May 19, 2024

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.

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Live Nation Chief Sells Nearly $12 Million in Stock

Michael Rapino, the chief executive of Live Nation Entertainment, has sold $11.7 million of stock in the company in recent days, representing about 38 percent of his direct holdings, the company revealed in a regulatory filing late Tuesday.

The sales, made on Friday and Monday, apparently came as the company was in the process of dismissing Nathan Hubbard, the president of its Ticketmaster division. News of Mr. Hubbard’s imminent departure — for reasons that are still unclear — emerged on Monday evening.

According to the filing with the Securities and Exchange Commission, Mr. Rapino sold 640,000 of the 1.7 million shares he owned, not counting about 3 million stock options.

Jacqueline Peterson, a spokeswoman for Live Nation, said late Tuesday that Mr. Rapino sold the stock for estate-planning purposes. She said the shares represented a small portion of his total equity stake in the company, including options, and that this was the first time in the eight-year history of the company that Mr. Rapino had sold shares. Live Nation was spun off from Clear Channel Communications in 2005.

Since Live Nation merged with Ticketmaster in early 2010, the company’s stock price has mostly remained sluggish. But it has nearly doubled since the end of last year, when Irving Azoff, its former executive chairman and Mr. Rapino’s chief rival, left the company. The stock closed at $18.19 on Tuesday.

Last year, Mr. Rapino earned a total of $28.5 million from the company, including about $21.6 million in grants of stock and options, according to Live Nation’s most recent proxy report, in April.

Live Nation was believed to be close on Tuesday to signing an agreement terminating Mr. Hubbard’s employment, but the company has made no public statement about it.

In a research note on Tuesday, Ben Mogil, an analyst with Stifel Nicolaus, wrote that the reports of Mr. Hubbard’s departure appeared to be negative for the company because it came in the midst of a revamping of Ticketmaster’s technology platform, and because “it implies that some of the issues at play are personality driven.”

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DealBook: A Towering Fine for Naught, as the S.E.C. Tracks Cohen

Steven Cohen's lawyers may not have seen the possibility of administrative charges by the S.E.C.Steve Marcus/ReutersSteven Cohen’s lawyers may not have seen the possibility of administrative charges by the S.E.C.

“We’re willing to pay $600 million because we have a business to run and don’t want this hanging over our heads with litigation that could last for years.”

That’s what Steven A. Cohen’s lawyer told a judge just four months ago to justify why Mr. Cohen had agreed to pay $616 million to the Securities and Exchange Commission to settle civil accusations that his firm was involved in insider trading without admitting or denying guilt.

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If that explanation sounded like a payoff — “buying off the U.S. government” is the way John Cassidy of The New Yorker put it at the time — that’s because, with hindsight, that’s what it was.

But it didn’t work.

The S.E.C., having been shamed by critics for making what seemed like a deferential deal, returned with a new civil action against Mr. Cohen individually on Friday, seeking to bar him from the industry.

The new charges and evidence raise all sorts of questions. But within the legal community, one question is now particularly baffling: Why did Mr. Cohen pay more than half a billion dollars to settle a case that now appears far from settled?

“It’s hard to believe he got bad advice. It’s not like he’s using some street-corner lawyer,” said Jacob S. Frenkel, a former S.E.C. enforcement lawyer who is now a partner at Shulman Rogers Gandal Pordy Ecker.

Within Mr. Cohen’s legal camp, which includes Paul, Weiss and Willkie Farr, the new civil action came as a surprise, according to people involved in the case. His legal team had thought that by settling with the S.E.C. in March for such a large sum it would be unlikely that the agency would come back for more, despite assertions by the S.E.C. that it reserved the right to pursue additional charges against Mr. Cohen.

At minimum, Mr. Cohen’s lawyers thought they had strong evidence that would help them talk the S.E.C. out of bringing a fraud charge against their client, these people said. In that regard, they succeeded. But they never imagined the S.E.C. would bring an administrative claim of “failure to supervise” against Mr. Cohen, which, to their way of thinking, would be an admission of defeat by the S.E.C. because it would be perceived as a demonstration of weakness, the equivalent of charging Al Capone with tax evasion.

