SEC Charges 36 Firms In Massive Muni-Underwriting Shakedown Including Citigroup, Merrill, Morgan Stanley & Goldman Sachs

The SEC announced enforcement actions against the banks listed below. These are actions specifically for violations in municipal bond offerings. What's interesting about this case is that banks got off easy.

As a way to incentive banks to self-report material misstatements and omissions in muni-offerings the SEC offered firms favorable terms for self-reporting. This is referred to as the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.

“The MCDC initiative," said SEC Chair Mary Jo White, "has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures. This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.”

LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit had this to say, “The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward. Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.”

The firms did not admit or deny the findings, but agreed to "cease and desist" from any future violations -- typical legal doublespeak.

The maximum penalty for each firm was $500,000.  Of the 36 firms charged, 8 received the maximum penalty.

Link to the SEC’s orders and penalty amounts:
•           The Baker Group, LP – $250,000
•           B.C. Ziegler and Company – $250,000
•           Benchmark Securities, LLC – $100,000
•           Bernardi Securities, Inc. – $100,000
•           BMO Capital Markets GKST Inc. – $250,000
•           BNY Mellon Capital Markets, LLC – $120,000
•           BOSC, Inc. – $250,000
•           Central States Capital Markets, LLC – $60,000
•           Citigroup Global Markets Inc. – $500,000
•           City Securities Corporation – $250,000
•           Davenport & Company LLC – $80,000
•           Dougherty & Co. LLC – $250,000
•           First National Capital Markets, Inc. – $100,000
•           George K. Baum & Company – $250,000
•           Goldman, Sachs & Co. – $500,000
•           Hutchinson, Shockey, Erley & Co. – $220,000
•           J.P. Morgan Securities LLC – $500,000
•           L.J. Hart and Company – $100,000
•           Loop Capital Markets, LLC – $60,000
•           Martin Nelson & Co., Inc. – $100,000
•           Merchant Capital, L.L.C. – $100,000
•           Merrill Lynch, Pierce, Fenner & Smith Incorporated – $500,000
•           Morgan Stanley & Co. LLC – $500,000
•           The Northern Trust Company – $60,000
•           Oppenheimer & Co. Inc. – $400,000
•           Piper Jaffray & Co. – $500,000
•           Raymond James & Associates, Inc. – $500,000
•           RBC Capital Markets, LLC – $500,000
•           Robert W. Baird & Co. Incorporated – $500,000
•           Siebert Brandford Shank & Co., LLC – $240,000
•           Smith Hayes Financial Services Corporation – $40,000
•           Stephens Inc. – $400,000
•           Sterne, Agee & Leach, Inc. – $80,000
•           Stifel, Nicolaus & Company, Inc. – $500,000
•           Wells Nelson & Associates, LLC – $100,000
•           William Blair & Co., L.L.C. – $80,000

Fed's CEO Talks Rate Hike Timing, Consumer Credit Up 7.25% & SEC Charges $CSC



William C. Dudley, President and Chief Executive Officer of the Federal Reserve, gave remarks at the Economic Club of Minnesota’s June Luncheon in Minneapolis on Friday. In his remarks he provided his views on the timing and pace of rate hikes over the short- and long-term. It's clear that Dudley is less optimistic about growth, but he's still hopeful about the future in terms of inflation and labor trends. 

"Putting this all together," he says, "I still think it is likely that conditions will be appropriate to begin monetary policy normalization later this year." Dudley also takes some time to address concerns that the Fed has the ability to control the fed funds and the impact of a rate hike on asset prices. 

"We have the appropriate tools to push up short-term interest rates," Dudley says. "However, lift-off may not go so smoothly in terms of the impact on financial asset prices. After all, lift-off will represent a regime shift after more than six years at the zero lower bound." Only time will tell.

The SEC charged Computer Sciences Corporation (NYSE: CSC) and its executives with manipulating financial results. Former finance executives involved with the company's international businesses were also charged for ignoring basic accounting standards. CSC agreed to pay $190 million, former CEO Michael Laphen agreed to return more than $3.7 million under the clawback provision and pay a $750,000 penalty, and former CFO Michael Mancuso will return $369,100 and pay a $175,000 penalty. Allegedly items were added to the company's accounting models that artificially increased profits leading to significant reductions in company earnings in 2010 and 2011. 

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. 

The SEC also found that finance executives in Australia and Denmark manipulated financial results of the company’s businesses in those regions. "They overstated CSC’s operating results by more than 5 percent in the first quarter of fiscal year 2009 and allowed the company to meet analysts’ earnings targets during that period," the report said.The stock currently trades at $67.69 and is up 41.67% in the last 5 years.

According to the Federal Reserve, consumer credit increased at an annual rate of 7.25% in April. Revolving credit is up 11.5%, while non-revolving credit increased at 5.75%.

Fry's Electronics' Bank Fails FDIC Inspection & SEC Freezes $2M In Assets



The June 2015 List of Banks Examined for CRA Compliance was published. As usual, most banks passed, however, there were two that received a "needs to improve" including: Sewickley Savings Bank or Sewickley, PA, and First State Bank of Socorro, NM. Only one bank, First Electronic Bank of Sandy, UT, received a non-compliance rating. First Electronic Bank is a wholly owned subsidiary of Fry's Electronics. This is the first time I've seen this low rating given out. 

