Civil or Criminal Actions against companies or regulators

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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 29, 2011 8:04 pm

Section 219 of the Criminal Code states that, “Everyone is criminally negligent who (a) in doing anything, or (b) in omitting to do anything that it is his duty to do, shows wanton or reckless disregard for the lives or safety of other persons.” The provisions of Section 219 broadly state that for the purposes of the criminal negligence section, Section 219 of the Criminal Code, “duty” means a duty imposed by law.

Criminal cases have found that for criminal negligence to occur, a breach of a duty must represent a “marked” and significant departure from the standard of a reasonably prudent person in the circumstances. There must be more than mere failure to meet an OH&S or Criminal Code standard through inadvertence. There must be evidence of behaviour which shows complete disregard for, or indifference to the duty. As one court put it, there must be a finding of a “devil-may-care” attitude that shows a criminal standard has been met.

Securities Commissions in Canada meet both standards in my opinion, for the wanton and reckless manner in which they fail to protect the public interest while simultaneously selling out for loyalty, money, job security or other considerations to financial interests.
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Fri Aug 26, 2011 2:36 pm

Montreal Gazette
Two Mount Real investment victims awarded $460,053

Grocery store operators lost $232,000 when corporation collapsed in 2005


A couple whose retirement savings were invested in promissory notes of scandalwracked Mount Real Corp. have obtained a $460,053 judgment in Superior Court.

Grocery store operators Denis Guillemette and France Mercier and their company filed suit against the liquidators of investment manager iForum and the insurer of their former financial adviser, Yves Tardif.

They entrusted to Tardif all their savings from 1996 to 2005, with the instruction the money be invested only in secure assets.

Tardif's first investment for them was in offshore products he told them were guaranteed. Later, he added Mount Real notes, also described to them as risk-free and returning six to eight per cent annually.

They lost $232,000 when Mount Real collapsed in 2005.

Because the investments Tardif recommended and managed were neither secure nor guaranteed, and failed to preserve the clients' capital, he's professionally liable and so is the company that employed him, the plaintiffs argued.

The liquidators maintained that the alleged faults were by the adviser, not the firm. The insurer, Lloyd's, argued that Tardif had acted outside the areas of professional responsibility covered by his insurance policy.

Judge François Huot didn't see it that way.

Investment firms are responsible for the acts of their employees in the execution of their duties, he said, and none of the insurance exclusions invoked by Lloyd's applied in this instance.

Huot said the couple clearly had little investment knowledge, Tardif made little effort to get a clear picture of their needs, and his investment choices for them were concentrated, high-risk and volatile.

To the actual capital lost, he added a sum that a portfolio invested conservatively and competently would have returned over the period in question, producing a final figure of more than $460,000, jointly payable by Lloyd's and the liquidators.


Read more: ... z1WAo0R5hM
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Fri Aug 26, 2011 2:34 pm

Montreal Gazette

Mount Real class action can go ahead: Quebec top court


Janet Watson says many of the investors included in the lawsuit against Mount Real Corp. lost their life’s savings in the alleged scam and they are frustrated.

In what could be the first step toward recovery of some of the millions lost by investors in the Mount Real Corp. scandal, Quebec Superior Court Judge Jean-François Buffoni this week okayed a request to file a class-action suit for damages on behalf of 1,600 investors left holding an estimated $130 million of worthless promissory notes when the company was shut down in 2005. The suit targets former Mount Real executives Lino Matteo and Paul D’Andrea, the three accounting firms that successively verified the company’s books from 1993 to 2004 (Deloitte & Touche, BDO Dunwoody and Schwartz Levitsky Feldman), B2B Trust and Services Financiers Penson Canada Inc.
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Fri Aug 26, 2011 8:37 am Fraud is the new industry standard practice.

22 August 11

They Still Don't Get It

By Eliot Spitzer, Slate Magazine

Some people on Wall Street, and at the Wall Street Journal, speak as if the financial crisis never happened.

he art of the "big lie" is to repeat something often enough, and with a powerful enough megaphone, such that your distortions are not challenged. So it is with the Wall Street Journal's obsession with attacking and misrepresenting the multiple cases that I brought against both AIG and its former chairman and CEO, Hank Greenberg.

At stake is much more than the particular cases at issue. By trying to rewrite the narrative of the economic cataclysm we have lived through, the deniers are attempting to challenge the common-sense conclusions that flow from an accurate understanding of history. They are desperately trying to protect a particularly rabid, and ultimately damaging, anti-regulatory philosophy that has dominated the past 30 years. They are trying to protect a broken and misguided understanding of how markets really function, a view now openly rejected even by such staunch free-market advocates as Judge Richard Posner and former Fed Chairman Alan Greenspan. Acknowledging the propriety of any government prosecutions of corporate wrongdoing would make impossible their current effort to push back against even the government's minimal responses to the financial crisis.

So, in view of the Journal's recent editorial, a few facts are in order: Greenberg was removed as CEO of AIG by his own board - of its own volition - after his refusal to answer questions about his involvement in fraudulent reinsurance contracts that his company had created. Five people were convicted by a jury in Connecticut in 2008 for their role in these frauds. The federal prosecutor, in his summation, called Greenberg an unindicted co-conspirator in the scheme. In New York, the judge who will hear the case based on these facts, brought by the state when I was attorney general, called the case "devastating" and referred to AIG as a "criminal enterprise." AIG as a corporate entity settled the case with my office in 2006 by restating its financial results and paying a fine of $1.6 billion. Shareholders are now awaiting judicial approval of an additional $750 million settlement to compensate them for damages they suffered from these accounting frauds.

Contrary to the claims of the Journal's editorial, the cases against Greenberg and AIG have been both proper and successful. More to the point, perhaps, they have been necessary to the vindication of justice and ethics in the marketplace.

The Journal's editorial also seeks to disparage the cases my office brought against Marsh & McLennan for a range of financial and business crimes. The editorial notes that two of the cases against employees of the company were dismissed after the defendants had been convicted. The judge found that certain evidence that should have been turned over to the defense was not. (The cases were tried after my tenure as attorney general.) Unfortunately for the credibility of the Journal, the editorial fails to note the many employees of Marsh who have been convicted and sentenced to jail terms, or that Marsh's behavior was a blatant abuse of law and market power: price-fixing, bid-rigging, and kickbacks all designed to harm their customers and the market while Marsh and its employees pocketed the increased fees and kickbacks. Marsh as a company paid an $850 million fine to resolve the claims and brought in new leadership. At the time of the criminal conduct, Jeff Greenberg, Hank Greenberg's son, was the CEO of Marsh. He was forced to resign.

What does it mean that supposedly thoughtful voices in the corporate world continue to deny the simple fact that irresponsible behavior should be addressed head on, and the rules of conduct altered sufficiently to permit a sound foundation for future economic growth?

I fear that we have still not constructed a social contract or general understanding of the role of government in the marketplace that will bring things into balance - in terms of both individual behavior and collective responsibility. Maybe we are still living in the remaining hours of a fading regime, still addled by the warped perspective of too many who have done perhaps too well over the past decade or two. A case in point is Steve Schwarzman, the founder and CEO of Blackstone, a private equity firm. Schwarzman recently compared the attempt to tax the often astronomical fees earned by private equity managers as ordinary income - as they should be - to Hitler's invasion of Poland. This horrific statement, from someone who spent millions of dollars on his own birthday party, is an unfortunate reminder of the mind-set of at least some pockets of our corporate leadership. It is time for more enlightened voices in the corporate world to use their own megaphones.
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 22, 2011 4:12 pm

November 2, 2008
The Reckoning
From Midwest to M.T.A., Pain From Global Gamble
“People come up to me in the grocery store and say, ‘How did we get suckered into this?’ ”
— Marc Hujik, of the Kenosha, Wis., school board
On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan.
It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits.
“Every three months you’re going to get a payment,” he promised, according to a tape of the meeting. But would it be risky? “There would need to be 15 Enrons” for the district to lose money, he said.
The board and four other nearby districts ultimately invested $200 million in the deal, most of it borrowed from an Irish bank. Without realizing it, the schools were imitating hedge funds.
Half a continent away, New York subway officials were also being wooed by bankers. Officials were told that just as home buyers had embraced adjustable-rate loans, New York could save money by borrowing at lower interest rates that changed every day.
For some of the deals, the officials were encouraged to rely on the same Irish bank as the Wisconsin schools.
During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays.
But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally.
The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs.
The bank at the center of the saga, named Depfa, is now in trouble, threatening the stability of its parent company in Munich and forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany’s economic system.
“I am really worried,” said Becky Velvikis, a first-grade teacher at Grewenow Elementary in Kenosha, Wis., one of the districts that invested in Mr. Noack’s deal. “If millions of dollars are gone, what happens to my retirement? Or the construction paper and pencils and supplies we need to teach?”
The trail through Wisconsin, New York and Europe illustrates how this financial crisis has moved around the world so fast, why it is so hard to tame, and why cities, schools and many other institutions will probably struggle for years.

