Randomly Noted

Fraud is fraud, so it’s silly to try to decide on degrees of venality amongst the various types.

Still, it seems particularly loathsome to try for ill-gotten gains off the back of disasters and the tragedies of others.

Case in point: the Securities and Exchange Commission today warned investors to be wary of scams that seek to exploit the big oil spill in the Gulf and the efforts, which no doubt will be expensive and time-consuming, to clean up.

“While some of the companies touting their role in the cleanup may be legitimate, others could be bogus operations that are only looking to clean out unsuspecting investors,” The SEC and market regulator FINRA said in a jointly issued press release.

It’s ghoulish enough that some investors, upon their hearing of some unexpected tragedy, quickly turn their attention to the business, and therefore investment, implications of the disaster.

That’s the way of the world. Still, scamming off tragedy seems beyond the pale.

The SEC and FINRA provided a list of what to look for in potential Gulf oil spill-related scams. The list includes:

Company claims to have products that effectively help clean up oil spills and/or fix  ecosystems. Company claims to have contracts or an expectation of contracts with BP for the cleanup. Or that claim some involvement with one of the federal government agencies on the scene.

It’s certainly not as sexy as the government probe into hedge funds, where people communicated in code, used special cell phones, had money drop schemes and informants with wire taps. no, this case against Johnson & Johnson announced today alleging it gave a healthcare provider kickbacks is, well, downright boring when it comes to the theatrics. The evidence: a white paper, a power point presentation and emails.

Despite the lack of drama, the charges are pretty serious. The U.S. Attorney in Massachusetts alleges that J&J gave kickbacks to Omnicare to have the provider of drugs to nursing homes push more J&J products.  (See the complaint.)

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There’s a different kind of Sun King who rules Venezuela (the other sunny fellow was a guy named Louis and he was the 14th in France).   When thinking about the way Hugo runs things south of the border, remember that song said to be inspired by a vamp Lola Montez: whatever Lola wants, Lola gets. Replace the name “Lola” with “Hugo.”

My fellow blogger Gabriella Stern wrote earlier about Hugo Chavez and his threat to take over a Toyota production plant in his country. (Click here to see Gabby’s blog.) We now see Hugo & Co. is asking the U.S. to extradite a banker that a Venezuelan judge earlier this month released because the banker had been held in jail too long. Lola, I mean Hugo, wasn’t happy by that decision. The judge was arrested and the Venezuelan president with the sunny disposition said she (the judge) ought to be jailed for 30 years for letting him go. This isn’t to say this banker did good things. He’s accused of defrauding the central bank in Venezuela. But then again, he deserves his day in court and it hasn’t happened.

With all the flaws we think we have with our political and legal systems, we don’t have presidents jailing judges because they don’t agree with a decision. Happy Holidays, Hugo. And let’s hope the U.S. just ignores that extradition request.

Here’s the story from Newswires reporter Dan Molinski:

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Brazen. That’s the word that comes to mind when you read the complaint filed today by the Securities and Exchange Commission against three former officers of one-time mortgage giant New Century Financial Corp.

According to regulators, these three not only failed to disclose to investors that their business was cratering, but they failed to do so while they were desperately trying to raise much needed capital to replace capital that had been flying out the door because the business was blowing up.

The net-net: they cost investors millions of dollars while continuing to pay themselves handsomely for running what regulators say was a fraud.

The complaint is also a stark reminder of how little regulation there was (and is) of the mortgage business. Another thought that comes to mind is you really wonder how regulators exercising even an ounce of common sense didn’t see this train wreck coming. New Century’s problems began with something called the 80-20 loan. It was essentially two loans that allowed a borrower to buy a property without putting up a dime out of his/her own pocket. Loan number one was worth 80% of the purchase price and loan number two the remaining 20%. The above chart shows how dependent New Century was on this product.

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Hewlett Packard became the latest tech company to put some of its cash to work today by offering to buy networking gear-maker 3 Com for $2.7 billion. There’s obviously an interesting H-P strategy story in all of this but what is more fascinating to me is what the headline on this blog item asks. Hours before the deal was announced, there was very unusual trading in the stock options of 3 Com. As Newswires reporter Tennille Tracy reports, a days work in 3 Com options results in a few hundred contracts traded daily. Today, there were close to 8,000 traded. What makes this kind of trading even more remarkable is that it happens against the backdrop of a very high profile federal investigation into hedge funds brokering inside information with a network of paid tipseters that seems to be fingering some pretty high profile players. Maybe just a coincidence but it doesn’t seem like it. Even if you innocently heard a rumor today about H-P and 3 Com, would you risk trading on it given what the Feds are up to? The more things change, the more they stay the same…

The woman who has been identified as the informant in the Galleon hedge fund case appears to have had a separate run-in with the law in another case that involved Galleon.

MercuryNews.com reported earlier today that Roomy Khan, the 51-year-old informant, was convicted in 2002 on federal wire fraud charges for faxing to a Galleon employee confidential information about Intel while she worked at the high-tech company. She pleaded guilty in 2002 and was given a six-month sentence and paid a fine of $30,000. (click here for the MercuryNews.com story).