The SEC froze $2 million in assets of two brokerage accounts connected to trading schemes. The schemes were set up to manipulate Avon and other stocks.  
Only three weeks after the manipulation of Avon stock occurred, this emergency court order keeps not only the alleged illicit profits from being transferred offshore, but preserves the SEC’s ability to recover substantial penalties. -Andrew Ceresney, Director of the SEC Enforcement Division
Strategic Capital Partners Muster Ltd., Strategic Wealth Investments Inc., and PTG Capital Partners LTD were also charged. According to the announcement, the stock schemes: 
followed similar patterns where the accounts had substantial holdings in a company that had been losing value and the companies’ stock values substantially increased after a false filing or press release originating from Bulgaria.
Evidently, the firms hid behind proxy serves, false filings and phony foreign entities to hide their tracks, a strategy which clearly didn't work.









Balance With OPEC Shifted To Surplus, Beige Book Shows Expansion, and Insider Trading Schemes



  • The U.S. Census Bureau and the Bureau of Economic Analysis (BEA) announced that the goods and services deficit was down almost $10 billion, from $50.6 billion in March. April exports were ~$190 billion, or ~$2 billion more than March. Imports were $7.8 billion less than March. The report also showed a deficit increase of $6.4 billion to 89.1 billion with China. Additionally, and perhaps most salient, the "balance with OPEC countries shifted from a deficit of $1.5 billion to a surplus of $6.2 billion." 
  • The Beige Book was released. The report, which is consolidation of the twelve Federal Reserve Districts, says economic activity expanded from early April to late May. The pace of growth increased in all areas except Dallas and Atlanta. This is just the kind of data Yellen would need to see prior to the June meeting in order to commit to a rate hike.
  • The SEC announced charges against day trader Steven Fishoff, his brother-in-law Steven Costantin, his friend and neighbor Ronald Chernin, and his friend Paul Petrello, also a former day trader who resides in Florida. The U.S. Attorney’s Office for the District of New Jersey also filed criminal charges against the foursome. The SEC alleges that the four were engaged in a $4.4 million insider trader scheme which involved at least 15 stocks. Evidently, the group posed as portfolio managers in order to get information out of investment bankers with insider information in exchange for business. Ballsy.

Is There An FOMC Data Disconnect & New DFA Stress Tests For Medium Sized Banks

Federal Reserve Governor Lael Brainard Talks About The FOMC Data Disconnect
The Fed Issued A Joint Release On Stress Test Requirements For Medium Sized Banks
  
A summary of noteworthy news and publications from financial regulatory and supervisory agencies on June 2, 2015.
This spring marks the end of the Federal Reserve's calendar-based forward guidance and the return to full data dependency in the setting of the federal funds rate. So it is notable that just as policy making is becoming more anchored in meeting-by-meeting assessments of the data, the data are presenting a mixed picture that lends itself to materially different readings.
These were the words of Federal Reserve Governor Lael Brainard in a speech delivered at the Center for Strategic and International Studies. This is the first speech I've seen coming out of the Fed to acknowledge the disconnect between Federal Reserve Staff Forecast data and the real data that's coming in. Fed staff believes Q1 was transitory, but the data suggests that low growth may be the norm. 

Brainard is clearly not in favor of a rate hike in June, but he hasn't ruled one out for the year and reminds the audience that "the stance of monetary policy will remain highly accommodative even after the federal funds rate moves off the effective lower bound, because the real federal funds rate will initially still be low and because of the elevated size of the Federal Reserve's balance sheet and the associated downward pressure on long-term rates." This is a point most don't appreciate -- the Federal Reserve isn't lowering the real fed funds rate, only the interest rate on excess reserves. The hope is that raising this rate will also increase the fed funds rate, but the actual fed funds rate will start off low. June 17, the date of the next FOMC "statement", should be interesting.

In other regulatory news, the Board of Governors of the Federal Reserve System issued a joint release with the FDIC on the Dodd Frank Wall Street Reform and Consumer Protection Act (DFA). The DFA states that starting in June 2015, banks, federal and state savings associations, and bank holding companies with assets between $10 billion and $50 billion must undergo stress tests "that include the annual public disclosure" of test results. Starting June 2015, medium sized banks will be required to "publicly disclose DFA stress test results on an annual basis." The press release stated that the test requirements are significantly less than they are for large banks so this should have little impact on stock prices.

Disposable Income Up, Merrill Lynch's ETB Charges, Buyouts & Beta, Monetary Policy Vs Income Inequality And More



