SEC and Other Investigations of Illegal Trading

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Top 101. Jan 22, 2004 1:00 PM

» Kirk - Thom Calandra resigns amid probe of trading activities

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From Briefing.com: 2:52PM MKTW: MarketWatch.com commentator Calandra resigns amid probe of trading activities -- CBS MarketWatch 10.00 -0.93: CBS Marketwatch reports that Thom Calandra, chief commentator for CBS MarketWatch and one of the founders of its parent company, resigned Thursday amid an internal probe into his trading activities that was sparked by a query from the SEC.

January 22, 2004 03:01 PM US Eastern Timezone

MarketWatch.com Chief Commentator, Thom Calandra, Resigns

SAN FRANCISCO--(BUSINESS WIRE)--Jan. 22, 2004--MarketWatch.com, Inc. (NASDAQ:MKTW), a leading multimedia publisher of business news and provider of financial information and analytical tools, announced today that its chief commentator and author of The Calandra Report, Thom Calandra, has resigned for personal reasons.

The U.S. Securities and Exchange Commission (SEC) has commenced an informal inquiry into Mr. Calandra's trading activities dating back to October 2002. Upon being notified of the inquiry by Mr. Calandra in December 2003, MarketWatch began conducting its own internal investigation into whether Mr. Calandra violated the Company's trading and disclosure policies. The Company's internal investigation is ongoing.

"We regret Thom Calandra's departure from the Company. While we have made a very clear distinction that Thom provides commentary and opinion in his newsletter and does not report business news, Thom was required to abide by our internal trading policies and fully disclose his activities to his readers and subscribers," said Larry Kramer, MarketWatch's chairman and CEO. "We have a responsibility to our readers and subscribers to cooperate with the SEC in its determination of whether or not Thom violated these policies."

In connection with the SEC's informal inquiry, MarketWatch has received a request from the SEC to produce voluntarily documents and other relevant information concerning these matters. MarketWatch is cooperating fully with the inquiry.

Mr. Calandra's newsletter, The Calandra Report, has been terminated and subscribers will be given pro-rated refunds. All subscribers are being notified directly by the Company today.

About MarketWatch.com, Inc.

MarketWatch.com, Inc. (NASDAQ:MKTW) is a leading multimedia publisher of business news and provider of financial information and analytical tools. Founded in 1997, the Company operates two award-winning Web sites, CBS.MarketWatch.com and BigCharts.com. The Company produces the syndicated CBS MarketWatch Weekend program, airs financial reports over The CBS Television Network and provides updates every 30 minutes on the MarketWatch.com Radio Network. MarketWatch.com also offers subscription products for individual investors, including The Hulbert Financial Digest, Retirement Weekly and The Technical Indicator. With the Pinnacor merger, the Company's MarketWatch Information Services group is a leading licensor of market news, data, investment analysis tools and other online applications to financial services firms, media companies, wireless carriers and Internet service providers.

TheStreetDotCom says:
http://www.thestreet.com/_tscbrk/markets...

Eyebrows were raised last month when Barron's reported that Calandra had traveled to China and Mongolia at the expense of Ivanhoe Energy (IVAN:NASDAQ - commentary - research), a tiny Canadian oil stock whose shares went from 32 cents a year ago to the low-$7 range in November. Calandra's columns on the stock, in which he acknowledged an ownership stake, contributed to its rally, which has recently tailed off.

Calandra, who couldn't immediately be reached, is quoted on the MarketWatch Web site saying: "I've worked hard for the past eight years helping to build MarketWatch and for the last year I've worked hard creating The Calandra Report. While it's been tremendously rewarding professionally, it has also been stressful. And the SEC's informal inquiry adds to this stress. So I've decided to take this time off to focus on my family, whom I adore. I look forward to the conclusion of the SEC's inquiry."

Wow!

-- posted by Kirk

Top 102. Mar 2, 2004 10:56 AM

» Kirk - Feds Charge Ebbers in WorldCom Probe

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Feds Charge Ebbers in WorldCom Probe
Tue Mar 2, 2004 12:53 PM ET

NEW YORK (Reuters) - Former WorldCom Inc. Chief Executive Bernard Ebbers has been indicted on federal fraud charges stemming from the telephone company's collapse into the largest U.S. bankruptcy ever, according to court records.
Earlier on Tuesday, Ebbers' former lieutenant, Scott Sullivan, pleaded guilty to three criminal charges in the matter and is expected to cooperate with the government's case against Ebbers.
http://www.reuters.com/financeNewsArticl...

-- posted by Kirk

Top 103. Mar 2, 2004 3:09 PM

» Normxxx - Futile courtroom dramas

The Bear's Lair: Futile courtroom dramas

By Martin Hutchinson | 3/1/2004 12:07 PM

WASHINGTON, March 1 (UPI) -- The Martha Stewart trial and the approaching Jeffrey Skilling trial certainly provide soap-opera-style entertainment for the financial pages, but as the storylines get more complex, the doubts should grow: does all this courtroom activity actually benefit the retail investor in stock markets?

Once upon a time, in both New York (before 1933) and London (until about 1980), there was a financial services business with very little regulation. Common law principles of theft and fraud deterred the worst crooks, and for the rest, the overriding principle was "caveat emptor" -- let the buyer beware. The buyer of financial services was expected to know the reputation of the seller, and to act accordingly as a prudent man should. If a financial services industry participant gained a reputation for shady dealing, his career among thoughtful clients and top tier business partners was finished. As the great J. Pierpont Morgan testified before Congress in 1913, questioned by Samuel Untermyer:

Untermyer: "Is not commercial credit based primarily upon money or property?"

Morgan: "No sir. The first thing is character."

Untermyer: "Before money or property?"

