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Tuesday, March 31, 2015

It's Official: Lynn Tilton, Manager of Zohar Funds ($2.5 billion), Charged With Fraud

Yesterday, the SEC announced fraud charges against Lynn Tilton, an investment adviser, and her New York based Patriarch Partners. Here's a video posted on YouTube detailing Tilton's mission:

Instead of showing Zohar investors actual valuations, the value of loan assets within the portfolio remained unchanged from the time they were acquired, even though it was shown that many of the borrowers on the loans were making partial, or even no interest payments to the fund for several years.

Lynn Tilton, is a resident of New Jersey and Highland Beach, Florida. She is age 55 and manages Patriarch VIII (Zohar I), Patriarch XIV (Zohar II), and Patriarch XV (Zohar III), collectively, the “Patriarch Collateral Managers”.  Each fund had the following amounts and maturities as noted in the order:
Source: Lynn Tilton, et. al, SEC Order
 Within the deal documents, Tilton was required to provide investors with monthly reports which assigned loans into categories - the highest category meant that the loan was current on all interest payments. Each category impacted the fund's “overcollateralization” ratio, which was meant to reflect "the likelihood that investors will receive a return on their principal."

OC Ratio = Value of Funds’ Loan Assets / CLO Investors’ Principal 

If this ratio falls below zero Tilton does not receive full management fees and must cede a certain amount of control to the investors. It is the SEC's beleif that documents were intentionally modified to preserve management fees and total control of the company. In other words, the financial statements that were reported by Zohar Funds failed to provide an impairment analysis. They also claimed assets were reported at fair values when they were not. "Tilton repeatedly and falsely certified that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP)," claimed the announcement.

Instead of updating investors about the nature of the distressed loans that made up the CLO's, Lynn Tilton led investors to believe valuations were handled outside of her office and were subject to audits. “We allege," said Andrew J. Ceresney, Director of the SEC’s Enforcement Division, "that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled.” The three CLO funds managed by Patriarch Partners are known as the Zohar Funds. Collectively, over $2.5 billion has been raised from investors.

Tildon has now informed investors in Zohar Funds I that if they do not extend the maturity of their notes they will experience a significant loss when the notes mature on November 2015. Any default in Zohar I will also have significant ramifications for Zohar II and Zohar III.

 Source: SEC Lynn Tilton, et al. Order

From Capital Formation To Zohar's Billion Dollar Funds

Daily Summary Of Government Events & News For Investors

  • On March 27, Commissioner Daniel M. Gallagher gave a speech titled "Grading the Commission’s Record on Capital Formation: A+, D, or Incomplete? at the Vanderbilt Law School’s 17th Annual Law and Business Conference.  For whatever reason the speech was just published yesterday, but I plan on reviewing it later on this afternoon and will publish a short summary of insights.
  • Vice Chairman Stanley Fischer gave a speech yesterday entitled "Central Banking in the Shadows: Monetary Policy and Financial Stability Postcrisis," at the 20th Annual Financial Markets Conference sponsored by the Federal Reserve Bank of Atlanta in Stone Mountain, Georgia on March 30, 201. Look for a review of this speech later on this week. Unlike Gallagher, who's fairly conservative, you can count on Fischer to give an unbiased assessment of the Fed's actions. 
  • Aegis Capital, LLC, Circle One Wealth Management, LLC, Diane W. Lamm, Strategic Consulting Advisors, LLC and David I. Osunkwo were all charged by the SEC for providing misleading documents to investors.  Aegis Capital is accused of overstating its AUM by over $119 million and the total number of client accounts maintained by at least 1,000, or over 340%. 
  • In good news the Fair Fund for Gregg C. Lorenzo and Charles Vista has finally been established and the FRB of New York published another interesting working paper entitled "The Gender Gap in Mathematics: Evidence from a Middle-Income Country.
  • Perhaps the biggest story of the day, and it's not being covered well in the general media, is the SEC's cease and desist order against Zohar Funds -- the scheme reportedly involved billions of dollars. Check back this afternoon for more on this story or read the full order yourself here.

This week's events: click here.

Gregg C. Lorenzo and Charles Vista Disgorgement Fund Created: Over $500K In Fund

This order, which was originally issued in 2013, alleged that Gregg C. Lorenzo and Charles Vista made "fraudulent misrepresentations" to customers of Charles Vista. The scheme was aimed at convincing customers to purchase convertible debentures issued by Waste2Energy (W2E).

The Fair Fund to be distributed is comprised of disgorgement, prejudgment interest, and civil penalties. To date, Lorenzo has paid $130,000 in disgorgement, $20,000 in prejudgment interest, and a civil penalty of $375,000. The Fund Administrator will identify eligible investors within sixty days of the approval of the plan submitted by the Fund Administrator.

For more information about the details of Fair Fund's Distribution Process click here.

This week's Events, Hearings and Speaking Engagements (3/30 - 4/3)

Thursday, April 2, 2015
2:00 p.m.
Closed Meeting
Location: SEC Headquarters
Contact: Office of the Secretary, (202) 551-5400
Friday, April 3, 2015
3:15 p.m. (2:15 p.m. CT)
David Woodcock, Director, Fort Worth Regional Office, will be a panelist at the Texas A&M Law Review’s Annual Energy Symposium. His panel will discuss energy securities and investing.
Location: Texas A&M University School of Law, Conference Center, 1515 Commerce St., Fort Worth, Texas
Contact: Deborah Barnett,
Monday, March 30-Friday April 3, 2015
9:30 a.m. PDT
Chief Administrative Law Judge Brenda P. Murray will hold a hearing in the matter of Total Wealth Management, Inc., et al. (as to Jacob Keith Cooper) Administrative Proceeding File No. 3-15842
Location: U.S. District Court, 312 N. Spring Street, Courtroom 24, Los Angeles, CA
Contact: Office of Administrative Law Judges, 202-551-6030
Monday, March 30-Thursday April 10, 2015
9:30 a.m. EDT
Administrative Law Judge Jason S. Patil will hold a hearing in the matter of Gregory T. Bolan, Jr. and Joseph C. Ruggieri (as to Ruggieri), Administrative Proceeding File No. 3-16178
Location: Jacob K. Javits Building, 26 Federal Plaza, Room 238, New York, New York
Contact: Office of Administrative Law Judges, 202-551-6030

