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Monthly Archives: March 2009

Morgan Stanley Must Pay $7.2 Million to Resolve FINRA Charges Of Early Retirement Scam

Dozens of retirees from Xerox Corp. and Eastman Kodak will soon share in a welcome pay-out after the Financial Industry Regulatory Authority (FINRA) ruled investment firm Morgan Stanley must pay $7.2 million to settle charges that two of its brokers wrongly persuaded 90 Rochester, New York, employees to take early retirement. Ultimately, the false promises of big profits and unsuitable investing strategies cost many of the investors their life savings. 

FINRA’s ruling breaks down to $3 million in fines and $4.2 million in restitution to the retirees. In addition, former Morgan Stanley broker Michael Kazacos is permanently barred from the securities industry. The second former Morgan Stanley broker, David Isabella, was charged with misconduct. His case must still go before a three-person FINRA hearing panel. Ira Miller, who managed both Kazacos and Isabella, has been suspended from acting as a supervisor for one year and fined $50,000. 

According to a March 25 statement issued by FINRA, from the years of 1998 to 2003, Kazacos allegedly solicited potential clients from Kodak and Xerox by promising them at least 10% annual returns on their investments with Morgan Stanley. He also reportedly told clients they would be able to keep up their current lifestyles by withdrawing 10% every year and not touch their principal.  

FINRA has charged Isabella with similar misconduct. As reported March 26 by 13WHAM-TV in Rochester, New York, Gerald Miller is one of the individuals who followed Isabella’s advice. Miller, who worked for Xerox, was told by the former Morgan Stanley broker that he would “make him a millionaire in 10 years.” Instead, three years after investing with Isabella, Miller learned that he and his wife needed to drop their 10 percent draw and that they were “going to run out of money in five years.” 

The Millers were later told by Isabella that they might need to sell the lakefront home they previously purchased for their retirement years, according to 13WHAM-TV. 

Other retirees are in the same predicament as the Millers. Some have financial issues, while others are headed toward bankruptcy because they retired too early. 

Morgan Stanley’s settlement with FINRA comes out to approximately $45,000 a person, far below the amount of money many retirees actually lost in the early retirement investment promotion.

FINRA Panels Returning Awards For Losses In Morgan Keegan Bond Fund Investments

Stung by huge financial losses in several Regions Morgan Keegan (RMK) bond funds, investors finally are getting some welcome news. Earlier this month, three separate FINRA arbitration panels announced awards in favor of investors who lost money in RMK mutual funds. 

In each of the arbitration claims, Morgan Keegan is accused of shrouding the true risks of the bond funds from investors. Instead, investors say Morgan Keegan and its management marketed and sold certain funds as relatively conservative investments, while in fact they were heavily exposed to subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments.  

Ultimately, several of the Morgan Keegan funds saw their value plummet as much as 90% because of the high concentration of risky and speculative debt. 

In early March 2009, two cases decided by Financial Institution Regulatory Authority (FINRA) panels returned six-figure awards to investors for their losses in Morgan Keegan funds. In one of the cases, the investors received more than the actual damages they claimed.  

Also in March, an Indiana FINRA panel awarded $18,000 to a Whitestown, Indiana, investor for losses she suffered in a Morgan Keegan bond fund. Mark E. Maddox of Maddox Hargett & Caruso served as the investor’s legal counsel. Maddox also was the attorney for the retired cattle farmer from York, Alabama, who won an earlier award from FINRA in March for losses in Morgan Keegan funds. 

In total, FINRA panels have awarded $604,000 to investors in their claims against Morgan Keegan. The Memphis-based brokerage firm also faces several class-action lawsuits from investors who say they were never made aware about the risks of certain Morgan Keegan investments.

Under Funded Pension Plans A Bone Of Contention For Companies, Employees and Retirees

Chaos in the world’s financial markets has wreaked havoc on corporate pension plans, with more people seeing their retirement savings slowly dwindle in value month after month. For retirees of bankrupt employers, the reality is especially grim.

David Jeanes, 60, is one of those individuals. Jeanes retired from Nortel Networks, North America’s biggest telephone equipment maker, in 2003 with a full pension benefit package. On Jan. 14, 2009, Nortel filed for bankruptcy protection. Now, Jeanes’ dreams of retirement, along with his pension plan, could be in jeopardy.

As reported March 25 in the Toronto Star, the future of corporate pension plans has become a huge question mark. With stock losses eating away at retirement earnings, many people who are close to retirement may either have to work longer than they initially planned or retire with far less income.

In less than six months, the amount of under funded pension plans in the United States has doubled to $373 billion. By law, when pension plans are under funded companies must infuse additional money into their plans each year to remedy the funding imbalance.

According to a March 23 article by Bloomberg, the decline in U.S. stock prices will saddle more than 50% of companies in the Standard & Poor’s 1500 Index with defined-benefit plans with about $70 billion in pension expenses this year.

Among the companies with ballooning pension deficits: Dow Chemical and Sears Holdings Corporation. Dow, whose pension plan was under funded by $4 billion at the end of 2008, anticipates doubling pension contributions to $376 million this year from $185 million in 2008.