Morgan: "Before money or property or anything else. Money cannot buy it...because a man I do not trust could not get money from me on all the bonds in Christendom."

It was a very different world, but one in which small investors, provided they dealt with a reputable house, had considerably more protection than they have today.

For illustrations of where regulation can fail, consider some of the scandals of the last couple of years:

-- Mutual fund late trading, in which hedge funds traded with major mutual fund groups on a short term basis at closing prices that were already out of date in the light of post-closing events. Public pension funds pulled more than $4 billion in investments from Putnam Investments, one of the leading fund groups implicated, in one week in November 2003, after which Putnam's chief executive Lawrence Lasser was forced to resign. A satisfactory market based outcome, in other words, in which regulation played no part since "late trading" had not been thought of when the regulations were drafted.

-- The ImClone insider trading scandal, in which Sam Waksal, chief executive of ImClone was jailed for 7 years for insider trading -- for knowledge of a Food and Drug Administration ruling that should never have been issued, since it delayed by 2 years the availability in the United States of Erbitux, a drug effective against advanced and generally fatal colo-rectal cancers. Waksal appears to have been one of the few entrepreneurs of the 1995-2004 period who created something of lasting and important value.

-- The Martha Stewart case, in which Stewart is being prosecuted, not for insider trading, since she had no fiduciary relationship with ImClone Systems, but for propping up the stock price of her own company, Martha Stewart Living Omnimedia, by protesting her innocence of insider trading. So far, stockholders in Martha Stewart Living Omnimedia have lost through the adverse publicity several thousand times the amount of Martha Stewart's non-insider traded gain.

-- Ray Dirks, the analyst who exposed the 1973 Equity Funding insurance swindle -- and was prosecuted by the SEC for telling his clients of his own analysis before he told the market -- is again in trouble, and possibly facing final ejection from the market. He is accused of "pumping" (whatever that means) penny stocks to retail investors. The fact that the principal stock he is accused of "pumping," Transmeridian Exploration, is currently selling at three times the price at which he recommended it is of no importance, it seems.

-- Enron, in which middle management was enriching itself illicitly at stockholder expense, illegal under any financial system since and including the South Sea Bubble of 1720. Meanwhile top management was losing money for stockholders, certainly, but through derivatives trades of such complexity and elegance that not only could regulation not have prevented them, but top management itself was completely unaware until close to the end that the entire edifice was a house of cards.

-- Fannie Mae, the huge government-sponsored home mortgage corporation, lost over half its capital in 2002 through similar derivatives trades, reported "off balance sheet" and therefore hidden from all but the most knowledgeable and conscientious investors -- who, if they sold the stock short, lost their shirt. Fannie Mae's stock price has substantially risen since the event, nobody appears to have lost their job, and Fannie Mae's credit rating remains AAA.

-- Parmalat, the Italian food company, which slid into bankruptcy after it was revealed that the company had concocted a fictitious bank account, with a balance of more than $4 billion, thus creating an entirely spurious solidity in its income statement and balance sheet, all of which had been audited according to Internationally Accepted Accounting Principles by the major international auditor Grant Thornton. Even the simple rules, that a publicly traded company must publish an audited balance sheet and that bank statements must be verified by the auditors, were no help there, it seems.

Even when no illegality has occurred, investors still get fleeced. Companies such as Cisco and E-Bay have paid out more in value to their management in stock option profits than their reported earnings, all of it without affecting the income statement -- after management remuneration, the two companies have run at a substantial loss since their inception and, taking one year with another, continue to do so. The Financial Accounting Standards Board is attempting to rectify this problem -- but the timetable for the implementation of new accounting standards slips further and further back, as the tech sector lobby puts pressure on its favorite senators, who in turn put pressure on the FASB.

Even more important than stock options, the total of "extraordinary items," costs debited directly against capital and not passing through companies' income statements, has rocketed in the last few years. In the middle 1980s, it averaged around 5 percent of reported earnings for the Standard and Poors 500 as a whole, now it averages around 40 percent. Of course, the frequency of corporate restructurings has increased, so one would expect a greater level of one-time write-offs. Nevertheless, when the S&P 500 is considered as a whole, these items are not "extraordinary" at all, but occur on a regular basis in every quarter. Hence around 40 percent of reported S&P 500 earnings are "water" in the sense that they do not represent value to stockholders; combine this with the stock options problem and you can see that S&P 500 reported earnings of just over $50 are about double the true level that actually accrues to stockholders and could potentially be paid out as dividends. Thus the stock market currently trades on around 45 times true earnings.

Regulation is useless, far too slow to catch up with the various fraudulent schemes, and the stock market boomlet of 2003-04 has brought back all the scams and gullibility of the bubble years. As the pace of trading in the market has grown ever faster, the traders ever younger and more aggressive, and the rule-makers ever more hopelessly in arrears, investors are increasingly considered as "marks," existing only to be defrauded under some illicit new scheme. Any distinction between high quality houses and bucket shops has been lost, as practices are shaved to the minimum legally necessary, rather than raised to preserve the institution's good name. Every now and then the authorities move in, whether or not an explicit law has been broken, and a trader or market participant is given a swingeing jail sentence. Alternatively, the trial lawyers hover greedily in the wings, seeking carrion wherever they can get it.

The randomized threat of imprisonment or bankruptcy greatly increases the risk and unpleasantness of the securities business, and makes it less and less likely that the honest and conservative will enter it. For the "sporting-minded," of course, the rewards are sufficient to make the risks worth it.

This type of environment has been seen before; lovers of old Broadway musicals will recognize it as that of Damon Runyon's classic "Guys and Dolls," based on the career of New York crime kingpin Arnold Rothstein, whose life as the "Thomas Edison of crime" (as one reviewer called him) is lovingly set out in a new biography ("Rothstein" David Petrusza, Carroll and Graf Publishers, $27.)