Thursday, March 26, 2015

SEC Charges 22 Unregistered Broker-Dealers Across The Nation

Today the Securities and Exchange Commission charged almost two dozen companies and individuals affiliated with a Chicago-based trading firm for not registering with the SEC as a broker-dealer.

The investigation found that Global Fixed Income, LLC entered into agreements to buy investment grade fixed income products and bought billions of dollars’ worth of new issues from July 2009 to June 2012. . The offerings were usually oversubscribed which allowed the company to “flip” the bonds for a small profit. It then split these guaranteed profits with those that sold the bonds.

The owner of the company, Charles Perlitz Kempf, arranged the deals and has agreed to settle the SEC’s charges. Collectively those involved must pay almost $5 million in disgorgement of profits along with approximately $1 million in penalties. 

In addition to Kempf and Global Fixed Income, LLC, the following companies and individuals were named in the charges:
  1. AGS Capital Group (based in Florida)
  2. Allen Gabriel Silberstein of Miami, AGS Capital Group's owner
  3. Banes Capital Management (based in Tennessee) 
  4. Joel Banes of Memphis (Banes Capital Management's owner) 
  5. Michael Warner Kochman (Springfield, N.J.) an investment adviser at Banes Capital Management
  6. Big Star Capital (based in Florida)
  7. Ryan Patrick McGuinness of Tampa (Big Star Capital's owner)
  8. Esso Ventures (based in California) 
  9. Mark Leonard Lechler of Pasadena, (Esso Ventures' owner)
  10. Etek Investment Management (based in New Jersey)
  11. Kevin Gregory Haley of Jenkintown, Pa., and David Boyle of Blackwood, N.J. (part-owners of Etek Investment Management)
  12. Finmark Resources (based in New Jersey) 
  13. Peter Eric Baker (Finmark Resources' owner)
  14. Parker Paschal & Company  (based in Louisville)
  15. Andrew Parker Shook of Louisville (Parker Paschal & Company's owner)
  16. PMK Capital Management (based in Florida)
  17. Roger Kumar Jr. of Ocean Ridge, Fla. (PMK Capital Management's owner)
  18. RLJ Fixed Income (based in Bethesda, Md.)
  19. Corey Antwuan Printup (RLJ Fixed Income's owner)
  20. Joseph Michael Araiz of New York City, a former owner and CEO of an investment adviser that is no longer in business.

Wednesday, March 25, 2015

3/26 @ 11:00am: FTC Crackdown on Fraud in Auto Industry (Public Conference Call)

The Federal Trade Commission is holding a media call on Thursday, March 26, 2015 at 11:00 a.m. EDT to announce a crackdown on deceptive auto sales practices.

The toll-free number in the U.S. and Canada is: (800) 288-8974 and the confirmation number is: 356800.

U.S. Treasury Settles With PayPal For $7.6M In Violations Related To Terrorism (NASDAQ: #EBAY)

A settlement was reached and announced today between the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and PayPal for $7,658,300. Both parties agreed to settle civil liabilities for 486 possible violations of:
  • Weapons of Mass Destruction Proliferators Sanctions Regulations, 
  • Iranian Transactions and Sanctions Regulations, 
  • Cuban Assets Control Regulations, 
  • Global Terrorism Sanctions Regulations; and, 
  • Sudanese Sanctions Regulations.
According to the original charges, PayPal failed to adequately screen users for potential involvement in U.S. sanctions targets in its transactions. As a result, PayPal did not reject or block prohibited transactions from October 20, 2009 to April 1, 2013. During this time PayPal processed 136 transactions totaling $7,091.77 to or from an individual on the OFAC’s List of Specially Designated Nationals and Blocked Persons. Even after the company identified the risk, PayPal's Risk Operations Agents dismissed six separate alerts.
You can read about each violation in the original order by clicking on the link below.
Settlement with PayPal, Inc.

Federal Court Orders Massachusetts Based BioChemics to Pay Over $17 Million

Today, the SEC ordered BioChemics, Inc, a biopharmaceutical company based in Danvers, Massachusetts to pay over $17 million. The enforcement action was originally filed on December 14, 2012 against BioChemics, John J. Masiz, the company's founder and, until January 2014, its President, CEO, and Chairman of its Board of Directors; Gregory S. Kroning, a promoter; and a Craig Medoff, another promoter and, at one point, BioChemics' interim director of Finance.

From 2009 to mid-2012 BioChemics raised $9 million from 70 investors by providing misleading information about pharmaceutical companies and drugs the company had under FDA review. In actuality, the company never had any drugs under review. The company also lied about the results of clinical trials as well as purported valuations that the company was worth between $500 million and $2 billion. Additionally, investor dollars were used to pay for Masiz' and Kroning's personal expenses.

Masiz, the company's founder, was the subject of prior SEC enforcement action in 2004, which he never disclosed.

The judgment entered today requires the company to pay disgorgement of $15 million, prejudgement interest of $2 million, and a civil penalty of $750K.

The SEC also has a case against each individual in this action.

