Jon Corzine caught up as MF Global inquiries escalate

Each morning this week has brought a new batch of revealing details about what brought down MF Global, the trading firm run by former U.S. senator and Goldman Sachs Chief Executive Jon Corzine.

Since the firm declared bankruptcy  Monday morning, we have learned the Commodity Futures Trading Commission and then the Federal Bureau of Investigation were investigating allegations of misused customer funds.

Today, it is the Securities and Exchange Commission that is reported to be opening a probe, according to the Wall Street Journal. The SEC is said to be looking at whether Corzine misled its investors as the company's share price was in freefall.

The case has raised questions about why regulators did not notice MF Global problems sooner. After all, critics say, MF Global was done in by the type of highly leveraged bets that regulators should have been very familiar with from the demise of Lehman Brothers and Bear Stearns in 2008.

Reuters reports today that Wall Street's industry-funded regulator, the Financial Industry Regulatory Authority, started asking questions back in June, but that it was not enough to get MF Global to scale down its bets on the sovereign debt of struggling European nations. 

At a conference in San Francisco on Wednesday, the chief investment strategist at Charles Schwab, Liz Ann Sonders, said, "It may show that we don't have adults manning the regulatory store."

At the same conference, PIMCO bond guru Bill Gross said the bankruptcy was another sign that Wall Street had "lost its way."

"We need a banking system that is attractively and conservatively capitalized," Gross said.

The most scathing new criticism of the situation, though, may have come in the form of a fable about Corzine and MF Global, penned by Financial Times columnist John Gapper. Gapper imagines Corzine as an emperor with no clothes, or in this case, an emperor with Goldman clothes, in reference to his previous employment at Goldman Sachs:

Some of the traders wondered if they should heed the emperor. He was oddly attired and his beard was gray. Perhaps he is just reliving past glories, they thought to themselves. But the emperor  showed them the label sewn inside his worn-out suit. “Goldman,” they said admiringly. “They are the     finest of weavers. We were wrong to doubt him.”

 Shortly afterward, a messenger arrived from far-off lands with tales of great events. The grand emperors of France and Germany had settled an argument and lent florins to the southern kingdoms that had debased their currency. "We should load up," Emperor Corzine cried. “We must trade in size. Here,” he told the treasurer. “Borrow 40 more bags of coins like this one. Wear my cloak and no one will refuse you."

Corzine himself is contending not only with embarrassment and investigations, but also with the prospect that his $12-million golden parachute may not launch, according to Fortune.

RELATED:

MF Global is investigated for possible misuse of customer funds

MF Global files for bankruptcy, undone by Europe's financial crisis

-- Nathaniel Popper

twitter.com/nathanielpopper

Photo: File photo of MF Global CEO Jon Corzine. Credit: Rich Schultz / Associated Press

Wall Street: Stocks rise at the open; gold up

Gold: Trading now at $1,787 an ounce, up 0.6% from Monday. Dow Jones industrial average: Trading now at 11,431.30, up 0.3% from Monday.

Mixed news. U.S. stock markets wavered at the open; there was disappointing news about the housing market, but that was tempered by speculation that the Federal Reserve may announce a new stimulus plan.

Morgan Stanley's feud. Wall Street has become increasingly divided between its trading operations and its more traditional investment banking operations -- and at Morgan Stanley, this division has become personal.

Downgrade insiders. The Securities and Exchange Commission is reportedly probing whether some big trading firms took advantage of last month's downgrade of the United States' credit rating by Standard & Poor's.

Rogue trader. UBS executives will meet later this week in Singapore to review the fallout from the disclosure of a rogue trader's $2.3-billion losses.

Quiet protest. Protesters are continuing their demonstrations on Wall Street, but their numbers and strength have not been overwhelming.