“The S.E.C. created expectations in the settlement by strong inference,” Mr. Frenkel said. “There is an expectation of reasonable closure.”

But Mr. Cohen’s lawyers — and perhaps everyone else — missed the larger picture: The S.E.C.’s “failure to supervise” case can still have the same effect as a more damning fraud charge because it has the potential to put his firm out of business.

When Mr. Cohen’s $616 million settlement was first presented to Judge Victor Marrero of Federal District Court in Manhattan, he resisted approving it, saying aloud what so many people were thinking at the time, “There is something counterintuitive and incongruous about settling for $600 million if it truly did nothing wrong.”

What Judge Marrero didn’t appreciate — and what the public may have missed as well — was the math behind why the whopping settlement arguably made sense if it would end the years-long investigation into Mr. Cohen.

The goal of the settlement, and its timing, were clearly aimed at assuaging nervous investors in Mr. Cohen’s fund so that they wouldn’t seek the return of their money. Mr. Cohen managed $15 billion, including about $9 billion of his money and other employees’. The remaining $6 billion comes from outside investors — and it is worth big fees to the firm. Mr. Cohen collects a 3 percent “management fee” and takes upward of 50 percent of profits. On $6 billion, if you follow the math, annual management fees collected can total as much as $180 million. If the firm can produce profits of as little as 10 percent, the firm can collect $300 million more. If the firm produces more than 30 percent returns, its historical average, the fees could jump to over $1 billion.

Consequently, a settlement payment of $616 million could pay for itself in a year or two.

That was then. Now, that $616 million settlement appears to be a down payment on a much longer soap opera that could still include a criminal case down the road.

When Mr. Cohen made his original settlement agreement, the S.E.C.’s leadership was in transition, a clear red flag from a tactical perspective. With the addition of Mary Jo White a month after the deal was reached, she pressed to continue the inquiry, and ultimately, the new action.

While the S.E.C. under Ms. White clearly didn’t rescind its previous agreement, the new civil action could have one adverse outcome: it could make the agency’s job more complicated in future investigations.

“This could impact the approach to cooperation,” Mr. Frenkel said. “You have to believe whatever ambiguities existed were intentional on the S.E.C.’s part. It calls into question whether the agency negotiated in good faith.”

Maybe so. But after years of Wall Street executives appearing to outnegotiate the S.E.C., it finally seems as if the agency won a round.

Andrew Ross Sorkin is the editor-at-large of DealBook. Twitter: @andrewrsorkin

A version of this article appeared in print on 07/23/2013, on page B1 of the NewYork edition with the headline: A Towering Fine For Naught, As the S.E.C. Tracks Cohen.

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DealBook: Arsenal of Legal Firepower at Tourre Trial

Pamela Chepiga, left, a former federal prosecutor, with her client Fabrice Tourre.Louis Lanzano/Associated PressPamela Chepiga, left, a former federal prosecutor, with her client Fabrice Tourre.

When Wall Street lawyers gathered at a conference in Orlando, Fla., during the 2008 financial crisis, one law firm posted an outsize picture of Sean Coffey’s head on the body of a wrestler, labeling him Public Enemy No. 1.

Five years later, Mr. Coffey’s role is reversed. Once famous for suing Wall Street — Mr. Coffey extracted $6.2 billion from big banks in the wake of WorldCom’s collapse — he is now defending a former Goldman Sachs trader, Fabrice Tourre, in one of the biggest actions stemming from the financial crisis.

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The Securities and Exchange Commission’s civil case against Mr. Tourre went to trial on Monday in a federal courthouse in Lower Manhattan, putting a spotlight on Mr. Coffey and a tightknit network of other legal players, many of whom are playing unusual roles in the case.