SEC adopts new rules allowing smaller companies to sell up to $50 million in securities (Link Only)

Read the full story here: 

Tuesday, March 24, 2015

Jeffory D. Shields Gets 6 Years For Colorado Oil & Gas Investment Fraud

Today Jeffory D. Shields was barred from associating with any broker, dealer, investment adviser, muni securities dealer or transfer agent. According to the SEC, from January 2010 to August 2011, Shields mailed out false and misleading information about four oil and gas investments. Shields held conference calls and misrepresented the amount that was spent on drilling. He is also accused of misusing investor proceeds. Shields pled guilty on June 5 of 2014 in the state of Colorado and was later sentenced to 6 years in prison, followed by 5 years of parole. He is also ordered to make restitution in the amount of $4,613,124.97.

Ex-U.K. #Rabobank Senior Trader Charged With #LIBOR Manipulation

An ex-U.K. Rabobank senior derivatives trader pled guilty to U.S. Dollar (USD) and Yen London InterBank Offered Rate (LIBOR) interest rate manipulation. Charges were issued by the U.S. Department of Justice. At the time of the manipulation LIBOR served as the primary benchmark for short-term interest rates in the global market as published by the British Bankers’ Association. Steward wasn't the only one in on the scheme. From May 2006 to early 2011 Stewart confessed to conspiring with others at Robobank, a Dutch multinational banking and financial services company headquartered in Utrecht, the Netherlands, to manipulate the LIBOR benchmark interest rate. In 2013, the bank was fined $1.1 billion for failing to recognize the conspiracy and alleged that as many as 30 traders were involved. The FBI continues to investigate the matter. Lee Stewart, 51, worked as a trader from 1993 to 2009 and will have a sentencing hearing on June 9, 2017.

Monday, March 23, 2015

IRS Asking For A $2 Billion Budget Increase

This is a review of J. Russell George, Treasury Inspector General for Tax Administration's testimony to the Senate Appropriations Subcommittee on Financial Services And General Government.

According to the testimony of J. Russell George the TIGTA is "statutorily mandated to provide independent audit and investigative services necessary to improve the economy, efficiency, and effectiveness of the IRS." He goes on to say that it is "designed to identify high risk systemic inefficiencies in IRS operations and to investigate exploited weaknesses in tax administration." Published on March 3, the document represents a review of the Administration's Fiscal Year 2016 Funding Request for the Department of the Treasury and the IRS.

The Administration is asking for $12.9 billion, an increase of $2 billion, or approximately 18 percent more than FY 2015. This is after a $346 million reduction from 2014 to 2015. The request includes a net staffing increase of 9,245 Full-Time Equivalents (FTE) for a total of approximately 90,524 appropriated FTEs. The largest increases by department or functional area were in Business Systems Modernization and Operations Support.

Clearly, TIGTA George believes the IRS has done a good job of maintaining operations considering the budgetary cuts from mandated sequestration, reduced staffing and the loss of supplementary funding, but he also believes there's over $5 billion on the table in cost savings that could be made by 1) closing loopholes on known tax fraud scams, 2) requiring tele-work employees to share workstations, 3) allowing tax payers to file amended returns electronically, 4) being able to measure revenue coming in from enforcement activity, and 5) eliminating erroneous carry-forwards claimed by corporations.

The TIGTA believes many of the IRS' current shortfalls in service, technology or enforcement are due to budget cuts, however, he also believes there are many opportunities for the organization to save money. Namely, a $111 million cost savings over a 5 year period for requiring tele-work and part-time employees to share workstations. The report estimates that 10,244 workstations could potentially be eliminated. The report also faults the IRS with mismanagement of software licensing and estimates the issue could cost the IRS $81 million and $114 million in licenses and annual license maintenance that could be eliminated if managed properly. The IRS agreed with the assessment and has already taken steps toward implementation.

In addition to cost savings the TIGTA also found $439 million in potentially erroneous tax refunds claimed on 187,421 amended returns in FY 2012. Amended tax returns can't be filed electronically so there's a higher incidence of error. A statistical sample of 259 amended tax returns by the TIGTA identified 17 percent with questionable claims.  According to the TIGTA, allowing taxpayers to file amended returns electronically could "prevent the issuance of more than $2.1 billion in erroneous refunds associated with amended tax returns". The IRS has also agreed to expand filing for amended returns.

Finally, the TIGTA accused the IRS of failing to create a process to identify corporations claiming erroneous carry-forward credits and estimates the errors total more than $2.7 billion. Even more startling is that the IRS does not plan to implement this recommendation due to lack of IT resources and more pressing priorities.

So, net/net the IRS is asking for a $2 billion increase, when the TIGTA has pointed out several ways for the agency to pull in over $5 billion. To be fair, some of these suggestions do cost money. Let's hope the budget approval is conditional on implementing at least some of these suggestions.

Regulators Feud Over Mutual Fund Supervision


  • Commissioner Michael S. Piwowar recently gave a speech at the 2015 Mutual Funds and Investment Management Conference.
  • Piwowar is not in favor of further regulation of the industry. Specifically, he is against grouping mutual funds into the same category as banks that pose a "systemic risk".
  • Others in the world of regulatory finance, like Janet Yellen, disagree. Yellen, an ardent opposer of regulatory capture, believes mutual funds should be under increased supervision. 
To read the full story click here.

3/25 @ 10am ET: SEC Chair Mary Jo White will testify before the House Financial Services Committee

10 a.m. ET
SEC Chair Mary Jo White will testify before the House Financial Services Committee on “Examining the SEC’s Agenda, Operations, and FY 2016 Budget Request.”
Location: HVC-210 Capitol Visitors Center
Contact: David Popp, (202) 226-2467,

3/25: Scott Bauguess, Deputy Director, Division of Economic and Risk Analysis Keynote

Tuesday, March 24, 2015 @ 9:40 a.m.