Rothstein ran a huge gambling empire, enormously profitable, generating revenue from intermediating pretty well every illicit activity in New York, and making sure that none of his business partners ever knew what his real game was. His "fix" of baseball's 1919 World Series was Enron-esque in its complexity, involving no fewer than three teams of gamblers placing bets and attempting to bribe the Chicago White Sox players; it was also Enron-esque in its collapse, causing disaster to Chicago players and innocent bystanders but allowing Rothstein himself the remain at liberty with a substantial overall profit. Over and over again, laws were passed attempting to curb his activities, but they merely caused him to change his style of operations, moving from a fixed gambling casino in Manhattan to mobile "action" in its major hotels, and making another huge fortune from the onset of Prohibition, by which he gave Meyer Lansky and "Lucky" Luciano their start in life.

Recognize it? Investing in today's stock market is like playing poker with Arnold Rothstein -- you may even win in the short term, but in the long run it's an intrinsically unprofitable activity. However, just as you were unlikely to profit from hoping that the New York legal system would curb Rothstein, so investors are unlikely to gain a fair deal through regulation, when the ethical standards of the market are so low, and the profit opportunities from chicanery so enormous.

There will come a reckoning, and it will be both financially painful and psychologically shattering for those investors who have trusted a system corrupted by the easy money of the 90s. Eventually, the huge wave of Fed-created liquidity that is sustaining the markets will dry up, the poker game will end, the Rothsteins will vanish and investors will be left with only losses. Needless to say, the backlash against Wall Street that this will cause will be enormously politically powerful, and even more economically damaging.

The solution is not to write off capitalism as a hopeless casino where crooks get rich and the suckers get fleeced, it is to recognize that regulation cannot in reality protect investors if they deal with financial institutions driven by their trading desks to exploit every angle for a fast buck. Before the regulatory wave of the 1930s in the United States and the 1980s in Britain, for those investors who made sure to deal with top quality institutions: J.P. Morgan, the First National Bank, Kidder Peabody and the Boston money managers (or Schroders, Rothschilds, Hill Samuel, Warburgs, Hambros), their money was both safe and earned a decent return. Only investors dealing with "bucket shops" entered the world of Damon Runyon and Arnold Rothstein and lost their money.

As Morgan would have told you, regulation is absolutely no substitute for character.

-0-

-- posted by Normxxx

Top 104. Mar 11, 2004 8:50 AM

» Kirk - Bank of America Penalized Record by SEC

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BoA front running their investment recommendations:

From: Michael Happel Wednesday, Mar 10, 2004

RE: BoA front running their investment recommendations:

SEC "I'm shocked — shocked to find that gambling is going on in here."

[BoA hands SEC a pile of money.]
BoA: Your winnings, sir.

SEC: Oh, thank you.... very much. Everybody out at once!

Reuters
Bank of America Penalized Record by SEC
Wednesday March 10, 4:25 pm ET
By Tim Dobbyn and Jonathan Stempel

WASHINGTON/NEW YORK (Reuters) - Bank of America Corp. (NYSE:BAC - News) will pay a record $10 million penalty for hindering a federal probe into possible improper trading at the bank's securities unit, the agency said on Wednesday.

The U.S. Securities and Exchange Commission (News - Websites) said the unit, Banc of America Securities (News - Websites) , repeatedly failed to promptly provide requested documents, gave "misinformation" about the documents' availability, and engaged in "dilatory tactics."

The agency said it is probing whether Banc of America Securities improperly traded securities before issuing market-moving research about those securities. It said it is probing the personal trading of a former senior employee at the unit. Neither the SEC nor the bank named the employee.

The SEC penalty was the largest ever against a company for failing to produce documents, SEC spokesman John Heine said.

Charlotte, North Carolina-based Bank of America, the third-largest U.S. bank, also agreed to an SEC censure, and to refrain from further record-keeping violations. It neither admitted to nor denied the SEC's findings.

"We will not tolerate unreasonable delay in responding to our inquiries and will act aggressively to protect the integrity of the Commission's investigative processes," said SEC enforcement director Stephen Cutler in a statement.

Bank of America spokeswoman Shirley Norton said the bank considers the problems addressed in the settlement "isolated."

She said the bank has created an internal regulatory investigation unit to develop "new procedures and new technology to enhance e-mail recovery," and hired Davis Polk & Wardwell as new outside legal counsel for the SEC inquiry.

"We continue to look for ways to improve our ability to respond to inquiries such as this," Norton said.

Bank of America is also being probed by Italian investigators for its role in the collapse of food company Parmalat Finanziaria SpA (Milan:PRFI.MI - News), and by U.S. regulators for its role in the mutual fund trading scandal. The bank hopes to finish its purchase of FleetBoston Financial Corp. (NYSE:FBF - News), which was originally valued at $47 billion, in early April.

In its settlement order, the SEC said it received in 2001 an anonymous informant's letter alleging that senior equities managers at the securities unit may have caused the firm to buy or sell securities that it knew would be the subject of reports generated by its equity research analysts.

Banc of America Securities was not part of last April's $1.4 billion global stock research settlement among regulators and 10 banks.

Bank of America shares on Wednesday fell $1.78, or 2.2 percent, to close at $79.99 on the New York Stock Exchange (News - Websites) . They have risen 20 percent in the last year.

-- posted by Kirk

Top 105. Mar 16, 2004 7:00 PM

» Kirk - Pimco Allowed Market Timers !!!!

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[Kirk's Editor Comment: Looks like they allowed the big guys to do something they don't allow the small investors to do..

If this is true, this could be the end of Bill Gross's fame. ]

Pimco Bond Funds Had Different Rules for Big Investors, Documents Indicate
http://www.miami.com/mld/miamiherald/bus...

