said Goel would have been dismissed immediately from his job for discussing details of a possible Sprint-Clearwire partnership, including capital commitments from Intel, Comcast Corp and Google Inc. Viswanathan also said Goel also would not have been authorized to disclose that Intel had held a board meeting on the matter. Those details were disclosed to the jury through phone taps of conversations between Rajaratnam and Goel. The case is U.S. v Rajaratnam et al, U.S. District Court, Southern District of New York, No. 09-01184. (Reporting by Jonathan Stempel and Grant McCool, editing by Matthew Lewis and Gerald E. McCormick) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Ex-Goldman Progammer Gets Big Sentence For Stealing Codes

March 19, 2011

(Reuters) – A former Goldman Sachs Group Inc (GS.N) computer programmer was sentenced to eight years in prison on Friday for stealing secret code used in the Wall Street bank’s valuable high-frequency trading system. Sergey Aleynikov, was arrested by the FBI and charged in July 2009 with copying and removing trading code from Goldman before taking a new job at Teza Technologies LLC, a high-frequency trading startup firm in Chicago. A onetime collegiate-level competitive ballroom dancer, Aleynikov, 41, was convicted of trade secrets theft and transporting stolen property across state lines on December 10 after a two-week long jury trial in Manhattan federal court. High-frequency, computer-driven trading has become an important and competitive business. The software codes that trade shares in milliseconds are closely guarded secrets. “I very much regret the foolish thing of downloading information,” the Russian-born father of three said at his sentencing on Friday. “Part of this information was proprietary to Goldman. I never meant to cause Goldman any harm or harm anyone at the bank.” Aleynikov’s words fell short of U.S. District Judge Denise Cote’s hopes for “an open and honest statement of responsibility” for his criminal conduct. “You did not do that,” said Cote, imposing a sentence of 97 months that was within the eight to 10 years recommended by the government. Cote also fined him $12,500. Aleynikov’s lawyer, Kevin Marino, had originally asked for a sentence of probation but in court on Friday he suggested two years was adequate for what he called Aleynikov’s “foolish, tragic, horrible, ridiculous mistake.” Aleynikov has the right to appeal the sentence. His defense lawyers have argued that the matter belonged in civil, not criminal court. U.S. prosecutor Joseph Facciponti said the stolen code was Aleynikov’s “golden ticket” to Teza and “he stood to make millions more” there than he did at the bank. Facciponti said Aleynikov spent several months planning his move, eventually transferring 500,000 lines of Goldman Sachs source code to an outside server. Cote had revoked the bail of Aleynikov, a dual citizen of the United States and Russia, on the grounds that there was a risk of him fleeing before sentencing. Throughout the trial and sentencing phase, many comparisons were made with a similar case in the same courthouse against a former Societe Generale (SOGN.PA) trader, Samarth Agrawal. The citizen of India was found guilty by a jury last November of stealing high-frequency trading code from the French bank before going to a new job. On February 28, a judge sentenced him to three years in prison and he will be deported when he completes his sentence. The case is USA v Aleynikov, U.S. District Court for the Southern District of New York, No. 10-00096. (Reporting by Grant McCool; Editing by Tim Dobbyn) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Rajaratnam Paid For Tips, Man Testifies

March 11, 2011

NEW YORK (Reuters) – A disgraced former McKinsey & Co partner told jurors he leaked secrets about the elite consulting firm’s clients in exchange for $1.75 million in hidden payments from onetime friend Raj Rajaratnam, the main defendant in the biggest U.S. insider trading trial in years. Anil Kumar said the Galleon hedge fund founder told him: “You work very, very hard. You are underpaid. People are making fortunes … so just keep track of your knowledge and share it with me.” The calmly delivered testimony for the prosecution capped a day when the Manhattan federal jury also for the first time heard the voice of Rajaratnam captured on FBI wiretaps. On the tapes, he is heard at times giggling with associates and on other occasions speaking rapidly in a high-pitched voice, rattling off numbers and acronyms for companies. Kumar’s testimony will resume on Monday. Prosecutors say the Galleon Group founder made $45 million in illicit profit from 2003 to March 2009 through insider trading. His multimillion-dollar defense team contends that he conducted legitimate stock research and did not gain an unfair advantage over other investors. Rajaratnam took notes on a legal pad while Kumar testified. Kumar, 52, dressed in business attire, avoided Rajaratnam’s gaze. The Sri Lankan-born Rajaratnam, free on bail since his October 2009 arrest, is accused of creating a network of tipsters who fed him inside information. His trial is the signature case in an insider trading probe that has shaken the secretive $1.9 trillion hedge fund industry. Kumar is among 19 people who have pleaded guilty to conspiracy or fraud charges in the broad Galleon probe. He admitted accepting $1.75 million from Rajaratnam and said he tipped the onetime billionaire on deals involving McKinsey clients including chipmaker Advanced Micro Devices. “I told him there were advanced discussions both with Dell and Hewlett Packard,” Kumar testified. He said Rajaratnam responded that “that was very useful information.” AMD ultimately announced a pilot program with Hewlett Packard in February 2004 worth $400 million to the chipmaker. U.S. prosecutor Jonathan Streeter projected onto courtroom screens a confidential McKinsey document that referred to computer maker HP with the code name “New Hampshire.” The Galleon probe has been embarrassing to McKinsey, which has not been accused of wrongdoing. The U.S. Securities and Exchange Commission accused Rajat Gupta, the consultancy’s former chief, of supplying Goldman Sachs secrets to Rajaratnam when he sat on the bank’s board. The case stands out from previous insider trading scandals — such as those of the mid-1980s involving speculator Ivan Boesky and junk bond financier Michael Milken — because of the government’s widescale use of wiretaps. Rajaratnam, sitting behind the defense table in the crowded courtroom, did not react to hearing the digital recordings of his mobile phone calls being played. Along with Kumar, the recordings featured another friend-turned-government-witness, Intel Corp’s Rajiv Goel, and former Galleon employee Adam Smith, who will also testify in the two-month trial. In a May 2008 call played for the 12 jurors, Rajaratnam is heard talking with one-time employee Smith. Rajaratnam asks Smith how the market is treating him and Smith answers: “Like a baby treats a diaper.” Rajaratnam laughs and the two men go on to discuss Vishay Intertechnology Inc, a company prosecutors cited in charges against both men. The government contends that Smith and Rajaratnam conspired to obtain secret information about a potential acquisition of Vishay. As it turned out, Vishay was never acquired. Kumar’s testimony followed that of FBI Special Agent Diane Wehner, who described how she became familiar with Rajaratnam’s voice by listening in to his conversations. But defense attorney Terence Lynam, on cross examination, pointed out that she did not know whether Rajaratnam’s discussions caught on the tapes were based on Galleon stock research or not. The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184. (Editing by Steve Orlofsky, Gary Hill) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Oracle Wins $1.3 Billion Over Stolen Files

March 3, 2011

SAN FRANCISCO (Reuters) – SAP AG (SAPG.DE: Quote, Profile, Research, Stock Buzz) has been ordered to pay Oracle Corp (ORCL.O: Quote, Profile, Research, Stock Buzz) $1.3 billion for stealing files in Silicon Valley’s priciest legal controversy — and San Francisco’s top federal prosecutor may raise the stakes even more. Newly installed Attorney Melinda Haag in San Francisco is now personally reviewing a criminal copyright investigation, which is independent of the civil case won by Oracle last year, one attorney familiar with the probe said. The decision on whether to prosecute that case comes as Haag tries to make Northern California a hub of white collar enforcement that rivals New York. And it is just those types of headline-grabbing, high impact prosecutions that observers say have been lacking from federal gumshoes in the Bay Area. In an interview with Reuters, Haag, who took over the job last August, said big prosecutions send a message, and it is important for her office to send them. “High profile cases have deterrent value just because people are paying attention,” she said. Haag would not confirm or deny any criminal investigation surrounding SAP. Spokespeople for SAP and Oracle declined to comment. With its robust financial services sector, high-tech giants and biotech start-ups, Northern California has long been viewed as a natural location for corporate crime enforcers. But when the FBI recently banged down doors in Silicon Valley to nab insider trading defendants, San Francisco federal prosecutors found themselves making perfunctory court appearances on bail, before the cases were shipped back East for the heftier legal battles. The realm of insider trading — particularly the case around hedge fund Galleon — is probably the most glaring example of Manhattan federal prosecutors taking the lead over their Bay Area colleagues. Hedge fund founder Raj Rajaratnam heads to trial in New York next week, even though a swath of the alleged criminal conduct, related guilty pleas, and a probe of expert networks used by hedge funds have come from Silicon Valley, generating strong business for California defense lawyers. Haag flashes a wry grin at the Galleon case and notes that New York took charge before she became U.S. Attorney. “If the misconduct occurred here, the witnesses are here, and the evidence is here, the case should be handled here,” Haag said. “New York may beg to differ, and we may have to have some conversations down the road.” Ten years ago, current FBI director Robert Mueller was U.S. Attorney in San Francisco and the office was front and center in several cases, eventually taking a big role in the Enron Task Force. But under Mueller’s successor, Kevin Ryan, several experienced white collar prosecutors — including Haag — left for private practice. White collar crime case charges dropped by half in five years to a low of 62 in fiscal year 2005, according to U.S. Department of Justice statistics. The case figures started to come back up under Joseph Russoniello, Haag’s immediate predecessor, but the best known recent Bay Area federal case is the upcoming perjury trial against baseball home run king Barry Bonds over performance enhancing drugs. Haag’s ambitions also face some budget realities. Eight job offers to prospective prosecutors — which were already accepted by the candidates — have been held up in Washington due to a hiring freeze, Haag said. “HIGH BAR” IN SAP CASE A criminal copyright case against SAP could be tough. The allegations against SAP have been public since Oracle sued in 2007, claiming that an SAP subsidiary wrongfully downloaded millions of Oracle’s files. SAP is seeking to reduce the $1.3 billion verdict. Even though SAP admitted to liability in the civil case, if federal prosecutors brought a case against the company or any individuals they would have to prove an element of willfulness that Oracle didn’t, said Eric Goldman, a professor at Santa Clara University School of Law. “Willfulness in a criminal context is a very high bar,” Goldman said. Speaking generally, Haag said prosecutors’ speed is an important factor in encouraging tech companies to come forward when they are hacking victims. Otherwise they may remain silent. “Sometimes these companies do make a business decision that they don’t want to report it; they don’t want the publicity,” she said. Haag has added two prosecutors to a group devoted to health care fraud in the district, which has been a Justice Department priority nationally. It was part of a larger office reorganization that had some prosecutors still settling into new offices in January. That process, Haag acknowledged, led to lost time, and she knows that charging cases is the key to publicizing her office’s efforts. “My mantra with people here is this is a wonderful case, a great case that you’re investigating, and no one knows about it,” Haag said. “So let’s get it resolved.” (Reporting by Dan Levine, editing by Gerald E. McCormick) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Feds Arrest Over 100 In NY-NJ Mob Takedown

January 20, 2011

NEW YORK — Federal prosecutors say 127 people are facing charges in one of the largest Mafia crackdowns in FBI history. U.S. Attorney General Eric Holder said at a news conference Thursday in New York City that the defendants include high-ranking members of the Gambino and Colombo crime families and the reputed former boss of organized crime in New England. Holder says the charges cover decades worth of offenses, including hits to eliminate perceived rivals, a killing during a botched robbery and a double shooting in a barroom dispute over a spilled drink. Authorities say the investigation was aided by informants who recorded thousands of conversations by suspected mobsters. THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below. NEW YORK (AP) – Federal agents dealt another major blow to New York’s five Mafia crime families by arresting more than 100 suspected mobsters throughout the Northeast on charges including murder, extortion and narcotics trafficking. The FBI said most of the arrests were made Thursday morning. Many were in Brooklyn, but they also occurred throughout New York City and in New Jersey and New England. Luigi Manocchio, the reputed head of New England’s Patriarca crime family, was arrested Wednesday in Fort Lauderdale, Fla., the U.S. attorney’s office in Providence said. A newly unsealed indictment accused him of collecting protection payments from strip club-owners. Also arrested was Thomas Iafrate, who worked as a bookkeeper for strip clubs and set aside money for Manocchio, prosecutors said. The takedown was the result of multiple investigations. Federal probes aided by mob turncoats have decimated the families’ ranks in recent years and have resulted in lengthy prison terms for several leaders. On Friday, a federal judge in Brooklyn sentenced John “Sonny” Franzese, 93, to eight years in prison for extorting Manhattan strip clubs and a pizzeria on Long Island. Federal prosecutors had sought at least 12 years behind bars for the underboss of the Colombo crime family – in effect, a life term. To bolster their argument, they had an FBI agent testify that Franzese bragged about killing 60 people over the years and once contemplated putting out a hit on his own son for becoming a government cooperator. In October, Mafia turncoat Salvatore Vitale was sentenced to time served after federal prosecutors praised his total betrayal of his own crime syndicate – and after he apologized to the families of his victims. Authorities said he had a hand in at least 11 murders, including that of a fellow gangster in the fallout from the infamous Donnie Brasco case. The evidence provided after his arrest in 2003 helped decimate the once-fearsome Bonanno organized crime family, Assistant U.S. Attorney Greg Andres said. “The Mafia today is weaker because of his cooperation,” Andres said. “Mr. Vitale provided lead after lead. … The results speak for themselves.”

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One Of America’s Most Dangerous Cities Fires Half Its Police Force

January 18, 2011

Budget pain hit home in Camden, N.J., on Tuesday, as nearly a sixth of city employees lost their jobs in one of America’s most dangerous cities , AP reports. The layoffs are just the latest consequence of devastating budget strains that have crippled the nation’s cities. As Camden attempts to cut spending to compensate for diminished revenue, the city has begun to execute a plan , approved last month, to cut a fourth of the municipal workforce. Residents fear the cuts will deal a critical blow to the already struggling city. About 335 municipal workers lost their jobs Tuesday, according to mayor Dana Redd. That includes about half of the police force, and a third of firefighters. Already, Camden is one of the nation’s most dangerous cities: An analysis of recent FBI data ranks it number two. Layoffs will turn Camden into a “living hell,” according to a police union advertisement in a local paper, AP reports. While Camden faces severe challenges, it’s hardly alone. After the worst financial crisis since the Depression, the nation’s cities have seen their revenue wither. As enormous pension obligations come due — one estimate places the unfunded liabilities of city pension plans at $574 billion — cities are having to make cuts that seemed unthinkable just half a decade ago. As Camden lays off workers, nearby Newark is dealing with the effects of having fired more than 13 percent of its police force late last year. A recent spike in crime has left many Newark residents worried that the layoffs have made their city more dangerous. The city contends, though, that re-deployments have ensured that the same number of officers are patrolling Newark’s streets. Outside of New Jersey, other cities have also resorted to seemingly desperate measures. Prichard , Alabama, has illegally stopped paying its pensioners. Hamtramck , Mich., has repeatedly tried to enter bankruptcy. Detroit is considering a plan that would deprive a fifth of its city of basic municipal services, like trash collection and police protection. As cities are forced to make tough choices, officials tend to cast public unions in a negative light. Redd, the Camden mayor, said public employe unions’ refusal to accept a pay cut made layoffs necessary. But unions resist such talk. “We get paid to do a service, and we do that service very well,” Gregory Floyd, president of the New York City local division of the Teamsters union, told the Huffington Post. “We’re not rich, we don’t retire rich, and we don’t have lucrative pensions.”

