Financial Fraud Strikes Again

Haven't we had enough of financial scandals? Of course not, here we go again. This time it is with a boutique futures trading broker - Peregrine Financial Group, also known as P.F.G.. On July 9, 2012, the National Futures Association (NFA) - the industry wide, self-regulatory organization for the U.S. futures industry, made an inquiry with U.S. Bank and learned that out of the $225 million in customer segregated funds that P.F.G. had reported to the NFA as being on deposit at the Bank just days earlier, only approximately $5 million was actually on deposit. The NFA also learned that, although P.F.G. submitted confirmations that U.S. Bank account balances as of February 2010 and March 2011, were reported to be approximately $207 million and $218 million, respectively, P.F.G.'s actual balances were less than $10 million for each one of these months.

On top of the reported financial fraud, a day earlier, the chairman and chief executive, Russell Wasendorf Sr., tried to commit suicide outside of the firm’s offices in Cedar Falls, Iowa .The Federal Bureau of Investigation is investigating the matter, according to a spokeswoman for the Omaha office, Sandy Breault. Ms. Breault indicated that the Chicago office of the agency might also get involved.

The Commodity Futures Trading Commission (C.F.T.C.) is seeking a restraining order against P.F.G., to prevent the destruction of any information that may be needed in the course of the investigation. The C.F.T.C. is also asking a federal court to appoint a receiver for the firm and freeze its assets.

This feels a lot like a curtain call for MF Global, where $1.6 Billion is still missing. (refer to a prior article in this blog for more information about MF Global). Similarly in this case, as the complaint states: “P.F.G. and Wasendorf have used customer funds for purposes other than those intended by its customers, and consequently, have misappropriated these funds”. “The whereabouts of the funds is currently unknown".

Needless to say, the operations of the firm have been halted. Unfotunately, I am one the many victims. For two years, I was an active futures trader with the company which offered  proprietary trading platforms to small retail customers like myself with unique and robust features that were not available from other brokerage houses. Although it has been several years since I day traded, due to time constraints, I still kept a funded account with P.F.G.. I contacted the NFA today and registered my name as an account holder. I urge all others affected to do the same. It may not amount to much but at least it is better to take some kind of action and to make your voice heard.

Back to Home Page

C. Cohn
The Cohn-Reilly Report
www.Facebook.com/Cohn.Reilly

BFF: Ballad of the Facebook Fiasco

Countless individual investors, and some intrigued "average Joes" thought that the Facebook IPO was going to be the atom bomb of Silicon Valley. The Golden Egg of the privately held tech companies, and its fearless leader, Zuckerberg, was sure to deliver. As the highly anticipated IPO jettisoned into history, as being the most anticipated offering of the millennium - I too thought FACEBOOK would be the IPO not to be missed. "get in now", I thought, "or you will regret it". Of course, I truly expected that the offering would be priced in the mid-teens, $13 or $15 per share. At the very least, it would be priced at a level commensurate with the "value", of a company that has no PRODUCT, who depends solely on Advertising. Advertising as a revenue source is not at all bad, but when you take into consideration that revenue growth on an ongoing basis would mean continued popularity, increased memberships and usage. Now, therein lays the rub. Allow me to offer MySpace into evidence, as how quickly a popular "hang out" can just as quickly shift into decline. MySpace, which was somewhat of a pioneer, is now valued at approximately $1 million, and struggling to stay relevant. That said, the pricing geniuses at Morgan Stanley had to be confusing FB stock with a commodity; you know... one of those limited resources that the world could not do without. How else would you explain a $38 opening price.

When a new popular issue is priced in the teens, it has no place to go but up. Sure it would fluctuate during the course of the day, but normally it would wind up quite a bit higher than the initial price. On the other hand, if you come into the market at $38, you are already at a premium, there is no place to go but down. Of course the speculation as to why the issue was priced so high, created underlying tension and uncertainty. By the end of the following day, reports of unethical matters surrounding the handling of the new issue began to surface. What a Fiasco this turned out to be! A sad, and bitter reality hit as news broke of possible insider trading. It is alleged that the lead bankers handling the FACEBOOK account at Morgan Stanley had tipped off their clients with confidential information. This information was in essence a warning not to purchase the stock at the opening price. Was this a setup, designed specifically to make million on the short sale of Facebook shares. An article in Business Insider reported that Morgan Stanley provided a select few classified information about FACEBOOK's weaker than expected forecast. Within 48 hours, news circulated of an SEC and FINRA investigation into what really happened. Whatever the case, Finance Reform obviously didn't go far enough.

