Articles Posted in Financial Firms

Ex-Morgan Stanley Smith Barney Broker Settles with FINRA for Allegedly Failing to Notify Firm of Previous Arrest

Published on: June 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Broker Bruce Parish Hutson has turned in a Letter of Acceptance, Waver, and Consent to settle allegations of Financial Industry Regulatory Authority rule violations involving his alleged failure to advise Morgan Stanley Smith Barney (MS) of his arrest for retail theft at a store in Wisconsin. FINRA has accepted the AWC, which Hutson submitted without denying or admitting to the findings and without adjudicating any issue.

The Ex-Morgan Stanley Smith Barney broker (and before that he worked for predecessor company Citigroup Global Markets Inc. ((ASBXL)), had entered a “no contest” plea to the misdemeanor charge in February 2010. He received a jail sentence of nine months, which was reduced to 12 months probation. On August 16, 2010, Hutson, turned in a Form UT (Uniform Termination Notice for Securities Industry Registration) stating that he was voluntarily let go from Morgan Stanley Smith Barney because the financial firm accused him of not properly reporting the arrest.

Also, although Form U4 (Uniform Application for Securities Industry Registration or Transfer) doesn’t mandate the disclosure of a mere arrest but does contemplate a criminal charge (at least), many industry members obligate employees to disclose any arrests. Yet when it was time to update this form by March 18, 2010, FINRA says that Hutson did not report the misdemeanor theft plea. Then, when he filled out Morgan Stanley Smith Barney’s yearly compliance questionnaire on May 19, 2010, he again denied having been arrested or charged with a crime in the past year or that he was statutorily disqualified.

FINRA contends that Hutson willfully violated its Article V, Section 2 (C) by-laws by not disclosing the criminal charge. The SRO also says that his later “no contest” plea to the misdemeanor theft violated FINRA Rule 2010 (when he made the false statement that he hadn’t been charged with any crime in the 12 months leading up to his completion of the compliance questionnaire) and he again violated this same rule when it was time to fill out the questionnaire. Per the AWC terms, Hutson is suspended from associating with any FINRA member for five months and he must pay a $5,000 fine.

“A broker can have a dozen complaints by investors and lose a half-dozen claims of wrongdoing, in which arbitrators reimburse these investors only part of their millions in collective losses, yet the broker is neither fined nor suspended,” said Shepherd Smith Edwards and Kantas, LTD, LLP founder and Securities Attorney William Shepherd. “A shoplifting charge in one’s past – very bad. Repeated misrepresentations to investors – so what. Perhaps FINRA should get its priorities straight.”

Broker Bruce Parish Hutson, Forbes, June 27, 2012

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements

Published on: June 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Former Sentinel Management Group Inc. CEO Eric Bloom and head trader Charles Mosley have been indicted for allegedly defrauding investors of about $500 million prior to the firm’s filing for bankruptcy protection in 2007. The government is seeking forfeiture of approximately that amount.

The two men are accused of fraudulently getting and retaining “under management” this money by misleading clients about where their money was going, the investments’ value, and the associated risks involved. According to prosecutors, defendants allegedly used investors’ securities as collateral to get a loan from Bank of New York Mellon Corp. (BK), in part to buy risky, illiquid securities. Bloom is also accused of causing clients to believe that Sentinel’s financial problems were not a result of these risky purchases, the indebtedness to the BoNY credit line, and too much use of leverage.

In other securities law news, Egan-Jones Rating Co. wants the Securities and Exchange Commission’s attempts to pursue claims against it in an administrative forum instead of in federal court blocked. The credit rating agency, which has long believed that the SEC does not treat it fairly even as it “historically coddled and excused” the larger credit raters, contends that if it were forced to make its defense in an administrative hearing it would not be able to avail of its constitutional due process rights due to the SEC’s bias.The Commission’s administrative claims accuse Egan Jones and its president Sean Egan of allegedly making “material misrepresentations” in its 2008 registration application to become a nationally registered statistical rating agency for government and asset-backed and securities issuers.

Egan-Jones filed a complaint accusing the SEC of “institutional bias,” as well as of allegedly improper conduct when examining and investigating the small credit ratings agency (including having Office of Compliance Inspections and Examinations staff go “back and forth between divisions and duties” to engage in both examination and enforcement roles.)The credit rater is also accusing the Commission of improperly seeking civil penalties against it under the Dodd-Frank Wall Street Reform and Consumer Protection Act, even though the actions it allegedly committed happened way before Dodd-Frank was enacted.

