Financial Abuse by "Trusted Professionals"

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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Mon Sep 20, 2010 8:32 am

Grant Robertson and Tara Perkins
From Monday's Globe and Mail
Published on Monday, Sep. 20, 2010 4:34AM EDT
Last updated on Monday, Sep. 20, 2010 9:12AM EDT
Even at 86, she isn’t afraid to take a risk – you don’t lose almost a half-million dollars by playing it safe. But where, her family wants to know, was her financial adviser as she pumped her life’s savings into volatile mining shares? And how can someone that old, having suffered a stroke and been diagnosed with frontal lobe dementia, be allowed to sign a form stating that she has an “excellent understanding” of the stock market?

By the time the complaint, which is still outstanding, reached Douglas Melville, Canada’s banking ombudsman, the woman’s portfolio was down an alarming $470,000.

For another elderly woman, family was part of the problem. After being diagnosed with cognitive impairment, she wisely turned over her financial affairs to her daughter. But she retained joint control of her account, which was all an unscrupulous relative needed to have her co-sign for a pair of hefty bank loans.

With dementia on the rise as the population ages, Canada’s financial and legal systems are beginning to realize how ill-equipped they are to deal with the growing number of people unable to administer their own affairs. Some are being taken advantage of, defrauded in a variety of ways, while others are being given bad advice, even by lawyers, financial advisers and family members with good intentions.

How serious is the problem? Nobody knows for sure – because nobody is keeping track.

Dementia: Confronting the Crisis
See more stories, portraits and multimedia from The Globe's series
The Ombudsman for Banking Services and Investments, the agency that investigates public concerns involving 600 financial institutions, has not been tracking how many of its cases involve dementia. But when Mr. Melville, appointed its head about a year ago, was asked to look into the situation, he quickly found several such cases filed last year alone.

And dicey investment is far from the only dementia-related problem facing the courts and business community. An ever bigger issue is a rising tide of family friction. As their parents live longer, many Baby Boomers find that divorce and a tendency to live beyond their means have left them short of cash. Eager for their inheritance, some are cutting corners to speed things up.

Whether it’s fraud or feud, says Toronto lawyer Jan Goddard, diminished mental capacity makes almost anyone a potential victim. “It would take a lot of influence to get any of us to do something we don’t want to do,” she explains, “but it doesn’t take much if we have dementia: All I have to do is lie to you.”

As a result, financial abuse is increasing, along with pressure to do something about it. Many financial institutions operate on the understanding that buyers must beware, says Laura Watts, national director of the Canadian Centre for Elder Law in Vancouver, but “I’m not sure that system will stand up.”


Clearly it’s wrong to take advantage of someone, but the banks claim that dementia puts them in a sticky situation at the best of times.

They say the condition isn’t always readily apparent, and it’s awkward to question an elderly person’s mental faculties and second-guess a transaction. “If the client comes in to co-sign” a loan for someone else, Mr. Melville asks, “does the bank have the right to challenge that?” To do so on a regular basis could amount to age discrimination.

Even preventative measures aren’t always enough, he says. His office was alerted last year when a free-spending dementia sufferer was issued a credit card even though her family had flagged her credit profile to keep that from happening. Somehow she evaded the restriction by applying for a pre-approved card and spent $1,000 before anyone noticed. The credit-card company ended up eating half the cost.

Mr. Melville blames much on a lack of consistency. “What we’re seeing is a wide range of approaches to dealing with the problem in society,” he says. “Legal documents, powers of attorney, different banks with their own internal policies, provincial guardian offices, social agencies – it’s not co-ordinated. It’s creating a range of different failures in the system.”

The rising number of “failures in the system” is helping to make dementia a staple of Canada’s court system, but lawyers say the biggest contributing factor is family battles over the assets of parents who can no longer make financial decisions for themselves.

“You used to wait until the person was dead, and then the heirs would have arguments about the estate,” says Elder Law’s Ms. Watts. “Now the fights are happening over whether the person is cognitively impaired... and sometimes it’s the family members fighting each other.”

Arthur Fish, an estate lawyer in Toronto, tracks the trend to impatient heirs: “Older people control a disproportionate share of the wealth,” he says. “So you’ve got all this wealth, and then you go down a generation and that’s a very, very [financially] stressed generation.”

Often a relative suddenly appears offering to help care for an older person, perhaps receiving power of attorney in the process. It’s a scenario now so familiar, Ms. Goddard says, that “we actually have a term in our business: We call it the ‘nephew-come-lately.’ ”

Concerned family members can resort to the law, Mr. Fish says, but ‘”once things get into the courts, they drag on, and you can end up with a horrible situation where an older person’s assets are frozen because someone who is supposed to be looking after him or her has gone astray.”

According to Ms. Watts, when families drop the gloves, the only real victims are the people who are impaired. “Their own funds are being used to fuel the fight,” and sometimes even their mail is stopped until the mess is sorted out.

All of which is beginning to grate on those required to do the sorting out.

A family feud so irritated one judge that he sent a message to all members of the bench suggesting the courts stand up to misuse of the legal process. Mr. Justice Dennis Brown of the Ontario Superior Court had watched as the three children of 87-year-old Ida Abrams spent almost five years battling over what each would inherit even as their mother was being overtaken by dementia.

“Each, in his or her own way, has bickered and delayed,” Judge Brown wrote, “leading me to believe that Ida’s best interests have been shoved to the back seat ... Had any of the parties really cared about Ida’s well-being, they would have had this matter adjudicated yesterday.”

Ms Goddard fears that changes to the legal system may be encouraging litigation. It has become increasingly easy to obtain power of attorney, with do-it-yourself kits, much like tax-return software, widely available in much of the country. Some provinces, including Ontario, provide them free of charge.

To deter the larcenous, some jurisdictions – such as British Columbia, Britain and New York State – have introduced public registries for power of attorney, although an opposition member’s attempt to create one for Ontario was defeated in the legislature in March when a government MPP argued that making such information public goes against many of the wishes of elderly people.

Much family bickering also revolves around what people with dementia really want, which can be incredibly difficult to determine.

This issue was central to the notorious case of Helena Munroe, a Nova Scotia expert in dementia who, at the first sign she had Alzheimer’s herself, began to get her affairs in order. She gave power of attorney to her husband, but her family suspected she did so against her will. One day her brother arrived to take her out to lunch but instead put her on a plane to England, sparking an international outcry and court battle. She was allowed to return to Canada only after she died last year – to be buried.

“An expert in dementia who thought she had taken care of all the necessary things ... and it wasn’t enough – it was really quite sad,” says Jeanne Desveaux, the husband’s Halifax-area lawyer.

“I really think this is a wake-up call.”


Is the wake-up call being heard?

Canada is, according to Ms. Watts, “somewhat behind in its planning for an aging population,” but in the United States, several groups are working to draw attention to the fact dementia makes people vulnerable to financial abuse and do something about it.

One initiative launched this summer is the Elder Investment Fraud and Financial Exploitation Project, which will help doctors and nurses spot potential trouble and alert the authorities. It is a joint venture by securities regulators, an adult protective services group and leading medical associations, which say they are especially concerned about seniors with mild cognitive impairment.

The U.S. program has prepared a pocket guide for medical professionals with questions they can ask patients (Do you have a will? Has anyone asked you to change it?), red flags to watch for (someone who supports a relative financially or is accompanied by an overly protective caregiver) and places they can turn for help.

Meanwhile, in Canada, the National Initiative for the Care of the Elderly began a research project this year in a bid to determine how widespread elder abuse is. It designed a special pocket guide that includes financial as well as physical and psychological abuse, but it does not deal specifically with dementia.

For their part, financial institutions claim the issue is on their radar.

Lee Anne Davies, head of retirement strategies at Royal Bank of Canada, says the country’s largest bank realizes it must prepare. “What that means is that our sales force, our advisers, need to have some good understanding of what aging is all about and what dementia means,” says Ms. Davies, who has a master’s degree in gerontology.

