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Weidner sentenced to 6 years in fraud case
By Steve Fry
The Capital-Journal
Former Topeka banking executive Clinton Odell "Del" Weidner II was sentenced today to six years, six months on each of six counts for convictions of conspiring to hide a bank loan.
The judge handed down the sentence at about 2:15 p.m. today. The sentences are to run concurrently, meaning Weidner won't spend more than six years, six months in prison.
U.S. District Court Judge Julie Robinson declined to impose fines on Weidner. She allowed him to remain free and will let him voluntarily surrender to a federal correctional facility.
At the defendant's request, Robinson will recommend to the U.S. Bureau of Prisons that Weidner be housed at a federal correctional facility in Yankton, S.D.
However, Robinson rejected Weidner's request to remain free on bail pending appeal of his case.
Weidner made a sometimes emotional statement during the sentencing. He apologized to his family, his girlfriend, her children and his supporters. About 25 family members and friends were in the courtroom during the last hour of the sentencing today.
Weidner takes the stand
Weidner climbed into the witness stand late this morning to testify about what happened to thousands of dollars worth of antique cars, a gun collection and artwork.
Photo by Ann Williamson/The Capital-Journal
Del Weidner closes his eyes as he listens to his girlfriend, Carol Reynolds, talk with the news media following his sentencing today at the Frank Carlson Federal Courthouse in Topeka. Weidner was sentenced to six years, six months in prison.Weidner became a witness after an FBI agent testified that a number of cars purchased by Weidner had never been titled or tagged, and there is no record of Weidner selling the vehicles.
At one point in response to questions by Richard Hathaway, senior litigation counsel for the U.S. attorney's office, Weidner said he had never owned a red 1964 Mercedes Benz. But he quickly reversed himself, saying he had purchased the car from Frank Sabatini, owner of Capital City Bank, and now the car is in his garage.
"So you lied under oath?" Hathaway said.
"Yes. I did," Weidner said.
Robinson presided over the sentencing today of Weidner for convictions of six felonies in a bank fraud case. Weidner and David Wittig, 48, former chief executive officer, president and chairman of the board of Westar Energy were convicted on July 14 of conspiring to hide a $1.5 million loan from federal regulators.
Weidner's testimony this morning came in response to a contention by federal prosecutors that Weidner was trying to hide his financial assets.
Weidner this morning said a financial statement dated May 31, 2001, submitted to Capital City Bank showed that he had a car collection valued at $160,000.
Weidner's statement
:: Weidner's full statement to the judge
From start to finish
This timeline chronicles events that ended with Del Weidner's sentencing today.
October 1994 -- Weidner becomes president of Capital City Bank.
April 3, 2001 -- Weidner tells Wittig about a $1.5 million investment in a an Arizona real estate project. Wittig declines but agrees to loan Weidner the money if Weidner extends Wittig's credit line by $1.5 million.
April 30, 2001 -- Weidner approves a $1.5 million extension to Wittig's $3.5 million line of credit at Capital City Bank. Weidner wires $1.5 million to provide down payment for the real estate project.
March 16, 2002 -- The true nature of the loan was discovered by Capital City Bank. Weidner is placed on administrative leave.
Nov. 7, 2002 -- A federal grand jury charges Wittig and Weidner each with seven crimes linked to the case.
June 30, 2003 -- Weidner pleads guilty to two of the crimes.
July 14, 2003 -- Wittig and Weidner are convicted of the other crimes by a jury, which also rules Weidner must forfeit any "real property" linked to the loan.
Feb. 26, 2004 -- Weidner is sentenced to six years, six months in prison.
Recent stories
:: Feb. 26, 2004 -- Weidner to be sentenced today
:: Feb. 24, 2004 -- Wittig pleads for leniency
:: Feb. 22, 2004 -- Wittig, Weidner likely face prison
:: Jan. 27, 2004 -- Prosecutors seek forfeiture
Story archives
:: Past stories in the case
CONVICTIONS
A U.S. District Court jury on July 14, 2003, returned guilty verdicts against Weidner and Wittig.
Clinton Odell "Del" Weidner II, 50, of Topeka:
• Conspiracy
• Two counts of filing false bank entries
• Money laundering
• Two guilty pleas before the trial began to two other counts of filing false bank entries
• Ordered to forfeit the proceeds from the Arizona land deal
David C. Wittig, 48, of Topeka:
• Conspiracy
• Four counts of filing false bank entries
• Money laundering
In July 2002, another Weidner financial statement showed he had cars, artwork, guns and a Harley-Davidson motorcycle, all valued at $250,000.
Hathaway questioned Weidner closely about the sale of a 1995 Porsche about six or seven years ago to Fritz Reynolds, a former broadcast executive. Weidner earlier had said he didn't keep any paperwork, including bills of sale, that reflected the sales of his cars. Weidner said he didn't recall how much Reynolds paid him for the Porsche.
Hathaway placed a document in front of Weidner, which showed the car's title was still registered to the man that Weidner had purchased it from. The title didn't have Weidner's name on it.
"Does the figure $50,000 ring a bell?" Hathaway asked.
Weidner said he didn't recall how much it sold for.
"I don't know if it was more than 50 or less than 50," Weidner said. "I don't know."
Hathaway showed a bill of sale for the car to Weidner. He asked Weidner whether it showed the earlier owner as the seller of the car to Reynolds.
"I don't know," Weidner said.
Hathaway pointed out that the bill of sale bore a notarization by Christy Gurney, who worked as Weidner's secretary for eight years. Weidner said he didn't recall the bill of sale, which showed the car was sold for $28,500.
"You sold it for substantially more than that?" Hathaway asked.
"I don't recall, Mr. Hathaway," Weidner said.
Weidner testified he gave Fritz Reynolds, a "blank bill of sale." After his testimony, Robinson said "this is all very interesting."
She said what's more important to the court is that Weidner was instructed to turn over accurate information to the presentence report writer, a federal investigator who compiles information to help determine what sentence a defendant is to receive.
The judge said that if she had to, she would put the presentence writer on the witness stand to testify about his efforts to get information about the cars from Weidner.
"I wonder what is going on here," Robinson said, adding that there is an allegation that Weidner impeded the collection of information by the presentence investigation writer.
"It's looking more and more like that's what's going on here," Robinson said.
Judge enhances sentence
When the case resumed at 12:30 p.m. following a lunch break, Robinson denied a series of objections by Weidner to the presentence investigation writer's report.
She said she would enhance Weidner's sentence by two levels based on his obstruction of information to the court about his financial statement. Robinson said she also would enhance his sentence because the gross loss was more than $1 million, referring to the $1.5 million loan between the men.
The defendants could reasonably see a "pecuniary harm" in the deal, she said. Weidner had contended there would be no loss to the bank due to Wittig's worth, but Wittig wouldn't have paid back the loan to the bank, Robinson said, because it was Weidner's loan. The bank was repaid.
The judge noted that Weidner couldn't afford the payments on the loan and had to get help from third parties to repay his loan. At times, the judge lectured Weidner about nominee loans -- loans one person takes out in the name of another person. Robinson emphatically told Weidner that nominee loans are illegal.
"Capital City Bank was a victim," Robinson said, adding she didn't know whether it showed Weidner's arrogance that he didn't acknowledge the bank was a victim.
"He really doesn't get it," she said.
Robinson said the rules are designed to uphold the public's confidence in the banking industry and to assure that bank officers won't be "self-dealing." Robinson lectured Weidner about banking ethics and full disclosure, saying "self-dealing" doesn't belong in the banking industry.
Forfeiture from land deal
Earlier in the morning, Robinson ruled that a company in which Weidner was a partner must forfeit up to $1.5 million set aside in an escrow account. Weidner is half owner of Arizona-based Scottsdale Sierra Eagle Ridge LLC.
The judge's first ruling came shortly after the 9 a.m. start of the court proceedings this morning. Robinson denied a motion for acquittal and a new trial for both Weidner, 50, and David Wittig, 48, former chief executive officer, president and chairman of the board of Westar Energy.
Wittig is to be sentenced on Friday in Kansas City, Kan.
Robinson said she had planned to begin the sentencing portion of this morning's proceedings directly after making the forfeiture ruling. Attorneys for Weidner said they thought the forfeiture portion would take longer, and told witnesses to arrive at the Frank Carlson Federal Building by 1:30 p.m.
Weidner and Wittig were convicted on July 14 of conspiring to hide a $1.5 million loan from federal regulators. Weidner, who was Wittig's banker, approved a $1.5 million extension to Wittig's line of credit at Capital City Bank. The money then was moved by wire transfer to Weidner for him to invest in Scottsdale Sierra Ridge LLC's upscale Eagle Ridge housing developing near Scottsdale, Ariz.
The $1.5 million Wittig loaned Weidner later was repaid by Topeka investigator Jack McGivern, who then received Weidner's interest in the Eagle Ridge development.
The jury that convicted Wittig and Weidner also ruled in July that Weidner should forfeit any "real property" linked to the $1.5 million loan. Robinson ruled today that the money would be forfeited from an escrow account set up by Scottsdale Sierra Eagle Ridge LLC in April 2003.
Wittig and his attorneys also were in the courtroom today. Wittig entered the federal building's lower level at about 8 a.m., then went into a room adjacent to the courtroom at about 8:35 a.m.
Accompanied by his attorneys, the former Westar chief sat behind Weidner's defense attorneys.
Weidner exited the fourth-floor elevators at about 8:40 a.m. with girlfriend Carol Reynolds and her son, then entered the courtroom minutes later. About 10 minutes before court proceedings were to begin, Weidner led Reynolds and her son to a corner in the courtroom's public-viewing area and spoke with them privately.
Decked out in a dark-blue suit, Weidner sat solemnly in the front row of the courtroom's public area while Robinson poured over facts in the case. His hands were folded and his legs crossed.
Robinson said she also planned to sentence Wittig today, though his sentencing was delayed because Wittig's attorneys didn't plan on the sentencing occurring today.
Capital-Journal reporters Tim Richardson and Tim Hrenchir contributed to this report.
http://www.cjonline.com/stories/022604/bre_weidner.shtml
Raging Bull BASHERS to be IDENTIFIED...........
By Jack Burney
Published by OTCNN.com
If you have a nasty disposition, an undefined anger at the world in general, and a gift for venomous verbosity, here’s the perfect job for you: Paid Basher for the MMs.
Any illusion that such tactics are beneath the MMs was shattered recently when a Florida court issued an injunction again one of the defendants, "Cats3," in the lawsuit filed by QuestNet Corp. (OTCBB: QNET). "Cats3" turned out to be Jerome Rosen, senior trader with J. Alexander Securities (ALEX), a major market making firm.
Rosen was enjoined from "publishing any false and defamatory statements concerning QuestNet and its current and former officers, directors, and employees in any manner," and from "interfering with any contractual/business relationships between Quest Net and its employees, customers, suppliers, consultants, shareholders and/or investors."
Now, InvestAmerica (OTCBB: INVT) has subpoenaed Raging Bull to identify 14 INVT-bashers who posted on RB’s message boards, and is waiting for the response.
"Purpose of the suit," said Bryan Kitts, director and secretary-treasurer of INVT, "is ultimately to find out if any of these 14 bashers is employed directly or indirectly by a market maker or by a member firm of the SEC or the NASD."
If they are, as INVT expects, then ultimately, the next question is: "Is the entity that employed the bashers responsible for the actions of its employees?" If anyone is transmitting messages designed to enhance the position of his employer or influence the price of the stock to the employer’s advantage, what is the employer’s culpability?
....
