America’s baby boomers are increasingly becoming targets for investment brokers who put their hard-earned “nesteggs” at risk.  

Many examples are emerging where retirees are losing significant funds from their pensions and 401(k) accounts because they are seduced into turning them over into high-fee investments that promise high returns. Studies show that as much as 69% of pre-retirees miscalculate how much money they can annually withdraw from their retirement accounts, which gives rogue brokers the opportunity to take advantage of these investors in order to generate more commissions. 

Brokers and brokerage firms gain access to groups of workers who are close to retirement through free seminars and advisory services offered through the workers’ employers. These presentations have the potential to be misleading for workers who have limited knowledge or experience investing money. Studies show that 10% of these so-called seminars have explicitly offered fraudulent advice and given unrealistic guarantees on high rates of return. 

In January, a group of Kodak and Xerox retirees from Rochester, NY, filed a class-action lawsuit against two of Morgan Stanley’s top brokers, Michael Kazacos and David Isabella, and branch manager Ira Miller. These Kodak and Xerox employees were advised to withdraw 10% from their portfolios annually with the promise that they would still have plenty of money leftover, perhaps millions, in their accounts.

Many other investment brokers in Rochester lost clients to Kazacos because they were capping the amount in which the employees could withdraw from their funds at 4%.  However, at 10%, many of these workers almost depleted their long-saved retirement funds. Some of these retirees are being forced to return to work again. Kazacos, Isabella, and Miller could face disciplinary actions for breach of fiduciary duties and using deceptive sales tactics.  

Morgan Stanley’s policy is to cooperate with the investigation and claims that many of the clients’ losses were caused by the market downturn of 2000-02 and other excessive withdraws from the clients. Investor attorneys have filed a number of arbitration claims on behalf of Kodak and Xerox employees.  

InterSecurities, a financial firm in St. Petersburg, FL, gave similar explanations to why some of its investors lost money from their retirement funds. Two of InterSecurities’ brokers were accused of promising a 13% return on investments made by a group of Kansas City Southern employees. These brokers earned a high commission of 7.25% for each investment sale.

Likewise, in 2006, 32 former ExxonMobil employees won $13.8 million in an arbitration case against Securities America because one of its top brokers told the employees that they would receive 18% return and still withdraw sums of money equal to their salaries. Since then, Securities America has greatly improved its oversight and policies.  

Investors should be on the lookout for brokers who recommend they withdraw money from their retirement plans in order to make other investments.  Oftentimes the only one who wins under these circumstances are the brokers themselves.

Citigroup Inc., the bank with the largest reported losses due to the mortgage market collapse, is expected to take an additional $8.9 billion in net writedowns for the second quarter. Citigroup is already staggering from the $42.9 billion defeat in credit related losses. 

Goldman Sachs Group Inc. has lowered its ratings for U.S. brokerages from “attractive” to “neutral”, because the deterioration rate of the industry appears to be far worse than they originally believed. Goldman also slashed Citibank’s six-month price target to $16 and put the bank on its “conviction sell” list, after it closed at $18.85 in trading last week. Citibank has dropped about 16% this year. 

Goldman sees more struggles in the near future for Citigroup. Cathy Chan reported in a recent Bloomberg article that Goldman expects the bank to face risk of further writedowns, higher consumer provisions and the potential need for additional capital raisings, dividend cuts or asset sales. Goldman is not alone in these forecasts for Citigroup. UBS AG and Merrill Lynch & Co. also predicted more writedowns. Merrill Lynch analyst Guy Moszkowski believes the bank will report another $8 billion of writedowns this year.  

Citibank CEO Vikram Pandit announced an additional 13,000 job cuts this year. He also expects “substantial” additional writedowns and more losses on consumer loans. Goldman believes Citigroup may writedown $7.1 billion of collaterized debt obligations and associated hedges, as well as $1.2 billion for other asset classes. They also said the bank may need to post a $600 million loss to reflect the market-to-market value of its own structured note liabilities.  

It is unlikely that Citigroup will be able to keep its current 7% dividend yield, and they need to make more capital. It’s estimated they could generate $3.5 million in capital a year by cutting payouts in half.