  • Personal income and disposable income went up 0.4 percent in April, according to the Bureau of Economic Analysis. In March, personal income decreased less than 0.1% and disposable income increased less than 0.1%. 
  • Merrill Lynch was charged by the SEC for using inaccurate data for short sale orders. The firm is expected to pay $11 million to settle the charges. “Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
  • Liberty Street Economics, the research leg of the New York Federal Reserve, published a fascinating paper titled What Drives Buyout Booms and Busts? The paper suggests that buyout activity is a function of the overall risk in the market more so than the availability of financing. The authors use the cost of capital to show that when the risk premium increases, the discount rate for firms with high beta increases at a faster rate. "By extension," the authors figure, "the present value of the buyout declines more for high beta firms than low beta firms." As a result, when the risk premium is high there are fewer buyouts of higher beta firms. The authors expect the same logic to hold true for IPO's, mergers and acquisitions, and other types of corporate actions; that is, corporate actions are a function of the time variation in the risk premium more so than access to credit. It's hard to say what the ultimate implication of the paper is for investors, but it appears to be saying that this is a great time to own high beta stock.
  • Liberty Street Economics published another fascinating paper titled Regional Heterogeneity and Monetary Policy in which the authors looked at the effect of monetary policy on households in different regions of the country. "We find," said the authors, "that if regions with low relative income also have depressed collateral values (as in 2008), then expansionary monetary policy will further exacerbate regional dispersion of economic activity and will also be less effective at stimulating aggregate spending." The implications of the paper are clear and somewhat disturbing as it seems the current monetary policy supports income inequality.
  • Federal Reserve Vice Chairman Stanley Fischer gave a speech at the International Monetary Conference in Toronto, Canada titled What have we learned from the crises of the last 20 years? "No-one," says Fischer, "should underestimate the costs of the financial crisis to the United States and the world economies. We are in the seventh year of dealing with the consequences of that crisis, and the world economy is still growing very slowly." Fischer goes on to suggest that we may have either entered a period of "secular stagnation as Larry Summers argues", or a "deep and long" recession, "as Carmen Reinhart and Ken Rogoff's research implies." 
Fischer also makes no apologies about the wave of supervisory action over banks suggesting that the increased regulation may have failed only in its ability to go after the individuals with bad behavior rather than just the banks involved. "Individuals should be punished for any misconduct they personally engaged in", Fischer said. This is a fascinating read as Fischer has held many roles including his role at the IMF, his role as Governor of the Bank of Israel, and his role now as Vice-Chairman of the Fed which he's held since 2014.
Source: United States Department of Commerce
The good news is that as the Federal Staff has consistently said, Q1's manufacturing challenges were most likely transitory in nature which is supported by the March reading.
  • The Federal Reserve published an enforcement action against State Street Bank after identifying deficiencies in SSC's firm-wide compliance particularly with respect to "internal controls, customer due diligence procedures, and transaction monitoring processes." The bank has 60-90 days to correct deficiencies to avoid penalty.


GDP Revised Down, #FFIEC Requests Public Comment, #CEI Shows NY Deceleration and FDIC Issues Q3 CRA Schedule

GDP Was Revised Down
The #FFIEC Requests Public Comment
The #CEI Shows Deceleration in NY &
The FDIC Issued Its Q3 CRA Schedule

A summary of noteworthy news and publications from financial regulatory and supervisory agencies on May 29, 2015.

Source: BEA Website
Perhaps the biggest news of the day is that GDP was revised down to a .7% decrease from a .2% increase in the first estimate. Either way the economy slowed in Q1 and either way the Fed will dismiss negative news as transitory in nature. 

The Survey also showed that profits of domestic financial corporations decreased $2.6 billion in Q1, compared with a decrease of $12.5 billion in Q4, while profits of non-financial corporations decreased $100.4 billion compared to an increase of $18.1 billion in Q4. Taxes on corporate income increased $9.3 billion in Q1 in contrast to a decrease of $4.8 billion in Q4. Dividends increased $5.1 billion in Q1, compared with an increase of $18.6 billion in Q4. 

________________________________________________________________
If you like what you're reading, please join my mailing list to receive blog posts and updates as they occur. If you're an investor with all of your assets tied up in the stock market and cash, you might want to consider a few diversification strategies. Gold is the oldest asset in the world and it's inflation proof. Bitcoin is the gold standard for the cryptocurrency world, which is the fastest growing asset class in the world. Diversifying your portfolio into one or both of these assets can help to insure your portfolio against a stock market crash or inflation. Most importantly, it can help to safeguard the gains you've made over the last 10 years.

Please note that there are other companies that sell gold and Bitcoin on the market, and you should always do your research when making decisions about your portfolio. Just like your personal health, if you're planning on having major surgery, you need to get a second, and sometimes a third, opinion. You want to make sure your surgeon is good and has performed the procedure many, many times.  In the same way, you need to trust your broker and you need to make sure they are reputable. This is the process I used when looking for a broker to recommend.

Full disclosure: RegalAssets compensates me for everyone I send their way, but I would receive compensation from any company I chose to recommend. The only broker I'm recommending is Regal, primarily due to its innovative product offering in my favorite commodities - gold, precious metals and cryptocurrency like Bitcoin. They also have a distinguished track record for success (see below).




Next Steps: Use Regal as one of your options and compare against them. Your other brokers should be able to offer the same level of service and the same low rates. The kit is free and it will provide you with a basis for comparison. Don't wait, get started today. Fill out the form below to get your free investment kit.

If you're interested in learning more about gold investments, click here to receive a free gold investment kit from Regal Assets.

If you're interested in learning more about Bitcoin investments, click here to receive a free Bitcoin investment kit from Regal Wallet.


Every 10 years the Federal Financial Institutions Examination Council (FFIEC) examines the relevance of certain rules and regulations on financial institutions. Due to Dodd-Frank the review will be a sizable one this year. The FFIEC is requesting public comment for 90 days. You can provide your comments about the need for regulation of the financial industry at the following website: http://egrpra.ffiec.gov/submit-comment/submit-comment-index.html

The April Index of Coincident Economic Indicators was published and showed a deceleration of economic activity in New York City, however it grew at a moderate pace in New York State and New Jersey.

