June 24, 2017

Sketch Guy: Be Wary of Even ‘Safe’ Investments

What makes an investment “safe”?

I’ve always considered this a loaded question (what does “safe” actually mean, anyway?). It’s rarely the right question to ask. But it comes up pretty often for an average investor, and rarely for the right reasons.

Consider the recent allegations leveled by the Securities and Exchange Commission at a financial adviser and wedding singer (apparently a successful one), Larry Dearman Sr., and his friend Marya Gray. According to the commission, Mr. Dearman and Ms. Gray convinced investors that “they were investing in an Internet company, a real estate business and another firm that were controlled by Ms. Gray.”

Instead, the S.E.C. said in its complaint that the pair defrauded investors of $4.7 million in investments, and stole about $700,000. And they persuaded people to invest by assuring them that the investments “bore little to no risk.”

How did they persuade the 30 people to invest? According to the complaint, many had known Mr. Dearman and his family since childhood, “thought of him as an active member of their church and knew him as a popular local wedding singer.” In other words, they thought it was safe to invest because they knew Mr. Dearman. After all, why would a guy who sings at weddings steal your money?

But it’s not just people that you personally know who are promising safety and then failing to deliver, as a recent example out of Spain made clear. A few weeks ago The New York Times highlighted a “safe” investment that was promoted to Spanish investors by Spanish bank officials. As a result, about 300,000 Spanish investors over the last four years lost $10.3 billion collectively, and it was in investments that they were told qualified as “safe.” I encourage you to read the original article, but the basics are this:

During the economic crisis four years ago, Spanish bank officials started recommending an investing “product” with a 7 percent return. That’s a great return, right? Investors, on average, put in $40,000. It’s not a huge amount, but it reflected the type of individuals who were pitched this “product” — lifelong savers who wanted to protect their money. As with the S.E.C.’s complaint against Mr. Dearman and Ms. Gray, it turns out that what the banks offered wasn’t much of an investment:

“Bank officials hit on the idea of raising capital and cleaning debts off their books by getting people with savings accounts to invest in their banks instead,” the Times article recounted. “For many of these savers, the first hint of trouble — and understanding that they had bought into risky investments — was when some of these banks essentially failed about two years ago. Overnight, they were unable to withdraw their money. Soon, they came to understand that they had purchased complex financial products, originally designed for sophisticated investors. They had become creditors, and not at the head of the line, either.”

Both of these episodes, and the many comparable stories we’ve heard over the years, should make us think hard about pursuing the idea of “safe.” So next time your friend or a big bank suggests a great deal for you that is just as safe as a CD, but will deliver amazing returns, keep a few things in mind:

■ There are people out there trying to sell you junk. They know it’s bad, and they don’t really care much about you and your needs. They will even lie to you.

■ When something is too complex to understand, either run as fast as you can or hire an independent professional to help you navigate the complexity. Don’t just guess and hope you understood correctly.

■ That said, getting professional advice at some level requires trust, but not blind trust. You can’t trust anyone blindly. I’d suggest following the Russian proverb that Ronald Reagan adopted during the cold war: trust, but verify.

■ When something appears too good to be true, it often turns out that it is. It may not happen immediately, but at some point there will be a consequence.

■ Ultimately we have to take responsibility for our own decisions. This is painful. After all, the system doesn’t always work the way we think it should. People lie. People steal. And institutions we thought we could trust let us down. But it’s the system we have right now, and even as we look for ways to improve it and get justice for bad behavior, we can’t pretend that how we behave isn’t part of the solution, too.

I feel horrible for the investors who lost money to the wedding singer and to Spanish banks. Both stories, however, reinforce the reality that the question — is it safe? — doesn’t tell us much. If we want to protect ourselves from individuals and institutions alike, we need to ask questions that help us uncover the real motives and whether it’s in our best interest to trust what we’re being sold.

Article source: http://www.nytimes.com/2013/09/03/your-money/be-wary-of-even-safe-investments.html?partner=rss&emc=rss

BBC Faces New Allegations of Sexual Abuse

Thirty-six of the new accusations are from complainants who were under the age of 18 at the time of the alleged assaults.