In a lawsuit filed yesterday by Massachusetts Secretary of State William Galvin, the head of UBS AG’s municipal securities group David Shulman is alleged to have exchanged emails with UBS executives that discussed how the bank should promote its failing auction-rate bonds as money market securities.  UBS attempted to shift its burden of $11 billion in auction-rate bonds by selling them to investors.

The emails also indicate that UBS almost pulled out completely from the auction rate market nine months ago, but instead bought out bonds in order to prevent the auctions it managed from failing. These emails came after the fact that UBS executives recognized the high risk of auction-rate securities in August. Despite these warning signs, the emails indicated that UBS faced pressure to free up capital because it had an overload ($10 billion) of auction-rate holdings. 

Galvin holds UBS responsible for committing fraud for not informing investors that the auction-rate market was collapsing. Galvin also plans to have UBS liquidate its auction-rate bonds, which adds up to $190 million, so investors can get their money back.   

Last year, the popularity of auction-rate bonds decreased significantly for securities firms (who are typically the buyers) in the auction-rate market because the bonds were reclassified as long-term investments rather than money-market instruments. Many investors are now left with bonds that will not sell and are having to pay high penalty rates. 

Investors harmed by the current auction-rate market meltdown accuse Wall Street of hiding the recognized risks of the securities from them. According to a June 26, Bloomberg article, some investors are even comparing this crisis to the dot-com scandal involving former Merrill Lynch analyst Henry Blodget.

Many wonder why brokers did not see the impending catastrophe for the market. But, according to recent reports they actually were aware.   

To date, at least 24 proposed class action lawsuits have been filed against brokerages. A nine-state task force is also investigating how these firms went about marketing the securities to clients. Among the task force is Massachusetts, which charged UBS Thursday with fraud for its sale of auction-rate securities to investors in the state. They claim UBS told clients their investments were “safe, liquid cash equivalents”, when they had knowledge this was completely not the case.  

One investor claims her broker at UBS recommended investing in auction-rate securities last December. At the same time UBS is reported to having told an issuer of these securities that the $330 billion market was in danger of collapsing. Shortly thereafter, dealers who underwrote and managed the market for over 20 years were forced to stop buying as last resorts due to the escalating mortgage losses in February.  

Over the past two decades, auction-rate bonds have allowed local governments, hospitals and universities to borrow money for the long term at cheap, short-term rates because they would resell the debt at upcoming auctions every seven, 28 or 35 days.  Once banks were no longer the “last minute buyers”, rates skyrocketed as high as 20 percent because failed auctions brought a penalty rate for issuers. In many cases, this penalty rate was set recently due to banks recognizing a decrease in demand. 

As light continues to shine on the problems associated with the auction-rate collapse, it becomes clearer every day that some on Wall Street were well aware of the potential issues with these products before the auctions themselves started to fail.    

Over the past few weeks, some of the largest closed-end fund companies, including Eaton Vance Corp. and Nuveen Investments Inc., have disclosed plans to redeem their auction-rate preferred securities. This solution may allow some irritated investors to cash out quickly.   

However, many other closed-end fund companies have yet to announce plans to redeem their auction-rate preferred securities.  The reason given is to protect their common shareholders.  

Companies are worried cashing out preferreds right now will hurt their common shareholders. Therefore, the preferred holders may have to wait months or even years before they are able to cash in.   

Prominent closed-end operations that have not publicized a redemption plan include; Allianz SE’s Pimco and Nicholas-Applegate funds, Lehman Brothers Holdings Inc.’s Neuberger Berman funds, Bank of New York Mellon Corp.’s Dreyfus funds, and Pioneer Investments. Together they have totaled $7.6 billion of auction-rate preferred. 

Auction-rate preferreds are long-term securities that functioned like short-term investments. But, when the market stopped functioning like normal, buyers for these securities vanished in auctions. Holders have been stuck in a slump by fund companies since the credit crunch weakened in February.

Ed Dowling owns preferreds issued by five different companies, including $300,000 in Neuberger Berman, which is the only one yet to redeem any his securities. He is questioning the future of his funds and is even considering selling on the secondary market at a loss.   

