How not to design a pump-and-dump stock scheme

There often is some degree of subtlety in illicit efforts to manipulate stock prices.

But in a suit the Securities and Exchange Commission filed Thursday, the agency alleges that an East Coast stockbroker issued blatantly phony press releases about companies in attempts to push up their shares.

The case, as documented by the SEC, is downright comical, except for the fact that some hapless investors fell for the scam.

The SEC alleges that 34-year-old Lambros D. Ballas, a Merrick, N.Y., broker who works as an independent contractor for Global Arena Capital Corp., went on a four-day binge in late September and early October cooking up fake releases involving companies including Microsoft Corp., Google Inc., Walt Disney Co., Imax Corp. and Local.com Corp.

Here’s the summary of one of Ballas’ alleged escapades, detailed in the suit (which is well worth reading in full):

--- On Oct. 1, just before the market closed for the day, he bought 5,000 shares of Irvine-based Local.com, an Internet search engine, for $5.33 each.

In the following hour, Ballas posted press releases on two PR wire services announcing that Local.com had agreed to a buyout by Microsoft.

--- Ballas then went on the Yahoo message board for Local.com, directing people to the phony news releases and urging them to buy the company’s shares in after-hours trading. "Woo hooo .... daddy needs a new pair of shoes," he wrote in one post.

Some investors apparently fell for it -- and drove the stock as high as $9.65, the SEC said -- even though the release included sentences like this gem: "For those of you who own it, enjoy the success, for those of you who do not, mergers right now seem to be hot, and keeps [sic] your scanners peeled for opportunities."

--- Within a few hours, Local.com issued a statement denying that it was in a deal with Microsoft.

Undeterred, Ballas tried to issue yet another phony release about Local.com the very next day, this time saying that the company would be bought by Google. The first service he tried to use, WiredPRNews.com, expressed concern that the announcement might be a hoax. So Ballas went to another service, EIN Presswire, and got his fake announcement published for $49.95, the SEC said.

Not surprisingly, once the SEC got involved it wasn’t too difficult for the agency to trace the addresses of the computers that sent the press releases, said Michael Dicke, one of the SEC lawyers who investigated the case.

"This was one of those cases that looked like it was going to be fun to investigate, and it was," he said.

The SEC suit, filed in federal court in San Jose, seeks to get Ballas to disgorge any ill-gotten gains and pay penalties.

Ballas couldn’t be reached for comment.

-- Tom Petruno

Photo credit: Andrew Harrer / Bloomberg News

SEC a sloth on crime? Not in this case

The Securities and Exchange Commission, forever criticized for being too slow to ferret out Wall Street crime, reacted with lightning speed this week to signs of insider trading ahead of a big merger deal.

The agency today charged a Texas man with illegally reaping $8.6 million by buying option contracts of Perot Systems Corp. before Dell Inc. announced its takeover of the firm on Monday, then dumping them.

The defendant, Reza Saleh, works for Perot Investments Inc. and Parkcentral Capital Management, private firms affiliated with Perot Systems. Parkcentral is the investment firm of H. Ross Perot, who isn't implicated in the case.

From Reuters:

According to a complaint filed on Wednesday with the federal court in Dallas, Saleh, 53, bought 9,332 call option contracts on Perot through two TD Ameritrade brokerage accounts between Sept. 4 and Sept. 18, after learning about merger talks through his employment.

The SEC said the Richardson, Texas resident sold the contracts after the $3.9 billion takeover was announced on Monday, resulting in the illicit profit.

"What's significant here, clearly, is the amount of money," said Rose Romero, regional director for the SEC's office in Fort Worth, Texas, in an interview. "It's incredible. It's a lot of money for a single individual to realize."

Saleh did not immediately return a call seeking comment, Reuters said.

News reports on Monday noted that trading in Perot Systems options contracts had surged before the deal was announced, suggesting that someone had been tipped off.

Nothing like calling attention to yourself by buying in bulk . . .

-- Tom Petruno

Weekend reading: Full report on SEC's Madoff mess

Now available on the Securities and Exchange Commission’s website: the full 457-page report by the SEC’s inspector general on how the agency repeatedly failed to detect Bernie Madoff’s 16-year-long Ponzi scheme.