Selective dissemination of "material" information concerning a cut in forecast estimates for the company would cause institutions to lose interest, which generated investor uncertainty among the small investors who weren't privy to this insider information. From the savvy individual investors, down to the average Joes jumping in to get a piece of the Facebook pie, this scandal put investors at an unfair disadvantage. The whole matter created a unprecedented IPO fiasco, leading to untold losses, and a decline of market confidence, which we could have done with out.

Adding insult to injury, Nasdaq had a fair share of technical problems which only added to the mayhem. Thousands of trades were stuck in limbo for individual investors. This may actually be a blessing, giving them the opportunity to either pick up shares at a steep discount, or back out completely. Ultimately, FB shares ended up about 30% lower than its initial price, with occasional ticks upward and downward. We're not likely to see stability in this stock price until the dark cloud of confusion is lifted, legally or otherwise.

My plans to purchase a hand full of shares immediately fizzled when I heard the price. A conversation with a few hopelessly optimistic friends convinced me that I should go ahead and pick up a couple shares just to be a part of the historic IPO. I never expected it would become the Fiasco of the decade.

Back to HomePage

K Reilly
The Cohn-Reilly Report
www.Facebook.com/Cohn.Reilly

Crimes & Misdemeanors: FBI Closes in on Large Wall St. Funds

The FBI has arrested key members of a ring woking out of several states, including New York. Similar to the Galleon Group, these guys traded information concerning publicly traded companies in an apparent conspiracy to commit insider trading fraud. This ring was so productive, they were able to generate financial gains that rival the Galleon Hedge fund, who's founder recently received an 11 year sentence for insider trading. One of the hedge funds involved, Level Global Investors, raked in over $50 million in gains alone. The court documents state that a ring of traders and analysts, who formed an insider trading club, swapped information that resulted in over $60 millions in illegal profits.

As the voices of "Occupy Wall Street" draw attention to the stark imbalances of the privileged 1%, the fraud saga continues. According to the , Wall Street Journal the government has already prosecuted 63 people on charges of insider trading, yielding 56 guilty pleas or convictions. This marks an unprecedented number of cases procsecuted concerning insider trading in a three year period. Judging by this unrelenting onslought of crimes and Misdemeanors, it would appear that the Finance Reform Act is about as valuable as wall paper. That is not to demean the efforts of law makers or the Obama Administration, its merely a commentary on the industry's commitment to an "any means necessary" approach to capitalism. The only consolation is that the Feds and the SEC seem to be paying closer attention to the activities and trade patterns of hedge funds and other financial institutions that engage in trading. There's fresh optimism about the economic forecast, as job reports and other market indicators send a strong message of recovery. Neverthless, with the reluctance traders, money managers and banks to change their habits to avoid a repeat of a financial collapse, sends another message altogether: They still don't get it, and its likely that they never will.

Back to Home Page

K. Reilly
The Cohn-Reilly Report
www.Facebook.com/Cohn.Reilly

$700 Million Bank Heist: SEC Investigates Citibank

Did Citbank swipe $700 million from investors? Well according to an SEC filing, which alleges that Citibank sold securitized housing bonds, which they knew were sub-standard, and bet against them, something is definitely amiss. It’s easy to see why Banks are no longer seen as a safe place to invest your money, as a depositor or shareholder.

Citibank, being charged with fraud, is fighting the charges, but Recommended settlement of $285 million is likely going to stick. The SEC asked a federal judge to approve the amount, citing that $285 million would not unfairly punish the shareholders, who were essentially victims of the bank's unethical acts. Of the $285 million, the settlement breaks down as follows: $95 million is the fine, $160 million in for ill-gotten profits and $30 million in interest. We're about 18 months post signing of the Finance Reform Bill, and we're still unraveling the spoils of unbridled greed.