The disclosures raise new questions about the workplace culture at the BBC, the behavior of its employees, and what it may have condoned or overlooked over the years. They also show how the broadcaster is still consumed with the fallout from the case of Mr. Savile, a larger-than-life BBC star who died in 2011 at the age of 84 and who was later unmasked as a serial sexual predator with dozens of victims over four decades.

The new figures were first reported by The Daily Telegraph, which unearthed them through a Freedom of Information request. The BBC subsequently made its response available to other news organizations.

The broadcaster would not comment on any specific cases, but it said in a statement that it was “appalled” by the allegations.

“We have launched a series of reviews that aim to understand if there are any issues with the current culture of the BBC or the historic culture and practices from as far back as 1965,” the statement said, “to see what lessons can be learned to prevent this happening again.”

The report shows that 40 of those accused currently work for or contribute to the BBC, while 41 are dead or employees from long ago. Of the 152 separate complaints, 48 involve Mr. Savile, who died before the revelations about him came to light.

Some of the allegations did not involve criminal acts and were investigated internally, the BBC said, while the rest were reported to the police. The police have investigated or are investigating the allegations against 25 of the current employees or contributors, the broadcaster said. So far, the investigations have led to the conviction of one person who is “no longer employed by the BBC” and is awaiting sentencing, the report says.

That is most likely a reference to Stuart Hall, 83, a former BBC personality who recently admitted molesting 13 girls, ages 9 to 17, from 1968 to 1986.

The Savile case provoked a crisis in the BBC, Britain’s public broadcaster, and led to the resignation of its director general and to numerous personnel and structural changes. The broadcaster now faces the prospect of lawsuits brought by victims of Mr. Savile and Mr. Hall and a long period of more investigations into its culture, involving current practices and events from as long ago as the 1960s.

An independent report released in early May, one of many commissioned by the BBC in the aftermath of the Savile scandal, painted a picture of an organization with a “visible, frequent and consistent” culture of bullying, anxiety and fear.

“It may be bullying or harassment, it can be rudeness, victimization or verbal abuse, but whatever the definition or action, people recognize it as simply ‘wrong,’ ” said the report, prepared by a lawyer, Dinah Rose.

The report said that victims were afraid to complain, and that those who did often found their concerns “swept under the carpet or referred elsewhere,” never to be dealt with.

Tony Hall, the BBC’s director general, said at the time that the broadcaster was conducting a thorough overhaul of its culture.

“I want zero tolerance of bullying and a culture where people feel able to raise concerns and have the confidence they will be dealt with appropriately,” he said. “I also want people to be able to speak freely about their experiences of working at the BBC so we can learn from them.”

Article source: http://www.nytimes.com/2013/05/31/world/europe/bbc-receives-new-allegations-of-sexual-abuse-by-its-employees.html?partner=rss&emc=rss

High & Low Finance: How S.&P. Tempted Arthur Andersen’s Fate

They were the gatekeepers, with a clear conflict of interest — the people they were supposed to check up on were also the ones who hired and paid them. The need to protect their reputation was supposed to assure that the conflict would not lead to bad behavior.

But it did not. Those within the firm who wanted to be tough found themselves outmaneuvered by those who wanted to make compromises to keep business that might otherwise be lost to competitors — competitors who were not above making compromises themselves. It was not that they wanted to act badly, only that they did not want to offend important customers. They had no idea that the corners they were cutting would blow up into a scandal that would dominate the news, shock the nation and lead to the demise of the firm.

That is a description of what happened to Arthur Andersen, the accounting firm, more than a decade ago.

It may turn out to be a description of what will happen to Standard Poor’s, the ratings agency, as a result of its behavior during the housing boom.

The good news for S. P. is that it faces only civil liability from the suit filed this week by the Justice Department. It was the criminal complaint against Andersen that sealed the firm’s fate.

But the allegations in the suit are reminiscent of what happened at Andersen, whose image had previously been of being the most independent, and most committed to quality accounting, of the major firms.

Until now, the role of the credit ratings agencies in the financial crisis had seemed — to me, at least — to be defensible. They may have been foolish or even stupid, but they were not venal. They applied their models in good faith in rating mortgage-backed securities. Their models proved to be overly optimistic, but the housing collapse was an unprecedented event. Being wrong is not a crime.