One theme of the report, as highlighted in the summary the SEC released on Wednesday, is how Madoff was able to intimidate inexperienced SEC staffers who conducted examinations of the swindler’s business.

The report includes this testimony from an SEC attorney, recounting an episode during a 2005 examination:

"[W]e were asking for documents or something and he got . . . it was sort of disconcerting how angry he became. I mean his veins were popping out of his neck, and . . . he just repeatedly said, you know, ‘What are you looking for?’ And his voice level got increasingly loud and the veins were popping out, and one of us -- I may have said something, you know, ‘What do you want us to look for? What do you think we’re looking for?’ "

-- Tom Petruno

SEC repeatedly fumbled Bernie Madoff probes, agency watchdog says

The Securities and Exchange Commission "never properly examined or investigated" Bernie Madoff’s trading and "never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme," the SEC’s inspector general says in a report released today.

The agency, the report says, fumbled "numerous credible and detailed complaints" that could have uncovered the $65-billion scheme, which mushroomed for 16 years until Madoff confessed in December.

The postmortem by Inspector General H. David Kotz paints a picture of SEC incompetence, and asserts that the agency’s repeated failures to expose Madoff -- even after undertaking three examinations and two investigations of the firm over the years -- allowed Madoff to suck in more victims.

"We . . .found that investors who may have been uncertain about whether to invest with Madoff were reassured by the fact that the SEC had investigated and/or examined Madoff, or entities that did business with Madoff, and found no evidence of fraud," Kotz said in a summary of his report posted on the SEC’s website.

"Moreover, we found that Madoff proactively informed potential investors that the SEC had examined his operations," Kotz said. "When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts that may have arisen while due diligence was being conducted."

SEC Chairwoman Mary L. Schapiro, who took over the helm of the agency in January, said in a statement that the report "makes clear that the agency missed numerous opportunities to discover the fraud. It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors."

Kotz’s report depicts the SEC as bumbling, but doesn’t find evidence of wrongdoing by agency staff in connection with Madoff.

The probe "did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work," Kotz said.

The investigation "also did not find that former SEC Assistant Director Eric Swanson's romantic relationship with Bernard Madoff’s niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm."

Swanson, who worked at the SEC in the first half of this decade, married Shana Madoff in 2007. She was a compliance lawyer at Madoff Investment Securities.

The Kotz report on the SEC website today is the executive summary of the investigation. Schapiro said the full 450-page report would be released in the next few days.

-- Tom Petruno

Photo: Bernie Madoff leaves federal court in March. Credit: Louis Lanzano / Associated Press

SEC to release report on how it botched Madoff case

Ready to settle into your beach chair this weekend with a good book?

The Securities and Exchange Commission is expected to make public later this week its inspector general’s report on how the agency failed to detect Bernie Madoff’s massive Ponzi scheme.

From the Wall Street Journal:

The report by SEC Inspector General David Kotz was sent to SEC Chairman Mary Schapiro’s office late Monday. The SEC protocol requires it to be reviewed by all five commissioners before its release.

The report, 450 pages long with more than 500 exhibits, delves into the numerous tips the agency received from hedge funds, news articles and Harry Markopolous, a former Madoff rival turned whistleblower, who spent nearly a decade trying to persuade the SEC to follow up on his suspicions.

In an email, Kotz called the report "an exhaustive summary of the investigative work that the SEC [Office of Inspector General] has conducted over the past 8 months." He said it is "a comprehensive review of the complaints issued to the SEC regarding Madoff, and the investigations and examinations that the SEC conducted of the Madoff firm."

-- Tom Petruno

SEC chief sees risk to investors in broker bonus plans

The federal focus on excessive financial industry pay now extends to the bonuses that brokerages often offer to lure top salespeople from rivals.

Securities and Exchange Commission Chairwoman Mary Schapiro today sent an open letter to brokerage chief executives warning that "certain forms of potential compensation may carry with them enhanced risks to customers."