The INVT complaint asserts causes of action alleging violations of the Racketeering Influenced and Corrupt Organization or RICO Act, the Massachusetts Consumer and Business Protection Act, and common law defamation. It alleges that the defendants have conspired to post statements on Raging Bull. The message here...BASHERS BEWARE!!
http://ragingbull.lycos.com/mboard/boards.cgi?board=PAVP&read=8507
Found it at this link, but its probably archived:
http://www.cfo.com/cfo_home
Treasury and IRS Shut Down Aggressive Executive Stock Transaction
AccountingWEB.com - February 25, 2004 - On Wednesday, the Treasury Department and the IRS issued a revenue ruling that would shut down an aggressive transaction involving the exercise of stock options by corporate insiders using debt financing provided by the corporation.
In these transactions, typically the corporate insider will exercise options he or she holds by giving the company a promissory note. If the value of the stock later falls below the face amount of the note, the company may agree to reduce the insider’s debt. Certain individuals have claimed that this debt reduction does not result in taxable income.
Revenue Ruling 2004-37 provides that reduction of debt in these circumstances does result in taxable income to the insider. By forgiving part of the purchase price, the company has increased the amount of stock that the insider has received without paying for the stock. If the stock was not paid for by the insider, the insider will be treated as receiving compensation.
Acting Assistant Secretary for Tax Policy Greg Jenner stated, “Once again, we have made it clear that everyone has to play by the same rules. A corporate insider whose compensation is increased because the company reduces the purchase price on stock the insider has already purchased must pay tax on that increased compensation.”
The ruling also provides that a reduction in the interest rate under the note, or a change in the note so that the executive no longer has personal liability, also would result in compensation income.
http://www.accountingweb.com/cgi-bin/item.cgi?id=98785&d=815&h=817&f=816&dateformat=...
Class Action Lawsuit Against Medical Staffing Network Holdings, Inc.
BALTIMORE, MD -- (MARKET WIRE) -- 02/20/2004 -- Law Offices Of Charles J. Piven, P.A. today announced that a securities class action has been commenced on behalf of shareholders who purchased the common stock of Medical Staffing Network Holdings, Inc. (NYSE: MRN) traceable to Medical Staffing's Registration/Statement/Prospectus used in connection with its April 17, 2002 Initial Public Offering.
The case is pending in the United States District Court for the Southern District of Florida against defendant Medical Staffing and certain of its officers and directors.
The action charges that defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period which statements had the effect of artificially inflating the market price of the Company's securities.
No class has yet been certified in the above action. Until a class is certified, you are not represented by counsel unless you retain one. If you are a member of the Class, you may move the court no later than April 19, 2004 to serve as a lead plaintiff for the Class. In order to serve as a lead plaintiff, you must meet certain legal requirements. To be a member of the class you need not take any action at this time, and you may retain counsel of your choice.
If you acquired shares of Medical Staffing Network Holdings, Inc. traceable to its Registration Statement/Prospectus used in connection with its April 17, 2002 Initial Public Offering and want to discuss your legal rights, you may e-mail or call Law Offices Of Charles J. Piven, P.A. who will, without obligation or cost to you, attempt to answer your questions. Law Offices Of Charles J. Piven has been involved in securities litigation for over ten years. You may contact Law Offices Of Charles J. Piven, P.A. at The World Trade Center-Baltimore, 401 East Pratt Street, Suite 2525, Baltimore, Maryland 21202, by email at hoffman@pivenlaw.com or by calling 410/986-0036.
http://www.marketwire.com/mw/release_html_b1?release_id=63399
Treasury and IRS Shut Down Abusive Life Insurance Policies in Retirement Plans
IR-2004-21, Feb. 13, 2004
WASHINGTON — Today, the Treasury Department and the Internal Revenue Service issued guidance to shut down abusive transactions involving specially designed life insurance policies in retirement plans, section “412(i) plans.” The guidance designates certain arrangements as “listed transactions” for tax-shelter reporting purposes.
A “section 412(i) plan” is a tax-qualified retirement plan that is funded entirely by a life insurance contract or an annuity. The employer claims tax deductions for contributions that are used by the plan to pay premiums on an insurance contract covering an employee. The plan may hold the contract until the employee dies, or it may distribute or sell the contract to the employee at a specific point, such as when the employee retires.
“The guidance targets specific abuses occurring with section 412(i) plans,” stated Assistant Secretary for Tax Policy Pam Olson. “There are many legitimate section 412(i) plans, but some push the envelope, claiming tax results for employees and employers that do not reflect the underlying economics of the arrangements.”
“Again and again, we’ve uncovered abusive tax avoidance transactions that game the system to the detriment of those who play by the rules,” said IRS Commissioner Mark W. Everson. “Today’s action sends a strong signal to those taking advantage of certain insurance policies that these abusive schemes must stop.”
The guidance covers three specific issues. First, a set of new proposed regulations states that any life insurance contract transferred from an employer or a tax-qualified plan to an employee must be taxed at its full fair market value. Some firms have promoted an arrangement where an employer establishes a section 412(i) plan under which the contributions made to the plan, which are deducted by the employer, are used to purchase a specially designed life insurance contract. Generally, these special policies are made available only to highly compensated employees. The insurance contract is designed so that the cash surrender value is temporarily depressed, so that it is significantly below the premiums paid. The contract is distributed or sold to the employee for the amount of the current cash surrender value during the period the cash surrender value is depressed; however the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. Use of this springing cash value life insurance gives employers tax deductions for amounts far in excess of what the employee recognizes in income. These regulations, which will be effective for transfers made on or after today, will prevent taxpayers from using artificial devices to understate the value of the contract. A revenue procedure issued today along with the proposed regulations provides a temporary safe harbor for determining fair market value.
Second, a new revenue ruling states that an employer cannot buy excessive life insurance (i.e., insurance contracts where the death benefits exceed the death benefits provided to the employee’s beneficiaries under the terms of the plan, with the balance of the proceeds reverting to the plan as a return on investment) in order to claim large tax deductions. These arrangements generally will be listed transactions for tax-shelter reporting purposes.
Third, another new revenue ruling states that a section 412(i) plan cannot use differences in life insurance contracts to discriminate in favor of highly paid employees.
Copies of the proposed regulations, the revenue procedure, and the two revenue rulings are attached.
Related Links:
Revenue Ruling 2004-20 (PDF 65K)
Revenue Ruling 2004-21 (PDF 58K)
Revenue Procedure 2004-16 (PDF 71K)
Proposed Regulations (PDF 50K)
http://www.irs.gov/newsroom/article/0,,id=120409,00.html
Those deficits would put the national debt at $10 trillion by the end of the decade...Bush and Greenspan must both be fired! Elect Trump as the new chairman of the Fed...Bush...your fired! Greenspan...your fired... Snow...your fired!
Stuck in the SAS 70s
As Sarbanes-Oxley Section 404 meets up with an obscure auditing standard, many companies are thinking hard about offshoring their business processes.
Craig Schneider, CFO.com
February 23, 2004
A little-known and perhaps largely outdated auditing standard for outsourcers could be the next big hurdle for Sarbanes-Oxley compliance. Not only might the standard cause a number of businesses to run afoul of the Section 404 provisions on internal controls, but it might also dissuade other companies from business process outsourcing in India, China, and other emerging nations.
The standard in question is Statement on Auditing Standards No. 70, "Reports on the Processing of Transactions by Service Organizations." Set up by the American Institute of Certified Public Accountants in 1993, SAS 70 spells out how an external auditor should assess the internal controls of an outsourcing service provider and issue an attestation report to outside parties or to a client.
Auditors and other critics of the standard say SAS 70 is in need of a major overhaul, especially considering the June deadline for Section 404 compliance facing many public companies. (Read more about what companies and their auditors are planning for in "Just What Does Section 404 Entail?" at the end of this article.)
Finance would seem to have more at stake than other corporate functions in clarifying the situation, since transferring financial tasks overseas can put material transactions in the hands of outsourcers. That will give finance folks pause, however many cost-cutting sermons they've sat through. Stan Lepeak, vice president of the research firm Meta Group, believes that incompatibilities between SAS 70 and Sarbanes-Oxley will "dampen outsourcing, at least in the short run, until outsourcers can show that they have both the adequate controls in place [and] evidence to prove that."
Tom Eubanks, of IBM business consulting services, isn't so sure. "On first blush," he says, "one might think, 'Why would you outsource in a world where Sarbox is in place...and the magnifying glass is on the finance function?' " But what Eubanks and his colleagues are finding, he adds, is that "companies are looking at outsourcing as a valid way to address some [Sarbanes-Oxley] issues."
All in the Timing
Under SAS 70, an outsourcing-service provider undergoes an annual audit, performed either by its own independent auditor or by the auditors of its outsourcing clients. There are two types of service-auditor reports. Type I includes the service auditor's opinion on the fairness of the presentation of the provider's description of its controls and how well they're designed to meet specified control objectives. Type II reports, generally preferred for their greater depth, include the same data as Type I as well as the auditor's opinion on the effectiveness of the controls during the period under review.
Even a Type II report, however, doesn't guarantee airtight compliance with Sarbanes-Oxley. For one thing, the timing of the audit — if it's performed by the service provider's auditor — might be out of sync with the client's reporting period. If the audit is performed in June and the client's fiscal year ends December 31, for instance, there's a six-month gap in the attestation of the outsourcer's internal controls. If the controls slip up during the second half of the year, the accuracy and reliability of the client's own year-end attestation could be compromised — and fair game for a Securities and Exchange Commission inquiry.
One response to the timing issue is to request that the service provider undergo SAS 70 audits on a quarterly basis or "fill in the gaps" with updates throughout the year. Smaller service providers might bridle at the added cost during contract negotiations — but after all, it's the client's attestation that's on the line.
Another worry for outsourcer auditors concerns just how much of the service provider's audit is being revealed. A service provider is required to inform its client only about any failures of SAS 70 tests; there's no requirement to spell out the exact substance or scope of the audit.
Thus, for instance, a client's own external auditor would be unable tell the client whether a test that unearthed two failures probed 40 processes, or only four. That could lead to some poor assessments of service-provider controls. "We will be dealing completely in the dark as far as the population of that test," says Lynn Edelson, systems and process assurance leader for PricewaterhouseCoopers. "I think that was one of the biggest flaws in SAS 70 in light of Sarbanes-Oxley."
That raises another point for clients to bear in mind during contract negotiations, says Edelson: Insist that the service provider disclose the scope of the audit and not only the failures.
Auditor Dependence?
Another thorny area is the possibility of conflicts of interest. That's particularly worrisome, says Meta Group's Lepeak, when a company's external auditor also performs the SAS 70 audit of the service provider.
In the eyes of the Public Company Accounting Oversight Board, there's no distinction between Section 404 compliance audits of a company's internal business processes and its outsourced processes. But in either case, an external auditor — which must attest to the client's Section 404 compliance — cannot also provide consulting services to the client or to the outsourcing provider on how to perform the SAS 70 audit.
In the area of auditor independence, much remains cloudy. The situation becomes especially unclear when an auditor performs a SAS 70 test on an outsourcing provider to distribute to the outsourcer's clients. If one of those clients has the same external auditor as the outsourcing provider, must it hire another external auditor to maintain an objective view of the service provider's audit?
The PCAOB could provide a great deal of clarity on the issue of auditor independence — and many other BPO-related conundrums — by finalizing its guidance for auditors on Section 404. The provision itself makes no mention of outsourcing. Nor have PCAOB officials expressed any intention of updating SAS 70 anytime soon. (Through a spokesperson, PCAOB chief auditor Douglas Carmichael declined to be interviewed for this story.)
With regulatory guidance in scant supply, many companies may well hold off for a while on business process outsourcing in India, China, and other emerging nations. As for companies and auditors already dealing with BPO providers overseas, they may soon find themselves up the Yangtze without a paddle.
Just What Does Section 404 Entail?
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, in May 2003 the Securities and Exchange Commission (SEC) adopted rules regarding internal controls at public companies. Section 404 also requires that a company's independent auditors attest to and report on management's controls assessments, following standards established by the Public Company Accounting Oversight Board (PCAOB).