Posted on Mon, Mar. 15, 2004

The Orange County Register, Calif. Knight Ridder/Tribune Business News

Mar. 14 - If you're a cautious mutual fund investor who's always been coached to buy and hold, the Newport Beach-based Pimco bond funds have probably appeared, over the years, a very safe place to practice that strategy.

Pimco indicates in its prospectus that it's watching out for rapid trading in its funds, and for other practices that might harm fund performance.

"In particular a pattern of exchanges characteristic of "market-timing" strategies may be deemed by Pimco to be detrimental...," the prospectus warns. "(Pimco) has the right to refuse any exchange for any investor who completes ... more than six round trip exchanges in any 12-month period."

Even if you were tempted to trade every two months, you were likely to get a call from Pimco's market-timing monitors. Some investors were told they had to hold Pimco funds for at least six months -- or trade elsewhere.

But it turns out there's a lot of wiggle room in those apparently stern warnings.

And a lot would depend on who was doing the trading.

When a consultant representing New Jersey millionaire Edward Stern, heir to the Hartz Mountain pet supply fortune, offered to invest $20 million in late 2002 -- if he could trade in and out at least once a month -- Pimco quickly agreed.

"We have always shunned these 'timers' in the past but wanted to get your current read," a Pimco marketing executive e-mailed High Yield portfolio manager David Hinman.

"At $4B in (the fund) we can handle $20 mm in timer money," Hinman replied.

By April 2003, Stern was moving $30 million into and out of the High Yield Fund at least once a month -- and was offering to invest $150 million more if he could get the same deal.

"We are able to take another four separate clients up to $20 million each into the domestic public High Yield Fund provided they each trade on a separate day," replied Andre Mallegol, a Pimco vice president of marketing, in an e-mail to a Stern representative on April 30, 2003.

In a fraud lawsuit filed last month, New Jersey Attorney General Peter C. Harvey, alleges that those arrangements constituted a secret agreement that allowed Stern to trade in excess of Pimco's publicly disclosed limits.

Pimco declined to be interviewed for this story.

But in an interview with The Register last month, Bill Gross, the Newport Beach bond investment chief and two-time Morningstar Fixed-Income Manager of the Year, denied the fraud charges.

Gross said the rules in the fund prospectuses were not broken and no investors were hurt by any of the rapid trading. He said Pimco agreed to allow Stern's Canary Capital Partners limited market-timing in order to bring its trading under control.

But many experts say the venerable Newport Beach bond house appears to have broken faith with small investors.

"You are giving the impression that you will discourage market timing in order to protect the small investors. Having done that you turn around and leave them vulnerable," said John C. Coffee, a Colombia University professor and expert in securities law.

In addition to Pimco, the fraud lawsuit names Pimco Equity Advisors (PEA), the New York stock fund managers, Pimco Advisors Distributors (PAD), the Connecticut sales arm for the stock and bond funds and Allianz Dresdner Asset Management, the company which owns the controlling interest in the entire Pimco funds operation.

The fraud charges against Pimco Equity Advisors--the first of the Pimco fund family to give Canary written permission to market time in its funds, make up the bulk of the NJ complaint and appear more serious. PEA had the same six-trade rule in its prospectus but allowed Canary as many as 37 round-trip trades in some of its funds in less than 10 months.

A spokesman for PEA acknowledged last month that fund managers had allowed Stern to market time some of their stock funds in 2002. But the spokesman said PEA "eventually came to the belief that they had been misled about (Stern's) intentions and strategy and called (the arrangement) off after a number of months."

But it is the allegations against the Newport Beach bond house -- which had insisted in early February it was not involved in market timing--which have shaken up the mutual fund world. That relatively stable bond funds could be timed in the first place surprised some fund watchdogs. That Pimco was involved stunned them.

"Early in the scandal, when people were putting together a list of the good guys, Pimco was on this good-guy list," said Roy Weitz, a mutual fund analyst and founder of FundAlarm.com, which warns consumers about troubled funds.

"They were sitting on top of the world and acted like nothing could touch them. Now they've been cut down a notch."

The marriage between Pimco and PEA Capital, as it's now known, was always one of convenience.

The stock funds took on the Pimco name when they were created in 1999 to trade on the fame of their better-known bond half, which had been building its reputation since 1971.

The bond and stock funds operated independently -- but documents attached to the New Jersey fraud lawsuit show that both had an official policy discouraging market timing.

Since 2000, Pimco Advisor Distributors had send out more than 700 letters to investors enforcing the market timing rules, the lawsuit says. The letters asserted "Pimco does not allow this type of activity to occur in our funds."

Pimco employees telephoned investors who traded too often.

"Spoke w/Mary (very nice)," a Pimco Advisors Distributors market-timing log for October 1998 says. "They traded $1.4 (million in Pimco's High Yield Bond Fund) via Schwab--held less than 45 days. Explained we had a six-month minimum hold. She agreed not to use it."

But in late 2001 executives at Pimco Equity Advisors met with brokers for Edward Stern, general manager of a $700 million hedge fund named after one of the biggest consumers of Stern's Hartz Mountain products, court documents show.

Stern wanted to be able to move in and out of the stock funds as often as five times a month, his representative told PEA. In return Canary would make a long-term investment in a PEA stock or Newport Beach bond fund.

The deal eventually struck put the long-term assets in the stock fund managed by PEA chief executive Kenneth W. Corba -- PEA Select Growth.

When it wasn't moving into the stock funds, Canary parked its trading money in Pimco short-term bond and money-market funds, the lawsuit alleges. At one point in February 2002, it made 89 transactions in the Newport Beach funds in three days.

Steve Howell, a Connecticut-based market-timing cop for Pimco Advisor Distributors, saw the rapid trading in Pimco's stock and bond funds in early 2002, but didn't blow the whistle.