Specifically, Schapiro’s letter focuses on the risk that brokers  lured with rich bonuses or other incentives might victimize customers to generate commissions big enough "to justify special arrangements that they have been given."

If a broker "is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest," Schapiro wrote.

It isn’t clear what spurred the letter, but Bank of America’s Merrill Lynch unit has become particularly aggressive in its recruiting recently.

Schapiro doesn’t call for broker bonuses to be reined in but rather advises brokerage CEOs and supervisors "to be particularly vigilant in ensuring that sales practices are closely monitored and that investor interests are carefully considered in the sale of any security or other investment product."

Isn’t that what they’re supposed to be doing anyway?

-- Tom Petruno

Photo: SEC Chairwoman Mary Schapiro. Credit: Susan Walsh / Associated Press

BofA defends settlement over Merrill Lynch bonuses

Bank of America Corp. came out swinging today in defense of its hoped-for legal settlement with securities regulators over controversial bonuses at Merrill Lynch & Co.

The bank stressed in court papers that it never misled shareholders about the bonuses and that it repeatedly made clear that billions of dollars would be doled out to Merrill employees before its acquisition of the investment banking giant was completed Jan. 2.

The filing urged a federal judge to approve a proposed settlement between it and the Securities and Exchange Commission.

The SEC has alleged that the bank misled shareholders into believing that Merrill would not pay year-end 2008 bonuses as it limped through a financially devastating year. In fact, the SEC alleged, the bank had already approved $5.8 billion in bonuses at Merrill, of which $3.6 billion was eventually doled out.

“Throughout 2008 – both before and after the merger agreement was signed – Merrill Lynch consistently disclosed its intention to pay incentive compensation in the range of multibillions of dollars,” the bank’s attorney, Lewis Liman, wrote.

BofA and the SEC are trying to convince U.S. District Judge Jed Rakoff to approve the $33-million settlement.

At a hearing two weeks ago,  Rakoff blasted several key elements of the settlement and said he wouldn't approve it until he gets additional information on several key points.

Among other things, Rakoff said he wants details on whether BofA intentionally misled shareholders about the bonuses, the names of which executives and lawyers approved the bonuses, and whether shareholders got sufficient information about Merrill’s weakening finances before they voted to approve the merger late last year.

Rakoff also said at the hearing that he was troubled by the proposed settlement amount, saying $33 million could be far too little if BofA was shown to have deceived shareholders.

-- Walter Hamilton

Earlier: BofA, SEC to file details on Merrill Lynch bonuses

BofA, SEC to file details on Merrill Lynch bonuses

After enduring the courtroom equivalent of a tongue-lashing from a federal judge two weeks ago, Bank of America Corp. and the Securities and Exchange Commission are expected today to detail the logic behind their controversial settlement over bonuses at Merrill Lynch & Co.

The bank and the agency are scheduled to file briefs responding to U.S. District Judge Jed Rakoff’s criticism of the proposed $33 million settlement.

BofA agreed to settle an SEC lawsuit alleging that it led shareholders to believe that Merrill would not pay year-end bonuses last year. In fact, the bank had already approved $5.8 billion in bonuses at Merrill, which it was in the process of acquiring at the time, and Merrill eventually doled out $3.6 billion in payouts.

Rakoff blasted several key elements of the settlement, and said he won’t approve it until he gets additional information on several key points.

Among other things, he wants details on whether BofA intentionally misled shareholders about the bonuses, the names of which executives and lawyers approved the bonuses, and on whether shareholders got sufficient information about Merrill’s weakening finances before they voted to approve the merger late last year.

Rakoff also said at the hearing that he was troubled by the proposed settlement amount, saying $33 million could be far too little if BofA was shown to have deceived shareholders.

-- Walter Hamilton

Related: BofA defends settlement over Merrill Lynch bonuses 

In financial agency turf wars, at least one loser is obvious

Evidently, Treasury Secretary Timothy Geithner failed to strike fear in the hearts of the nation’s top financial-system cops, after he lambasted them late last week for publicly opposing parts of the Obama administration’s regulatory-overhaul plan.