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eBay User Turns Tables On Scammer With Great Trick, Serves Up Justice

December 16, 2010

Gizmodo flags this excellent and hilarious post on Reddit in which user BadgerMatt tells how he turned the tables on a woman who bought sports tickets from him on eBay for $600 and then refused to pay, claiming that she “overbid and my husband won’t let me buy these.” BadgerMatt was then unable to sell the tickets to people who had made lower bids, so he used a technique called the ” glim-dropper ” to trick the woman into paying what she owed. I created a new eBay account, “Payback” we’ll call it, and sent her a message: “Hi there, I noticed you won an auction for 4 [sporting event] tickets. I meant to bid on these but couldn’t get to a computer. I wanted to take my son and dad and would be willing to give you $1,000 for the tickets. I imagine that you’ve already made plans to attend, but I figured it was worth a shot.” At 11:30pm she responded to Payback: “I’ll do it for $1,100, no less. I can meet you at the game if you agree. I need your phone number.” At 11:35pm, Payback wrote: “Deal. Here is my number…” (Thanks Google Voice for the throwaway number). She called a few minutes later and made Payback “promise” to go through with the deal. She emphasized that she’d be out a lot of money if Payback backed out. Payback swore he would never do such a thing. At 11:45pm, the woman emailed me: “Fine. I’ll buy them. But you have to drop them off at my house tonight. I’ll have the cash ready.” So at fucking midnight I drove to her house across town and met her on the road in front of her apartment building. She was a nasty and rude individual. Things didn’t get any better when I told her I wanted an extra $20 for the trouble of driving there at midnight (yeah, pushing my luck, I know). It became very awkward and she literally threw 31 $20 bills at me. I counted them before handing over the tickets. I said, “thanks for the great transaction” as she flipped me off while walking away. At 10:00am she called Payback to make sure they were still on for the exchange. Payback said that he could no longer go to the game and wouldn’t be able to do the exchange. She blew her fucking top and I swear to god started speaking in tongues. Payback said, “Ma’am, this is eBay, not a car dealership” and hung up. I got a rabid email 10 minutes later telling me that I was going to hell and that she’s reported me to the local police, FBI, and… the fire department. WTF? She knew she’d been had and sent him an unhinged and profanity-laden email threatening him. He reprints the email in his Reddit post. It is well-worth reading. BadgerMatt wonders if he did the right thing. We think justice was served. What do you think?

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Exec Hit With Subpoena After Refusing To Wear Wire In Insider Trading Case

December 3, 2010

NEW YORK (By Matthew Goldstein): John Kinnucan, the owner of an independent Portland, Oregon-based research firm that has been implicated in a major insider trading investigation, said he had received a subpoena on Friday morning to provide federal prosecutors with documents dating back to January 2008. Kinnucan, in a telephone interview with Reuters, said the subpoena was personally served on him at his home by an FBI agent. The agent appeared at Kinnucan’s home as his children were getting ready to go to school. The owner of Broadband Research, Kinnucan said he had no plans to hire a lawyer because he did not want to bankrupt his family in the process. “The feds have been taping my calls, they know who my clients are,” he said. He said he had asked his former clients to contribute to a legal defense fund. Kinnucan said so far he hasn’t received any contributions. Kinnucan became something of a celebrity after refusing to cooperate with the investigation and notifying all his clients and industry contacts in an email last month. Several of the hedge funds and mutual funds that did business with him have been served with subpoenas. “My clients are not some scummy fly-by-night hedge funds,” said Kinnucan, who insisted the kind of information on technology companies he provided his clients was perfectly legitimate. Some of the current and former Kinnucan clients that have gotten subpoenas include Citadel and SAC Capital. Mutual fund companies Janus Capital Group Inc and Wellington Management also got federal subpoenas. FBI spokesman Jim Margolin declined to comment. Kinnucan sent his October email to more than 50 people associated with roughly 20 hedge funds and mutual funds. He said he had rebuffed the FBI’s demand that he cooperate and secretly record conversations, people familiar with the situation said. (Reporting by Matthew Goldstein and Jonathan Stempel; Editing by Lisa Von Ahn, Dave Zimmerman) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Insider Trading Probe Leads Investors To Wonder: Is The Market Rigged?

November 24, 2010

NEW YORK — The Wall Street insider trading investigation may lead everyday investors – already rattled by a stock market meltdown, a one-day “flash crash” and the Madoff scandal – to finally conclude that the game is rigged. “A large part of trading has to do with trust, and I don’t have it,” says Mark Swenson, a 43-year-old plumber from New Hampshire who refuses to buy individual stocks. “When a stock moves up 10 percent, you don’t know why,” he added. “We can pretend that everyone has access to the same information, but they don’t.” Even before news broke that federal investigators were looking into whether hedge funds traded on inside information, small-time investors were pulling their money out of stocks – despite a remarkable run for the market since the spring of 2009. Americans have pulled $60 billion out of U.S. stock funds this year, according to the Investment Company Institute, a trade group. Meanwhile, investors have piled money into Treasuries and bond funds that are considered safer investments, even if they don’t return as much money. And at the same time, banks like Wells Fargo have reported that money is moving into checking and savings accounts. To be sure, it’s natural for people worried about their jobs or the falling value of their homes to sock cash into more conservative investments. But this has been no garden-variety recession. It has coincided with turmoil in the stock market that goes back a decade, to the collapse of the Internet bubble and portfolio-draining scandals involving high-flying companies such as Enron and WorldCom. More recently, investors have lived through the housing bubble, the collapse of Wall Street firms such as Bear Stearns and Lehman Brothers and stomach-churning days when it wasn’t clear whether capitalism would survive. On top of that came news that financier Bernard Madoff had bilked investors out of billions. “Virtually everyone on the Street believes there are significant improprieties, and I think there is an even more important point for the massive number of investors who are not Wall Street players,” says former New York Gov. Eliot Spitzer, once known as the “sheriff of Wall Street” for aggressively prosecuting white-collar crime as state attorney general. “And that is for most of us, you can’t beat these guys at their own game.” People are nervous about the state of their assets in part because their homes are worth so much less these days, not to mention job insecurity and slow economic growth overall. Some pros on Wall Street say hesitation by small investors is good news. It means that there’s plenty of “dry powder” to propel the market higher in the next few months when and if the little guy finally relents and joins in the rally. The insider-trading probe could test that theory. The FBI this week searched the offices of three hedge funds, and some of Wall Street’s most influential firms, including Janus Capital Group, have been subpoenaed in the probe. On Wednesday, an employee of a firm that supplied market intelligence to hedge funds was arrested and charged, among other things, with conspiracy to commit securities fraud. It was not yet known whether the man dealt with the funds raided this week. For Swenson, the allegations of insider trading are unnerving, particularly on top of the “flash crash” in May, when a computerized selling program set off a chain reaction that drove the Dow Jones industrials down nearly 1,000 points in mere minutes. The sell-off was a reminder to some individual investors that hedge funds and other powerful traders use computer programs to make rapid-fire stock trades, giving them an advantage over the slower smaller investor. “The hedge funds are resorting to more questionable tactics. It’s mind-boggling,” says Swenson, who invests largely in exchange-traded funds, which track market indexes and can be traded throughout the day, unlike mutual funds. Spitzer says the new insider trading probes illustrate how the game is tilted against small investors. “If you are sitting there in front of a screen, thinking your information is going to be good enough to make smart judgments that will permit you to outperform the hundreds of thousands of people on Wall Street who have access to better information and more timely information than you, you’re mistaken,” Spitzer says. It’s not the first time small investors have been scared out of stocks. Charles Geisst, a finance professor at Manhattan College who has written 18 books on the history of markets, says investors balked at buying for years after the Crash of 1929 and Black Monday in 1987. The view both times: The odds are stacked against the little guy. To combat such an impression, the Securities and Exchange Commission was established in 1934, and “circuit breakers” were instituted after the 1987 crash to stop massive selling. But all of the safeguards don’t seem to be helping lately. “If the stock markets had any reputation for integrity, they lost it in the past year,” Geisst says. Restoring small investors’ confidence may depend on whether they see ample evidence that federal regulators are successfully cracking down on bad behavior, says Ross B. Intelisano, a securities fraud attorney with the firm Rich & Intelisano. The market needs them back. Most of the stock in U.S. companies, both public and private, is held by individuals, not institutions, according to Federal Reserve data. Small investors may be comforted to know that professional investors don’t always fare better, even with the edge they have over the masses. Numerous studies have shown that mutual funds overseen by professional stock pickers often are outperformed by computer-driven index funds. The record for hedge funds hasn’t been so impressive, either. Since 2008, when the number of those funds hit 10,000, nearly 3,000 have gone out of business, according to Hedge Fund Research in Chicago. “The edge is hugely exaggerated,” says Richard Ferri, founder of the investment advisory firm Portfolio Solutions and an advocate of low-cost index funds. “If the small investor does the right thing, he can do better than 99 percent of anyone else.” ___ Associated Press writer Michael Gormley contributed to this report from Albany, N.Y.

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Video: Coffee Says Kinnucan Didn’t Do Anything Unlawful

November 24, 2010

Nov. 24 (Bloomberg) — John Coffee, a securities law professor at Columbia University, discusses the federal investigation into possible insider trading at hedge and mutual funds. John Kinnucan, who runs Broadband Research LLC, has been questioned by the FBI, putting a spotlight on money managers and their use of a burgeoning breed of firms selling research and access to industry experts. U.S. authorities in New York today arrested Don Ching Trang Chu, who worked for an expert-networking firm, on charges that he arranged for insiders at publicly traded companies to improperly provide information to hedge-fund clients. Coffee speaks with Julie Hyman on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Markets Close Lower after FBI’s Insider Trading Probe

November 22, 2010

Markets Close Lower after FBI’s Insider Trading Probe

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Markets Close Lower after FBI’s Insider Trading Probe

November 22, 2010

Markets Close Lower after FBI’s Insider Trading Probe

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Markets Close Lower after FBI’s Insider Trading Probe

November 22, 2010

Markets Close Lower after FBI’s Insider Trading Probe

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Muslims Targeted In $30M Ponzi Scheme

November 18, 2010

CHICAGO — A taxi driver turned prominent businessman in Chicago’s South Asian community is among three people indicted for defrauding hundreds of Muslim investors out of $30 million, in part by promising that investments complied with Islamic law, federal prosecutors said Wednesday. Salman Ibrahim, 37, who vanished in 2008 after allegedly persuading hundreds of Pakistani and Indian immigrants to contribute their savings and mortgage their homes to finance real estate deals, is believed to be abroad, possibly in his native Pakistan, the U.S. Attorney’s Office in Chicago said. The FBI is trying to locate him. One alleged victim, Fazal Mahmood, said he lost more than $200,000, some of which he intended to use to put his two daughters through college. “I will never trust anyone with my money again,” the 54-year-old told The Associated Press. “I’m a Muslim and he’s a Muslim. I was always taught … a Muslim will never cheat another Muslim.” The other two men indicted were Mohammad Akbar Zahid, 59, who investigators believe also fled the U.S., and Amjed Mahmood, 47, of Des Plains, a Chicago suburb. Mahmood, who isn’t related to Fazal Mahmood, has not been arrested but is expected to be arraigned soon, U.S. Attorney’s Office spokesman Randall Samborn said. A phone message left Wednesday for a Amjed Mahmood in Des Plaines wasn’t returned. Prosecutors allege that Ibrahim, the majority owner of the now-bankrupt Sunrise Equities Inc., along with Zahid and Mahmood, who were part owners, told investors they would not be paid interest, which is prohibited by Islamic law. Instead, they were told they would share profits from real estate projects, according to the indictment. More than 300 investors nationwide fell victim and three banks lost more than $13 million after the alleged Ponzi scheme collapsed in 2008, the indictment alleges. Such schemes use new investors’ money to pay previous investors. Ibrahim and Zahid face bank fraud and other charges, while Amjed Mahmood is charged with conspiracy to commit mail, wire and bank fraud. Each fraud count carries a maximum penalty of 30 years in prison. The indictment also seeks forfeiture of more than $43 million. Before he disappeared, Ibrahim lived in a bustling South Asian enclave on Chicago’s North Side that has a large Muslim population. The neighborhood hugs Devon Avenue, where men often wear knee-length shirts and caps, many women cover their heads and Urdu is spoken as often as English. The indictment accuses Ibrahim of misusing investor money to, among other things, operate an Islamic school to enhance his reputation in the community. During a 2008 meeting, Ibrahim told investors that his Chicago-based Sunrise Equities needed more than $1 million to continue. They knew at the time that Sunrise had expended nearly all investor funds and couldn’t recover more than $40 million owed to investors, according to the indictment. “He said, ‘Trust me, trust me,’” Fazal Mahmood, one of the victims and a Pakistani immigrant, recalled. “And people were willing to help.” But within weeks, Ibrahim disappeared. “A lot of people lost their homes, they went through divorces – some lost their kids,” said Mahmood, a suburban Chicago engineer. “All their dreams have shattered.” Mahmood said he first invested $50,000 after a friend vouched for Ibrahim, and for three years received an 18 percent return. In 2007, Mahmood said Ibrahim persuaded him to borrow $200,000 against his home in return for an unsecured promissory note that was never paid. Those who knew Ibrahim said he put himself through college by driving a taxi. He graduated from Northeastern Illinois University in Chicago with an accounting degree in 1997. Ibrahim was a member of the Shariah Board of America, a group of Islamic clerics in the Chicago area that advises Muslim investors. The board certified Sunrise Equities as conforming to an Islamic law, or Shariah, that prohibits Muslims from earning interest on investments. What irks Mahmood the most is not that Ibrahim could, if he’s never found, evade justice in the U.S. It is that some of the rumors swirling in his old Chicago neighborhood. “Some people say he is living well somewhere, maybe in Dubai or Pakistan,” he said. “It makes me angry that he might be living a good life somewhere.”