Ashley Gilbertson for The New York Times
IN WISCONSIN “This is something I’ll regret until the day I die,”
said Shawn Yde of the Whitefish Bay schools.
“The local papers and radio shows call us idiots, and now when I go home, my kids ask me, ‘Dad, did you do something wrong?’ ” said Shawn Yde, the director of business services in the Whitefish Bay district. “This is something I’ll regret until the day I die.”
The Royal Bank of Canada Was Selling Risk
Whitefish Bay’s school district did not intend to become a hedge fund. It and four nearby districts were just trying to finance retirement obligations that were growing as health care costs rose.
Mr. Noack, the local representative of Stifel, Nicolaus & Company, a St. Louis investment bank, had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools.
Mr. Noack told the Whitefish Bay board that investing in the global economy carried few risks, according to the tape.
“What’s the best investment? It’s called a collateralized debt obligation,” or a C.D.O., Mr. Noack said. He described it as a collection of bonds from 105 of the most reputable companies that would pay the school board a small return every quarter.
“We’re being very conservative,” Mr. Noack told the board, composed of lawyers, salesmen and a homemaker who lived in the affluent Milwaukee suburb.
Soon, Whitefish Bay and the four other districts borrowed $165 million from Depfa and contributed $35 million of their own money to purchase three C.D.O.’s sold by the Royal Bank of Canada, which had a relationship with Mr. Noack’s company.
But Mr. Noack’s explanation of a C.D.O. was very wrong. Mr. Noack, who through his lawyer declined to comment, had attended only a two-hour training session on C.D.O.’s, he told a friend.
The schools’ $200 million was actually used as collateral for a complicated form of insurance guaranteeing about $20 billion of corporate bonds. That investment — known as a synthetic C.D.O. — committed the boards to paying off other bondholders if corporations failed to honor their debts.
If just 6 percent of the bonds insured went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt. By comparison, the C.D.O.’s offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk.
The boards, as part of their deal, received thick packets of documents.
“I’ve never read the prospectus,” said Marc Hujik, a local financial adviser and a member of the Kenosha school board who spent 13 years on Wall Street. “We had all our questions answered satisfactorily by Dave Noack, so I wasn’t worried.”
Wisconsin schools were not the only ones to jump into such complicated financial products. More than $1.2 trillion of C.D.O.’s have been sold to buyers of all kinds since 2005 — including many cities and government agencies — an increase of 270 percent from the four previous years combined, according to Thomson Reuters.
“Selling these products to municipalities was pretty widespread,” said Janet Tavakoli, a finance industry consultant in Chicago. “They tend to be less sophisticated. So bankers sell them products stuffed with junk.”
From the Wisconsin deal, the Royal Bank of Canada received promises of payments totaling about $11.2 million, according to documents. Stifel Nicolaus made about $1.2 million. Mr. Noack’s total salary was about $300,000 a year, according to someone with knowledge of his finances. And Depfa received interest on its loans.
In separate statements, the Royal Bank of Canada and Stifel Nicolaus said board members signed documents indicating they understood the investments’ risks. Both companies said they were not financial advisers to the boards but merely sold them products or services. Stifel Nicolaus said its relationship with the boards ended in 2007. Mr. Noack now works for a rival firm.
“Everyone knew New York guys were making tons of money on these kinds of deals,” said Mr. Hujik, of the school board. “It wasn’t implausible that we could make money, too.”
A Bank Goes Global
By the time Depfa financed the Wisconsin schools’ investment, it had already become an emblem of the new global economy. It was founded 86 years ago as a sleepy German lender, and for most of its history had focused on its home market.
But in 2002 a new chief executive, Gerhard Bruckermann, moved Depfa to the freewheeling financial center of Dublin to take advantage of low corporate taxes. He soon pushed the company into São Paulo, Mumbai, Warsaw, Hong Kong, Dallas, New York, Tokyo and elsewhere. Depfa became one of Europe’s most profitable banks and was famous for lavish events and large paychecks. In 2006, top executives took home the equivalent of $33 million at today’s exchange rates.
Mr. Bruckermann was a gregarious leader who joked that he hoped to make all employees into millionaires. He divided his time between a London home and a vast farm in Spain, where he grew exotic medicinal plants. And his success fueled an arrogance, former colleagues say.
Mr. Bruckermann once told a trade publication that Depfa, unlike German banks, understood how to benefit from the global economy. “With our efforts, we are like the one-eyed man who becomes king in the land of the blind,” he was quoted as saying.
Mr. Bruckermann, who left the bank earlier this year, did not respond to requests for an interview.
But as Depfa grew, other European banks began competing with the firm. So executives stretched into riskier deals — the sort that would eventually send shockwaves across Europe and the United States.
Some of Mr. Bruckermann’s employees grew concerned about deals like one struck in 2005 with the Metropolitan Transportation Authority of New York, the agency overseeing the city and suburban subways, buses and trains.
For years, municipal agencies like the M.T.A. had raised money by issuing plain-vanilla bonds with fixed interest rates. But then bankers began telling officials that there was a way to get cheaper financing.
Bankers said that cities, like home buyers, could save money with adjustable-rate loans, where the payments started low and changed over time. What they did not emphasize was that such payments could eventually skyrocket. Such borrowing — known as variable-rate bonds — also carried big fees for Wall Street.
The pitches were very successful. Municipalities issued twice as many variable-rate bonds last year as they did a decade earlier.
But variable-rate bonds had a hitch: many investors would purchase them only if a bank like Depfa was hired as a buyer of last resort, ready to acquire bonds from investors who could find no other buyers. Depfa collected fees for serving that role, but expected it would rarely have to honor such pledges.
Mr. Bruckermann’s salespeople traveled the world encouraging officials to sign up for variable-rate loans. And bureaucrats and politicians, including some in New York, jumped in.
By 2006 Depfa was the largest buyer of last resort in the world, standing behind $2.9 billion of bonds issued that year alone. It backed a $200 million bond issued by the M.T.A.
But as Depfa grew, it became more reliant on enormous short-term loans to finance its operations. Those loans cost less, and thus helped the bank achieve higher profits, but only when times were good. Indeed, some employees were worried about that debt.
But Mr. Bruckermann plowed ahead, and it paid off. In 2007, even as the global economy was softening, Mr. Bruckermann persuaded one of Germany’s biggest lenders, Hypo Real Estate, to purchase Depfa for $7.8 billion. Mr. Bruckermann’s cut was more than $150 million. He left the company to grow oranges on his Spanish estate.
The Risks Turn Bad
Last March the delicate web tying Wisconsin, Dublin and Manhattan became an anchor dragging everyone down.
Mr. Yde, the director of business services for the Whitefish Bay district, began receiving troubling messages indicating the district’s investments were declining. Worried, he started coming into his office at dawn, before the hallways of Whitefish Bay High School filled with students.
As the sun rose, Mr. Yde searched for explanations by the light of his computer screen. He Googled “C.D.O.’s.” He called bankers in London and New York. Each person referred him to someone else.
Then notices arrived saying that the bonds insured by Whitefish Bay’s C.D.O.’s were defaulting. It became increasingly likely that the district’s money would be seized to pay off other bondholders. Most, if not all, of the $200 million would probably be lost.
As other districts received similar notices, panic grew. For some boards, interest payments on borrowed money were now larger than revenue from the investments. Officials began quietly warning that they might have to dip into school funds.
“This is going to have a tremendous financial impact,” said Robert F. Kitchen, a member of the West Allis-West Milwaukee school board. Officials say some districts may have to cut courses like art and drama, curtail gym and classroom maintenance, or forgo replacing teachers who retire.
Problems were emerging elsewhere, as well.
Depfa’s executives were realizing that bonds all over the world were declining in value, exposing the company to the possibility they would have to make good on their pledges as a buyer of last resort. And Depfa was still borrowing billions each month to cover its short-term loans. By autumn, the short-term debt of the bank and its parent company, Hypo, totaled $81 billion.
Then, in mid-September, the American investment bank Lehman Brothers went bankrupt. Short-term lending markets froze up. Ratings agencies, including Standard & Poor’s, downgraded Depfa, citing the company’s difficulties borrowing at affordable rates.
That set off a crisis in Germany, where officials worried that Depfa’s sudden need for cash would drag down its parent company and set off a chain reaction at other banks. The German government and private banks extended $64 billion in credit to Hypo to stop it from imploding.
“We will not allow the distress of one financial institution to endanger the entire system,” Angela Merkel, the German chancellor, said at the time.
That crisis spread almost immediately to the M.T.A.
The transportation authority, guided by Gary Dellaverson, a rumpled, cigarillo-smoking chief financial officer, had $3.75 billion of variable-rate debt outstanding.
About $200 million of that debt was backed by Depfa. When the bank was downgraded, investors dumped those transportation bonds, because of worries they would get stuck with them if Depfa’s problems worsened. Depfa was forced to buy $150 million of them, and bonds worth billions of dollars issued by other municipalities.
Then came the twist: Depfa’s contracts said that if it bought back bonds, the municipalities had to pay a higher-than-average interest rate. The New York transportation authority’s repayment obligation could eventually balloon by about $12 million a year on the Depfa loans alone.
On its own, that cost could be absorbed by the agency. But, as the economy declined, the M.T.A. had lost hundreds of millions because tax receipts — which finance part of its budget — were falling. And its ability to renew its variable-rate bonds at low interest rates was hurt by the trouble at Depfa and other banks. The transportation authority now faces a $900 million shortfall, according to officials. It is “fairly breathtaking,” Mr. Dellaverson told the M.T.A.’s finance committee. “This is not a tolerable long-term position for us to be in.”
In a recent interview, Mr. Dellaverson defended New York’s use of variable bonds.
“Variable-rate debt has helped M.T.A. save millions of dollars, and we’ve been conservative in issuing it,” he said. “But there are risks, which we work hard to mitigate. Usually it works. But what’s happening today is a total lack of marketplace rationality.”
In a statement, the transportation authority said that it was exploring options to reduce the cost of the Depfa-backed bonds, that its variable-rate bonds had delivered savings even during the current turmoil and that the agency had remained within its budget on debt payments this year.
However, the transportation authority has already announced it will raise subway and train fares next year because of various fiscal problems, and may be forced to shrink the work force and reduce some bus routes. Some analysts say fares will probably rise again in 2010.
The Depfa fallout doesn’t end there. Rating agencies have downgraded the bonds of more than 75 municipal agencies backed by Depfa, including in California, Connecticut, Illinois and South Dakota. Officials in Florida, Massachusetts and Montana have cut budgets because of C.D.O.’s or similar risky bets.
And Hypo, the German company that bought Depfa, last week asked the German government for financial help for the third time. Depfa has frozen much of its business, according to Wall Street bankers, and though it continues to honor its commitments, some wonder for how long.
The Wisconsin school districts have filed suit against the Royal Bank of Canada and Stifel Nicolaus alleging misrepresentations. Board members hope they will prevail and schools and retirement plans will emerge unscathed. The companies dispute the lawsuit’s claims. Mr. Noack is not named as a defendant and is cooperating with the school boards.
In Mrs. Velvikis’s classroom at Grewenow Elementary in Kenosha, students have recently completed a lesson in which each first grader contributed a vegetable to a common vat of “stone soup.” The project — based on a children’s book — teaches the benefits of working together. The schools have learned that when everyone works together, they can also all starve.
“Our funding is already so limited,” Mrs. Velvikis said. “We rely on parent donations for some supplies. You hear about all these millions of dollars that have been lost, and you think, that’s got to come out of somewhere.”
NPR will present reports on this topic throughout the week on “Morning Edition,” “All Things Considered” and “Weekend Edition Sunday” and on the Planet Money blog and podcast at
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 22, 2011 4:11 pm

The Looting of America: How Wall Street [Canada’s Royal Bank] Fleeced Millions from Wisconsin Schools

By Les Leopold, Chelsea Green Publishing
Posted on June 3, 2009, Printed on June 3, 2009

Wall Street investment houses went after the $100 billion saved in

school-district trust funds like Whitefish Bay's, and made a killing.

The following is an excerpt from Les Leopold's new book,
"The Looting of America" (Chelsea Green, 2009).