The problem fund managers are struggling with is whether replacing the auction-rate debt with other leverage would be more expensive and would consume fund earnings. Action-rate financing has the benefit of longer maturities than bank loans and bonds typically have. Funds that replaced the preferreds with bank borrowings run a risk that the bank may charge a higher rate to extend the loan, or not extended it at all. 

According to the Wall Street Journal, when the market started declining there were about $64 billion of these securities issued by closed-end funds. Now, just 31 percent has been redeemed, or plan to be shortly.

Securities and Exchange Commission (SEC) Chief Christopher Cox is facing criticism for his lack of involvement in handling Bear Stearns’ financial crisis. The failure of Bear Stearns and alleged neglect from Cox has stimulated debate over who should be in charge of Wall Street, the SEC or the Fed.

Treasury secretary Henry Paulson suggested broadening the Fed’s responsibilities to include overseeing investment banks. 

Bear Stearns began having problems last July when two large hedge funds collapsed due to securities tied to subprime mortgages. The firm incurred $1 billion in write-downs by December. Some critics argue that Cox and the SEC should have pressured Bear Stearns to raise capital and increase the confidence in their investors.  

Cox was said to have been absent during crucial conferences with the Fed and the Treasury, who negotiated a bailout plan for Bear Stearns. One such call discussed J.P. Morgan Chase & Co. granting a loan to Bear Stearns, and the other meeting discussed J.P. Morgan potentially buying out Bear Stearns and the Fed’s role in lending money to investment banks.  

Many of Cox’s predecessors, such as Richard Breeden and Harvey Pitt, were seen as more proactive in taking charge over the securities market during times of financial turmoil.

According to reports, Mr. Cox claimed that the SEC acted appropriately during the Treasury and Fed bailout negotiations because the SEC’s responsibility was to regulate the industry—not arrange its deals.

Cox has encouraged constructive debate over the issue of shifting authority to the Fed, but his stance is primarily passive, saying that the outcome is up to lawmakers in Congress and not the SEC. He also says that if the Fed continues to loan money to investment banks, it will inevitably play a larger role in Wall Street.

According to reports, Wachovia’s money-management unit, Evergreen Investments, will be liquidating $403 million from its Ultra-Short Opportunities Fund. The fund, which is primarily backed by mortgage securities, has lost 20% this year alone and has dropped 18% just this month.  

The failure of this fund highlights the ongoing problem brokerage firms are having in pricing the value of their investors’ illiquid investments. Bond-fund managers are being pressed to ensure their holdings are valued correctly so investors receive the correct amount of liquid funds from their shares.  

As of March, two thirds of Ultra-Short Opportunities assets consisted of home-loan securities that were not backed by government entities. The fund also carried only 70% ($9.1 million) of the original value of Novastar ABS CDO I Ltd. because it was created from low-rated subprime-mortgage bonds.  

Wachovia wrote down the value of its bank-owned insurance policies this spring, which resulted in a loss of $708 million on May 6th. The bank also paid a $144 million settlement over complaints of telemarketers and payment processors stealing from customer accounts under the supervision of former Chief Executive Kennedy Thompson.  

Although debt-pricing companies such as Interactive Data Corp. and Street Software Technology, Inc. are making strong efforts to place correct valuations on securities, difficulties arise in getting an accurate price when high-yield or non-investment-grade bonds aren’t trading in high volumes.  

Other firms such as Charles Schwab and Fidelity Investments are facing lawsuits from investors who have suffered substantial losses due to the sub-prime mortgage crisis.

Investors who put their money in two Bear Stearns hedge funds last spring are finding themselves uncertain, to say the least, about the value of these deteriorating funds. Former Bear Stearns’ hedge fund managers, Ralph R. Cioffi and Matthew M. Tannin, were charged this week with nine counts of securities, mail, and wire fraud.  

This case highlights the problems Wall Street is facing regarding how to value investments that have suffered from the subprime mortgage crisis. For example, Cioffi substantially undervalued one of the hedge funds, saying its loss was 6.5% in April, while colleagues at Bear Stearns said the loss was three times higher than what Cioffi valued.  