-- Nathaniel Popper in New York
Twitter.com/nathanielpopper

Photo credit: Stan Honda / Getty Images

Consumer Confidential: Retail sales up, easier credit score access, more missing data

Here's your you-better-think Thursday roundup of consumer news from around the Web:

-- Shoppers are shopping, but they're also looking for bargains. Deep discounts and falling gas prices helped boost June retail sales, with 85% of retailers reporting that results exceeded expectations. Sales at stores open at least a year rose by 7.2% compared with the same period last year, led by strong discount retailers’ performance, including Costco and Target. Gas prices fell 85 cents on average nationally from the same period in 2010, according to government figures, and that helped. Luxury retailers showed strong performance, with sales at Neiman-Marcus and Saks up 12.5% and 11.9%, respectively. The bulk of mid-market retailers reported increasing same-store sales for the month. Victoria’s Secret posted a 17% jump, while Gap logged a 1% increase.

-- You'll soon have easier access to your credit score. Consumers who are denied credit or whose existing loan terms become less favorable will soon be able to get free credit scores under new rules from the Federal Reserve Board and Federal Trade Commission. Effective July 21, if a credit score is used to set certain credit terms or to deny or revoke credit or change existing terms banks and others will be required to disclose credit scores and related information to consumers. Credit scores are often used by lenders to set or adjust loan terms, such as interest rates charged, and can change over time to reflect changes in a borrower’s financial history.

-- Heads up: Brokerage Morgan Stanley Smith Barney says two CDs containing personal information belonging to about 34,000 investment clients were lost in transit to a government office. The information included clients' names, addresses, account and tax identification numbers, the income earned on investments in 2010, and some clients' Social Security numbers. The CDs, which were password protected but not encrypted, were lost after the company mailed them to the New York State Department of Taxation and Finance. The package appeared to be intact when it reached the department, but the CDs were gone by the time the package reached the intended recipient.

-- David Lazarus

Photo: Deep discounts are drawing shoppers back into stores. Credit: Glenn Koenig/Los Angeles Times

 

New stock trading rules proposed to avoid another 'flash crash'

Federal regulators are considering new limits on intraday stock volatility aimed at avoiding another “flash crash” like the one that rocked Wall Street last May 6.

The Securities and Exchange Commission late Tuesday said major stock exchanges proposed the  idea of a “limit up/limit down” system to keep share price moves from spiraling out of control.

The system would replace the individual-stock “circuit breakers” pilot program put in place after the flash crash, when some big-name stocks briefly plunged as low as a penny a share amid a flood of computer-driven sell orders.

The current circuit-breaker system has been criticized for automatically halting trading if a stock moves 10% within five minutes. The new system would allow time to see if transactions could occur within a preset price band before a halt would kick in.

From the SEC:

The proposed “limit up/limit down” mechanism would prevent trades in listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For stocks currently subject to the circuit breaker pilot, the percentage would be 5 percent, and for those not subject to the pilot, the percentage would be 10 percent.

The percentage bands would be doubled during the opening and closing periods, and broader price bands would apply to stocks priced below $1.00. To accommodate more fundamental price moves, there would be a five-minute trading pause -- similar to the pause triggered by the current circuit breakers -- if trading is unable to occur within the price band for more than 15 seconds.

“Upgrading our trading parameters will help our markets retain the confidence of investors and companies,” SEC Chairwoman Mary L. Schapiro said in a statement.

The SEC asked for public comment on the idea for 21 days.

-- Tom Petruno

Regulator probes funding of California muni bond lobbying group

The brokerage industry’s self-regulatory agency is investigating the funding of the California Public Securities Assn., a group that lobbies on issues affecting the municipal bond industry in the state.

The Financial Industry Regulatory Authority sent a letter last week to firms that are members of CPSA, asking for details on payments they make to the 30-year-old group and how those payments are allocated toward political contributions that the group doles out.

The six-page letter, which asks for all data since Jan. 1, 2006, “was a surprise to us,” said James Cervantes, a managing director at bond underwriter Stone & Youngberg in San Francisco and CPSA’s current chairman. “Their requests are very broad.”

On its website, CPSA lists about three dozen members, including major brokerages such as Goldman Sachs & Co., regional bond underwriters such as De La Rosa & Co. and law firms including Orrick, Herrington & Sutcliffe.

Gina Petrocelli, the regulator who signed the letter, couldn’t be reached for comment. The letter said the request "should not be construed as an indication" that the agency has determined that any federal laws or agency rules have been broken.

There are long-standing industry “pay-to-play” rules restricting securities firms from doing business with municipalities, including handling bond offerings, once certain political contributions have been made to officials in those municipalities.