She says that dementia is touched on in the guidance RBC gives its employees on how to deal with clients as they age. If concerned about someone, however, a staffer will seek advice from a more senior employer rather than reach out to a medical professional. “The most important thing is the dignity of the clients and making sure we’re doing the right thing.”

And Mr. Melville, the banking ombudsman, argues that forewarned is forearmed. It’s all well and good for aging parents to enlist help with their finances, he says, “but as soon as someone is on a joint account with you, they have a right to every dime in that account ... People don’t realize that.”

In other words, it’s still buyer beware.

Grant Robertson and Tara Perkins write on banking and financial services for The Report on Business.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Thu Sep 16, 2010 12:47 pm

Good morning,

If one could be confident that by taking the extra time, the SROs (self regulatory organizations) would get it right, I wouldn't feel so bad. However, due to the fact that their policy formation process is deeply flawed to begin with, not to speak of the structural flaws in the industry itself, I have little hope that the final policy will meet the objectives of the CRM (client relationship model) initiative.

Most structured products are generated by the capital markets divisions of the banks. Most of these products require a sophisticated knowledge of game theory to understand, let alone evaluate for investor suitability. It would be like going to the casino where they introduce a new game every day with its own set of enticements but where even experienced gamblers would have no idea what the odds are for the house. This is why the industry needs to be bifurcated into buy side and sell side interests with advisors professionally trained and firmly planted on the buy side. Until this fundamental structural change is put into place every attempt to massage the client relationship model will be fraught with deceit and conflict of interest and unworthy of the publics trust.

The whole notion of dealers should be dispensed with when it comes to financial advice. Dealers sell. Advisors should assist their clients with the buying. You can't have advisors working for dealers. There should even be a separate regulator for each. Industry is deeply afraid that its products will be commodified resulting in scant margins, if the so called advice component were to be unbundled. A regulator whose first duty is to the health of the capital markets should not be responsible for the oversight of those who may be advising the public not to participate in such markets when the regulation and behaviour of these markets does not justify confidence. The regulator itself, is deeply conflicted from the get go. There has not even been a discussion paper on this issue as the CSTO progresses towards the National Securities Regulator monolith which may only serve to further entrench the status quo.

John DiNovo

(well said John)
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Sep 15, 2010 8:50 pm

