SEC and Other Investigations of Illegal Trading

Top 41. Sep 25, 2002 2:10 PM

» Kirk - Re: Homestore.com NAILED by the Feds!

In response to message posted by Kirk:

9/25/2002 04:38 PM
Story provided by Reuters

Homestore Execs Agree to Plead Guilty

By Deborah Charles

WASHINGTON (Reuters) - Three former executives of online real estate firm Homestore Inc. (HOMS) have agreed to plead guilty to fraudulently inflating the company's revenue, U.S. Attorney General John Ashcroft said on Wednesday.

The U.S. government filed a criminal information in Los Angeles charging Homestore's former Chief Operating Officer John Giesecke and former Chief Financial Officer Joseph Shew with conspiracy to commit securities fraud.

Giesecke was also charged with wire fraud and former vice president John DeSimone was charged with insider trading.

In plea agreements filed on Wednesday, the three men agreed to cooperate with the ongoing investigation into Homestore.

Ashcroft told a news conference that Homestore had fraudulently recognized about $46.4 million in bogus revenue in the first three quarters of fiscal 2001.

But, he said no charges would be brought against Homestore itself because the company cooperated in the investigation into extensive accounting errors.

The California-based company said last year it would launch an internal audit into its accounting. The deals it was looking into reportedly involved companies including America Online, the Internet arm of media giant AOL Time Warner Inc (AOL) .

Ashcroft would not comment when asked if AOL was being investigated in connection with the Homestore case.

In August, AOL Time Warner said America Online may have improperly accounted for three advertising deals with revenue totaling $49 million.

One source said on Wednesday the Securities and Exchange Commission informed AOL that it was not a target in the Homestore investigation but was a third-party witness.

COMPLICATED SCHEME, 'BOGUS REVENUE'

The three executives are to be arraigned in Los Angeles next month.

The SEC filed civil charges against them, and though none of the men admitted or denied the SEC's allegations they agreed to return $5 million to shareholders to pay back the money they fraudulently earned in trading profits plus interest.

Shew and Giesecke were permanently banned from serving as officers or directors of a public company while DeSimone was barred from those roles for 10 years.

Ashcroft said the action against Homestore showed that the government would pursue corporate law breakers regardless of the size or prominence of the company.

"So whether you are an executive at a Fortune 100 firm or an Internet start-up, if you victimize investors and employees, you will face investigation, prosecution and prison for your crimes," he said.

Ashcroft said Giesecke and Shew joined in a scheme from March 2001 to December 2001 to defraud investors by manipulating Homestore's reported revenue.

The conspiracy involved an illegal practice known as "round-tripping," when a company fraudulently inflates the revenue it reports to the investing public.

The round-trip transactions involved the flow of money out of Homestore through middlemen, then back to Homestore so the company could claim those funds as new revenue even though the transactions never had an economic effect on the company.

One example outlined in the criminal information involves an agreement Homestore entered in the first two quarters of 2001 with a "major media company."

In the deal, Homestore agreed to refer advertisers to the media company to purchase online advertising. The company then agreed to buy online advertising from Homestore, dependent on the amount of advertising purchased by Homestore's referrals.

The company paid about $49.8 million to the advertisers in 16 separate transactions in first and second quarters of 2001.

The advertisers then paid about $45.1 million to the media company to buy online ads. Homestore recognized about $36.7 million in revenue from the media company's related purchase of advertising and Homestore included the "bogus" revenue from the transactions in its financial statements. (Additional reporting by James Vicini and Reshma Kapadia)

-- posted by Kirk

Top 42. Sep 27, 2002 6:41 AM

» Kirk - SEC may punish execs who got IPOs

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To:mmmary who wrote (80523)
From: NoBusinessWire.com Friday, Sep 27, 2002 9:25 AM
http://www.siliconinvestor.com/stocktalk...

SEC may punish execs who got IPOs
Enforcement would shift from brokers to CEOs

By Susan Pulliam, Randall Smith and Michael Schroeder
THE WALL STREET JOURNAL

The Securities and Exchange Commission, in a significant shift, is considering enforcement actions against corporate executives who received shares of hot IPOs, people close to the agency say.