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Robert Stinson, Penn. Businessman, Charged With $17 Million Ponzi Scheme

November 5, 2010

PHILADELPHIA — A businessman who authorities describe as a repeat offender in securities fraud was arrested Friday and charged with overseeing a $17 million Ponzi scheme. Robert Stinson Jr. of Berwyn fleeced more than 260 investors over the past four years while claiming to operate several real estate hedge funds, according to a federal indictment. The funds boasted returns of up to 16 percent a year, but authorities allege that Stinson diverted most of the money for personal use, including expensive cars, meals and vacations. Some investors who received “dividends” from funds managed by Stinson’s company Life’s Good Inc. were actually paid using money from new clients, the indictment said. Stinson also lied to investors about having degrees from the Massachusetts Institute of Technology and Penn State University, and falsely claimed big experience in currency trading, investment management and other businesses, authorities said. In addition, Stinson concealed previous fraud convictions and two bankruptcy filings, according to the indictment. He was also the target of fraud complaints by the Securities and Exchange Commission in 1990 and this past June. On June 29, the FBI raided several of Stinson’s business locations and seized two Mercedes bought with proceeds from the alleged scheme. Stinson then obstructed justice by wiring money out of Life’s Good accounts, authorities said. Stinson was charged with fraud, money laundering, obstruction and other offenses. His attorney did not immediately return a call for comment.

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FDIC Called On To Put Bank Of America Into Receivership

October 22, 2010

Charging that the ongoing foreclosure fraud epidemic is the work of precisely the same unrepentant bank officers whose fraudulent mortgage schemes crashed the financial system in the first place, two leading critics of the financial industry are calling on the FDIC to put some of the nation’s biggest banks into receivership — starting with the Bank of America — and make them clean house. William K. Black, a former regulator and white-collar crime expert who cracked down on massive fraud during the savings and loan scandal of the 1980s, and his fellow economics professor at the University of Missouri-Kansas City, L. Randall Wray, write in the Huffington Post that it’s time to “foreclose on the foreclosure fraudsters”. They write: The lenders, officers, and professional that directed, participated in, and profited from the fraudulent loans and securities should be prevented from causing further damage to the victims of their frauds, through fraudulent foreclosures. They argue that, far from being a coincidence, massive foreclosure fraud “is the necessary outcome of the epidemic of mortgage fraud that began early this decade.” The reason for that: The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents… Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents…. Foreclosure fraud is the only thing standing between the banks and Armageddon.” So the only solution, then, is new management. “We should remove the senior leadership of the banks and replace them with experienced bankers with a reputation for integrity and competence, i.e., the honest officers that quit or were fired because they refused to engage in fraud,” Black and Wray write. They suggest starting with Bank of America, which they call “a ‘vector’ spreading the mortgage fraud epidemic throughout much of the Western world.” Looming large among Bank of America’s sins is its purchase of mortgage giant Countrywide Financial long after it became clear that the company had engaged in massive fraud. Even the extremely slow-to-anger New York Fed, which bought billions of securitized mortgages that Bank of America improperly represented as fully documented and conforming to underwriting standards, is now demanding that it buy some of them back . But far from expressing remorse, Bank of America is going on the offensive, announcing it will end its three-week-old freeze on foreclosures in 23 states on Monday, much earlier than expected. Bank of America officials are claiming they didn’t find evidence of unwarranted foreclosures and are vowing to “defend the interests of Bank of America shareholders,” and hire more lawyers, the New York Times reported . “It’s loan by loan, and we have the resources to deploy in that kind of review,” said the bank’s chief executive. Black and Wray write that Bank of America “is sufficiently large and powerful that its receivership will send the credible signal that America is restoring the rule of law and that even the most elite frauds will be held accountable. ” They note that about a thousand receivers were appointed during the S&L and banking crises of the 1980s and early 1990s under Presidents Reagan and Bush. “Contrary to the scare mongering about ‘nationalizing’ banks, receivers are used to returning failed banks to private ownership,” they write. The new managers would “direct the business operations, find the true facts about the bank’s operations, senior managers, and financial condition, recognize the real losses, and make the appropriate referrals to the FBI and the SEC so that the frauds can be investigated and prosecuted,” they write. “The receiver is also a well-proven device for splitting up banks that are too large and incoherent by selling units of the business to different bidders who most value the operations.” On Wednesday, administration spokesmen declined to endorse any dramatic federal action. They declared that they had found no “systemic” threat to the financial system from the foreclosure problems, spoke of “mistakes” and “errors” rather than pervasive fraud and said the banks and servicers now need to “fix” their “processes.” They “cannot even bring themselves to use the ‘f’ word — fraud,” Black and Wray write. “They substitute euphemisms designed to trivialize elite criminality.” The central problem appears to be that Obama Administration continues to see the mortgage and foreclosure crises primarily through the eyes of the banks — not through the eyes of the regular people who became their victims, or even the taxpayers who bailed out the very fat-cat bankers who are now back to their tricks. Black and Wray write: This nation’s most elite bankers originated and packaged fraudulent nonprime loans that destroyed wealth — and working class families’ savings — at a prodigious rate never seen before in the history of white-collar crime. They created the worst bubble in financial history, echo epidemics of fraud among elite professionals, loan brokers, and loan servicers, and would (if left to their own devices) have caused the Second Great Depression. The two professors call for “[n]othing short of removing all senior officers who directed, committed, or acquiesced in fraud.” For more on William K. Black, read my Oct. 20 story on his blistering critique of the press coverage of the financial crisis: Nine Stories The Press Is Underreporting — Fraud, Fraud And More Fraud . ************************* Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail , bookmark his page ; subscribe to his RSS feed , follow him on Twitter , friend him on Facebook , and/or become a fan and get e-mail alerts when he writes.

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In The Pipeline: CoStar Development and Construction News for Oct. 17-23

October 19, 2010

In this edition of In The Pipeline, the FBI will make its Phoenix-area headquarters in a building under construction in the Deer Valley area; a medical device becomes the newest tenant to sign a prelease at the under-construction University of Miami…

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Richard (RJ) Eskow: Wall Street Noir: Moody’s "Double Agent" Ratings

September 28, 2010

What happened to Moody’s is what happens to every “agent” who thinks he can serve two masters. The sad thing is that it keeps happening, even though we’ve seen this movie before. Credit rating agencies are supposed to monitor debt that’s issued by financial institutions and governments. It’s their job to protect investors from purchasing financial instruments that are misleadingly packaged or are riskier than the buyer can afford. These “agencies” hold extraordinary power — to destroy companies, to make people fabulously rich, even to influence governments. The problem is they’re not “agencies” at all. They’re for-profit companies who have their palms outstretched to the big banks for revenue even as they’re “policing” the soundness of their portfolios. Consider the recent checkered past of Moody’s, which holds a 40% market share in the worldwide credit rating business. Allegations have been raised about its CEO’s stock trading, harassment of a whistle blower, and intentional deception of the public for its own financial gain. It got everything wrong when it came to rating debt, despite reports it should have known all along. How is Moody’s handling the public shame caused by its ignominious failures? By lecturing the government on how to handle the disaster its own ratings helped to create. The Moody’s File The SEC declined to file fraud charges against Moody’s last month, not because they thought the “agency” was innocent — the evidence showed otherwise — but because it said there was a jurisdictional problem. As the SEC’s report made clear, Moody’s knew a number of credit ratings had been incorrectly rated too favorably. But rather than face the public embarrassment of admitting its mistake, Moody’s let the public believe the ratings were accurate. Moody’s looked the other way as investors were placed at risk, twiddling its thumbs and whistling to itself like a crooked cop ignoring a robbery. To conceal its mistake, Moody’s s-l-o-w-l-y let the numbers climb back to where they should have been all along. As the SEC makes clear in its report, there is substantial evidence that fraudulent behavior occurred and that investors were misled as a result. The report also presents evidence which shows that Moody’s misled the SEC itself, which is a violation of law. In the latest scandal, a firm that analyzes home mortgages just testified that it told banks that the mortgages they were bundling were a mess , with more than one in four failing to meet even basic underwriting standards — and they kept on doing it anyway. They told the rating franchises, too . But, as the head of the analysis firm observed, “if any one of them would have adopted it, they would have lost market share.” He can’t help it if he’s lucky As if Moody’s reputation wasn’t battered enough, there’s the matter of Kevin Hall of McClatchy Newspapers as follows: “If you look at his major sales in 2007, 2009, 2010, they are all around price peaks and followed by large declines. The likelihood that this is just ‘lucky’ is very low — it appears he is using inside information to time his trades.” Hall and McClatchy had been on the Moody’s story like white on rice, as the saying goes. The headline McClatchy gave to Hall’s October 2009 story, ” How Moody’s Sold Its Ratings — And Sold Out Investors ,” shows how strongly his editors backed his work. Senate panels and the Financial Crisis Inquiry Commission both began investigating Moody’s shortly thereafter, and the FCIC found it tough sledding. Both the FCIC and California Attorney General Jerry Brown found that Moody’s was dragging its feet on providing requested documents. The FCIC was forced to issue a subpoena, and Brown had to go to court to force compliance with a subpoena he had already issued. Revenue over research Moody’s drive to “always be selling” severely compromised its judgment, according to reports. As Hall reported last June , Moody’s executives described its former CEO as “getting in their face whenever they raised obstacles to rating a complex deal, often boasting that they weren’t the ones responsible for Moody’s surge in revenues.” “Agencies” like Moody’s don’t make money by generating accurate ratings. They make it by generating ratings that make the customer — the banks, funds, and insurance companies issuing these debts — look good. No wonder analysts were discouraged from raising red flags about risky deals. A review of emails and other documents generated by the Senate Permanent Subcommittee on Investigations provided more evidence of this pattern. As an internal PowerPoint showed, consultants who spoke with members of the group that rated the riskiest financial instruments found that they saw their roles as follows: Generating increased revenue. Increasing Market Share and/or Coverage Fostering good relationships with issuers and investors Delivering high quality ratings and research Just in case that didn’t make priorities clear enough, the consultants added: “When asked about how business objectives were translated into day-to-day work, most agreed that writing deals was paramount, while writing research and developing new products and services received less emphasis.” A “franchise,” not an agency That’s why the word “agency” is such a misnomer. It’s a word with multiple meanings, but in this case it suggests a quasi-government function. The FBI is an “agency.” The Environmental Protection Agency is an “agency.” Moody’s isn’t that kind of agency. You’d have to look to another definition , like “the capacity, condition or state of exerting power” or “an establishment engaged in doing business for another.” The analysts who placed “writing deals” above research aren’t “agents,” except for the high-stakes gamblers who pay their fees. Follow the money. McDaniel held a “town hall meeting” with employees as the economy was crashing around them, thanks in large part to the great ratings they and their colleagues had given to fraudulent products. He said “… my thinking is there’s a much greater concern about the franchise. Everyone in this room is a long-term investor (ed: presumably in Moody’s stock), for sure.” The raters all own stock in Moody’s and want “the franchise” to succeed. That’s not an agency. It’s a “franchise.” That’s why the company reportedly ” purg(ed) analysts and executives ” who warned that there was trouble coming. It’s why Moody’s and its competitors don’t want to be held liable for “recklessly” issuing bad information. It’s why they withheld their services at a crucial time because they didn’t want to responsible. Now an ex-employee is alleging they defamed him after he raised issues of fraud and inflated ratings internally, and then to investigators. Agencies don’t do that. Franchises do. Ending the rigged game Despite all the evidence, Moody’s is still treated as a credible player … and one that’s powerful enough to send a warning shot across the bow of the United States government . It threatened to downgrade the US government’s debt last March if more wasn’t done to reduce the government’s debt. That’s the kind of rigged game we’re facing: One of the biggest sources of the government’s debt is the economic collapse. That collapse was enabled in large measure by the bad ratings issuing by rating franchises like Moody’s. Now Moody’s wants to hamstring the government’s ability to repair the damage it helped create. And it might. They’re that powerful, and the system is that rigged. Imagine: Moody’s still holds enormous power because it can deny the government a AAA rating — the same rating it once freely gave to mortgage securities underwritten so badly that 28% of them were virtually worthless. It’s a classic film noir ending: The double agents, the cops on the take, they’re the ones who wind up having connections, the ones who seem to come out on top in the end. The Franken Amendment would slow down the profit-driven salesmanship of the ratings franchises. Good idea, but why stop there? Where are the prosecutions? And it’s time to consider shutting these groups down. You’ve seen this movie, too: everybody knows you can’t trust a double agent. _______________________________________________________________ Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Zach Carter: Handcuffs For Wall Street, Not Happy-Talk