The Hooking of Whitefish Bay
The great economic crash of 2008 tore right through Whitefish Bay, Wisconsin, population 13,500—though you’d never guess it from looking around town.
Located just a few miles north of Milwaukee, this golden village exudes the hopeful self-confidence of the early 1960s. Whitefish Bay’s stately mansions offer breathtaking views of Lake Michigan from cliffs that rise a hundred feet above the shoreline. As you head inland on its tree-lined streets, the houses slowly shrink back into sturdy, middle-class neighborhoods. The stores on Silver Spring Drive, its main shopping strip, have survived despite fierce competition from the nearby Bayshore Mall (a self-contained ultramodern shopping village with faux streets, a faux town square, and real condos). Whitefish Bay also supports an art deco movie theater that serves meals while you watch the show, and a top-notch supermarket, fish market, and bakery. Nothing is out of place—except you, if you happen to be brown or black. Whitefish Bay is 94 percent white and only 1 percent black. There’s a reason the town’s unfortunate moniker is White Folks Bay.
Yet this white-collar town voted for Obama—and has always voted for its schools, which are considered among the best in the state. Its residents’ deep pockets supply the school system with all the extras: In 2007, $700,000 in donations provided “opportunities, services and facilities for students.” The investment has paid off. An average of 94 percent of Whitefish Bay’s high school graduates go on to college immediately. And the school dropout rate is less than half of 1 percent.
The school district takes its fiscal responsibilities seriously. It has set up a trust fund to pay benefits, primarily health insurance, for retired school employees. When these benefits (called “Other Post-Employment Benefits” or OPEB) were originally negotiated, the expense was modest. But then health care costs exploded. What’s more, accounting rules now require that school districts amortize these costs and post them on their books as a liability each year. Whitefish Bay, like many other school districts, became worried about how to meet these liabilities.
Whitefish Bay is a town full of financially sophisticated residents, including its school managers. They sought to pump up the OPEB trust fund quickly so they could keep their promises to retirees. As responsible guardians of the town’s resources, they looked for the highest rate of return at a minimal risk to the fund’s principal. As Shaun Yde, the school district’s director of business services, put it, the goal was to “guarantee a secure future for our employees without increasing the burden on our taxpayers or decreasing the funds available to our students to fund their education.”
Meanwhile, Wall Street investment houses had set their sights on school-district trust funds like Whitefish Bay’s. They hoped to persuade districts to stop stashing this money—valued at well above $100 billion nationwide in 2006—in treasury bonds and federally insured certificates of deposit (CDs). Wall Street’s “innovative” securities could provide higher returns—not to mention more lucrative fees for the investment firms.
So an old-fashioned financial romance began: Supply (Wall Street’s hottest financial products) met Demand (school districts seeking to build up their OPEB trust funds). It looked like a perfect match.
In the Milwaukee area, Supply was represented by Stifel Nicolaus & Company, a venerable, 108-year-old financial firm, which promised to put “the welfare of clients and community first” as it pursued “excellence and a desire to exceed clients’ expectations . . .”
As a national firm based in St. Louis, Stifel Nicolaus was fortunate to be represented in Milwaukee by David W. Noack. According to the New York Times, “He had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools.” School boards repeatedly referred to him as their “financial advisor”—a label he never refuted.
In 2006, Mr. Noack, an avuncular, low-key salesman (he preferred to be called a banker), urged the Whitefish school board and others in Wisconsin to buy securities that offered higher returns than treasury notes but were just about as safe. He had recently attended a two-hour training session on these new financial products, so he was confident when he assured the officials that they were “safe double-A, triple-A-type investments.” None of the investments included subprime debt, he said. And the deal conformed to state statutes, so the district would be erring on the conservative side. In fact, Noack said, the risk was so low that there would have to be “15 Enrons” before the district would be affected. For the schools to lose their investment, “out of the top eight hundred companies in the world, one hundred would have to go under.”
As in many romances, one party seduces and the other is seduced. Noack certainly came across as a caring, considerate suitor. He started his sales drive by inviting area school administrators and board members to tea, “with food and beverage provided by Stifel Nicolaus,” making the gathering seem more like a PTA fund-raiser than a high-powered investment pitch. He merely wanted to introduce the local officials to these new “AA-AAA” investments, as the invitation pointed out.
In a series of video- and audiotapes recorded by the Kenosha school board—which later joined forces with Whitefish Bay and three other nearby school districts to invest with Noack—you could discern a pattern to his pitch.
First he would stress the enormity of the financial problems the school districts faced in meeting their long-term retiree liabilities. For example, during a seventeen-minute spiel recorded on July 24, 2006, he reminded school board members that, based on Stifel’s actuarial computations, the district had an $80-million post-retiree liability. (In an “updated” Stifel study presented a year later, the estimate rose to $240 million.) In fact, Noack spent much more time describing the extent of the liability and how the district would have to account for it than he did explaining his proposed multimillion dollar investments and loans. Not to worry. He said that he had “spent the past four years” developing investment solutions for such liability problems.
Next Noack stressed that he was not about to take unacceptable risks with the schools’ money. His recommended investments were extremely conservative, his approach cautious. As he put it in the July meeting, “our program ... is using the trust to a certain degree [and] a small portion of the district’s contribution, investing the money, making the spread in double-A, triple-A investments and funding a little bit at a time over a long period of time ... and what we make is as risk-free as we can get. . . .”
He also nudged the school district along with a bit of peer-group pressure, describing how other Wisconsin districts were working with him on similar investments. There was power in numbers, he told them. By working together with other districts, they would “increase their purchasing power,” a phrase he repeated many times.
Noack made it seem as if the districts’ collective “purchasing power” had banks and investment houses lining up to compete for their business, offering them the lowest-cost loans and highest rates of return. He was soon going to be “bidding out” the districts’ packages and he was sure he was going to get them the best rates.
To take the edge off the enormity of the investment Noack was pushing, he ended his pitch by asking the school board to pass resolutions to “authorize but not obligate” its financial committee or officials to make the investment if and when the rates seemed favorable. He never asked the boards to make a final commitment then and there. Instead, he conveyed the sense that even after the vote, they weren’t committed to anything.
But the seduced are rarely passive. In this affair, several key board members helped the process along. On the Kenosha video­tapes, for example, one board member, Mark Hujik, a hulking, ex–Wall Street player who now owns a Wisconsin financial advisory service, repeatedly sealed the deals. The self-confident Hujik never asked a question he didn’t already know the answer to. He made sure everyone knew that he knew the ins and outs of finance. At a key meeting before Kenosha signed on to its first deal, he stressed that the tens of millions in loans the board would be taking out were “moral” but not “contractual” obligations on behalf of the town. He implied that if things went wrong, the town really wasn’t on the hook for $28.5 million in loans. (Unfortunately, he didn’t mention that the town could still be successfully sued and see its debt ratings plummet if it defaulted on its “moral” financial obligations. And when a town’s debt rating falls, it faces higher interest rates for all its other borrowing needs, assuming anyone will ever lend to it again.)
Together, Hujik and Noack wooed the parties with intimate bankerspeak that conveyed confidence and expertise. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like “million” and “dollars” disappeared from their vocabulary; instead they referred familiarly to “twenty” and “thirty” (as in thirty million dollars). Perhaps the slang and technical lingo distracted the officials from the risky nature of their financial decisions. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like “million” and “dollars” disappeared from their vocabulary; instead they referred familiarly to “twenty” and “thirty” (as in thirty million dollars).
Like any romance, at first everything seemed simple. There was so much trust. As one Kenosha board member said to more experienced members before a key authorization vote: “I’m not a financial person. So if you say it should be done, I will follow your lead.”
Listening to seven taped meetings, it’s hard not to notice the school officials’ consistent deference to Noack and their inability to ask him basic or troubling questions. No one wanted to seem dumb, though nearly all decidedly were not “financial persons.” The district officials never asked questions such as: “How will the rate of return compare to government-guaranteed securities?” Or, “If Wall Street goes into a slump, how much could we lose?” Unless you’re Woody Allen, you don’t talk about the prospect of breaking up at the beginning of a romance. When the votes were taken, no one dissented. Demand and Supply consummated their relationship.
To the Wisconsin school districts, the deal seemed safe. They would pool their money to increase their “purchasing power.” They would borrow more money (“leverage,” as the big boys call it) and invest it in something called a “synthetic CDO” for seven years. In a handout he gave to the boards on July 24, 2006, Noack illustrated how their trust fund for retirees’ benefits could accumulate almost $9 million in seven years by borrowing and investing $80 million. These CDOs would pay them over 1 percent more than what it would cost to borrow the money. The more the schools borrowed, the more they would make. It was practically free money. What was not to like?
The complexity of the deal alone should have given the investors pause. Their newly purchased “Floating Rate Credit Linked Secured Notes” were a lot more complicated than federally insured CDs or treasury notes. In fact they were more convoluted than anything any of them had ever bought or sold, individually or collectively. But Noack had done his job well by making the purchases seem straightforward and prudent.
According to court documents, by the time Noack was through, the five school districts had put up $37.3 million of their own funds (most of it raised through their towns’ general-obligation bonds) and borrowed $165 million more from Depfa, an aggressive Irish bank owned by a much larger German bank. The net investment after fees [$12.3-million] was $200 million. With that money, the school officials bought three different bondlike CDO financial instruments from the Royal Bank of Canada—Tribune Series 30, Sentinel Series 1, and Sentinel Series 2. With a little Wall Street magic, a big payoff seemed like a sure thing.
But what if Wall Street took a tumble and the value of the school boards’ investments fell below the value of their loans? The school officials didn’t even ask the question, but Noack already had the answer: “If we stick to all investment-grade companies, you still got to have ten percent . . . go under. You’re talking, I would assume, and I’m not an economist, but that’s a depression.”
The districts seemed oblivious to risk, even after securing disappointing returns on their first investments. There was a huge gap between the rates Noack had expected to lock in and what they finally got. The entire point of investing in CDOs was to get a rate of return that was substantially higher than what it would cost to borrow the money. The difference is called “the spread.” Every quarter of a year you were supposed to collect what you’d earned through the spread and reinvest it. Noack had predicted that the CDOs would yield the school districts about 1.5 percent above what it would cost to borrow the money.
1. In the first purchase, Tribune Series 30 for $25 million, the spread was 1.02 percent.
2. However, on the next CDO purchase, Sentinel 1 for $60 million, the spread was only 0.67 percent.
3. In their final deal, Sentinel 2 for $115 million, the spread was 0.82 percent.
The idea was that after the seven years the districts could redeem their CDOs, like bonds, and have enough money to pay off the Depfa loan as well as the general-obligation bonds taken out by the town. Of course, this assumed that the CDOs would be safe and sound for seven years.
Unfortunately the CDOs were not the secure investment Noack had thought they would be. According to the New York Times’ analysis:
If just 6 percent of the bonds ... went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt. By comparison, the CDO’s offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk.
But this comparison missed the true alchemy of the deal, and its great attraction to the local school officials. Buying a safe treasury bond would have required the schools to put up $35 million from their general-obligation borrowing—money they would have to pay back and on which they would have to pay interest to the bondholders. In fact, if the districts had made such an investment, they would have had to pay more in interest than the treasury bonds would have yielded. That investment would make little sense.
The CDO deal was complex but it seemed to have enormous advantages: Not only would it supposedly produce $1.8 million a year in revenues, it would also pay for all the interest on the general-obligation bonds, as well as the debt itself, at the end of the seven years. That is, returns from the CDOs would cover the $165 million in loans from Depfa and the $35 million of collateral the schools put up through the general-obligation bonds. All in all, the deal was supposed to generate $1.8 million a year, free and clear. Now that’s fantasy finance.
Hujik certainly had bought into the dream. “Everyone knew New York guys were making tons of money on these kinds of deals,” he said. “It wasn’t implausible that we could make money, too.”
The Wisconsin officials didn’t see that their quest for this pot of gold had created two insidious problems.
First, town elders were now ensnarled in a series of complicated financial transactions that yielded considerable fees for bankers and brokers. The districts paid fees to issue their general-obligation bonds; they paid fees to service those payments; they paid fees to borrow the funds to buy their CDOs; they paid fees to buy their CDOs, and they paid fees to collect the loan payments and to distribute the CDO payments. Someone would be getting rich off all this, but it wasn’t the five Wisconsin school districts.
Second, when little fish try to swim with big fish, they better be prepared for risk—lots of it. No one on either side of the deal, at least on the local level, had read the fine print. They couldn’t have, since the detailed documents—the “drawdown prospectuses”—were delivered weeks after the securities were purchased. They wouldn’t have understood them anyway. In this romance between Supply and Demand, everyone was in over their heads. The “experts” in the room (on both sides) sounded cautious, confident, and knowledgeable. But in truth, Noack had no idea what he really was selling, and school district officials like Hujik and Yde had no idea what they really were buying. It is likely that both parties truly believed they were handling the equivalent of a mutual fund made up of highly rated corporate bonds. They weren’t.
It’s hard to blame the Wisconsinites for not understanding the transaction: They were dealing with one of the most complex derivatives ever designed—a synthetic collateralized debt obligation, which is a combination of two other derivatives: a collateralized debt obligation (CDO) and a credit default swap (CDS). This is the kind of security that Federal Reserve chairman Ben Bernanke called “exotic and opaque.” Investment guru Warren Buffet called it a “financial weapon of mass destruction.” In other words, one of the most dazzling—and dangerous—illusions in all of fantasy finance.
As we’ll see, these investments were truly mysterious in their design and in their execution. One of the most “exotic” features was that these securities didn’t give the buyer ownership of anything tangible at all. The buyer received no stake in a corporation, as they would have with a stock or bond. Instead, the school districts, without realizing it, had become part of the trillion-dollar financial insurance industry. (It was not called insurance, however, since insurance is, by law, heavily regulated.) In fact, they had put up their millions, and had borrowed millions more, to insure $20 billion worth of debt held (or bet upon) by the Royal Bank of Canada. And that debt included some very nasty stuff: home equity loans, leases, residential mortgage loans, commercial mortgage loans, auto finance receivables, credit card receivables, and other debt obligations. Technically, Mr. Noack may have been correct when he said that the schools didn’t own any subprime debt. They didn’t own anything. Instead, they had agreed to insure junk debt. The revenue they hoped to receive each quarter was like receiving insurance premiums from the Royal Bank of Canada, which was covering its bets on the junk debt.
What’s more, although the synthetic CDOs had been rated AA, as Noack had touted, those ratings were bogus. The CDOs were drawn from a vast pool of junk debt that had been chopped up into slices based on risk. The top slices had the least risk and the bottom slices had the most risk. Unbeknownst to both Noack and the school districts, the districts’ $200 million of borrowed money was used to insure a slice near the bottom of the barrel! They would be on the hook for paying out claims if the default rate hit about 6 percent, a number it is fast approaching. Neither savvy Dave Noack, nor confident Mark Hujik, nor concerned Shawn Yde appeared to have any understanding of this frightening reality.
But the big fish—the CDO creators and peddlers at the top levels—knew what they were doing. The Canadian bank received $11.2 million in up-front fees. (That’s right, the bank was, in effect, buying insurance, yet the school districts were paying the bank up-front fees for the honor of insuring the bank’s junk debt.) The investment sales company took $1.2 million in commissions. We don’t know precisely how much Depfa got for the loans, but it was substantial.
Whitefish Bay and the other school districts got something substantial too: nearly all of the risk. The school districts are about to lose all of their initial $37.3 million. They will also lose another $165 million of the money they’d borrowed from Depfa. As soon as the default rate is reached, $200 million will go to pay insurance claims to the Royal Bank of Canada. And the schools still will owe the full $165-million Depfa loan, and they will still owe on the bonds they had issued to raise much of their $37.3 million in collateral. The risk of reaching total default currently is so high that Kenosha’s entire piece of the CDO investment ($35.6 million) was valued at only $925,000, as of January 29, 2009—a decline in value of $36,575,000. Now the school districts are paying hefty fees not just to bankers but also to lawyers, as they sue to unwind the deal and recover damages.
“This is something I’ll regret until the day I die,” said Shawn Yde of the Whitefish Bay schools.
He’s not alone. As National Public Radio and the New York Times reported in a joint article, “Wisconsin schools were not the only ones to jump into such complicated financial products. More than $1.2 trillion of CDOs have been sold to buyers of all kinds since 2005—including many cities and government agencies. . . .”
Did these public agencies deserve any protections? A prudent rule might be to forbid investment houses to peddle such risky securities within a thousand yards of a school district. But there are no rules, since these “exotic and opaque” financial securities are still entirely unregulated. (When the Kenosha Teachers Association discovered that the securities peddled to the school districts were identical to those that sunk AIG, it requested that the Federal Reserve remove them from the school districts just as they have done for AIG—an eminently fair and reasonable request in my opinion. See chapter 8 for more on AIG.)
Whitefish Bay, Kenosha, and the other three districts made missteps and miscalculations. They were naive. As Mark Hujik candidly said, they saw a pot of gold on Wall Street and wanted their piece. But they were had. We all were. We know that something has gone terribly wrong not just in Whitefish Bay but with our entire economy. There’s a connection between the junk that was peddled to the “Wisconsin Five” and the crash of the global financial system. In fact, if we can understand exactly what David Noack sold to Whitefish Bay and why, we will also understand how the economy collapsed, and what needs to change to prevent this from happening again.
Our trail will lead to an examination of financial booms and busts, including the Great Depression. And those of us with strong stomachs will also learn more than we ever wanted to know about CDOs, CDOs-squared, synthetic CDOs, and credit default swaps—those exotic instruments that swamped Whitefish Bay.
Along the way, we will see how bankers, traders, and salespeople pocketed hundreds of millions of dollars by selling risk all over the world as if it were a collection of predictable Swiss watches. And we’ll puzzle over why Alan Greenspan, Robert Rubin, and Ben Bernanke fought so hard to keep these dangerous financial instruments unregulated.
We’ll tackle the “logic” of free marketeers who claim that the meltdown is the fault of low-income homebuyers who got in over their heads. We’ll also marvel at how, in response to the financial meltdown, former treasury secretary Paulson and friends blew open the U.S. Treasury vault so that Wall Street could walk off with a trillion dollars . . . and counting.
And once we’ve put all the puzzle pieces together, we’ll use our new understanding to formulate reforms that might protect us from the fantasy-finance fiasco that is harming not just Wisconsin and the rest of America, but the whole world.
Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America (Chelsea Green Publishing, 2009).
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 22, 2011 4:10 pm