Under the SEC rules, management's annual internal-control report must contain:
A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company.
A statement identifying management's framework for evaluating the effectiveness of internal controls.
Management's assessment of the effectiveness of internal controls as of the end of the company's most recent fiscal year.
A statement that the company's auditor has issued an attestation report on management's assessment.
Internal controls, according to the new rule, include assurances of accurate records maintenance, as well as financial reporting that complies with generally accepted accounting principles. The rule also stipulates that managers and directors sign off on receipts and payouts, and that publicly traded companies maintain adequate systems to prevent or detect unauthorized material transactions.
Management must disclose any material weakness in a company's internal-controls structure. If material weaknesses exist, senior executives "will be unable to conclude that the company's internal control over financial reporting is effective," according to the SEC.
The PCAOB, which proposed its standard for auditors in October 2003, must still finalize the standard, after which it must be approved by the SEC before taking effect.
The proposed auditing standard addresses both the work that is required to audit internal control over financial reporting and the relationship of that audit to the audit of the financial statements. The integrated audit results in two audit opinions: one on the internal controls and one on the financial statements.
The proposed standard requires the auditor to communicate in writing to the company's audit committee all significant deficiencies and material weaknesses of which the auditor is aware. The auditor also is required to communicate in writing to the company's management all internal control deficiencies, and to notify the audit committee that such communication has been made.
A number of circumstances are defined by the proposed standard as "significant deficiencies" that would be strong indicators of a material weakness. They include:
Ineffective oversight of the company's external financial reporting and of internal control over financial reporting by the company's audit committee. The proposed standard requires the auditor to evaluate factors related to the effectiveness of the audit committee, including whether committee members act independently from management.
Material misstatement in the financial statements not initially identified by the company's internal controls.
Significant deficiencies that have been communicated to management and the audit committee but that remain uncorrected after a reasonable period of time.
Most senior managers will have to report on — and certify — their companies' internal financial controls starting with fiscal years ending on or after June 15, 2004. That reporting date applies to "accelerated filers" — U.S. companies with a market cap of over $75 million that have filed annual reports with the SEC.
All other issuers, including small businesses and foreign private companies, must comply with the new requirements beginning with fiscal years ending on or after April 15, 2005.
http://www.cfo.com/Article?article=12161&f=home_featured
AFL-CIO Questions Comcast's Governance
A merger with Disney, maintains the union, will concentrate even more power in the hands of the chief executive and his family.
Stephen Taub, CFO.com
February 27, 2004
While governance experts and pension funds are beating up on Walt Disney Co., the nation's largest union is questioning the corporate citizenship of Disney's suitor, Comcast Corp.
According to Reuters, AFL-CIO leaders are suggesting that the cable giant's governance could be an impediment to its $48 billion hostile takeover offer for Disney.
AFL-CIO secretary-treasurer Richard Trumka reportedly fired off a letter to Comcast chairman C. Michael Armstrong calling on the company to alter its charter. The union seeks to eliminate some of Comcast's "unfair" corporate governance features, which put too much power in the hands of chief executive Brian Roberts and his family, maintains the AFL-CIO.
Trumka also called on Roberts to immediately resign from the board's governance and directors nominating committee, according to the letter, obtained by Reuters.
In a statement, Comcast defended its "culture of ethics" and pointed out that its shares outperforming the S&P 500 by a 2-to-1 margin since the company went public in 1972, according to the wire service. The company reportedly added that its governance plan, which Comcast altered when it AT&T's cable systems last year, was approved by more than 99 percent of AT&T shareholders.
Under the governance structure, shareholders cannot amend the Comcast charter or call special meetings, according to Reuters' report of the AFL-CIO letter. Until 2010 — or until Roberts resigns — it can be amended only with approval of 75 percent of the board.
The Roberts family controls one-third of the combined voting power in the company in shares that cannot be diluted, explains Reuters — which means that other shareholders will see their shares diluted if Comcast's all-stock offer for Disney is approved.
"Comcast's restrictive charter, dual-class voting arrangement, CEO-dominated nominating committee and lack of director independence are all contrary to the interests of Comcast and its shareholders," Trumka reportedly wrote. "In particular, Disney shareholders will perceive Comcast's corporate governance as a significant reason not to support any proposed merger."
It just doesn't end...
Former Lyonnais Chairman Under Fire
Excluded from an out-of-court settlement, Jean Peyrelevade is contesting U.S. sanctions.
Ed Zwirn, CFO.com
February 23, 2004
The former chairman of Crédit Lyonnais is fighting charges that he lied to the U.S. Federal Reserve regarding the French bank's acquisition of failed U.S. insurer Executive Life, according to the Financial Times.
Jean Peyrelevade, who served as Lyonnais chairman from 1993 until his resignation in October, has appealed against the criminal charges of making false declarations about the acquisition of Executive Life in 1991 by a Lyonnais subsidiary. At the time, reported the Associated Press, U.S. law prohibited banks from owning insurance companies.
Peyrelevade was among a "handful" of French businessmen left out of a $770 million out-of-court settlement of the case between the French government, Lyonnais, and U.S. prosecutors in December, according to the FT.
Sanctions that would be imposed by the Fed include a fine of $500,000, a prohibition against working for a bank in the United States, and a three-year ban on entering the country. Two weeks ago Dominique Bazy, his former deputy at Lyonnais, pleaded guilty on similar charges, reported the AP. Bazy paid a $250,000 fine, agreed to five years' probation and a three-year ban from the country, and was escorted to Los Angeles International Airport to board a plane for France.
Peyrelevade has also called for a parliamentary inquiry into the French government's handling of the scandal. He claims President Jacques Chirac left him at the mercy of U.S. prosecutors while intervening to protect his friend François Pinault, whose family holding company bought Executive Life from Credit Lyonnais. The FT also noted that several high-profile French businessmen, including Peyrelevade and Pinault, still face billion-dollar civil suits due to go to trial in February 2005.
http://www.cfo.com/article/1,5309,12378//T/321,00.html?f=TodayInFinance_Inside
Grand Jury Investigating KPMG Tax Shelters
The accounting firm may have made $124 million helping corporations and wealthy individuals improperly escape at least $1.4 billion in federal taxes.
Ed Zwirn, CFO.com
February 23, 2004
A federal grand jury in Manhattan is investigating the sale of tax shelters by KPMG to corporations and wealthy individuals who used them to escape at least $1.4 billion in federal taxes, reported The New York Times.
From 1997 through 2001, KPMG collected $124 million in fees for tax shelters, according to a November estimate by minority staff of the Senate Permanent Investigations subcommittee cited by the Times.
Last month KPMG announced a new team for its tax service division, not long after several executives left the practice.
So far, despite widening scrutiny by Congress and the Internal Revenue Service in the face lawsuits by clients whose shelters failed, no subpoenas have been issued, which would indicate that the inquiry is in its early stages. Whether the investigation will focus only on the tax professionals and bankers involved in the design, sale, and execution of the tax strategies, or if it will include customers who bought the shelters, is unclear, said the Times.
George Ledwith, a senior KPMG spokesman, said in a statement that "it is our understanding that the investigation is related to tax strategies that are no longer offered by the firm." He added that "KPMG has taken strong actions as part of our ongoing consideration of the firm's tax practices and procedures, including leadership changes announced last month and numerous changes in our risk management and review processes."
Marvin Smilon, a spokesman for David Kelley, the interim United States attorney in New York, declined to comment for the Times article.
http://www.cfo.com/article/1,5309,12360//T/321,00.html?f=home_todayinfinance
San Jose club sues Deloitte
Paul Ivice
Correspondent
SOUTHSIDE -- Stung by an alleged embezzlement loss of more than $1 million, San Jose Country Club is suing the accounting firm it contends should have noticed the theft.
The lawsuit filed in Duval County Circuit Court names as defendants Deloitte & Touche and Gabriele M. Beyer. He is the audit manager at Deloitte & Touche the club says was responsible for the audit of the club's financial statements.
William Dietz, 47, who was controller for San Jose Country Club from 1994 until shortly before his arrest last October, is charged with grand theft. He posted a bond of $35,003 and is awaiting trial, set for March 22.
Investigators said in their arrest report Dietz confessed to embezzling the money, which was allegedly taken between 1998 and 2001.
At the time of Dietz's arrest, investigators put the total amount taken at $999,473. The lawsuit says the country club has suffered damages totaling about $5 million. The suit contends Deloitte & Touche should be held responsible for the $200,000 it collected in fees over the period of the theft, as well as the $200,000 it cost to research and discover the embezzlement and $3.5 million in lost revenue.
"We're in the process of determining those losses and we believe those losses will be substantial," said Greg Anderson, the club's attorney.
The suit accuses Deloitte & Touche and Beyer of accountant malpractice and breach of fiduciary duty. It alleges that Deloitte & Touche "failed to advise SJCC of problems with its internal controls which allowed Dietz to engage in his theft," and that its audits were not in accordance with generally accepted auditing standards.
Deloitte & Touche did not respond to requests for comment on the lawsuit.
jacksonville@bizjournals.com / 396-3502
© 2004 American City Business Journals Inc.
http://jacksonville.bizjournals.com/jacksonville/stories/2004/02/16/story5.html
$8.8 Billion in Financing for Adelphia
If approved, the exit financing would be more than four times the record $2 billion received by Kmart last year.
Stephen Taub, CFO.com
February 26, 2004
Adelphia Communications Corp., whose founders and former top executives are currently on trial for fraud and other charges, announced that it arranged $8.8 billion in exit financing as part of a reorganization plan that would take it out of bankruptcy.
If the plan is approved by the bankruptcy court, it would be by far the largest exit financing a company has ever received.
Last year Kmart Holding Corp. received a record $2 billion in financing when it emerged from bankruptcy, and UAL is currently trying to obtain approval for $2 billion in exit financing as part of its reorganization plan.
JPMorgan Chase & Co., Credit Suisse First Boston, Citigroup Inc., and Deutsche Bank AG will lead the financing package; each will provide an equal share of the commitment. The package includes $5.5 billion of senior secured credit facilities, a $3.3 billion bridge facility, and a $750 million revolving credit facility following the company's emergence from bankruptcy.
The proposed plan values Adelphia at $17 billion.
The company announced that it intends to issue preferred securities and common stock after it emerges from bankruptcy. Under the plan, Adelphia will distribute cash, preferred shares, and common stock as well as interests in a litigation trust for its creditors, shareholders, and litigants. However, no one from the Rigas family, the company's founders, will receive payments for their equity stakes or other claims.
SEC Delays Implementation of Section 404
The June 15 deadline that was fast approaching has been pushed back to November.
Stephen Taub, CFO.com
February 26, 2004
The Securities and Exchange Commission has postponed the implementation of Section 404 of the Sarbanes-Oxley Act for the second time.
Section 404 directed the SEC to adopt rules regarding internal controls at public companies. It also requires that a company's independent auditors attest to and report on management's controls assessments, following standards established by the Public Company Accounting Oversight Board (PCAOB).
Most senior managers will now have to report on — and certify — their companies' internal financial controls starting with fiscal years ending on or after November 15, 2004. The prior compliance date was June 15, which itself was revised from last September.
The November 15 reporting date applies to "accelerated filers" — U.S. companies with a market cap over $75 million that have filed annual reports with the SEC. All other issuers, including small businesses and foreign private companies, must comply with the new requirements beginning with fiscal years ending on or after July 15, 2005. Their compliance date had been April 15, 2005.
The commission also extended the compliance date for related requirements regarding evaluation of internal control over financial reporting and management certification requirements, including certification and related requirements applicable to registered investment companies.
The SEC gave no rationale for the postponement, but one reason might be that the PCAOB still has not finalized its standard for auditors, which it proposed in October 2003. The oversight board has reviewed some 180 letters regarding the standard, most of which comment on the scope of work involved in compliance.