THE SEC PLAN TO consider action against executives who received allocations of initial public offerings of stock is an expansion of regulators’ scrutiny of the practice known as “spinning” — in which Wall Street firms steer allocations of sought-after IPOs to executives of favored investment-banking clients in return for financing business from their firms.

[Kirk here: Some of us call this a bribe and don't mince words.]

The SEC’s effort is an outgrowth of a broader bid by the agency to address conflicts of interest on Wall Street. SEC Chairman Harvey Pitt, in a series of measures that soon will be disclosed, is expected to require for the first time that Wall Street stock-research departments clearly be split from investment-banking operations, people familiar with a proposal being formulated say. It isn’t clear whether Mr. Pitt will press for a total separation or something less severe.

Mr. Pitt also is expected, through a combination of proposed rules and enforcement actions, to require Wall Street firms to formally separate their IPO-allocation businesses from their investment-banking departments, these people say. The SEC also is considering actions that would require corporate executives to disclose to their own boards the IPOs they receive from investment-banking firms. Whether this would require a new SEC rule isn’t clear. The development stems from an investigation this year by the SEC, the National Association of Securities Dealers and legislators into the practice of spinning which first came to light more than five years ago but has so far escaped regulatory action. Until now, much of the focus by regulators has centered on whether the practice of spinning represented an illegal quid pro quo on the part of securities firms by tying IPO shares to investment-banking services.

As the ramifications of the IPO probe spread beyond Wall Street to corporate executives, the question is whether these executives breached their fiduciary duties by receiving IPO profits that may have belonged to their companies.

The focus on executive conflicts relating to receiving IPO shares draws attention again to a legal theory that was visited by the SEC five years ago when it looked at the practice of spinning. The legal doctrine, known as “corporate opportunity,” states that corporate executives can’t take advantage of opportunities that come to them through their position at a company without first offering the opportunity to the company.

The basic idea is that directors and officers of companies owe a duty of loyalty to the company they serve. One other element of any potential enforcement action against corporate executives is likely to center on SEC disclosure laws. If an executive failed to disclose receiving IPO shares and those allocations resulted in a breach of corporate duty, the SEC could potentially have grounds for fraud charges, people close to the situation say.

With the new tack by the SEC, there will be more scrutiny on executives who received large amounts of IPO shares during the technology-stock boom, such as former WorldCom Inc. chief executive, Bernard Ebbers, who made $11 million in trading profits during a four-year period on shares of initial public offerings he received from Salomon Smith Barney, according to document turned over to a congressional committee in recent weeks.
The most high-profile focus of the SEC’s new overhaul effort is likely to be its proposal to separate research from banking. Currently, most Wall Street analysts work for research groups that are separate from investment banking, but still work hand-in-glove with bankers. Although recent regulatory reforms have imposed some limits around the edges on their dealings with bankers and corporate executives, analysts still can benefit from investment-banking fees as long as their pay isn’t tied to specific deals.

Major Wall Street firms are on the fence about the potential shift until they learn more about it. In a worst-case scenario for the firms, analysts would have to be completely separated, working for an independent entity in a way that would deprive the firms of offering a sympathetic hearing from a star analyst as part of their package of services.

The issue of conflicts on Wall Street has been roiling major securities firms and the markets this year. Following a high-profile action by Mr. Spitzer against Merrill Lynch & Co. in May, Mr. Spitzer, the SEC and the National Association of Securities Dealers have been conducting investigations into conflicts on Wall Street.
The NASD has interviewed current and former Wall Street employees regarding the practice. In particular, the NASD has been asking questions about the role in doling out IPOs to executives played by Frank Quattrone, top technology-industry banker at Credit Suisse Group’s Credit Suisse First Boston. Mr. Quattrone’s San Francisco banking group oversaw “friends of Frank” accounts that funneled hot IPOs to technology-banking clients of the firm. CSFB has long maintained that its practices are in line with the industry.