Globe and Mail

SEC launches suit against U.S. broker in RBC case

jeff gray — LAW REPORTER
Globe and Mail Update
Published Wednesday, Aug. 10, 2011 7:27PM EDT
The U.S. Securities and Exchange Commission has launched a civil fraud case against brokerage Stifel Nicolaus & Co. Inc. in a long-running battle over risky derivatives provided by Royal Bank of Canada (RY-T 51.411.683.38%) and sold to five Wisconsin school districts.
The SEC’s complaint, filed Wednesday in federal court in Milwaukee, accuses the St. Louis-based Stifel and its former senior vice-president of fraud in the 2006 sale of about $200-million (U.S.) in complex derivatives, that later collapsed, to the school boards.
More related to this story
Derivatives deals land RBC in legal case
Banks brace for fallout from debt storm
Canadian banks raise cash as debt feud drags on
The SEC alleges that Stifel misrepresented the risky investments as safe. Its complaint does not label RBC as a defendant. The allegations have not been proven in court. In a statement, Stifel vowed to “vigorously defend” itself.
The derivatives, purchased with mostly borrowed money, were notes linked to the performance of collateralized debt obligations (CDOs), similar to those later notorious for their role in the 2008 financial crisis.
The school districts had hoped the investments would cover the rising costs of health benefits for retired employees. The school boards launched their own lawsuit against Stifel and RBC in 2008, accusing both of fraud. Those allegations are unproven and the case is still in court. Both Stifel and RBC deny the allegations, and point fingers at each other in court filings.
The SEC lawsuit filed Wednesday names only Stifel and its former senior vice-president, David Noack, as defendants. “Stifel and Noack induced the School Districts to invest in complex financial instruments through a series of falsehoods and misrepresentations,” the SEC alleges in its complaint.
The SEC alleges that Stifel knew that the school boards were “risk averse” yet “materially misled” them about the risks of products normally reserved for highly sophisticated investors like hedge funds.
Citing a taped sales pitch, the SEC says Mr. Noack reassured the school boards that the investments would be safe unless there were “15 Enrons.”
RBC acknowledged in May that its role in the deals was under investigation by the SEC.
In a June court filing, Stifel blamed RBC for the mess. Stifel alleges that RBC had made as much as $14-million in “hidden profits” in the deal, and hid those profits and the derivatives’ risks in order to preserve the products’ credit rating. None of these claims have been proven in court.
On Wednesday, an RBC spokeswoman denied Stifel’s allegations. “Stifel’s math about our profits on the transaction is flat out wrong,” spokeswoman Katherine Gay said. “In fact, we lost money.”
Ms. Gay said RBC “never misrepresented” its estimated profits to Stifel or the school districts. She said the derivatives were designed according to a request-for-proposals put out by Stifel, which conceived of the investment plan and “represented to us in writing” that Stifel had deemed the investment suitable for the school boards.
“Stifel’s claims are meritless and we strongly deny them. We also take exception with Stifel’s strategy to deflect blame to other parties without recognizing its central role in the school districts’ losses,” Ms. Gay said.
Although RBC is not named as a defendant, the SEC’s 44-page complaint does mention the bank. The SEC alleges that Stifel asked potential CDO providers, including RBC, to attend a July, 2006, meeting with the school districts. The SEC also says several other firms declined, with one saying it “could not get comfortable” selling the derivatives to the school boards.
Ms. Gay said that until seeing the SEC complaint, RBC was unaware that other firms had declined to participate.
The SEC complaint also alleges that before the first sale of derivatives, RBC and Stifel disagreed about which of them would serve as the principal because neither wanted “to sell directly to the school districts.” The SEC says RBC told Stifel “it did not want to bear responsibility for determining the suitability of the investments for the school districts.”
Ms. Gay said RBC felt that Stifel should actually sell the derivatives to the school boards, since they were long-time clients of Stifel, not RBC.
A lawyer for the school boards, C. J. Krawczyk, welcomed the SEC’s move but said it would not deter his clients from continuing their lawsuit against Stifel and RBC.
More related to this story
JPMorgan to pay $153.6-million in SEC case
Senate panel slams Goldman in scathing crisis report
SEC charges U.S. investment firm with fraud
SEC widens probe of Wall Street
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 22, 2011 4:09 pm

Globe and Mail
Derivatives deals land RBC in legal case

Published Tuesday, Aug. 09, 2011 7:26PM EDT
Last updated Wednesday, Aug. 10, 2011 7:19PM EDT
The U.S. Securities and Exchange Commission is investigating subsidiaries of Royal Bank of Canada (RY-T51.411.683.38%) for their role in the 2006 sale of nearly $200-million (U.S.) in risky derivatives to five Wisconsin school districts – an investment rendered next-to-worthless after the financial crisis.
The sales saw the school boards, using mostly borrowed money, invest in financial products known as collateralized debt obligations (CDOs), derivatives similar to those that would later became notorious in the near-collapse of the U.S. banking system in 2008.


investors, the lawsuit alleges, “carried a perpetual risk of collapse.”