The Justice Department suit offers a different sequence of events. As the housing bubble grew, and the revenue from rating the deals skyrocketed, S. P. was determined to stay competitive with other agencies — Moody’s and Fitch — in getting the business. That led to tinkering with models and ignoring inconvenient evidence so as to produce the ratings that were desired by the banks putting together the deals. Even when it became clear that new deals did not deserve the ratings they were getting, S. P. chose to issue high ratings.

By not filing criminal charges, the government got a lower burden of proof — preponderance of the evidence rather than beyond a reasonable doubt — while the potential for a $5 billion fine provides punishment as severe as any criminal case against a corporation could.

It is important to understand the financial alchemy that was involved in rating mortgage securitizations.

In the corporate world, to get a top rating a company has to have a sterling balance sheet and good prospects. But not in the world of securitizations. The logic was that a lot of clearly risky subprime mortgages could be put together and — presto, become mostly AAA in a residential mortgage-backed security, or R.M.B.S. Since it was extremely unlikely that more than, say, 20 percent of the mortgages would default, 80 percent of the money that financed them could be raised by issuing AAA-rated securities.

And the agencies took that one step further. Put together junior securities from a bunch of such deals and issue a new securitization, called a collateralized debt obligation, or C.D.O., and most of it was AAA too.

The result was that the boom in subprime lending was financed by investors who were told they had supersafe securities. The bubble would not have happened without S. P. and its peers.

The Justice Department has evidently been through every memo, e-mail and text message sent out by S. P. analysts and executives from 2004 through 2007, and found some that sound as if bosses were putting the short-term commercial interests of S. P. — both the fees it got and the need to maintain good will with the investment bankers who chose which rating firm to use — ahead of truth.

The most recent events the government complains about happened in 2007, and there are five-year statutes of limitations in some fraud laws. So the government turned to a 1989 law that makes it illegal to defraud a bank — a law passed during the savings and loan scandals — that has a 10-year statute of limitation, and cites case after case where banks bought the securities S. P. rated, and lost money. Some of those cases sound real, but as Jonathan Weil of Bloomberg News has pointed out, in some cases the bank that S. P. is supposed to have defrauded is the very same bank that put together the securitization, and kept part of it. It seems like a stretch.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/02/08/business/sp-may-have-tempted-arthur-andersens-fate.html?partner=rss&emc=rss

Executives Organized Olympus Cover-Up, Panel Finds

TOKYO — Top executives at Olympus, the Japanese maker of cameras and medical equipment, devised an elaborate scheme to cover up investment losses involving at least $1.7 billion and should face legal action, a third-party panel said Tuesday in a highly anticipated report that called the company’s management “rotten to the core.”

The panel’s findings appeared to vindicate, to a great extent, the company’s ousted president, Michael C. Woodford, who had made public allegations and called for an inquiry into a series of exorbitant acquisition payments made by the company before his tenure. Mr. Woodford has called for the entire Olympus board to resign and has said he is in talks with shareholders to help install fresh management at the company.

The report also highlights the role played by three former Nomura bankers in arranging the cover-up, as well as alleged failings of Olympus’s auditors, especially KPMG’s Japan affiliate, in exposing fraud at the company. It alleges that several banks, including Société Générale, submitted incomplete financial statements to auditors, in effect aiding the cover-up.

“The management was rotten to the core, and infected those around it,” said the report, more than 200 pages long with appendices.

Still, concerns remain over the true independence of a panel appointed by the Olympus board, as well as just how fully a monthlong investigation could have investigated a complicated program involving numerous overseas funds and financial advisers. The panel cleared the cover-up of alleged links to Japan’s notorious criminal underworld, for example, despite acknowledging that it did not know for sure where some of the money ended up or whether individuals had pocketed money.

The possibility of organized crime involvement in the cover-up had become a critical issue in the investigation, as any proof of mob links could wipe out all shareholder value in the company by causing its shares to be delisted from the Tokyo Stock Exchange. The Japanese police are investigating possible links to organized crime, according to several people close to the inquiry.

Tatsuo Kainaka, the panel’s chairman and a former judge of Japan’s Supreme Court, acknowledged that a forensic accounting by Olympus’s auditors, as well as an investigation by the Japanese and overseas authorities, was needed to bring all facets of the scheme to light.