In testimony before the Senate Banking Committee on Tuesday, banking regulators including Federal Deposit Insurance Corp. Chairwoman Sheila Bair and Office of Thrift Supervision Acting Director John Bowman hardly sounded contrite -- despite Geithner’s expletive-laced attempt to quash agency turf wars.

On the administration’s proposal to place oversight of major financial firms under a single regulator -- most likely the Federal Reserve -- Bair was right back with her previous objections.

"We do not see merit or wisdom in consolidating all federal banking supervision," she told the Senate. "The risk of weak or misdirected regulation would be exacerbated by a single federal regulator that embarked on a wrong policy course. Prudent risk management argues strongly against putting all your regulatory and supervisory eggs in one basket."

Of course, no government bureaucracy ever believes that it should shrink itself or give up authority. But even Bair, in arguing for the regulatory status quo, seems to think that we could do without at least one financial agency: the Office of Thrift Supervision.

The OTS, recall, had responsibility for Washington Mutual, IndyMac Bancorp and Downey Financial, all of which went down in flames last year, with the latter two costing the FDIC fund dearly. Another OTS-regulated giant, Guaranty Bank, is on the brink of collapse.

The Obama administration wants to kill off the OTS, hand its oversight functions to a single national-bank regulatory agency, and phase out thrift charters.

Not surprisingly, the OTS’ Bowman insisted in his Senate testimony that the agency should be preserved. His reasoning included this gem: "Failures by insured depository institutions have been no more severe among thrifts than among institutions supervised by other federal banking regulators."

In other words, the OTS should survive just because it's no worse than its peer agencies in preventing failures?

At another point, Bowman argued that the OTS' image suffered unfairly because it allowed insolvent thrifts like WaMu, IndyMac and Downey to collapse, while Citigroup and other big banks were propped up by the Treasury. As if that somehow absolves the OTS for what happened on its watch.

Sen. Charles Schumer (D-N.Y.), whom the OTS last year accused of helping to bring down IndyMac by publicly questioning the bank’s health, wasn't buying Bowman's line. "Almost everyone regards the OTS as having failed in its responsibilities," Schumer asserted.

As for the administration’s basic goal of consolidating regulatory authority, Schumer made a well-reasoned case in a relative few words:

"A hodge-podge of different regulators add to conflicts in regulation and creates confusing burdens for the banks. We’ve all heard from institutions who were told one thing by one regulator and another thing by another regulator, each of whom has authority.

"A single regulator could keep better tabs of industry-wide risks, dangers and developments. That’s pretty apparent. And . . . a single consolidated regulator can eliminate agency and regulatory arbitrage and gaps, and no bank could escape from being held accountable for violations and poor practices."

Sounds like what Geithner might have been trying to say -- without the expletives.

-- Tom Petruno

Photo: John Bowman, acting director of the Office of Thrift Supervision. Credit: Chip Somodevilla / Getty Images

Geithner to regulators: 'Stop your (expletive) turf wars'

Treasury Secretary Timothy Geithner launched an "expletive-laced" tirade against top U.S. financial regulators in a meeting on Friday, demanding that they halt their turf battles over the administration’s proposed regulatory overhaul, the Wall Street Journal reports.

Frustration apparently has been building in the White House as individual regulators have publicly voiced objections to parts of the plan, including giving the Federal Reserve more oversight of the financial system and creating a new Consumer Financial Protection Agency to police lending products.

The regulators’ pushback could pose a threat to any overhaul by giving House and Senate leaders ammunition to challenge the plan.

From the Journal’s website:

Mr. Geithner told the regulators Friday that "enough is enough," said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Other attendees were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman.

Friday's roughly hourlong meeting was described as unusual, not only because of Mr. Geithner's repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Neal Wolin, Treasury's deputy secretary, told the Journal that Geithner wanted to make sure that turf battles didn’t get in the way of fixing a system that badly needed an overhaul.

Wolin wouldn’t comment on Geithner's tone or language, the Journal said.

-- Tom Petruno

Photo: Treasury Secretary Timothy Geithner. Credit: Chip Somodevilla / Getty Images