First Posted: 8/11/11 03:24 PM ET Updated: 8/11/11 03:33 PM ET

Sec Sues RBC Subsidiary For Fraud in Wisconsin School District Deals – Two Years Late

William Alden
NEW YORK – The Securities and Exchange Commission has accused a brokerage firm of duping five Wisconsin school districts into placing highly risky bets with public money – bets that resulted in fat fees for the broker and devastating losses for the public.
The case exemplifies the kind of behavior that worsened the fallout from the most punishing financial crisis in generations: A firm peddles an opaque product to investors without fully describing how risky the product actually is, leading to the investors' ruin.
But the SEC is late to the game. The school districts themselves filed a lawsuit in 2009, leveling essentially the same accusation. Now, more than two years later, the federal government is filing a complaint, seeking injunctions and penalties.
With the economy still wounded from the financial crisis, experts say the SEC needs more firepower to root out the bad financial actors and ensure a meltdown doesn't happen again. The financial industry became more complicated than ever before in the years leading to the crisis, and SEC officials say they're still learning how to police it.
"Enforcement needs greater coordination," said Joseph S. Fichera, chief executive of New York-based financial advisory firm Saber Partners and a former expert adviser to the SEC. "The federal government could do that, but Congress needs to be supportive of it. It's like medicine: An ounce of prevention would be better than a pound of cure."
The SEC contends that in this case, the nature of the investments that went bad for the school districts necessitated a particularly deliberative process of investigation.
"These are complex products," said Elaine C. Greenberg, who heads the SEC's Municipal Securities and Public Pensions Unit. "We had to make sure we understood what the transaction was about."
Nearly three years have passed since the financial crisis, and many experts have said the federal government's approach to law enforcement has been lacking. None of the major actors has been convicted of wrongdoing, and the most significant fine levied by the SEC – a $550 million settlement with Goldman Sachs last year – amounted to less than a week's worth of revenue for the firm.
The SEC's challenges are compounded by other arms of government. As its workload has increased, members of Congress have insisted on starving it of funds – despite repeated insistence from lawmakers and regulators that the agency needs more money and more staff to carry out its operations.
But with lawmakers intent on trimming the federal budget, the SEC has come under fire. A House panel approved a measure in June to keep funding for the agency flat next year at $1.2 billion. The Obama Administration has asked to raise the agency's budget by about $200 million for 2012.
To an extent, delays in SEC enforcement are inevitable. Unless it's taking emergency action, the agency generally conducts full investigations before filing a suit. That contrasts with the procedure in private lawsuits, in which lawyers can gather evidence after the case has been brought.
But there's another reason this suit took so long: The SEC units in charge of it didn't even exist until last year.
As part of an effort to stay as sophisticated as the industry it polices, the SEC created specialized units last year, including the Municipal Securities and Public Pensions Unit and the Structured and New Products Unit, which together brought this Wisconsin school district case.
In January 2010, the SEC installed chiefs for those units, which then grew over the coming months. The municipal unit and the structured products unit did not have full-fledged staffs until the spring, their respective chiefs said in interviews.
"I do think in these areas we're getting smarter," said Kenneth R. Lench, who heads the structured products unit.
"In the old days," he said, "there was no specialization. It was just whatever came in the door, whoever had time."
In this case, filed on Wednesday, the SEC has accused the St. Louis-based brokerage Stifel, Nicolaus & Co. and one of its former executives of misrepresenting particularly arcane investments known as synthetic collateralized debt obligations. The school districts that bought notes tied to the products were effectively guaranteeing a portfolio of corporate bonds against default without fully understanding the risks they were taking on, the agency said.
The school districts invested funds for employee benefits and borrowed more money in an attempt to magnify their returns. The former Stifel executive named in the suit, David Noack, was a trusted adviser to these school districts.
"Stifel and Noack induced the School Districts to invest in complex financial instruments through a series of falsehoods and misrepresentations," the SEC said in the complaint. "Stifel and Noack knew that the School Districts were risk-averse, and they knew that the preservation of capital was of paramount importance."
The brokerage told the school districts that it would take "15 Enrons" for these investments to fail, according to the SEC complaint and the original lawsuit filed by the districts. In fact, it took far less than that.
The school districts weren't told that the portfolio of corporate bonds in one of the deals was performing badly from the beginning, and that a portion of the credits was subsequently downgraded, the SEC said.
By 2010, the school districts' $200 million investment had been totally wiped out. More than four-fifths of that investment was funded by borrowed money, which made the losses far worse.
Stifel pushed back against the SEC's allegations in a statement, saying it would "vigorously defend" itself and laying blame on another firm involved in the deals.
"Based on what we knew in 2006, the investments were suitable," Stifel said in the statement.
Such complicated deals are a rarity for municipal investors, said Matt Fabian, managing director of the Concord, Mass.-based Municipal Market Advisors.
"This is a different kind of thing than anybody else in the muni world at least has seen," Fabian said. "In general, the SEC has become more activist in the municipal space."

From: Joe Killoran []
Sent: Wednesday, June 03, 2009 6:12 PM
To: Right Hon. PM Harper Stephen (; Hon. James M. Flaherty, Minister of Finance (

Subject: FW: The Looting of America: How Wall St. (RBC Canada) Fleeced Millions from Wisconsin Schools

The Wisconsin school officials bought three different bondlike
CDO financial instruments from the Royal Bank of Canada—

1. Tribune Series 30--$25 million,
2. Sentinel Series 1--$60 Million, and
3. Sentinel Series 2-- $115 Million.

With a little Wall Street magic, a big payoff seemed like a sure thing.

The Canadian bank received $11.2 million in up-front fees.
(That’s right, the bank was, in effect, buying insurance, yet the
school districts were paying the bank up-front fees for the honor
of insuring the bank’s junk debt.)

The investment sales company took $1.2 million in commissions.
We don’t know precisely how much Depfa got for the loans, but it
was substantial.
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Aug 22, 2011 4:07 pm


August 20, 2011

Finger-Pointing in the Fog


UNEARTHING the story of the financial crisis is like conducting an archaeological dig. New shards keep emerging from the dust.

Here’s an interesting find. The Securities and Exchange Commission has sued Stifel Financial, a regional brokerage firm in St. Louis, accusing it of fraud in connection with complex debt securities it recommended to five Wisconsin school districts in 2006. Rather than settle with the commission, as many firms do, Stifel is defending the matter.

The S.E.C. sued Stifel on Aug. 10 because the firm advised the school districts to buy the three ill-fated securities, which the regulator said were unsuitably risky for unsophisticated investors. David W. Noack, the firm’s sales representative, misled school district officials when he told them that the deals, involving corporate bonds and rated AA-minus, were nearly as safe as United States Treasuries, the S.E.C. said. The Wisconsin school districts lost tens of millions of dollars on a $200 million investment, most of which was borrowed.

Stifel earned $1.6 million in commissions. But it did not create the securities — and this is where the case gets murky and interesting. Royal Bank of Canada built the failed investments, using parameters set out by Stifel and secretly profiting on the deal, Stifel said. The S.E.C. has not sued the bank.

In a lawsuit against Royal Bank of Canada, Stifel points to internal bank documents indicating a $5.4 million profit on two of the Wisconsin deals. Stifel also maintains that Royal Bank of Canada hid these and the third deal’s profits and had undisclosed conflicts as the deals’ originator. As such, RBC failed to abide by the contract with the school districts requiring “complete expense and fee transparency and disclosure,” Stifel said.

Kevin Foster, a Royal Bank of Canada spokesman, called Stifel’s allegations meritless and said the firm was trying to deflect blame to others for its central role in the troubled investments. “We never misrepresented our estimated profit to Stifel or the districts,” Mr. Foster said in a statement. “Stifel’s math is flat-out wrong and based on erroneous assumptions. The transactions were not profitable to RBC.”

Stifel and a lawyer for Mr. Noack declined to comment.

Here’s a short history of the transactions. In 2005, the school districts faced $400 million in unfunded health care and other non-pension guarantees for retired workers. Mr. Noack had been financial adviser to the districts for decades; he suggested they borrow money and invest in securities rated AA-minus that would generate more in yield than they had to pay in interest.

This becomes maddeningly complex: The bank from which the school districts borrowed — Depfa, of Ireland — told Stifel that it preferred collateralized debt obligations as the securities against which it would lend money to the districts. Stifel asked for proposals from banks. Royal Bank of Canada won the assignment and began to construct synthetic collateralized debt obligations linked to about 100 corporate bonds. It worked with ACA Management and UBS to select the underlying portfolios.

Depfa lent the money to the districts on a “nonrecourse” basis, meaning that the districts would not have to repay the loan if the securities bought with the borrowed funds defaulted. This arrangement, Stifel argues, shows that Depfa, a sophisticated institution, believed that the investment was not high-risk. Under the deal’s terms, Depfa could seize the collateral if the security’s asset values fell to 95 cents on the dollar and did not return to $1.01 within 30 days.

It didn’t take long for the deals to go south, and for the school districts to lose their $37 million investment. Depfa seized the underlying collateral supporting its $163 million loan. Lawsuits began flying.

Once again, we see the same toxic ingredients that have appeared repeatedly in the aftermath of the crisis: collateralized debt obligations, credit default swaps, ruinous leverage, an overreliance on credit ratings, greed and extreme naïveté.

But the case raises questions about a largely unexplored part of the collateralized debt obligation mania — whether Wall Street firms putting together these deals knew how to game the ratings agency models and profited by selecting debt issues to suit their purposes.

If, for example, a firm was designing an instrument to be used to bet against the underlying collateral — Goldman Sachs’s famous Abacus deal was created so the hedge fund manager John Paulson could short risky mortgages — a firm could assign debt issues to the deal that carried overly optimistic or misplaced ratings. Later, when reality intervened and the ratings were cut, those betting against the underlying collateral would prosper.

Because ratings agencies were slow to recognize the severe deterioration in mortgages in 2006 and 2007, taking advantage of this tardiness turned out to be highly profitable to those taking a negative view.

The Royal Bank of Canada concoctions were not created for the purpose of betting against them. And they contained corporate issues which the ratings agencies have historically been better at assessing.

Nevertheless, in its lawsuit, Stifel accuses the bank of increasing its profits by gaming the model used by Standard & Poor’s, the ratings agency on the deal.

n “RBC understood the mathematical models used by S.& P. to assign ratings on synthetic C.D.O.’s,” the firm maintained. “Armed with this information, RBC constructed the reference portfolios with the objective of maximizing its profits while technically achieving the AA-minus rating from S.& P.”

Stifel was heavily involved in these deals, to be sure. And this is the only suit brought against Royal Bank of Canada for C.D.O.’s that it created, said Mark Kirsch, co-chairman of litigation practice at Gibson, Dunn & Crutcher, who represents the bank.

But there appears to be plenty of blame to go around, as has been typical throughout the crisis. The S.E.C. said its investigation is continuing. It would do well to examine closely any allegations of gaming ratings agency models.

In the meantime, the Wisconsin Circuit Court in Milwaukee will decide whether Stifel will be held liable for the school districts’ losses. Who will prevail in Stifel’s battle with the S.E.C. remains to be seen.

This much, however, is clear: Lawsuits filed against institutions involved in the credit mania continue to reveal much about practices that led to titanic losses in this crisis. Because we still don’t know the whole story of this mess, even four years after it erupted, how these lawsuits play out will help determine whether such an episode ever happens again.
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Fri Aug 05, 2011 3:02 pm

15 years of fighting pays off

Barry Critchley, Financial Post · Jul. 30, 2011 | Last Updated: Jul. 30, 2011 3:06 AM ET

Hats off to Edmontonians Barb Trosin and Jason Cowan, who have spent the past 15 years fighting for what they believe was improperly taken away from them.

The two lobbied everyone - including the Alberta Securities Commission and the RCMP - with information about their case asking for help. All turned a blind eye until Pat Kirwin, a lawyer, got involved, prepared a statement of claim and, despite numerous objections from the slew of defendants - which included ScotiaMcLeod, Pacific International Securities and James Sikora, the president of a company called Northside Minerals - managed to get a court date. Their goal was to make the case that shares they owned in a company they set up to develop some technology started by Trosin's late husband were improperly acquired by Sikora with an assist from Pacific International.

Recently Justice Sterling Sanderman, of the Court of Queen's Bench of Alberta, agreed with the pair and awarded them about $2-million in damages. "Mr. Cowan's total loss because of Mr. Sikora's dishonest activities is $834,938.74," wrote Justice Sanderman, adding that "Ms. Trosin's loss due to Mr. Sikora's actions is $933,588.74."

Justice Sanderman said the case was also a rare example of where punitive damages were also warranted. "Punitive damages are awarded only in exceptional cases where the conduct of the defendant has been malicious, oppressive and high handed. It is conduct that offends the Court's sense of decency," he wrote before adding $50,000 to each plaintiff.

For its role, Pacific International was required to pay a total of $220,000.

