Whistleblower law firm Labaton Sucharow released a survey on July 10, 2012 that showed 25% of Wall Street executives see wrongdoing as a key to success. The survey included 500 senior executives in the United States and the UK. 30% also said their compensation plans created pressure to compromise ethical standards or violate laws. The survey confirms something I already believed. Wall Street has to cheat to win because it cannot meet the investor expectations it created with slick marketing and personable financial advisors. Continue reading
There are several regulators (SEC, FINRA, State Securities Commissioners) that audit financial advisory firms on a regular basis; for example every four or five years. The purpose of the audit is to make sure the firms and their representatives are following the rules. A second goal is to identify problems before they damage investors.
In addition to periodic audits, the regulatory agencies receive thousands of complaints per year from investors who believe they have been damaged by investment firms and their representatives. Many of the complaints are frivolous – that is, investors lost money in down markets and the representative did nothing wrong. But, at the other end of the spectrum is criminal wrongdoing. Continue reading
Wall Street executives come to the rescue of Goldman Sachs’ reputation. Morgan Stanley CEO James Gorman and JPMorgan Chase & Co. CEO Jamie Dimon warned their staffs not to circulate Gregg Smith’s op-ed criticizing that firm.
Gorman also said it wasn’t fair for a newspaper to publish the article. I guess it was fair for Goldman Sachs to package $1 billion of toxic mortgages and sell them to clients as a safe investment. Sachs’ clients lost $700 million.
Gorman said it was the view of a single, random employee and not a consensus opinion. Does Gorman really believe a group of current Goldman Sachs’ employees are going to risk their jobs by coming clean about the culture at that company? Give me a break. They would have to leave Sachs like Smith did before they would be willing to talk.
Even if they left they would keep quiet so another Wall Street firm would hire them. Do you believe Gorman would hire someone who told the truth about the culture at Goldman Sachs? Not very likely! Morgan Stanley has its own skeletons.
What was Goldman Sachs response to this public relations nightmare? It sent a memo to current and former employees, saying “most” of its workers believe it provides exceptional service to clients. What else would it say?
Don’t expect current employees of Goldman Sachs to go public criticizing the firm. They make too much money. Plus, they would be black listed by other Wall Street firms.
In the romantic comedy, Something’s Gotta Give, Jack Nicholson said to Diane Keaton, “I have always told you some version of the truth”. I believe the SEC is also telling the public some version of the truth.
The court system is currently reviewing a $285 million fine and settlement that was agreed to by the SEC and Citigroup when it sold toxic mortgage securities to investors. Citigroup told investors the mortgages were safe investments. Then the company bet money this mortgage pool would fail. If this sounds familiar, Goldman Sachs perpetrated the same scam. Citigroup made $160 million and investors lost hundreds of millions of dollars.
Judge Jed Rakoff rejected the settlement because it did not include an admission of wrongdoing by Citigroup. He wants this case to go to trial. The SEC and Citigroup are fighting his decision.
Why are the SEC and Citigroup on the same side? One should be the prosecutor and one should be the defendant.
In my opinion, the Rakoff decison interrupted a long running scam that damages the public. It is somehow legal for financial service companies to rip-off investors. If they are caught, they are allowed to pay a fine without admitting guilt. Because they do not admit guilt, no crime was committed.
This travesty of justice has two consequences. First, fines are a cost of doing business for companies and most of the fines are offset by profits that were generated by the scams. Second, no company executives are prosecuted for committing fraud. These are the executives at Citigroup who approved the sale of toxic assets and then bet the mortgage product would decline in value. This fraud was committed by high level executives at Citigroup.
The SEC is telling investors some version of the truth when it says the public interest is being served by the payment of fines. If that was true, why aren’t the fines more of a deterrent? The real truth is executives are using company resources to stay out of jail and the SEC lets the get away with it.
The SEC has accused a father and son of bilking LDS church members out of $220 million. The money that was supposed to be used to buy apartment buildings and renovate them was used to fund the lifestyles and businesses of the perpetrators.
Churches are easy prey for Ponzi schemes. The bad guys sell the scam to church elders then they make sure the elders have a very positive experience or the elders are lead to believe they are having a very positive experience.
Elders may be inclined to share their good fortune with other church members. Or, the scam operators convince the elders to act as references for their scam. Either way, church members tend to trust other church members. They do not question the validity of the experiences of other church members, in particular church leaders.
One trust is established, they let their guards down and they are easy prey for the criminals who operate scams.
Investors should not trust the comments of references when they invest their assets. No advisor will provide a bad reference. Most references are selected because they are willing to make positive comments. Most references are coached to make particular statements. And, you do not know the nature of the relationship that exists between the reference and the person selling the investment.
Be very cautious, even when the reference is a member of your church.
Wall Street companies cheat investors to maximize earnings, share prices, and executive bonuses.
When they are caught, companies pay fines to make the problem go away.