Yesterday the board scheduled an open meeting on March 9 to adopt a final standard. Speaking at a conference in New York, PCAOB chief auditor Douglas Carmichael stated that the standard would then be posted on the board's Web site within a few days. After a short comment period, added Carmichael, the standard would have to be approved by the SEC before taking effect.
http://www.cfo.com/article/1,5309,12438//T/381,00.html?f=home_todayinfinance
SPOTTING FRAUD
WORRIED ABOUT ACCOUNTING SCANDALS? HERE ARE FIVE TIPS FOR UNCOVERING FINANCIAL FAKERY.
BY PAT DORSEY
Morningstar.com
For some reason, reporters and investors ask me a lot of questions about accounting. I guess I must look really boring. (I do wear glasses, after all.) They all want to know how to spot accounting blowups before they happen and how to distinguish low-quality from high-quality earnings.
So, here is a short checklist to help you separate the clean numbers from the potentially dirty ones.
• Do the sniff test.
This one's subjective, but it's powerful. Essentially, if something looks wrong, and management can't provide a convincing explanation, it probably is wrong. Trust your gut -- it's better to not make money on a potential investment that smells funny than to lose money by ignoring your intuition and investing anyway.
My favorite example of this is Sunbeam during Al Dunlap's tenure. When the company posted huge sales of barbecue grills in the fourth quarter of the year, something was definitely overcooked. People don't buy barbecues in December, after all.
This one smelled fishy, and it turned out that it was -- Sunbeam offered retailers massive discounts to buy grills six months before they normally would, without having to accept delivery or make payment. Later, Sunbeam was forced to restate earnings and push those sales into future quarters.
• Remember that cash is always king.
Does accounting gobbledygook make your head spin? Fear not -- there is one very simple thing you can do: Keep an eye on cash flow. Over time, increases in a company's cash flow from operations should roughly track increases in net income. (Cash flow from operations measures the amount of cash that a company is generating from its business, and you can find it on the statement of cash flows. It's always available in quarterly 10-Q filings, and sometimes in earnings press releases as well.)
If you see cash from operations decline even as net income keeps marching upward -- or if cash from operations increases much more slowly than net income -- watch out. This is usually a very good recipe for a blowup down the road. The company might be selling products on credit and not collecting the cash it's owed, it might be padding its bottom line with reversals from restructuring reserves (see ''Watch the honeypot,'' below), or it might be selling off investments or other assets -- none of which says anything about the true health of the firm's operations. This simple test will keep you out of trouble more often than you may think.
• Beware overstuffed warehouses.
When inventories begin rising faster than sales, trouble is likely on the horizon. Sometimes the buildup is just temporary as a company prepares for a new product launch, but that's usually more the exception than the rule.
When a company is producing more than it's selling, either demand has dried up or the company has been overly ambitious in forecasting demand. Either way, the unsold goods will either have to get sold eventually -- probably at a discount -- or written off, which would result in a big charge to earnings.
• Keep an eye on accounts receivable.
There are few things Wall Street loves more than growth, and so it shouldn't come as any surprise that companies will go to great lengths to keep their top line increasing as rapidly as possible. One of the sneakier ways for a company to pump up its growth rate is to loosen customers' credit terms, which induces them to buy more stuff. (Companies can also simply ship out more products than their customers ask for, but this is much more rare.)
The catch here is that even though the company has recorded a sale -- which increases revenues -- the customer has not yet paid for the product. If enough customers don't pay -- think of those looser credit terms, which are probably attracting financially shakier clientele -- then the pumped-up growth rate will eventually come back to bite the company in the form of a nasty writedown or charge against earnings.
You can keep an eye out for this kind of thing by watching the accounts receivable (A/R) balance, which measures the amount of bills a company has outstanding. Roughly speaking, watch A/R as a percentage of sales, and watch the growth rate in A/R relative to the growth rate of sales. If A/R is moving up much faster than sales, something may be amiss. Check the company's 10-Q filing for any mention of changes in credit terms for customers, as well as for any explanation by management as to why A/R has jumped. (You'll want to look in the ''Management's Discussion and Analysis'' section for the latter, and in the accounting footnotes for the former.)
• Watch the honeypot.
Companies in the midst of big changes will often take a huge charge -- which Wall Street is supposed to look right through, because, hey, it's a one-time thing -- to set up a ''restructuring reserve,'' and then slowly reverse some of the charge later on. This is known as a ''honeypot,'' because the company can dip into it whenever its operational results aren't looking so hot. The company's point of view is that if it overestimated the costs of a big corporate overhaul, then it (properly) needs to account for the lowered costs by reversing a portion of the previous charge.
In practice, companies have every incentive to take one-time charges that are as whopping as possible because Wall Street usually views the charges as nonrecurring events -- kind of like a hurricane, or something. Down the road, the company can then pad a rocky quarter with a couple of cents per share in reversals from the Big Whopper charge. Usually, these reversals don't amount to a lot of money, but they can be the difference between meeting and missing the all-powerful consensus earnings per share number. To check for this sort of thing, always read the footnotes to any earnings release or 10-Q if a company has taken several charges in the recent past.
http://www.miami.com/mld/miamiherald/business/personal_finance/8006108.htm
The links do not work.
Regulation NMS National Market System Reforms Proposed
The Securities and Exchange Commission today posted a release
proposing new Regulation NMS, which would incorporate proposals designed to
enhance and modernize the regulatory structure of the U.S. equity markets
and would consolidate existing rules governing the national market
system into a single regulation. Release No. 34-49325 (Feb. 26, 2004).
The proposals are intended to prevent trade-throughs (the execution of an
order in its market at a price that is inferior to a price displayed in
another market), to modernize the terms of access to quotations and
execution of orders in the national market system, to require a minimum
pricing increment of one cent (except for securities with a share price
below $1.00), and to revise the rules for disseminating market
information to the public. Comments must be received within 75 days after
publication in the Federal Register. The SEC press release is reproduced
below, and the 346-page proposing release is available, in PDF format
only, at
http://www.sec.gov/rules/proposed/34-49325.pdf
If you have difficulty accessing this large file directly, go to
http://www.sec.gov/rules/proposed.shtml
Find the Regulation NMS proposal, download it to your hard drive, and
open it with Adobe Acrobat Reader.
SEC To Publish Regulation NMS for Public Comment
FOR IMMEDIATE RELEASE
2004-22
Washington, D.C., Feb. 24, 2004 - The Commission today voted to publish
for public comment Regulation NMS, which would contain four
interrelated proposals designed to modernize the regulatory structure of the U.S.
equity markets. The substantive topics addressed by proposed Regulation
NMS are (1) trade-throughs, (2) intermarket access, (3) sub-penny
pricing, and (4) market data. In addition, Regulation NMS would update the
existing Exchange Act rules governing the national market system, and
consolidate them into a single regulation.
1. Trade-Throughs
Regulation NMS would establish a uniform trade-through rule for all
market centers that would affirm the fundamental principle of price
priority, while also addressing problems posed by the inherent difference in
the nature of prices displayed by automated markets, which are
immediately accessible, compared to prices displayed by manual markets, which
are not.
Specifically, the proposal would require self-regulatory organizations
(SROs), as well as any market center that executes orders, to establish
procedures to prevent the execution of an order for national market
system stocks at a price that is inferior to the best bid or offer
displayed by another market center at the time of execution.
At the same time, the proposal would include two exceptions to the
general trade-through rule.
First, a market center would be allowed to execute an order that trades
through a better-priced bid or offer on another market center if the
person entering the order makes an informed decision to affirmatively opt
out of the trade-through protections. Informed consent would need to be
given on an order-by-order basis. This exception is designed to provide
greater flexibility to informed traders while preserving the average
customer's expectation of having his or her orders executed at the best
price.
Second, an automated market - one that provides for an immediate
automated response to incoming orders for the full size of its best displayed
bid or offer, without restriction - would be able to trade through a
better displayed bid or offer on a non-automated market up to a de
minimis amount of one to five cents, depending on the stock's price. This
exception reflects the comparative difficulty of accessing market quotes
of non-automated markets.
Overall, the proposal is designed to be a practical response to
developments in the marketplace that still preserves the important customer
protection and market integrity goals of best execution and the
protection of limit orders.
The proposed trade-through rule would not change a broker-dealer's
existing duty to obtain best execution for customer orders.
2. Intermarket Access
Non-Discriminatory Access
Regulation NMS would establish a uniform market access rule that would
help assure non-discriminatory access to the best prices displayed by
market centers, but without mandating inflexible, "hard" linkages such
as the Intermarket Trading System (ITS).
At its core, the proposal would prohibit a market center from imposing
unfairly discriminatory terms that prevent or inhibit any person from
accessing its quotations indirectly through a member, customer, or
subscriber.
This standard is intended to assure that a member, customer, or
subscriber of a market center can sponsor access to quotes and order execution
without receiving disparate treatment in the handling of those orders
with respect to fees, speed, or other terms.
Quote Standardization
Regulation NMS also would establish an access fee standard. This
standard - designed to promote a common quoting convention - is intended to
harmonize quotations and facilitate the ready comparison of quotes
across the national market system.
The proposal would establish a de minimis fee standard for all market
centers and broker-dealers that display attributable quotes through
SROs. Specifically, access fees would be capped at $0.001 per share, and
the aggregation of this fee would be limited to no more than $0.002 per
share in any transaction.
Locked and Crossed Markets
Finally, the proposed rule would require each SRO to establish and
enforce rules requiring its members to avoid - and prohibiting them from
engaging in a pattern or practice of - locking or crossing the markets.
3. Sub-Penny Pricing
Regulation NMS would ban sub-penny quoting in most stocks.
Specifically, it would prohibit market participants from accepting, ranking, or
displaying orders, quotes, or indications of interest in a pricing
increment finer than a penny in national market system stocks, other than
those with a share price below $1.00.
This proposal is intended to prevent sub-penny pricing from being used
by some market participants to "step-ahead" of customer limit orders
for an economically insignificant amount. This "sub-pennying" could, over
time, discourage investors from placing limit orders, which are an
important source of market liquidity.
4. Market Data
Regulation NMS would amend the existing arrangements for disseminating
market data in order to better reward SROs for their contributions to
public price discovery, as well as implement most of the recommendations
of the Commission's Advisory Committee on Market Information.
Under existing rules and joint industry plans, the trades and best
quotes in thousands of listed and Nasdaq stocks are made available on a
real-time and consolidated basis.
The proposal would replace the current plan formulas for allocating
revenues derived from market data fees to the SROs, which are based solely
on the number of trades or share volume reported by an SRO. This method
of allocation has led to serious economic and regulatory distortions,
creating incentives for "print" facilities, "wash" trades, and
"shredded" trades. In addition, those markets that generate the highest quality
quotes (i.e., the best prices and the largest sizes) are not
necessarily rewarded.
In general, the proposed new formula would divide market data revenues
equally between trading and quoting activity, in order to reward
markets that publish the best accessible quotes.
The proposal also includes a number of improvements that were
recommended by the Advisory Committee on Market Information. For example, the
proposal would broaden participation in plan governance by creating
advisory committees composed of non-SRO representatives. Such committees
would help assure that interested parties have an opportunity to be heard
on plan business, prior to any decision by the plan operating
committees.
In addition, the proposal would authorize market centers to distribute
their own additional data, such as limit order books, separate from
other markets, as well as establish uniform standards for the terms of
such distribution.
Comments on these proposals should be submitted to the Commission
within 75 days of publication in the Federal Register.
Why hedge funds are not a fad
By Tony Jackson (Filed: 15/02/2004)
If you find hedge funds worrying, this story is for you. Earlier this month, a group of proprietary traders at Deutsche Bank decamped to set up their own hedge fund. The bank's reaction to this dastardly act was prompt and revealing: it gave them around $1bn (£537m) to manage.