In a sworn deposition, Howell told New Jersey investigators he did nothing about the market timing -- although he considered it abusive -- because high-ranking executives at Pimco Advisors -- the Connecticut marketing arm -- had warned him that the accounts would have frequent transactions "and directed us not to pursue that."

"This whole arrangement was put together by, you know, people above me and ... I didn't feel like I was in a position to question what had been established," he said.

How much the Newport Beach fund managers knew in early 2002 about the deal struck between PEA and Canary is unclear.

Gross told The Register last month Pimco's Newport Beach fund managers weren't part of the arrangement.

"We really didn't know what they were doing," Gross said in an interview.

The fraud lawsuit says bond fund managers "did not appreciate the frequent exchanges in and out of the money market and bond funds..." There are some indications that Canary may have eased off on bond transactions in mid-2002.

But in October Canary's market-timing consultant, Dave Byck, approached the Newport Beach bond fund officials directly.

"David -- we have an advisor who has a HNW (high net worth) investor who wants to put $20 million in the hyld fund and have the ability to move in and out roughly once a month," Pimco senior vice president of marketing Doug Ongaro e-mailed High Yield Portfolio manager David Hinman on Oct. 1, 2002.

Pimco subsequently agreed to take $30 million from Canary, and as Stern began trading that in early 2003, Byck e-mailed Pimco with the request to invest as much as $150 million more.

The e-mail's subject line read: "More money?"

Then came a response that still has experts disagreeing,

"We are able to take another four separate clients up to $20 million each into the domestic public High Yield Fund provided they each trade on a separate day," Mallegol, a Pimco vice president of marketing, responded to Byck on April 30.

"Consecutive days are OK although we would prefer every other day at the most. After these four come into the fund we will not be taking others unless they are buy and hold investors."

Pimco subsequently accepted another $50 million from Canary, the court documents indicate, including two accounts totaling $20.5 million in the domestic High Yield bond fund and three accounts totalling $30 million in the Pimco Real Return Fund.

"It looks to us like they had an agreement to market time well beyond what they allowed others to do. It was a special arrangement," Franklin L. Widmann, chief of the New Jersey Bureau of Securities said in an interview.

Coffee and some other experts agree.

"That's far more than allowing this (market timing), that's inviting it. That is putting a 'For Sale' sign out front," Coffee said.

Mutual fund research company Morningstar doesn't agree, calling the evidence "troubling" but inconclusive.

"The complaint seems to be reaching too far to try and illustrate malfeasance," Morningstar analyst Eric Jacobson wrote.

Gross has said that trades in the Newport Beach bond funds never violated the prospectus.

But there is not enough information included in the court filings to verify or contradict his claim,

The 89 transactions alleged in February 2002 -- which possibly could have exceeded the six-in-a-year limit -- are not detailed in the case documents.

There are exhibits detailing the Canary trades in 2003 -- after Pimco specifically agreed to allow market timing.

None of those show more than six trades into and out of any individual fund -- the buy-and-sell transaction limit set by the Pimco prospectus.

For fund companies, the reason for allowing large market timers to invest in your fund is simple: more management fees.

Advisor fees typically equal a percentage of the funds' assets -- in most of the Pimco funds, that was .25 percent. When the fund gets bigger, they bring in more money.

"(The fund managers) were looking for market timers to improve their revenues," said Weitz, the mutual fund watchdog. "They were just attempting to goose the fund with some extra assets."

Still, the approximately $40 million balance that Canary kept in various Pimco funds for about seven months in 2003 is a tiny fraction of the $374 billion Pimco has under management -- and would generate perhaps $50,000 in fees.

Securities law experts like Columbia University's Coffee, and the University of San Diego School of Law's Frank Partnoy say its likely that Pimco was allowing other large hedge funds to invest as well -- since the managers didn't believe their activity was harming the funds.

"Canary was very aggressive, and was able to convince a lot of people, not just Pimco, to give them special treatment," said Partnoy, who is the author of "Infectious Greed: How Deceit and Risk Corrupted the Financial Markets."

For Canary, successful market timing had a large potential upside.

Experts say bonds held by a municipal or high yield fund may only trade once every week or two so their assigned value in the fund gets "stale," not reflective of recent movement in the overall bond market. Sophisticated timers who calculate such changes can make an extra 10 percent to 25 percent over those who buy and hold a bond fund.

But it's not clear how sophisticated Canary's trades were. At times the giant hedge fund bought high and sold low.

An Orange County Register analysis of Canary trades in the Pimco Real Return Fund -- based on a chronology attached to the lawsuit and the fund's net asset value, as tracked by Bloomberg -- shows that Canary bought in Aug. 7 in three accounts totalling $30 million at a net asset value of $11.23.

The share price then began to fall and on August 13 Canary sold about half of its shares at $11.14 -- thus missing a rally that began a day later and took the share price back up to $11.32 on Aug. 19.

Canary then bought back in -- and the shares sagged again. They dumped just under $15 million worth on Sept. 2, at a share price of $11.18, then bought back in Sept. 4, at $11.22, and caught a rally that took the shares to $11.42 on Sept. 10.

They then redeemed all their shares over the next two days, exiting with a profit of $180,333, according to the court documents.

An investor who had bought in with $30 million and stayed in the fund during the same period that Canary was moving in and out would have earned far more -- $401,614 before paying any fees or commissions.

The attorney general implies that Canary's trading investments harmed small investors in the fund, siphoning off short-term profits while contributing nothing that could earn dividends for Pimco share holders.

Experts agree that is likely, noting that fund managers keep volatile investments such as market timer funds in cash -- meaning no stock or bonds are purchased with the timer money.

But because the bond funds in which Stern was playing are so large -- $4 billion to $9 billion -- their effect is measured in fractions of a percent.