One firm that has agreed to settle the SEC’s administrative action against it is OppenheimerFunds Inc. Without denying or admitting to the allegations, the investment management company will pay over $35 million over allegations that it and its sales and distribution arm, OppenheimerFunds Distributor Inc., made misleading statements about the Oppenheimer Champion Income Fund (OPCHX, OCHBX, OCHCX, OCHNX, OCHYX) and Oppenheimer Core Bond Fund (OPIGX) in 2008.

The SEC contends that Oppenheimer used “total return swaps” derivatives, which created significant exposure to commercial mortgage-backed securities in the two funds, but allegedly did not adequately disclose in its prospectus the year that the Champion fund took on significant leverage through these derivative instruments. OppenheimerFunds also is accused of putting out misleading statements about the financial losses and recovery prospects of the fund when the CMBS market started to collapse, allegedly resulting in significant cash liabilities on total return swap contracts involving both funds. The $35 million will go into a fund to payback investors.

Meantime, Nasdaq Stock Market and Nasdaq OMX Group are proposing a $40M “voluntary accommodation” fund that would be used to payback members that were hurt because of technical problems that occurred during Facebook Inc.’s (FB) IPO offering last month. Nasdaq would pay about $13.7 million in cash to these members, while the balance would be a credit to them for trading expenses.

A technical snafu had stalled the social networking company’s market entry by about 30 minutes, which then delayed order confirmations on May 18, which is the day that Facebook went public. Many investors contend that they lost money as a result of Nasdaq’s alleged mishandling of their purchases, sales, or cancellation orders for the Facebook stock. Some of them have already filed securities lawsuits.

Sentinel Management Chief, Head Trader Indicted in Illinois, Bloomberg/Businessweek, June 1, 2012
Investors sue Nasdaq, Facebook over IPO, Reuters, May 22, 2012

Credit Rater Egan-Jones, Alleging Bias, Sues To Force SEC Proceeding Into Federal Court, BNA Securities Law Daily, June 8, 2012

OppenheimerFunds to pay $35M to settle SEC charge, Boston.com, June 6, 2012 Continue Reading ›

District Court Denies UBS Summary Judgment in Sarbanes-Oxley Whistleblower Lawsuit

Published on: June 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Connecticut has decided not to grant summary judgment to UBS AG (UBS) and UBS Securities LLC in Mary Barker’s lawsuit claiming that her firing violated the whistleblower provision of the Sarbanes-Oxley Act. Judge Janet Hall found that UBS failed to show that there was “clear and convincing evidence” that the plaintiff would have been let go “regardless of any protected activity.”

Barker, who started working for UBS in 1998, was terminated from her job in 2008 during a “large-scale” layoff. At the time, she was working in the Business Management Group of the Equities Chief Operating Officer’s office as an associate director. Barker filed her complaint the following year contending that she was actually let go because she “discovered reporting discrepancies” while working on a project to “reconcile” UBS’s New York Stock Exchange holdings. Barker contended that after this, she was “retaliated against or constructively discharged.” She also said that one of her bosses not only failed to adequately support her, but also had been “overlooking her for projects.”

Seeking summary judgment, UBS said that Barker failed to show that her “protected” behavior led to her termination. The district court, however, disagreed with UBS, countering that although the financial firm showed that it was undergoing “extreme financial hardship,” this does not show why the plaintiff, in particular, was let go.

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, the two federal agencies didn’t know that JPMorgan & Chase (JPM) had sustained $2 billion in trading losses until they heard about it through the press in April. Schapiro and Gensler testified in front of the Senate Banking Committee on May 22. Both agency heads noted that trading activities aren’t within the purview of the CFTC and the SEC. They also pointed out that the risky derivatives trading did not happen through JPMorgan’s futures commission merchant arm or broker-dealer arm.

The SEC has no authority over the credit default index derivatives that were involved in the trades, and although, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will eventually regulate the swap dealing activities of banks, the rules to make this authority law have not yet been written.