On a worldwide scale, banks and bank executives are writing down the value of their assets by as much as $380 billion. This year, Credit Suisse, Merrill Lynch, Morgan Stanley, and Lehman have had employees caught for overpricing the value of various assets, costing the firms and investors millions of dollars. 

Although executives are increasing their supervision over employees to prevent future dishonesty or over-optimism about valuations, the pricing process has become the bigger controversy. For example, rather than using only market prices, the chief financial officer of Citigroup said the company would use collateralized debt obligations as another determinant in pricing. Other investors have complained that Wachovia and Washington Mutual are using an over-optimistic housing index when modeling values.  

Write-downs occur usually when banks are selling in the market; although, banks such as Bank of America have refused to mark down the C.D.O.’s of a city in the Southeast because they did not want to be forced to mark down their other holdings, or cause a domino effect. 

Some steps have been suggested to remedy these problems, like expanding the evaluation period of traders to possibly prevent future valuation misconduct.  But the question for many investors remains: what are my investments worth?

Matthew Tannin and Ralph Cioffi, former Bear Stearns’ hedge fund managers, were taken into custody at their homes Thursday morning. They are facing criminal charges due to the collapse of the subprime mortgage market and the resulting implosion of the two hedge funds they managed.  

Both former executives are accused of deceiving investors about the risk of their investments in subprime mortgages. The principal question is what did they really know when they presented the funds as promising investments.  

The prosecutors look to rely heavily on private emails.  According to the Wall Street Journal, the two allegedly sent emails implying the funds they invested in were about to crash four days before they told their investors they were confident in these funds. Tannin supposedly told Cioffi he thought the market they invested in was “toast” and wanted to shut down the funds.  

“The arrests are appropriate given the magnitude and the egregiousness of their alleged misconduct,” said attorney Steven Caruso, who is representing investors in arbitration cases against these funds.  

Their arrests are the first of possible fraud cases by banks and mortgage firms whose investments in the subprime market decreased in value. The market’s losses are now totaling around $396.6 billion. The current indictments may lead to several other criminal cases and civil suits in the future. 

Bear Stearns’ termination should have been predicted when the Federal Reserve intervened early this year to bail out the bank after the hedge funds collapsed. This collapse added fuel to the fire for the recent credit crisis. It was proof that the market could critically impair the companies that bought and resold these loans.  

Tannin and Cioffi were brought up in lawsuits last year by hedge fund investor, Barclays Bank, claiming they were purposely misled. Barclays stated Bear Stearns’ knew for months the assets in its Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund had decreased in cost since their original value.  Barclays reported that the email from Tannin said the fund is “having our best month ever.” But, at the time the fund was actually having “severe liquidity problems, and lost hundreds of millions of dollars.”  The funds failed despite Cioffi and Tannin’s positive evaluations , resulting in over $20 billion in assets to crash.

Former Bear Stearns Cos. managers Ralph Cioffi and Matthew Tannin are on the verge of criminal charges for securities fraud for mismanaging two Bear Stearns Cos. hedge funds, costing investors $1.6 billion in losses.  

Federal prosecutors have suggested that Cioffi and Tannin could face indictment. “At issue is whether the managers intentionally misled investors by presenting a rosy picture of the funds at a time when they were privately communicating with colleagues about their worries over how the investment vehicles would ride out weakness in the mortgage market,” says Wall Street Journal reporter Kate Kelly.  

Bear Stearns’ recent history of financial problems has raised concerns over its management abilities and risk controls. Bear Stearns invested large amounts of borrowed securities into bonds backed by subprime mortgages.

Despite the subsequent meltdown of mortgage-backed securities, Cioffi and Tannin remained optimistic about the subprime market. However, in May 2007, Bear Stearns was unable to repay its investors with cash and meet demands from lenders for additional cash, or margin calls. As a result, Bear Stearns lent $3.2 billion in order to recover its High-Grade fund only to see the funds file for bankruptcy protection a month later. Additional losses to the firm came from the bond market losses and investor panic. 

The potential indictment of managers from Bear Stearns, now part of J.P. Morgan Chase & Co., could mark the beginning of more investigations dealing with the mortgage-market crisis, which began a year ago. More financial firms are taking precautions to provide more precise valuations on their holdings of mortgage securities.