“We do not know for sure where funds ultimately flowed to and how,” Mr. Kainaka said at a news conference after the report’s release. But the panel “could not find any evidence of a flow of funds to organized crime,” he said.

In a separate statement, the Tokyo Stock Exchange warned that the company could still be delisted if it failed to meet a Dec. 14 deadline to submit its latest financial statement. Olympus shares have already lost half their value in the scandal.

According to the report, Olympus executives plotted with several former investment bankers to hide ¥117 billion in losses made from investments that went sour in Japan’s stock bubble crash in the early 1990s.

The company later used a series of acquisition-related payouts to settle those losses, including an outsize $687 million in fees paid to a now-defunct fund incorporated in the Cayman Islands for Olympus’s takeover of a British medical equipment maker in 2008. Olympus also paid $773 million for three companies in Japan that appeared unrelated to its main business, including a face cream maker, only to quickly write down the bulk of their value.

The report denied speculation that those acquisitions had been made solely to cover up losses. However, Olympus executives saw the purchases as an opportunity to hide irregular transactions, the report said.

The report also alleged that Olympus’s auditors KPMG AZSA and Ernst Young Nippon had not done enough to expose Olympus’s financial maneuvers. In 2009, KPMG AZSA raised serious concerns with the company’s recent acquisitions, the report said, but backed down and gave Olympus’s finances the all-clear when the company insisted that a third-party inquiry had found nothing wrong.

Article source: http://www.nytimes.com/2011/12/07/business/global/banks-aided-in-olympus-cover-up-report-finds.html?partner=rss&emc=rss

Madoff Trustee Seeking Billions More From JPMorgan

Mr. Picard had sought $5.4 billion in damages previously in addition to $1 billion in transfers and claims.

JPMorgan “was an active enabler of the Madoff Ponzi scheme,” David Sheehan, Mr. Picard’s lawyer, said in a statement. JPMorgan officials “not only should have known that a fraud was being perpetrated, they did know,” he said.

Mr. Picard, who has filed 1,000 lawsuits, claiming $90 billion for Madoff investors, first sued JPMorgan in bankruptcy court in December, contending it ignored signs of fraud as billions of dollars flowed from Mr. Madoff’s account at the bank to investors. JPMorgan was Mr. Madoff’s primary banker.

The lawsuit sought $1 billion in fees and transfers, and $5.4 billion in damages, contending that JPMorgan defrauded federal regulators and violated banking law.

The amended complaint makes additional allegations, including that two former employees of an unidentified financial institution observed “nearly daily circular transactions” between an account that Mr. Madoff controlled at their employer and his account at JPMorgan.

After raising questions about the transactions, the financial institution closed the account because it saw no legitimate business purpose for the transactions, according to the complaint.

The amended complaint also includes a request for a jury trial.

A JPMorgan spokesman, Joseph Evangelisti, has said the bank complied fully with all laws and regulations.

JPMorgan has sought dismissal of the case, arguing that Mr. Picard was hired to liquidate the Madoff firm and has no legal right to mount a class action and claim damages for the Ponzi scheme’s investors.

Article source: http://feeds.nytimes.com/click.phdo?i=55ea52b7becb16196915377afcbcdba9

Oversight Group Did Not Refer Housing Complaints

While the report did not determine whether these and other complaints had merit, it said that the agency’s unresponsiveness to them was problematic.

“Failure to recognize and quickly provide law enforcement authorities with information about allegations of fraud and other potential criminal conduct presents a significant risk for the agency,” the report said.

The inspector general’s report is the third to assess the agency that acts as conservator for Fannie and Freddie, which have cost the taxpayer roughly $154 billion since they nearly collapsed in September 2008.

The assessment covers the agency’s responses to complaints raised by consumers as well as current and former employees of Fannie and Freddie. It covers a period from July 30, 2008, when the finance agency was created, to Oct. 31, 2010, when the inspector general began its operations.

“Millions of Americans have been touched by the housing crisis,” Steve A. Linick, the inspector general, said in a statement. “Increasingly, they have filed complaints about fraud, waste or abuse, including allegations of improper foreclosures and possible criminal activity. Those complaints deserve timely and responsible action by F.H.F.A.”