[Kirk's Editor Comment: Anyone besides me get tired of this crap saying "We stole $50K from small investors but it was such a small percentage of their total net worth"?
What a load or horse manure! ]

In a 2002 paper for the Journal of Financial Economics, Jason T. Greene and Charles W. Hodges estimated that market timers cost the average mutual fund about .28 percent per year in transaction costs and lost earnings from holding their cash instead of investments.

So an investor with $50,000 in a fund with market-timers at play might lose $140 in earnings over the course of a year; one with $5,000 would lose $14.

[Kirk's Editor Comment: $14 is a nice lunch... People with 401K accounts have far more than $50K in Pimpco Bond funds... ]

Kunal Kapoor, director of fund analysis at Morningstar, a Chicago-based independent investment research firm, said it doesn't really matter whether smaller Pimco shareholders lost any money in these deals.

"It's a question of intent," he said. "One of the reasons people buy mutual funds is that it's essentially paying for equal access to an investment, where you are getting the same rights as every other shareholder," Kapoor said.

Gross said in a letter sent to clients last month that he wishes Pimco had never attracted Stern and Canary.

[Kirk's Editor Comment: Nixon wishes he never brought a tape recorder into the White House ]

He told The Register he wants Allianz AG, their Munich-based parent, to grant them a "divorce," formally separating PEA from Pimco.

Still, Gross said, he believes Canary's trading "harmed no shareholders. If any investor in our funds was disadvantaged by this arrangement, then we want to give assurances we will make it up -- in full."

Morningstar analyst Jacobson recommended last week that people holding PEA stock funds consider selling. But he was less critical of the Pimco bond funds, saying only that some employees "appear to have used poor judgement" in their dealing with Canary.

"One would frankly hope that anyone approaching the firm and even breathing the term "market-timing" would have been shown the door without delay," Jacobson wrote.

There's a lot at stake here for Gross and Pimco.

Most of its bond funds have Morningstar's top--five star--rating.

Gross appears as an expert commentator on both CNBC and CNN.

When Munich-based insurer Allianz AG bought a controlling interest in Pimco from Pacific Life Insurance in 2000, they gave Gross a seven-year contract that pays him $40 million annually for the first five years.

Allegations that portray the bond funds' practices as "down there at the bottom of the barrel," as Gross put it in his client letter, have damaged a reputation that took him 30 years to build.

The California Public Employees Retirement System is considering removing Pimco as a manager of its $208 million bond portfolio.

"They've taken a significant reputational hit," said Nell Minow, founding principal of The Corporate Library, an independent investment research firm in Maine.

But Robert Adler, president of AMG Data Services in Arcata, which monitors mutual fund inflows, said the charges don't appear to have deterred investors so far.

For the week ended Feb. 25, the most recent information available, Pimco's taxable bond funds got $1.2 billion in new money; the money market funds $22 million and municipal bond funds $28 million. Adler said that might be slightly off January's weekly inflows, but only because January was a record month for the industry.

That contrasts with investors' flight from Putnam Investments, which, according to Financial Research Corp., saw more than $23 billion in redemptions in the four month after the SEC and Massachusetts attorney general brought civil suit against the mutual fund and two former managers for allowing market timing. Putnam lost $13 billion in the first month alone.

"I don't see any evidence that Pimco's been affected," Adler said.

--By Chris Knap and Mary Ann Milbourn

-----

To see more of The Orange County Register, or to subscribe to the newspaper, go to http://www.ocregister.com

-- posted by Kirk

http://www.siliconinvestor.com/stocktalk...

Top 106. Mar 29, 2004 11:17 AM

» Kirk - Cypress Invested in a Hedge Fund short it suppliers

.
This story, if true, is quite interesting.

I would think that buying a hedge fund that would go long or short your major suppliers would be acting on illegal inside information.

Cypress Engages in Risky Business

By Troy Wolverton
TheStreet.com Staff Reporter
3/29/2004 7:26 AM EST

Cypress Semiconductor (CY:NYSE - commentary - research) and its CEO T.J. Rodgers have long been controversial. Revelations the firm owns a stake in two hedge funds raise yet another red flag in Cypress' checkered history.

The chipmaker revealed its unusual investment in a footnote buried within its annual report, filed earlier this month. Notably, Cypress only revealed its investment -- ongoing since at least 2002 -- because gains in one of the hedge funds amounted to a material portion of Cypress' 2003 pretax income.

Adding to the drama, one of Cypress' hedge fund investments held short positions in five semiconductor equipment makers, including Applied Materials (AMAT:Nasdaq - commentary - research) and Novellus Systems (NVLS:Nasdaq - commentary - research).

The revelations raise questions about what Cypress is doing with shareholders' cash and the transparency of its investments, said Todd Fernandez, a senior research associate at San Francisco-based Glass Lewis.

"Those are shareholder funds. They should either be reinvested in the business or dividended back to shareholders," Fernandez said.

Others were even more critical. Gary Lutin, an investment banker and shareholder rights advocate, likened Cypress' investments in the hedge funds to the company using shareholder funds to make a bet at the race track.

"That is not what people contribute capital to a corporation for," Lutin said.

Cypress spokesman Joe McCarthy declined to respond to the criticism or answer specific questions about the company's hedge fund investments.

"Like any company, we make certain investments. This one was approved by our board of directors," McCarthy said.

Cypress' board has approved some controversial practices in the past, and these investments will be news to most investors. Aside from those in the company's most recent annual report, no other mentions of "hedge fund" or "limited liability partnership" or "Digital Century Capital" -- the name of one of the funds -- turned up in a search of the chipmaker's regulatory filings going back to 1986.

According to the annual report, Cypress has been invested in the funds since at least 2002. But the company did not specify when it originally invested in the funds, how much it originally invested, or whether it has added to or subtracted from its original investment.