Scott Bauguess, Deputy Director, Division of Economic and Risk Analysis, will give the keynote at the OpRisk North America Conference on Market Risk Assessment. The keynote will focus on big data and operational risk. 
Location: New York Marriott Marquis Times Square, 1535 Broadway, New York
Contact: Olesya Dmitracova,

4/9: Investor Advisory Committee Quarterly Meeting

April 2015

Thursday, April 9, 2015

9:30 a.m.
Investor Advisory Committee Quarterly Meeting
See Agenda.
Location: SEC Headquarters, Multipurpose Room, 100 F Street, N.E., Washington, D.C.
Contact: Frankie White, Office of the Investor Advocate, 202-551-4310

Thursday, March 19, 2015

SEC Orders Texas Based Robert J. Andres To Pay $3.2M

Robert J. Andres was suspended from appearing or practicing law before the SEC due to his part in a ponzi scheme.

Quick Summary: An ex-attorney in the state of Texas, Andres was previously charged and convicted of a felony in December. Andres used new investor funds to pay earlier investors and admitted to using $2.2 million of those funds for his own personal use.  He also invested $1.2 million in unauthorized investment schemes.

Penalty: Andres was sentenced to 56 months in prison and 3 years of probation. He is also ordered to pay restitution in the amount of $3.2 million.

To read the original order click here.

SEC Charges NY Based Joseph Stilwell and Stilwell Value LLC "Stilwell Funds"

Joseph Stilwell and Stilwell Value LLC were charged with using $20 million in investor funds to make short-term loans to purchase securities over a period of 7 years.

J. Stilwell is a 53 year old resident of New York, NY and the principal owner of Stilwell Value, LLC. Stilwell owns ~99% of Stilwell Value.

Quick Summary: All loans were repaid, but the Commission believes the loans represented a conflict of interest which compromised the fiduciary responsibility of the advisers. At the very least, investors should have been informed about the loans which were undocumented.

The Penalty: Both J. Stilwell and Stilwell Value were issued a cease and desist order by the SEC and suspended from association with any broker, dealer, or investment adviser. Stilwell is also prohibited from acting as an employee, officer, director, investment adviser or principal underwriter for 12 months and is ordered to pay disgorgement/penalties of over $500,000.

To read the original order click here.

Tuesday, March 17, 2015

CFTC Orders ICE Futures U.S. Inc. (NYSE: ICE) to Pay $3 Million

The U.S. Commodity Futures Trading Commission (CFTC) issued an order against ICE Futures U.S., Inc. (NYSE: ICE), a designated contract market (DCM). The order charges ICE with "submitting inaccurate and incomplete reports and data to the CFTC over at least a 20-month period, from at least October 2012 through at least May 2014." ICE blamed the issue on technology upgrades and data migration issues, but these issues have nothing to do with the company's ability to respond to CFTC requests for information. The CFTC repeatedly notified ICE, but the company continued to submit inaccurate reports. The order also requires the company to pay $3 million.

To read the original order click here.

ICE Chart

Monday, March 16, 2015

FRB: Help Your Country Create a Faster, More Secure Payments System

As promised in the paper Strategies for Improving the U.S. Payment System the Federal Reserve just released details for those interested in helping their country create a better payments system. Registration is open to all stakeholders (consumers and businesses) with "relevant payment knowledge and experience who can commit the required time and resources to these key initiatives." 

Participants of the Faster Payments Task Force will be asked to evaluate ways to implement a faster payments system in the U.S. The Secure Payments Task Force will assist in advising the Fed on payment security matters.

Diverse and committed membership will ensure a broad range of perspectives are considered as we pursue improvements to the U.S. payment system. We welcome and actively seek participation from the entire spectrum of payment system participants, including businesses and consumers.  -Esther George, president of the Federal Reserve Bank of Kansas City and executive sponsor of the effort

For additional information about the task forces, including charters, participation agreements, and registration forms, visit The Fed will also host a teleconference on March 20 and March 31 for Q&A.

Friday, March 13, 2015

Municipal Securities Trivia: 10 Things You Should Know

It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives.      
-SEC Commission Luis A. Aguilar
The municipal market is officially on the radar of regulatory agencies as noted by the words of Securities and Exchange Commissioner Luis A. Aguilar in a recent speech entitled Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair. Aguilar uses the speech to discuss current updates in regulation which you can read about in the article New Regulatory Developments In The Muni-Market on SeekingAlpha.

To best appreciate the changes coming to the market we've created a little muni-trivia for you. Listed below are 10 things about the municipal market that we bet you didn't know. 

  • According to one BlackRock study, there are 78,000+ potential issuers of municipal securities ranging from small school districts to water authorities and states.
  • The muni market is less than half the market size of corporate bonds by principal outstanding.
  • Muni's are estimated to maintain 20x more types of issuance's, i.e. variations in cash flow, pay type, etc, than corporate bond types. The existence of so many unique offerings increases risk in the market which reduces liquidity and impedes trading.
  • One-third of all municipal bonds trade only once after the initial offering or distribution period;
  • 5% of all muni-bonds trade only once every twelve years.
  • According to one study, conducted between 2009 and 2013, individual investors traded ~$915 billion muni -bonds and paid brokers ~1.73%, approximately double the spread paid for corporate bond transactions during the same period.
  • According to one working paper, it is twice as expensive to trade New York muni bonds as it was in the 1920s.
  • As of the end of 2014, only 6% of newly issued muni's had municipal bond insurance.
  • Municipal securities are exempted from SEC registration as well as periodic disclosure requirements with uniform accounting standards.
  • According to Fitch, asset managers have increased municipal holdings by 57% since 2007 and now hold 20% of all outstanding muni-bonds.
The recurring them here is liquidity and pricing; the SEC views lack of regulation as the primary driver behind these issues. Investors should expect to hear more about ways the federal government is looking to not only regulate, but support, the muni-market. The net effect is greater liquidity and a more robust market for investors.