Mr. Coffey’s co-counsel is Pamela Chepiga, a former federal prosecutor who once played basketball with another diminutive lawyer, Mary Jo White, the chairwoman of the S.E.C. The defense team is facing off against the head of the S.E.C.’s trial unit, Matthew T. Martens, who typically supervises cases, but has never before led a jury trial at the S.E.C. (He is a friend of Mr. Coffey’s from private practice, though Mr. Martens temporarily unfriended Mr. Coffey on Facebook as a precautionary measure during the trial.) Rounding out the roster, the two sides will argue before Judge Katherine B. Forrest, a longtime corporate lawyer and relative newcomer to the bench who will face her biggest securities trial yet.

From left, Sean Coffey, Fabrice Tourre's attorney; Katherine B. Forrest, the president judge; and Matthew Martens, a lawyer for the S.E.C.Fred R. Conrad/The New York TimesFrom left, Sean Coffey, Fabrice Tourre’s attorney; Katherine B. Forrest, the presiding judge; and Matthew Martens, a lawyer for the S.E.C.

The convergence of such prominent lawyers exemplifies the insular world of the securities bar — and the revolving door its members often pass through on their way back and forth between government and private practice. It also underscores the importance of a trial in which Mr. Tourre is fighting a possible ban from the securities industry, and the S.E.C. is seeking a defining victory in its uneven campaign to punish those at the center of the crisis.

In the Goldman case, the S.E.C. accused Mr. Tourre of misleading investors about a mortgage security that ultimately failed. Mr. Tourre, the agency says, sold what is known as a synthetic collateralized debt obligation, a deal linked to the performance of mortgage-backed bonds, while omitting a crucial fact: a hedge fund helped pick the bonds and then bet against them. Goldman chose to settle the case, paying a $550 million penalty without admitting or denying guilt.

On Monday, Ms. Chepiga explained to the nine-person jury that synthetic C.D.O.’s are structured such that someone needs to bet against the deals. One investor bets the bonds will fail; another bets they will pay out, creating what she called a “zero-sum game.”

Still, the case will test the lawyers’ ability to translate such sophisticated concepts — C.D.O.’s and mortgage bonds, to say nothing of hedge fund strategy — to a jury that includes a minister, a retiree and a graphic designer who likes to watch Fox 5 News.

“You guys are going to have a hard time making this case non-mumbo jumbo,” Judge Forrest told the lawyers at a hearing last week. Mr. Coffey later joked: “I couldn’t spell C.D.O. a few months ago.”

Mr. Coffey’s partner on the case, Ms. Chepiga, found her way into securities law as a young federal prosecutor working for Jed S. Rakoff, now one of New York’s best-known federal judges. While Ms. Chepiga has handled mostly securities cases at the Allen Overy firm, she also helped lead a team in 2004 that sued the government on behalf of 15 detainees from Yemen held on suspicion of terrorism at Guantánamo Bay.

In the Goldman case, Ms. Chepiga has represented Mr. Tourre since the S.E.C. filed its suit in 2010. And on Monday — which also happens to be both her and Mr. Coffey’s birthday, 64 for her and 57 for him — she delivered opening arguments in the case.

Mr. Coffey’s career has also included turns as a federal prosecutor and a defense lawyer. But unlike other securities lawyers, he is a retired naval officer who tracked Soviet submarines during the cold war and served as a personal military assistant to then-Vice President George H. W. Bush. He also defended a death-row inmate in one of the first cases involving DNA evidence.

But it was as a plaintiff’s lawyer at Bernstein Litowitz Berger Grossmann where Mr. Coffey became an enemy of Wall Street. Tom Ajamie, a securities lawyer who attended the seminar in Orlando, said the message was clear: “Here is the guy you need to attack.”

The WorldCom case, possibly Mr. Coffey’s biggest success at Bernstein, led him to Ms. Chepiga. While he was suing WorldCom’s banks and directors, she represented some of the directors.

Mr. Coffey left Bernstein in 2009 and began what turned out to be an unsuccessful bid for New York attorney general.