The national Occupy Wall Street Protest was founded on just this type of offensive conduct. I had a feeling that the near collapse of our financial markets in 2008 was the tip of the iceberg, and so far it has proven to be true.

Back to Home Page

K.Reilly
The Cohn-Reilly Report

US Dollar: A Safe Haven Reversal

The US Dollar is generally a safe-haven when the global markets are volatile. This was illustrated this past summer, during the EU financial crisis, when the dollar rose nearly 10%. According to the WSJ, the dollar actually rose 24% against major currencies during the financial crisis, which had a global rippling effect. But alas, the Dollar has hit a snag, as political unrest in Africa and the Middle East sends the dollar in the other direction. Investors are likely concerned over regions in turmoil prices overshadow the foreign exchange markets. The key difference is the attention to our heavy reliance on energy, as we watch the oil prices climb. This is what is driving the currency downward against other major currencies.
Even though America’s overall reliance on oil has declined in recent years, oil remains our capital weakness. US Consumption is still much higher than Europe and Japan, whose currencies are not as impacted by the mid-east fallout. There is a saying: “One man’s loss, is another man’s gain”: as the US Dollar suffers declines as a result of anticipated Oil price surge, other currencies, such as the Swiss Franc, the Norwegian Krone, and Canadian Dollar have seen gains. In contrast to the Unites States, the latter two countries are large oil exporters, with lower consumption than the US. France’s consumption is also much less than the US, which perhaps explains the currencies jump to high levels against the dollar last Thursday. As for the US Dollar; Fasten your seat belts, this is going to be a bumpy ride.

Reform Bill Signed ..and the Sky is Not Falling

The Bill was finally signed by President Obama on Wednesday July 21st, marking the most extensive financial reform legislation since the great depression. In addition to tougher regulations and fees for large banks, the bill outlines new processes and steps to be taken to address troubled companies, which would break down the business units and sell them off, rather than bail them out. The bill is being heavily criticized for what appears to be the government’s increased role of power and control. Further, despite what we’ve heard from the President and democrats on Capital Hill, the bill does contain language that suggests that the Federal Government still retains the authority to bailout troubled companies. Bloggers are going bonkers over this issue. I, on the other hand, feel otherwise. In all likelihood, the government’s authority is restricted to last resort options, or special circumstances. Let’s face it, no one could have predicted the turn of events in ’08 and ’09. Therefore, to close the door to any alternate options that may save the country from another “never before seen” economic turn of events, would not be wise.

As anticipated, the large financial institutions will be subject to increased oversight. Unfortunately, my understanding is that the Securities and Exchange Commission is going to be the watchdog. Are you kidding me? Now this is a real concern! The SEC, in all due respect, is the very same group that ignored countless warnings about Madoff, slept as the high risk sub-prime were securitized with “A” ratings, while spending thousands of office hours porn surfing. I am not encouraged by this at all.

I'm sure you've heard the "sky is falling!" type reports surrounding the passing of this bill, where market journalists, analysts and self proclaimed finance geniuses speculate that the bill will have a harsh impact on banks, which will stall or reverse the economic recovery. Sure there will be some initial impact, but banks have always found ways and means of navigating around the Regs and pulling out their multi-billion dollar profits. Time will tell, my friend times well tell. In the meantime, I shall remain open minded until I get more information about this historic bill might impact the economic recovery.

K. Reilly
Cohn-Reilly Report

___________Comments

Charlie said......
I agree with you about the SEC. The problem is that companies are concerned about how the financial regulations will affect their businesses going forward, along with the impact of health care reforms. As a result, firms are sitting on trillions of dollars in cash, reluctant to commit to hiring the still 9.5% of the population that is unemployed.

