Category

Conspiracy & Corruption

Bankers Committed Fraud to Get Bigger Bonuses

In case you didn't catch the article titled "Guilty Pleas Hit the 'Mark'" in the Wall Street Journal, I'm here to make sure you don't miss it.

This is too good.

Three former employees of Credit Suisse Group AG (NYSE: CS) were charged with conspiracy to falsify books and records and wire fraud. They were accused of mismarking prices on bonds in their trading books by soliciting trumped-up prices for their withering securities from friends in the business.

By posting higher "marks" for their bonds in late 2007, they earned big year-end bonuses.

What a shock!

What's not a shock is that, after a bang-up 2007, Credit Suisse had to take a $2.85 billion write-down in the first quarter of 2008. No one knows how much of that loss was attributable to the three co-conspirators who were fired over their "wrongdoing."

Two of the three accused pled guilty. Also not shocking is the reason David Higgs – one who pled guilty – gave for his actions. He said he did it "to remain in good favor" with bosses, who determined his bonus and who profited handsomely themselves from his profitable trading and inventory marks.

As for Salmaan Siddiqui, the other trader who pleaded guilty? His attorney Ira Sorkin, the former Securities and Exchange Commission (SEC) enforcement chief, said of his client: "What he did was the result of his boss and his boss' boss directing him to do it."

You know what else is shocking?

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How JPMorgan Aided and Abetted the Largest Municipal Bankruptcy in U.S. History

Alabama's Jefferson County filed for bankruptcy protection on Wednesday, making it the largest municipal bankruptcy in U.S. history.

But believe it or not, that's not the biggest story here.

The big story is how JPMorgan Chase & Co. (NYSE: JPM) – specifically, JPMorgan's Securities arm – has a filthy hand in the whole Jefferson County saga.

This isn't breaking news. I've written about it before and so have others. You just may have missed it because the spin machine was so effective that the story got buried fairly quickly.

It's really an interesting story – albeit a long one. But unfortunately, I don't have the space and you don't have the time for all the grisly details, so here's the short version.

Jefferson County is full of characters – and a few who made it into the local government turned out to be good old boy crooks.

Jefferson County, home to Birmingham, had an aging and stinky sewer system. The Environmental Protection Agency (EPA) demanded that the county do something about it as far back as 1996.

And it did.

County administrators decided that a brand new sewer system needed to be built at an expected cost of about $1.5 billion. With that decided, the county commission had to decide who would run the financing operations, craft a plan to manage the debt, and float bonds to pay for the project.

Here's where I'm cutting out all the starch and getting to the meat of the story: Local politicians, who were in cahoots with local broker-dealers (securities firms), wanted a piece of all the money that was going to be sloshing around. They ended up demanding, and getting, hefty bribes from big securities firms to let them become the chosen ones to run this lucrative muni finance deal.

I'm not going to get into how Goldman Sachs Group Inc. (NYSE: GS) got involved in 2002 and ended up being paid some $3 million (some of which it passed along to "consultants") to get in on the deal – which incidentally it ended up doing nothing on, other than participating in a back-door swap arrangement with JPMorgan Securities. Nor am I going to get into Bear Stearns' dealings, nor the small securities dealers who acted as conduits for money being exchanged between JPMorgan and others.

Instead, I'm going to focus on JPMorgan, which ended up constructing the finance arrangements and doing most of bond deals that served to finance the building of the new sewer system – because that's where the story takes a truly ugly turn.

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These Three Men Represent Everything That's Wrong with Wall Street

I've already expressed my desire to embrace the Occupy Wall Street movement.
I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve.

But I don't know – and I'm not convinced they do, either.

Still, that doesn't mean we should dismiss them entirely. After all, there are millions of Americans who sense there's something terribly wrong with our capitalist system, but they can't pinpoint exactly what it is either.

But I can.

Bad actors have done bad things to good institutions and our capitalist system. Today, I'm going to let you in on who three of those bad actors are.

You see, part of the problem is that when we think of the "bad guys" on Wall Street, or in Washington for that matter, we don't often think of specific people. We talk about "them" as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.

I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they're using to get away with it.

So, I'm going to start today with three of the biggest perpetrators of the mess we're in.

The Three Bears

There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:

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Combating the Cons: Where Should Victims of Financial Scams Turn?

Today's story "Classic Cons: 10 Financial Scams Fair-Minded Investors Should Avoid," describes just a few of the financial scams investors should watch out for. If you have reservations about a potential investment opportunity, or if you've been victimized by a financial scam, you might turn to one or more of the following agencies.

Better Business Bureau – With offices nationally, in every state and most large and mid-sized cities, the BBB can alert you to problems with local businesses, work-at-home programs, distributorships, sales routes you can buy and other one-on-one type rip-offs. They usually have lists of current online offers that are suspect or drawing lots of complaints. You can access the national BBB Web site at http://www.bbb.org/us/
and navigate to your home state or city chapter from there.