September 12, 2010

The Washington Post has published a very silly op-ed by Chrystia Freeland accusing President Barack Obama of unfairly “demonizing” Wall Street. Freeland wants to see Obama tone down his rhetoric and play nice with executives in pursuit of a harmonious economic recovery. The trouble is, Obama hasn’t actually deployed harsh words against Wall Street. What’s more, in order to avoid being characterized as “anti-business,” the Obama administration has refused to mete out serious punishment for outright financial fraud. Complaining about nouns and adjectives is a little ridiculous when handcuffs and prison sentences are in order. Freeland is a long-time business editor at Reuters and the Financial Times, and the story she spins about the financial crisis comes across as very reasonable. It’s also completely inaccurate. Here’s the key line: “Stricter regulation of financial services is necessary not because American bankers were bad, but because the rules governing them were.” Bank regulations were lousy, of course. But Wall Street spent decades lobbying hard for those rules , and screamed bloody murder when Obama had the audacity to tweak them. More importantly, the financial crisis was not only the result of bad rules. It was the result of bad rules and rampant, straightforward fraud, something a seasoned business editor like Freeland ought to know. Seeking economic harmony with criminals seems like a pretty poor foundation for an economic recovery. The FBI was warning about an ” epidemic ” of mortgage fraud as early as 2004. Mortgage fraud is typically perpetrated by lenders, not borrowers–80 percent of the time, according to the FBI. Banks made a lot of quick bucks over the past decade by illegally conning borrowers. Then bankers who knew these loans were fraudulent still packaged them into securities and sold them to investors without disclosing that fraud. They lied to their own shareholders about how many bad loans were on their books, and lied to them about the bonuses that were derived from the entire scheme. When you do these things, you are stealing lots of money from innocent people, and you are, in fact, behaving badly (to put it mildly). The fraud allegations that have emerged over the past year are not restricted to a few bad apples at shady companies– they involve some of the largest players in global finance. Washington Mutual executives knew their company was issuing fraudulent loans , and securitized them anyway without stopping the influx of fraud in the lending pipeline. Wachovia is settling charges that it illegally laundered $380 billion in drug money in order to maintain access to liquidity. Barclays is accused of illegally laundering money from Iran , Sudan and other nations, jumping through elaborate technical hoops to conceal the source of their funds. Goldman Sachs set up its own clients to fail and bragged about their “shitty deals.” Citibank executives deceived their shareholders about the extent of their subprime mortgage holdings. Bank of America executives concealed heavy losses from the Merrill Lynch merger, and then lied to their shareholders about the massive bonuses they were paying out. IndyMac Bank and at least five other banks cooked their books by backdating capital injections. For the past decade, fraud has been a mainstream business on Wall Street. That’s to be expected–massive financial crashes simply do not occur without widespread fraud. After the savings and loan crisis, more than 1,000 bankers went to jail for fraud, and the S&L bust was a much smaller debacle than the frenzy that took down Wall Street in 2008. This is not to suggest that everyone on Wall Street is a criminal–many of these frauds were committed against reasonable financial professionals. But the only reason we haven’t we seen throngs of financiers in handcuffs over the past two years is precisely because Obama has been listening to people like Freeland, trying to avoid “demonizing” bankers who broke the law. Obama critics like hedge fund manager Daniel Loeb have been calling him “anti-business” precisely because some fraud charges have surfaced in the past two years– even though his agencies have gone easy on the fraudsters themselves. The regulators Obama kept on board at the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) have not recommended any fraud prosecutions to the Justice Department–and we know that the OTS itself was involved in the illegal backdating scheme at IndyMac and other banks. The SEC has not pursued civil fraud cases against some of the executives it believes were involved in Citibank’s subprime scam, nor is the agency seeking serious accountability for Barclays. Nothing has happened to Lehman Brothers or Bank of America for their Enron-style derivatives scams that hid debt from investors, or to Merrill Lynch for its self-dealing of subprime derivatives . The Justice Department is letting Wachovia off the hook for laundering drug money. Let me repeat that: the Obama administration has been so eager to please Wall Street that it is letting bankers get away with laundering drug money . Applying the law equally to all citizens isn’t demonization and it isn’t socialism– it’s a basic proponent of justice. When you steal a lot of money, you go to jail. When your theft crashes the global economy and throws 8 million people out of work, you go to jail for a long time. Obama doesn’t just need tough talk for Wall Street, he needs to prosecute the frauds that were committed, and explain them to the American people. Nothing about this should be threatening to the millions of fair and reasonable American financial professionals who have done nothing wrong. If you examine Freeland’s two examples of so-called “demonization,” her story simply becomes absurd. When hedge funds who owned Chrysler bonds complained about losing money in the Chrysler bankruptcy, Obama called them “speculators” who needed to take losses. That’s perfectly reasonable. They were speculators , and they speculated on a company that went bankrupt. When you invest in a bad company, you lose money. That’s how capitalism works. Freeland also claims that Obama was “out of line in permitting the denunciation of Goldman Sachs.” Goldman deserved to be denounced– their ABACUS scam was abhorrent , and it wasn’t the only egregious act the company engaged in (see: ” shitty deal “). But Obama has had plenty of nice things to say about Goldman. He defended the massive bonus that Goldman CEO Lloyd Blankfein paid himself, and praised Blankfein as a “savvy” fellow . You cannot reason with someone who claims he is being demonized when you call him “savvy,” nor should you. Any president who neglects basic principles of justice and standards for economic security in order to pamper princely executives isn’t doing his job. Ethical financiers and reasonable business editors should have nothing to fear from a president who criticizes and prosecutes illegal finance.

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Disney Insider Trading Case: Defendants Plead Guilty

August 23, 2010

NEW YORK — A man charged with selling secrets about finances at Walt Disney Co. pleaded guilty in federal court Monday to wire fraud charges and conspiracy to commit securities fraud. Yonni Sebbag, a citizen of Morocco, and his girlfriend, former Disney employee Bonnie Hoxie, were arrested in California in May in the insider trading case filed in New York. “I agreed with others to commit securities and wire fraud,” Sebbag, 30, said in court, reading from a statement. “As part of this, I disclosed material and non-public information about the Walt Disney company to outside investors.” The government said the pair arranged for anonymous letters to be sent in early March to dozens of hedge funds and other investment companies, many of which were in Manhattan, offering to sell secrets. Most of the hedge funds and companies that received the offers notified the FBI. Federal agents then posed as hedge fund traders and offered to buy the information from Sebbag and Hoxie, prosecutors said. Before Disney’s May 11 earnings report, the couple sent FBI agents a copy of a 107-page document titled: “The Walt Disney Company Q2 Fiscal 2010 Key Topics Speaking Points,” prosecutors said. The pair notified agents two hours before the public earnings announcement that Disney’s results would exceed stock analysts’ expectations. Sebbag said Monday that he was paid $15,000 for the information when he met two undercover FBI agents in New York, and was ordered to return the money. Prosecutors said he agreed to provide similar confidential information in the future in return for a 30 percent share of any profits from early trades. Sebbag has been held without bail in Manhattan because he was deemed a flight risk. Sentencing was set for Nov. 16. Though the charges carry a potential penalty of up to 25 years in prison, a plea agreement recommends that the judge impose a prison sentence of two years and three months to two years and nine months. Prosecutors said Hoxie, who had been employed at Disney since Dec. 18, 2007, obtained information, like Disney’s quarterly earnings, before the results were publicly released and fed the information to Sebbag, who tried to sell the tips to at least 33 investment companies. Hoxie’s case is still pending. She remains out on bail. Shares of Walt Disney Co. were down 14 cents at $13.91 in late morning trading in New York.

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Gulf Oil Spill Investigation: Companies At Fault Will Be In Charge Of Recovering Evidence

August 6, 2010

NEW ORLEANS (AP) — Now that BP appears to have vanquished its ruptured well, authorities are turning their attention to gathering evidence from what could amount to a crime scene at the bottom of the sea. The wreckage — including the failed blowout preventer and the blackened, twisted remnants of the drilling platform — may be Exhibit A in the effort to establish who is responsible for the biggest peacetime oil spill in history. And the very companies under investigation will be in charge of recovering the evidence. Hundreds of investigators can’t wait to get their hands on evidence. The FBI is conducting a criminal investigation, the Coast Guard is seeking the cause of the blast, and lawyers are pursuing millions of dollars in damages for the families of the 11 workers killed, the dozens injured and the thousands whose livelihoods have been damaged. “The items at the bottom of the sea are a big deal for everybody,” said Stephen Herman, a New Orleans lawyer for injured rig workers and others. BP will surely want a look at the items, particularly if it tries to shift responsibility for the disaster onto other companies, such as Transocean, which owned the oil platform, Halliburton, which supplied the crew that was cementing the well, and Cameron International, maker of the blowout preventer. BP and Transocean — which could face heavy penalties if found to be at fault — have said they will raise some of the wreckage if it can be done without doing more damage to the oil well. That would give the two companies responsibility for gathering up the very evidence that could be used against them. But the federal government has said it simply doesn’t have the know-how and the deep-sea equipment that the drilling industry has. And it said the operation will be closely supervised by the Coast Guard. Lawyers will be watching, too, to make sure the companies don’t do anything untoward, said Brent Coon, an attorney for one of the thousands of plaintiffs seeking damages. “I think they would do something in front of their own mother if they could,” Coon said. “But the reality is there are a lot of eyes watching them and a lot of smart scientists who would know if they did anything they weren’t supposed to.” The crisis in the Gulf appeared to be drawing to a close this week when BP plugged up the top of the blown-out well with mud and then sealed it with cement. BP Senior Vice President Kent Wells said crews plan to resume drilling Sunday night on a relief well more than two miles below the seafloor that will be used to inject mud and cement just above the source of the oil, thereby sealing off the well from the bottom, too. The two wells should hook up between Aug. 13 and Aug. 15, Wells said. In other developments Friday, BP said it might drill again someday into the same undersea reservoir of oil, which is still believed to hold nearly $4 billion worth of crude. That prospect is unlikely to sit well with Gulf Coast residents furious at the oil giant. “There’s lots of oil and gas here,” Chief Operating Officer Doug Suttles said. “We’re going to have to think about what to do with that at some point.” Also Friday, BP said Suttles — who has spent more than three months managing BP’s response efforts on the Gulf — is returning to his day job in Houston. Mike Utsler, a vice president who has been running BP’s command post in Houma, La., since April, will replace him. Willie Davis, a 41-year-old harbormaster in Pass Christian, Miss., said he fears his area will be forgotten if BP pulls out too soon. “I’m losing trust in the whole system,” he said. “If they don’t get up off their behinds and do something now, it’s going to be years before we’re back whole again.” Utsler told Gulf residents not to worry, saying the spill’s effects are “a challenge that we continue to recognize with more than 20,000-plus people continuing to work.” Investigations of the disaster began immediately after the rig blew up on April 20. The government alone is conducting about a dozen, including several congressional investigations, criminal and civil probes by the Justice Department, and an examination by an expert panel convened by President Barack Obama. Officials want to find out not only the cause of the explosion, but also how oil drilling a mile or more below the surface can be made safer. A final outcome could be years away, particularly if someone is charged with a crime, said David Uhlmann, former chief of the Justice Department’s environmental crimes team. “Normally an investigation of a case this complicated would take two to three years. This is not a normal case,” he said. “This is the worst environmental disaster in U.S. history.” Any items brought up from the seafloor will be photographed and preserved. Investigators for the government, BP and others who have a stake in the case will try to come up with testing procedures acceptable to all sides. The blowout preventer will probably make it to the surface. The 300-ton mechanism is designed to be placed on a well and brought back to the surface for reuse. It was supposed to be the final line of defense against a catastrophic spill, but BP documents obtained by a congressional committee showed the device had a significant hydraulic leak and a dead or low battery. “That piece of equipment will tell us whether the blowout preventer had a design defect or whether it was mechanical or human error that caused this disaster,” Herman said. The blowout preventer is still attached to the broken wellhead but will be replaced as part of the effort to permanently secure the well, said retired Coast Guard Adm. Thad Allen, who is overseeing the spill response for the government. “In some ways it’s the smoking gun,” said Eric Smith, associate director of the Tulane Energy Institute. “It’s rich evidence. It still won’t tell you exactly what happened at the bottom of the well … but the fact is it didn’t work — and everybody wants to know why.” Coon said the rig might contain “black boxes” that recorded critical data and control panels that could be removed to re-create conditions before the explosion. Transocean has asked the government for permission to test the blowout preventer and hopes to see it raised it in September, company President Steven Newman said. Getting to the exploded rig itself might be harder. It would be impractical to raise the entire structure because of its immensity, twice the size of a football field, Coast Guard Rear Adm. Paul Zukunft said. He would not say whether it would be possible to cut off vital pieces of the structure.

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Katy Welter: To Be a Banker Is to Be in Heaven

July 28, 2010

As a kid, I knew a boy whose father was a carpenter. The boy learned how to use a circular saw at an alarmingly young age, and he and his father built a magnificent tree house that earned the envy of the grade school. Another friend’s dad was an FBI agent. The son never really knew what his father did, which ensured that the dad was perceived to be important, but the son didn’t learn a trade. My father was a banker. He ran a community bank in Valparaiso, Indiana for thirty years until the bank was sold against my dad’s and my every effort to prevent the sale . I began answering the bank’s switchboard at age 5. I couldn’t really read yet, so I memorized twenty or so extension numbers for the most frequently requested employees and departments. I passed off the phone to the operator–my first of many bank supervisors–when I didn’t recognize a name. At 9, I was filing paperwork for various departments, and at 15 I became a teller. I still remember when my dad tried to convince me that “Congress did a good thing today.” It was 1999 and Congress had just passed the now-vilified Gramm-Leach Bliley Act (GLBA). GLBA (pronounced glee-bah) freed commercial banks to engage in non-banking financial activities, such as insurance sales and stock brokering. I was seventeen years old. By the time the bank was sold, I had worked in and heard my dad’s philosophy about nearly every aspect of banking, from IT to Trust and Roosevelt to Reagan. Banking came as naturally to me as carpentry to my classmate. It got in my blood. It’s easy to suppose that I was raised with a sense of entitlement about the bank. But that wasn’t the case. I learned that the bank existed because of its employees and customers–not its shareholders. And that the money in the bank did not belong to us. We were its custodians. We mediated between the savers and the borrowers in an act of financial alchemy I now know to be called the “multiplier effect.” The process, as we’ve all learned, is more treacherous than a circular saw and as mysterious as the FBI. But I grew up with it, and came to understand and appreciate the magic of collecting one hundred deposits in order to provide one loan, which generates more deposits and loans, and so on. Upon my college graduation, my dad gave me a strange-looking picture I had made when I was nine years old. I’d drawn a large grey cat in a shirt and tie (presumably an illustration of my father, modeled after our family cat), wearing a familiar bank pin on his lapel. The cat stands in his office and next to a yellow couch sprinkled with dollar signs. Above the couch, I drew a brown wooden frame around the declaration, “To Be a Banker is To Be in Heaven!” I knew my place in the world earlier than most. After years of working at–and then trying to stave off the sale of–the bank, completion of law school, and finally, an exhaustive (but ultimately withdrawn) pursuit to form a de novo (new) bank, I find myself playing a new role in the world of community banking–as an advocate. From here on out, I’ll be blogging regularly about community banking issues–legislation, current events, publications, and generally about what community banks are and do and why they’re an essential and overlooked part of our economy. I stumbled upon this opportunity after becoming enamored with the Move Your Money campaign, which was co-founded by Arianna Huffington. I hope to support that campaign by explaining just what makes a community bank unique, useful, and deserving of your money. “To Be a Banker Is to Be in Heaven” still hangs on the wall of my home office as a reminder of the peace of mind I enjoyed for so long about the vocation. But now I can’t help but wince when I consider the philosophy. It was always odd and maybe absurd, but now it just seems tasteless. To be a banker is to be an embarrassment. But it doesn’t have to be. In this forum, I hope to show the world that there are banks where your money is safe, your fees are reasonable, and the service is friendly and competent. I bet there’s one in your community.