I speak to recruiters frequently and they confirm that employees are still working long hours to make up for the lack of staff in their departments. Hiring managers have numerous open requirements for employee spots to be filled, but until senior management can get over this uncertainty, we still will have major hurdles in putting America back to work.
JULY 23, 2010 6:25 AM

Katherine said......
You're right, Charlie. We don't disagree. Except from my standpoint, the Reform Bill is a key contributor, but there are other factors that come into play with respect to companies sitting on cash, and still reluctant to hire. Overall, the concerns are valid: How stable is the market?, How tight will the banks be with distributing credit? , and Will there be liquidity?, These are significant issues where the corporations are concerned, particularly the small companies, who depend on credit to purchase inventory, and make payroll. I definitely get it. Nevertheless, reform was absolutely necessary. We all know the financial industry was out of control, and now we all have to suffer for it. My old boss used to say "This too shall pass". Corporate America will adjust, survive, and eventually thrive again. Yes the economy may stagnate, but it will prevail.

No doubt there will need to be some changes in the Reform Bill – a few nips and tucks before we can strike a balance between consumer protection and keeping the banks motivated.
JULY 23, 2010 7:35 PM


Anonymous said......
Hey....nothing like a healthy debate, right? You both make solid arguments, but I’m more of the wait and see type. These are scary times, but I hear they don’t compare to the great depression – we have it easy. Look. - it’s not going to be the same no matter what we do, so why whine about it. Let’s just man-up and wait it out. Banks are never going to satisfied, and the Wall Street high rollers are moaning because we're raining on their parade. Wall Street and Main Street will never see eye-to-eye. So how do you write legislature that reflects the concerns of both sides. You Don't!

Independence Day for the Feds: Lawmakers to Let the Federal Reserve Retain Their Independence

Wall Street reform, begins to take shape as the House of Representatives and the Senate attempt to hammer out the details of the much anticipated plan.
The Federal Reserve has been the subject of much sustained criticism for its role in the financial crisis. Eventually the Feds admitted to being complacent and not responding to mitigate mounting housing troubles due to risky lending practices back in ‘2007. Accordingly, there was a not-so-subtle push to make the head of the Federal Reserve Bank a political appointment. This idea was, thankfully, abandoned according to a Reuters report. Nevertheless, the Federal Reserve did not get off completely, as Lawmakers allegedly signed off on a one-time review of its emergency lending during the Crisis, and has ordered them to disclose the Discount Window and Open Market operations on an on-going basis. Even though the information requested is at a 3-year lag, this may come as huge adjustment for the Feds. Hey Feds...you win some, you loose some.
I am guarded but excited about the prospect of Wall Street reform, but I anticipate a difficult road ahead for the lawmakers as they chisel out the historical bill. It will certainly be interesting to see how they revise and attempt to blend the separate(and very different) bills that previously emerged from the House and the Senate. This July 4th weekend, which was the White House dead line, should quickly reveal just how bumpy the road might have been. As of week before last, the key issues were as follows:
1. "Yes" or "No" to a provision that would open the Fed’s interest-rate policy to congressional audits. If not perhaps they would look at examining other less sensitive areas.
2. Establish tighter regulations that would essentially crimp financial firms' profits, but serve to avert a repeat of the financial crisis of 2009.
3. Establish improved consumer protections. This would protect consumers from predatory and unsavory loan rates and fees.
4. Set up a process for dismantling troubled firms, in lieu of costly bail outs
5. Limit the range of high-risk, but profitable trading activities, which played a key role in the financial collapse of banking firms.

Although the Lawmakers differ in the details, both the Senate and the House would like to see funds set aside for dismantling troubled companies, rather than save them because they're “too big to fail. Regulators have also been directed to find ways to eliminate the conflict of interest that may have lead to credit-rating agencies. I wonder why they're ignoring the conflict of interest concerning research analysts who issued “strong buy” reports to stocks and companies that were troubled? Will they be included? You may or may not recall that one of the research analysts of a major investment bank was fired after pressure from Enron, because he did not give them a "strong buy" rating. Once the analyst was fired, Enron rewarded the Investment bank with a $50 million transaction. I can only imagine the numerous stories that have not been made public? At some point this week the details will be made public on this widely anticipated bill.