The FDIC issued the Q3 schedule for CRA bank examinations. Your bank might be on the list. To view the schedule by region click here.

Officer Turned Criminal, Discover Financial's Anti-Money Laundering Woes & The Fed Awards $65b In Term Deposits

Fraud charges against William Quigley 
Enforcement action against Discover Financial Services (DFS)
Two penny stock promoters charged in Canada
Fed awards $65 billion in 7-day term deposit offering
OFC publishes a paper that aims to predict stock market crashes
  • The SEC announced fraud charges against William Quigley of Long Island for "fleecing investors and stealing money from a brokerage firm" -- Quigley was the Director of Compliance at the firm. “We allege a classic situation of the fox guarding the henhouse as William Quigley subverted his position of trust as compliance director and stole money from investors and his own firm,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
  • The Federal Reserve brought an enforcement action against the credit card issuer Discover Financial Services (DFS). The company has agreed to improve anti-money laundering policies through a series of plans that must be submitted to the Fed within 90 days. It is unclear what penalties have occurred or will occur if Discover fails to provide adequate improvements. This also suggests we may be seeing charges brought against Discover in the near future from other regulatory agencies such as the Department of Justice through the Foreign Corrupt Practices Act or the Federal Trade Commission.
  • The SEC charged two penny stock promoters in Canada, Mike Taxon and Itamar Cohen, with manipulating the stock of Raven Gold Corporation (RVNG) and natural gas production company Kentucky USA Energy (KYUS). “Taxon and Cohen lured investors to these stocks by depicting the illusion of an active market and positive market trends,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
  • On May 28, 2015, the Federal Reserve offered a seven-day floating-rate term deposit with the rate set equal to the sum of the interest rate paid on excess reserves (IOER) plus a fixed spread of 1 basis point. The offering awarded 42 participants a total of $65 billion, $15 billion less than the offering held last week on the same terms.
  • The OFC published a paper that provides readers with a framework that can predict stock market crashes like the 2008 financial crisis. The framework is designed to predict a system-wide collapse with the use of  market liquidity indicators.


________________________________________________________________
If you like what you're reading, please join my mailing list to receive blog posts and updates as they occur. If you're an investor with all of your assets tied up in the stock market and cash, you might want to consider a few diversification strategies. Gold is the oldest asset in the world and it's inflation proof. Bitcoin is the gold standard for the cryptocurrency world, which is the fastest growing asset class in the world. Diversifying your portfolio into one or both of these assets can help to insure your portfolio against a stock market crash or inflation. Most importantly, it can help to safeguard the gains you've made over the last 10 years.

Please note that there are other companies that sell gold and Bitcoin on the market, and you should always do your research when making decisions about your portfolio. Just like your personal health, if you're planning on having major surgery, you need to get a second, and sometimes a third, opinion. You want to make sure your surgeon is good and has performed the procedure many, many times.  In the same way, you need to trust your broker and you need to make sure they are reputable. This is the process I used when looking for a broker to recommend.

Full disclosure: RegalAssets compensates me for everyone I send their way, but I would receive compensation from any company I chose to recommend. The only broker I'm recommending is Regal, primarily due to its innovative product offering in my favorite commodities - gold, precious metals and cryptocurrency like Bitcoin. They also have a distinguished track record for success (see below).




Next Steps: Use Regal as one of your options and compare against them. Your other brokers should be able to offer the same level of service and the same low rates. The kit is free and it will provide you with a basis for comparison. Don't wait, get started today. Fill out the form below to get your free investment kit.

If you're interested in learning more about gold investments, click here to receive a free gold investment kit from Regal Assets.

If you're interested in learning more about Bitcoin investments, click here to receive a free Bitcoin investment kit from Regal Wallet.


Eurodollar Market, FDIC Reports 7% Increase In Bank Income & Survey Says Americans Unprepared For Economic Downturn

Fed Publishes A Primer On the Eurodollar Market
FDIC Publishes The Quarterly Banking Profile
Fed Publishes The 2014 Survey of Household Economics and Decision-making 

Liberty Economics, the research leg of the New York Federal Reserve, published a post titled The Eurodollar Market in the United States. It provides insight into the Eurodollar market and is a great primer for anyone looking for some background into the market. This comes months before the release of a new rate that will be based on both federal funds and Eurodollar transactions as reported on the FR 2420 Report of Selected Money Market Rates. The rate is expected to provide a broader measure of overnight funding costs for U.S.-based banks as a complement to the fed funds rate.

The FDIC released the Quarterly Banking Profile and it shows a marked improvement in the industry, with a 6.9% increase in net income, and a 2.6% increase in net operating revenue. Community banks lead the industry on net income growth of 16% over last year. Net interest margin continues to struggle, falling 3.02% in the quarter.

The Federal Reserve Board published the 2014 Survey of Household Economics and Decision-making. The survey provides information about how Americans view their economic security. According to the survey, 65% of respondents feel their families are "doing okay" or "living comfortably" financially, 29% say they expect household income to be higher next year. The results also suggest, as can be seen in the video to the left, that many Americans are not prepared for a financial crisis or retirement. Over 5,800 people completed the survey which was conducted in October and November of 2014.