He went on to create BlackRobe Capital Partners, which helped finance litigation against big corporations, but he closed the company recently before joining Mr. Tourre’s legal team. One of his partners at BlackRobe was Ms. Chepiga’s husband, Michael J. Chepiga.

While Mr. Coffey is also friends with Mr. Martens from their days at the corporate law firm Latham Watkins, the similarities appear to stop there. Mr. Coffey is a liberal Democrat. Mr. Martens, after graduating first in his class from the University of North Carolina School of Law, was a law clerk to William H. Rehnquist, the conservative former chief justice of the Supreme Court.

After Latham, Mr. Martens joined the Justice Department as an aide to Assistant Attorney General Michael Chertoff. He later became a federal prosecutor in North Carolina, specializing in white-collar fraud.

While Mr. Martens, 41, has tried 20 cases in his career, Mr. Tourre’s case will be his first jury trial at the S.E.C., reflecting its importance to the agency. He did, however, represent the S.E.C. in court for its settlement with Citigroup, another C.D.O. case that was among the agency’s most complex.

“He’s really good at explaining things in plain English,” Mr. Chertoff recalled.

Colleagues at the agency described Mr. Martens as serious — he rarely smiles, they say — but also “brilliant.”

At times, S.E.C. investigators have complained that Mr. Martens’s team is too timid. The team has argued against filing cases that the agency spent years building, according to officials who spoke on the condition that they not be named.

Yet the level of caution has impressed some S.E.C. veterans who argue that the agency should pursue appropriate outcomes, not headlines. The agency also notes that, under Mr. Martens, its Washington office has expanded its docket of actively litigated cases to 90, up from 60 when Mr. Martens started in 2010.

As Mr. Tourre’s trial begins, Mr. Martens’s unit is in transition. In recent town halls, officials say, the agency has discussed assigning a group of litigators to each team of S.E.C. investigators, an idea aimed at generating more cooperation at the agency.

Mr. Martens is also facing a change himself. Mr. Tourre’s trial is seen as one of his final acts for the agency, officials say, as he considers joining a law firm, with Latham and WilmerHale among the possibilities.

The trial will also prove one of the biggest cases yet for Judge Forrest. A former corporate lawyer who served in the Justice Department’s antitrust division, she joined the bench in fall 2011. In perhaps her most prominent ruling, she moved to permanently block the federal government from employing a legal provision allowing for the military detention of people deemed to have provided support to the likes of Al Qaeda or the Taliban.

Ms. Forrest, 49, came from a difficult childhood — her family was briefly homeless — to attend Wesleyan College and then New York University’s law school. She began her career at the law firm Cravath, Swaine Moore, focusing on antitrust and litigation, but also handling pro bono matters like First Amendment cases.

Friends and former colleagues described Ms. Forrest — known as Kitty to close acquaintances — as decisive.

“To my mind, she has the perfect judicial temperament,” said C. Allen Parker, the presiding partner of Cravath.

On Monday, Judge Forrest urged the legal teams to “have a heart” when explaining “gibberish” like C.D.O.’s to the jury. “Do not assume people know what an investment bank does.”

A version of this article appeared in print on 07/16/2013, on page B1 of the NewYork edition with the headline: Arsenal of Legal Firepower Masses Around Tourre Trial.

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DealBook: Trial of Former Goldman Trader Gets Under Way

Fabrice P. Tourre, the former Goldman Sachs trader, entered federal court in Lower Manhattan on Monday.Louis Lanzano/Associated PressFabrice P. Tourre, the former Goldman Sachs trader, entered federal court in Lower Manhattan on Monday.

2:04 p.m. | Updated
The seat for juror No. 6 proved especially nettlesome to fill on Monday in the civil trial of Fabrice Tourre, the former Goldman Sachs employee who has become a prominent face of the financial crisis.

Six people were rejected from the trial’s jury pool, including a professor and a mortgage underwriting.