Kenmar review of Mackenzie financed U.S./Canada COO study ... c8383.html
Canadian investors and fund salespersons after reading the Mackenzie study on Canada/US fund costs
Kenmar Associates September 13, 2010
In a new study that challenges all previous comparisons of Canadian and U.S. mutual fund fees, researchers suggest that the cost of owning mutual funds purchased through a financial advisor in Canada compares favourably with U.S. costs. This, despite the fact of greater U.S. competition and a $7 trillion+ fund industry compared to just $600 billion in Canada . The study, which was conducted by business consulting firm Bain & Co. and financed by Mackenzie Investments, seeks to provide an accurate comparison of mutual fund fees in Canada with those in the U.S. Several previous studies on mutual fund fees [ e.g. The Tufano study] , including one conducted by Morningstar Inc. in 2009, conclude that fees and expenses in Canada are substantially higher than those in other countries. On fixed income funds, Canada and three other countries had the highest Management Expense Ratios (MERs) for fixed-income funds. The complete report can be accessed here. There is no attempt to reconcile the differing conclusions.
In 2009, Mackenzie unleashed I Thought I Wanted an ETF, a marketing brochure full of carefully selected information and half-truths about ETF's. It was a master of writing cleverly designed to discourage their clients from exiting Mackenzie’s high-priced product and into low-cost investments. You can read discussions of this work of fiction on Larry MacDonald’s and Jon Chevreau’s blogs. At the time , we came out with I thought I wanted a Mutual Fund poking fun at the biased piece of "research' . Clearly, Mackenzie is trying to halt the shift to ETF's .
The new study's title [ Canadian Mutual Fund Ownership Costs:Competitive Relative to the U.S.] suggests that it is a comparison of Canadian mutual funds but in fact covers only about 350 Canadian funds from a select list of 16 fund managers, and excludes most of the fund industry on both sides of the border. On the US side, for instance, no Vanguard, ( a large low cost fund manufacturer) no Fidelity (and its large Fidelity Advisor family), no BlackRock, T. Rowe Price, nor State Street.
The new study highlights the obvious - commonly referenced mutual fund expense ratios cannot be used to accurately compare fees in Canada with those in the U.S. This is because of differences between the countries in fee structures, tax regimes and the ways mutual funds are purchased. A summary of the research and the research report are available at In any event, Canadian regulations do not allow U.S. residents to purchase Canadian-owned mutual funds or U.S.-owned mutual funds to be sold to Canadians unless they are registered with a provincial securities commission.
Back in June , Morningstar Canada graded a number of large Canadian fundcos and assigned Mackenzie a C . On Fees , Morningstar had this to say- “ Management-expense ratios on Mackenzie funds often come in a little above median relative to their category peers. As well as being expensive on average, the firm doesn't offer much in the way of cheap individual offerings that would allow investors to put together a low-cost portfolio. Mackenzie's fees are also middling relative to other advisor-sold fund families.” Morningstar said one reason for Canada's high MERs is the "embedded compensation" by which trailer commissions paid to advisors account for 0.5 or 1% of a typical 2.5% MER for an equity fund. Morningstar describes trailers as "fairly specific to the Canadian market". The complete report can be accessed here.
A 1997 study by Malhotra and McLeod ‘An empirical analysis of mutual fund expenses,’ Journal of Financial Research 20, 175–90 determined that economies of scale have a significant role in U.S. mutual funds fees. Perhaps things have changed over the past 13 years. Here's one of the
Mackenzie study's charts purporting to demonstrate this surprising change:
Note that if the GST is properly drawn [ shown in dashed lines for some reason ] Canada moves to the right and becomes 15th out of 16. If the 0.10 % HST effect is added as of July 1 , Canada moves still further to the right and becomes last. Taxes may not be fair but they are real . The words don't seem to match the numbers.
Some observations
We're always constructively skeptical of industry funded research . Here are some observations: The assumed hold period is 5 years; This appears to be congruent with historical data in the U.S.
Canadians, according to some estimates, hold their funds slightly more than 6 years. As we understand the figures,the study assumes Canadian FEL's are 0 % and U.S. 5 %. If investors actually treated mutual funds as long term investments , the lower U.S. MER would yield greater returns as the initial 5 % upfront load payment is amortized over a greater number of years.
The Transaction Expense Ratio (TER ) does not appear to be considered as a Cost of Ownership . Canadian regulators regard the TER as important and mandate its disclosure in the Management Report of Fund Performance. In some cases it can rival the MER in magnitude.
The report's contention that DSC fees have an impact of only 0.03% or three basis points on the costs incurred by investors seems unduly low and is unsupported .Early redemption penalty fees would have been incurred on most DSC sold funds in Canada under a 5 year hold assumption . Per the researcher: “ In our Canadian sample, DSC funds represent about 55% of assets and 32% of sales. In the US, where DSC sales are far less common, we have excluded DSC assets from our analysis. ” As an aside, a DSC fund sold after 5 years could incur as much as a 3% early redemption fee.
There is a growing trend in Canada to sell wraps which can add a layer of costs .The study's primary analysis was on commissioned advisor-sold mutual funds focused on those with front-end loads .Wraps were not part of the study or even referenced.
Lower -cost Index funds are also not part of the study. A 2003 study by Professor Karen Ruckman , then of McGill university, found that index funds comprise just 1.51% of the total assets of the Canadian market and 7.04% of the U.S. Market. Since Index funds have lower MER's than actively managed funds this exclusion distorts the data in favour of Canadian funds. The well documented Ruckman paper, Expense ratios of North American mutual funds, used Morningstar data from the end of 1998, She found that Canadian-domiciled equity funds were roughly 50% (or 79 basis points) more expensive than US-domiciled equity funds. Inexplicably, Mackenzie makes no mention of that important piece of research specifically focused on Canada/ US fund expense ratios.
The study says: " The introduction of HST in Canada will further increase COO by another 0.10%. It is, therefore, important to compare both the pre and post tax COO of mutual funds between Canada and the U.S. " It apparently does not however appreciate that this shifts the Canadian data in the wrong direction ,making some of the narrative and assertions seem plain silly. That's why we consider the term “very similar” to be imprecise – it seems to be a relative term that could allow for a range of results to be described as “in line.”
Overall, Mackenzie's summary of the 14 page Bain study is below academic quality . For example , the tables show an "average" COO for Canadian funds but no corresponding average is given for the selected U.S. funds. It's also odd that the US companies are listed but not identified in the tables, and the Canadian fundcos aren't listed at all . The Bain & Company name does not appear on the report and the authors name (s) is not revealed. At least pages are numbered.
Other commentators
Some argue that the study is irrelevant .F class /D-series class funds ( or equivalent) are more available in the U.S.; we just don't seem to have a big gorilla such as Vanguard to keep our costs low and
everyone else honest. Others feel there's enough choice in Canada to build low cost mutual fund portfolios. Canadians can invest directly through low-cost companies such as Philips Hager & North, Mawer, Steadyhand and McLean Budden, though direct-sold funds make up a mere 8% of fund assets in this country, according to the report. The obvious question is, why embedded commission “advisors” don't recommend them and the likely answer is because it would reduce the compensation for the advisor. [ About 83 % of Canadian mutual fund investors purchase through an advisor per 2009 IFIC Investor Survey . In Canada, only 8% of mutual funds are sold directly by fund companies compared to 30% in the U.S. According to the study , 95% of front-end load funds in Canada are sold without the front load. ]
A blog by respected fund analyst Dan Hallett had this to say:
“ Bain’s focus is on those investors who want and need advice. But their carefully-worded report raises the question: What’s “comparable”? A crude analysis suggests that Canadian fund fees exceed the U.S. by 50 to 60 basis points (i.e. 0.50% to 0.60%) annually when equating the trailer (or 12b-1) fee levels but without controlling for GST/HST. Consider these three examples of identical investment mandates with the same parent-company sponsors.
• The expense ratio of the Canadian-domiciled Templeton Growth (sold to Canadians) is 0.53% per year more costly than the US-domiciled Templeton Growth (sold to Americans).
• The Canadian-domiciled Mutual Discovery costs 0.59% per year more than its US-domiciled sibling Mutual Global Discovery.
• Canadian-domiciled Fidelity Europe costs 0.62% more per year than the US-based Fidelity Europe. “
Source: ... revisited/
Another commentator, who wishes to remain anonymous, said: “ The U.S. mutual funds industry has done fairly extensive studies on the cost of mutual funds ownership. It is telling that this report does not refer to that research at all. It is an example of research that starts with the desired conclusion – Canadian total ownership costs for mutual funds are comparable to those in the U.S. – and works backwards to find the data that would fit that conclusion. Further, there are lots of “optional ' fees such as short term trading fees and switch fees, not covered by Bain .As to “apples to apples”
comparisons ,U.S. Funds have full fund governance; Canadian funds have toothless Independent Review Committees to watch over fund assets ”
“ Canadians really get a deal on fixed income funds, with an average cost of ownership of 1.66%.” (Wow, the bond fund only takes one-third to one-half the expected return. What a fantastic deal.) - Couch Potato's Ban Bortolotti commenting on Mackenzie US/Canada fund cost comparison study
Mr. Bortolotti added : “ Unfortunately, the Mackenzie report focuses only on actively-managed funds sold through commissioned advisors. That sidesteps the real issue: the reason that Canadian fund investors look to the US with envy is not because their commission-based advisors are better than ours. It’s because Americans have so many excellent alternatives to that model. The big boys in US fund industry are Vanguard and Fidelity, both of whom allow investors to bypass the toll-taking advisor and invest in their funds directly. These companies offer an extraordinary menu of index funds with fees as low as 0.10%. Tens of millions of Americans invest like this: direct-sold funds make up 30% of the US
market. They are all ignored in the Mackenzie report.”
Long-time consumer activist Ben Yevzeroff noted: “This isn't an “apples to apples” comparison since it's known that Canadians hold on to funds longer than Americans. Bain shouldn’t claim they’ve made such a comparison, when it seems to me that they didn't. If we could buy lower MER U.S. funds we'd be better off since we hold on to funds 6-7 years. Unless you're a DIY'r , what really counts is a professional advisor that has your best interests at heart”
Mike MacDonald from Weighhouse Investor Services remarked: “ The assumption in the report seems to be that you get the same level of attention and advice if you pay from your pocket directly to an advisor as you do when the funds are paying the advice fee via a hidden siphoning from the fund. And since taxes are raised as an issue in the report, what is the tax status of advice paid directly from an investor versus thru the fund? I think one could argue the direct payment may be tax deductible while the indirect [ embedded compensation ] fee is not.” Read Out of sight, out of mind , ... _id=496315 . The American researchers find consistently negative relations between fund flows and front-end load fees. They also document a negative relation between fund flows and commissions charged by brokerage firms. In contrast, they find no relation (or a perverse positive relation) between operating expenses and fund flows. Additional analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a fund's operating expenses, account for this surprising result. Fees count but if you get bad advice, any fee is too much. If you get trusted , competent advice and service, the fees should pay for themselves.
A number of investor advocates complimented Mackenzie in that it was at least trying to support the Canadian fund industry, something IFIC apparently is unable to do. A recent IFIC report The Value of Advice was ridiculed for its lack of in-depth research, disregard for available academic research and abuse of statistical information.
Summary and Conclusion
If the report was supposed to make Canadian Main Street feel warm and fuzzy, it didn't. We add parenthetically that in Canada the MER's of FEL and DSC sold funds are by and large identical which seems to violate a few accounting principles. Also , there's about $32 billion in mutual fund assets with discount brokers - why aren't fund trustees and regulators preventing fund assets from being siphoned off ? Bortolotti further observes: " Canadians who buy mutual funds through discount brokerages get gouged, too. Our banks’ index funds charge at least three times what US index investors pay. And DIY investors who buy Class A funds still pay that 1% trailer commission for nothing: discount brokerages pocket the “advice” fee despite giving no advice. (Questrade is the only brokerage with the decency to rebate these fees, albeit with some conditions.) This cash grab is not practiced in the US, and indeed, the Schwab, Fidelity, and Vanguard brokerage arms even allow clients to buy ETFs with no commissions. No such luck here.".
Is an International equity fund COO of 2.51 % supposed to make us happy? According to RBC , the average International Equity fund in Canada is in fact 2.46 % . Source: ... index.html For the 5 years to August 31 , 2010 the peer group return for this Category was -2.91 % versus an Index loss of 0.80%. For Canadian Equity funds the COO is 2.38 %. ( per RBC the average MER is 2.39 %) . And
Mutual Fund Expenses
for 5 years , this category has achieved a return of just 2.56 % vs. 5.06 % for the S&P/TSX Total Return Index. The vast majority of mutual funds underperform their index over the long term due ti fees.
Setting aside all our concerns about the study, if we did agree that our apples are no less expensive than those in the U.S. , then maybe it's time to look at ETF's or low-cost Index funds. That's certainly one unintended consequence of the study.
No matter how you slice it, Canadians face real challenges putting together cost-effective mutual fund portfolios. The Mackenzie study's red herrings and soothing comments are nothing more than another piece of financial pornography from an industry that has forgotten who its customers are .
Kenmar Associates Research team
BONUS Feature
Impact of Front-end load commission
Some mutual funds charge a front end load commission for buying into the fund. The compound interest formula can help find the adverse impact of a front-end load fee on fund returns: AR=(1+i)(1-[FEL/n])-1 Where AR=adjusted rate of return expressed as a decimal
i=published rate of return expressed as a decimal FEL=the percentage of front end load paid expressed as a decimal n=the number of years the fund units are held
Say FEL= 4%, n=3 years and the fund cites a 12 % return =i Then AR= (1 +0.12)(1-0.04/3)-1=(1.12x(1-0.0133)-1=1.12 x.0.9867-1
=1.105-1=0.105 or 10.5% Given equal MER’s , a no- load fund with a return of say 11% would actually be the better choice over the 3- year period. The longer the load fund is held, the less the impact of the front load. As usual, however other fund metrics need to be considered when purchasing a mutual fund.
If you’re interested in the derivation of the formula, we need to return to our trusted compound interest formula. We set (1-FEL)(1+i) n =(1+AR) n where the RHS term is the equivalent of a no-load. Taking the n’th root of both sides we have (1-FEL) 1/n (1+i)=1+AR or AR= (1+i)(1-FEL) 1/n -1.You can use a scientific calculator to get at the roots but a simple approximation formula (the binomial formula) from our high school math puts (1+i) n approximately equal to 1+ni if I is small. So AR=(1+i)(1-FEL/n)-1.
Mackenzie has an excellent brochure Fees and Mutual fund investing at ... 2010.shtml It does a good job
of explaining all the direct and indirect fees that can befall a Canadian unitholder. Bylo also has a good enumeration of fees .Bylo observes " A mutual fund incurs trading costs when it buys or sells securities. These costs include brokerage commissions, bid/ask spreads and the affect that large transactions can have on the market price of a stock. It's difficult to quantify how much these costs add to a fund's operating expenses because they depend on a variety of factors:
• Large mutual fund companies can negotiate lower brokerage fees than their smaller competitors.
• Funds with high portfolio turnover incur higher brokerage expenses. • The bid/ask spread on the market price of a stock can vary from as little as a few basis points for
a well-known, highly liquid issue to as much as a few percentage points for an obscure small
cap stock. • A fund that buys (or sells) a relatively large position in a particular stock can raise (or lower)
that stock's market value due to the forces of supply and demand.
It's been estimated that these expenses can add 1% or 2% to the annual costs of managing a mutual fund. They are not included in a fund's MER. " A 2008 study by Bauer and Kicken (see in particular Figure 5) came to the conclusion that Canadian mutual funds are sufficiently more expensive that they underperform pension funds. They researchers compare the investment performance of a sample of domestic fixed income portfolios of Canadian pension funds with those of a sample of Canadian fixed income mutual funds. They find an average performance differential of 1.8 % per annum in favor of pension funds. This performance gap is approximately equal to the average cost differential between the two approaches. They conclude that high mutual fund fees significantly reduce the net returns of mutual fund investors.
A 2005 study by Morningstar ,The MER Bite ,explains the importance of low MER's . See ... ERbite.pdf
For the U.S. , the SEC does a reasonable job at explaining U.S. Mutual fund fees at The Commission has more than a few words to say about price breakpoints . "Each fund company establishes its own formula for how they will calculate whether an investor is entitled to receive a breakpoint. For that reason, it is important to seek out breakpoint information from your financial advisor or the fund itself. You'll need to ask how a particular fund establishes eligibility for breakpoint discounts, as well as what the fund's breakpoint amounts are. " In Canada , you don't hear much about breakpoints .
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sat Sep 11, 2010 9:17 am