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Shanshan Du, Ex-GM Worker, Allegedly Tried To Sell Hybrid Car Secrets To Chinese Companies

July 23, 2010

DETROIT — A former General Motors engineer and her husband conspired to steal trade secrets about hybrid technology and use the information to make private deals with Chinese competitors, according to a federal indictment unsealed Thursday. Shanshan Du and Yu Qin, both of Troy, were indicted on conspiracy, fraud and other charges. They had been under scrutiny for years and were charged in 2006 with destroying documents sought by investigators, a case that was dropped while a broader probe was pursued. The indictment says Du, who was hired at GM in 2000, purposely sought a transfer in 2003 to get access to hybrid technology and began copying documents by the end of that year. In 2005, she copied thousands of documents, five days after getting a severance offer from the automaker, according to the indictment. By that summer, Qin was telling people he had a deal to provide hybrid technology to Chery Automobile, a GM competitor in China, the indictment says. The couple had set up their own company, Millennium Technology International. Outside court, Assistant U.S. Attorney Cathleen Corken said there’s no indication the Chinese benefited. Jin Yibo, a Chery spokesman in China, said early Friday that the company saw a news report about the case but knew nothing else about it. “We are surprised about why anyone connected this with Chery. This is ridiculous,” Jin said. Du, 51, and Qin, 49, were arrested Thursday and remained mostly silent during a court appearance where they waived a reading of the indictment. Not-guilty pleas were entered for them. The maximum penalty if convicted is 20 years in prison. “Theft of trade secrets is a threat to national security,” Andrew Arena, head of the FBI in Detroit, said in a statement. Du’s attorney, Robert Morgan, declined to comment. Qin’s attorney, Frank Eaman, said he was “completely surprised” by the indictment. “This investigation has been going on so long I figured if they had a basis they would have charged them a long time ago,” Eaman said. Corken said GM learned about the alleged theft and called the FBI. GM estimates the value of the stolen information at $40 million. In May 2006, Du and Qin were charged with destroying records to stifle an investigation of them. FBI agents followed them to a major grocery store where Qin approached a Dumpster, according to a court filing at the time. Agents later retrieved shredded documents. That criminal complaint was dropped less than two months later, a common move when investigators want to further develop a case. The indictment includes an obstruction of justice charge against Qin for the alleged Dumpster incident. Du and Qin, both U.S. citizens, were released on bond and ordered to mostly stay in the Detroit area.

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Danny Schechter: Justice on Steroids–for Ruskie Spies, Not Wall St Bigs

July 12, 2010

We just witnessed justice on steroids. Ten Russian “spies”–even if we still don’t know what they were spying on or why–were brought to court, copped a plea, and were on their way out of the country by midnight. The wheels of justice move quickly when governments want them to. Wam, bam, thank you ma’am. When a crisis is looming–in foreign affairs or even potential embarrassment for a country in the spotlight, Courts jump to; cases are rapidly disposed of and the wrath of the law is felt with dispatch. In South Africa, land of the World Cup and vuvuzelas, special courts were set up to avoid a crisis of image if an expected crime wave erupted. Noted the New York Times : To swiftly handle the anticipated caseload — to satisfy the robbed, the throttled, the burgled, the scammed — 54 courtrooms around the country were set aside, “on the ball” from 8:30 a.m. to 11 p.m. and staffed with 110 magistrates, 260 prosecutors, 1,140 court officials and 200 translators. But only 172 cases have come to the World Cup courts, the noise of the gavels no match for the vuvuzelas. The scorecard, as tallied by the Justice Ministry through July 5, reads: 104 convictions, 7 acquittals, 28 withdrawn or dismissed, 33 pending. Now contrast this approach to the handling of our financial crisis where nary a financial big shot has gone to jail or even been tried. Despite the loss of trillions and the destruction of our economy, it’s business as usual in the halls of justice where, as Lenny Bruce once quipped, “the only justice is in the halls.” The government is not pushing prosecutions and there are no special courts despite all the anger in the public at the crimes of Wall Street. According to a recent report in Forbes , the Business magazine, financial crime is growing. Mortgage fraud is on the rise, as are bogus job counseling services and frauds conducted over the Internet. Since the financial crisis erupted in 2008, the FBI’s 1,000-agent New York office has tripled its mortgage fraud investigations squad and beefed up its securities and financial fraud group. The FBI’s Internet Crime Complaint Center says it received 336,655 fraud complaints last year related to financial losses of $560 million, double the dollar amount reported the year before. Instead of “all deliberate speed” (to use a civil rights era phrase), there is no deliberate speed in going after this financial crime wave. Yes, the FBI rounded up low-level mortgage fraudsters but did not go after the firms that securitized the bogus mortgages or insured them. Instead you get cases like this one reported by Business Insider , Robert Miller, a former lawyer for the SEC (and also a former money manager) deserves a prize for his performance in court the other day. He just escaped a potential 20-year prison sentence by telling the judge that he used to be a “fearful, self-loathing suicidal alcoholic,” says the Wall Street Journal. He was just too drunk to realize that he was participating in a fraud. It’s like he told his lawyer: ‘No matter how drunk I was, I wouldn’t have” [done it had I known it was a fraud]. Now Miller won’t have to spend anytime in jail. He will just have to live under “supervised release” for 2 years. This is amazing because Miller already plead guilty to conspiracy to commit securities fraud, wire fraud and securities fraud in November. Part of the reason for this shocking judicial failure is the way the industry, through lobbying and political contributions, managed to change the laws and decriminalize their scams. It’s hard to remember that 1500 bankers went to jail after the S&L crisis. Almost none are going to jail today. That’s why we need prosecutions of criminal enterprises under the RICO laws used against the mafia. In other countries, there are more creative ideas writes financial analyst Janet Tavakoli on Huffington Post: Broadcaster Max Keiser interviewed Luc Saucier, a Parisian lawyer to the financial community and Fulbright Scholar, on how to create a fast remedy to amoral behavior in the global financial markets. …Saucier explains that labeling a financial institution “obscene” is an effective social deterrent. U.S. citizens have the right to own property and to make money. We also enjoy freedom of speech, up to a point. The Supreme Court stated that when “art” becomes obscene-and the court worked hard to define what is meant by “obscene”-it is no longer considered art and does not enjoy the protection of freedom of speech. The most highly compensated players in finance are hedge fund managers earning $1 billion to $4 billion per year. Saucier says that when you see someone making money-billions of dollars a year in bonuses by exploiting the subprime crisis-then one can take the view that part of the remuneration is obscene. The same can be said for many bank CEOs, who may earn somewhat less economic compensation, but enjoy countless valuable perks. …Mr. Saucier puts it this way:

”They are committing acts of obscenity…They are morally bankrupting society…It’s obscene like kiddie porn is obscene…On the financial front that’s what [corrupt financiers are] guilty of.” Too many Americans don’t see it this way, says another financial blogger, Martin Andelman of Mandelman Matters , I think everyone has a friend or family member who thinks the crisis was caused by irresponsible sub-prime borrowers, who are now lowing their homes and should be. They’re wrong, and you know they’re wrong, but it’s a tough argument to win. More than a few of my readers have contacted me over the last year saying that they wish I could come over and set their special someone straight, and frankly I wish I could too, because no one… and I do mean no one… has any chance of winning that argument if I’m involved, and not because I’m such a brilliant debater, but because they have their facts wrong… they are misinformed. I am not, and neither is Danny Schechter. He then goes on to call for “Plunder Parties” to show my film Plunder The Crime of Our Time because our media is not doing enough to cover the criminal basis of the crisis. Boing Boing reports that “Italy’s media is going on strike today, and practically no news will be reported. This is in protest of Prime Minister Silvio Berlusconi’s plan to ram through anti-wiretapping legislation that includes a gag order on reportage concerning government investigation (especially investigation of corruption).” Unfortunately, in our country, we don’t need laws like this. Most of the media is already complicit with little inclination and few resources to investigate institutional corruption. Give them a celebrity scandal, a sex siren like Anna Chapman or an already wealthy ballplayer like Lebron James and they will beat the story to death in a mad pursuit of ratings and revenues. Ask them to investigate the collapse of our economy and hijacking of our country and you don’t get called back. News Dissector Danny Schechter directed Plunder The Crime of Our Time http://plunderthecrimeofourtime.com) that views the financial crisis as a crime story, (Plunderthecrimeofourtime.com). Comments to dissector@mediachannel.org

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David Isenberg: Just Another Day in Helping Make the U.S. Military the Best Supplied in Human History

July 4, 2010

Thanks to the ever watchful and observant Ms. Sparky , always on the lookout for the latest in contractor malfeasance, I want to share this latest news on the newly announced suspensions of PWC/Agility executives. Some may recall that last year, on November 9, 2009 to be precise, a Criminal Indictment was filed in the United States District Court for the Northern District of Georgia against the Public Warehousing Company (PWC) aka Agility DGS Holdings, Inc., headquartered in Kuwait, for violations of 18 U.S.C. § 371 (Conspiracy to Commit an Offense), 18 U.S.C. § 1031 (Major Fraud Against the United States), and 18 U.S.C. § 1343 (Fraud by Wire). PWC was indicted on allegations it overcharged the U.S. government on a multibillion-dollar contract to supply food for troops in Kuwait and Iraq. On July 1 the Defense Logistics Agency (DLA) sent out a memo announcing that Agility’s Chairman and Managing Director Tarek Sultan and two others have been suspended indefinitely from doing business with the DoD under ANY circumstances! The suspended parties are PWC affiliates who actively participated in the criminal conduct that lead to the indictment. Agility, by the way, is a member company of the trade association IPOA , which goes by the name of The Association of the Stability Operations Industry. It is headed by Doug Brooks, well known for his ubiquitous sound bite that “this [U.S. military operations in Iraq] is the best-supported and -supplied military operation in history.” Perhaps he might want to rethink that. One also wonders what IPOA will do regarding Agility? After all, IPOA’s exhortative but toothless Code of Conduct , Article 3.3, states “Signatories shall take firm and definitive action if their personnel engage in unlawful activities. For serious infractions, such as grave breaches of international humanitarian and human rights laws, Signatories should report such offences to the relevant authorities.” Perhaps nothing will be done. After all overcharging on a food contract most likely is not considered a grave breach of “international humanitarian and human rights laws.” Or perhaps a lawyer could argue that a suspension is not tantamount to an “unlawful activity. Although being suspended indefinitely strikes me as a pretty good sign that something is not kosher. One of Ms. Sparky’s colleagues observes, It is possible that at least two of KBR top brassholes, Paul Cerjan and Joe Cosumano will get caught up in the mess. Paul Cerjan was at L3, after KBR and before Agility. Also Remo Butler is at L3; then of course there is Craig Peterson who left KBR and went to IAP, got caught up in the Walter Reed scandal. What do they all have in common, they are all retired Generals and KBR. A commenter on Ms. Sparky’s website wrote : These “suspension” notices against the three PWC/Agility scumbags are a hoot. The only reason that DLA is taking such an agressive posture against these three is to stay ahead of the Justice Department’s investigation. DLA does NOT want the FBI looking into the “Prime Vendor Program” and the people running it in Philadelphia because therein exist the accomplices that make it possible for companies like PWC/Agility to rip-off the American Taxpayers for so much money on a systematic basis: People like Gary Shifton, Linda Sandoli and Paul Zebrowski. Oh, and Alan Estevez the Deputy Assistant Secretary of Defense who oversees DLA and who fixes lots of contracts for his friends….like his GREAT friend Maj. Gen. Daniel Mongeon (ret.) the President of PWC/Agility and former Commander of the Defense Supply Center Philadelphia.

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Frank DiPascali, Madoff’s Ex-Finance Chief, Released On Bail

June 22, 2010

NEW YORK — The former finance chief for jailed financier Bernard Madoff was released on $10 million bail Tuesday, months after he admitted his role in an epic fraud that cost thousands of investors billions of dollars and agreed to cooperate with investigators. Just a few hours after Frank DiPascali left U.S. District Court in Manhattan without speaking to reporters, prosecutors revealed they had filed civil papers to recoup $5 million from two longtime former back office Madoff employees who have never been charged criminally. DiPascali, 53, was freed according to the terms of a bail package that a judge had set in February. He pleaded guilty in August to helping with Madoff’s multi-decade Ponzi scheme until it collapsed in late 2008, when Madoff revealed to his sons that his private investment business was a fraud and they notified the FBI. DiPascali walked quickly in front of his lawyer Marc Mukasey as he left the courthouse. Mukasey and prosecutors have said DiPascali provided substantial information that contributed to the arrests of two computer programmers for the firm and Madoff’s longtime auditor. The FBI’s work to identify those who can be held accountable for the fraud and to help civil investigators identify assets continued soon afterward when prosecutors announced they were seeking to recover $5 million in assets controlled by two women who worked for Madoff for more than 25 years. The civil complaints seeking proceeds of Madoff’s fraud were filed against Annette Bongiorno and Joann Crupi, identified as members of Madoff’s back office staff. Prosecutors said in a news release that Bongiorno was a supervisor of the back office staff and was responsible for answering questions from clients about their purported investments, along with overseeing the fabrication of account statements, trade confirmations and other documents and distributing those documents to clients. A lawyer for Bongiorno did not immediately return a telephone call for comment Tuesday. Eric Breslin, a lawyer for Crupi, said: “Our position is that Ms. Crupi did nothing wrong here, and we intend to contest the government’s allegations.” Madoff, 72, is serving a 150-year prison term after admitting that his secretive investment advisory service at Bernard L. Madoff Investment Securities never bought any securities. Instead, he used new investments to pay returns to existing clients. DiPascali’s cooperation has delayed his sentencing on his guilty plea to securities fraud, money laundering and other charges that carry potential penalties of up to 125 years in prison. “I was loyal to him. I ended up being loyal to a terrible, terrible fault,” DiPascali said during the plea. DiPascali began working for Madoff in 1975, just after he finished high school. He has said he became aware of the fraud by the 1980s or early 1990s. After the plea, U.S. District Judge Richard Sullivan twice turned down bail packages that were arranged for DiPascali and were supported by prosecutors. He called DiPascali’s role in the fraud “crucial” and the potential sentence “astronomical.” He asked for proof that DiPascali’s cooperation had been significant. He agreed to the $10 million bail in February but ordered that DiPascali remain under house arrest after his release and required that he and his wife forfeit all family assets except for an amount less than $300,000 to be agreed upon by the government, the defendant and the judge. The government in April filed papers saying DiPascali’s wife could keep $178,000 after the family gave up assets estimated to be worth more than $6 million. The government said the sales of three cars and a yacht alone totaled nearly $1 million. It was unclear where DiPascali was headed Tuesday. In January, he and his wife, Joanne DiPascali, agreed to the sale and forfeiture of their Bridgewater, N.J., home, which is being prepared for its marketing and sale. Items also surrendered by the couple included a Jet Ski, two motorcycles, two minibikes, a scooter and a snow blower, along with watches and jewelry. The judge has asked prosecutors to notify him by letter before Nov. 17 whether DiPascali’s cooperation has concluded and whether the parties are prepared to proceed with sentencing. In a May 14 letter to the judge, prosecutors said DiPascali’s cooperation was ongoing. It confirmed that DiPascali’s cooperation had been partly responsible for the charges brought against Madoff’s former director of operations and the two computer programmers. The government said it expects to call DiPascali as a witness should those cases proceed to trial. The government redacted several paragraphs from the letter, saying disclosure of all its parts would unfairly prejudice subjects of the investigation who haven’t been indicted. Prosecutors have said they expect to request leniency at sentencing in return for the cooperation.