Justice Sanderman had few kind words for Sikora. "He suggests to the court that he should be trusted as he is honest. He is not and I do not trust him. His evidence barely survived examination in chief let alone crossexamination. I reject his evidence without hesitation.... Where his evidence conflicts with that of the Plaintiffs, it is rejected in its entirety. Their collective version of their dealings with Mr. Sikora is accepted without hesitation. It is on the basis of this finding of credibility that the action against Mr. Sikora can be decided."

And for good measure: "I find that he was involved in a calculated scheme to use the share certificates of the Plaintiff's as if they were his own.... He preyed upon the inexperience and naivety of the Plaintiffs in relation to business and financial matters."

Calls to Paul Moreau, the lawyer for Sikora, seeking a comment weren't returned.

But Kirwin did, noting that "the court system allows many opportunities for delay by well-funded defendants and this certainly happened here. [Just before Kirwin arrived, the two were required to post a $50,000 bond to continue the action.] Barb and Jason are to be commended for sticking to their guns and seeing it through. It was challenging for them." ... story.html
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Tue Jul 26, 2011 8:01 pm ... ExDDRq0zdk

Massachusetts Suing RBC Capital Over Leveraged ETF Sale
By Christopher Condon - Jul 20, 2011 2:13 PM ET Wed Jul 20 18:13:03 GMT 2011

Massachusetts’ top securities regulator is suing RBC Capital Markets LLC over the sale of leveraged and inverse exchange-traded funds, saying they sold them to clients who didn’t understand the investments.

Secretary of the Commonwealth William F. Galvin said RBC Capital and Michael D. Zukowski, a former agent, used “dishonest practices” in selling the funds, according to a statement e-mailed today. The lawsuit seeks restitution to Massachusetts investors, a cease and desist order, and an administrative fine.

“The point of the complaint is not that the investors lost money,” Galvin said in the statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”

Galvin opened a probe into leveraged and inverse ETFs in July 2009, a month after the Financial Industry Regulatory Authority said that such products might not be a good fit for long-term investors. Leveraged ETFs use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark.

Kevin Foster, a spokesman for New York-based RBC Capital Markets, said the firm was “disappointed” with Galvin’s lawsuit.

“We have been cooperating fully on this matter which involves the practices of an ex-employee,” Foster said in an e-mailed statement, adding the firm has “in place extensive policies and procedures and training requirements.”

Client Losses

Galvin said Zukowski, who worked in the firm’s Osterville office, sold clients such “non-traditional” ETFs without proper training or supervision. The lawsuit alleges RBC didn’t have practices in place to prevent unsuitable sales until Dec. 22, 2009, six months after FINRA’s warning.

The complaint cited losses totaling $793,000 by 35 of Zukowski’s clients. Brian McCabe, a spokesman for Galvin, said the state’s investigation is continuing and that other investors may have been affected.

The U.S. Securities and Exchange Commission halted the approval of new ETFs making significant use of derivatives in March 2010 because it wanted to review the products more closely. FINRA and the SEC have said the products could confuse individual investors.

Leveraged and inverse ETFs in the U.S. hold about $33.9 billion in assets, according to Boston-based State Street Corp.

RBC Capital is a subsidiary of Toronto-based Royal Bank of Canada. (RY)

To contact the reporter on this story: Christopher Condon in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Thu Jul 07, 2011 1:12 pm

not legal advice, but you CAN file private criminal charges yourself if the police refuse to get involved:
from ... cution.htm

If you have reasonable grounds to believe an offence has been committed contrary to a provincial or federal statute [i.e. Criminal Code of Canada], a regulation made under that statute, or a municipal bylaw, you may prosecute the offender yourself. Before launching a private prosecution, you may want to make a complaint to the police. If the police refuse to lay charges and you believe there is enough evidence of an offence to support a conviction, you may lay your own charges.

Prosecutions consist of five (5) basic parts:

Laying the information

issuing the summons

serving the summons

setting the trial date

the trial

1. Laying the Information

The first step is to go to a justice of the peace (JP) at your local court and sign a form on which you set out the details of the alleged offence. This form is called an "information," and you are referred to as the "informant." The JP then asks you to swear that this statement is true, and the JP signs his or her name as a witness. This process is called "swearing the information." Formal charges have now been laid.

Draft the charges with care, because inaccurate information may hurt your chances of a successful prosecution. Often the JP will draft the charges for you, or you may wish to fill out the form with the help of a lawyer. Here are some tips:

The forms used for provincial offences are different from those for federal offences, so be sure you get the right one.

Be sure to lay the information promptly. Under the Ontario Provincial Offences Act and the summary conviction provisions of the Criminal Code, you have only six months from the time an offence occurred to lay the charges. Some statutes have shorter or longer limitation periods.

Be precise. It is safest to follow the wording of the statute describing the offence (e.g., the Highway Traffic Act) as closely as possible.

State the specific date and place where the offence occurred, and give the name of the accused in full. If the accused is a corporation, use the full corporate name.

When the information relates to more than one breach of the law, set out each offence in a separate "count" (separately numbered paragraphs each setting out all the details of one offence).

When laying charges under the Highway Traffic Act against the registered owner of a motor vehicle, set out not only the section of the Act that was violated but also that the violation occurred contrary to section 207, the section that makes the owner liable for violations by the driver.

2. Issuing the Summons

The JP has no discretion in swearing the information – he or she can't refuse to do it. However, the JP does have discretion not to take the next step: issuing the summons to the accused. The summons is a copy of the information that also states the time and place where the accused must appear to answer the charges.

JPs are mainly used to issuing summonses for the police, and some JPs may be reluctant to issue a summons requested by a private citizen. The JP can ask you probing questions, so it is advisable to be well prepared when you visit the JP to swear the information, and even to bring a lawyer with you if you anticipate difficulty.

If the JP issues the summons, he or she will usually make it "returnable" in about two to four weeks' time. At least two weeks should be allowed, so there is enough to serve the summons on the accused. The "return date" will not be the trial date, but the date when the prosecutor and the accused appear in court to set a date for the trial.

3. Serving the Summons on the Accused

Serving the summons means delivering the summons to the accused. Serving a summons is generally valid only if it is done by a designated person – usually a police officer. [The staff of the county and district sheriff's offices are also peace officers, and for a fee they may serve summonses for you. Give them the summons as early as possible and follow up with them to check that the summons has been filed.]

To be on the safe side, it's a good idea to also personally deliver or mail a copy of the summons to the accused. Even though the accused is not required to respond, many people do not know this and will come to court. Once the accused or his or her lawyer appears in court, the accused is bound by the summons, even if he or she need not have appeared.

Once a summons has been served, the person who served it must fill out and sign an "affidavit of service" on the back of a copy of the summons. This affidavit sets out the identity of the person served with the summons, and the time and place the summons was served. It is then up to you to make sure the copy of the summons with its affidavit of service is filed in the proper court before the return date (this will mean chasing up the police officer or whoever served the summons).

4. Setting the Trial Date

On the return date, the informant and the accused or their lawyers meet to set a trial date. Choose a date far enough away to give you time to prepare, and to give the accused written notice of all the documents you intend to use as evidence. (Otherwise the documents may be inadmissible.) Also make sure you choose a date when all your witnesses are available.

The court will set a trial date and adjourn the case to that day.

If the accused does not turn up on the return date, the court will go ahead anyway and set a date for the trial. But if the affidavit of service has not been filed with the court, the court will not proceed, and a new summons will have to be issued.

A brief glance at the broader history of criminal prosecution may help
to put this article in its proper context. For the purposes of this section,
it is useful to divide English history into four periods. 12
1. The first age of private prosecution (seventh to tenth
centuries). During this period criminal prosecutions were almost entirely
private. Prosecution was at least partially motivated by the possibility of
monetary compensation. Until at least the late tenth century, those
convicted of crime were not ordinarily hanged, incarcerated, or otherwise
punished, but instead owed the victim compensation (bot) or, in homicide
cases, owed the victim's family the deceased's wergild, a monetary payment
that varied with the deceased's social status.6 13

2. The rise of presentment (tenth to fourteenth centuries).
Starting in the late tenth century, Anglo-Saxon kings began to change the
nature of criminal prosecution. Aethelred's third code, promulgated around
1000, required the twelve leading thanes (nobles) of a wapentake (district)
to accuse and arrest those suspected of crime in their locality.7 This
procedure seems to foreshadow presentment, which, according to some
historians, did not became a routine part of judicial administration until
almost two centuries later, during the reign of Henry II. Under the
presentment procedure, leading men were chosen from each locality and were
required to present (that is, report) on oath crimes committed in their
neighborhoods. These leading men were known as the presenting jury, which is
the ancestor of the grand jury. Like the medieval trial (petit) jury, the
presenting jury was self-informing.8 Little or no evidence was presented in
court. The jurors were expected to gather information informally before they
came to court and to present their conclusions to the judges. 14

The nature of criminal penalties also began to change during this
period. As early as the late tenth century, bot seems to have been payable
to church, king, or community at large rather than to the injured kin.9
There is also archaeological evidence that the death penalty was frequently
imposed in the eleventh century.10 By the late twelfth century, these
changes were firmly entrenched and are regularly attested to by the
surviving records. Hanging and fines payable to the king were the only
criminal penalties regularly imposed in royal courts. In addition, hanging
was usually accompanied by forfeiture of land and chattels. 15

Although presentment and noncompensatory punishments were
becoming increasingly important, no English king even attempted to abolish
private prosecutions, which by the late eleventh century were called
"appeals." In fact, until the turn of the fourteenth century, presentments
were confined almost exclusively to homicide and theft,11 and nearly all
accusations of rape, mayhem,12 wounding, false imprisonment, assault and
battery were brought by way of appeal, as were large numbers of homicide and
theft cases. Although the legal sanction for crime was death or fines
payable to the king, victims (and their families) could appeal and use the
threat of legally imposed hanging or fines to induce compensatory monetary
settlements. By the end of the thirteenth century, however, the appeal was
becoming much less common, and presentment had become the way nearly all
crimes were prosecuted. 16

3. The return of private prosecution (fourteenth to nineteenth
centuries). As noted above, twelfth- and thirteenth-century juries (both
presenting juries and trial juries) were largely self-informing. During the
fourteenth and fifteenth centuries, however, for reasons that have yet to be
fully explained, juries became more passive.13 Trial juries began to rely on
evidence that parties presented in court, and the presenting jury (now
called the grand jury) less frequently made accusations based on its own
knowledge. Instead, the grand jury primarily screened accusations made by
others, declaring "true bill" of accusations ("indictments") it approved.14
Although these prosecutions were formally brought in the name of the Crown,
the predominance of victim initiative suggests that they are properly
classified as private prosecutions.15 Nevertheless, royal officials did
provide investigative assistance. From the late twelfth century, the coroner
had been gathering evidence in homicide cases.16 Justices of the peace
performed a similar function for other crimes from, at latest, the sixteenth
century, and possibly as early as the fourteenth.17 17

4. The age of public prosecution (nineteenth century to present).
In the nineteenth century, partly in response to the growing problem of
urban crime, pressure began to mount for public prosecution. Victims
frequently did not prosecute because it was expensive, time consuming, and
brought few benefits other than the satisfaction of revenge or justice.18 As
a result, by the mid-nineteenth century, most prosecutions were private in
name only, as the "private" prosecutor was in most instances a policeman.
Nevertheless, public prosecution was perceived as a threat to liberty, and
Parliament did not pass legislation to set up a national system of public
prosecutors until 1879.19 Even this statute did not fundamentally undermine
private prosecution, because public prosecutors had very limited
authority.20 It was only with the passage of the 1985 Prosecution of
Offenses Act that England established an effective system of public
prosecution, and even this legislation preserved a limited right of private
prosecution.21 In America, public prosecution seems to have become common
somewhat earlier.22 18


26.1 Introduction
The relationship between the private citizen, as prosecutor, and the
Attorney General, who has exclusive authority to represent the public in
court1, has been described as follows2:

The right of a private citizen to lay an information, and the right
and duty of the Attorney General to supervise criminal prosecutions are both
fundamental parts of our criminal justice system.