Sears may need to nearly triple its pension contributions to $500 million in 2010.

Meanwhile, pension funds have become a hot issue in New Jersey, which recently sued former executives of Lehman Brothers over claims that fraud and misrepresentation caused the state’s public pension fund to suffer more than $118 million in losses.

According to a March 17 article in the New York Times, a “thirst for profit” and “simple greed” on the part of Lehman’s top executives, including former CEO Richard Fuld, were responsible for the investment firm misstating its financial position when New Jersey bought more than $180 million worth of Lehman shares in April and June 2008. 

The lawsuit also said that Lehman executives provided false and misleading statements about the firm’s liquidity, the value of its assets and its ability to hedge against risk.

This is the second lawsuit filed by a government entity that names former Lehman executives as defendants. In November 2008, San Mateo County, Calif., accused Fuld and other Lehman executives of making false statements that ultimately led to a $150 million loss in the county’s investment pool. 

JP Morgan To Buy New Corporate Jets, Faces Public Backlash

As the recipient of $25 billion in funds from the government’s Troubled Asset Relief Program (TARP), JPMorgan Chase should be focusing on how and when it will pay back taxpayers’ money. Instead, ABC News reports that the bank plans to spend nearly $140 million on two new luxury Gulfstream jets and embark on a lavish renovation of a hangar at the Westchester Airport to house them.

The news comes on the heels of recent public outrage over TARP recipients allocating money to buy luxury items or pay corporate bonuses. Last week, criticism reached a boiling point after it was learned that American International Group (AIG), which has received more than $180 billion in bailout money from the U.S. government, handed out $165 million in employee bonuses.

In January, a firestorm of criticism forced Citigroup, also a recipient of billions in TARP funds, to abandon plans to purchase a $50 million French-made corporate jet for executives.

Foundations, Universities, Nonprofits Face Dwindling Endowments From Failed Investments

A downturn in the economy, coupled with bad investments in auction rate securities and other risky financial instruments has left many foundations, universities and nonprofits with record low endowments. A March 2009 study from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst performance ever at the end of 2008, losing an average of 24.1%. Previously, endowments had their worst year in 1974, with an average loss of 11%.

The Commonfund survey included 235 institutions that lost $28 billion in asset value from July 1 to Dec. 31, bringing their endowments to $87 billion. About 51% of endowment assets were allocated to alternative investments, such as hedge funds and buyout funds as of Dec. 31, which is an increase from 46% six months earlier.

The collapse of the auction rate securities market in particular has created a firestorm of trouble for many foundations and nonprofit organizations. ARS buy back programs, which were announced last summer by some of Wall Street’s biggest investment firms and banks did not cover institutional investors, only retail investors and small businesses. 

As result, many foundations and nonprofits have been stuck with investment portfolios of hard to value and difficult to sell assets. Among these investments are mortgage related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.

For some entities, the plunging asset value of their endowments has forced them to close their doors. Others have reduced services or cut staff.

A March 20 article in the News and Observer offers another grim reality for universities, nonprofit organizations and foundations: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. Adding to their financial woes are state laws that prevent nonprofits from tapping into their principal.

No one can say exactly how many foundations and nonprofits are struggling with under water endowments but, by all accounts, it is grave. Says Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, in the News and Observer article: “Anecdotally, it is a serious problem. And if the current financial downturn continues, the problem will only get worse.”

Morgan Keegan Loses In Indiana FINRA Arbitration Award

In a page out of David and Goliath, a church secretary from Whitestown, Indiana, emerged victorious in her FINRA arbitration claim that investment firm Morgan Keegan failed to disclose the risks of a certain bond fund that was heavily invested toxic collateralized debt obligations (CDOs) and other asset-backed securities. Ultimately, fallout from the collapse of the subprime mortgage market caused the fund to plummet in value.

As reported in a March 19 story in the Indianapolis Star, Jo L. Wright was awarded $18,000 on March 12 by a Financial Industry Regulatory Authority (FINRA) panel for her losses in the Morgan Keegan Select Intermediate Bond Fund.

Wright initially got into the Morgan Keegan fund because of a recommendation from her local Indiana Regions bank branch manager. Before moving her money, Wright’s investments had been in a certificate of deposit (CD) and a savings account.

When she transferred her money into the Morgan Keegan Select Intermediate Bond, she says the fund was described as a “safe, conservative but higher-yielding investment.”

According to the Wright’s complaint with FINRA, representatives of Morgan Keegan never told her about the risks of the fund nor did they reveal the high concentration of asset-backed securities that it contained. Because she never received a prospectus about the fund, she had no way to determine its asset make-up or the risks it presented.

Memphis based Morgan Keegan continues to be the subject of ongoing investor complaints and investigations for its management of a group of open end and closed end bond funds that collapsed in value because of their massive investments in risky asset-backed securities.  So far, investors have sustained more than $2 billion in losses from the funds.

Wright, who lost $11,000 in the Morgan Keegan Select Intermediate Bond, is the first Indiana case to go to an arbitration hearing over the Morgan Keegan bond funds, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.