________________________________________________________________
If you like what you're reading, please join my mailing list to receive blog posts and updates as they occur. If you're an investor with all of your assets tied up in the stock market and cash, you might want to consider a few diversification strategies. Gold is the oldest asset in the world and it's inflation proof. Bitcoin is the gold standard for the cryptocurrency world, which is the fastest growing asset class in the world. Diversifying your portfolio into one or both of these assets can help to insure your portfolio against a stock market crash or inflation. Most importantly, it can help to safeguard the gains you've made over the last 10 years.

Please note that there are other companies that sell gold and Bitcoin on the market, and you should always do your research when making decisions about your portfolio. Just like your personal health, if you're planning on having major surgery, you need to get a second, and sometimes a third, opinion. You want to make sure your surgeon is good and has performed the procedure many, many times.  In the same way, you need to trust your broker and you need to make sure they are reputable. This is the process I used when looking for a broker to recommend.

Full disclosure: RegalAssets compensates me for everyone I send their way, but I would receive compensation from any company I chose to recommend. The only broker I'm recommending is Regal, primarily due to its innovative product offering in my favorite commodities - gold, precious metals and cryptocurrency like Bitcoin. They also have a distinguished track record for success (see below).




Next Steps: Use Regal as one of your options and compare against them. Your other brokers should be able to offer the same level of service and the same low rates. The kit is free and it will provide you with a basis for comparison. Don't wait, get started today. Fill out the form below to get your free investment kit.

If you're interested in learning more about gold investments, click here to receive a free gold investment kit from Regal Assets.

If you're interested in learning more about Bitcoin investments, click here to receive a free Bitcoin investment kit from Regal Wallet.

Deutsche's $55M Settlement, Fischer in Tel Aviv & Gottbetter Settles For $4.6M

SEC charged Deutsche Bank with misstating financial statements
Vice Chairman of the Federal Reserve Stanley Fischer in Tel Aviv University
SEC charged Adam S. Gottbetter
Timothy Massad, Chairman of the CFTC, before the Natural Gas Roundtable

In the biggest story for the day, the SEC charged Deutsche Bank with misstating financial statements. The misstatement created a "gap risk" that left the general market exposed to higher levels of systematic risk. Deutsche has agreed to pay $55 million to settle the charges.

Vice Chairman of the Federal Reserve, Stanley Fischer, gave a speech at a conference held in honor of Professor Haim Ben-Shahar, ex-president of Tel Aviv University. He used the speech to discuss the ways in which U.S. monetary policy impacts other countries, and vice versa. Ultimately, the speech is an argument for the central bank liquidity swap lines extended from the Federal Reserve during the global financial crisis - the FOMC agreed to extend those lines at the last meeting. Only one committee member dissented on the grounds that this should be a fiscal decision.

The SEC charged Adam S. Gottbetter, a securities lawyer, with orchestrating promotional campaigns for microcap companies, Kentucky USA Energy Inc. (KYUS), Dynastar Holdings Inc. (DYNA), and HBP Energy Corp. (HBPE). He enlisted Mitchell G. Adam and K. David Stevenson to help in the 6 year scheme. According to the announcement, "The three rehearsed stories they would tell if ever questioned by law enforcement." Evidently, according to the announcement, Gottebetter even went so far as to complain about the difficulties of stock manipulation in comparison to robbing a bank. Gottbetter settled charges for $4.6 million and is barred from the penny stock industry. Stevenson also agreed to settle, but the case against Adam will be litigated in federal court in Newark, N.J. The U.S. Attorney’s Office for the District of New Jersey announced similar criminal charges against the trio. “As a securities lawyer, Gottbetter should have served as a gatekeeper and protected the capital markets and investors from fraudsters. Instead, he swung the gates wide open and illicitly profited at investors’ expense,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

Timothy Massad, Chairman of the CFTC, gave a prepared speech before the Natural Gas Roundtable. He used the speech to discuss the CFTC's priorities with respect to the natural gas industry including: the steps taken to address the concerns of commercial end users, an update on the new rules on position limits as required by Congress, and the new rules on benchmarks and price indices.

FOMCs $80b Term Offering, Mortgage Contract Design, Atl's Gray Financial Grp, & The Euro-bond Sell Off Opportunity

The FOMC conducted an $80 billion floating-rate offering on a 14-day term for IOER+.01%
The Fed published the opening remarks at a mortgage contract design conference
The SEC announced charges against Atlanta-based Gray Financial Group
An OFR paper suggests Europe is a hot investment due to QE

