Insider Purchases Highest in Four Years

I have always been intrigued by the investment action of corporate insiders, every since my first insider trading case over 20 years ago. Insiders do know more than the rest of us, and the correlation between their purchases and the price of their stock cannot be due solely to coincidence.

In any event, an interesting article in CNNMoney yesterday - insiders are buying their company's stock like mad.

Throughout the recent market turmoil, executives and directors of public companies have invested heavily in their own companies, according to a news report late Tuesday. Total insider buying in the United States reached $252 million in August, the highest level since 2003, according to the Financial Times. The month normally averages $186 million in such trades.

There is also a remarkable drop in insider sales.

Now if only someone would do the research and tell us which companies these insiders are buying......

Brokers Deal With SubPrime Woes

While you would never know it from the press and the significant drop in the markets, the country's retail stock brokers are taking the mess in stride.

The reality is, most retail investors' accounts should not be affected by the subprime problems directly. While an indirect investment, through a hedge fund or a derivative, might find its way into an investor's portfolio, most investors, or at least those with brokers, are not really exposed to the mess.

From Registered Rep magazine:

“If you’ve got a diversified portfolio of stocks and bonds and you don’t have too much debt on your house there isn’t much to worry about, yet,” says Greg Ghodsi, a Raymond James broker in Tampa, Florida. That isn’t to suggest Ghodsi hasn’t been busy lately, calling and emailing clients to reassure them he has a game plan as well as moving large sums of their money into safer waters. “In general we were 1 to 2 percent cash going into June, but we’ve been moving that to 10 to 20 percent since then,” he says. He’s also taking advantaged of depressed values to increase his clients’ fixed income positions.

At the same time, brokers report that clients are calling, and brokers are responding, with appropriate portfolio reviews and assurances of diversification.

Bear and its Brokers

On Wall Street raises an interesting question - "Will Bear's Woes Eat Into Broker's Wallets?"

While the article discusses the impact of the subprime woes on Bear Broker's personal portfolios, the real impact of this debacle is going to be the litigation, arbitration and regulatory fallout.

Brokers are usually the fall guys in market debacles. Just look back to the market timing cases and the research cases. The front line of the investor litigation and the regulatory push were the retail brokers. Firms threw their own brokers under the bus, in an effort to save the firm, and its management.

Now, we have subprime. And of course, it is going to be the broker's fault that customers invested in such vehicles - who else is going to bear the blame without putting up a significant fight?

Smart brokers are reviewing their client's portfolios, gathering documents to demonstrate that the recommendations and representations were made by the firm, and getting defense counsel lined up for the onslaught.

Merrill Grabs Advisors Producing $5.5 million From Rival UBS

Let the recruiting wars begin again! Merrill Lynch recruited a team of three producers, and their support staff, with $2.5 billion in assets under management and $5.5 million in trailing 12-month production away from UBS last week.

Estimates on the EFL are up to 11 million dollars. That estimate is undoubtedly high, but who says retail is dead?

Investment Banks to Start Trading Platform

Citigroup, Lehman Brothers, Merrill Lynch, Morgan Stanley and New York Mellon have announced that they are creating a private system to trade stocks of private companies.

The new system will allow companies to have their securities trade, without being public. The ramifications could be significant, as the companies should be able to avoid the rules governing publicly listed companies.

The system is scheduled to be active by September.

"Investor Fear Has Overtaken Reason" - Sentinel Seeks to Freeze Redemptions

Adding to the subprime problems, Sentinel Management Group, an Illinois money manager has asked for permission from the CFTC to halt investor withdrawals from its 1.6 billon dollars under management. Bloomberg is reporting that the firm's investments include short term commercial paper, investment-grade bonds and Treasury notes, and there was no indication that the subprime issues that have plagued other private funds are affecting Sentinel's investments.

However, according to Bloomberg, Sentinel has stated that "investor fear has overtaken reason" and the firm is concerne that it cannot meet redemption requests without selling securities at deep discounts and the resultant losses to the funds.

Brokers - if you clients are in hedge funds, you need to review those investments and prepare for the inevitable rash of arbitrations. Customers - if you have not already done so, the time is now to review your investments with your financial professional and decide on a course of action.

No To Hedge Fund Regulation

Commissioner Atkins of the SEC, in a recent speech, spoke about hedge fund registration. Commissioner Atkins was one of the two Commissioner who dissented from the hedge fund manager registration rule last year.

For more background, see Registration of Hedge Fund Managers - Bureaucracy without Benefit. Commissioner Atkins repeats many of his original comments. One significant comment which bears repeating, is that the SEC simply cannot afford to oversee any more entities.

Many commentators, including myself, noted that the Commission was already having difficulties regulating the brokers, mutual funds, public companies and investment advisers that it was already responsible for. It simply did not make sense to add more regulations which were of dubious value, to an already burdened agency.

Commissioner Atkins made an additional point. Hedge fund investors, "including the likes of Rupert Murdoch and Rupert Johnson, George Soros and George Lucas, Michael Bloomberg and Michael Milken" don't need the SEC to hold their hand or to protect them. Hedge fund investors are institutions or wealthy individuals. They have the financial acumen to look out for themselves or to hire someone to do it. They have the wealth to enable them to sustain a loss, and they have the knowledge and funds to sue the whomever is responsible should there be a fraud or other misconduct.

Commissioner Atkins also discussed the proposed changes to the accredited investor definition, the misguided attempt to exclude venture capital funds from regulation, and the status of the SEC's efforts to effectively monitor private funds.

The text of the speech is at http://www.sec.gov/news/speech/2007/spch080207psa.htm

SEC Steps Up Subprime Inquiries

According to a Reuters article this morning, the SEC is now looking at the books of forms and investment banks to determine whether the firms are properly calculating the value of subprime mortgage assets on their books.