The right of a citizen to institute a prosecution for a breach of the law
has been called "a valuable constitutional safeguard against inertia or
partiality on the part of authority"3. However, this right can be abused. It
is sometimes necessary for the Attorney General to intervene and conduct or
stay the prosecution to prevent the harms that may flow from such
prosecutions, for example: 1) the harm suffered by a defendant who is
factually innocent; 2) the harm to the court system caused by a frivolous

Please note that it is a well known fact in the Province of British Columbia, the secret policy directive of the Attorney General's office, is "not to proceed on any private prosecution", and there are many examples of their interference in cases where of overwhelming evidence of criminal wrongdoing was demonstrated to a Justice of the Peace. [Stay in tune with BCREVOLUTION for examples]

Both of the excuses raised above, on behalf of the Attorney General to quash a private prosecution, fail to consider that the private party must FIRST present his/her evidence of the charge(s) to a Justice of the Peace, who themselves are already direct appointees of the government.

It therefore belies all common sense for the Attorney General to assert that "Private Prosecutions" are in any way MORE harmful to the innocent, or frivolous, than the thousands of Prosecutions THEY themselves commence on a daily basis.

An impartial Justice of the piece is more than qualified in making the lawful determination of facts; AS IS A JURY, WHICH OUR LAW OF THE LAND (Eternal Magna Carta) states is our inherent right before we can be imprisoned, or our property seized.

It is THE JURY OF OUR PEERS that is our greatest safeguard against harm to the innocent.

See below (as you read this government document) how the government is continuing to obstruct justice, and encroach on your unalienable right to bring the guilty to justice under our common law, as preserved in our Great Charter of Liberties, 1215, 1297.

This chapter explains the law on initiating and conducting private
prosecutions. It also explains when the Attorney General of Canada may and
should intervene either to conduct or stay such prosecutions.

26.2 Origin of Private Prosecutions
A private citizen's right to initiate and conduct a private prosecution
originates in the early common law. From the early Middle Ages to the 17th
century, private prosecutions were the main way to enforce the criminal law.
Indeed, private citizens were responsible for preserving the peace and
maintaining the law5:

[U]nder the English common law, crimes were regarded originally as
being committed not against the state but against a particular person or
family. It followed that the victim or some relative would initiate and
conduct the prosecution against the offender ...

Another feature of the English common law was the view that it was not
[actually] the privilege but the duty [by right] of the private citizen to preserve the
King's Peace and bring offenders to justice6.

Because of the increase in courts and cases in the Middle Ages, the King
began to appoint King's Attorneys to intervene in matters of particular
interest to the King. Intervention took two forms. The King could initiate
and conduct certain prosecutions through a personal representative. The King
could also intervene in cases begun by a private prosecutor where the matter
was of special concern to the King. By intervening, the King's Attorney
could then conduct or stop the proceedings7. As the English common law
developed, the role of Crown law officers grew. Still, private prosecutions
were allowed. To this day they are recognized in several English statutes8.

26.3 Foundation for Private Prosecutions in Canadian Law
No Criminal Code provision expressly authorizes private prosecutions.
Several provisions, however, impliedly recognize such proceedings. Except
where the Attorney General's consent is required, section 504 of the Code
permits anyone to lay an information. As well, the definitions of
"prosecutor" in sections 2 and 785 make it clear that someone other than the Attorney General may institute proceedings. These provisions apply to
proceedings under the Code and all other federal acts9.

Prior to the 2002 amendments to the Criminal Code10, courts had held: a) a
private citizen may institute and conduct a prosecution under federal
legislation without the knowledge or participation of the Attorney General
of Canada;11 b) clear and specific language is required to abolish private
prosecutions under a federal statute.12

Pursuant to the 2002 amendments, however, important limitations were
introduced on the right of a private citizen to institute proceedings.
Section 507.1 of the Code requires a justice receiving such an information
to refer it to a judge or designated justice, and requires notice to the
Attorney General and an opportunity for the Attorney General to participate
in a hearing to determine whether a summons or warrant for the arrest of the
accused shall issue. In summary conviction proceedings, the private
prosecutor controls the proceedings from start to finish unless the Attorney
General intervenes. In indictable matters, a private prosecutor may conduct
the trial, including the preliminary inquiry. However, the private
prosecutor requires a judge's consent under subsection 574(3) of the Code to
prefer an indictment.

26.4 Authority of the Attorney General of Canada to Intervene in Private

At common law the Attorney General could intervene in private prosecutions
and either conduct the prosecution or enter a nolle prosequi (the
traditional power of the Attorney General to stop proceedings)13. Under
section 5 of the Department of Justice Act, the Attorney General of Canada
is "entrusted with the powers and charged with the duties that belong to the
Office of the Attorney General of England by law or usage, insofar as those
powers and duties are applicable to Canada".

[There is absolutely no such thing as a "common law" right of an "Attorney General" to stop a proceeding at their whim. Our common law has always been based on Rule of Law, and the equality of ALL under the law.

Their assertion is a complete fabrication, and misdirection of the true common law, which is the law for the people, not the re-written half-drunken ramblings [precedents] of government puppet judges who will sell their own soul for 30 pieces of silver.] [LINK to Judges]

The Criminal Code provides that the Attorney General of Canada and Attorneys
General of the provinces share responsibility for conducting prosecutions.
However, several Supreme Court of Canada decisions have made it clear that
the authority of provincial Attorneys General to prosecute under federal
statutes, including the Criminal Code, is given by the Code. Their authority
does not flow from any constitutional principle based on subsection 92(14)14
or from some historic role15. The provincial prosecutorial role is assigned
through legislation by Parliament, not constitutionally entrenched.

Section 2 of the Criminal Code assigns prosecutorial roles as follows:

"Attorney General"

1.. with respect to proceedings to which this Act applies, means the
Attorney General or Solicitor General of the province in which those
proceedings are taken and includes his lawful deputy, and

2.. with respect to

1.. the Yukon Territory, the Northwest Territories and Nunavut, or

2.. proceedings commenced at the instance of the Government of Canada
and conducted by or on behalf of that Government in respect of a
contravention of a conspiracy or attempt to contravene or counselling the
contravention of any Act of Parliament other than this Act or any regulation
made under any such Act, means the Attorney General of Canada and includes
his lawful deputy.
Under this definition, it follows that if a private individual lays an
information, the Attorney General of Canada lacks authority to intervene in
the case, whether to conduct or stay the proceedings. This is because the
proceedings were not "commenced at the instance of the Government of

This lack of authority for the Attorney General of Canada to intervene
applies only to prosecutions brought in a province. According to the
definition set out above, the Attorney General of Canada has full authority
to start and stop proceedings and intervene in private prosecutions brought
in the Northwest Territories, the Yukon Territory, and Nunavut.

"Attorney General" is defined somewhat differently for drug prosecutions.
Section 2 of the Controlled Drugs and Substances Act states as follows:

"Attorney General" means

1.. the Attorney General of Canada, and includes their lawful deputy; or

2.. with respect to proceedings commenced at the instance of the
government of a province and conducted by or on behalf of that government,
the Attorney General of that province, and includes their lawful deputy.
Pursuant to this definition, the Attorney General of Canada has authority to
intervene in private prosecutions of drug matters throughout the country.

Another source of the Attorney General's power to intervene in private
prosecutions may be found in section 579.1 of the Criminal Code. This
section was added in 1994 to give the Attorney General of Canada authority
to intervene in private prosecutions commenced under federal statutes other
than Criminal Code, where the provincial Attorney General has not

Section 579.01 was added to the Criminal Code in 2002 to permit the Attorney
General to intervene in the proceedings without staying them. Under this
provision the Attorney General may call witnesses, examine and cross-examine
witnesses, present evidence and make submissions without actually conducting
the proceedings.

26.5 Statement of Policy
26.5.1 Private Prosecutions in the Yukon Territory, the Northwest
Territories, and Nunavut
The Attorney General has the responsibility to ensure that all criminal
prosecutions are in the public interest. The Attorney General must also
ensure that it is appropriate to permit private prosecutions to remain in
private hands.

When considering whether to intervene, Crown counsel should consult with the
Prosecution Group Head and consider the following:

1.. the need to strike an appropriate balance between the right of the
private citizen to initiate and conduct a prosecution as a safeguard in the
justice system, and the responsibility of the Attorney General of Canada for
the proper administration of justice in the territories;

2.. the seriousness of the offence - generally, the more serious, the more
likely it is that the Attorney General should intervene;

3.. whether there is sufficient evidence to justify continuing the
prosecution, that is, whether there is a reasonable prospect of conviction
based on the available evidence;

4.. whether a consideration of the public interest criteria described in
Part V, Chapter 15, "The Decision to Prosecute", leads to the conclusion
that the public interest would not be served by continuing the proceedings;

5.. whether there is a reasonable basis to believe that the decision to
prosecute was made for improper personal or oblique motives, or that it
otherwise may constitute an abuse of the court's process such that, even if
the prosecution were to proceed, it would not be appropriate to permit it to
remain in the hands of a private prosecutor; and

6.. whether, given the nature of the alleged offence or the issues to be
determined at trial, it is in the interests of the proper administration of
justice for the prosecution to remain in private hands.
Whenever the Attorney General intervenes, the decision to continue or stay
the proceedings should be made in accordance with the criteria set out in
Part V, Chapter 15, "The Decision to Prosecute".

In some cases, it may be difficult to assess whether there is sufficient
evidence to justify continuing the proceedings, because no police
investigation preceded the laying of charges. If so, it will in most
instances be appropriate for the Attorney General to intervene, request an
adjournment, and ask the RCMP to investigate. It may, in some situations, be
necessary to stay proceedings while the investigation is conducted. After
the investigation, Crown counsel should assess whether to commence
proceedings in accordance with the criteria set out in Part V, Chapter 15,
"The Decision to Prosecute". If a decision is reached not to prosecute,
subsequent proceedings brought privately should, in the absence of unusual
circumstances, be taken over on behalf of the Attorney General and stayed.

26.5.2 Private Prosecutions in the Provinces
As noted above, the Attorney General of Canada has a limited authority to
intervene in private prosecutions in the provinces. Where such authority
exists, it should be exercised on the same basis as outlined in s. 26.5.1

The Government of Canada may still have an interest in certain proceedings.
Many private prosecutions are commenced on the basis of an enforcement
scheme found in regulatory enactments such as the Fisheries Act. Charges of
this nature ought to be brought to the attention of the Regional Director,
as it may be appropriate to bring enforcement or policy concerns to the
attention of the Attorney General of the province so that provincial
authorities can then make an informed decision about intervening.

26.6 Consultation With Senior Management
Where an issue concerning the conduct or potential termination of a private
prosecution needs to be resolved, Crown counsel should refer the matter to
the Senior Regional Director who, in cases of particular public interest,
should confer with the Assistant Deputy Attorney General (Criminal Law)
before making a decision.

26.7 Case References
Re Bradley and The Queen (1975), 9 O.R. (2d) 161 (Ont. C.A.): Where the
interests of justice require, the Attorney General may intervene and take
over a private prosecution of a summary conviction offence.