Oil Prices & The FOMC

New Monetary Policy

These are unprecedented times for monetary policy and it's compounded by abnormally low energy rates. Even if labor indicators improve and inflation remains at the 2% target, oil prices are a wild card. The FOMC may not feel comfortable raising rates until they believe:
  1. Energy rates are back to "normal" with no impact on inflation.
  2. Energy rates will remain low and there's no worry of an impending or surprise increase.
Both options require more than six months to establish a track record.

What Do FOMC Meeting Notes Tell Us

To get a better understanding for how the FOMC feels about the probability of a hike we can data mine the minutes from the last FOMC meeting. The dominant argument is to keep rates low; examples provided below:
  • Raising rates too soon could "damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives of maximum employment and 2 percent inflation."
  • Raising rates too soon "would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound." Committee members noted the "challenges associated with the prospect of commencing policy tightening at a time when inflation could be running well below 2 percent..."
  • Raising rates too soon could lead to reputation and effectiveness issues, "..the public could come to question the credibility of the Committee's 2 percent goal."
  • One person on the committee recommended "in light of the outlook for inflation, the Committee consider ways to use its tools to provide more, not less, accommodation."
Indeed, Committee members appear just as concerned about their reputation and ability to control the fed funds rate -- for more on this read the article: Can The Fed Control The Fed Funds Rate In Times Of Excess Liquidity?  -- as they are about the effect of the rate hike on the economy. Committee members are also concerned about inflation and acknowledge that it's currently being held down by large increases in energy prices. Here's an excerpt from the minutes:
Consumer price inflation moved further below the FOMC's longer-run objective of 2 percent, held down by continuing large decreases in energy prices.
It goes on to say:
The staff's outlook for economic activity over the first half of 2015 was revised up since December, in part reflecting an anticipated boost to consumer spending from declines in energy prices.
Clearly, the FOMC believes lower energy prices have contributed to lower inflation and a better economy by boosting household purchasing power, which means they believe it can also have the reverse effect if prices rebound. This volatility translates into uncertainty and it's just one of the many risks FOMC members are finding hard to digest. "Many participants," the notes said,
indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.

GAFI's Fed Funds Prediction  - 1 Yr At Least

The FOMC wants to give the appearance of being data driven and prudent so look for very specific data points like improvements in labor compensation to drive a rate increase "language", but we predict it will be at least another year before the fed actually raises rates. Not only is the FOMC worried about being able to control the fed funds rate, but the volatility in energy prices is causing FOMC participants to shy away from raising rates until they can feel reasonably sure that energy prices have stabilized. If the FOMC raises rates and inflation grows past 2% due to a rise in energy prices the decision to raise rates may be criticized which is exactly what the FOMC is afraid of.

Why Was Bank Net Income Down 7.3% In The Fourth Quarter of 2014?

Every quarter the FDIC publishes a 305+ page update of member bank performance. In the fourth quarter of 2014, the FDIC reported that banks made a net income of $36.9 billion, down $2.9 billion or 7.3 percent from 2013. The decline was attributed to a $4.4 billion increase in litigation expenses for large banks and a decline in mortgage-related income. Here's what FDIC Chairman Martin J. Gruenberg had to say about the announcement:

The banking industry continued to improve at the end of the year. Although total industry earnings declined as a result of significant litigation expenses at a few large institutions and a continued decline in mortgage-related income, a majority of banks reported higher operating revenues and improved earnings from the previous year. In addition, banks made loans at a faster pace, asset quality improved, and the number of banks on the 'Problem List' declined to the lowest level in six years.
The Chairman also commented that community bank earnings were up 28% from the previous year. For the industry as a whole, over the past 12 months, loan and lease balances increased 5.3%, the highest growth rate since mid-year 2008. ROA fell to 0.96 percent in the fourth quarter from 1.09 percent in 2013 and ROE declined as well from 9.76 percent to 8.56 percent.

Other Highlights From the Report:

  • Full-year earnings totaled $152.7 billion. 
  • Full-year net income for 2014 was $1.7 billion (1.1 percent) less than 2013; the first decline in annual net income in five years. 
  • ROA for the full year was 1.01 percent. 
  • The number of "problem banks" fell for the 15th consecutive quarter.
To read the full report click here.

Is The High Equity Risk Premium (ERP) Due To Low Yields Or High Cash Flow?


  • A staff report was recently published by the Federal Reserve Bank of New York entitled "The Equity Risk Premium: A Review of Models".
  • The authors combined information from twenty ERP models and found that the ERP has reached high levels in recent years.
  • The paper explores whether or not the ERP is high due to low discount rates or high cash flow.
  • Ultimately, the authors conclude that the current ERP is due to lower yields not higher earnings or cash flow. In other words, this is not a bullish signal. 
Read the full article here.

CFTC’s Market Risk Advisory Committee to Meet on April 2, 2015 @ 10am

On April 2 the U.S. Commodity Futures Trading Commission (CFTC) will hold a public meeting of the Market Risk Advisory Committee (MRAC) at CFTC’s headquarters in Washington, D.C.