Still, after less than two hours of questions, a nine-person jury had been seated for the civil trial Mr. Tourre. The five women and four men who will hear the three-week case represent a fairly diverse lot, having been through a brisk selection process overseen by the presiding judge, Katherine B. Forrest of the United States District Court in Manhattan. None of the jurors said yes when asked if he or she had heard of the ‘Fabulous Fab’ — the nickname Mr. Tourre is widely known by.

The Securities and Exchange Commission in 2010 sued Mr. Tourre, arguing he was part of a conspiracy in 2007 to mislead investors when selling a mortgage security that ultimately failed. Mr. Tourre maintains he did nothing wrong.

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One prospective juror, who was selected, drew snickers from the audience when her profession was announced. She is a reverend, conjuring up memories a now infamous comment by Goldman’s chief executive, Lloyd C. Blankfein, who joked during the financial crisis that he was merely doing “God’s work.” The comment drew sharp criticism at the time.

Several jury candidates professed ties to Wall Street or finance, or said they had read articles about the case. One woman worked as a mortgage underwriter who had ties to JPMorgan Chase. Another was a day trader who had owned Goldman stock at one point. A number of prospective jurors were dismissed because of their views on Wall Street.

“I have a fairly jaundice view of Wall Street,” announced one juror before he was dismissed.

The jury that was selected includes the reverend, a former retail stockbroker and a retiree. The two teams of lawyers needed only two rounds of cuts before arriving at the present jury.

Judge Forrest promised the jury that she would run the trial as efficiently as possible, telling them that while the trial is scheduled for three weeks, she will try and beat that timetable.

“I am known as a judge who moves things along,” she said. She later added, “I am a shark on time.”

Meanwhile, a small armada of TV trucks was lined up outside the courthouse in Lower Manhattan — but it wasn’t clear that they were all present for Mr. Tourre’s trial. There are five trials starting in the same court house on Monday. (Representative Charles B. Rangel was seen by the courthouse

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Common Sense: S.E.C. Has a Message for Firms Not Used to Admitting Guilt

In a departure from long-established practice, the recently confirmed chairwoman of the Securities and Exchange Commission, Mary Jo White, said this week that defendants would no longer be allowed to settle some cases while “neither admitting nor denying” wrongdoing.

“In the interest of public accountability, you need admissions” in some cases, Ms. White told me. “Defendants are going to have to own up to their conduct on the public record,” she said. “This will help with deterrence, and it’s a matter of strengthening our hand in terms of enforcement.”

In a memo to the S.E.C. enforcement staff announcing the new policy on Monday, the agency’s co-leaders of enforcement, Andrew Ceresney and George Canellos, said there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.”

They added, “Should we determine that admissions or other acknowledgment of misconduct are critical, we would require such admissions or acknowledgment, or, if the defendants refuse, litigate the case.”

Ms. White said that most cases would still be settled under the prevailing “neither admit nor deny” standard, which, she said, has been effective at encouraging defendants to settle and speeding relief to victims.

The policy change follows years of criticism that the S.E.C. has been too lenient, especially with the large institutions that were at the center of the financial crisis. Bank of America, Goldman Sachs, Citigroup and JPMorgan Chase were among the defendants that settled charges related to the financial crisis while neither admitting nor denying guilt, although Goldman was required to admit that its marketing materials were incomplete.

That this approach became such a heated public issue is in large part because of the provocative efforts of Judge Jed S. Rakoff of Federal District Court, who has twice threatened to derail settlements with large financial institutions that neither admitted nor denied the government’s allegations.

In late 2011, he ruled that he couldn’t assess the fairness of the agency’s settlement with Citigroup in a complex mortgage case without knowing what, if anything, Citigroup had actually done. In his ruling, he said that settling with defendants who neither admit nor deny the allegations is a policy “hallowed by history but not by reason.”

He described the settlement, which was for $285 million, as “pocket change” for a giant bank like Citigroup. Other judges have followed Judge Rakoff’s lead, and an appeal of his Citigroup ruling is pending before the Court of Appeals for the Second Circuit.