This is thought-provoking in two ways. Hedge fund operators, if successful, earn much more than mere fund managers or traders, since they keep a slice - typically a fifth - of the profits. So the traders reckoned they deserved a pay rise, and Deutsche implicitly agreed.
More importantly, Deutsche took money previously subject to all kinds of rules and regulations, and handed it to gamblers over whose actions it has no control.
Now, $1bn may be loose change in the investment world, but it all adds up. Hedge funds now dominate the equity markets, accounting for some 60 per cent of all the business done by the big US broking houses. So what does this mean for the markets?
Let's start with a little history. The original hedge fund operator was Alfred Winslow Jones, a US financial journalist who set up a so-called "long-short" equity fund in 1949. He aimed to short overvalued stocks and go long of undervalued ones, thus profiting by market mistakes at either extreme.
He also borrowed to gear the fund up. Since both shorting and gearing were illegal for conventional funds, his was set up as a limited partnership.
Jones toiled in profitable obscurity until 1966, when Fortune magazine drew attention to his record. The timing was perfect: in the late 1960s, the long post-war bull market was ending, and investors were scrabbling for the returns they were used to. From then until the final market collapse of 1973-74, hedge funds blossomed.
That wonderful Wall Street book of the period, The Money Game, tells of the so-called "gunslingers" - young men with gnawed finger nails, given to such remarks as "the garbage is moving: it's the best market for garbage since '61".
Anyone watching the rise of the flakier tech stocks recently may find this familiar. It also prompts an essential question. Are hedge funds a cyclical phenomenon, or are they here to stay?
I asked Narayan Naik, the head of hedge fund research at the London Business School. Hedge funds themselves, he said, are not cyclical; just what they invest in, and how.
Through the 1990s, hedge funds followed the example of George Soros. They took big bets on the future path of currencies, interest rates and bond yields. Long-short equity funds scarcely existed. Now, Naik reckons, they account for 50 to 55 per cent of all the hedge fund money in the world.
Partly, this reflects the scramble for yield in a world of low inflation. But there is a deeper reason. The risks run by hedge funds and conventional funds are different in kind. The managers of long-short funds may get it wrong and self-destruct. But to the extent that their long and short positions are in balance, they are not exposed to the risk of general market movements.
Conventional long-only funds are set up to prevent reckless gambling, but their exposure to the market is unavoidable; and investors, scarred by recent experience, are terrified of market risk.
The big brokers, meanwhile, find hedge funds attractive as clients. Dealing commission may be negligible; but the investment banks lend the hedge funds stock to short with and money with which to gear up, besides providing them with all kinds of fancy derivatives.
But in the end, this boils down to a single proposition: that hedge funds can produce better returns without a commensurate amount of risk. Maybe so, but I doubt it. The yield famine is driving punters into some pretty dodgy plays these days, from Third World debt to Chinese flotations. The rise of the hedge fund seems to me part of the same phenomenon.
As such, it will play itself out eventually. Either the equity market will collapse further, and investors will lose heart as they did in the 1970s; or it will recover, in which case they will regain their appetite for market risk, and will be disinclined to hand a fifth of their gains to a hedge fund manager who might blow the lot.
Not, of course, that hedge funds will die out as a species. They will simply leave equities in peace, and go and stir things up somewhere else.
Soros made $1 billion and we were all better off
By George Trefgarne (Filed: 16/09/2002)
September 16 1992. Black Wednesday and the pound was ejected from the European Exchange Rate Mechanism. George Trefgarne ponders what Britain would be like had we stayed in
Britain in 2002 is a pretty prosperous place. Yet it nearly wasn't so. Ten years ago, we almost blew it, and if we had succeeded, we would all be considerably worse off. You might easily have lost your job, and your home, and you would certainly be paid less than you are now.
In October 1990, Margaret Thatcher was persuaded by her chancellor, John Major, and Douglas Hurd, then foreign secretary, to join the Exchange Rate Mechanism. She was against the idea. But it would, they said, kill off inflation. The ERM fixed the pound against the German mark - the strongest currency in Europe - within a six per cent band either side of 2.95 marks.
Prices in Britain were rising at nine per cent at the time and the housing market was overheating. The weakness of the pound was making inflation worse. The ERM would supposedly put a stop to all that and show how wonderfully pro-European we were.
The plan backfired spectacularly. To keep the pound up to the mark, interest rates had to be held up, too. Even when they came down to 10 per cent, in a shrinking economy they were still far too high.
But supposing we had stayed in? Supposing ruinous interest rates and the Bank of England spending £4 billion of the foreign exchange reserves had been enough to beat off the speculators? What would modern Britain be like?
Poorer, is the answer. Joining the ERM coincided with a major downturn in the world economy and the mechanism pushed us into a deep recession. A million people lost their jobs, and a quarter of a million had their homes repossessed.
Bankruptcies more than doubled, from 40,000 in 1989 to 100,000 in 1992. Consumer spending was down and companies were cutting back on investment. If we had stayed in, these nasty trends might easily have continued for another couple of years.
That would have been perilous for the housing market. By September 1992, it was poised for collapse. About two thirds of Britons own their homes, among the highest proportion in the world. But houses are bought with secured loans and those who cannot keep up with their monthly payments risk repossession by the banks.
There were 32,000 repossessions in 1992, about seven times more than in a normal year. But, by 1993, an amazing 511,000 households were at least three months in arrears on their mortgages. A few more months of interest rates at 12-15 per cent - as they reached to keep us inside the ERM - and the disaster would have been turned to catastrophe. This would have been a terrible blow to the banks and the weaker ones might not have survived so many loans going bad.
Aside from the human misery of homes being repossessed and a further fall in property prices, staying in the ERM would have undoubtedly prolonged the recession. In 1992, the economy shrank by 1.4 per cent. If it had kept on contracting at a similar rate for a couple more years before the recession ended, national output would now be around 13 per less than it is now. This is a huge sum.
As a nation, we would currently be producing £1,600 less for every man, woman and child. Unemployment, which peaked at more than three million, could well have reached four million, widening the Government's deficit still further.
It is not surprising that the ERM crisis lost the Conservatives their reputation for economic competence, which they have never recovered. If their policy had succeeded, and we had stayed in, they would be even more unpopular.
One conspicuous beneficiary of the debacle was a little-known shadow chancellor, one Gordon Brown. Pretty soon, he and the then Labour leader, John Smith, were taunting John Major for being "the devalued leader of a devalued government".
After Mr Smith's death, Tony Blair picked up where he left off. But Mr Brown shouldn't crow. He originally supported the ERM. If we had stayed in and the economy had weakened, his current public spending spree would be almost impossible to finance. He would be facing something like a £40 billion shortfall in his revenues.
Philip Stephens, the author of Politics and the Pound, thinks things would not have been that bad - an orderly devaluation within the system would have been allowed and interest rates could have been cut. But, he reckons, even this would not have been enough to allow the Tories to win the 1997 election. We might well, though, after a successful ERM apprenticeship, now be using the euro.
Fixed exchange rates are no panacea. There are examples from around the world that show how bad things might have been here. In Hong Kong, where the currency is fixed to the mighty dollar, property prices have fallen 40 per cent from their peak.
Germany is on the verge of recession and unemployment is more than four million, but the natural prescription of devaluation and cutting interest rates is unavailable, since its rates are set by the European Central Bank to contain inflation in the whole euro zone.
In Argentina, the peso was pegged to the dollar and could not keep pace with the American currency's rise in the late 1990s as America boomed. The peg collapsed, the banks followed and the Argentine economy is now in serious recession. There have been five presidents in the past year.
Since escaping from the ERM, Britain has overtaken France to become the fourth largest economy in the world, and growth, though slowing, is the fastest among G7 advanced nations. Unemployment is at its lowest since the mid-1970s. The pound is strong against the euro, as returning holidaymakers can testify.
The experience of the ERM proves that you cannot buck a foreign exchange market, nor should you try. Rather than a fixed exchange rate, the best way to control inflation is via your own, independent central bank, as Mr Brown has so heroically demonstrated.
We have much to thank speculators such as the infamous George Soros for. Their legacy is our current prosperity and the $1 billion that Mr Soros pocketed out of the Bank of England's foreign exchange reserves, 10 years ago today, was cheap at the price.
Lenin declared that the best way to destroy the capitalist system is to debauch the currency. For once, he was right and we should count our blessings we narrowly avoided such a disaster here. But it was more by luck than judgment.
O'Reilly and Soros will clean up in £1bn Eircom float
By Dominic White (Filed: 27/02/2004)
George Soros and Sir Anthony O'Reilly are expected to almost treble their money when they sell their shares in Eircom, the Irish phone company that yesterday unveiled plans for a €1.6billion (£1billion) March flotation.
The Hungarian and Irish financiers were part of a consortium that injected €400m of equity into the group when it was taken private in 2001 after the shares collapsed.
The consortium is expected to offload all of its 71pc stake in a secondary offering that analysts say could be worth 1billion. It has already benefited from a special dividend last summer.
Sir Anthony is expected to stay on as chairman of the group when Eircom floats, even though the newspaper proprietor is thought likely to place all of his 5pc stake.
Eircom's flotation comes five years after its first, ill-timed foray on to the stockmarket and will be the first by a large European telecoms company since France Telecom's cellphone unit Orange floated in 2001.
Ireland's former state telecoms monopoly hopes to also raise €300m of new money through a primary issue of new shares on the London and Irish stock exchanges.
Eircom will use this money to pay down some of its debt, estimated to be €2.2billion. The employee trust that holds the remaining 29pc of the equity - worth about €300m - is expected to buy enough new shares to avoid dilution.
Eircom's previous flotation in 1999 remains a painful memory for thousands of Ireland's small investors, who lost millions when the telecoms bubble burst.
However, Eircom chief executive Philip Nolan said the group had cut costs to the point where it could offer an attractive dividend. Citigroup, Deutsche Bank, Goldman Sachs and Morgan Stanley are joint bookrunners.
Bush Family Engaged In International Money Laundering Scheme
"Using their positions of power and the Bush family name, the Bush Administration is accused of laundering over $1 trillion dollars of taxpayer money over the past 12 years and moving it into offshore bank accounts held by corporations engaged in war profiteering" according to secret sources working inside the white house.
"Some of that money has come back to the current administration as clean laundered funds in the form of major campaign contributions amounting to over $200 million", said an insider who goes by the code name "Deep Throated Again".
Source: Intelligence.
Ex-BANK OF AMERICA Banker Paid Millions Over Parmalat
By Emilio Parodi
MILAN (Reuters) - A former Bank of America Corp. executive under investigation in the Parmalat fraud case has admitted he received millions of dollars from work linked to the food firm but said the payments were commissions, judicial sources said on Friday.
The sources said Milan prosecutors had discovered two Swiss bank accounts linked to Luca Sala, the former head of Bank of America's (NYSE:BAC - News) corporate finance division in Italy, which had received more than $30 million in deposits since 1997.
Sala, under investigation for suspected market rigging and money laundering, told magistrates he had received the money as bonuses for work connected to Parmalat before Italy's biggest listed food group went insolvent last December, they said.
"He said they were commissions for his work as an agent hedging the bank against political risks" stemming from Parmalat financing, a judicial source said without elaborating.
Sala, who quit Bank of America last year to work as a consultant at Parmalat has offered to forfeit some of the money, said the sources, who asked not to be identified.
The Wall Street Journal reported on Friday that Sala had told investigators he misappropriated $27 million in a kickback scheme involving Parmalat.
The former banker is one of more than two dozen people under investigation in one of the world's biggest fraud scandals, which has raised questions about banks' dealings with the insolvent firm. Nineteen people are under arrest. None have been charged.
RESCUE PLAN SOON
Parmalat's emergency administrator Enrico Bondi is expected to present a draft of a recovery plan to Industry Minister Antonio Marzano early next week, a source close to the situation said on Friday.