Perhaps in anticipation that regulators might argue IPO allocations given to executives of investment-banking clients would violate the “corporate opportunity” doctrine, securities firms have argued that the IPO allocations were given to clients who were important brokerage clients of the firm in their own right.

[Kirk: Yes and I have a red bridge located in SF that those securities firms might be interested in buying. You get $5 every time a car drives across it!]

— Charles Gasparino in New York contributed to this article.

-- posted by Kirk

Top 43. Oct 1, 2002 8:51 AM

» Kirk - "We Support Pigs"

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Says Solly's advice is "worthless"... jeeze...

SOLLY'S ‘PIG' OUT

By JESSICA SOMMAR
http://www.nypost.com/business/58394.htm

October 1, 2002 --

Prosecutors came out swinging yesterday against greedy telecom bigwigs, but it's Citigroup that's taking the worst beating.

New York Attorney General Eliot Spitzer's suit to recover $1.5 billion in IPO profits from former CEOs revealed damning e-mails from Citi's Salomon Smith Barney unit that labeled some investment banking clients "pigs" and questioned the quality of research the firm's analysts produced.

In one e-mail to U.S. research chief Kevin McCaffrey, star telecom analyst Jack Grubman admitted: "Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got a huge pushback from banking. I wonder what use bankers are if all they can depend on to get business is analysts who recommend their banking clients."

The suit was reminiscent of Spitzer's move in April to release Merrill Lynch e-mails revealing conflicts among analysts and stocks they covered.

The complaint details Grubman's pitiful record at the firm. Of the 20 to 36 stocks Grubman recommend from 1998 through June 2002, 16, or almost 50 percent, went bankrupt.

Yet Grubman never issued a "sell" rating on any of them, the complaint noted. In fact, an e-mail shows that Grubman admitted he wasn't giving his true rating to some firms.

"If I so much as hear one more ****ing peep out of them [Focal Communications - a telecom that Salomon took public] we will put the proper rating (i.e., 4) [underperform] not even 3 [neutral] on this stock, which every single smart buy-sider feels is going to zero. We lost credibility on MCLD [McLeod USA] and XO [Communications] because we support pigs like Focal," the complaint said Grubman wrote on Feb. 21, 2001.

Grubman's high ratings on questionable stocks so infuriated his own brokers that he was voted the worst analyst for 2000 and 2001, the complaint said. In fact, Jay Mandelbaum, the head of Solly's retail brokerage unit, called the firm's research "basically worthless" and threatened to end his division's financial contribution to it.

Among other claims made in Spitzer's suit, filed in New York Supreme Court, is that in January 2000, Salomon's top research execs held a "Best Practices Seminar" allegedly to teach its analysts how to fudge their financial models to help investment banking clients meet earnings expectations.

"Overall . . . remember that those first two quarters have got to be hit and have nothing to do with how we're gonna really probably do valuation of the company," the complaint said, quoting from what analysts were told at the seminar.

"This is of staggering significance. These are patently offensive types of conduct," said securities lawyer J. Boyd Page.

"It probably goes beyond smacking of fraud. It is virtually an instruction on how to commit fraud," said Page, of Page Gard Smiley & Bishop in Atlanta

Citigroup settled for $5 million charges by the National Association of Securities Dealers that Grubman and another analyst published tainted research to retain now-bankrupt Winstar Communications' investment banking business. Grubman and his assistant have contested the charges.

Grubman's lawyer said in a statement: "The suggestion that [his] research was . . . altered to help enrich executives who received IPO allocations or to obtain their investment banking business is categorically false."

Citigroup, in a statement, declined to comment.

Spitzer's suit seeks to recover millions made by telecom senior execs - like Bernie Ebbers, former founder and CEO of WorldCom, and 4 others - from allocations of coveted IPO shares they got from Salomon Smith Barney.