The new policy would seem to vindicate Judge Rakoff, at least in spirit, but Ms. White said the decision was rooted in her experience as United States attorney in New York, where defendants in criminal cases are almost always required either to enter a guilty plea or go to trial.

“Judge Rakoff and other judges put this issue more in the public eye, but it wasn’t his comments that precipitated the change,” she said. “I’ve lived with this issue for a very long time, and I decided it was something that we should review, and that could strengthen the S.E.C.’s enforcement hand.” (Judge Rakoff, who is presiding over a trial in Fresno, Calif., said he couldn’t comment, citing the appeal of his Citigroup ruling.)

Those concerned that Ms. White, who before her confirmation as chairwoman of the S.E.C. was head of the litigation department at the prominent corporate law firm Debevoise Plimpton, might be too cozy with the big banks and corporations that were formerly her clients, can breathe easier. Even some of the S.E.C.’s harshest critics were at least somewhat mollified.

“It’s an important step in the right direction,” said John Coffee, a professor at Columbia Law School and a vocal critic of S.E.C. settlements he deems too lenient. “There’s clearly a public hunger for accountability. Mary Jo White has shown she is sensitive to this.”

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DealBook: Couple Settle Fraud Case Involving Chinese Company

A husband-and-wife team that ran a Chinese maker of pollution control equipment agreed on Wednesday to pay $3.75 million to settle accusations that they had defrauded American investors.

The settlement with the Securities and Exchange Commission came more than two years after the company, Rino International, at one time worth about $500 million on the Nasdaq stock exchange, collapsed after a short seller accused the company of claiming revenue from nonexistent contracts. More than three years ago, the company raised $100 million from American investors in a stock offering.

The S.E.C. complaint said the company; its chief executive, Zou Dejun; and his wife, the chairwoman, Qiu Jianping; kept two sets of books. The Chinese books, which the S.E.C. said were correct, showed total revenue of $31 million from the first quarter of 2008 through the third quarter of 2010. The United States books, which were used in financial statements, showed revenue of $491 million, or about 15 times as much.

The 2009 public offering, which raised $100 million by selling stock and warrants to buy more shares, valued the shares at more than $30 each, and they traded for as much as $34.25 in Nasdaq trading. They were delisted by Nasdaq in 2010 and now trade over the counter for about a nickel.

As part of the settlement, Mr. Zou agreed to pay a penalty of $150,000, and Ms. Qui, $100,000. In addition, they agreed to pay $3.5 million to settle a related class-action suit.

The S.E.C. said that days after the 2009 public offering, the couple, who together controlled 65 percent of the company’s stock, used $3.5 million of the money raised to buy a home for their use in Orange County, Calif., then gave conflicting accounts to auditors regarding how the money was used. They eventually signed notes indicating that they had borrowed the money from the company.

The fraud fell apart in November 2010 after the Muddy Waters research Web site, which seeks out stocks to sell short and has exposed a number of Chinese frauds, released a report saying some of the company’s reported revenue came from fraudulent contracts with purchasers. The company did not deny the report, saying only that it would investigate, and the stock fell sharply.

A few days later the company’s auditors, Frazer Frost, reported that Mr. Zou had admitted that some of the contracts did not exist. The auditors withdrew their previous certifications of the financial results.

On Nov. 30, the company sent a letter to the S.E.C. saying it intended “to file restated audited financial statements” for 2008 and 2009 “as soon as practicable.” It has made no such filings since, and the company’s Web site is no longer available.

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Fannie Mae and KPMG to Pay Investors $153 Million

The settlement was announced on Tuesday by the Ohio attorney general, who had served as lead plaintiff in the case, representing state pension funds that owned the stock.

The settlement stemmed from a time when Fannie Mae was led by Franklin D. Raines, a former director of the Office of Management and Budget under President Bill Clinton and a man who was deemed to be quite powerful in Washington.