To be discussed:

  • "Current risk management techniques employed by Derivatives Clearing Organizations (DCOs) to ensure that the appropriate measures are in place to address the potential default of a significant clearing member"
  • "the evolving structure of the derivatives markets, particularly with respect to Swap Execution Facilities (SEFs)"
Seating is on a first-come, first-served basis. You can also listen to the meeting via the conference all number provided below.

Location:CFTC Headquarters lobby-level Hearing Room
1155 21st Street, NW, Washington, DC 20581

Time:10:00 a.m. to 1:30 p.m.

Conference call information
Domestic Toll Free:800-779-9086
International Toll Numbers:International Numbers
Conference Passcode:CFTC

Thursday, March 12, 2015

SEC Commissioner Gallagher's Illustration of New Financial Regulation

An illustration by SEC Commissioner Daniel M. Gallagher of new financial regulation over the past 5 years. Gallagher put this chart together as a way to depict the regulatory and subsequent cost burden for the financial industry. What the chart does not show are the regulations that were repealed 10 years before the financial crisis. To read Gallagher's full comment click here. To view a larger version of the chart click here.

SEC Commissioner Gallagher's Chart of Financial Regulation

Wednesday, March 11, 2015

FTC Charges DIRECTV (DTV) With Deceptive Advertising

The FTC just announced charges against DIRECTV (NASDAQ: DTV), the nation's largest provider of satellite television services, for deceptive advertising. Based in El Segundo, California, and serving 20 million customers, the company failed to disclose that a discounted 12-month service required a two-year commitment. They are also accused of not telling customers about the $45+ price increase and the $480 early cancellation fee if they cancelled early.
DIRECTV misled consumers about the cost of its satellite television services and cancellation fees. DIRECTV sought to lock customers into longer and more expensive contracts and premium packages that were not adequately disclosed. It’s a bedrock principle that the key terms of an offer to a consumer must be clear and conspicuous, not hidden in fine print. - FTC Chairwoman Edith Ramirez.
A court order has awarded a monetary judgement which will likely lead to refunds for harmed customers. DIRECTV is trading at $85.87 as of this writing, down $.26. Investors may sell-off more after the press call in 30 min. 

To read the order click here.

To listen in to the Press Call dial-in as shown below:
WHAT:Press Call on Enforcement Action
WHEN:1:00 p.m. ET, Wednesday, March 11, 2015
CONTACT:The dial-in number for the call is 800-230-1092; the confirmation number is 355920. The lines will be open for calls beginning at 12:45 p.m.

Tuesday, March 10, 2015

New Post: Can The Fed Control The Fed Funds Rate In Times Of Excess Liquidity?

We just published a new article titled Can The Fed Control The Fed Funds Rate In Times Of Excess Liquidity?
  • SEC Chairman Stanley Fischer spoke at the 2015 U.S. Monetary Policy Forum, sponsored by the University of Chicago Booth School of Business on February 27, 2015.
  • The Fed is facing numerous challenges with its current balance sheet.
  • As a result, the Fed is having to rely on other tools like ON REPOs and changes in the IOER to control the Fed Funds Rate. 
  • Click here to read the full post.

Volcker Rule: It's The New Glass-Steagall

We just published a new article entitled Volcker Rule: It's The New Glass-Steagall on SeekingAlpha.
  • The Volcker Rule is the legal separation between consumer banks and proprietary trading.
  • Much like Glass-Steagall, which was repealed in 1999, the Volcker Rule draws a new line in banking but it's more exhaustive in some ways.
  • Ultimately, the goal of the new rule is to improve resiliency without sacrificing global competition or liquidity. 
  • Click here to read the full post on SeekingAlpha.

FTC Sends Out $2.4M To Investors Of Premier Precious Metals

The Federal Trade Commission sent $2.4 million out to investors harmed by a precious metals scam. Charges originally went out against Anthony J. Columbo and his companies, Premier Precious Metals Inc., Rushmore Consulting Group Inc., and PPM Credit Inc. in 2012. The amount sent to investors today represents 70% of what the average investor lost in the scheme. The original judgment imposed $3.6 million against the defendants. The scheme consisted of conning the elderly into buying precious metals on credit without disclosing the associated risks. The FTC is advising harmed investors to cash the mailed checks within 60 days to avoid delays.

To read the full press release click here.

Friday, March 6, 2015

Are Bank Stress Test Results Too Predictable? OFC Publishes New Report

Yesterday the Fed released the results of the most recent stress test on banks. The result was fairly predictable -- they all passed. This shouldn't be a surprise according to the paper Are the Federal Reserve’s Stress Test Results Predictable? by Paul Glasserman and Gowtham Tangirala. Published by the U.S. Office of Financial Research the theory is a bold one with stark implications. Namely, that stress tests cease being a real deterrent to crisis if they are predictable because actual market crisis is anything but. As a result, the authors suggest that the scenarios used in future stress tests should be more diverse and numerous.

The current stress tests, as a function of regular economic policy, were created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Testing (DFAST) program are the two stress test programs in use. Both are designed to complement each other in application, but the process had become cumbersome for banks in both implementation and reporting which may have led to the use of the same scenarios every year to avoid creating any additional burden. According to the paper,
The annual execution of the CCAR/DFAST process has become an enormous undertaking for the banks covered by these programs and their supervisors. Despite the complexity of this process, using results made public across various stress tests we find that projected losses by bank and loan category are fairly predictable and are becoming increasingly so. In particular, losses for CCAR 2013 and 2014 are nearly perfectly correlated for banks that participated both years. 
In other words as the process has matured, stress tests have become more routine. "But whereas the results of stress tests may be predictable," the paper goes on to say, "the results of actual shocks to the financial system are not, and herein lies the concern."