Meg Burns, senior associate director in the office of Congressional Affairs and Communications, said that the agency had a limited mandate to deal with consumer issues but that it agreed with the recommendations and would follow them.

Mr. Linick and his staff found that during the period covered by the report, the agency assigned only two employees to process consumer complaints about Fannie and Freddie. Responding to the complaints was an additional duty for these employees, who also handled external correspondence for the agency, the report said. Because the agency’s workers did not separate complaints from other correspondence, they could not provide the inspector general with a complete file of complaints; this limited the study’s scope, it said.

Nevertheless, the inspector general examined 585 e-mail complaints provided by the finance agency. Of those, 68 described possible foreclosure abuses and 27 involved suspicions of fraud.

Complaints in these two categories were supposed to be forwarded to the general counsel’s office at the Federal Housing Finance Agency. But, the report said, the two staff members overseeing the complaints “received no specific training regarding how to evaluate complaints or how to identify allegations requiring further action by the agency or referral to law enforcement authorities, such as the Department of Justice or the F.B.I.”

Agency officials had no records showing that any complaints had been submitted to the general counsel’s office, reviewed or acted upon. The general counsel’s office did confirm that it had referred no complaints to law enforcement authorities during the audit period, the report noted.

“It is stunning that the conservator of Fannie Mae and Freddie Mac, which have received $150 billion in a taxpayer-funded bailout, had just two people receiving and processing customer complaints,” Representative Spencer Bachus, the Alabama Republican who is chairman of the House’s financial services committee, said in a statement. “Who knows how many reports of waste, fraud and abuse have gone unheeded and unaddressed?”

The inspector general concluded that the housing finance agency’s failure to address or effectively track complaints “was largely the result of its inability to decide whether to handle consumer complaints, and how to address those complaints it decided to handle. From the onset, F.H.F.A. treated its complaints processing function more as a public or external relations task, as opposed to a core regulatory or conservator function.”

This approach left the agency in the dark about potential trends or risks in Fannie’s and Freddie’s operations, the report added. Being able to spot such risks is especially crucial for a regulator that is as thinly staffed as the agency, the inspector general said. “Such a capacity could have served as an ‘early warning system,’ ” the report noted.

Most of the e-mailed complaints reviewed by the inspector general — 470 — were sent by the finance agency to Fannie and Freddie for disposition, the report said. But the agency conducted no follow-up about whether the companies had responded.

Agency staff members told the inspector general that “they considered complaints to be resolved or disposed of at the time that they were referred” to the companies. As a result, the agency received complete correspondence and documentation in 2 of the 470 complaints referred to Fannie and Freddie, the report said.

The agency should set up policies and procedures, the inspector general said, to ensure timely and accurate responses to complaints and enable it to identify areas of risk. Agency officials should also work closely with the inspector general on accusations of fraud or abuse.

Ms. Burns of the agency’s communications office said that the general counsel’s office would review complaints of fraud to determine if appropriate action had been taken or needed to be taken. Officials at the agency declined to comment further.

Article source: http://feeds.nytimes.com/click.phdo?i=6a8d193a049e47f65656b7cbf5439a29

Cell Firm in Mexico Fined $1 Billion

MEXICO CITY (AP) — Mexico’s antitrust commission has fined a subsidiary of América Móvil 12 billion pesos, or $1 billion, the parent company announced.

The agency, the Federal Competition Commission of Mexico, said that the cellphone subsidiary, Telcel, had engaged in monopolistic practices associated with call terminations, América Móvil said in a filing with the Mexican stock exchange late Friday.

The company, controlled by the billionaire Carlos Slim Helú, said that it was studying the ruling and all options for appeal.

América Móvil is the largest provider of wireless service in Latin America, with 225 million subscribers. Its 2009 revenue totaled $30 billion.

Mr. Slim, named the richest man in the world by Fortune Magazine, is estimated to be worth $74 billion. His companies have come under various allegations of monopolistic practices in the past. Mr. Slim owns about 7 percent of the publicly traded shares of The New York Times Company.

Article source: http://feeds.nytimes.com/click.phdo?i=1e0711fc28adfd4a318e327c875e75fa