The regulator of Fannie Mae had usually deferred to it, and Mr. Raines initially insisted the regulator was wrong about the accounting issues. He drew support from both the Fannie Mae board and from KPMG, the auditing firm that had certified the books that the regulator criticized.

Mr. Raines asked that the staff of the Securities and Exchange Commission review the accounting, but stuck to his position even after the S.E.C. concluded Fannie had erred. It was not until the regulator, then known as the Office of Federal Housing Enterprise Oversight, demanded his ouster that the board fired him. At the same time, it dismissed KPMG.

The S.E.C. and oversight office reports concluded that Fannie had run roughshod over accounting rules in order to report profits that were not volatile, which it believed would reassure investors. The regulator said that in one case KPMG had concluded Fannie was wrong, but evidently yielded on the basis that the amount involved, about $200 million, was not material.

The settlement came after the federal judge hearing the case, Richard J. Leon, urged the parties to enter mediation. A statement by the regulator said the mediator had recommended the settlement terms.

A spokesman for KPMG said the accounting firm and Fannie Mae would share equally in the payment. He said the settlement would have no effect on the audit firm’s finances, since it had set aside reserves to cover the liability.

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DealBook: Businesses Take a Cautious Approach to Disclosures Using Social Media

Reed Hastings, chief of Netflix, used Facebook to brag about his company.Richard Brian/ReutersReed Hastings, chief of Netflix, used Facebook to brag about his company.

Zynga’s latest quarterly earnings report, released on Wednesday, came in the typical format and was accompanied with the usual financial tables investors expect.

But the social gaming company that counts FarmVille among its games included a new addition: a 204-word paragraph encouraging investors to check its corporate blog and Facebook and Twitter pages for regular news updates.

It was just one of dozens of companies taking advantage of newly clarified rules from the Securities and Exchange Commission that have now blessed the use of social media sites to disclose financial information.

Although social networks have proliferated for years and the public more readily turns to Twitter than the S.E.C.’s Edgar Web portal for updates, the agency just a few months ago was still evaluating whether using newer outlets would violate its rules.

Even with the updated guidelines, uncertainty over what exactly the commission will allow has meant that many companies, and their legal teams, are playing it safe this earnings season.

“Right now it’s like the Wild West,” said Broc Romanek, editor of, a Web site that focuses on S.E.C. rules and regulations. “The S.E.C.’s guidance is definitely going to need to be further refined.”

For instance, when General Electric released its earnings last Friday, the company mentioned its Twitter and Facebook accounts for the first time, noting that they “contain a significant amount of information about G.E., including financial and other information for investors.” A quick check showed that G.E. has at least 10 different Facebook pages and 10 different Twitter feeds. A company spokesman, Seth Martin, however, said the conglomerate would continue to rely on news releases to communicate material information.

“While we currently have no plans to disseminate material information using social media, we will comply with S.E.C. guidance as it evolves,” Mr. Martin said.
Others may simply be hesitant to leap into the world of 140-character messages out of fear of security. Earlier this week, the Dow Jones industrial average briefly plunged 150 points after hackers gained control of The Associated Press’s Twitter feed and falsely reported explosions at the White House. A similar fake report on a company stock could easily cost investors billions in a matter of seconds.

Not long ago, regulators regarded social media sites with skepticism.

Until now, information that has the potential to affect a company’s stock price had for the most part been relegated to the bureaucratic sounding form 8-K, the S.E.C.’s document of choice.

Last year, the S.E.C. warned Netflix that it might file civil claims after its chief executive, Reed Hastings, bragged about subscriber numbers on his Facebook page. But after the ensuing reaction against the agency’s view, the S.E.C. gave in a little, saying this month that social networks were acceptable news outlets — as long as shareholders knew which to check. The new rules update the S.E.C.’s Regulation Fair Disclosure, which requires companies to publish material information to all investors at the same time.