  • On May 21, 2015, the FOMC conducted a floating-rate offering of 14-day term deposits with a rate equal to the interest rate paid on excess reserves (IOER) plus 1 bps (IOER +.01%). The offering awarded $80 billion and had 53 participants. The "award" will settle on May 21, and mature on June 4. This is why the fed funds rate dropped a bps point, from .13% to .12% on May 19, one day after the Fed announced the offering, which suggests that while increasing the IOER acts like a magnate to pull interest rates up, term deposits at a rate of IOER + .01% can have the opposite effect. Expect to see this policy tool used frequently in the coming years as the Fed looks for ways to control rates.
  • The Federal Reserve published the opening remarks at the Mortgage Contract Design: Implications for Households, Monetary Policy, and Financial Stability Conference. The remarks were given by James McAndrews, Executive Vice President and Director of Research at the Federal Reserve Bank of New York. The conference is sponsored along with the NYU Stern Center for Real Estate Finance Research. I won't go into the details of this report as I will be providing a full write up due to its significance, but I can say that the speech provides a great deal of insight into the true nature of what drives interest rate design in the mortgage debt market, and therefore the securities that back it. This is a must read. 
  • The SEC announced charges against an Atlanta-based Gray Financial Group, its founder and president Laurence O. Gray, and co-CEO Robert C. Hubbard IV for "selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers, and other employees." To be clear, these are stewards of public pension funds. Evidently, "Georgia law allows most public pension funds in the state to purchase alternative investment funds," the announcements states, "but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet."  The order accuses the group of collecting over $1.7M from investors. Not only did the Group breach their fiduciary duty to the investor, but they profited from the breach of service. Expect heavy penalties if convicted.
  • The OFR published an interesting paper suggesting that Europe is a good place to put you monetary over the next QE season. "Over the last month, long-term euro area bonds experienced a sharp sell-off, leading to outsized moves in other major global bonds, including U.S. Treasuries," the write up states, adding that the, "sell-off reflects a partial unwinding of the euro area “QE trade,” in which investors established sizable positions in euro area bonds, equities, and the euro in response to the European Central Bank’s expanded asset-purchase program." In other words, asset prices went up in the US largely due to QE over the last 5 years, and now that Europe is about to embark on the same journey, the same will happen to euro area bonds and equities, most especially the euro itself. I see this unwinding as opportunity. Expect a new portfolio coming out focusing on euro area equities.

BHP Billiton, Data Jobs Pay $41.04/hr, New Reporting Rules, FOMC Minutes, Real GDP & Arjent LLC

Why Are Interest Rates So Low? 
SEC charges BHP Billiton  
Fed announces more charges against banks
Data jobs pay more? How much?
SEC votes for stronger reporting rules 
The FOMC released minutes from the last meeting
Real GDP increased .2%  
SEC charges Arjent LLC

  • A working paper published by the Federal Reserve titled Why Are Interest Rates So Low?  analyzes the former Chairman of the Federal Reserve System, Ben Bernanke's, three part post about why interest rates are so low.  The paper suggests that Bernanke believes rates are low due to a reduction in the natural rate of interest, saying that "Monetary policy has largely accommodated the decline in the natural rate of interest, in order to mitigate the adverse effects of the crisis, but the zero lower bound on interest rates has imposed a constraint on the ability of interest rate policy to stabilize the economy." The operative phrase is "the zero lower bound on interest rates has imposed a constraint." It implies that the Fed may be inclined to raise rates more so out of a need to be able to impose monetary policy than a real need to tighten economic policy.
  • The SEC charged BHP Billiton with violating the Foreign Corrupt Practices Act (FCPA) as it sponsored the "attendance of foreign government officials at the Summer Olympics." The company has agreed to pay $25 million in penalties to settle the charges. The charges allege that BHP Billiton did not maintain sufficient controls over the program after the company invited over 150 government officials to attend the Games at BHP's expense. “BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.
  • The Fed announced that it will impose $342 million each for UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co.; $274 million for Royal Bank of Scotland PLC (RBS); and $205 million for Bank of America Corporation. The Fed also issued cease and desist orders over activities in wholesale FX. Five banks were charged with failing to detect illegal agreements between traders. Bank of America was charged with failing to detect traders that merely discussed the possibility of entering illegal agreements. The Federal Reserve also found UBS, Citigroup, JPMorgan Chase, and Barclays conducted unsafe FX sales. Action is being taken against UBS, Barclays, Citigroup, JPMorgan Chase, and RBS alongside charges from the Department of Justice (DOJ) regarding the FX markets, however, Bank of America was not part of the actions taken by the DOJ. Other actions from entities such as the Connecticut Department of Banking and the New York Department of Financial Services are taking separate actions.
  • According to the Department of Commerce's Economics & Statistics Administration data jobs are growing at a faster clip than non-data jobs. "The unemployment rate for data jobs was just 3.1 percent in 2014, or half the national average," said the official announcement. Data jobs are defined as occupations where data analysis is central to the work performed. 
    Source: Department of Commerce's Economics & Statistics Administration
    The average pay in the private sector for data jobs was $41.04 an hour.  During the Great Recession the unemployment rate related to data jobs was 4.9 percent compared to 9.6 percent for the national average. 
  • SEC voted for stronger reporting rules for investment companies and investment advisers. “These recommendations will vastly improve the type and format of the information that funds provide to the Commission and to investors,” said SEC Chair Mary Jo White.  The new reporting requires a new monthly portfolio reporting form, Form N-PORT. The form will ask for the following information as listed in the press release:
  • Data related to the pricing of portfolio securities.
  • Information regarding repurchase agreements, securities lending activities, and counterparty exposures.
  • Terms of derivatives contracts.
  • Discrete portfolio level and position level risk measures to better understand fund exposure to changes in market conditions.
The proposed rules also call for a new annual reporting form, Form N-CEN, which requires "registered funds to annually report certain census-type information to the Commission and would replace the form currently used to report fund census information (Form N-SAR)."  Additionally, funds must report data in a structured data format, and provide more information about fund financial statements, particularly relating to the fund’s securities lending activities. The new rules also allow mutual funds and other registered investment companies to provide shareholder reports on their website instead of printing and mailing. The comment period for the rules will be open for 60 days.
Source: BEA
  • The Federal Reserve Board and the FOMC released the minutes of the meeting held on April 28-29. I'll discuss my views on the minutes in an upcoming post. 
  • Real GDP increased .2% in the fist quarter compared to 2.2% in the fourth quarter of 2014. The drop was blamed on weather, strength in the dollar, West coast labor disputes, and lower energy prices. Lower energy prices may have dampened the energy economy but it also helped consumer spending, as can be seen in the chart to the right, as well as investments in inventory. However, exports, nonresidential fixed investment, and imports are down considerably.  
  • The SEC alleges that Arjent LLC and its UK-based affiliate Arjent Limited misrepresented themselves to investors on the value of the firm's assets and how investor money would be used. The CEO allegedly transferred the first $2.3 million raised in an offering directly to his own bank account and used it for his personal benefit.“We allege that DePalo and Gladtke sold overvalued interests in Pangaea and then raided investor funds for their own personal benefit,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. The New York County District Attorney’s Office also announced criminal charges against Robert P. DePalo and Joshua B. Gladtke. Gregg A. Lerman was also named in the charges. 