Now, the CFTC is probing JPMorgan’s trading transactions. It recently issued subpoenas asking for the firm’s internal documents related to the financial firm’s massive loss. The probe is being run by the agency’s enforcement division and, according to Reuters, will revolve around what JPMorgan traders told internal management staff and their supervisors as the bets began to sour. (However, per the Wall Street Journal, the inquiry is in the beginning phases and not limited to what traders said or didn’t say. It also doesn’t necessarily mean that JPMorgan or certain individuals will be subject to any civil enforcement action.)

Meantime, Schapiro has said that the SEC is also looking into whether JPMorgan’s financial reporting and public disclosure were accurate in regards to what the financial firm knew and when it had this knowledge. She told Sen. Robert Menendez (D-N.J.) that it was too early to tell whether JPMorgan’s activity would have violated the Volcker rule, which calls for banks to have their proprietary trading activity limited to risk-mitigation hedging. While JPMorgan has said that its transactions were hedges, experts are divided over this assessment. (The Volcker rule, which is part of Dodd-Frank, has not yet been implemented and there are critics fighting its current incarnation.) Menendez, in turn, said that Schapiro should look to JPMorgan’s trading loss as a reason for constructing strong verbiage when implementing the rule. However, Sen. Bob Corker (R-Tenn.), who was also at the hearing, wondered whether employing this approach might backfire-initially causing the legislation to “look good,” while ultimately creating a situation where highly complex institutions would be placed situations to “not appropriately hedge their activity.”

IMPLEMENTING DERIVATIVES REFORM: REDUCING SYSTEMIC RISK AND IMPROVING MARKET OVERSIGHT, Banking.Senate.gov, May 22, 2012

Regulators Say They Learned Of J.P. Morgan Losses from news reports, Los Angeles Times, May 22, 2012

CFTC subpoenas JPMorgan over trading loss: WSJ, The Republic, May 31, 2012

More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012

JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Fraud, May 19, 2012

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012 Continue Reading ›

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

Published on: May 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

Read the SEC Complaint (PDF)

More Blog Posts:

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Published on: May 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Inc. arbitrator Alvin Green is ordering David Lerner Associates Inc. to pay claimants Florence Hechtel and Joseph Graziose $24,450 for the Apple REITs that they bought from the firm. They will get the money after returning the Apple REIT 9 shares to the company. The Apple REIT is the 14th largest nontraded real estate investment trust in the US. David Lerner & Associates also will have to reimburse them their $425 FINRA claim filing fee.

According to Graziose and Hechtel, the financial firm misrepresented the Apple REIT 9, as well as breached its fiduciary duty and contract to them. Other Apple REIT investors have made similar claims. However, of the hundreds of arbitration claims (there are also securities lawsuits) that have been pending, this is the first one to go to hearing.

Per FINRA, since 1992 David Lerner & Associates has sold close to $7 billion in Apple REITs, making about $600 million in revenue from the sales (60-70% of the firm’s business since 1996). It is the only distributor of Apple REITs.

Last year, the SRO charged the financial firm with soliciting investors to buy Apple REIT Ten shares (a $2 billion non-traded REIT) without performing a reasonable investigation to make sure the REITs were suitable for these clients. Many of its Apple REIT investors are not only unsophisticated investors but also they are elderly. David Lerner & Associates also allegedly offered misleading information about the distribution online.

Several months ago, FINRA also sued firm owner David Lerner for similar alleged misconduct, including misleading clients about the valuation and risk involved in their Apple REIT Tens. The complaint against Lerner follows statements he is accused of making to investors after FINRA made its charges against the financial firm.

Per the amended complaint, Lerner wrote to over 50,000 clients to “counter negative press.” This letter also talked about a potential opportunity for Apple REIT shareholders to take part in a listing or a sale on a national exchange to get rid of their shares at a reasonable price. Also, at a seminar he hosted Lerner allegedly made statements to investors that were misleading.

For the last nine months, our REIT lawyers at Shepherd Smith Edwards and Kantas, LTD, LPP has been investigating claims on behalf of investors who sustained losses in Apple Real Estate Investment Trusts that they bought from David Lerner Associates. For many investors, these non-traded REITs were unsuitable for them.