September 10, 2010

Guilty Plea in Fraud by Adviser to Stars

Nati Harnik/Associated Press
Kenneth I. Starr


Kenneth I. Starr, the New York investment adviser who once counted Hollywood celebrities like Al Pacino, Martin Scorsese and Sylvester Stallone as clients, pleaded guilty on Friday in Federal District Court in Manhattan to charges that he diverted tens of millions of dollars of his clients’ money to pay for his lavish lifestyle.

A money manager to the stars who frequented charity events, conspicuous parties and movie premieres in search of clients, Mr. Starr, 66, wore a dark blue prison smock and appeared stooped and drawn as he stood before Federal Magistrate Judge Theodore H. Katz and pleaded guilty to one count each of wire fraud, money laundering and investment adviser fraud.

Mr. Starr, who is not related to the special prosecutor with the same name who investigated President Bill Clinton, admitted that he stole $20 million to $50 million from his clients to use for his own purposes.

Some of the money paid a multimillion-dollar legal settlement with a former client while other money bought a $7.5 million Upper East Side condo with a lap pool and a 1,500-square-foot garden.

A plea agreement between Mr. Starr and the government calls for a prison sentence of 10 to 12.5 years. But Judge Shira A. Scheindlin, who is scheduled to sentence Mr. Starr on Dec. 15, is not bound by that agreement and could impose a greater or lesser penalty.

The government said it could also seek the forfeiture of as much as $50 million in assets owned or controlled by Mr. Starr and $50 million in restitution for his victims.

After the courtroom proceedings, a lawyer for Mr. Starr, Flora Edwards, indicated that the forfeiture and restitution amounts were under discussion but that they were likely to be “significantly less” than $50 million.

“He’s assumed full responsibility for his conduct,” Ms. Edwards said. “He made a colossal error in judgment that he recognizes. He’s paying a very, very heavy price.”

In a statement, Preet Bharara, the United States attorney in Manhattan, said, “Kenneth Starr’s is a tale of fiction and fraud, in which he played the role of legitimate investment adviser to a cast of unsuspecting victims.”

Mr. Starr was indicted in June on 23 counts, including wire fraud, securities fraud, fraud by an investment adviser and money laundering.

Clients relied on him to provide investment advice, financial planning and even pay bills and help with tax filings, federal prosecutors said in the indictment.

In federal court on Friday, Mr. Starr admitted his clients had “entrusted him” with their money, but “from 2009 to 2010, instead of using my clients’ money as I promised, I knowingly used a portion of the money for my own purposes,” he told the judge.

In one case, he said he transferred $1 million to a trust account in New Jersey that was in the name of a lawyer and that Mr. Starr used at least part of the money for his own purposes. The name of the lawyer was not disclosed in court, and Mr. Starr’s lawyer declined to identify the lawyer.

Mr. Starr told the judge that, in another case, he had encouraged a client to invest in a firm called Wind River but had not disclosed that the money was actually a loan, not an investment.

Mr. Starr, who spoke during the morning proceedings in a clear and steady voice, did not acknowledge anyone in the courtroom. He stood silently and rested his fingertips on the table in front of him as the judge read the potential penalties.

His appearance and demeanor were markedly different from the days when he flitted about cocktail parties and movie screenings, trying to gain the confidence — and business — of celebrities.

One heiress identified as a victim was Rachel Lambert Mellon, a philanthropist and the widow of Paul Mellon, who accused Mr. Starr of using $5.75 million of her money to help buy the luxury condo. A call to Ms. Mellon’s lawyer was not returned.

In his deal with prosecutors, Mr. Starr will forfeit the condo.

Another person who says he was Mr. Starr’s victim is Jacob Arabov, a celebrity jeweler who met Mr. Starr at a charity event in May 2006. The next day, Mr. Starr went to his store and bought a $77,000 watch. The two became friends, and Mr. Starr became a frequent customer, buying a $70,000 diamond bracelet and a $32,000 wedding band. Eventually, Mr. Starr persuaded Mr. Arabov, who served prison time on money laundering charges in a separate case, to invest nearly $14 million with him.

A lawyer for Mr. Arabov, Benjamin Brafman, said in a statement that Mr. Starr’s guilty plea was a "welcome" development.

"The evidence that Starr defrauded Mr. Arabov and other celebrity high-net-worth clients was truly overwhelming.” the statement said. “The fact that these victims will now be spared from having to testify at a trial brings at least some closure to these proceedings."

For some of Mr. Starr’s prominent clients, alarms went off early.