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Taylor Bean’s Former CEO Lee Farkas Is Charged in $1.9 Billion TARP Fraud

June 16, 2010

By William McQuillen and Justin Blum June 16 (Bloomberg) — Lee Farkas , the former chairman of Taylor, Bean & Whitaker Mortgage Corp., was accused by the U.S. of helping run a more than $1.9 billion fraud scheme aimed in part at the government’s Troubled Asset Relief Program. An indictment unsealed today in federal court in Alexandria, Virginia, alleges that Farkas, 57, and fellow conspirators sought to deceive financial firms and TARP by covering up shortfalls at his closely held mortgage lending company based in Ocala, Florida. The company filed for bankruptcy in August 2009. Farkas was arrested yesterday by the Federal Bureau of Investigation in Ocala, said Lindsay Godwin, an FBI spokeswoman. The scheme contributed to the failure of Colonial BancGroup Inc., one of the 50 largest U.S. banks in 2009, and closely held Taylor, Bean & Whitaker, once one of the largest privately held mortgage companies in the U.S., the Justice Department said in a news release. Farkas and unnamed co-conspirators are accused by the government of misappropriating more than $400 million from a division of Colonial and about $1.5 billion from Ocala Funding, a mortgage lending facility controlled by Taylor, Bean & Whitaker. The indictment alleges that Farkas and his co- conspirators committed wire and securities fraud by attempting unsuccessfully to persuade the government to provide Colonial with about $553 million in TARP funds. Farkas misappropriated more than $20 million in Taylor, Bean & Whitaker funds for personal use, according to the government’s pretrial detention memo. “To cover up collateral shortfalls, Farkas and co- conspirators caused false information to be sent to the financial services investors,” the indictment said. The case is USA v. Farkas, 10cr200, U.S. District Court for the Eastern District of Virginia (Alexandria). To contact the reporter on this story: William McQuillen in Washington at bmcquillen@bloomberg.net

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"Boiler Room" Busted For Financial Scam

June 9, 2010

A midtown “boiler room” was broken up by the FBI earlier today. Authorities claim that the finance scammers swindled elderly people out of about $12 million. From the Associated Press: Agents arrested several people Wednesday at an office building on West 36th Street. The FBI said one of the suspects was a member of the Bonanno organized crime family. Authorities said the illicit brokerage was artificially inflating the value of a stock in a company with misleading sales pitches. Other workers in the office building reportedly suspected that something was amiss. Maria Cruz, a secretary for a company on the same floor as the boiler room told the New York Post , “To be honest with you, we never knew what kind of work they did. One of them dressed like a gangster. They were kind of scary-looking. One looked just like Howard Stern. At times we were afraid to be alone while they were here.” The alleged mob member, Anthony Guarino, and the other defendants associated with Powercom Energy Services are expected to appear in federal court today.

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Janet Tavakoli: Wall Street’s Advice to Joran van der Sloot

June 8, 2010

Before we get to your problem areas, we’d like to congratulate you on almost having “the right stuff.” You are a manipulator and an unabashed liar. You have no remorse. You are a master at twisting things to suggest your victims had it coming, and you don’t think of them as human beings. You suggest that Natalee Holloway threw herself at you when you weren’t even interested. Stephany Flores “intruded” on your private life, after you escorted her to your room. She took your computer–presumably a computer that either didn’t have logon password protection, or for which you gave her the password. She failed to acknowledge your greatness and recoiled in horror. How dare she? What an insult to your Weltanschauung! You couldn’t allow her to roam free with that sort of judgmental attitude aimed in your direction. We appreciate your attitude and then some. Unfortunately, you are a piker and more than a little sloppy. Extorting money in exchange for information was truly inspired, but you only collected $15 thousand of the $250 thousand you originally asked for. We are really big on extortion, and we know how to keep milking our victims. We threatened our government that the financial system would collapse, if it allowed shareholders to be wiped out and debt holders to accept debt for equity swaps. We had our government eating out of our hands, begging us to take hundred of billions in TARP money, and hundreds of billions more in back-door bailouts and ongoing Fed subsidies. We deflected some blame to Fannie and Freddie, even though most of the problematic subprime mortgages were fueled by money raised from our private securitizations. We got Congress to pressure Fannie and Freddie to lower their standards and buy hundreds of millions of our “AAA” rot. After our Ponzi schemes unraveled, they were forced to pick up the slack. Meanwhile, we make money hand-over-fist funded by our victims, U.S. taxpayers. We pillaged entire neighborhoods driving millions into bankruptcy. We destroyed families and drove a few of our victims to suicide . As for lack of remorse, we’ve even propagated what Elizabeth Warren calls the ” myth of the immoral debtor.” We excel at shifting blame and kicking our victims when they’re down. Fortunately for us, we devastated the finances of the least powerful people. The public outcry from our victims has been successfully muted. This brings us to the most important part, and here’s where you really screwed up. If you kill an influential customer, don’t get caught in unfriendly territory. If you forget that rule, don’t confess. Notice how well things went for you in Aruba where your family had connections? Your friends and family sheltered you. The justice system seemed designed to protect you. The entire investigation was a farce to feed the media. It left you free to commit more crimes. In Peru, your victim’s family has connections, and now the shoe is on the other foot. You don’t see us vacationing in China do you? They take financial crimes seriously. We stay in friendly territory. “Investigations” and “financial reform” are designed to feed sensational–but harmless–content to the media. They love us! We’ve bought most of Congress, the SEC crafts lame complaints, the entire regulatory system is captured, rating agencies are in our pocket, the FBI’s budget is a joke, and the Department of Justice can’t seem to remember its purpose. We cratered the economy and got the financial equivalent of a traffic ticket. This has left us free to make a mockery of traditional banking and ramp up global systemic risk. We’re rolling in more cash than ever before. You probably noticed that all of this good advice comes a bit too late to be helpful. We’d like to say it’s because we have a conscience, and that you are a bigger creep than we are, except you’d see through that. The fact is we enjoy rubbing salt in wounds, and when it comes to creating havoc and misery, we just want you to know that we are better at it than you are. Endnote: Free Copies for the Grand Jury My book on the the global financial meltdown, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street , (Wiley, January 2009) explains that the relationship between failed mortgage lenders and Wall Street securitization departments was a widespread interconnected Ponzi scheme, which is illegal in the United States, and names culprits: mortgage lenders, investment banks, CDO managers, credit rating agencies, monoline insurers, regulators, Congress, and more. Some were criminals, others were enablers. If the Department of Justice ever decides to prosecute, I will provide free copies for the first grand jury.

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New Jersey Terrorism Suspects Appear Before Judge After Arrests at Airport

June 7, 2010

By David Voreacos June 7 (Bloomberg) — Two New Jersey men accused of conspiring to join a terrorist group in Somalia and kill, maim and kidnap people outside the U.S. were ordered held without bail at a court appearance in Newark, New Jersey. Mohamed Mahmood Alessa, 20, and Carlos Eduardo Almonte, 24, appeared today before U.S. Magistrate Judge Madeline Cox Arleo . A prosecutor told her the men pose a risk of flight and a danger to the community. Arleo set a detention hearing for June 10. The two were arrested June 5 at New York’s John F. Kennedy International Airport as they tried to board separate flights to Egypt on their way to join the Islamic Al-Shabaab movement in Somalia, U.S. prosecutors said. An undercover police officer had recorded the men discussing and preparing for violent jihad overseas. “The charges were filed before their bags were packed, and the arrest teams were waiting at the airport before they arrived,” Paul Fishman , the U.S. attorney for New Jersey, told reporters outside the courthouse. “There was never any chance that those defendants would get on those planes.” Alessa, of North Bergen, and Almonte, of Elmwood Park, face a maximum of life in prison if convicted. They had their hands and feet manacled as they entered the packed courtroom. They gave brief answers, telling the judge they understood the charges. Federal Defender The judge appointed an assistant federal public defender, David Holman, to represent Alessa, and attorney James Patton for Almonte. She set a preliminary hearing for June 21. The Federal Bureau of Investigation began investigating the men after receiving a tip online in October 2006. Two months later, agents interviewed a member of Almonte’s family. The family member said that when agents previously talked to Almonte outside his home, Alessa hid indoors with a large knife and said he “would kill the agents if they entered the residence,” according to an FBI criminal complaint. A New York Police Department undercover officer began meeting the men in 2009 and recorded conversations about their plans, according to prosecutors. “My soul cannot rest until I shed blood,” Alessa told Almonte and the undercover agent last November, according to the complaint. “I wanna, like, be the world’s known terrorist.” ‘Start Killing Them’ Alessa said, “They only fear you when you have a gun and when you — when you start killing them, and when you — when you take their head, and you go like this, and you behead it on camera,” according to the complaint. “We’ll start doing killing here, if I can’t do it over there.” The complaint, by FBI agent Samuel P. Robinson, paraphrased Almonte, speaking in April, saying “there would soon be American troops in Somalia which was good because it would not be fun to kill only Africans.” The suspects played video games and listened to recordings promoting violent jihadist attacks, according to the complaint. The complaint also says the two men flew to Jordan in February 2007, where they had tried to sign on as mujahedeen fighters. The men worked out in gyms, played paintball, engaged in tactical training, and acquired military gear such as Russian- made night-vision binoculars, according to the FBI. Almonte also tried to buy a Somali phrasebook, the FBI said. In January, the men decided to pursue a tie with Al-Shabaab after talking about the various Islamic groups operating in Somalia, according to the complaint. Flight Reserved In March, at the undercover agent’s residence in Jersey City, New Jersey, the men told the agent that they had reserved seats to Egypt on a flight leaving June 5. At the airport, “both defendants resisted arrest,” Fishman told reporters. The U.S. attorney praised the work of the undercover agent as “exemplary.” In a statement, New York Police Commissioner Raymond Kelly said he couldn’t publicly identify the officer. The Al-Shabaab militia, controlled by militant members of the former Islamic Courts Union, took power in south and central Somalia in June 2006. The militia has claimed responsibility for much of the violence in the country since then. The U.S. government has designated Al-Shabaab as a terrorist organization, according to prosecutors. Somalia’s Western-backed government, which has been led by Sheikh Sharif Sheikh Ahmed since January 2009, has been battling Islamic insurgents for the past three years. The country hasn’t had a functioning central administration since the ouster of former dictator Mohamed Siad Barre in 1991. To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net .

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Two Men Arrested at JFK Airport, Charged With Plotting Terrorist Attacks

June 6, 2010

By Dan Hart June 6 (Bloomberg) — Two New Jersey men suspected of conspiring to kill American troops in Somalia were arrested at New York’s John F. Kennedy International Airport yesterday, the U.S. Attorney for New Jersey said in a statement. The men, Mohamed Mahmood Alessa, 20, and Carlos Eduardo Almonte, 24, were arrested as they attempted to board separate flights to Egypt on their way to join the Islamic al-Shabaab movement in Somalia, the U.S. Attorney’s office said. The FBI began investigating the men after receiving a tip about them in October 2006. A New York Police Department undercover officer met with them and recorded numerous conversations about their plan, the statement said. Almonte, speaking in April, said “there would soon be American troops in Somalia, which was good because it would not be fun to kill only Africans,” according to the criminal complaint. In November, Alessa told the undercover officer, “They only fear you when you have a gun and when you — when you start killing them, and when you — when you take their head, and you go like this, and you behead it on camera . . . We’ll start doing killing here, if I can’t do it over there.” The suspects, officials said, also watched and played videos promoting “violent” jihad and which showed attacks by al-Shabaab and other terror groups. Leave the U.S. Their preparations included physical conditioning, participating in paintball and other tactical training, and acquiring military gear and apparel for use overseas, according to the statement. Alessa is a resident of North Bergen, New Jersey, and Almonte lives in Elmwood Park, New Jersey. They were charged with conspiring to kill, maim and kidnap persons outside the U.S. Alessa’s landlord, Hemant Shah, speaking in an interview on Fox News today, said Alessa told him he planned to leave the U.S. for “probably about six months.” The U.S. is concerned about Somalia as a possible safe- haven for members of al-Qaeda, including suspects in the 1998 U.S. Embassy bombings in Kenya and Tanzania. The al-Shabaab militia, a group controlled by militant members of the former Islamic Courts Union, took power in south and central Somalia in June 2006. The militia has claimed responsibility for much of the violence in the country since then. Insurgents Somalia’s Western-backed government, which has been led by Sheikh Sharif Sheikh Ahmed since January 2009, has been battling Islamic insurgents for the past three years. The country hasn’t had a functioning central administration since the ouster of former dictator Mohamed Siad Barre in 1991. The men are to appear in U.S. federal court in Newark, New Jersey, at 11 a.m. local time tomorrow, the office said. The defendants face a maximum penalty of life in prison if convicted. The agencies involved in the arrests were the New York Police Department, the State Department, Homeland Security’s Immigrations and Customs Enforcement, New Jersey State Police, Jersey City Police Department, Bayonne Police Department, and the Port Authority of New York and New Jersey, the statement said. To contact the reporter on this story: Dan Hart in Washington at dahart@bloomberg.net .