Markets are eager to know what Parmalat assets Bondi might try to sell off and how much money the company expects eventually to be able to repay banks and bondholders.
The Parmalat crisis exploded on Dec. 19 after a 4-billion-euro Cayman Islands account documented on Bank of America letterhead was declared false.
Parmalat's debts have since been revealed to be 14.5 billion euros, and founder Calisto Tanzi, one of those in jail, has admitted to misappropriating hundreds of millions of euros.
Seven Italian and foreign financial institutions, including Bank of America, are being investigated to see how much they knew about Parmalat's finances when they bought and sold its bonds or did other business with its former management, news reports have said.
Milan prosecutors questioned Sala for a third time on Friday, focusing on $1.2 billion in private debt sales that they estimate Bank of America arranged for Parmalat.
Prosecutors are investigating whether some of the money was returned to Bank of America, possibly via a trust, a judicial source said.
"Some of that money can be traced to Parmalat's accounts and some can't," the source said.
Sala had said earlier this year that he was a victim of fraud and that he and Bank of America had been duped.
Neither Bank of America nor Parmalat would comment. The bank has previously said it was not aware of alleged improprieties.
Former Parmalat finance director Alberto Ferraris told investigators on Jan. 8 that Shahzad Shahbaz, Bank of America's London-based head of regional corporate and investment banking, helped Sala place the debt, according to a transcript of the questioning obtained by Reuters.
Vote Momentum Against Disney's Eisner
By Peter Henderson
LOS ANGELES (Reuters) - Another activist pension fund, North Carolina, on Friday joined at least seven states opposing Walt Disney Co. Chairman Michael Eisner's reelection to the board next week as Disney signaled it did not consider the vote a sweeping referendum on Eisner's stewardship.
Disney, braced for 30 percent of shareholders to oppose Eisner, also on Friday launched full-page advertisements in major newspapers featuring Mickey Mouse and Kermit the Frog and declaring "Our future is in good hands."
The 11-member Disney board is guaranteed to be reelected at the March 3 meeting, since there are no rival candidates, and so the battle is brewing whether to interpret a substantial percentage of votes withheld for Eisner as a call for him to step down or a less direct signal about corporate governance.
Comcast Corp. (NasdaqNM:CMCSA - news) whose takeover bid was rejected by the Disney board, is also waiting in the wings in Philadelphia, coincidentally the city in which Disney's meeting will be held, and analysts said it could pounce again after the vote.
Nell Minow, a governance analyst at the Corporate Library, said the vote would send a message to Comcast and other potential buyers. "The higher the vote of no confidence, the more vulnerable the company is," she said.
Smith Barney analyst Niraj Gupta argued in a note that Comcast could resubmit its $48 billion bid or sweeten it slightly by adding or substituting a cash component to the all-stock offer.
"We believe that Comcast would cite the shareholder vote as evidence that a management change is in order," he wrote.
The Comcast offer is now worth about $3.20 per share less than Disney's shares are trading on the New York Stock Exchange (news - web sites), although the discount has narrowed from $3.60 in mid-February, when Disney rejected the bid. Comcast's all-stock offer represented a 10 percent premium when it was made.
State funds opposed to Eisner hold at least 40 million shares, about 2 percent of Disney stock, and many more are still making decisions.
DISNEY SEES PROTEST OVER DUAL ROLES
A Disney source said that the company was prepared for more than 30 percent of shareholders to withhold their votes for Eisner and that the company saw the signal as a protest, largely inspired by adviser Institutional Shareholder Services, against his combined roles of chairman and chief executive.
Board member Judith Estrin made similar arguments in interviews with major newspapers. The board has not wavered from its public support of Eisner and his strategy for keeping Disney an independent content company focused on household names that range from Mickey Mouse to ESPN, and now include the Muppets after a recent acquisition.
Minow put the influence of ISS at around 10 percent of votes and said the board had wide latitude to interpret and respond to the results of the vote, including simply stepping up communication with investors.
A majority of the 11 board members up for reelection face protest votes or recommendations against them from two major shareholder advisers, major pension funds, or dissidents Roy Disney and Stanley Gold.
The board has reformed its governance rules over the past few years, although critics say Eisner still has too much power and that more reform is needed.
North Carolina Treasurer Richard Moore said on Friday that his state pension funds would withhold votes for Eisner as chief executive and chairman -- although he is only up for reelection to the board -- and withhold votes for the three audit committee members.
"As one of the most visible companies in the country Disney's management needs to be more responsive to its owners. The failure of the company to generate long-term value for shareholders combined with their past inattention to good corporate governance practices has forced us to take this step," he said in a statement.
Disney shares lost 20 cents or less than 1 percent to end at $26.53 on the New York Stock Exchange on Friday.
The securities fraud charge had been criticized by Stewart's lawyers as a violation of the First Amendment, and the judge herself has referred to it as "novel" and "problematic."
http://www.investorshub.com/boards/read_msg.asp?message_id=2482890
Stewart Judge Throws Out Fraud Charge
By ERIN McCLAM, Associated Press Writer
NEW YORK - A federal judge on Friday tossed out the most serious charge against Martha Stewart (news - web sites), a count alleging she deceived investors in her company when she publicly declared her innocence in the ImClone stock trading scandal.
The decision by U.S. District Judge Miriam Goldman Cedarbaum came just five days before jurors are expected to begin deciding the case against the celebrity homemaker and her stockbroker.
"I have concluded that no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her company," Cedarbaum wrote.
Stewart still faces four criminal counts — conspiracy, obstruction of justice and two counts of lying to investigators. The judge declined to throw out any of the five counts against broker Peter Bacanovic.
The securities fraud count carried a potential prison sentence of 10 years and a $1 million fine. The remaining four counts against Stewart each carry a prison sentence of five years and a $250,000 fine.
"I'm pleased that the judge has dismissed the most serious of the charges against me, concluding that there is no evidence to support it," Stewart said in a message posted on her personal Web site.
Legal analysts said the ruling was cause for celebration for Stewart's defense team — but cautioned that it was by no means a signal that she will be cleared of all charges by a jury.
"There's no question the government put forth evidence that at least supports their version of events," said Jack Sylvia, a veteran Boston securities lawyer. "And there is a very minimalist case the defense put on."
The securities fraud charge had been criticized by Stewart's lawyers as a violation of the First Amendment, and the judge herself has referred to it as "novel" and "problematic."
The count accused Stewart of trying to prop up the stock price of Martha Stewart Living Omnimedia when she claimed in 2002 that she had sold ImClone because of a deal with Bacanovic to dump the stock when it fell to $60. Stewart personally stood to lose $30 million for every dollar her stock price dropped.
The government claims that was a lie, and that Stewart sold instead because Bacanovic sent word to her that her friend, ImClone founder Sam Waksal, was frantically trying to sell his ImClone shares.
Still, many legal experts said they believed the charge was unprecedented, and Stewart's most ardent supporters cried that she was being prosecuting for simply saying she was innocent.
Cedarbaum issued her decision just as lawyers in the case began meeting with her behind closed doors to discuss the instructions the judge will give jurors when they begin deliberating next week.
The decision put a charge into Martha Stewart Living Omnimedia stock, sending its shares up $1.49, or more than 11 percent, to $14.59 in afternoon trading on the New York Stock Exchange (news - web sites).
Stewart herself was in the meeting with lawyers and the judge. Prosecutors, leaving the judge's robing room for lunch, declined to comment, and a spokesman for the U.S. attorney's office did not immediately return a call for comment.
The securities fraud charge focused on three statements in 2002 — one on June 6 by her lawyer, and two on June 12 and June 18 by Stewart herself.
Each time, the $60 agreement was given as the reason for Stewart's stock sale. Stewart's lawyers said she was just trying to clear her name, but the government contended that she was spreading a lie with deliberate purpose.
The judge conceded that Stewart had a motive — her heavy investment in her own company — to deceive investors. But she said the government had not sufficiently shown an intent by Stewart to defraud investors.
The judge also pointed out there was no evidence Stewart showed particular concern for Martha Stewart Living's stock price around the time of her statements. The stock price actually fell, from $19.01 on June 6 to $12.55 on June 24.
"Here, the evidence and inferences the government presents are simply too weak to support a finding beyond a reasonable doubt of criminal intent," the judge wrote in a 23-page ruling.
Closing arguments in the trial are scheduled to begin Monday and last well into Tuesday. The jury is expected to receive its instructions and begin deliberating on Wednesday.
Stewart's lawyers still must convince the jury that she was not lying to investigators when she told them in 2002 that she had no memory of being tipped about Waksal.
The government's star witness in the trial was Douglas Faneuil, the former Merrill Lynch & Co. assistant who claims he gave Stewart the tip about Waksal on orders from Bacanovic, his boss.
Stewart's personal assistant also testified that Stewart changed a computerized record of a phone message Bacanovic left for her on the day she sold ImClone stock — then ordered the assistant to change it back.
Competitors Blast NYSE in Hearing
By MICHAEL J. MARTINEZ
AP Business Writer
February 20 2004, 8:35 PM EST
NEW YORK -- The new chief of the New York Stock Exchange received a fiery
introduction to politics in a House subcommittee hearing Friday when his
competitors criticized the exchange's controversial specialist system as
corrupt and outdated and urged congressmen to overturn a federal rule they
claim gives the NYSE an unfair advantage.
Even the veteran congressmen were surprised at the vitriol directed at NYSE
chief executive John Thain's institution from Nasdaq Stock Market chief
executive Robert Greifeld and the heads of the Instinet Group Inc. and
Archipelago Holdings electronic markets.
Greifeld noted that five NYSE specialist firms agreed to a tentative $240
million settlement with the Securities and Exchange Commission for skimming
profits on trades that put investors at a disadvantage, and said the SEC's
"trade-through" rule, designed to ensure investors received the best price,
was ineffective and handed the NYSE a monopoly.
"The New York Stock Exchange did not protect investors, as the recent
settlement makes clear," Greifeld testified before the Capital Markets
subcommittee of the House Financial Services Committee, meeting a few blocks
from Wall Street in lower Manhattan. "They are the beneficiaries of an
anticompetitive rule that allowed these specialists to intermediate
themselves between trades."
Thain defended the exchange's actions in the wake of the specialist scandal
and last year's ouster of former CEO Dick Grasso over his $187.5 million
compensation package. He said measures have been put in place to prevent
specialists from trading illegally, and noted that the NYSE has turned over
the investigation of Grasso's pay to the SEC and New York Attorney General
Eliot Spitzer.
He also defended the trade-through rule, saying specialists ensure that
volatility in stock prices remains at a minimum, and that research showed
the NYSE had the best price for any given stock 93 percent of the time,
despite conflicting figures provided by Greifeld.
"There are many ways to slice and dice data, but I have never seen
information used in quite so misleading a way as I've seen here to day,"
Thain said in a jab at Greifeld.
Rep. Richard Baker, R-La., chairman of the subcommittee, said he hoped to
take action on the trade-through rule in the short term, although he
admitted he was torn on whether the rule was ultimately beneficial to
investors or anticompetitive. While each market has its own competitive
reason for its stance on the rule, Baker said the ultimate goal would be to
protect investors.
"When the sharks are fighting each other, you just want to keep them at
arm's length," Baker said. "But when the sharks turn their attention to the
minnows, it's important for the minnows to know exactly what the sharks are
doing."
The electronic markets, in seeking to have the rule relaxed or repealed,
claim that the best execution of a stock trade isn't necessarily about
price. Some investors, primarily large brokerage houses, would prefer to
have a trade done quickly over an electronic market than to take the trade
to the floor of the Big Board, which takes longer, and taking the chance
that a better price might be had.
The NYSE, however, said the rule must remain intact to protect small
investors. Thain promised to work with the other markets on improving
electronic links between them to ensure that any trade could flow freely to
the market with the best price.