We know that the court papers relating to this case have been sealed by the court. And we know that Khan worked for Galleon sometime in the late 1990s. What we don’t know if is if that was before or after she worked for Intel.

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Raj Rajaratnam, the billionaire hedge fund manager arrested Friday and charged with insider trading, is apparently connected to a case in his native Sri Lanka that involves money transfers that should have been reported to the local government.

Rajaratnam, with the help of a Sri Lankan Parliament member, transferred $1 million from Galleon (his hedge fund) into an account of Nexia Corporate Consultants in late 2006, according to a Sept. 26, 2009,  article in the Daily Mirror of Sri Lanka.  Rajaratnam then followed with his own $2 million transfer in early 2007, according to the article. The money was to be used to buy shares of Union Bank of Colombo, the article said.

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To read the responses, you’d think we just published a story that declared Apple Pie isn’t American but instead a creation of that thug in Venezuela.

Motors Liquidation was created after General Motors went into bankruptcy. When the “new” GM emerged, much of the old, crappy assets were thrown into Motors for purposes of liquidation. What usually happens in cases when you have fewer assets than liabilities, the liabilities get paid at a value of less than each dollar that was paid in, and any equity gets wiped out.

And as often is the case with these bankrupt situations, market manipulators have a hay day suckering uneducated investors into their little game of misrepresentation.

Newswires reporter Geoff Rogow did a great job explaining this yesterday. As the chart above shows, Motors Liquidation stock tanked, falling 33% for the day. What Geoff wrote was not only correct and common sense, but repeated something Motors Liquidation, Finra and the Securities and Exchange Commission have all said recently – the stock is valueless. Before his article, the stock was trading around $1.20, giving this worthless company a market cap of about $732 million. It closed at 73 cents, giving this still worthless company a market cap of $445 million.

Geoff got emails declaring him an idiot. Another writer said he didn’t know the purpose of the story beyond making people panic and lose money. One classic came from someone claiming to be a law student who essentially said the spreading of misinformation isn’t all that bad of a thing. I see he went into law for all of the right reasons. The idiots are the people who perpetuate dumb rumors and ideas to draw not-very-smart people into their bad trading schemes. Go make your money on intelligent investments, not by taking advantage of people who don’t know any better.

To read Geoff’s story, go to the next page:

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In terms of size, this one is but a $140 million fraud (alleged, of course) and certainly doesn’t rank up there with the Bernie Madoff kind of schemes. But in terms of brazenness, it’s pretty close. The Securities and Exchange Commission and U.S. Attorney in Manhattan charged six individuals with running a boiler-room  operation that allegedly scammed investors in the U.S. and United Kingdom.

The company they ran and worked for was called Sky Capital and what they did, according to the Feds, was sell stock and convertible securities in two companies related to Sky that eventually became publicly traded. Principals of the firm were said to direct brokers to make material representations about the two companies – like make up “baseless price predictions” about the future values of the securities. This was for two companies with no operating history.

And it gets better.

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Is paying bounties the way to better protect U.S. investors?

The inspector general of the Securities and Exchange Commission thinks so. And while a certain vague distate arises from the notion of paying people to turn other people in, it’s probably a good idea.

With all the talk in the air about new regulations and “behavioral economics,” the direct appeal of cold cash for information does cut through the clutter and appeal to our basic (and possibly baser) instincts.

If it works and gets securities law violators off the figurative streets faster, why not?  With the downturn and market decline for a time exposing what seemed like a Ponzi scheme  du jour, the need for faster and more effective enforcement is certainly there.

All this relates back to Bernard Madoff, the just-sentenced king of the Ponzi, who avoided for so many years being apprehended by the SEC. In that case, the watchdog agency apparently got some leads even without bounties as inducements.

The SEC’s failure to uncover the $65 billion Madoff fraud has led the inspector general of the SEC, H. David Kotz, to try to find out why this happened. He is, in esssence, the watchdog of the watchdog.

As Kotz has investigated the SEC and the Madoff affair, he’s been urged by Rep. Paul Kanjorski, D-PA., the chair of the House Financial Services Subcommittee on Capital Markets, to provide updates on this probe. Kotz was also asked specifically for some ideas on modifying securities laws to avoid a Madoff recurrence as Congress prepares to debate regulatory reform legislation.

Kotz replied on June 30 with some ideas, one of which was about bounties. (The Financial Times wrote a news article about the inspector general’s bounty idea.)

“Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity,” Kotz wrote. He said there’s some evidence that bounty programs run by the Department of Justice and the Internal Revenue Service have borne the desired fruit.

The SEC already does have a bounty system, Kotz noted, which is 20 years old. But few awards are paid, he said, because it’s limited to insider trading cases “and the stated criteria for judging bounty applications are broad, somewhat vague and not subject to judicial review.”

Kotz’s recommendation: authorize the SEC to “award a bounty for information leading to the recovery of a civil penalty from any violator of federal securities laws, not simply insider trading violations.”

There seems no harm in trying a broader distribution of bounties. If nothing else, the Madoff scandal made clear enforcement help is needed.