In 2002, the actor Sylvester Stallone filed a lawsuit accusing Mr. Starr of mismanaging an investment in Planet Hollywood. Over the years, other clients, including the actress Lauren Bacall and the broadcaster Diane Sawyer, fired Mr. Starr. In April 2008, Joan A. Stanton, who was the voice of Lois Lane in the “Adventures of Superman” on radio in the 1940s as well as an heiress to a $70 million estate, sued Mr. Starr, accusing him of fraud.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Tue Sep 07, 2010 8:52 am

Tim Shufelt, National Post · Tuesday, Sept. 7, 2010

It's easy to find horror stories of average investors bilked, gouged and abused by unscrupulous brokers in Canada, as well as examples of the failures of the industry's regulators to protect those who feed their money into the system. Such stories make headlines and often spark outrage, if little action. But more rampant -- and less reported -- are tales of investors being taken advantage of in little ways. Hidden fees, dodgy trades and double dipping by brokers: These aren't necessarily illegal, but hurt far more investors than the occasional outright fraud. That's why many investor advocates condemn the overseers of this country's financial services industry and espouse wholesale regulatory transformation, from the need for a single securities regulator to the need for a fee-based model for brokers to help ensure they are looking after their client's interests, not just their own.

Critics even include federal Finance Minister Jim Flaherty, who has called the regulatory framework in Canada -- the only country in the G20 without a national securities regulator -- an "embarrassment." As other economies create more sophisticated systems to protect investments, Canada has fallen well behind and its international credibility has suffered, Flaherty has said.

Canada falls short on many fronts. The country is viewed by many as a haven for insider trading. Its mutual fund fees have been identified as among the highest in the world. Investor rights advocate FAIR Canada says the Toronto Stock Exchange falls below international standards in managing conflicts of interest. And a report by Transparency International, a German group dedicated to fighting corruption, ranks Canada at the bottom when it comes to preventing foreign bribery, having little or no enforcement. "We don't need to be the worst in the world," says Ken Kivenko, a consumer advocate and president of Toronto-based Kenmar Associates. "That's not a good objective."

There have certainly been many well-intentioned plans promising to impose stringent regimes of regulation and enforcement on Canadian capital markets. But they have been shelved by a lack of consensus and an industry intent on maintaining as much self-governance as possible. For instance, regulators have deliberated since the 1990s on how best to mandate disclosure documents for mutual funds that spell out the possible risks for prospective investors. In 2002, after years of examining ways to impose fiduciary standards on the industry, the Ontario Securities Commission (OSC) came up with the Fair Dealing Model to improve disclosure and remove embedded compensation for brokers. "It was really good thinking," Kivenko says. "We were ahead. We were way ahead. And it's what everybody else is doing now." But the OSC's proposal was subsequently watered down by the industry, and absorbed by the provincial regulator into a different framework that reformers say fails to address the conflict of interest issue for investment dealers.

The federal government, meanwhile, has come up with a plan to replace the country's 13 provincial and territorial regulators with a single national entity. "We need to rebuild the ship while it's still sailing," said Doug Hyndman, chair of the government's transition team, in July. The notion of a unified regulator is hailed by the industry's most fervent critics, but they're skeptical Ottawa can do it, particularly since it's two years away at best. "Is it even going to happen?" Kivenko asks. "What happens if the government loses an election? It doesn't seem like the Liberals want it very much." The plan also faces virulent opposition from Alberta and Quebec, which dismiss it as a federalist power grab. The Conservatives, however, have vowed to bring a national regulator into existence. "It is progress," says Larry Elford, a former financial adviser from Lethbridge, Alta. "It will be progress to simply say to 13 corrupted securities commissions: 'You are fired.'"

Elford was a broker for 20 years, but left disillusioned with what he views as systematic misrepresentation and conflicts of interest. He was dismayed by brokers who willingly ignored the interests of their clients in pursuit of higher commissions and fought against the expectation for him to do the same. The tricks of the trade range from double dipping -- charging commissions from new issues in addition to the annual fee applied to client accounts -- to brokers pushing a firm's proprietary products rather than providing options from the whole menu.

The key disincentive splitting brokers from the interests of their clients is a commission-based model that is pervasive in Canada, but increasingly being replaced worldwide by fee-based systems that essentially impose a fiduciary duty on brokers. Without that duty, brokers and salespeople can pursue deals that maximize commissions regardless of the impact on a client's portfolio. Until Canada embraces fiduciary standards, those selling investments should only be called salespeople, Elford says. Yet, they all refer to themselves as advisers, "even if they have less professional training in their craft than a hairdresser," he says. "There are methods that the industry uses to obtain the greatest amount of commission from the client, usually done in an invisible manner, usually done without disclosure and usually done without the interests of the client."

On the regulatory side, groups such as Investment Industry Regulatory Organization of Canada (IIROC) and the Ombudsman for Banking Services and Investments (OBSI) are funded by the industry, creating inherent conflicts of interest. And the various securities commissions, to varying degrees, are simply impotent and inactive, critics charge. In a report this past March by the Standing Committee on Government Agency, the OSC was given a reminder of its general mandate to protect the public interest. "Almost every submission we received commented on the lack of enforcement in the area of securities fraud," the report stated, noting the requirement of police to pursue criminal activity in capital markets.

The committee also criticized the Ontario regulator's response to the asset-backed commercial paper (ABCP) crisis. It cited a National Post story in which Jim Turner, vice-chairman of the OSC, was quoted as saying, "We didn't feel we had to jump in to protect investors." Retail investor Brian Hunter was acutely aware of the absence of any OSC leadership when $650,000 of ABCP paper he bought from Canaccord was wiped out. Hunter subsequently waged a public campaign to organize victims and eventually got his

Considering the baby-boom generation is entering retirement age and requires competent management of their nest eggs, a regulatory regime with teeth is needed more than ever, Kivenko says. "White-collar crime is like financial assault. It can kill you as much as a knife. You can get distressed, get ill. Life is never the same again when you lose 50% of your money at 65."

money back in a deal negotiated between a group of investors and Canaccord. "We were the lucky ones," he says, noting that without publicity, he would not have stood a chance. "Otherwise, you're a lost voice yelling into the night."

Of course, there are less sophisticated investors who lack the confidence to challenge brokers and advisers. The elderly are particularly vulnerable to slippery practices that can shrink a retirement fund. Take Harold Blanes. His son, Alan, says his father was 90 years old, and his mother, Gladys, was terminally ill when the couple's broker began to push them into increasingly riskier assets. "They were only interested in preserving their principle and that's it," says Blanes. "But they were getting steered into higher risk against their wishes. And they didn't have the strength to fight back."

After examining the client file, Blanes found it included a number of unsolicited trades, something his father wouldn't have done, particularly since he was preoccupied tending to his ailing wife. "He had no interest at all in moving money around in his portfolio," he says, suggesting the broker was churning the account to make commission fees on each transaction. In July 2006, his father was convinced to buy a "low-risk" equity that promptly lost almost $10,000 in two weeks. "My mother's spirits were totally destroyed by this. She felt the world was just too corrupt for her to live in and she just gradually shut down," he says. She died in 2007. The broker later claimed his client agreed to purchase a $160,000 yield deposit note with a seven-year term.

"People in their 90s don't normally put their money into a seven-year lock-in," Blanes says. Although he says his father lost $50,000 due to what he believes are dishonest practices, complaints to the OBSI and IIROC have gone nowhere.


Beyond regulation

When Financial Planners Make Bad Moves, Clients Have To Sometimes Take Matters Into Their Own Hands

Seeing his financial planner's picture in a newspaper confirmed Sylvio Gagnon's fears. Really, he already knew, but didn't want to believe it. Months earlier, the man he entrusted his finances to for 15 years, convinced him and his wife to sink about $70,000 into second mortgages. The retiree agreed and his money went into the mortgage on a home in Hawkesbury, Ont., between Ottawa and Montreal. Soon after, the property owner declared bankruptcy, the house was foreclosed on and Gagnon's money vanished. Still, his planner told him everything would be resolved and the home would be refinanced. But news reports earlier this year of similar deals involving his planner extinguished those hopes.