The Municipal Securities Rulemaking Board this month proposed a new rule that would impose similar restrictions on firms and individuals that advise municipal entities on financial issues

But CPSA says it isn’t an advisor. “We’ve taken great care to not play that role,” Cervantes said.

He said the group limits its lobbying and contributions to “big-picture issues” such as Proposition 22, a measure on last November’s ballot that sought to ban the state from raiding certain local-government funds. Voters approved it.

On its website, the group says it also organizes “educational conferences to help municipal officials make informed decisions regarding the use of various financial instruments to fund capital improvements or mitigate interest rate exposure.”

The letter from the Financial Industry Regulatory Authority asks the association's members to “describe with specificity [CPSA’s] purpose, activities and organizational structure.”

The regulator says all the information requested in the letter must be delivered by Feb. 1.

-- Tom Petruno

Schwab settles SEC case over troubled YieldPlus fund for $119 million

Three years after a supposedly safe bond fund plunged in value, Charles Schwab Corp. agreed Tuesday to pay $119 million to settle a government lawsuit accusing it of misleading investors about the risks.

Schwab aggressively marketed its YieldPlus bond fund (ticker: SWYSX) to retail clients as conservative but higher-yielding than money market funds. But the fund began sinking in early 2008 when its heavy concentration of mortgage bonds collapsed during the global financial crisis.

The Securities and Exchange Commission suit alleged that Schwab consistently played down the fund’s risks in ads and sales materials and violated federal law by putting too much cash in a single sector. It also misled investors about the magnitude of investor redemptions after the losses struck, according to the agency.

“All financial firms and professionals -- including large mutual fund providers -- must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely held mutual funds that are the bread-and-butter investments of retail investors,” Robert Khuzami, SEC enforcement chief, said in a statement.

Schwab said that it regretted the customer losses, and it said company founder Charles Schwab was one of the fund’s largest investors.

Schwab settled the suit without admitting or denying liability. In a statement, the firm attributed the losses to “an unprecedented and unforeseeable credit crisis and market collapse.” Schwab also blamed the investment banks that created the mortgage bonds, and Wall Street rating firms.

“To provide future protection for individual investors from similar market crises, the company hopes that greater focus and attention will ultimately be given to the investment banks that created mortgage-backed securities and the ratings agencies that legitimized them with triple-A ratings, which have so far largely escaped scrutiny and accountability,” Schwab said.

About $110 million of the settlement money will be returned to aggrieved investors. Lawyers representing Schwab customers in a federal class action have alleged that 250,000 investors lost about $800 million in YieldPlus.

YieldPlus was an “ultra-short” bond fund that had notched strong returns in the years leading up to the financial crisis. Fund tracker Morningstar Inc. gave the fund a five-star performance rating, its highest, in late 2004.

But the fund's heavy mortgage-related holdings got pounded during the financial crisis. YieldPlus lost 35.4% in 2008 and 10.5% in 2009, according to Morningstar. Investors stampeded out of the fund. Its assets have fallen from $13.5 billion to less than $150 million today.

-- Walter Hamilton

 Photo: SEC Enforcement Chief Robert Khuzami. Credit: Chip Somodevilla / Getty Images

Your weekly ScamWatch

A roundup of alleged cons and iffy arrangements to watch out for.

Gym memberships -- Have you resolved to lose weight in 2011? If joining a gym is part of the plan, the Better Business Bureau has some advice to avoid unexpected expenses. Be sure to ask the gym whether your membership will renew automatically, how long your introductory rate will last and what happens if you move or the gym goes out of business, the BBB said in a recent bulletin. Before signing a contract, you should consider whether you’re feeling pressured to join, can afford the monthly dues and are getting everything in writing, the BBB said. “Regardless of how eager you are to start losing weight in the new year, take the time to do research before joining a gym and don’t give in to high-pressure sales pitches,” said Alison Southwick, a BBB spokeswoman.

For-profit colleges -- Enrollment at trade schools and Internet-based colleges has skyrocketed in recent years. These programs are not always a wise investment, the BBB said. When applying to a for-profit school, students should be wary of recruiters who use high-pressure sales tactics or guarantee jobs or future income or if the degree seems too easy to obtain, the BBB said in a news release. The BBB also suggested that students research whether the schools are accredited by the U.S. Department of Education and how their tuition compares with competitors'. One school charged $14,000 for a certification in massage therapy while a similar certification at a public college would have cost only $520, the BBB said.