Construction Up, How Banks Are Supervised, CFTC Meeting Agenda, NDDF & Sethi Petroleum

Residential construction statistics for April 
 Supervising Large, Complex Financial Companies: What Do Supervisors Do? 
The CFTC Market Risk Committee Agenda
NDDF, Sethi Petroleum, & Sameer Praveen Sethi's fraudulent oil and gas investments

The U.S. Census Bureau and the Department of Housing and Urban Development published residential construction statistics for April. Permits were up a staggering 10.1% from March and up 6.4% from April 2014. Housing starts were up 20.2 % from March and 9.2% from last year.

The Federal Reserve published a working paper titled Supervising Large, Complex Financial Companies: What Do Supervisors Do? The paper describes the Fed's "supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day‐to‐day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System." The ultimate goal of the paper is to provide an overview of what supervision is in order to determine its impact.  

The CFTC Market Risk Committee is having a meeting on June 2. The agenda is published on the website.

The SEC filed an emergency civil action against Sethi Petroleum, LLC and its president, Sameer Praveen Sethi. The action accuses the firm of offering fraudulent oil and gas investments. Since January 2014 the firm raised ~$4 million "through the fraudulent offer and sale of securities in the Sethi-North Dakota Drilling Fund-LVIII Joint Venture ("NDDF")". The offering materials were for oil and gas wells in the Bakken Shale formation in North Dakota. The firm spent less than 25% for these purposes. The suit accuses the SEC of spending more than 75% of investor funds on unapproved expenditures. As a result "less than $1 million of the funds raised went to NDDF's actual oil and gas operations."

FRB Forecasting Models Predict Recovery, IMF On Global Energy Subsidies, and More Insider Trading

The FRBNY DSGE Model Forecast--April 2015
How Large Are Global Energy Subsidies
SEC charged several amateur golfers  
May 2015 Business Leaders Survey
 
Liberty Economics, the research leg of the NY Fed, published a post titled The FRBNY DSGE Model Forecast--April 2015. The post in the first in a two-part series by about the usefulness of various types of "economic forecasts, such as judgmental forecasts or model-based forecasts." All five models continue to predict "a gradual recovery in economic activity with a progressive but slow return of inflation toward the Federal Open Market Committee’s (FOMC) long-run target of 2 percent."

The IMF published a working paper titled How Large Are Global Energy Subsidies? The paper provides a summary of the updated picture on energy subsidies at the global and regional levels. The paper focuses on the effects of post-tax energy subsides and what happens when consumer prices are below supply costs.

The SEC charged several amateur golfers of insider trading. Douglas Parigian pled guilty to "criminal charges of conspiracy and securities fraud for his role in an insider trading ring involving trading in the stock of Massachusetts-based American Superconductor Corporation." Parigian pled guilty along with Eric McPhail, "for conspiracy and securities fraud and, for Parigian only, lying to FBI agents." Parigian evidently used the information provided by McPhail to profit on the purchase of American Superconductor stock and options. The case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing, according to the press release.

Source: Business Leaders Survey
The Federal Reserve Bank of New York's May 2015 Business Leaders Survey was released on Monday. The survey shows moderate expansion in the region's service sector with the index up two points to 12.8. According to the survey, "respondents continued to view the business climate as worse than normal". The prices paid index also rose three points to 43.9, suggesting continued increases in input prices. At the same time the prices received index slipped two points to 6.6.


________________________________________________________________
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Fed Conducts More Repos Next Week, Good News For College Grads & Fed Staff Gives Economic Forecast

The FOMC's Statement Regarding Repurchase Agreements
The Class of 2015 Might Have a Little Better Luck Finding a Good Job
Empire State Manufacturing Survey Released
Industrial production Released
FRB staff provides an economic forecast 

The FRB released a "Statement Regarding Repurchase Agreements" regarding the FOMC approved open market transactions for the month of May. The desk plans on conducting "two small-value repo operations next week" from 9:40 – 9:50 a.m. ET on May 19, followed by a multi-tranche (Treasury, agency, and agency MBS) repo operation on Wednesday, May 20. The outcome of this could be interesting as this is the first time I've seen a multi-tranche repo used as the collateral. This is probably the reason why the offering is so small. I suspect it will have no impact, but you never know. 


