Charlie Engle, encouraged by his broker, lied about his income on two mortgage applications for stated-income loans (also called ‘liar loans’ because no one was required to verify the numbers provided by applcants). An IRS agent started looking at Engle’s finances after he saw him in a documentary training to run marathons. The agent wondered how Engle could afford to train, and thus began an investigation that ended with Engle in prison, not for tax fraud, but for lying on his mortgage applications (it took a female undercover agent to wrestle a supposed confession out of Engle). “His punishment stands in stark contrast to that of the Countrywide chief executive Angelo Mozilo, who personally pulled in millions of dollars from his company’s embrace of low-documentation loans like Engle’s,” says the Huffington Post.
The eight plaintiffs, with a combined loss of nearly $18.7 million, say the agency’s negligence and misconduct caused their losses, and that they should’ve caught Stanford’s “massive” Ponzi scheme long before it collapsed. Last year, according to Bloomberg, the SEC’s inspector general faulted the agency and some specific employees for not taking action against Stanford sooner. They’d suspected Stanford was operating a Ponzi scheme for eight years before doing anything about it, the inspector general said.
Promising relief to investors already taken in by a bad investment (maybe through a pump-and-dump scheme), fraudsters swoop in and offer to help recover victims’ money by buying the bad shares, as long as the investors agree to pay “transfer fees” and other costs. It’s a double-hit; once they’ve got all the money they can, they’re gone and the bad investment is still bad. The so-called reload scams come and go in waves, says the Saskatchewan Financial Services Commission, and they’re seeing a lot of them rising up in the United States. They’ve got a warning, according to the Post-Leader: “Anything that’s asking you to send more money, good money to recoup the bad, you’ve got to really be careful.”
The Securities and Exchange Board of India, or SEBI, says it’s noticed that brokers and their employees have been circulating unauthenticated news and rumors via blogs and other social media with the potential to damage the markets. It wants that to stop, and says that brokers should put a code of conduct in place, restrict their employees’ access to blogs and keep records of all employee social media activities. || Earlier: Before you ‘friend’ the SEC
“The SEC claims that Spyglass Equity Systems cold-called suckers and induced them to invest in co-defendants Flatiron Capital Partners and Flatiron Systems, which supposedly had ‘stock trading systems … based on algorithms or computer models,’” according to the Courthouse News Service. But none of that was really true. The SEC says the scam netted the defendants over $3 million after investors poured money into worthless investments.
From the Wall Street Journal: Securities-fraud plaintiffs don’t often get good news when their cases reach the current Supreme Court, but this week the court, in a 9-0 decision, ”reaffirmed one of its earlier rulings that the duty to disclose hinges instead on whether a reasonable investor would regard an omitted fact as a significant part of the ‘total mix’ of information that affects a decision on whether to trade stock.” The case involved a company called Matrixx Initiatives Inc., the maker of Zicam nasal spra. Matrixx had received a number of reports that the spray caused a loss of smell, but didn’t disclose them because it concluded that the total wasn’t statistically significant. The company’s shares plunged nearly 70 percent in 2009 after the Food and Drug Administration issued a warning about the product, citing the reported health problems.
Rajat Gupta, a former director of Goldman Sachs & Co., says the Securities and Exchange Commission is trying to retroactively apply the Dodd-Frank financial reform law by bringing action against him before an administrative law judge, where he won’t have the right to a trial by jury, instead of in federal court. Gupta is accused of giving inside information to the founder of the Galleon Group hedge fund. The Courthouse News Service says that the SEC has brought cases against 27 other defendants but filed all of them in federal court. Gupta is asking the court to block the SEC from bring the case, because he says the retroactive application of the law would violate his right to due process. || More from Deal Book
Jonathan Weil says at Bloomberg.com that the Securities and Exchange Commission is jumping through hoops to not accuse any of the country’s major financial firms of cooking their books, despite the obvious evidence in front of them. That might be because in many cases, like at Fannie Mae and Freddie Mac, at least one government agency not only knew about but also sanctioned the accounting irregularities that contributed to their implosions. “The toughest challenge for the SEC will be finding violations that the government didn’t know about while they were going on,” Weil says.
The frenzy over Facebook’s pre-IPO trading might be attracting fraudsters, FINRA announced in a statement today. Private companies sometimes allow their employees and others with shares to make private trades ahead of public offerings, but because the markets in such shares aren’t well-regulated, it’s difficult to know who actually owns legitimate shares. FINRA says if investors aren’t careful, they could end up forking over cash only to find that they’ve bought non-existent shares.
233 FBI agents are assigned to investigate securities fraud cases, while 110 focus on corporate fraud. According to FBI Director Robert Mueller, the bureau had more than 2300 open financial investigations at the end of its 2010 fiscal year. Mueller gave those numbers at a Congressional hearing, after Rep. John Conyers (D-Michigan) asked why there hadn’t been more cases stemming from the financial crisis, according to Reuters.