He also touted the exchange's proposed improvements to its own electronic
system, designed to match buyers and sellers without as much input from
specialists. Greifeld, however, called the plan "transparent and shallow,"
noting that specialists would still have ultimate control over prices.
Nonetheless, the representatives of the four markets agreed that more SEC
oversight would be welcomed to ensure that investors would receive the best
price.
The agreement on that point was a pleasant surprise to many on the
subcommittee after the rancorous testimony.
"We have fights in Congress, but ... don't you all have a drink together
after work?" asked Rep. Paul Kanjorski, D-Pa., ranking minority member of
the subcommittee.
Copyright © 2004, The Associated Press
After months of slamming the New York Stock Exchange's rules as restrictive and bad for investors, the Nasdaq is now trying to stop its own bellwether companies from trading on the Big Board.
The electronic stock market, which recently moved to dual list six NYSE-listed companies, recently said stocks in the Nasdaq 100 must not list on any other exchange if they want to remain part of the index.
The move is particularly ironic since Nasdaq argued for years against the NYSE's Rule 500, dubbed "the roach motel," which made it difficult for NYSE-listed companies to leave the exchange.
"It's the most hypocritical thing anybody could do - stomping around screaming about Rule 500 and coming up with your own," said Archipelago exchange CEO Jerry Putnam. "At the minimum, you look like a hypocrite. It's indefensible."
The move could be a harsh punishment for companies that choose to list on more than one exchange - something Nasdaq CEO Robert Greifeld has recently been encouraging NYSE-traded companies to do.
Dual listing, Greifeld said in numerous interviews, was good for investors and good for companies.
The listing debate has heated up as the NYSE - the premiere exchange for listings - has come under pressure from scandals ranging from an investigation into its trading specialists to the fat pay package of ousted chief Dick Grasso.
Now it seems Nasdaq-listed companies that choose to dual list will be punished by being kicked out of the prestigious Nasdaq 100 index.
That index represents the Nasdaq's top 100 non- financial companies and is the backbone of more than 400 financial products in 39 countries.
"Being included in a Nasdaq index is a benefit we reserve for listed companies, but this does not impede trading on other markets," said Nasdaq spokeswoman Bethany Sherman.
In its petition to have Rule 500 revoked, the Nasdaq said Rule 500 "impedes issuers in selecting the marketplace best suited to their needs" and is "antithetical to the free and open competition that the commission has consistently advanced and that is the bedrock of the U.S. capital markets system."
To be sure, Archipelago is aggressively courting companies to dual list on their own exchange and is at odds with the Nasdaq over a lawsuit filed in October alleging they were engaged in unauthorized trading of the QQQ's.
Stocks that are part of the Nasdaq 100 enjoy the prestige of the index, as well as the exposure of being part of popular products like the QQQ's - an exchange-traded fund made up of the Nasdaq 100.
Kicking a company out would put pressure on that stock, say traders. "It would cause selling," said one trader on the Big Board who is familiar with the listing debate. "The upside is they would no longer have to list on a fragmented market," he chided.
--------------------------------------------------------------------------------
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NYSE, rivals square off at hearingCongressional panel examines role of
specialists
By Roland Jones
Wall Street reporter
MSNBC
Updated: 7:56 p.m. ET Feb. 20, 2004
NEW YORK - Revising or eliminating rules on how stocks are traded could end
up costing investors billions of dollars a day, New York Stock Exchange CEO
John Thain said Friday. Thain and rival stock market executives testified
before the House Financial Services Committee in Manhattan.
Chaired by Rep. Richard H. Baker, (R-La.), the committee's capital markets
subcommittee met to discuss the role of specialist firms, who match buyers
and sellers on the floor of the NYSE. The Big Board insists that specialists
are essential to setting the best prices for shares traded on the exchange
and for smoothing trading volatility, but their role has come under fire
recently following charges they defrauded investors of millions of dollars
through trading abuses.
Thain, along with executives from Nasdaq, Instinet and Archipelago, met to
discuss market-structure issues. Each made their case for keeping, modifying
or eliminating the highly-contentious trade-through rule, which requires
that stock orders are channeled to the market that offers an investor the
best price for buy and sell orders of stock.
Electronic markets such as ECNs, which are newer rivals to traditional
markets like the NYSE, say the 20-year old rule is outdated because it
doesn't prioritize the trading speed and certainty of execution their
electronic markets provide. For its part, the NYSE argues the rule is
crucial as it ensures investors receive the best transaction price.
Thain told the congressional panel that eliminating the trade-through rule
could cost investors as much as $3 billion daily. If similar markets offer
the same trade execution capabilities, the price of a trade is what matters
most, he said. And given that the NYSE handles 1.7 billion shares daily, a
two- or three-cent difference on a trade "can quickly add up to billions of
dollars," he added.
Nasdaq CEO Robert Greifeld told the panel that the trade-through rule
effectively stifles competition in the marketplace, which ultimately hurts
investors. The rule requires all markets to complete a trade at the exchange
that offers the best price - often the NYSE. He said the recent settlement
between regulators and specialists reveals "a structural flaw at the New
York Stock Exchange," because the NYSE failed to stop the abuses earlier and
has used the trade-through rule to "insulate" specialists from outside
competition.
"Absolute power corrupts," Greifeld said. "And if specialists didn't have
this absolute power in the first place they would never have been able to do
harm to investors."
The House subcommittee is expected to make a recommendation to the
Securities and Exchange Commission about changes to the rule and the SEC is
expected to propose a revision to it next week. Although the panel appeared
undecided in its course of action, it did agree that technology that allows
trading between the exchanges must be improved.
Specialists agree to settlement
Friday's hearing came just a few days after news of a proposed settlement
was reached between regulators and five large NYSE specialist firms accused
of trading ahead of investors, an illegal practice known as "front-running."
The five firms involved in the agreement have reportedly agreed in principle
to pay $155 million in restitution and another $85 million in fines. None of
them have admitted to any wrongdoing.
Five NYSE firms settle with SEC
Thain, formerly president of Goldman Sachs, who took control of the NYSE
about a month ago, has come under pressure from regulators to eliminate the
barriers surrounding specialists and is in the process of introducing more
automation into the exchanges' trading system. He is also eager to repair
the image of the exchange, tarnished by the forced exit of former CEO
Richard Grasso last fall following an investigation into his compensation.
At Friday's hearing, Thain outlined his plans to overhaul trading practices,
including making it easier for listed companies to change the specialists
that make markets in their stocks, developing metrics to assess the
performance of specialists and allowing the rapid, automatic matching of
anonymous buyers and sellers -- effectively offering the same trading
execution found on rival electronic markets and bypassing specialists.
The changes look likely to crimp the NYSE's specialist system, an
open-outcry stock-trading system that is nearly as old as the 211-year-old
exchange. Individual brokers, or specialists, manage the sale of stocks on
the floor of the exchange. They are required to buy or sell shares from
their own holdings to keep the market for a stock orderly and in balance.
Rival electronic trading networks have cried foul over the specialist
system. They say it allows dishonest brokers to step in between transactions
and skim off profits. The powerful California Public Employees' Retirement
System recently filed a lawsuit against the NYSE and its specialist firms,
accusing them of widespread trading abuses.
One key factor in the specialists' settlement with regulators is the
establishment of a restitution fund, which is expected to total $155
million. The thinking, experts say, is the fund will deter investors from
launching their own civil lawsuits against the NYSE and the specialist
community.
"The fact that the settlement contains some restitution may eliminate the
possibility that investors will come after the specialists, so we may get
some closure," said Michael Malloy, a former counsel for enforcement policy
at the SEC and now a professor of law at the University of the Pacific in
Stockton, Calif.
But with billions of shares traded on the Big Board each day, working out
who lost what and when promises to be a technical nightmare according to
Michael A. Goldstein, an associate professor in the finance department at
Babson College in Massachusetts and who has served a one-year term as
visiting economist at the NYSE.
"It's possible to do this, but it means a lot of data and it will be a holy
mess," Goldstein said, adding that the tens of thousands of investors who
are owed money may end up actually receiving a very small portion of the
restitution pie.
© 2004 MSNBC Interactive
Can Burstein Crack The Da Vinci Code?
Institutional Investor Magazine, Americas and International Editions
February 20, 2004
Before reading The Da Vinci Code last summer, Daniel Burstein, the founder of Millennium Technology Ventures, wasn't much interested in the history of early Christianity. But the bestselling thriller seized his imagination. And like so many readers captivated by the novel's revelations of secret religious societies and assertions of suppressed history -- author Dan Brown suggests, for example, that Jesus Christ married Mary Magdalene -- Burstein wanted to sort truth from fiction.
Now he's doing just that with a book of his own, Secrets of the Code: The Unauthorized Guide to the Mysteries Behind the Da Vinci Code, due out in April. Burstein mines the bestseller's bibliography and related scholarship on early Judeo-Christian thought to shed greater light on Brown's claims.
This won't be the first book for Burstein, who spent 12 years at Blackstone Group before forming Millennium in 2000. He has published five other nonfiction works, including Big Dragon, a look at China's future written with business consultant Arne de Keijzer. Meanwhile, the two are gearing up their own publishing enterprise, Squibnocket Press, named for the Martha's Vineyard beach they frequent. (Secrets of the Code will be published by book distributor CDS.)
As a venture capitalist who loves to read, Burstein is convinced that Squibnocket will be able to attract an audience of professionals who will welcome a chance to buy compendia on a variety of topics, from nanotechnology to blogging. But he has no illusions about the profit margins in publishing. "This is a time-consuming hobby," he says with a laugh. "My day job is still running my fund."
Regulators Consider Global Standard For Compliance Officers
Compliance Reporter
February 23, 2004
Compliance Reporter
Prevent costly compliance fiascos with the crucial information needed by broker/dealers and investment advisors.
The International Organization of Securities Commissions (IOSCO) plans to propose a global standard for compliance officers. IOSCO standards are expected to be adopted by regulators in all IOSCO member countries, which include the U.S., the U.K., France and Germany. An IOSCO standard on compliance officers could lead to compliance officers in some countries such as Canada and Switzerland having to obtain compliance-specific qualifications for the first time.
Compliance has become a much more high profile role over the last few years, said Michael McKee, director at the British Bankers' Association. The European Commission's Financial Services Action Plan and the U.K.'s Financial Services and Markets Act, have both raised the profile and importance of compliance, he said.
IOSCO is starting to take a tougher line (CR, 11/3). The main points that need to be considered are whether a qualification in compliance is required, what compliance officers should be responsible for and whether compliance officers should have a minimum level of seniority, said Philippe Richard, IOSCO secretary general. He said it is important to create a global standard now because rules in many areas, such as investment research and market abuse, are being standardized globally and it therefore makes sense to do the same for compliance officers.
IOSCO is at the stage of surveying how different countries regulate the compliance function, said Ethiopis Tafara, director in the Securities and Exchange Commission's Office of International Affairs. It may result in a set of high level principles to guide securities regulators, he noted. Richard said this is a long-term project for IOSCO. "This will take more than a year. It is huge," he noted.
Orix To Press For Summary Judgment On 1997 Nomura Deal
Securitization News
February 23, 2004
In a Web cast last Thursday, Orix Capital Markets said it would file for summary judgment in the case of ASC-1997 D5, a $1.8 billion commercial mortgage-backed securities deal. The Dallas-based company, which is the deal's special servicer, is suing Nomura Securities over a roughly $44 million mortgage on Doctor's Hospital in Chicago, saying that the mortgage never should have been included in the loan pool.
Orix became the deal's special servicer in March whenit purchased the B-piece assets from Lend Lease Asset Management. The litigation is the continuation of a lawsuit initiated by Lend Lease in 2000 on the Doctor's Hospital loan. LaSalle National Bank, the trustee on the deal, also filed a lawsuit against Nomura and affiliate Asset Securitization Corp. The hospital's operator filed for bankruptcy in April 2000 and subsequently rejected the lease. Since then, the deal has been accruing interest shortfalls. The property is vacant and has environmental issues in addition to legal expenses.