Gagnon tried to invoke protection from the industry's watchdogs. He met with officials from the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada, the Ombudsman for Banking Services and Investments (OBSI) and Quebec's Autorite des marches financiers. None were willing to pursue the matter.

Now Gagnon is a member of a group of 150 investors seeking certification to bring a $10-million class-action suit against the advisers. Some investors claim they had homes purchased in their names without their knowledge, at prices well above market value. Others thought their money was going into real-estate assets, but never received ownership of anything. None of the allegations have been tested in court. But for Gagnon, who retired from his job as an auditor with the federal government in 1993, the class-action lawsuit is the final hope.

"I don't give a damn about the money now. We've given up on that," he says. "But we want justice. I want people to realize how serious this is, that the small investor has no protection."

Read more: ... z0yrLDG2U2
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Sep 01, 2010 10:38 am

the above was sent to me by someone who viewed my youtube channel, featuring my public awareness campaign to inform of predatory financial behaviour by financial professionals

youtube site ... ature=mhum
(rest of chapters found at )

Thanks Larry, for the interesting videos. What happened to Chapters 3, 4, and 6?
This "investment advice" has been a problem for my conscience since 1968. I found the "estate planning" in the insurance business could be easily as manipulated. I am sure you know the commissions on an insurance policy continue year after year for the life of the contract. As an insurance salesman, you don't just get the commission on the initial sale.
Do purchasers know that? Ask them.
1)The insurance companies want to push sales of "whole life" plans, supposedly because of the "savings". But if you die before taking out the savings, the "savings" are confiscated by the company. So what you really bought was an expensive term insurance plan.
I left at the top of my game: rookie of the year with Sun, and the top salesman for Rocky. But I was so sick of the "cheatin' game" that I couldn't stand it any more.
2)Albert J. stole hundreds of millions, and tried to take over Manu Life with a huge attempted swindle.
3)When I left, I was also told I was not a "team player".
For a time it did emotional damage, and my marriage suffered. 4)Many friends and relatives also suffered because of my inexperience and taking the word of superiors. Only to find later, men like Albert take no honest responsibility for their psychopathic behavior. Its all just a game to them. A very rewarding financial game.
Cheers, Don
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sun Aug 15, 2010 3:45 pm ... /#more-526

Fund Company Owners: Millions Lost 37% While Owners Gained $2 Billion
by Paul B Farrell, JD, PhDShare | Print | 5/7/2010
They operate by casino rules that they invented and they manipulate while managing over $10 trillion of your assets. If you play by their rules, you will lose. Guaranteed. Examples: During the 2000-2002 bear market, one manager paid himself $47 million while his shareholders lost 43%. At the same time, the equity fund shareholders of Fidelity Investments lost 37% while Fidelity’s two major owners saw their net worth increase from $11.1 billion to $13.2 billion between 1999 and 2002. In 2006 they were worth $20.5 billion while their shareholders have barely broken even the past seven years. As Vanguard founder, Jack Bogle, put it in The Battle for the Soul of Capitalism: “The business and ethical standards of Corporate America, of investment America, of mutual fund America have been gravely compromised.”

Back in 2004, just before the Senate Banking Committee killed chances of any reform legislation (in spite of a 418-2 approval in the House) I warned fund investors that special interest groups would begin an aggressive campaign to defeat fund industry reforms under consideration by Congress and the SEC. It happened. The reasons were obvious. As critics point out, special interests take tens of billions of dollars right off the top of shareholder returns every year, with virtually no disclosure requirements. So fund company owners had an enormous incentive to oppose all reforms back in 2004—in fact, they always have and do oppose all reforms, all the time, it’s a matter of self-preservation.

Their opposition occasionally surfaces in the press, but more often than not, the press doesn’t get it, meanwhile, special interest money works behind the scenes through lobbyists and political contributions. Fund company owners are one of the major special interest groups identified. So it came as no surprise when Ned Johnson, chairman, CEO and controlling owner of Fidelity Investments, in the middle of the last major attempt at legislative reform, attacked reform legislation out in the open on the op-ed page of the Wall Street Journal—a rare event for a very private man.

Superhuman … or super-selfish?

Johnson’s attack, titled “Interested, and Proud of It!” was confined narrowly to defending his right to remain as the chairman of the board of trustees of Fidelity’s 290 mutual funds, as well as chairman and CEO of the management company, Fidelity Investments. Aside from the impossible, superhuman task of overseeing 290 individual funds, most critics, including independent voices like Jack Bogle, and former SEC Chair Arthur Levitt, as well as the New York Attorney General Elliot Spitzer and other state securities regulators, see this dual role as a clear conflict of interest. Johnson, however, dismissed all these critics and even argued: “Far from a conflict, these dual roles mean that my personal, professional and financial interests are directly aligned with those of the Fidelity shareholders.”

True to form for all fund company owners, Johnson was strenuously opposing the SEC’s proposed new regulations requiring that a fund chairman be independent. If the regs were approved, Johnson’s dominant ownership position in the fund management would force him to surrender his position of absolute control over the empire he created, which dominated more than $800 billion in shareholder assets.

In alignment … or in conflict?

While I admire Mr. Johnson strong convictions, he clearly had not just a conflict-of-interest but a major credibility issue here. The evidence contradicted Johnson’s claims of independence. Johnson’s dual roles actually put him in direct conflict with the interests of Fidelity’s shareholders, resulting in substantial personal gains for him during the 2000-2002 bear market while Fidelity investors lost substantial sums .

Moreover, when I called Fidelity and requested information that might support Johnson’s claim, they refused to release any data, hiding behind the industry’s all-purpose code of secrecy. In effect, Johnson was saying that investors should believe him simply because he said it, without question and without him providing any supporting evidence. So we checked other sources.

Fund industry’s shadowy “code of silence” in action

For the record, I should also add that this was not the first time I had offered Fidelity’s leadership an opportunity to set the record straight. A few months earlier Mr. Johnson and his executive vice president both declined when I asked to interview them on the proposed fund reform bill that had already passed the House and was being considered by the Senate. The bill would also legislatively force Mr. Johnson out of his conflicting roles.

I requested that earlier interview after reading Johnson’s remarks on the late trading and market timing posted on Fidelity’s website. Since Johnson rarely makes public comments, I offered him a forum to widen the discussion. I said that such an interview that would be a perfect opportunity for Fidelity’s leader to publicly air Fidelity’s opposition on all 21 provisions of Senate bill, not just selectively and narrowly discuss the market timing and late trading issues in public.

Fidelity held to the party line. Johnson and his officers refused, stone-walling me. The truth is, fund companies have become so used to their “conspiracy of silence,” as Jack Bogle calls it, that they oppose any disclosures to investors as a matter of principle. Witness how effective the industry was in getting an exception to the Sarbanes-Oxley requirements which covers all public corporate executives—but not the fund industry!

Fidelity investors lost 37% in bear … but insiders profited

Mr. Johnson’s central assertion in The Journal was very simple. He claimed that his “personal, professional and financial interests are directly aligned with those of the Fidelity shareholders.” Unfortunately, the evidence contradicted his claim. We know, for example, that during the bear market of 2000-2002 America’s stock market in general lost over 40 percent of its value. And yet, while the average American fund investor lost over 40 percent, fund owners, directors and managers took in more than $200 billion annually in fees, operating expenses, transaction costs, soft-money and other hidden compensation from deals with brokers and silent third-parties.

In fact, Morningstar said that during the bear years, 1999-2002, stock funds even increased their average expense ratio by a whopping 36 percent, forcing investors to fork out even more money for operating expenses during a crashing market, making sure the insiders wouldn’t suffer much while the financial markets crashed and lost over $8 trillion in market-cap.