Insider trading -- A registered investment advisor has pleaded guilty to conspiracy and securities fraud charges in connection with an insider-trading scheme. Alexei P. Koval admitted that he obtained inside information about mergers and acquisitions from a former investment banker at UBS and used the information to make profitable trades on involved companies, the FBI said in a news release. He then paid a portion of the profits to the investment banker, according to the FBI. Koval, 36, who kept residences in Chicago and Pasadena, pleaded guilty to three counts of securities fraud and one count of conspiracy. Combined, the charges carry a maximum sentence of 65 years in prison and more than $15 million in fines.

Author sentenced –- The author of a book about investing has been sentenced to 18 years in prison for stealing more than $4 million from dozens of investors in a scheme that lasted 10 years. William Arthur Sassman II used his book, “Secrets of a Worry Free Retirement,” to entice investors, many of them retirement age, to invest with him. He said he would use the money to purchase foreclosed properties and commercial real estate and to develop a laptop computer stand, but instead spent it on an extravagant lifestyle, the California Department of Justice said in a news release. Sassman, 42, charged more than $1 million on American Express cards and spent $300,000 on automobiles, including two Ferraris, the state officials said. As part of his sentence, Sassman was ordered to pay $4.45 million in restitution to 48 victims.

RELATED:

Jan. 2: Counterfeit drugs, child obesity, Apple malware

Dec. 26: Investment fraud, property loans, death and taxes

Dec. 19: Online shopping, stealing from kids, sweepstakes fees

 

--Stuart Pfeifer

Lawsuit describes fraternity-like atmosphere at L.A. law firm

Holiday season at most law firms means year-end bonuses and perhaps a nice dinner at which partners pick up the check.

But things were a little different at Century City law firm Glancy Binkow & Goldberg, a former employee alleges in a recent sexual harassment and wrongful-termination lawsuit.

At the conclusion of the law firm’s 2009 holiday party, founding partner Lionel Z. Glancy took employees to a Los Angeles bikini bar named Fantasy Island, paid for their admissions and bought a lap dance for at least one employee, according to the lawsuit.

The lawsuit alleges that female employees at the firm were subjected to a hostile work environment that included “partners’ obsession with discussing sex in the workplace and derogatory comments about women.” One lawyer posted photographs of naked women on the wall of his office, and partners once gave a male employee binoculars to “leer at the hot women through the office windows,” the lawsuit says.

Ashlee Ilewicz worked as an investigator at the firm for 14 months before she was fired in December 2009. Her lawsuit, filed this month in Los Angeles County Superior Court, said she was fired for complaining about the performance of an attorney and subjected to a hostile work environment while employed at the firm.

Glancy declined to comment, and the firm’s lawyer, Stuart D. Tochner, could not be reached for comment. Tochner told the legal newspaper the Daily Journal that the allegations were false and the firm intended to defend the lawsuit.

The Glancy firm, founded 16 years ago, represents investors in securities class-action lawsuits and also has offices in New York and San Francisco. According to the firm’s website, it represents investors in dozens of pending class-action securities lawsuits, including cases against American Express Co., E-Trade Financial Corp., Harley-Davidson Inc. and Crocs Inc.

-- Stuart Pfeifer

Consumer Confidential: GM recalls vehicles, economy strengthens, good times predicted

Here's your thinking-of-you Thursday roundup of consumer news from around the Web:

--It's been a good year for GM, with the company emerging from bankruptcy and selling its stock once again to the public. But the year is ending on a low note. GM says it's recalling almost 100,000 vehicles to fix two problems that could cause the rear axle to lock and the passenger-side airbag not to work. The airbag recall affects almost 96,000 2005 to 2007 model year versions of the Cadillac CTS. The axle recall affects almost 1,300 2011 model year versions of the Cadillac Escalade, Chevrolet Avalanche 1500 and Silverado 1500, as well as the GMC Sierra 1500. The axle recall is expected to begin in January. GM did not say when the airbag recall would begin.