The answer to the problem, as the authors point out, is easy -- greater diversity in the scenarios evaluated in a stress test. Providing the same two or three scenarios to every bank over and over again is like announcing a fire drill at 5pm every other Monday. It may help people to understand where to go in case of a fire, but it doesn't help to put the fire out any faster. Doing so requires a shift in focus to fire prevention and containment. It requires everyone at the bank to become "fire-fighters".  It is the ability to perform well under different scenarios that measures how well the bank is prepared for the unpredictable.

Only six Bank Holding  Company's undergo a stress test related to trading and counterparty risk, they are JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS). These banks are also considered "Too Big To Fail" as can be read about in an article published yesterday on SeekingAlpha by TheGAFI entitled, What Investing In Too Big To Fail Means For Banking Investors. The paper shows a high correlation in projected losses from one year to the next. "This is more surprising than the corresponding results for the loan categories," says the paper, "because trading portfolios change much more quickly than loan portfolios, and trading losses should be more difficult to forecast than loan losses." In other words, while the predictability of stress test results for loan products is concerning, the predictability of stress test results for trading is even more troubling as it may point to some level of manipulation.

In a seemingly unrelated matter, and perhaps of more importance to investors, is that stress tests result in no reaction from the stock market. Here's what the paper had to say about this:
We then examine the stock market reaction to announcements of stress test results; consistent with the predictability of the results, we find no significant correlation between the severity of a bank’s reported stress losses and the change in its stock price relative to the market.
Conspiracy theorists might say this is the reason we don't have "real" stress tests; that is, a negative result could have a "real" negative impact on the market.

Bottom-line: Do stress tests as they stand today have value, yes. They allow for a thorough assessment of risks in terms of financial stability and put the human resources in place to help navigate through a financial crisis, but there are glaring holes in the logic of using the same two or three scenarios with similar variables for every bank and in every test. A dynamic set of stress scenarios is best to test the financial viability of banks in an unpredictable and complex market economy.

Thursday, March 5, 2015

SEC Deputy Director, Division of Economic and Risk Analysis @ Columbia University 3/6 @ 11am

On Friday, March 6, 2015 at 11 a.m. Scott Bauguess, the Deputy Director, Division of Economic and Risk Analysis, will present a talk entitled “The Hope and Limitations of Machine Learning in Market Risk Assessment.”

Location: Columbia University, Data Science Institute

Contact: Martin Haugh,

What Investing In Too Big To Fail Means For Banking Investors

SeekingAlpha recently published one of our articles entitled "What investing In Too Big To Fail Means For Banking Investors." See below for a quick summary or click here to read the full article.
  • Due to banking reforms, institutions with a higher risk rating must also hold a higher percentage of capital in reserve to make up for the increased risk.
  • Based on a 7 point scoring framework, 33 banks make the cut for having the highest systematic risk.
  • Of the 33 banks, 5 have the highest risk of contagion. These are Citigroup (NYSE: C), JPMorgan (NYSE: JPM), Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC), and Goldman Sachs (NYSE: GS).
  • While these banks provide reduced risk to investors through an implicit government backing, the cost of this protection is a higher reserve requirement and greater regulatory scrutiny.

Wednesday, March 4, 2015

CFTC Staff to Hold Roundtable on Cybersecurity and System Safeguards Testing

The U.S. Commodity Futures Trading Commission (CFTC) will have a public roundtable on Cybersecurity and System Safeguards Testing.
Date: Wednesday, March 18, 2015
Time: from 9:00 a.m. to 5:00pm.
Location: CFTC’s Washington, DC, Headquarters at 1155 21st St. NW.

The Roundtable’s four panels will "address the need for testing in the current cybersecurity environment, as well as certain types of system safeguards testing and associated risk assessment practices, including: vulnerability and penetration testing, key controls testing, and business continuity-disaster recovery testing."

To view the agenda for the meeting, click here

The meeting is open to the public on a first come first serve basis.

SEC Charges An Investment Relations Fraudster For Penny Stock Pump and Dump Scheme

The Securities and Exchange Commission (SEC) charged Gary S. Williky of Colleyville, Texas with perpetuating a penny stock "pump and dump" scheme on the stock of Imperial Petroleum, Inc. (IPMN), a public company based in Evansville, Ind. Imperial Petroleum is the focus of another SEC lawsuit as well. 

Between 2010 and 2012, the SEC alleges that Williky, working as an investor relations consultant, pumped up the volume of Imperial's stock price via wash trades. Wash trading is the buying and selling of stocks through different brokers. The effect is an artificial increase in volume. He is also accused of sending out mass emails marketing the merits of the stock while selling his own shares.

Not only did Williky not disclose the purchase of more than 5% of company stock over the course of the violation, but he sold his shares in the company after learning that Imperial was engaging in illegal acts as well.

To read the original press release click here.

CFTC Charges Michigan's Jerry Stauffer With Forex Fraud

The U.S. Commodity Futures Trading Commission (CFTC) announced an emergency order freezing the assets of Jerry Stauffer in Traverse City, Michigan. Stauffer is being charged with fraudulently soliciting almost $1 million from members of the public to trade in the forex (FX) market through a commodity pool. The pool guaranteed participants a monthly ROI based on profits. The charges allege that Stauffer prepared and distributed false account statements showing high profits while pocketing the funds raised for his own use.

To read the full story follow the link below:

Spriza Inc (OTCBB:SPRZ) Temporarily Suspended

Spriza Inc (OTCBB:SPRZ) The SEC temporarily halted trading in Spriza today.  The self proclaimed, "leading social network for group prizes and incentives," is located in El Segundo, CA.