One: Owners net worth increased 10% in bear
The assets of Fidelity’s shareholders actual declined 37 percent from $662 billion in 1999 to $416 billion in 2002 according to information provided to me directly from Fidelity. Moreover, during the bear market, Fidelity’s flagship Magellan Fund had a 35 percent decline in its net asset value, from $105 billion to $68 billion, according to Morningstar, while Fidelity charged its 18,000 investors well over $1 billion in management fees. By comparison, between the bear years 1999 and 2002, the net worth of Fidelity’s two principle owners, Edward Johnson and Abigail Johnson, actually increased from $11.1 billion to $12.3 billion, as reported in the Forbes 400 lists of America’s richest billionaires.

In short, while Fidelity’s fund shareholders lost 37 percent of their assets during the bear market, the owners of the fund management company saw their net worth increase more than 10 percent. Flash forward: In the 2007 list of billionaires, the two Johnsons now have a combined net worth of $20.5 billion, roughly equal to the wealth of Prince Alwaleed of Saudi Arabia, the 13th richest person in the world.

Two: Fund directors increased their pay by 26% during bear
In addition, according to InvestmentNews, fund company directors voted themselves an average 26 percent pay raise during the bear market years from 2000 to 2002, increasing their average compensation to $249,500, for part-time work averaging five week a year. In Fidelity’s case, each of their fourteen directors were paid over $250,000 annually. Ned Johnson is chairman, and Fidelity claims that ten of the directors are independent.

Three: Fund managers pay increased 35% during bear
Nationally, the salaries of fund managers increased 35 percent between 1999 and 2001, to an average salary of $436,500 according to a survey of the Association for Investment Management & Research. The survey covered 10,000 portfolio managers and was conducted by Russell Reynolds, a national executive search firm. At the time, MSN columnist Timothy Middelton also looked at publicly owned fund companies. All of them had losses well in excess of the negative 30 percent in the S&P 500 index, and still they paid their executives huge compensations:

Fund company ….. executive ….. compensation … investors’ losses
Gabelli Asset Mgt … Mario Gabelli … $47.1 million … minus 43.3%
Alliance Cap Mgt … Bruce Calvert … $12.1 million … minus 45.6%
Blackrock Inc … Laurence Fink … $ 9.5 million … minus 52.9%
Janus/Stilwell … Thomas Bailey … $ 8.9 million … minus 62.7%
LeggMason … Raymond Mason $ 7.7 million … minus 38.8%
Eaton Vance … James Hawkes … $ 3.8 million … minus 38.4%
Federated … John Donohue … $ 3.6 million … minus 40.6%
T. Rowe Price … George Roche … $ 2.0 million … minus 40.3%
Neuberger Berman … Jeffrey Lane … $ 1.6 million … minus 36.4%
Waddell & Reed … Keith A. Tucker … $ 1.1 million … minus 47.1%

Rip-off? You bet. Not only did these guys lose boatloads of their investors’ money, while filling their own pockets, every one lost more than the market! And many continued on through the recent credit meltdown. They treat mutuals funds as their personal piggy banks.

Bottom line: Fidelity CEO’s claim was not credible

Ned Johnson’s claim that his “personal, professional and financial interests are directly aligned with those of the Fidelity shareholders” does not square with the facts. He not only had a clear conflict of interest, but he had a credibility problem. And worse yet, the SEC was, in effect, protecting him, and with rare exceptions, the game went over the heads of the media and press.

During the crucial bear market years from 2000-2002 not only were the interests of fund industry insiders in significant conflicts with their own investors, but as we saw, Fidelity’s two major owners realized a 10 percent gain while Fidelity’s shareholders experienced a 37 percent loss of asset value. So, as much as we may admire Fidelity’s founder, Mr. Johnson, for building one of the biggest financial empires in American history, his claim was not credible. His interests clearly conflicted with Fidelity’s fund shareholders—and serve as an example of an attitude pervasive throughout the fund industry.

FirstPubDate: Dec’04 ... /#more-526
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Tue Jul 13, 2010 11:12 am

The Double Life of Wall Street
by David Weidner
Tuesday, July 13, 2010

Commentary: Masking debt mars earnings season — and analysts don't help

Fairy tale season is about to begin.

Wall Street banks and brokerages are readying second-quarter numbers for mass digestion. They'll show healthy balance sheets, tolerable risk levels and have all the trappings of well-run companies.

Don't believe a word of it.

If the second quarter is anything like quarters of the past couple years, risk is up and capital is down. And what you'll see on earnings day bears little resemblance to the business being conducted between the bookends of the start and end of the latest quarter. After all, Wall Street is an industry built on prevaricating for clients — Enron Corp., Greece and Parmalat Spa (PLATF.PK - News) to name a few — why would it come clean with its own financials?

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Late last week, Bank of America Corp. (NYSE: BAC - News) became the latest big financial firm to cop to manipulating end-of-the-quarter earnings. In a letter to the Securities and Exchange Commission, B. of A. said it masked debt levels between 2007 and 2009 by making six trades designed to shine up the numbers on earnings day.

You can bet that the Charlotte, N.C.-based bank isn't the only one using the David Blaine accounting method. In April, the The Wall Street Journal examined data from the Federal Reserve bank of New York and found 18 banks including Goldman Sachs Group Inc. (NYSE: GS - News), Morgan Stanley (NYSE: MS - News) and J.P. Morgan Chase & Co. (NYSE: JPM - News) masked debt levels in the five quarters ending in March.

The Journal found the banks "understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data showed. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters."

Of course, like many Wall Street practices in the era of deregulation, all of the trades were perfectly legal, just as the "repo" accounting used by Lehman Brothers to hide its leverage exposure was legal — at least in the opinion of the U.K. attorneys they could get to approve the deals.

Lehman was hardly alone. Before, during and after the financial crisis, banks used countless accounting tricks, including off-balance sheet entities called special purpose vehicles, short-term repurchase agreements, securities that banks label "available for sale," and all varieties of "intent-based accounting."

Research conspiracy

You would think this kind of window dressing would raise the ire of analysts whose rosy analysis of Wall Street firms including American International Group Inc. (NYSE: AIG - News) Bear Stearns, Lehman Brothers and Merrill Lynch were made to look foolish by opaque and misleading balance sheets.

Think again. Most analysts still read the suspect financial data they're handed every three months and take it as gospel.

Take a look at the usual suspects. Since the start of the year, analysts have issued six ratings upgrades to Citigroup (NYSE: C - News), six to Goldman, four to Morgan Stanley and nine to Bank of America, according to FactSet. Combined, analysts have only issued five downgrades.

Even some of the best analysts, including Brad Hintz at Bernstein Research, Meredith Whitney, who runs her own research company and Glenn Schorr at Deutsche Bank AG seem reluctant to mention the fact that banks are tweaking the numbers. And why should they? Admitting that a bank has cut risk for earnings day undermines their "analysis."

Denials and lies

Less than a decade ago, a crusading attorney general upended Wall Street with a series of investigations and settlements concerning practices that the industry and public took for granted: late trading of mutual funds, bid-rigging in the insurance market and research conflicts.

Regardless of Eliot Spitzer's personal failings and his lasting impact as a reformer, at least he had the gumption to challenge practices on the grounds of common sense and evenhandedness. Unfortunately, no one seems to have taken up the mantle of championing fairness in the markets.

Even after the financial crisis, financial firms still take short cuts behind the scenes, the analysts keep playing it straight, investors continue to follow the analysts and credit ratings agencies. Not only does the emperor have no clothes, no one in the kingdom cares.

Maybe it's the obfuscation: like the way a chief financial officer authoritatively patronizes investors on the earnings call. Or perhaps it's the way banks such as Goldman and Morgan Stanley vehemently deny they use "repo" transactions to make the books look better at the end of the quarter but are hazy when asked about other transactions.

Maybe it doesn't matter anyway. All of this stuff, we're told, is legal. And if the SEC does make a move, it's only going to require more disclosure of mid-quarter activities.