--On the other hand, the economy has a good head of steam as it nears the finish line for 2010. The latest stats suggest employers are laying off fewer workers, businesses are ordering more computers and appliances, and consumers are spending more confidently. The number of people seeking unemployment benefits edged down by 3,000 to a seasonally adjusted 420,000, according to the Labor Department. That was the second drop in three weeks. Meanwhile, companies increased their orders for long-lasting manufactured products by the sharpest amount in eight months, personal spending rose modestly last month and consumers' incomes grew 0.3%, lifted by gains in stock portfolios. God bless us every one.

--And because I want to close this blog for the year on a happy note, here's the latest word from Jim O'Neill, the Goldman Sachs financial guru who accurately predicted the rise of emerging-market economies a decade ago. He's now telling clients that 2011 will be the "year of the USA" and that the stock market could rise by as much as 20% as the economy recovers. I have no idea whether he's right. But it's nice to think we'll have more than coal waiting for us as we open our Christmas stockings.

--After I put my Friday newspaper column to bed, I'll be AWOL for the remainder of the year, enjoying a little time off with friends and family. All the best to you and yours this holiday season. See you in January.

-- David Lazarus

Photo: A recall ends an otherwise impressive year for GM. Credit: Paul Sancya / Associated Press

 

Ernst & Young sued, accused of covering up Lehman Brothers decline

New York Atty. Gen. Andrew Cuomo filed a lawsuit against the accounting firm Ernst & Young, accusing it of helping Lehman Bros. cover up its declining health in the years before its 2008 collapse.

The civil complaint filed in New York Supreme Court on Tuesday morning demands that Ernst & Young pay New York the $150 million in fees it earned from Lehman.

The collapse of Lehman in September 2008, when it was the fourth-largest investment bank in the U.S., was one of the defining moments of the financial crisis. Before Tuesday's lawsuit, though, regulators and prosecutors had not accused anyone of wrongdoing in the bank's collapse. 

Cuomo's suit focuses on a set of accounting maneuvers, begun in 2001, that allowed Lehman to shift securities to other banks for short periods in order to look healthier. The suit says that Ernst & Young, Lehman's lead accountants, knew the maneuvers were not being disclosed to investors but still approved Lehman's financial statements. 

The so-called Repo 105 transactions were done just before Lehman publicly reported its earnings and made it appear as though Lehman had more cash, according to the complaint. Lehman would immediately buy back the securities after reporting results.

"E&Y sat by silently while Lehman deceived the public," the complaint says.

Ernst & Young did not respond to a request for comment.

Cuomo will be leaving his post as attorney general at the end of the year and taking up office as New York's governor.

-- Nathaniel Popper

 

 

Consumer Confidential: Gap logo redux, record Wall Street pay, Wal-Mart does iPad

Here's your treat-me-nice Tuesday roundup of consumer news from around the Web:

--I wrote last week about Gap Inc. introducing a new logo that immediately drew scorn online for being a step in the wrong direction. Looks like our friends at Gap got the message. The company has abandoned its new-and-not-so-improved logo, and will return instead to its traditional, iconic blue box. The new logo had changed the type face and moved the blue box to the side -- changes that some said made it look like a logo for a phone company. "We’ve learned a lot in this process," said Marka Hansen, Gap brand president in North America. "We are clear that we did not go about this in the right way." You think?

--Wall Street's underpaid denizens are on track for record paydays this year, according to a survey by the Wall Street Journal. Leading financial firms will pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009. This follows separate news that many Wall Streeters are expecting big jumps in bonuses this year. Is it just me, or is it now painfully clear that the financial world learned nothing from its all-too-recent brush with disaster? Not a very encouraging thought.

--Because Apple just doesn't get enough free press, here's the latest update: Wal-Mart will begin selling the uber-popular iPad on Friday, and the gizmo should be available at nearly all outlets by mid-November. This follows a move by Target to include the iPad in its product lineup, as well as a decision by Apple to make the iPad more readily available to iPad-deficient consumers. But don't go thinking that just because Wal-Mart is involved, prices will come down. The world's largest retailer will sell the iPad at Apple's suggested retail prices -- $499 to $829, depending on the model.

-- David Lazarus