Tuesday, December 11, 2007
The SEC obtained an asset freeze and other emergency relief to halt a massive pyramid scheme with as many as 70,000 victims in 64 countries. The scheme involving the purported sale of English and Spanish language tutorials particularly preyed on Hispanic communities in Orlando, Fla., and Puerto Rico. The SEC charged Robert Lane, Wealth Pools International, Inc., and Recruit For Wealth, Inc. with the fraudulent offer and sale of unregistered securities in the form of "Associate" memberships in an enterprise called Wealth Pools. The fraudulent offering began in 2005 and the defendants claim to have raised more than $132 million in 2007 alone, according to the SEC's complaint.
While Wealth Pools purports to be a multi-level marketing company primarily selling an English and Spanish language tutorial DVD called Talk-N-Tutor through a network of sales Associates around the world, the SEC alleges in its complaint that the DVD is, in reality, a front for Wealth Pools's true product - an investment in one or more "pools" that offer investors an opportunity to receive passive income through the efforts of others to recruit new investors.
The SEC filed a settled civil fraud action yesterday against San Diego's independent auditor, Thomas J. Saiz and his firm, Calderon, Jaham & Osborn (CJO), in connection with the city's false and misleading financial statements in five 2002 and 2003 bond offerings. According to the complaint, the independent auditor issued unqualified audit reports on the bond offerings that raised $260 million from investors but contained materially false and misleading information about San Diego's pension and retiree health care obligations. It also charges that they failed to comply with generally accepted accounting standards, were not knowledgeable about San Diego, and failed to obtain sufficient competent evidential matter.
The Public Company Accounting Oversight Board fined Deloitte & Touche $1 million and censured the firm for shoddy work in auditing the books of Ligand Pharmaceuticals. It is the board's first enforcement action against a Big Four Accounting firm. D&T agreed to settle charges that it failed to perform appropriate and adequate procedures in a 2004 audit. The company later had to restate its financial results for the period because of non-compliance with GAAP. WSJ, Deloitte Receives $1 Million Fine.
More fallout from the subprime mess:
Washington Mutual, one of the largest lenders, is leaving the subprime lending business, raising $2.5 billion through an issuance of convertible preferred shares, cutting its dividends and eliminating over 3000 jobs. NYTimes, Washington Mutual Cutting Dividend and Jobs; WSJ, WaMu Is Retrenching After Taking Hard Hit From Mortgage Crisis .
Bank of America has closed its Columbia Strategic Cash Portfolio, the largest of its kind, after wealthy investors withdrew billions of assets. Only last month the fund had $40 billion in assets. Investors will lose 1/2 cent on the dollar. NYtimes, Mortgage Crisis Forces the Closing of a Fund; WSJ, A $34 Billion Cash Fund to Close Up.
MBIA, the largest bond insurer, is receiving a $1 billion investment from private equity firm Pincus Warburg after Moody's warned last wekk that MBIA was at "greater risk" of a capital shortfall than previously thought. NYTimes, Equity Firm Makes $1 Billion Investment in MBIA; WSJ, MBIA Gets a Capital Pain-Reliever.
Lawyers made closing arguments in the second criminal corporate fraud case against former PurchasePro CEO Charles E. Johnson Jr. Johnson is charged with both accounting fraud to meet earnings projections (stemming from conduct in March 2001) and obstruction of justice, based on four emails that Johnson fabricated and gave to his former lawyers in April 2006, who testified against him in this trial. Johnson said that the phony emails were to test the attention span of his lawyers. WPost, Both Sides Rest in Trial Of Ex-PurchasePro Chief.
Monday, December 10, 2007
Conrad Black, the former CEO of Hollinger International accused of stealing millions of dollars from the corporation, was sentenced to 6-1/2 years in prison. Some observers expected that he might be sentenced to 19-25 years. Last summer a jury convicted him of three counts of mail fraud and one count of obstruction of justice; he was acquitted of nine other counts. The judge reprimanded Black for not accepting his guilt. CFO.com, Conrad Black Sentenced in Fraud Case.
We have all become aware of the financial clout of sovereign capital in the markets today, as sovereign funds in the Middle East and Asia are stepping in to bail out the cash-strapped megabanks hit by the subprime crisis. SEC Chair Cox, in a recent speech, "The Rise of Sovereign Business," before the American Enterprise Institute Legal Center for the Public Interest, addressed how (1) state-owned or controlled corporations in the public markets and (2) government-owned commercial investment funds are challenging the conventional approaches to the roles of government and the private sector, respectively, in an era when the world's capital markets are converging. He asks: is there a point at which the entire financial activity we call a "free market" stops being that and morphs into something else? He addresses specific SEC concerns, including enforcement, conflicts of interest, market efficiency, and transparency.
Both the SEC and the New York Attorney General conducted investigations in 2005 into how Bear Stearns priced mortgage securities it sold to institutional investors, but each ultimately decided not to bring enforcement actions. Bear Stearns' disclosure this summer of mispriced mortgage securities in two hedge funds marked the beginning of the subprime mess. The article raises the intriguing question of whether an earlier enforcement action would have sent a message to Wall St. to clean up their houses. Did the SEC's emphasis on bringing enforcement actions on behalf of small investors cause them to miss this opportunity? The investors in the 2005 matter were institutional investors. WSJ, Did Authorities Miss a Chance To Ease Crunch?
In what is becoming a familiar pattern, megabank UBS announced a $10 billion writedown due to subprime mortgages and an emergency cash injection, totalling approximately $11.5 billion, from the Singapore government and an unnamed Middle East investor believed to be the government of Oman or Abu Dhabi. UBS also announced it expected a overall loss this year and cancelled its cash dividend and instead will issue a stock dividend. The investment takes the form of a convertible preferred stock bearing a 9% dividend. Singapore will take a 9% stake in UBS. NYTimes, UBS Declares a $10 Billion Writedown; WSJ, UBS Gains Two New Investors, Writes Down $10 Billion.