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Disney Secretary, Boyfriend Arrested in Plan to Sell Earnings Information

May 26, 2010

By Edvard Pettersson and David Glovin May 26 (Bloomberg) — A Los Angeles federal judge granted $50,000 bail to an assistant to Walt Disney Co. ’s head of corporate communications accused of leaking confidential stock tips about the entertainment company’s earnings. Bonnie Hoxie, the assistant to Zenia Mucha , was ordered to appear June 3 for a court hearing in New York, while her boyfriend, Yonni Sebbag, was detained without bail. Federal prosecutors in New York charged the pair today with sending letters in March to at least 33 investment companies including hedge funds with offers to sell confidential information about Burbank, California-based Disney. Los Angeles Magistrate Judge Patrick J. Walsh rejected a $10,000 bond for Hoxie before setting bail at $50,000, saying “there’s potential for her to be a flight risk.” Walsh said Sebbag “might be inclined to leave the country based on these charges.” Hoxie, 33, and Sebbag, 29, were arrested today in Los Angeles. The U.S. Securities and Exchange Commission today also sued them. “Hoxie and Sebbag stole Disney’s confidential pre-release earnings information and put it up for sale,” Robert Khuzami , the SEC’s enforcement director, said in a statement. “Fortunately, multiple hedge funds reported the illicit scheme, and the SEC and criminal law enforcement authorities acted quickly to stop this brazen attempt to establish an ongoing insider-trading business.” None of the funds acted on the tips, according to a person familiar with the matter. Second-Quarter Profit Disney, the world’s biggest media company , said May 11 that fiscal second-quarter profit climbed 55 percent on more successful film releases, including “Alice in Wonderland.” The shares fell that day after operating profit at the television unit that includes ESPN and ABC missed analysts’ estimates. “The Walt Disney Company has been fully cooperating with this investigation,” the company said in a two-sentence statement. On March 11, an undercover agent with the Federal Bureau of Investigation began reaching out to the pair, according to a criminal complaint filed today in New York. On May 8, the two gave undercover FBI agents an internal Disney “talking points” document that the company planned to use during its earnings presentation, according to the complaint. Three days later, they passed along Disney’s earnings per share, prosecutors said in the complaint. On May 14, Sebbag got a $15,000 cash payment from two undercover agents at a meeting on Long Island, New York, prosecutors said. Court documents detail communications between Sebbag and the undercover agents. ABC’s Audience “The most important thing in all that is to not get caught,” Sebbag wrote, according to the SEC complaint. The criminal complaint includes a March 15 e-mail that Sebbag allegedly sent to an undercover agent pretending to be a hedge fund trader. In the e-mail, Sebbag wrote that Disney Chief Executive Officer Robert Iger “is in serious and advanced negotiations” to sell the ABC network to two private equity firms, “but no price has been determined yet.” Sebbag offered to pass along new information as he learned it, according to the complaint. Disney said in its statement that “the reference in the complaint to conversations regarding the ABC Network were and are false.” Broadcaster ABC, third among major U.S. TV networks in prime-time viewers, is the only broadcaster whose audience shrank this season through May 24, according to Nielsen Co. ratings data. Iger told shareholders in March in San Antonio that, while he was comfortable with the company’s current assets, including ABC, he is always mindful of how to keep Disney growing. “There are no guarantees in terms of what will remain part of our company and what will not,” Iger said. The complaint doesn’t mention Mucha or suggest that the head of the company’s corporate communications unit engaged in any wrongdoing. Before joining Disney in 2002, Mucha was press secretary to New York Governor George Pataki . From 1986 to 1992, she managed two successful campaigns for U.S. Senator Alfonse D’Amato , a New York Republican. Mucha didn’t immediately return calls and e- mail messages seeking comment. Hoxie was to be released today as soon as she is processed. The judge ordered her to surrender her passport and not to travel other than for her court appearances. Hoxie and Sebbag were represented by public defenders who weren’t available for comment after the hearing. Disney rose 95 cents, or 2.9 percent, to $33.27 in New York Stock Exchange composite trading at 2:38 p.m. The case is U.S. v. Hoxie, 10-mag-01113, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net ; Andy Fixmer in Los Angeles at afixmer@bloomberg.net .

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Bruce Shore, Unemployed Philadelphia Man, Indicted For ‘Harassing Email’ To Jim Bunning

May 25, 2010

When Sen. Jim Bunning complained on the Senate floor in February that he’d missed the Kentucky-South Carolina basketball game because of a debate on unemployment benefits — a debate the Kentucky Republican himself prevented from proceeding to a vote — Bruce Shore got angry. “I was livid. I was just livid,” said Shore, 51, who watched the floor proceedings on C-SPAN from his home in Philadelphia. “I’m on unemployment, so it affects me. I’m in shock.” Instead of just being angry, Shore took action: He sent several emails to Bunning staffers, blasting the senator for blocking the benefits. “ARE you’all insane,” said part of one letter Shore sent on Feb. 26 (which he shared with HuffPost). “NO checks equal no food for me. DO YOU GET IT??” In that letter he signed off as “Brad Shore” from Louisville. He said he did the same thing in several messages sent via the contact form on Bunning’s website. “My assumption was that if he gets an email from Philadelphia, who cares?” he said. “Why would he even care if a guy from Philadelphia gets upset?” Bunning might not have cared, but the FBI did. Sometime in March, said Shore, agents came calling to ask about the emails. They read from printouts and asked if Shore was the author, which he readily admitted. They asked a few questions, and then, according to Shore, they said, “All right, we just wanted to make sure it wasn’t anything to worry about.” But on March 13, U.S. Marshals showed up at Shore’s house with a grand jury indictment. Now he’s got to appear in federal court in Covington, Ky. on May 28 to answer for felony email harassment. Specifically, the indictment ( PDF ) says that on Feb. 26, Shore “did utilize a telecommunications device, that is a computer, whether or not communication ensued, without disclosing his identity and with the intent to annoy, abuse, threaten, and harass any person who received the communication.” The language of Shore’s indictment is taken directly from the statute — there’s no description of the actual crime. The Kentucky U.S. Attorney’s Office declined to comment, but said it’s a typical indictment. The crime carries a penalty of up to two years in prison and a $250,000 maximum fine. Shore swears he didn’t intend to make a threat. He thought sending angry letters to Congress was a First Amendment thing. “If I send 50 letters to Congress, is that illegal or is it just me wasting paper?” Harvey Silverglate, a prominent civil liberties lawyer and the author of “Three Felonies a Day : How the Feds Target the Innocent”, has long argued that vague laws allow the federal government to prosecute citizens for things most people wouldn’t consider crimes. (The message of his book’s title is that the average person unintentionally commits three felonies a day. “Half of the anonymous Internet comments would” be illegal according to the statute used against Shore, said Silverglate.) “If nothing else the U.S Attorney has managed to harass a defendant. Now we have to find out if the defendant managed to harass anybody,” said Silverglate, who looked at Shore’s indictment. “When finally the government is forced by a judge’s order to specify what the criminal harassment consisted of, if in fact the words used are quite innocuous and don’t by any standard rise to the level of a real threat, it’s going to be an example of exactly what my complaint is about.” Bunning’s office is not involved in the prosecution. A staffer said the office received lots of email over the unemployment issue and turned some over to the Capitol Police. It’s up to the Capitol Police whether to involve federal or local law enforcement, and up to those agencies to pursue a case. Shore said he’s been unemployed for the past two years since losing his job as an office manager. He recently received his final unemployment check, joining the ranks of 35,200 Pennsylvanians and hundreds of thousands of Americans who’ve exhausted all their benefits . He said he used a credit card to book a hotel room in Covington for Friday. He’s particularly alarmed because he’s already got a criminal record: In 1995, he and his girlfriend pleaded guilty to 35 burglaries in Bucks County, Pa. The Philadelphia Daily News dubbed them “Bonnie & Clyde”: “Their last embrace came in their Northeast Philadelphia apartment. Cops with a warrant did some breaking in of their own and caught the couple, well, coupling — surrounded by half the booty they’d burgled.” Shore said he got out of prison in 1999 and his lived since then with his mother, who is 81. He’s afraid his email indiscretion will wipe out his progress, which includes community college and classes at Temple University, where in 2004 he was on a team that won a $2,000 prize in an IT excellence competition . “I’m walking around in my head: jail for email, jail for email,” he said. “At this point I’m just looking at my government and going, anything is possible. When do the adults wake up and say, ‘This gentleman is just angry and frustrated?’ I’m just speechless. Shocked. I probably dropped 10 pounds in a week. To think you turn your life around, you don’t do anything wrong after you make a mistake when you were younger…”

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Too Big To Jail? Executives Unscathed As Regulators Let Banks Report Criminal Fraud

May 3, 2010

Republished from the Huffington Post Investigative Fund. The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges. That’s in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr. One explanation for the difference may be that key bank regulators — who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors — have this time left reporting fraud up to the banks themselves. Spokesmen for two chief regulators, the Comptroller of the Currency and the Office of Thrift Supervision, say that they have not sent prosecutors a single case for criminal prosecution. An OTS spokesman said the agency, much like the banks themselves, does not see much evidence of criminal fraud inside the financial institutions. The spokesman, Bill Ruberry, citing the agency’s enforcement director, said, “There may be some isolated cases, but certainly there’s no widespread patterns.” That surprises William K. Black, a former OTS official who helped coordinate criminal investigations during the S&L crisis. “Dear God,” Black said when told bank regulators haven’t made any criminal referrals. “Not a single one?” Black sees many signs the the government is less aggressive than during the S&L era — and could result in more bad behavior. “This crisis was not bad luck,” he said. “It was done to us. When you bring those convictions, you hope that at least for a while to deter.” Banks have reported massive amounts of fraud to the Treasury Department but have not held themselves — or their top executives — responsible, instead pinning blame on borrowers, independent mortgage brokers, and others. That may account for the dearth of prosections against big fry. For instance, in California, among states where the mortgage meltdown hit hardest, the Huffington Post Investigative Fund identified 170 mortgage fraud prosecutions in federal courts. Only two are against employees of a regulated lender. An Investigative Fund analysis shows that two-thirds of the 170 prosecutions are against mortgage brokers, real-estate professionals or borrowers — the same groups blamed by the banks when they report suspicious activities to regulators. Besides the absence of criminal referrals, other plausible factors for the lack of major prosecutions may include a skittishness among prosecutors about filing cases they could have trouble winning, and a severe decline in investigative resources. The FBI dramatically shifted resources away from white-collar crime after the 2001 terrorist attacks. To be sure, there are also notable differences between the S&L and current financial crisis, in the behavior of lenders during both periods, and between civil allegations of fraud and proving that someone committed a crime — all of which could account for the lack of big prosecutions. But interviews with several law enforcement authorities suggest another explanation: A lack of active assistance to prosecutors by bank regulators who played key roles during the S&L crackdown. Those regulators sent detailed reports to prosecutors of known and suspicious criminal activity. “Only the regulators can make a lot of these cases,” Black said. “The FBI can make a few, but the regulators are the ones that understand the industry.” Under intense political pressure in the late 1980s, the Justice Department and thrift regulators developed a strategy to thoroughly investigate failed S&Ls for evidence of fraud and to focus their resources on the highest ranking executives. In the early years, between 1987 and 1989, there were more than 300 prosecutions. Some bank executives were already behind bars. In 1989, Woody Lemons, chairman of Vernon Savings and Loan in Texas, was sentenced to 30 years. In June 1990, then-OTS director Timothy Ryan told Congress that his agency had established criminal-referral units in each of 12 district offices. In addition, more than 30 OTS employees were assigned as full-time agents of grand juries or assistant US attorneys to help prosecutions. And the agency prioritized prosecutions to a Top 100 list, targeting senior S&L executives and directors. While data on criminal referrals during the S&L crisis is spotty, the Government Accountability Office reported that in the first ten months of 1992 alone — a random snapshot — financial regulators sent the Justice Department more than 1,000 cases for criminal prosecution. One study showed that 35 percent of criminal referrals in Texas — ground zero for the S&L problems — were against officers and directors. This time, prosecutors are relying more heavily on banks to report suspicious activity to the Treasury Department. Banks are required to report known or suspected criminal violations, including fraud, on Suspicious Activity Reports designed for the purpose. In effect, the reports, which can be many pages in length, provide substantive leads for criminal investigations. Black scoffs at the strategy of leaving it to banks to ferret out all the fraud. “Institutions will not make criminal referrals against the people who control the institutions,” said Black. A white-collar criminologist and law professor at the University of Missouri-Kansas City, he argues that there’s ample evidence of fraud. Insiders working for lenders openly referred to loans they made without proof of income as “liar loans.” Many banks actively sought inflated appraisals in their rush to make as many loans as possible. As previously reported by the Investigative Fund, such lending practices contributed to the demise of Washington Mutual. Not everyone agrees that such a case can be successful. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said. So far, only sporadic news reports suggest that the Justice Department has ongoing criminal investigations against major banks such as Washington Mutual and Countrywide, as well as investment bank Goldman Sachs. Fewer Cops on the Beat The Justice Department, in response to written questions from the Investigative Fund, acknowledged the absence of criminal referrals from financial regulators. Months into the financial crisis, a new Financial Fraud Enforcement Task Force, formed by President Obama last fall, was trying to work out communication problems between Justice and the regulatory agencies, according to the head of the task force, Robb Adkins. Adkins has said that criminal referrals from regulators have been “too often the exception to the rule.” At a Congressional hearing in December, Assistant Attorney General Lanny Breuer was asked why there have been no criminal cases brought yet against CEOs. “Don’t for a moment think [these cases] aren’t being investigated,” Breuer replied. “They are complicated cases. It took a long time in hatching them and developing them. But they will be brought.” The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them. Yet in their reports, banks overwhelmingly have blamed others for fraud. Whenever a borrower’s income was wrong on a loan application, the banks fingered borrowers 87 percent of the time and independent mortgage brokers 64 percent of the time, according to a 2006 Treasury analysis of the SARs. But the bank’s own employees were almost never blamed — only about four times in every 1,000 reports. That might explain why so few prosecutions have targeted bank insiders. Another reason for fewer prosecutions against bank employees is that the Federal Bureau of Investigation has far fewer agents working on the current crisis. Deputy Director John Pistole testified before Congress last year that the bureau had 1,000 people working on the S&L crisis at its height. That compares to about 240 agents working on mortgage fraud cases last year. The FBI dramatically shifted its resources away from white-collar crime and to terrorism after the Sept. 11 attacks. “We just didn’t have the cops on the beat” during the recent crisis, said Sen. Ted Kaufman, the Delaware Democrat who conducted a hearing on the lack of criminal prosecutions. “I was around during the savings and loan crisis [as a Congressional aide] and we had a lot more folks working it when it went down.” Even with additional funding from Congress, which Kaufman helped push through, the FBI is budgeted to have 377 people working mortgage fraud cases this year, about a third as many as during the S&L investigations. Charges Harder to Prove? Charges in the recent banking crisis may be harder to prove, said Robert H. Tillman, who teaches at St. John’s University and who analyzed data about S&L prosecutions. Savings and loan executives who were convicted often personally approved large commercial loans for projects doomed to fail. Some would use federally insured deposits to pay themselves excessive salaries or to lend money to their own real estate projects. A few even took kickbacks. This time, lending executives may have encouraged the making of bad loans, but they generally did not personally approve the loans, Tillman said. They didn’t send emails telling the troops to make fraudulent loans but paid big commissions to loan offers who made risky loans. Then the executives were able to reap huge bonuses for making the company look so profitable. So far, the biggest cases have been civil lawsuits brought by the Securities and Exchange Commission, including most recently a highly publicized securities fraud case against Goldman Sachs and one of its vice presidents, Fabrice P. Tourre. News reports suggest that a referral from the SEC’s enforcement division to the Justice Department has led to a criminal inquiry. Typically, federal authorities deal with massive financial scandals by picking a few cases they are confident they can win, said Henry Pontell, an expert on fraud at the University of California — Irvine. This time, the administration may have been more focused on saving failing banks — and an entire financial system — than in prosecuting bank executives, Pontell said. Giving billions in bailout dollars to executives who encouraged fraudulent practices not only could complicate a case, it could prove embarrasing, he added.