-- posted by Kirk

Top 44. Oct 5, 2002 8:23 PM

» Sinewave - Pitt Criticized for Meeting

Talk With Bank Chairman Inappropriate, Say Democrats

By Washington Post Staff Writers
Saturday, October 5, 2002; Page E03

Harvey L. Pitt, the chairman of the Securities and Exchange Commission, damaged his credibility and that of the agency by meeting last month with the chairman of an investment bank under SEC investigation, congressional Democrats said in a letter to Pitt released yesterday.

The meeting appears to have contradicted Pitt's past pledge "to avoid even the appearance of impropriety in instances where such meetings could be misconstrued," said Reps. John D. Dingell (Mich.) and Edward J. Markey (Mass.), the ranking Democrats on the Committee on Energy and Commerce and its subcommittee on telecommunications, respectively.

Pitt gave lawmakers that assurance earlier this year after it was reported that he met privately with the heads of Xerox Corp. and the accounting firm KPMG LLP while the SEC was investigating both for possible securities fraud. Pitt had represented KPMG as a lawyer in private practice.

The Democrats' Oct. 3 letter was prompted by a Washington Post report that Pitt sought the meeting with Goldman's Henry M. Paulson Jr. to discuss how Goldman and other firms could restructure to eliminate conflicts of interest that result from their dual roles providing investors with research on companies and helping those same companies sell stock to investors.

The SEC is reportedly investigating whether Goldman issued misleading research reports and how Goldman allocated shares in initial public offerings to companies that used the firm's banking services.

Pitt's meeting with Paulson did not include representatives of the SEC's enforcement division, which is responsible for investigations.

"[T]he exclusion of enforcement staff signals to firms under investigation by the Commission that they can influence the course of inquiries by making their case directly to Commissioners," Dingell and Markey wrote. "That you requested this particular meeting . . . only heightens our concern about your judgment," they added, asking Pitt for an explanation.

An SEC spokesman declined to comment.

Lucas van Praag, a spokesman for Goldman Sachs, said "there was no discussion of any enforcement matter" at the meeting.

However, sources at the SEC and in the financial industry said any settlement of enforcement actions could depend on what steps investment banks are required to take to restructure their businesses.

Also at the meeting were Pitt's chief of staff, Mark Radke, and the SEC general counsel, Giovanni P. Prezioso, sources said.

Under ethics rules, SEC officials are supposed to recuse themselves from matters that involve former clients. Sources said Prezioso is supposed to recuse himself from matters concerning Goldman Sachs. Reached by phone this week, Prezioso would not comment on the meeting or on his restrictions.

Others familiar with the meeting said Prezioso thought he did not have to recuse himself because Goldman Sachs itself was not discussed, only how the company and its competitors might change the operations of their research and investment banking business to avoid the types of conflicts the SEC is investigating.

In another development yesterday, House Minority Leader Richard A. Gephardt (D-Mo.) and two other senior Democrats urged Pitt not to bow to pressure from the accounting industry by rejecting pension fund executive John H. Biggs for the chairmanship of a newly created board to police the industry. Biggs has called for tighter restrictions on corporate auditors.

Washingtonpost.com

-- posted by Sinewave

http://www.boston.com/dailynews/280/econ...

Top 45. Oct 7, 2002 5:53 PM

» Kirk - CSFB - Credit Suisse First Boston

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I wonder if it is too late to short CSFB?
These people deserve jail time at a minimum.
Kirk

Documents suggest CSFB used favorable stock coverage to solicit investment banking business

By Justin Pope, Associated Press, 10/7/2002 17:33

BOSTON (AP) Making a pitch for new business, Credit Suisse First Boston told a prospective client it would conduct more forgiving research than competitors, according to documents being gathered to support a possible criminal case against the Wall Street firm.

The documents, gathered by Massachusetts securities regulators, appear to show the company deciding to resume research coverage of a technology company once it had paid investment banking fees.

In an e-mail from March 2001, Frank Quattrone, a high-profile CSFB investment banker, was told by a colleague that Research in Motion, the company that makes the BlackBerry wireless e-mail device, should return to ''most favored nation status'' now that the company ''paid us the extra $1.8 (million) we asked for.''