Referring to itself as an "emerging growth public company", the stock of the company is being suspended due to assertions about "business relationships" in a company press release dated on February 6, but the extent and full nature of the warning are unclear. One can only assume the company is claiming a relationship or client that does not exist.

The only press release filed by the company on February 6 can be read here. Both FINRA and the Alberta Securities Commission are assisting with the investigation. We will continue to follow this story as it evolves. For now, investors in this stock should exercise caution.

To view the original order click here.

Monday, March 2, 2015

Obama's Retirement Legacy: Government IRAs & Higher Fiduciary Standards

  • Last week was 'America Saves' week.
  • In its honor, the Treasury Department discussed the Administration's plans to make retirement plans and trusted financial advice available to anyone with a job.
  • In addition to rolling out myRA, a government backed retirement fund, Obama has also asked the Department of Labor to make a few changes.
It may seem an ironic thing to celebrate given the current rate environment, but last week was America Saves Week and The Treasury Department honored the week by announcing the roll out of the myRA program. President Obama also challenged the Labor Department to improve fiduciary standards for retirement products.

It was a little over a year ago that President Obama first announced the introduction of government-backed retirement accounts as a savings initiative. Referred to as a 'myRA', these government-backed retirement accounts earn interest at the same rate as investments in the government securities fund for federal employees. Managed by the Thrift Savings Plan (G Fund), the fund does not have a ticker because it is a trust regulated by the Comptroller of the Currency, not by the SEC.

These savings plans are specifically targeted at employees that don't have a pension or 401k option at their job -- the only requirements being a job and direct deposit. Like a Roth Individual Retirement Account, investors can invest dollars and withdraw earnings tax-free in retirement. You can also withdraw funds at any time without penalty, up to $15,000 per person. Once the account reaches $15,000 it's rolled over into a private sector IRA account. Unlike the Roth, however, funds will be invested solely in government bonds.

From a return perspective, the situation is slightly better than you may think. The chart below provides a 10-year summary of the 'G Fund' compared to other Funds managed by the government's Thrift Savings Plan.

(click to enlarge)
Source: Thrift Savings Plan

This G-fund has had an average annual return of 3% over the last ten years and an annual return of 2.31% in 2014, which while low is much better than the average annual savings rate.

President Obama also announced that he will be advising the Department of Labor to "update its rules relating to retirement advice". In a speech made last Monday Obama said, "If your business model rests on taking advantage of bilking hard-working Americans out of their retirement money, then you shouldn't be in business." This is a welcomed discussion as the number of seniors targeted for investment fraud grows due to new Reg D requirements which lift the 80 year ban on general advertising for private placements.

What the new rules will mean exactly is hard to say -- we won't know until we actually see them, but Obama's remarks clearly call for higher fiduciary standards on retirement products. The rule-making process will begin by soliciting "extensive public feedback" and you can stay informed on the process as it develops at

To read the original statement as made by J. Mark Iwry, the Senior Adviser to the Secretary of the Treasury for Retirement and Health Policy, and the Deputy Assistant Secretary for Tax Policy, click here.

To learn more about myRA you can email or call customer support at 855-406-myRA.

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.

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Olympus Corp Broker Charged With Hiding Billions In Losses

On February 27, 2015 the SEC formally charged Hajime Sagawa, age 67 and resident of Boca Raton, Florida with a host of violations involving Olympus Corp., including the "cover-up of billions of dollars in losses by Olympus Corp". The losses were incurred from speculative investments. To avoid having to post the losses they were transferred to entities in the Caymans and British Isles. These entities then purchased the bad "speculative investments" from Olympus at their original cost, not market prices, using cash secured with bank loans from Olympus' assets.

After completing the fake sales, Olympus executives had to figure out a way to pay for the bank loans. To do this, the company hired Axes America LLC, a registered financial adviser, partially owned by Sagawa. Sagawa was a registered representative, founding member and minority owner of Axes America, LLC. as well as its president and CEO from 2007 to 2010 -- during this time Sagawa lived in New York, Connecticut and Florida. Olympus then overpaid Axes in advisory fees and expected Axes to transfer the excess to the off-balance sheet entities in the Caymans and British Isles. By doing this, the entities were able to pay back the bank loans.

Established in October of 1919, Olympus Corp is a Japanese corporation that sells medical equipment. The company posted a profit of $273 million in the April-December period. In the mid-1980's, to combat the sharp rise in the Japanese yen, Olympus’s management supplemented income with "zaiteku", a Japanese word for speculative investments. Olympus’ ordinary shares are listed on the Tokyo Stock Exchange at approximately ¥4,305 or $36 (ADR: OCPNY).

 Source: Google 

To read the full order click here.

The SEC collected $4.1 billion for investors in 2014. For information on how to find out if the SEC reached a settlement for a company you've invested in go to

SEC Delays $100M Payment To Credit Suisse Investors

On November 16, 2012 the Securities and Exchange Commission ("SEC") issued a cease and desist order against Credit Suisse Securities, LLC, DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Acceptance Corp., Credit Suisse First Boston Mortgage Securities Corp., and Asset Backed Securities Corporation. Each entity was accused of providing investors with misleading or false accusations about the risk and reward nature of the mortgages underlying mortgage based securities. As a result, the SEC is collecting over $100+ million in the form of disgorgement, interest, and other associated penalties.

Before harmed investors can gain access to these funds the SEC must first make a Disbursement Plan, however, due to the complexity of the securities in question and the nature of comments received from the public, the SEC is requesting yet another extension order for plan approval. The new deadline is April 17, 2015.

To view the actual extension order click here.

The SEC collected $4.1 billion for investors in 2014. For information on how to find out if the SEC reached a settlement for a company you've invested in, go to