MacIssac v. Motor Coach Ind. Ltd., [1982] 5 W.W.R. 391 (Man. C.A.): Since
the word "prosecutor" includes the informant or counsel for the informant,
it is incontestable that a private prosecution can take place in the absence
of intervention by the Crown.

Re Hamilton and The Queen (1986), 30 C.C.C. (3d) 65 (B.C.S.C.): An
intervention by the Attorney General in a private prosecution does not
contravene section 7 of the Charter.

Campbell v. A.G. of Ontario (1987), 31 C.C.C. (3d) 289; aff'd. 35 C.C.C.
(3d) 480 (C.A.): The court cannot review a decision by the Attorney General
to stay a private prosecution, absent flagrant impropriety.

Re Faber and the Queen (1987), 38 C.C.C. (3d) 49 (Que. S.C.): A decision to
stay does not infringe sections 7 or 15 of the Charter.

Chartrand v. Quebec (Min. of Justice) (1986), 55 C.R. (3d) 97 (Que. S.C.):
Ministerial decisions, whether based on a statute, a prerogative, or the
common law, are reviewable by virtue of section 32 of the Charter.
Therefore, the Attorney General's decision to intervene and stay a private
prosecution is also reviewable.

R. v. Cathcart and Maclean (1988), 207 A.P.R. 267 (N.S.S.C.): A superior
court judge does not need to approve a private prosecution of a hybrid
offence. An order under subsection 504(3) [now subsection 574(3)] of the
Criminal Code is required only after the accused has been committed to stand
trial on an indictable offence.

Osiowy v. Linn (1988), 67 Sask. R. 215 (Sask. Q.B.), sub nom. R. v. Osiowy
(1989), 50 C.C.C. (3d) 189 (Sask. C.A.): The Attorney General's discretion
to intervene and stay a private prosecution was upheld.

Kostuch (Informant) v. Alberta (Attorney General) (1995), 101 C.C.C. (3d)
321 (Alta. C.A.): The court will not interfere with the Attorney General's
exercise of discretion to intervene in a private prosecution unless there
has been a "flagrant impropriety".

Werring v. B.C. (Attorney General) (1997), 122 C.C.C. (3d) 343 (B.C.C.A.):
An informant seeking judicial review of Attorney General's decision to stay
a private prosecution is not entitled to cross-examine the prosecutor who
entered the stay without showing a basis for the belief that such
cross-examination would show flagrant impropriety by the Crown

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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Mon Jun 27, 2011 9:23 am ... &utm_term=

The costly consequences of inadequate supervision

Cassels Brock & Blackwell LLP
Ellen Bessner and Jessica Zagar
June 7 2011
A recent decision by the Ontario Superior Court of Justice in Straus Estate v. Decaire, 2011 ONSC 1157 (“Straus”) serves to reiterate the importance of ensuring that compliance policies and proper training of sales representatives are practiced at the branch level. This is yet another cautionary tale for dealers of the importance of providing oversight and ensuring compliance policies not only exist, but are functionally implemented throughout the organization. A full copy of the case is available here.

In Straus, the plaintiffs sought damages for losses sustained from an “off-book” investment opportunity recommended by the advisor that was neither part of the dealers’ registered mutual fund financial products, nor suitable for the plaintiffs.1

The dealers argued that the terms of their contract with the advisor was limited to the sale of the dealers’ mutual funds and that the plaintiffs knew that the investment opportunity was not a mutual fund and beyond the authority of the advisor as mutual fund representative of the dealers.

Despite finding that the plaintiffs were aware that the investment opportunity was not a mutual fund investment, the trial judge denied the dealers’ defence and found them vicariously liable for the plaintiffs’ losses. The conduct of the dealers in failing to maintain proper compliance practices played an important role in the trial judge’s reasons for finding the dealers vicariously liable. According to the trial judge, even a “superficial inquiry” by the governance officer would have revealed that the advisor was actively engaged in off-book activity.

While the plaintiffs’ request for punitive damages was denied, the trial judge took the rare step of awarding the plaintiffs substantially all of their costs (full indemnity costs) to restore the plaintiffs to their original financial position, in effect punishing the defendants for being motivated by profit through the exploitation of trust and for the defendants’ assertion at trial that the plaintiffs were the authors of their own misfortune.

(nearly every case of financial abuse I have seen carries that "you were the author of your own misfortune" defence by the industry. I am pleased to see in this case the investment dealer being punished for such a false and bullying tactic. If one checks the advertising, the promises implied, the terms used to mislead and misinform the public by most investment sellers, they will soon learn that the industry practices the world's best "bait and switch", to do financial violence to customers. see for a full explanation of the industry bait and switch)
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Sat Jun 25, 2011 9:07 am


JUNE 25, 2011
Madoff Trustee Raises J.P. Morgan Claims to $19 Billion

The trustee seeking to recover money for Bernard Madoff's victims filed an amended complaint Friday that increases the damages being sought from J.P. Morgan Chase & Co. to $19 billion from $5.4 billion.

The amended lawsuit in U.S. District Court for the Southern District of New York alleges that J.P. Morgan ignored or dismissed warning signs about the Madoff fraud even as it earned hundreds of millions of dollars from its relationship with the firm.
The trustee, Irving Picard, made similar allegations when he filed a first complaint against J.P. Morgan last year.
The damage request jumped by $13.6 billion because the amended complaint includes life-to-date damages and a jury demand, said a spokeswoman for the trustee. The trustee separately is seeking the recovery of $400 million in allegedly fraudulent transfers and "at least" $500 million in revenue J.P. Morgan made "off the back of Madoff's victims."

New evidence cited by the trustee includes an unnamed financial institution that "in or about" 1997 assigned an investigator to examine Mr. Madoff's many transactions with J.P. Morgan.
This investigator questioned Mr. Madoff's employees, and the unnamed financial institution closed its own Madoff account after "having failed to receive a satisfactory explanation for the suspicious account activity," according to the complaint. The trustee said the investigator "would have contacted" J.P. Morgan Chase about the transactions.

A J.P. Morgan spokeswoman said the amended complaint is "meritless and is based on distortions of both the relevant facts and the governing law." J.P. Morgan "did not know about or in any way become party to the fraud orchestrated by Bernard Madoff."
There is a detailed description in the amended complaint of Mr. Madoff's relationship with Sterling Equities, a real-estate firm founded by New York Mets owner Fred Wilpon and Saul Katz. Sterling was among Mr. Madoff's biggest customers and also a private banking customer of J.P. Morgan. Sterling Equities has denied any knowledge of the fraud.
Write to Dan Fitzpatrick at
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Re: Civil or Criminal Actions against companies or regulator

Postby admin » Tue May 03, 2011 3:51 pm

Deutsche Bank Accused Of Massive Mortgage Fraud, Sued for $1 Billion By U.S. Government

First Posted: 05/ 3/11 04:35 PM ET Updated: 05/ 3/11 04:42 PM ET


The Justice Department sued Deutsche Bank AG, one of the world's 10 biggest banks by assets, on Tuesday for at least $1 billion for defrauding taxpayers by "repeatedly" lying to a federal agency when securing taxpayer-backed insurance for thousands of shoddy mortgages.

MortgageIT, a subsidiary of Germany's largest lender, egregiously violated federal rules that came with government backing on more than 39,000 mortgages worth more than $5 billion since 1999, according to the lawsuit filed in Manhattan federal court.

By funneling risky mortgages to the Department of Housing and Urban Development's Federal Housing Administration, MortgageIT's loans were guaranteed with the full faith and credit of the U.S. government. A third of those mortgages, or about 12,500, have since defaulted, leaving the government on the hook.

On more than 3,100 of its FHA-guaranteed mortgages that have defaulted, HUD has paid more than $386 million in claims to the owners of the mortgage debt, according to the lawsuit. More than two-thirds of those mortgages defaulted within two years of origination.

As of February, more than 7,500 additional mortgages, with more than $888 million in unpaid principal balances, also had defaulted without HUD paying any claims. About half of those defaulted within the first two years.

The agency expects to pay "at least hundreds of millions of dollars" in additional claims as more risky mortgages default in the months and years ahead, according to the lawsuit.

Meanwhile, Deutsche Bank made "substantial profits" by selling these loans to investors, the suit claims. Federal authorities identified some of the MortgageIT practices that now form the basis of its suit as far back as 2003. Despite warnings, the problems continued.


The Justice Department is seeking damages three times the amount HUD has already shelled out for defaulted mortgages with allegedly fraudulently-obtained government insurance, plus additional penalties for each mortgage that broke federal rules.

While private investors have thus far faced a long, slow war battling lenders and connected Wall Street firms to buy back toxic mortgages investors claim were sold to them fraudulently, the government's suit is fairly straightforward. As part of the FHA program MortgageIT participated in, lenders are required to annually certify that they check basic records like borrowers' incomes, credit history and employment record. The lenders also are required to review loans that quickly default to guard against sloppy lending practices, and act in the government's best interests because taxpayers are bearing the risks for potentially poor loans.

Deutsche did none of those things, according to the lawsuit.

The lender "recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments," the government claims. "While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction."

Deutsche acquired MortgageIT for about $430 million in January 2007. At the time, Deutsche said MortgageIT was "one of the fastest-growing and largest residential mortgage loan originators in the U.S." and would help the bank expand its mortgage securitization business.

On Tuesday, a Deutsche spokeswoman, Renee Calabro, said that "close to 90 percent of the activity" alleged in the lawsuit occurred prior to the bank's purchase of the lending unit.

"We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously," Calabro said in a statement.

From 2007 through early 2009, Robert Khuzami, the current head of enforcement at the Securities and Exchange Commission, served as Deutsche's lawyer overseeing regulatory matters and investigations. He was not named in the Justice Department's suit.

In the suit, authorities spelled out a variety of alleged abuses that paint the Deutsche subsidiary as a reckless lender that employed minimal oversight over its operations. When alert employees raised concerns over violations, upper management, including the president of MortgageIT at the time, failed to act, the suit claims.

The firm's president knew there were problems with its loan underwriting as early as 2005, according to the lawsuit.

Upper management at MortgageIT "knowingly, wantonly, and recklessly permitted egregious underwriting violations to continue unabated," the lawsuit alleges. "These failures caused the government millions of dollars in losses."

In one example of the firm's reckless attitude, an outside auditor’s reports that found "serious underwriting violations" at MortgageIT were “literally stuffed in a closet and left unread and unopened" in 2004, according to the suit.

The firm should have had up to eight employees reviewing loans it peddled to FHA. Instead, it never employed more than one person, the suit claims. By the end of 2007, that one person was producing loans, instead of reviewing them.

On three separate occasions in 2003, 2004 and 2006 the firm was told by federal authorities to fix its deficient review practices. Each time, MortgageIT said it had complied. And each time, it lied, the suit claims.

Twice in 2005, employees at the firm went to upper management to complain about poor underwriting practices. Management did nothing, the suit claims.

The lawsuit follows two separate reports this year by HUD's inspector general. In one, the internal watchdog faulted the agency for its poor oversight of FHA-approved lenders. In the other, it found that more than 49 percent of loans underwritten by FHA-approved lenders in a sample did not conform to the agency's requirements.

"These companies repeatedly and brazenly breached the public trust," said Preet Bharara, the U.S. Attorney in Manhattan. "This lawsuit sends them -- and other lenders -- the message that they cannot get away with lies and recklessness. They cannot casually assign the prospect of being caught to the cost of doing business."
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