A spokesman for the agency, John Nester, argued that the new guidance on social media should not be too confusing, given how quickly companies adopted a 2008 rule that allowed the use of corporate Web sites in addition to S.E.C. filings.

“Companies were able to figure out how to use our guidance to disclose information on their Web sites, so there’s no reason they shouldn’t be able to do the same with social media,” he said in a statement.

In practice, corporations are experimenting with a wide variety of policies. In its earnings release last week, AutoNation listed five different places where investors could find information about the company, including the Facebook and Twitter feeds of its chief executive, Mike Jackson.

Netflix itself listed in a securities filing five different places where investors should check regularly for more information. Among them: its corporate blog and Twitter feed, as well as the chief executive’s personal Facebook page.

Glen Ponczak, a vice president for investor relations at the manufacturer Johnson Controls, said that the company had started posting information on Twitter several weeks before the S.E.C. outlined its new policy on social media, but that it was very much in experimental mode. On Twitter, the company posted a link to its earnings call, but did not post any updates from the earnings call.

“We’re starting off slow and learning what we need to do,” Mr. Ponczak said. At least for now, he added, “it will not be our primary disclosure point.”

Lawyers who focus on disclosure issues expect a bit of experimentation, and heavier use by technology companies whose business models are already heavily dependent on social media.

“The S.E.C. is not going to let companies be sloppy,” Thomas A. Sporkin, a former S.E.C. enforcement official and now a partner at Buckley Sandler, said. “The investing public needs to know where to go for disclosures, and the division of enforcement is going to be vigilant on this.”

And for some legal teams, the old formats of S.E.C. filings will still likely be the preferred method of disseminating financial news.

“Most companies are going to use social media as a supplement,” said Amy Goodman, a partner and co-chairwoman of the securities regulation and corporate practice group at the law firm Gibson Dunn Crutcher.

“You can’t go wrong if you file an 8-K. That’s your insurance policy.”

Michelle Leder is the editor of, a Web site that takes a closer look at companies’ Securities and Exchange Commission filings.

Earnings Reports and Social Media

[View the story “Earnings Reports and Social Media” on Storify]

A version of this article appeared in print on 04/26/2013, on page B1 of the NewYork edition with the headline: Businesses Take a Wary Approach To Disclosures Using Social Media.

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DealBook: Nelson Peltz Fund Said to Amass Stakes in Food Companies

Oreo is one of the several brands owned by Mondelez International.Mandel Ngan/Agence France-Presse — Getty ImagesOreo is one of the several brands owned by Mondelez International.

10:28 a.m. | Updated
Nelson Peltz’s Trian Fund Management has taken a $2.7 billion stake in PepsiCo and Mondelez International, according to people briefed on the investment.

The investment by Mr. Peltz, a longtime shareholder activist, has raised speculation that he could be seeking a position on the boards of both companies. The stake also raises questions about whether Mr. Peltz, who has pushed for spinoffs and mergers at other companies that he has pursued, will press Pepsi to spin off its Frito Lay unit and merge it with Mondelez, which was the snack business spun off by Kraft last year.

PepsiCo said Friday that it had held meetings with Trian Fund Management but did not reveal the nature of the discussions, but both companies have many prominent snack food brands, which could make a strategic fit. Mondelez owns several well-known brands worldwide including Ritz, Oreo and Toblerone.

“In recent weeks, we have held meetings with Trian to discuss and consider their ideas and initiatives as part of our ongoing evaluation of all opportunities to drive long term growth and shareholder value,” Pepsi said in a statement. “Trian is a respected investor, and we look forward to continuing constructive discussions with them.”

A Trian spokeswoman declined to comment on the matter.

A Securities and Exchange Commission filing on Friday revealed that Trian Fund had increased its stake in Pepsi to $269 million as of the end of 2012, and that it had taken a $494 million stake in Mondelez. But people briefed on the investment say that the Trian stake in both companies is actually worth $2.7 billion, with $1.4 billion in Pepsi and $1.3 billion in Mondelez.

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