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Goldman Scrutinized by U.S. Prosecutors Examining SEC Case

April 30, 2010

By Justin Blum and David Glovin April 30 (Bloomberg) — Federal prosecutors in New York are investigating transactions by Goldman Sachs Group Inc. , accused of misleading investors by U.S. securities regulators, to determine whether to pursue a criminal fraud case, according to two people familiar with the matter. The federal review, which lawyers say is common in such a high-profile case, is being done by the U.S. attorney in Manhattan, said the people, who weren’t authorized to comment and spoke on condition of anonymity. The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs on April 16 alleging fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The burden of proof in a criminal case would be higher than in the SEC’s civil case. Criminal allegations have to be proven beyond a reasonable doubt. Based on public reports about the SEC matter, a criminal case may be difficult, said Douglas R. Jensen , an attorney with Park & Jensen LLP in New York. The case appears “highly complex” and Goldman Sachs would be able to make multiple arguments in its defense, he said in an interview. “In order to proceed criminally in a case, you need to have very clear evidence of lying, cheating and stealing,” said Jensen, a former deputy chief of the criminal division of the U.S. attorney’s office in the Southern District of New York who served on that office’s securities fraud task force. ‘Higher Profile’ Cases The U.S. attorney’s office in the Southern District “pretty consistently” reviews SEC cases that are “higher profile” such as those involving large dollar amounts or policy issues, he said. The reviews may begin before the SEC files a lawsuit. Yusill Scribner , a spokeswoman for U.S. Attorney Preet Bharara , declined to comment. Lucas van Praag , a spokesman for New York-based Goldman Sachs, said the company would “fully cooperate with any requests for information.” “Given the recent focus on the firm, we’re not surprised by the report of an inquiry,” he said. Goldman Sachs Chief Executive Officer Lloyd Blankfein said in an interview with CBS News this week: “It is my belief that nothing unethical and nothing illegal has happened, but I will tell you if I discovered something like this, or any senior person at Goldman Sachs discovered illegal or unethical behavior, we would eliminate that from the firm.” The Federal Bureau of Investigation hasn’t opened a criminal investigation, said a U.S. official who spoke on condition of anonymity and wasn’t authorized to comment publicly on the matter. The Postal Inspection Service , which also could investigate such cases, doesn’t have any open probes into Goldman, said Tom Boyle , a spokesman for the agency in New York. Own Investigators Two former prosecutors for the U.S. attorney’s office in New York, who spoke on condition of anonymity, said prosecutors have their own investigators who may be examining the case before determining whether to involve the FBI or postal inspectors. The SEC may have provided documents and other information to prosecutors gathered as part of its investigation, allowing them to assess whether a criminal case could be made, they said. The Justice Department sometimes brings criminal charges at the same time the SEC files suit. In other instances, criminal charges come later. The SEC sued financier R. Allen Stanford and his firm in February 2009 on claims he ran a Ponzi scheme. Stanford was indicted on criminal charges later that year. The SEC accused WorldCom Inc. of fraud in 2002. Two senior WorldCom executives were arrested on criminal charges later that year. SEC Suit Goldman Sachs created and sold CDOs linked to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, according to the SEC’s lawsuit. At an April 27 congressional hearing, Goldman Sachs executives were questioned by U.S. lawmakers who compared the bank’s mortgage bankers to bookies. Company officials said they did nothing wrong. “The SEC and the courts will resolve the legal question of whether Goldman’s actions broke the law,” said Senator Carl Levin , a Michigan Democrat who is chairman of the Permanent Subcommittee on Investigations , at the hearing. “The question for us is one of ethics and policy.” Levin, whose panel is investigating Goldman Sachs, told reporters after the hearing that it was too soon to say whether he would refer any of the committee’s findings to the Justice Department or SEC. No Obligation Blankfein told Levin’s panel that market-makers have no obligation to tell clients about their own position in a security. Blankfein said the nature of the principal business often puts the firm on the opposite side of customers. Sixty-one House Democrats and one House Republican, led by Representative Marcy Kaptur , an Ohio Democrat, sent a letter to the Justice Department on April 23 asking Attorney General Eric Holder to investigate Goldman Sachs, if the Justice Department wasn’t already. The department will review the letter, Alisa Finelli, a spokeswoman, said in an April 27 e-mail. Billionaire John Paulson ’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre , a Goldman Sachs vice president who helped create the CDOs, known as Abacus. Goldman Sachs posted a record $13.4 billion profit in 2009, a year after receiving $10 billion in taxpayer aid during the financial crisis. It repaid the funds in June. The company has been criticized by lawmakers and pundits for its pay practices and its role in helping Greece mask the size of its debts. The company called the SEC’s claims “unfounded.” To contact the reporters on this story: Justin Blum in Washington at jblum4@bloomberg.net ; David Glovin in New York federal court at glovin@bloomberg.net

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Clients-Come-First Mantra at Goldman Is Undermined by SEC’s Fraud Lawsuit

April 16, 2010

By Christine Harper April 16 (Bloomberg) — Goldman Sachs Group Inc. ’s efforts to defend its reputation just became a lot harder. Chairman and Chief Executive Officer Lloyd Blankfein , 55, spent the last year trying to defend the firm against criticism from politicians, media and other commentators that Goldman Sachs profited in the aftermath of the financial crisis and sold investors securities that went sour. Now the U.S. Securities and Exchange Commission says the company defrauded investors. The suit filed today alleges that Goldman Sachs didn’t stick to its longstanding claim that “clients’ interests always come first,” and instead failed to tell investors that the securities Goldman Sachs was selling them had been designed to fail by another client, hedge fund Paulson & Co., which profited from the losses. Goldman Sachs said it will contest the charges, which it called “completely unfounded in law and fact.” “The risk is long-term reputational,” said Benjamin Wallace , an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and doesn’t own Goldman Sachs stock. “People are going to be more inclined to look at Goldman Sachs and think, ‘Who’s on the other side of this trade?’” Goldman Sachs fell as much as 16 percent in New York Stock Exchange composite trading and the cost to protect against a default on the firm’s debt jumped 30.5 basis points, or 0.305 percentage point, to 120.5 basis points. Clients’ Interests On a list of “Business Principles” posted on the company’s Web site, the No. 1 item is “Our clients’ interests always come first.” In their annual letter to shareholders last week, Blankfein and Goldman Sachs President Gary Cohn insisted that most of the firm’s business is aimed at serving sophisticated clients capable of making their own decisions. “The investors who transacted with Goldman Sachs in CDOs in 2007, as in prior years, were primarily large, global financial institutions, insurance companies and hedge funds,” the letter said. The firm “did not know whether the value of the instruments we sold would increase or decrease.” That contrasts with the SEC’s allegations. The suit says Fabrice Tourre , a 31-year-old vice president at Goldman Sachs, knew that Paulson’s firm had helped select the assets backing a collateralized debt obligation called Abacus 2007-AC1, even as Paulson planned to bet on it failing. The SEC says Tourre misled a collateral manager, ACA Management LLC, and an investor, IKB Deutsche Industriebank AG , about Paulson’s role. ‘False and Misleading’ “Marketing materials for Abacus 2007-AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio,” the SEC argues. Tourre, reached today at his office in London, where he is now an executive director, declined to comment. “Once upon a time, Wall Street firms protected clients,” Christopher Whalen , a bank analyst at Torrance, California-based Institutional Risk Analytics, wrote in a note to investors today. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.” ‘Swimming With Sharks’ Goldman Sachs’s loyalty to clients has been questioned before. E-mails released by congressional investigators earlier this week show that Washington Mutual Inc.’s former CEO, Kerry Killinger , didn’t want to hire a Goldman Sachs banker in 2007 to help with the bank’s credit problems before it collapsed. “They are smart, but this is swimming with sharks,” Killinger wrote in an Oct. 12, 2007, e-mail to a deputy. “They were shorting mortgages big time while they were giving CfC advice,” he added, referring to Countrywide Financial Corp., the home lender that ran short of cash the same year. “Goldman Sachs said they sold only to sophisticated investors, but the damage they did was so pervasive that unsophisticated investors got snared in their web too,” said Janet Tavakoli , president of Tavakoli Structured Finance Inc. in Chicago. “They say they are men of integrity and competence, and that makes what they do all the more craven.” William Cohan , a former investment banker who is writing a book about Goldman Sachs, said the accusations are surprising because the firm generally is diligent when it comes to legal disclosures. That the suit names none of Tourre’s superiors may signal that senior management can escape blame, he said. ‘Four Critical Points’ “It just strikes me as being entirely out of the firm’s character, as much as people like to hate them, because they are much too careful on the whole legal front and disclosure front,” Cohan said in an interview. The SEC has “only named a VP, it’s not going up the chain here at the moment, so I think that’s an important distinction to make,” Cohan said. “There are bad apples in any firm.” In a statement, Goldman Sachs made what it called “four critical points” in its defense against the SEC’s accusations. The first was that Goldman Sachs itself lost more than $90 million because it had an investment in the deal that overwhelmed the $15 million it made in fees. The firm said it provided “extensive disclosure” to IKB and ACA about the risk of the underlying mortgage securities. It said that ACA, whose $951 million investment made it the most exposed to risk, selected the portfolio. And the firm disputed the SEC’s accusation that Goldman Sachs told ACA that Paulson & Co. was going to be an investor in the CDO. Paulson Statement Paulson’s firm, which hasn’t been charged with any wrongdoing, said in a statement that “ACA as collateral manager had sole authority over the selection of all collateral in the CDO” and that Paulson didn’t “sponsor or initiate” Goldman’s Abacus program. The fund says that while it did purchase credit protection from Goldman Sachs on some Abacus securities, it wasn’t involved in the marketing. Some analysts said the SEC’s focus on Goldman Sachs, which set a new Wall Street profit record last year, shows that the firm is under a political and regulatory spotlight. “At the moment, it looks as if the SEC is pursuing an agenda aimed specifically at Goldman,” Chris Kotowski , a managing director at Oppenheimer & Co. in New York, wrote in a note to clients. “We believe that GS is probably vulnerable to more charges and outsized fines, and we are for now downgrading the stock to perform from outperform.” By contrast, one investor said he saw today’s stock price drop as a buying opportunity because he thinks Goldman Sachs is likely to successfully defend itself against the charges. “In the cosmic scheme of things, it’s probably more of a buying opportunity than anything else,” said Peter Sorrentino , a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages about $13 billion, including Goldman Sachs stock. The market reaction reflects “the grand fear that somewhere down the line you end up with a RICO suit, and then you might as well fold up,” he said, referring to the Racketeer Influenced and Corrupt Organizations Act. “I’m just happy that it wasn’t the FBI kicking in the door.” To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

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Diane Tucker: Lead SEC-Goldman Counsel Richard Simpson Will Be ‘Relentless’

April 16, 2010

“Richard Simpson is a relentless litigator who brought the Antar clan to its knees,” Sam Antar told me on the phone today. Sam is the cousin of Crazy Eddie Antar , the consumer electronics retailer charged with securities fraud and illegal insider trading in 1989. One of the largest securities frauds of its time, former U.S. Attorney Michael Chertoff called Eddie Antar “the Darth Vader of Capitalism.” Sam Antar offered to testify for Federal prosecutors in exchange for immunity. That’s how the Crazy Eddie accountant came to work with Simpson, who is lead counsel in the SEC’s fraud charges against Goldman-Sachs. “Rick is a tough adversary. I swear he works over 90 hours a week. He’s focused, aggressive, and understands the way criminals operate. He knows accounting backward and forward, which is rare for an attorney. Richard Simpson is what the SEC should be today, but unfortunately is not.” Antar admits to being verbally abusive to Simpson back in the day and marveling at how the prosecutor kept his cool. “He is tough, but always a gentleman.” Richard Simpson is a dedicated career veteran who has spent more than 20 years in the SEC Enforcement Division, a rarity today. He was lead counsel on SEC vs. Peter Lybrand (Southern District of New York), and SEC vs. Ed Johnson (District of New Jersey). In relative terms, the Crazy Eddie recovery still stands at or near the top of the list, at 40 cents on the dollar. Justin Feldman, former attorney for Eddie Antar, told the SEC Historical Society that Simpson is tenacious. “I’m telling you, he wanted every dollar back. We had to fight with him to get 10 cents on the dollar on our fees.” Not everyone is confident the SEC will be tough enough in the Goldman-Sachs case. Forensic accountant Tracy Coenen told me via email, “I’d like to be optimistic this is part of a new and improved SEC that will go after bad actors more aggressively. However, with their history of incompetence, I can’t help but be skeptical of the results they’ll actually get.” Former banker and retired FBI agent Paul D. Hayes told me on the phone he is impressed with Simpson. “He has the utmost respect for the procedures of civil and criminal law. He lets the facts tell the story, and yet he’s innovative as well. He’ll investigate areas where there’s no precedent in law, but are fair areas to address. That’s what he did in the Crazy Eddie case.” Investigative journalist Gary Weiss says the charges, if they stick, are going to sink Goldman. “This is pure sliminess.”

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