The documents, obtained by The Associated Press, are part of an investigation by Massachusetts Secretary of State William Galvin, the state's top securities regulator.

They offer the latest look into the once-common Wall Street practice in which financial firms offered research coverage of a company's stock in exchange for its investment banking business.

Last month, Galvin's office gave evidence involving CSFB to New York Attorney General Eliot Spitzer, saying the company may have broken the law. Spitzer's office has not decided whether to pursue criminal charges.

Galvin did not immediately return a phone message Monday. In published reports, he called the documents ''a smoking gun'' and said they indicate possible criminal activity.

CSFB spokeswoman Victoria Harmon declined to comment directly on the e-mails but said: ''We welcome the participation of Mr. Galvin in a new coalition of state and federal regulators who are trying to move these issues forward towards constructive resolution to restore investor confidence. We are very confident that after learning the facts the New York attorney general will determine that a criminal proceeding is not warranted against the firm nor any of its employees.''

Harmon said the company has made systematic changes in its practices in recent years.

In the e-mail about RIM, CSFB investment banker Chris Legg wrote to Quattrone and others that ''Now that the fee issue is behind us, I would ask that we return them to 'most favored nation' status.''

Legg, no longer with the company, wrote, ''I do believe if there were a significant M&A trade, they would use us'' and said he had told the company CSFB would resume coverage.

The documents also include a July 1999 CSFB presentation for new clients that indicated with charts that the company was more forgiving than competitors in the research ratings it assigned to clients' stocks.

Also on Monday, CNBC, citing unidentified sources close to the firm, said CSFB was expecting to announce job cuts totaling 20 percent of its work force. Quattrone's technology investment banking division could face 40 percent cuts, the network said. Harmon, the CSFB spokeswoman, declined to comment.

http://finance.yahoo.com/q?s=CSR&d=c&t=5...

-- posted by Kirk

Top 46. Oct 11, 2002 3:12 PM

» Kirk - Scam via Business Week magazine

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To:Anthony@Pacific who started this subject
From: mmmary Thursday, Oct 10, 2002 6:57 PM
View Replies (2) | Respond to of 80969

An interesting scam

I never would have thought about people doing this. I guess it's kinda like when people at cnbc were leaking out the names of the stocks that'd be talking about the next day on their show.

Securities and Exchange Commission
Washington, D.C.
Litigation Release No. 17784 / October 10, 2002
Securities and Exchange Commission v. Lionel P. Thotam
02-CIV-5466 (ARL) (E.D.N.Y.)

SEC Sues Insider Trader Who Got Advance Business Week Magazine Information from U.S. Postal Worker

The Securities and Exchange Commission announced today that it filed a Complaint against Lionel P. Thotam of Lockport, Illinois for illegally trading on misappropriated information about fifty-one companies featured in the "Inside Wall Street" column of Business Week magazine. The Commission alleged that Thotam, then a New York City rent examiner, illicitly obtained the information from a postal worker friend who read the relevant portions of the magazine to him before public release, in violation of postal regulations. Thotam traded in the "Inside Wall Street" stocks for nearly two and a half years, reaping profits of $77,213.38.

The Commission also announced that it has reached a settlement with Thotam. Thotam has consented, without admitting or denying the allegations of the Commission's Complaint, to the entry of a final judgment that (1) permanently enjoins Thotam from future violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and (2) orders Thotam to disgorge the $77,213.38 in profits and to pay prejudgment interest in the sum of $22,337.20 (subject to a credit for amounts he pays toward any restitution ordered in connection with parallel criminal charges to which he pled guilty today). The Commission has submitted the proposed final consent judgment to the United States District Court for the Eastern District of New York.

The Commission's Complaint alleges as follows:

From August 1996 through January 1999, Thotam used information misappropriated from Business Week magazine before its public release to execute in excess of sixty-four trades in the securities of fifty-one companies featured in forty-three IWS columns. Thotam improperly obtained this information from a friend employed by the United State Postal Service, who, at Thotam's request, read the column when the magazine passed through a Mount Vernon, New York postal sorting facility on its way to subscribers and news stands. The postal worker tipped the information to Thotam in violation of Postal Service confidentiality requirements. Thotam paid the postal worker $10,000 for the information. Thotam placed all of his purchase orders shortly before the close of the market on Thursday afternoons, before the magazine's release later that evening, and Thotam generally sold the shares the next day for total profits of $77,213.38. By these actions, Thotam violated the antifraud provisions of the Exchange Act.