Postings for College and Non-College Jobs
Source: Liberty Street Economics






Liberty Street Economics, the research leg of the NY Federal Reserve published an interesting article entitled The Class of 2015 Might Have a Little Better Luck Finding a Good Job. The article classifies job openings into two categories: college jobs and non-college jobs. The trend for both is shown in the chart. According to the article, postings for college graduates leveled off around 2013 and then declined slightly around mid-2014, but demand started to pick up again last summer, "rising by more than 10 percent through the first part of this year."


The Empire State Manufacturing Survey conducted by the Federal Reserve Bank of New York was released yesterday. The general business conditions index climbed four points to 3.1% indicating "that business conditions improved slightly for New York manufacturers."  New orders rose ten points to 3.9, shipments were flat and labor market indicators "point to a small increase in employment levels but a slight decline in the average workweek." Prices paid fell ten points to 9.4, the lowest level in almost three years. The Supplemental Survey Report, which provides past and expected changes in prices, will be released May 18 at 8:30 a.m.

Industrial production was released by the Fed on Friday. The index decreased 0.3% in April -- its fifth consecutive monthly loss. Manufacturing output was flat, the mining index was down .8%, its fourth consecutive monthly decrease.

The Federal Reserve Bank of New York (FRBNY) hosts the Economic Advisory Panel (EAP) in spring this year and the staff are presenting a forecast for "U.S. growth, inflation, and unemployment through the end of 2016." This is a short article and I highly recommend you read it in its entirety as it provides an overview of the Fed's view on the economy. This IS the staff recommendation to CEO Dudley and he will likely discuss it with Yellen. "After a period of robust growth during the middle of 2014," the post states, "GDP growth slowed to near zero in the first quarter of 2015, a performance reminiscent of last year."  The staff attributes this weakness to "transitory factors", in other words, the Fed does not see this as a long term problem. As a result, the staff forecast anticipates "that growth will rebound to around 2½ percent (annual rate) over the remainder of 2015 and 2016." The forecast goes on to say, "We see many of the underlying fundamentals of the economy as positive for growth, with household wealth and real income solid, fiscal policy slightly stimulative, and monetary policy still accommodative." Can you say rate hike?

Reg NMS, The FRBs $5B Term Deposit Facility, Nationwide Insurance & More Insider Trading

Commissioner Daniel M. Gallagher is not in favor of Reg NMS.
Federal Reserve will resume testing the Term Deposit Facility 
Nationwide Life Insurance charged
SEC charged a father and son in New York for insider trading
SEC settled with a former Microsoft employee and friend on insider trading charges

  • Commissioner Daniel M. Gallagher gave a statement at the Inaugural Meeting of the Market Structure Advisory Committee. Not surprisingly, Gallagher, being one of the Commission's most vocal advocates against financial regulation, is not in favor of Reg NMS. "Reg NMS in particular," Gallagher states, "has come to stand as the Commission’s poster child for unintended consequences and the need for the Commission to institute retrospective reviews of its rules." He goes on to say, "I am therefore thrilled the Committee is starting its review with an examination of Rule 611 of Reg NMS.  One would be hard pressed to find a more perfect example of regulatory distortion of market competition."
  • The Federal Reserve will resume testing the Term Deposit Facility (TDF). The first two operations will be on May 21 and May 28. The term will be 14-day and 7-day, respectively. The maximum individual award amount will be set at $5 billion, and the rate will be the IOER (currently 25 basis points) plus a fixed spread of 1 basis point. Complete details are to be announced the day prior to each offering.
  • The SEC charged Nationwide Life Insurance Company with violating pricing rules. Nationwide agreed to settle and pay an $8 million penalty. Nationwide’s prospectus "stated that mutual fund orders received before 4 p.m. at its home office in Columbus, Ohio, would receive the current day’s price and orders received after 4 p.m. would receive the next day’s price." However, the investigation found that Nationwide intentionally delayed picking up mail related to its variable contracts business. "Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4 p.m. cut-off time". "For more than a 15-year period, Nationwide intentionally delayed the delivery of untracked mail containing orders from customers and processed them at the next day’s prices in violation of the law," said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. Shame on you Nationwide, shame on you.
  • The SEC charged a father and son in New York with conspiring to create an insider trading scheme involving tips of nonpublic information via coded e-mail messages about golf. The SEC alleges that Sean R. Stewart, currently a managing director at Perella Weinberg Partners, a prominent investment bank, routinely provided his father, Robert K. Stewart, with tips and "confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years."  Prior to working for Perella Weinberg Partners, Stewart worked at JPMorgan Chase & Co.  The father is a certified public accountant and was arrested Thursday morning. The son has not yet been arrested.
  • The SEC settled with a former Microsoft employee and friend on insider trading charges filed in 2013. The two were accused of unlawfully trading nonpublic information about Microsoft (Nasdaq: MSFT). Brian D. Jorgenson, a ex-Senior Portfolio Manager within Microsoft's corporate finance department and Sean T. Stokke, a long time friend of Jorgenson's, admitted to the scheme and they will both be jointly liable for over $400,000 in " ill-gotten gains realized from their illegal trading as well as prejudgment interest." Both men pled guilty to criminal charges and Jorgenson was sentenced to 24 months in jail, while Stokke was sentenced to 18 months in jail.

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