To be sure, Cypress' current stake in the two funds amounts to a small fraction of its total assets.

As of Dec. 31, Cypress owned 9.5% of Digital Century Capital fund and 13.2% of another, according to the company's annual report. The total stake in the two funds was worth $4.8 million, or less than 1% of Cypress' total assets; at year-end, Cypress held about $183.71 million in cash and $14.91 million in short-term investments.

"The partnerships are not significant to Cypress' operations and effectively represent investments primarily in equity securities by Cypress," the company said in its annual report.

But Cypress' investment in one of the two hedge funds was significant to its pretax income last year, forcing the company to disclose the investment.

In 2003, Cypress posted a pretax loss of $2.51 million and a total net loss of $5.3 million, or 4 cents per share. Meanwhile, Digital Century recorded net income of $11.59 million, of which Cypress' share was $1.5 million, according to Cypress' annual report. That amounted to about a penny a share before taxes for Cypress.

Cypress Pushes the Edge, Again

A corporate investment in a hedge fund -- at least one that is publicly acknowledged -- is unusual, said Walt Nightingale, a general partner of Nightingale & Farber, a Seattle-based hedge fund. Wealthy individuals are more typical investors in hedge funds, which are notoriously risky because, unlike most mutual funds, they are able to short stocks.

-- posted by Kirk

Top 107. Mar 29, 2004 1:20 PM

» Kirk - 24 yrs in the Slammer!

.
Words like this bring a smile to my lips.

“These people never believed they were going to be held accountable for any of the shenanigans,” he said. “If they were caught, it was, ‘Well, you get probation, go home.' That's over. This is serious business now.”

Williamson: Dynegy CEO Named Chairman; Olis Guilty

Greg Levine, 03.26.04, 11:51 AM ET

Two days ago, Dynegy (nyse: DYN - news - people ) said President and Chief Executive Bruce Williamson will take on the chairman's mantle. On Thursday, the news was not so triumphant for a former executive at the energy company. Jamie Olis, ex-senior director of tax planning, was sentenced by U.S. District Judge Sim Lake to 24 years and four months for accounting fraud. He faced a maximum term of 35 years for three parole in the federal system. "I take no pleasure in sentencing you to 292 months," Lake said. "Sometimes good people commit bad acts, and that's what happened in this case." The punishment "reflects Congress's intent that white-collar corporate fraud defendants receive harsh sentences," said Lake, who is also presiding over the cases against former Enron (otc: ENRNQ - news - people ) bigs Jeffrey Skilling and Richard Causey.

Fraud resulting in big investor losses yields long sentences

By KRISTEN HAYS The Associated Press
Posted on Sat, Mar. 27, 2004

HOUSTON — There are no more slaps on the wrist for executives who fight corporate fraud charges and lose when heavy investor losses are involved.

That's one big and painful lesson behind a 24-year prison sentence for a former midlevel Dynegy Inc. executive convicted of helping craft a scheme to inflate the energy company's cash flow.

Jamie Olis, a former vice president of tax planning at the energy company, didn't pocket multimillion-dollar bonuses or raid the corporate coffers.

But unlike more notorious executives who cut plea deals — former Enron Corp. finance chief Andrew Fastow, who agreed to serve 10 years, and former ImClone chief executive Sam Waksal, who is serving more than seven years — Olis rolled the dice with a jury and found himself held responsible for more than $100 million in stock losses.

The conviction triggered tougher federal sentencing guidelines — revised in November 2001, a month before Enron's collapse touched off a string of corporate scandals that have landed scores of former executives in court — that are driven by the size of the illicit gains or financial losses to victims. Losses exceeding $100 million automatically kick the severity of the sentences into double digits if tied to a defendant's criminal act.

“Once you get a defendant tagged with fraud involving investors, the chances of not hitting $100 million are pretty slight,” said Kirby Behre, a former prosecutor and co-author of Federal Sentencing for Business Crimes.

Olis was charged last June with conspiracy and five counts of fraud alongside his former boss and another former colleague for helping craft a 2001 deal, dubbed Project Alpha, that improperly boosted cash flow by $300 million and cut taxes by $79 million.

The two other executives pleaded guilty to conspiracy and agreed to help prosecutors in exchange for facing a maximum of five years in prison.

Even a relatively minor manipulation in a vast marketplace could cause a ripple effect that would saddle hundreds of thousands of investors with staggering losses, said Robert Mintz, another former prosecutor now in private practice.

“This is a glaring example of why there are many critics to the sentencing guidelines because, in comparison to other defendants, this sentence is difficult to justify,” Mintz said.

U.S. Attorney Michael Shelby, whose staff prosecuted Olis last year, countered that stiff sentences satisfy Congress' intent to deter corruption.

In Olis' case, U.S. District Judge Sim Lake — who is also presiding over the conspiracy, fraud and insider trading cases against former Enron chief executive Jeffrey Skilling and former Enron top accountant Richard Causey — relied on unrefuted court testimony that the University of California lost $105 million after Project Alpha came to light in April 2002. That required him to consider a prison term ranging from 24 to 30 years.

The University of California alleges in a shareholder lawsuit that it lost nearly $145 million when 2.2 million Enron shares were purchased in the years before the company failed.

And overall, Enron investors lost $50 billion when the company's 600 million shares outstanding, valued at $85 per share in January 2001, fell to pennies before Enron collapsed 12 months later.

Fastow pleaded guilty in January...

-- posted by Kirk

http://quote.bloomberg.com/apps/news?pid...

Top 108. Mar 30, 2004 12:48 PM

» Kirk - Frontrunning costs Specialists $249M

.
The Bastards get off without having to admit guilt... what a crock of smelly stuff!