K Reilly
Cohn-Reilly Report

Post Script

Geithner and Michelle Obama at The U.S. Treasury

The two talk about the hard work of the treadury department employees, and the finance reform programs that are designed to mitigate another financial crisis from happenign again. Mrs. Obama talks about her child obesity initialtive.

Regulating the Industry: Derivatives spared harsh regulatory overhaul

Derivatives manage to maintain their smoke-and-mirrors appeal for hedge funds as the House Finance Services Committee approves a Derivatives Bill that would finally put derivative transactions under government regulatory control. The derivatives bill forces many of the complex products and negotiated contracts under the auspices of Commodity Futures Trading Commission, and Securities Exchange Commission, according to the Wall Street Journal.

Derivatives have always been a high risk, high return products that, until now, had little regulation and even less transparency. Derivatives are complex products which are privately negotiated agreements structured to hedge interest rate, credit risk, and commodities. These transactions involve private contracts with various institutions and third parties, often consisting of strips of bonds or interest rate swaps that are extremely difficult to track, or audit. So why did it take the near collapse of the financial market to bring the issue to light? Apparently, last year when authorities were trying to unravel the portfolio of derivatives for the faltering insurer AIG, regulators soon realized that it was next to impossible to figure out who owes who, and what the market value was given the circumstances.

Although the derivatives bill is a step in the right direction, there are exceptions written into it that should be cause for concern. Under the new bill, derivative contracts that are made between institutions are deemed standard and required to be processed through a clearing house. These trades will have to be traded on an electronic platform or exchanges, where dealers are required to use their own funds to make trades. The bill makes exceptions, however, for companies that use swaps as a way to hedge. In this instance, companies won't have to trade on exchanges, nor will they be required to go through a clearing house. Needless to say, this will result in untraceable trades, which could undoubtedly lead to abuses. It's these kinds of unregulated complex transactions that got us into trouble to begin with. It should be no surprise to find that corporations aggressively lobbied against this bill, and very possible that he loop hole left open for under-the-radar transactions is a kind of consolation gift.

The chairman of the Commodity Futures Trading Commission, Gary Gensler, was quoted as saying that "substantial challenges remain", although the passing of the bill marked a significant step (WSJ - Oct. 16). The bill will most likely see several revisions before it is signed into law, which should be by the end of the year.

Click for: Hedge Fund Fraud Article

K. Reilly

Banking On Geithner

Part 2 of 2

The Wall Street Journal’s September 18th article about bonuses and compensation reports that the Feds plan to curb compensation for traders, loan officers and executives on Wall Street. The front page article talks about the new policy that endeavors to structure pay for thousands of bank employees nationwide. It is important to note that this policy will only require the approval of the Federal Reserve, not Congress. Perhaps this is a good thing, considering the potential for months of bipartisan antics that could spark political debates, ultimately clouding the issues and stalling progress.

To the question asked by one citizen in the audience: "Given the new and deeper role the government plays in shaping our economy, do we have to reshape our Dreams?" Geithner offered reassurance saying “I think the American Dream is still about freedom and opportunity”. He went on to talk about one of the reasons America had been such a productive country in the past. He continued, citing how much ahead of other countries we were in establishing universal education and many other things that made us strong. The Secretary boasted that we were the envy of the world at one time, “That central vision is still going to be our future”. There were, of course, those questions that we've been hearing in televised round-table debates since the collapse of the financial market last Fall. Geithner fielded the questions with composure and confidence. Another concerned citizen asked: "You let GM fail, but City Bank was too big to fail? Why?": Geithner explained pension funds had already declined 30% by the time Citibank showed exposure, and also reiterated that the government failed to act soon enough. The Treasury Secretary emphasized that the American people played a role by taking on too much debt, and living beyond their means for too long. He went on to say that “you can not solve a crisis by teaching people a lesson”.