U.S. Securities and Exchange Commission (SEC) – Information is available on all securities-related fraud issues and investment scams, and you can file your own personal complaints or suspicions online at http://www.sec.gov/complaint.shtml. You can write them at: Securities and Exchange Commission, Office of Investor Education & Assistance, 450 Fifth Street, N.W., Washington, D.C. 20549-0213, or fax a complaint to 202-942-9634. You also can verify financials and regulatory standing on all publicly traded U.S. companies by accessing the SEC's EDGAR Database at: http://www.sec.gov/edgar.shtml.

Your SEC complaint can be anonymous or you can provide only limited personal data. However, the more information you give them, the more likely they'll be able to help you. Either way, include specific details about how, why and when you were bilked with any contact info you have on the fraudulent person or company involved.

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Classic Cons: 10 Financial Scams Fair-Minded Investors Should Avoid

When Peter Allen and Carole Bayer Sager wrote the tune "Everything Old Is New Again," they were probably hoping for no more than a Top 40 hit. Instead, the song became an oft-recorded classic, mostly because the title proved a truism in so many areas – especially in the seamy world of financial fraud.

Indeed, over the past 40 years, only one new entry has been added to the Federal Bureau of Investigation (FBI) roster of "Top 10" investment scams – the very broad category of "Internet fraud." The other financial rip-offs listed are merely new versions of tried and true swindles that have been around for decades or more – from Ponzi schemes and pyramid systems to phony stock offerings and commodity cons.

The big difference is that the one new category – Internet fraud (and the computers on which the Internet operates) – has greatly increased the frequency, speed and effectiveness of the other types of financial fraud, as well as exponentially increasing the scammers' take.

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Money Morning Mailbag: Big Banks Under Fire for Metals-Market Manipulation

A New York Post article in May reported that the Department of Justice had launched an investigation into the supposed metals-market manipulation by JPMorgan Chase & Co. (NYSE: JPM).

The article alleged that JPMorgan, which holds a number of derivatives in precious metals, attempted to lower the price of silver for its own profit. JPMorgan was quick to issue a response, stating there was no criminal or civil investigation into the company's silver trading practices.

But as word spread around the Web, readers' comments poured in with concerns over the news:

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Money Morning Mailbag: Wall Street Expects Money to Arbitrate Financial Reform

Financial regulation overhaul cleared another hurdle last week when the Senate approved its financial reform bill. However, the inclusion of a derivatives trading restriction left Wall Street wondering why its political contributions weren't doing the talking.

The financial industry was surprised when a provision created by Sen. Blanche Lincoln, D-AR, requiring banks to spin off their derivatives trading arms remained in the Senate's proposal. Wall Street lobbyists are now reaching out to the members of the Senate and House conference committee who will reconcile the two bills. The Senate named its committee appointees Tuesday, which included Lincoln.

The Financial Services Roundtable, a lobbying group representing financial companies, has already started meeting with House members who it believes will be involved in the final process and could help cut the provision.

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Goldman Director Linked to Insider Trading on Buffett Investment

Galleon Group founder Raj Rajaratnam Rajat may have engaged in insider trading on Goldman Sachs Group Inc. (NYSE: GS) stock by profiting from a tip from Rajat Gupta, a director at Goldman, The Wall Street Journal reported, citing a person it didn't identify.

The new disclosure stems from a government examination into whether Gupta gave inside information to Mr. Rajaratnam about a $5 billion investment Warren Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B) made in the Wall Street bank before it became public knowledge.

In a March 22 court filing, the government revealed more details about the information it alleges Rajaratnam received, alleging that he or "co-conspirators" traded on non-public information, including advance notice about the Buffett investment in Goldman.

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Goldman's First-Quarter Profit Doubles to $3.46 Billion, Even as its Fraud Probe Takes on an International Twist

Investment-banking giant Goldman Sachs Group Inc. (NYSE: GS) – the target of a civil fraud case filed by U.S. securities regulators – yesterday reported that its first-quarter earnings nearly doubled, even as the probe against it took on an international twist.

The New York-based Goldman said it earned reported first quarter earnings of $3.46 billion today (Tuesday), or $5.59 a share, an increase of 91% from earnings of $1.66 billion, or $3.39 a share, for the same period a year ago. The earnings report came just days after the U.S. Securities and Exchange Commission filed a civil fraud case against the Wall Street financial heavyweight.

Goldman's earnings beat analysts' average estimates of $4.16 a share. Its investment bank income revenue rose to $12.78 billion, and its fixed-income, currency and commodities trading generated net revenue of $7.39 billion.

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How the Goldman Sachs Fraud Case Could Accelerate Wall Street Reform

When the U.S. Securities and Exchange Commission announced Friday that it had filed a fraud action against Goldman Sachs Group Inc. (NYSE: GS), the news hit the financial markets like a carefully targeted bomb.

The Goldman Sachs fraud case, which relates to the investment bank's subprime-mortgage business, caused the financial giant's shares to nosedive 12.8%. The fallout spread to the broader markets, too, causing the Dow Jones Industrial Average to drop 1.1% and the Standard & Poor's 500 Index to skid 1.6%.

That reaction wasn't overblown.

Depending on how rough the SEC wants to play it, the case has the potential to shut down the cartel known as Wall Street. It could even jump-start the kind of sweeping overhaul that legal or regulatory reformists have so far failed to launch.

To see how the government fraud case against Goldman Sachs could force Wall Street to reform, please read on...

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