SEC, NYSE Reach $242 Million Specialist Settlement (Update3)

March 30 (Bloomberg) -- The Securities and Exchange Commission and the New York Stock Exchange said the five biggest market-makers agreed to pay $241.8 million to settle accusations of trading violations.

The settlement calls for $88 million in civil penalties, $154 million to compensate customers hurt by the alleged violations, and that the firms improve oversight of their traders. The firms profited by making unnecessary trades that short-changed clients, the SEC and the NYSE said.

The SEC is pursuing a probe of individual traders, or specialists, who were responsible for managing buying and selling shares of specific companies on the exchange floor. Investigators also are examining possible failures by the NYSE to enforce its own regulations.

``No entity or person is off the table other than the firms we're settling with today,'' SEC Enforcement Director Stephen Cutler said in an interview.

LaBranche & Co., the biggest specialist firm, will pay $21.8 million in fines and disgorge another $41.7 million; Van der Moolen Specialists, the fourth biggest and a unit of Van der Moolen Holding NV, will pay $22.7 million and $35 million; Spear Leeds & Kellogg Specialists, a unit of Goldman Sachs Group Inc., will pay $16.5 million and $28.7 million; Fleet Specialists, a unit of FleetBoston Corp, will pay $21.1 million in fines and $38 million; and Bear Wagner Specialists LLC, a unit of Bear Stearns Cos., will pay $5.5 million and $11 million.

Settlement Agreement

The firms agreed to settle with the SEC's enforcement division in February, after Cutler demanded they accept the basic terms within four days or face SEC lawsuits.

Earlier today, the New York Post said the firms and the SEC had agreed to final terms of the settlement. The firms neither admitted nor denied guilt.

The NYSE said it was investigating the firms last March after Fleet reported that it found potential violations in trading by the specialist who handled General Electric Co. shares. The exchange said the probe focused on whether specialists violated a rule prohibiting them from trading with customers from their own account when they had the opportunity to match client buy and sell orders.

Expanded Probe

Under pressure from the SEC, the exchange expanded the probe to review cases when specialists made trades for their own accounts while letting customers orders wait 10 seconds or longer. Interim NYSE Chairman John S. Reed, who replaced former Chairman Richard Grasso after he was forced out last September following disclosure of his $188 million pay package, said that the SEC had replaced the NYSE in conducting the investigation.

The specialist firms negotiated to avoid fraud violations, while leaving individual traders vulnerable to possible criminal charges. More than a dozen shareholder lawsuits seeking class- action status have been filed against the firms.

The California Public Employees Retirement System, the biggest U.S. pension fund, has sued the NYSE and all seven of the specialist firms for failing to enforce trading rules.

Goldman, Fleet

Six Goldman Sachs employees who managed trading and allegedly violated exchange rules have left the company's Spear Leeds & Kellogg specialist unit, said Goldman spokesman Lucas Van Praag. Todd Christie, president of the unit, left the second- biggest NYSE specialist last March.

Fleet spokesman Charles Salmans said the firm, whose parent bank is combining next month with Bank of America Corp., will make ``appropriate decisions regarding employment'' of four individuals who are no longer trading on the exchange floor. David Finnerty, the specialist who managed trading in General Electric shares, was put on leave last year and has since left the firm.

Bear Stearns declined to comment. LaBranche and Van der Moolen didn't return calls seeking comment.

The NYSE said the settlement involves alleged violations that occurred between 1999 and early 2003 by firms that traded the following stocks:

LaBranche: Nokia Oyj, Lucent Technologies Inc., Morgan Stanley, Tyco International Ltd., Compaq Computer Corp., Merck & Co.

Spear, Leeds: America Online Inc., International Business Machines Corp., Micron Technology, Inc., American International Group, Teradyne Inc. and Verizon Communications Inc.;

Fleet: General Electric Co., Goldman Sachs Group Inc., Applera Corp.-Celera Genomics Group, J.P. Morgan Chase & Co., Charles Schwab Corp. and Johnson & Johnson.

Van der Moolen: Pfizer Inc., Nortel Networks, Ltd., Hewlett- Packard Co.; Time Warner Inc.; Walt Disney Co.; Eli Lilly & Co.;

Bear Wagner: Texas Instruments Inc., Motorola Inc., Merrill Lynch & Co., Inc., Citigroup Inc., EMC Corp., Corning Inc.

To contact the reporter on this story:
Jed Horowitz in New York at jhorowitz2@bloomberg.net.

To contact the editor of this story:
James Greiff at jgreiff@bloomberg.net.

-- posted by Kirk

Top 109. Mar 30, 2004 2:07 PM

» SteveT - SEC May Fine Edward Jones Over Fund Fees

http://story.news.yahoo.com/news?tmpl=st...

SEC May Fine Edward Jones Over Fund Fees

BOSTON (Reuters) - Market regulators may fine Edward D. Jones, one of America's largest mutual fund distributors, for not telling clients that it was collecting fees for recommending some funds more than others, the brokerage's parent company said on Tuesday.

In a regulatory filing, The Jones Financial Companies, L.L.L.P said, "the staff of the SEC informed the partnership that it is considering recommending enforcement action in connection with the partnership's mutual fund sales practices."

In the same filing the company said the staff of the NASD, the securities industry's self-regulatory body, has also recommended an enforcement action against the brokerage.

St. Louis-based Edward D. Jones' is the latest in a string of high-profile brokerage firms to be investigated for selling a certain number of funds very aggressively.

So-called revenue-sharing agreements are not illegal, but regulators insist that clients must be told about them.

In recent months regulators have investigated and fined a string of companies, including Morgan Stanley, for this practice.

According to the filing Edward D. Jones earned some $89.9 million in revenue-sharing payments last year and $85.9 million in 2002.

-- posted by SteveT