Geithner very aptly pointed out that we should be all more committed to never letting this happen again, adding “Never again commit to tax cuts without having a way to paying for them”. He went on to say we should never again finance two wars without a way to pay for them and expand health care without the money to pay for it. In response to the question asked by co-host Steve Liesman, “How much pressure are you under to dial back, and get out of the private sector?” The Secretary adamantly exclaimed “no one is going to be more eager than I am”. Judging by his tone, he meant it. Geithner explained that the TARP program was designed to be used no longer than necessary, adding that there are dangers to withdrawing too soon. He continued saying other country’s have made this mistake in the past, which could reignite the recession and cause even more damage. The Treasury Secretary seemed to believe that the measures that were taken are working. He talked about the recent indications of traction and growth, citing that they already have $88 billion coming back into the treasury from TARP. While predicting that unemployment will stay “unacceptably high?". In closing, Geithner said that after two years, we now have an economy that is starting to grow, but we are just at the beginning. He warned that it is going to take a while to fix this. See Part 1

K. Reilly
Cohn-Reilly Report
____________________
WSJ: 9/18/09,“Bankers Face Sweeping Curbs on Pay”
http://www.cnbc.com/id/32372470

Banking On Geithner

Part 1 of 2

Last week marked one year after the fall of Lehman Brothers, pundits, newspapers, and financial news programs, both Cable and Network, felt compelled to weigh in on where the economy stands today, compared to where we were then. For whatever it’s worth, I believe we are on the path to recovery, though mixed indicators tell us that we should fasten our seat belts, because there will be bumps in the road. I was surprised to learn that the majority of Americans polled by CNBC believe that we are poised for another collapse. This is actually one of the questions Treasury Secretary, Geithner, was asked in the “ Banking On Geithner” special, among many other tough questions from the audience. After all that we’ve been through as a country, the American people have a need to know. The Treasury secretary was confident in his delivery when he stated that he did not see another collapse of the financial system. He added “It is in our power to prevent it. If we stick to it until we get this economy moving again”.

The past year felt as if the rug was pulled out from under us. With steep declines in pension and mutual funds, the loss of millions of jobs and housing values shifting below their underlying mortgages (often called upside-down mortgage), we have earned the right to be concerned about the future. Millions of hard working Americans believed in the American Dream, only to find that the country narrowly averted a nightmare, the likes of which we have never seen. To quote Timothy Geithner, “The financial system almost fell off a cliff.” I was relieved to hear the words that echoed my sentiments as it was unfolding last year. The “Banking on Geithner” special was aired on September 10th on CNBC, in a Town Hall-type setting, hosted by Erin Burnett and Steve Leisman. There were a litany of questions that were probably never asked but the ones that did make it to the floor were all about security, stability and taxes. They were all worded differently and maybe even sounded more eloquent, but in the underlying issues were the same; security, stability and taxes.

Geithner, who was referred to as the country’s chief financial officer, explained to a captive audience that the country went too long living beyond our means and built up too much leverage, so it will take a while to fix the economy. He went on to explain that we were behind the curve and did not move quickly enough, in response to the issues concerning the government’s over spending, and involvement in the private sector. In other words, the drastic measure that were taken, were necessary. He’s right. It was way too late to completely avoid the inevitable. At the time it was obvious to me and probably others in the financial industry, that the bail outs were desperate “last minute” measures to save the Country from a fate that we cannot even imagine. At this point last year, the country financial system was about to slip into a comma, the bail outs were efforts to keep the economy from flat-lining. The media coverage fostered panic and speculation, while the subsequent press conferences held by the Bush administration appeared to be strategies to improve global perception, and damage control.

Capitalism had spun out of control. Meanwhile, Investment Banks, Commercial Banks, Mortgage companies and Hedge Funds had to have known at least 18-months prior that their housing portfolios, loans, and mortgage backed securities represented high risk transactions. There were other high risk derivative positions that added to the losses. But like gambling addicts they irrationally thought that something, or some event would miraculously turn the losses around and no one would ever know. Further, knowing that they were sitting on billions in losses, how did they justify the distribution of bonuses - not just any bonuses, but multi-million dollar compensation packages to the folks who took excessive risks that amounted to massive losses, and in some cases, the downfall of companies. This is Capitalism at its worst. Greed has become the new four-letter-word. click for part 2

K. Reilly
Cohn-Reilly Report
____________________
WSJ:9/18/09, “Bankers Face Sweeping Curbs on Pay”
http://www.cnbc.com/id/32372470