FINRA Rules Against Regions Financial Corp.’s Morgan Keegan In Latest Arbitration Claim

Yet another investor has found justice over losses caused by the collapse in value of several Morgan Keegan bond funds that owned securities backed by risky subprime mortgages. On March 12, the Financial Industry Regulatory Authority (FINRA) ruled in favor of Alabama investor Philip Willingham, awarding him $187,000.

“It is becoming apparent that the evidence investors are now able to present about the scope of Morgan Keegan’s misconduct is allowing arbitrators to better understand it,” said Indiana lawyer Mark Maddox, who handled the recent case, in a March 13 article in the Birmingham News. Maddox is the founding partner of the law firm Maddox Hargett & Caruso, P.C.

The legal issues surrounding Morgan Keegan focus on a group of open-end and closed-end bond funds. They are: Regions Morgan Keegan Select High Income-A (MKHIX); Regions Morgan Keegan Select High Income-C (RHICX); Regions Morgan Keegan Select High Income-I (RHIIX); RMK High Income Fund (RMH); RMK Strategic Income Fund (RSF); Regions Morgan Keegan Select Intermediate Bond Fund-A (MKIBX); Regions Morgan Keegan Select Intermediate Bond Fund-C (RIBCX); Regions Morgan Keegan Select Intermediate Bond Fund-I (RIBIX); and RMK Multi-Sector High Income (RHY).

Because of their exposure to high-risk mortgage-backed securities, some of the RMK funds have fallen in value by more than 90%. In total, investors in the funds have faced more than $2 billion in losses.

When investors initially placed their money in the RMK bond funds, they were told by the funds’ management, including former Morgan Keegan manager Jim Kelsoe, they had invested in a diversified portfolio composed of relatively conservative corporate bonds and preferred stocks. As it turns out, the bond funds invested in high-risk, low-priority tranches of collateralized debt obligations (CDOs).

“This [recent] arbitration award affirms our view that Morgan Keegan engaged in a massive scheme to defraud many investors, including Philip Willingham, in the sale of its bond funds,” says Maddox.

UBS Problems Spur Management Upheaval

The subprime mess and allegations of tax evasion schemes are just some of the issues responsible for tarnishing the reputation of UBS AG. For months now, a string of crises has fueled speculation about the fiscal health of the Swiss-based investment firm. In the last year, the company saw its stock price fall some 85%, experienced $18 billion in losses and cut thousands of jobs.

Last month, the U.S. government sued UBS in an attempt to force the bank to reveal the identities of up to 52,000 American clients who allegedly hid secret Swiss accounts from U.S. tax authorities. Prior to the lawsuit, UBS struck a deal with U.S. prosecutors on Feb. 18 by agreeing to pay $780 million and provide the names of up to 300 individuals who may have avoided paying taxes by stashing money in Switzerland.

Fallout from tax evasion scandal has led UBS to clear out its top management. On Feb. 26, the company appointed Oswald Gruebel, who engineered the turnaround at competitor bank Credit Suisse, as its new chief executive. Gruebel replaced Marcel Rohner, who had been on the job as CEO at UBS for only 18 months.

On March 3, UBS announced that Kaspar Villiger would replace Peter Kurer as chairman of its board of directors.

Since the beginning of the subprime meltdown, UBS has amassed more than $50 billion in writedowns and losses, forcing the firm to reduce its workforce by 11,000 jobs.

Madoff Will Plead Guilty To Nation’s Biggest Ponzi Scheme

Ira Sorkin, the lawyer for disgraced money manager Bernard “Bernie” Madoff, says his client will plead guilty to 11 criminal charges on March 12. His punishment: a potential prison term of 150 years.

On Dec. 11, Madoff, a former Nasdaq chairman, was arrested by federal authorities and accused of running a $50 billion Ponzi scheme in which billions of dollars from new investors allegedly were used to pay off older ones.

Madoff’s March 12 court appearance, where he is expected to enter a guilty plea and avoid going to trial, has been anticipated for months. At least 25 of Madoff’s victims are expected to speak.

On Monday, the Wall Street Journal reported that one of Madoff’s assistants directed employees to produce fake trading tickets to mislead clients into thinking their investment returns were legitimate.

To date, authorities have located about $1 billion for investors burned by Madoff’s scam. 

CEO Vikram Pandit Defends Citigroup In Employee Memo

Citigroup CEO Vikram Pandit contends the bank whose stock fell below $1 last week is poised for a rebirth. As reported in a March 9 article in the Wall Street Journal, Pandit told colleagues that despite Citi’s ongoing financial issues and market perception, the bank’s capital strength and earnings power ultimately would enable the company to regain its fiscal footing in the future.

In the memo to employees, Pandit noted Citigroup’s “relatively stable” deposits, and that the bank had conducted its own stress tests using assumptions more “pessimistic than those of the Federal Reserve.” Pandit did not elaborate, however, about Citigroup’s internal stress tests.

At one time, Citigroup was the world’s biggest bank by market value. Two years ago, that value was more than $270 billion. Today, Citigroup stock has plummeted 95%, reducing the bank’s market value to about $5.8 billion.


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