First Apple REIT case goes against Lerner, Investment News, May 23, 2012

FINRA Charges David Lerner & Associates With Soliciting Investors to Purchase REITs Without Fully Investigating Suitability; Lerner Marketed REITs on its Website With Misleading Returns, FINRA, May 31, 2011

More Blog Posts:
David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

Published on: May 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission’s practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

Securities Law Roundup: Ex-Morgan Stanley’s SEC Settlement Over Alleged FCPA Violations Gets Court Approval, Corruption Probe Into Wal-Mart’s Mexico Activities Continue, and Sentry Global Securities Principal Gets 20-Years for Pump-and-Dump Scam

Published on: May 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A district court has approved ex-Morgan Stanley (MS) executive Garth Peterson’s civil settlement with the Securities and Exchange Commission over alleged Foreign Corrupt Practices Act violations. In SEC v. Garth Peterson, the plaintiff agreed to pay $241,589 in disgorgement and give up his interest in an apartment building in China. He is to work with an SEC-appointed receiver. Peterson has entered a guilty plea to related criminal charges.

According to the Commission, while working at Morgan Stanley’s real estate investment and fund advisory business, Peterson secretly obtained real estate investments worth millions of dollars from the financial firm’s funds not just for himself but also for others, including the ex-chairman of a Chinese state-owned entity that could influence Morgan Stanley’s real estate business in that country. Peterson, the official, and a Canadian lawyer are accused of acquiring a direct interest in the Jin Lin Tiandi Serviced Apartments. The Commission has said that Peterson violated the FCPA’s anti-bribery and internal control provisions, as well as aided and abetted violations of the 1940 Investment Advisers Act’s antifraud provisions.

In other allegations of Foreign Corrupt Practices Act violations, Wal-Mart (WMT) is accused of not just committing them but also of covering up its alleged misconduct. An investigation into the accusations was opened up in April.

Wal-Mart executives are accused of concealing possible corruption (including bribery) by company executives and officials in Mexico, where the retail chain has been working to build its presence. Now, House Energy and Commerce Committee ranking member Henry Waxman (D-Calif.) and House Oversight Committee ranking member Elijah Cummings (D-Md.) want the store’s CEO Michael Duke to let a former general counsel cooperate with their investigation.

In a letter to Duke, the two lawmakers said that there are several hundred internal documents that seem to confirm early reports of the scandal. At the time of the alleged cover up, then-Wal-Mart general counsel Maritza Munich had tried to get company’s board to expand its probe into the accusations and put into place a tough anticorruption policy. However, when she left Wal-Mart in 2006, Albert Mora, the person who replaced her, chose not to investigate further. Now, Waxman and Cummings want Wal-Mart to allow Munich to get involved in the current probe. They also are once more putting forward an earlier request that the retail giant give them a “substantive briefing” about the specific bribery allegations related to Mexico.

Meantime, Sentry Global Securities and Red Sea Management principal Jonathan Curshen has been sentenced to two decades behind bars for his conviction in a pump and dump stock manipulation scheme. He was found guilty of wire fraud, conspiracy to commit securities fraud, mail fraud, and conspiracy to commit international money laundering. He also has to forfeit about $7.3 million.

Curshen, stock promoter Nathan Montgomery, and their co-conspirators are accused in taking part in coordinated trades while with issuing false statements to the press. According to the US Department of Justice, the alleged misconduct, which is said to have occurred in 2007, was committed to raise the price of C02 Technologies stock. While co-conspirators “pumped,” Curshen and others “dumped” by selling the shares through his two Costa Rica brokerage companies. The shares then virtually lost all their value.

SEC v. Garth Peterson

Foreign Corrupt Practices Act, US DOJ
Read the letter to lawmakers’ Wal-Mart CEO Duke, BNA, (PDF)

CO2 Tech’s Curshen receives 20 years in jail, Stockwatch, May 14, 2012

More Blog Posts:
SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam, Stockbroker Fraud Blog, May 11, 2012

SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Fraud, March 29, 2012 Continue Reading ›

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked

Published on: May 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the “JPMorgan loophole” (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase‘s (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm’s loss has likely grown to closer than $6 billion to $7 billion.

Volcker Rule Resource Center, SIFMA

More Blog Posts:

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss, Institutional Investor Securities Blog, May 17, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record https://www.investorlawyers.com/our-staff.html, Stockbroker Fraud Blog, March 15, 2012