Orix wants Nomura to buy back the loan and is arguing that the loan is not a qualified mortgage because it is not principally secured by real property. In addition, Orix contends that the mortgage was not underwritten correctly and that Nomura breached its representations and warranties.
Michael Wurst, director, led the webcast, which included a question and answer session for investors. A Nomura spokeswoman was unable to comment while Wurst did not return calls.
SEC Guidance on Broker-Dealer Customer Identification Rule
The Securities and Exchange Commission staff recently announced that,
in following the new broker-dealer customer identification rule,
broker-dealers may treat registered investment advisers as if they were
subject to an anti-money laundering program rule. Securities Industry
Association, SEC No-Action Letter (Feb. 12, 2004). The customer
identification rule provides that broker-dealers may rely on certain other
financial institutions to undertake the required elements with respect to
shared customers if, among other things, the other financial institution is
subject to an anti-money laundering rule. Investment advisers are not
currently subject to anti-money laundering requirements, although a
rule was proposed last year. The staff position will be automatically
withdrawn upon the earlier of the date upon which an anti-money laundering
rule for advisers becomes effective, or February 12, 2005. The letter
is available online at
http://www.sec.gov/divisions/marketreg/mr-noaction/sia021204.htm
New York investment and technology firm seeks staff attorney
Brodie Research has been retained by a fast-growing Midtown Manhattan
hedge
fund/technology venture firm to find an exceptionally intelligent and
creative staff attorney for its legal department.
The successful candidate will work on projects such as launching new
businesses, capital raising, overseeing various intellectual property
matters, firm wide organizational matters and negotiating contracts and
legal arrangements. Much of the work will involve interaction with PhDs
in a
very demanding intellectual environment.
QUALIFICATIONS
Extensive experience in securities offerings (including private
placements
and IPOs) and intellectual property matters is required. Experience
advising
software companies or biotech firms would be ideal.
We are looking for a superb drafter, a hard worker, someone with an
obsession for detail and excellent organizational skills. We require at
least three years of experience managing deals and advising clients
directly. The ability to identify and analyze legal issues in a
fast-paced
and rapidly changing business environment is essential.
Stellar academic credentials and superb writing skills are critical.
COMPENSATION
The firm is prepared to offer a generous salary for a highly qualified
individual.
TO APPLY
Send a resume and cover letter (including GPAs and SAT and LSAT scores)
to
careers@brodieresearch.com or contact Alice Brodie at (914) 472-2446.
Alice Brodie
Recruiting Consultant
Brodie Research
914-472-2446
alice@brodieresearch.com
www.brodieresearch.com
Mutual Fund Market Timing/Late Trading Actions Consolidated
The Judicial Panel on Multidistrict Litigation has consolidated more
than 170 civil actions involving market timing/late trading allegations
against mutual funds, as well as any later-filed related actions, in a
single multidistrict docket. In re Janus Mutual Funds Investment
Litigation, Docket Nos. MDL-1576, MDL-1577, MDL-1582, MDL-1585, MDL-1586,
MDL-1590, MDL-1591 (J.P.M.D.L. Feb. 20, 2004). The consolidated docket
will be MDL-1586, In re Mutual Funds Investment Litigation, and will be
transferred to the District of Maryland. The parties generally
supported some form of consolidation but none, apparently, had sought the
District of Maryland as the transferee district; the Southern District of
New York and the District of New Jersey were more popular choices. The
panel said it had searched for a transferee district with the capacity
and experience to steer the litigation on a prudent course.
The panel took the unusual step of assigning the litigation to
multiple transferee judges: J. Frederick Motz, Andre M. Davis, and Frederick
P. Stamp, Jr. The judges will sit individually and/or jointly in their
own discretion. The panel's order is available online at
http://www.jpml.uscourts.gov/MDL-1586-TransferOrder.pdf
Neither, its open hunting season in the District of Criminals...watch for the Bush Administration Sex Scandal coming soon to a theatre near you...
Check this out:
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Investment Companies, Broker-Dealers Subject to Customer
Disclosure Requirement
As a result of a recent statutory change, investment companies and
broker-dealers, as well as certain other "financial institutions," are now
required to produce financial records relating to a "customer or
entity" when requested to do so by certain federal authorities engaged in
intelligence activities. Intelligence Authorization Act for Fiscal Year
2004, Public Law No. 108-177, sec. 374, 117 Stat. 2599, 2628 (Dec. 13,
2003). When the information is requested for foreign counter
intelligence purposes to protect against international terrorism or clandestine
intelligence activities, disclosure to the government is required and it
is illegal to disclose the request to any person. The statute also
provides that nothing in the title shall prohibit a Government authority
from obtaining financial records from a financial institution if delay
would create imminent danger of physical injury to any person, serious
property damage, or flight to avoid prosecution; there is no prohibition
against disclosing the request in these cases. Public laws can be
accessed at
http://www.access.gpo.gov/nara/publaw/108publ.html
Public Law 108-177 effects the statutory change by changing the
definition of "financial institution" in 12 U.S.C. 3414, which codifies
section 3414 of the Right to Financial Privacy Act. The new, much broader
definition is the same as that used in the USA Patriot Act to regulate
money laundering. The statutory change has attracted little attention
to date, although the Investment Company Institute advised its members
of the change in a January 30 memorandum. 12 U.S.C. 3414, prior to
amendment, is available online at
http://www4.law.cornell.edu/uscode/12/3414.html
Penthouse International Completes $24 Million Financing with Laurus Funds and Acquires Guccione New York City Mansion
Tuesday February 24, 10:30 am ET
NEW YORK, Feb. 24 /PRNewswire-FirstCall/ -- Penthouse International (OTC Bulletin Board: PHSL) announced today that it has completed the placement of $24 million in three-year, 7.5% convertible senior secured notes with Laurus Master Fund, Ltd. ("Laurus Funds"), a financial institution specializing in providing asset-based financing to public companies. The notes, acquired by Laurus Funds, are secured by a first mortgage on the double townhouse located at 14-16 East 67th Street, New York, New York and occupied by Robert Guccione, Chief Executive Officer of General Media, Inc., Penthouse's 99.5% owned- subsidiary and the editor-in-chief of Penthouse Magazine.
Penthouse used the proceeds to acquire the 67th Street townhouse residence previously foreclosed upon by creditors of Mr. Guccione and his affiliates and to retire related institutional mortgage debt on the property held by affiliates of Deutschebank and Merrill Lynch.
General Media and its subsidiaries, the entities that own and operate Penthouse Magazine and its related adult entertainment businesses, are debtors-in-possession in a Chapter 11 bankruptcy case currently pending in the United States Bankruptcy Court for the Southern District of New York. General Media intends to propose a revised plan of reorganization under which all of its secured and unsecured creditors will receive greatly enhanced recoveries generated by an infusion of new capital into the company by Penthouse. This plan would supercede the current plan under which control of General Media and subsidiaries would be transferred to its bondholders, principally an entity affiliated with Marc Bell, formerly of Globix Corporation.
"We are encouraged to complete needed debt restructuring for the real estate," said Claude Bertin, Executive Vice President and Director of Penthouse International. "Under a lease agreement with Penthouse, Mr. Guccione will continue to reside at the townhouse and expects to continue to edit Penthouse Magazine from his private offices located on that site. His continued involvement with the magazine and related enterprises is a key factor in Penthouse's ability to refinance General Media and emerge from Chapter 11." Bertin added, "Longstanding media speculation about Mr. Guccione's demise will hopefully be ended with this transaction. We anticipate that Mr. Guccione will continue to spend many more satisfying years living at 67th Street as well as remain Chief Executive of Penthouse Magazine, publisher of General Media and Editor-in-Chief of the magazine."
The townhouse is reported as one of the largest residences in Manhattan. The historic property was originally built in approximately 1896 and has served as the personal residence of Mr. Guccione for nearly 30 years. Penthouse anticipates hosting promotional events at the mansion.
Through another subsidiary, Del Sol Investments LLC, Penthouse owns real property in Zijuantanejo-Ixtapa, Mexico and, subject to General Media and subsidiaries emerging from bankruptcy as a continuing operating affiliate of Penthouse, plans to develop a membership-based resort complex.
About Penthouse International, Inc.
Penthouse International, Inc., through its 99.5% owned subsidiaries General Media, Inc. and Del Sol Investments LLC, is a brand-driven global entertainment business founded in 1965 by Robert C. Guccione. General Media's flagship PENTHOUSE brand is one of the most recognized consumer brands in the world and is widely identified with premium entertainment for adult audiences. General Media caters to men's interests through various trademarked publications, movies, the Internet, location-based live entertainment clubs and consumer product licenses. General Media licenses the PENTHOUSE trademarks to third parties worldwide in exchange for recurring royalty payments.
Safe Harbor
This release contains statements relating to future results of the Company (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the availability of DIP financing for the General Media subsidiary, the impact that public disclosures of the Company's liquidity situation and Chapter 11 filing may have on the Company's businesses, the fact that no assurances can be given that the General Media Plan of Reorganization will enhance the Company's competitive position, as well as other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission. On August 12, 2003, General Media and its direct and indirect subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. Penthouse International, Inc. owns 99.5% of the capital stock of General Media. Penthouse did not file for protection under the Bankruptcy Code and its activities are not subject to Bankruptcy Court supervision. On December 22, 2003, the Debtors filed their Joint Plan of Reorganization and the disclosure statement with respect to the Plan (as such Disclosure Statement may be amended). If the Plan is confirmed pursuant to its current terms, no distribution on account of equity is proposed under its terms. For additional information, reference is made to publicly available documents filed with the bankruptcy court to determine the most current status of all matters related to the bankruptcy case of General Media. The website of the Bankruptcy Court is http://www.nysb.uscourts.gov .
For more information, contact:
Gary Geraci
OTC Financial Network
781-444-6100 ext. 629
garyg@otcfn.com
http://www.otcfn.com/phsl
Even now, the Pentagon has under way one of the largest troop rotations in U.S. history as up to 200,000 soldiers will have moved in or out of Iraq before May.
U.S. Military Resources Getting Spread Too Thin?
U.S. sending military team to Haiti
By Tom Squitieri, USA TODAY
A small U.S. military team is going to Haiti to determine the security of the U.S. Embassy amid a three-week rebellion that could topple President Jean-Bertrand Aristide.
Pentagon (news - web sites) spokesman Lawrence Di Rita said Thursday that U.S. Ambassador James Foley asked for the assessment. Four military experts should arrive in Haiti by Saturday.
Dozens of people have been killed in the revolt that began Feb. 5. Insurgents control major cities in the north and are closing in on Cap-Haitien, the second largest city, but Aristide vowed to fight to the death if necessary.
The uprising is led by gang members once loyal to Aristide who turned on him after the death of a gang leader in September. Gang members say he was silenced to prevent spreading damaging information about Aristide.
The United States, Canada and France will send emissaries this weekend to push a peace plan that calls for a new government and the release of political prisoners. It does not call for Aristide's resignation. But Secretary of State Colin Powell (news - web sites) said the USA would not object if Aristide agreed to step down to settle the situation.
The United States has been under pressure from other countries to get involved in the latest imbroglio for Haiti. In 1994, the Clinton administration ordered troops into Haiti to restore Aristide to power after he had been ousted in a military coup. Aristide, a former priest, became Haiti's first freely elected leader in 1990.
In recent years, Aristide has been accused of using armed thugs to jail and kill political opponents in the impoverished island nation.
Meanwhile, the State Department urged U.S. citizens to leave Haiti, where more than 20,000 Americans live. Some family of U.S. Embassy staff and non-essential employees have left. The Peace Corps ordered its staff to leave.