Amid the controversy over subprime mortgages, and investor losses coming from these investments, analysts and investors are questioning the valuations, and whether firms are attempting to hide or minimize the losses from these obligations.

According to the article the firms who are expected to be examined are Goldman and Merrill, although Reuters did not dislose why it believes those two firms in particular are being scrutinized.

BNP freezes $2.2 bln of funds over subprime

France's biggest listed bank, BNP Paribas froze 1.6 billion euros ($2.2 billion) worth of funds on Thursday, citing the U.S. subprime mortgage sector woes that have rattled financial markets worldwide.

The move could add to the disasters that are looming for investors in the underlying hedge funds, whose ability to liquidate their holdings has been removed. While the ultimate impact will depend on the terms of the underlying investment, having your ability to sell your investment suspended can never be viewed as a good thing.

2nd Circuit Vacates Arbitration Award for Capping Attorneys Fees

Under the Federal Age Discrimination in Employment Act, a successful plaintiff is entitled to an award of attorneys fees. When an NASD arbitration panel denied a successful claimant's request for attorneys fees, a federal judge ordered the panel to do so.

The second time around, the employer's firm argued to the arbitrators that since the plaintiff's attorney was being paid on a contingency, that the fee award should be capped at that contingency.

I attempted to make the same argument to an arbitration panel many years ago, and my research found that such an argument was not supported by the case law. The underlying concept is that the agreement between the attorney and his client has no bearing on the statutory award of reasonable fees to a prevailing party.

The federal courts in New Yorka agree, because when, on the second time around, the arbitrators capped the legal fee at the amount of the contingency, the claimant moved to vacate again. The Second Circuit hedl that although deference is given to the decisions of arbitrators, decisions which are in manifest disregard of the law cannot be sustained. According to the Second Circuit, attorneys fees are mandatory in such a manner. Further, the US Supreme Court has previously held that a contingent fee agreement between a successful plaintiff and his attorney cannot be used as a cap on a statutory award of attorneys fees. BLANCHARD v. BERGERON, 489 U.S. 87 (1989) .

The Second Circuit vacated the award.

Another interesting aspect of the case. Accordig to the Law.com article, in awarding a sum which was the rough equivalent of the contingent fee, the arbitration panel also ordered the claimant's law firm to return the fees the claimant had previously paid. There have been prior court decisions holding that an arbitration panel has no jurisdiction over the attorneys who represent parties before them (as there is no agreement to arbitrate by the attorneys, only their clients have agreed to do so), but the Second Circuit when further.

Porzig's attorney was not before the arbitration panel in any manner other than as Porzig's counsel; Porzig was not before the Panel with respect to his relationship with his attorney; and neither Porzig nor Attorney O'Donnell had agreed to arbitrate a dispute, if in fact there was one, over their fee dispute," Hall wrote for the court in Porzig v. Dresdner Kleinwort, 06 Civ. 1212.

"The Panel here was plainly without jurisdiction to order Porzig's lawyer to pay back to his client the specified contingency fee."

Interesting case, although the decision is not on line, and curiously enough, the NASD ...err, FINRA, does not have either arbitration award online.

Gee, UBS Sued Again for Not Compensating Brokers

What is with this firm? InvestmentNews is reporting that a class action has been filed against UBS for undercompensating its brokers alleging that brokers were not paid the full 25 basis points a year on each $25,000 auction rate security purchased by the brokers' customers between 1993 and 2005.

The article calls the failure a computer error, but if the years are right, this went on for TWELVE YEARS!!!!

Never, in 25 years of practicing securities law have I seen a firm be accused so many times of stiffing its own brokers in so many different ways.

If you think UBS beat you on your compensation, you are probably not paranoid.

Former Brocade CEO Found Guilty on All Counts

Gregory Reyes, the former CEO of Brocade Communications, was convicted Tuesday on 10 felony counts relating to the backdating of stock options. Reyes was the first of a string of executives to be indicted on charges of misdating stock options. Most of those accusations involved backdated options granted to themselves, or frauds that stretch beyond changing dates. But Reyes' indictment accused him only of altering dates, and not of profiting directly from the scheme. His potential sentence is 20 years.

Merrill Broker Wins $1.6 Million in Defamation Suit

A NASD Arbitration Panel has awarded a Merrill Lynch broker $400,000 in compensatory damages plus $1.2 million in punitive damages for defamatory statements made by Merrill on the broker's U-5.

Registered Rep has a story on the award, which was decided under Florida law. As most of us are aware, the highest court in New York recently ruled that statements made on a U-5 are absolutely privileged, although brokers could still sue for expungement of defamatory comments.

New York law doesn't govern disputes arising in other states, as demonstrated by this award, and the $1.2 million in punitive damages, while unusual, demonstrates that arbitration panels will still protect brokers who are damaged by overzealous firms.

The award is online here, and more information is available at SECLaw.com

Bear Stearns Hedge Fund Sued

And here we go.........investor claims against brokerage firms, hedge funds and banks are going to start rolling in. Reuters is reporting that Bear Stearns has been hit with its first arbitration over the losses in two of its hedge funds.

According to Reuters, the claimant lost $500,000 and is blaming Bear for misleading him about its exposure to subprime mortgages.

While it appears that investor losses from subprime lending are going to be significant, the mere fact that an investor lost money in funds investing in such vehicles does not necessarily mean that there is a viable claim against the broker or the brokerage firm.

Investors who are contemplating filing claims would be wise to first have their case reviewed by a financial professional, or an experienced securities attorney, before pouring additional funds into the litigation process. Brokers who have recommended funds with significant subprime exposure should be reviewing those investments and, if necessary, consulting with outside counsel regarding potential exposure.

The brokerage firms are already gearing up for these cases.