The Commission acknowledges the assistance of the American Stock Exchange and the United States Attorney's Office for the Eastern District of New York.

-- posted by Kirk

Top 47. Oct 21, 2002 7:50 PM

» Kirk - SEC to charge Martha Stewart

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4:42pm 10/21/02
SEC to charge Martha Stewart: WSJ (IMCL, MSO) By Rex Nutting
The Securities and Exchange Commission has told Martha Stewart it intends to file civil securities charges against her in connection with her sales of ImClone (IMCL) stock last December, the Wall Street Journal reported, citing sources "familiar with the matter." Stewart, CEO of Martha Stewart Living (MSO) and a friend of ImClone founder Sam Waksal, sold 4,000 shares of ImClone just before the Food and Drug Administration released negative news about ImClone's promising cancer drug. The SEC staff sent Stewart a so-called Wells Notice, which gives her time to respond to the allegations before formal charges are filed. The SEC had no comment.
http://cbs.marketwatch.com/news/newsfind...

-- posted by Kirk

Top 48. Nov 5, 2002 6:40 PM

» Kirk - Harvey Pitt RESIGNS!

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Ding dong the incompetant fool is gone!

It was hard to believe president Bush kept this liability around for so long what with the stock market being decimated by lack of investor trust and this guy only making matters worse.

-- posted by Kirk

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

Top 49. Nov 12, 2002 1:12 PM

» SteveT - SEC Hat trick

They are 3 for 3. First Pitt then Herdman, now Webster.

Business - Reuters
Accounting Board Chief Webster Steps Down
41 minutes ago

By Kevin Drawbaugh and Susan Cornwell

WASHINGTON (Reuters) - Former FBI (news - web sites) chief William Webster has resigned as chairman of a new U.S. board that will police scandal-tarred corporate accountants amid controversy over his ties to a company accused of fraud, according to a letter obtained by Reuters on Tuesday.

In the letter, Webster wrote to Securities and Exchange Commission (news - web sites) Chairman Harvey Pitt: "It is with regret that I inform you of my intention not to serve as chairman or member of the Public Company Accounting Oversight Board which is in process of organization."

Citing the controversy surrounding U.S. Technologies Inc., a small company where he was chairman of the audit committee, Webster wrote: "I now believe my continued presence on the board will only generate more distractions."

SEC spokeswoman Christi Harlan said she could not confirm or deny whether the 78-year-old former federal judge had stepped down.

Webster could not be reached at his office.

His departure leaves the board without a leader, less than three weeks after it was set up by the SEC. Congress ordered the creation of the board to crack down on auditors and bolster investor confidence after a slew of corporate scandals that began last fall with the collapse of Enron Corp. .

SEC Chairman Harvey Pitt and SEC Chief Accountant Robert Herdman, who had backed Webster for the job. resigned last week. They failed to disclose to SEC commissioners and the White House the information related to Webster's former role at U.S. Technologies, which is based in Washington.

The accounting board was scheduled to hold its first meeting, largely organizational, in Washington on Wednesday.

Sources said they were uncertain how the SEC would proceed in naming a new chairman or an interim chairman from among the board's four other members.

Congress ordered the creation of the board as part of the sweeping Sarbanes-Oxley Act, passed in July, with unprecedented powers to regulate corporate accountants. The profession had previously been largely self-regulating.

"Those who know me will appreciate that I do not abandon duty lightly. It is time to clear the air," Webster wrote to Pitt. "A new SEC chairman will no doubt wish to have a part in the selection process of a new board chairman who can devote his or her full energy to building this important enterprise. That is my hope and my reason for giving up the position to which I was elected."

-- posted by SteveT