The latest example is Citigroup’s agreement to pay a $285 million fine to settle an SEC action that stated it sold investors $1 billion of a CDO then bet against the performance of the CDO. Investors lost $700 million and Citigroup made $160 million.
Citigroup is one of the biggest financial institutions in the world. If you can’t trust Citigroup, who can you trust?
Citigroup agreed to pay the fine without admitting guilt. If they didn’t do anything wrong why did they agree to pay the fine?
First of all, fines are a cost of doing business for Wall Street firms. They probably have a contingency fund to pay fines.
Second, they want the “problem” to go away as quickly as possible to minimize adverse publicity.
Third, Wall Street knows investors have very short-term memories. Very shortly, Citigroup’s alleged fraud will be yesterday’s news and it will be business as usual. I bet not one investor pulled their Citigroup accounts because the “problem” did not impact them.
What about the investors who lost the $700 million? Can they still afford to retire when they want to? Can they maintain their desired standard of living during retirement?
What about the executives who made millions from their decisions to package toxic assets and sell them to investors?
What about the fiduciary responsibility to always put investor interests first? I know the answer to this one. Brokerage firms are not held to fiduciary standards. Shame on FINRA and the SEC.
This is a great question that has no easy answer.
We know investors need the services that are provided by the financial services industry. We also know, compared to Wall Street, investors really are powerless. This does not bode well for meaningful change.
Wall Street executives are protected by influential politicians who pass regulations that protect the executives from prosecution when they defraud investors. Instead of jail time for executives, Wall Street companies are allowed to pay fines without admitting guilt.
Can investors stop these two corrupt entities from working together?
Investors are voters. They can get rid of the politicians that pass regulations that protect Wall Street executives. However, history says this is not likely to happen. Investors believe they are powerless so they accept the consequences of corrupt business practices with barely a peep.
A more practical solution is for investors to stop buying products from major Wall Street firms. They should begin using the services of small, independent Registered Investment Advisory firms that are required to put their financial interests first. These firms do a better job than their Wall Street counterparts for less money.
Investors may not be able to change Washington, but they can stop doing business with Wall Street Robber Barons that have long histories of cheating investors to maximize their own incomes.
If you won’t use the ballot box, then vote with your assets. Move them to investor friendly, independent firms.
This would be a worthy cause for Occupy Wall Street if they can get their act together.
Citigroup is paying a $285 million fine for cheating investors. Wall Street companies pay billions of dollars of fines without admitting quilt. This cozy relationship with regulators allow executives to commit acts of fraud with no risk of going to jail. Key executives make millions, investors lose millions, and no one goes to jail. This is heads I win, tails you lose played at level where billions of dollars are at stake.
As head of the Office of Management and Budget, Peter Orszag played a powerful and key role in shaping public policies such as the first stimulus package and the recent health-care reform legislation. Recently he has stepped down as OMB director to accept a senior position in the investment banking arm at Citigroup, an institution that received massive infusions of taxpayers’ dollars.
In his new role at Citigroup, Mr. Orszag’s annual salary alone has been ball-parked in the millions of dollars. This ability to effortlessly glide through the revolving door between Washington and Wall Street seems improper in the very least and demonstrates the potential for corruption and abuse. Do you wonder why the recent financial reform that was suppose to rein in reckless risk-taking by the very same institutions that brought this country to the brink of collapse, lacks teeth? Do you wonder why a law that was suppose to do away with “Too-big-to-fail” has had little effect? Why did our politicians accept such lax financial reform when a staggering majority of Americans wanted far greater and extensive measures ?
Mr. Orszag no doubt understands how the positions he takes and the policies he helps shape while in government will affect his future career options. The potential for such huge paychecks and the prospect of a big paying job on Wall Street and elsewhere undoubtedly influences government policy-makers positions on key legislation that impacts its respective industries. It’s no wonder our politicians are unable or unwilling to get any sensible legislation passed that would benefit the masses instead of a select few special interests.
It seems that news sources have been inundating us with the opinions of economists that have stated if the Bush tax cuts are not maintained that we will all be in trouble. These economists all claim to be “experts” at determining where the economy is going. These are the very same experts that did not predict the 2008 financial crisis and did not foresee the current mess we are in. But now these experts are telling us to listen to them or else. I have to confess that I have studied economics and I haven’t found it very useful for prophesying, and I don’t believe economists are very good at predicting anything with the exception of the past.
An ominous side effect of the tax deal being approved is the lost of the United States’ triple A bond rating. In a Reuters headline, Moody’s warns of possibly reducing U.S.’s Aaa rating because of Tax Deal, the rating agency said it may lower the U.S.’s Aaa rating if the compromise on the Bush tax cuts and the extension of unemployment benefits becomes law. The agency’s concern is the increase debt levels, which would make a rating reduction more likely in the next 12 to 18 months. Then again, Moody’s, along with others, was giving sub-prime mortgage-back securities triple-A ratings that clearly did not deserve such a high grade. Just another alleged “expert’s” opinion.