Maybe lie is too strong a word for the game big finance plays at the end of the quarter. It is, after all, trickery played inside the lines.

But here's something you should refuse to call it: the truth.
images-8.jpeg (3.06 KiB) Viewed 11074 times

David Weidner covers Wall Street for MarketWatch.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Dec 02, 2009 6:39 pm


Dante finally enters hell-- at least its outer region--by passing through a gateway. The inscription above this gate--ending with the famous warning to "abandon all hope"-- establishes Dante's hell..................

If a financially abused investor accepts and trusts in the objectivity and impartiality of the Canadian financial regulatory system to protect the abused investor, and if that abused investor enters into the regulatory and self regulatory maze of self serving dealers from hell, I say that Dantes quote should be placed above the entrances to the OCS, MFDA, IDA, IIROC, ASC, BCSC, SFSC, MSC, CBA, CCIR, CFIE, CICA, CSA, CFSON, FATF, FCAC, FSCO, ICB, IOSCO, IFIC, ETC......

Once you enter, you will be turning your life and your complaint over to the very people who are paid a salary NOT to resolve your complaint and NOT to see that you are made whole. Finance is the only retail game in the world that still has a "no satisfaction, no return" policy, even on knowingly toxic, and tainted, misrepresented products.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Thu Nov 26, 2009 9:34 am

2010 Investment Guide

The Brokerage Customer Is Always Wrong

Some brokerages field complaints with a smile.
That doesn't necessarily mean you'll get back the money you lost.

Matt Lechner questioned Fidelity's bond trades--and got bounced.

Asher Hawkins, 12.14.09, 12:00 AM ET
When financial planner Matthew Lechner put in an order with Fidelity Investments Institutional Services Co. three years ago to sell $100,000 worth of his family's Connecticut general obligation bonds, he assumed they'd be posted on a national broker-dealer network where they'd fetch the best possible price. He inquired and says he was shocked when Fidelity replied that it intended to execute his sell order within the firm.

Figuring such a move would result in an inferior price, the Westport, Conn. resident threatened to report Fidelity to regulators. The firm put his bonds out to bid the same day. They went for $103,000, which Lechner says is $1,000 more than he would have received under Fidelity's original proposal.

Six Steps To Prevent Being Ripped Off By Your Broker

Over the next two years Lechner repeatedly pushed Fidelity, sometimes in colorfully worded language but to no avail, to disclose whether its bond mutual funds trade the same way. Then last year Lechner received a letter declaring Fidelity could not "provide the level of service that you require" and that Lechner should take his business elsewhere. Fidelity says it is standard policy to execute bond orders within the firm, unless customers specifically request that they be displayed on a broader market.

Getting unceremoniously dumped by your brokerage or mutual fund company is a pretty extreme outcome. By contrast, many firms go to considerable lengths to keep customers content by funneling their complaints to dedicated groups that have been set up to handle disputes. Discount broker Charles Schwab has its Client Advocacy Team, Fidelity its Customer Advocacy Council. At Vanguard it's known as Executive Action Request Services. (Others, including Morgan Stanley Smith Barney, take an old-school approach and automatically forward complaints to legal and compliance departments.)

The upside of directing problems to dispute-resolution specialists is that often they'll be mediated without resorting either to binding arbitration (a requirement for signing up with most brokerage accounts) or a full-blown lawsuit.

The downside? No matter what name the groups go by, or how warm and fuzzy their reps sound on the phone, dispute-resolution specialists are neither your friends nor your advocates. A case in point involves the big losses Charles Schwab clients suffered in 2007 in the firm's YieldPlus ultra-short-term bond funds.

Former clients charge that Schwab sold the funds as being as safe as money market accounts and then loaded them with risky subprime mortgage paper. In October the Securities & Exchange Commission informed Schwab that it could face related civil charges. Many Schwab clients who invested in YieldPlus and lived to regret it had their first back-and-forth about their losses with the firm's three-year-old Client Advocacy Group. "We welcome complaints," says Brian McDonald, the vice president in charge. "If clients are complaining to me, I know they want to continue to do business with Schwab. It gives us an opportunity to fix the problem."

Fix, without being overly generous with Schwab's money. Lawyers for aggrieved YieldPlus customers say the company's offers have been the result of cold calculation rather than any sense of doing the right thing by customers. YieldPlus investors who claimed losses of $40,000 or more were offered 10% or less in compensation and no willingness on Schwab's part to negotiate, according to Thomas Shine, an Indialantic, Fla. attorney representing Schwab clients in a class action. Those with smaller losses were encouraged to renounce further action with offers of 20% to 40% of their claimed losses.

McDonald says that roughly one-fourth of customers who complain receive some form of financial compensation. Roughly 1% get everything they ask for.

Let us concede that sometimes the customer is indeed wrong. Investors who were all too happy to have their brokers pick hot stocks for them when the market was going up have a tendency to suddenly discover in a bear market that such stocks were unsuitable.

One client filed an arbitration claim against UBS because a stock sale resulted in capital gains taxes of $12,400. Arbitrators determined that any "reasonable person" should have known that he would be liable for taxes on investment income.

What to do if you have a gripe? If it's about not following your phoned instructions on a sale or purchase, try to get a recording. The brokerage doesn't have to cough this up--the recording is its property. Vanguard shares its recordings with customers "on a case-by-case basis," a spokesperson says. Schwab says it will play recordings for clients over the phone or at its branches. Fidelity says customer call recordings are not shared unless an arbitration claim is filed. Neither government nor industry regulators have formal policies regarding tape recordings of phone calls.

In the Schwab YieldPlus lawsuits, one of the plaintiff attorneys' first moves was to send Schwab a letter demanding that recordings be preserved for use in legal proceedings. Plaintiffs' attorneys say that Schwab has turned over recordings of all phone calls it says are in its possession.

How do you protect yourself? Trade online to create a paper trail if you can. When phoning in an order, note the date, time and name of the customer service rep and make your own recording. Even if the brokerage records calls (many do), your safest bet is to alert the firm that you are doing the same. (A digital recorder and jack run about $75; recordings can be stored on your computer.)

If you do decide to complain, do it in a timely way but not in a fit of rage. Venting about your problem without carefully thinking through what you're going to say could hurt your case in a more formal proceeding.

"People say something was fraud when really it was carelessness and look like crackpots," warns Seth Lipner, a Garden City, N.Y. securities lawyer. "Whatever you say in your complaint will be used against you by their lawyers."

Charity Cases: Contributions rose, but the members of our annual America's 200 Largest Charities collectively lost money for the first time ever—mainly on account of investment losses. Their highest-paid officials, by contrast, did better. For details, see
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sat Jul 18, 2009 5:52 pm

Fleecing the Elderly
Help Stop Scam Artists From Fleecing the Elderly
By Michelle Singletary
Thursday, July 16, 2009

Fraud is bad enough, but when you have family members or caregivers who are financially abusing their elderly relatives or patients, that's downright despicable.

And yet, in most of the cases of elder financial abuse, the perpetrators are not strangers. Family, friends, neighbors and caregivers are the culprits in 55 percent of the cases, according to a report, "Broken Trust: Elders, Family, and Finance," released by the MetLife Mature Market Institute. The report was produced in conjunction with the National Committee for the Prevention of Elder Abuse and Virginia Tech.

Law enforcement and securities regulators say the recession is pushing more people to steal from well-off seniors.

"There is definitely more fraud than there has been," said Fred Joseph, Colorado securities commissioner and president of the North American Securities Administrators Association (NASAA). "Elder financial abuse is becoming the crime of the 21st century as the growing senior population is increasingly targeted."

The annual financial loss by victims of elder financial abuse is estimated to be at least $2.6 billion, according to the report. The typical victim of elder abuse is a woman over 75 who lives alone.

It's not surprising that the more health issues seniors have, the more likely they will be victimized. As I searched media reports of abuse for just this year, I found numerous cases where family members and caregivers took advantage of seniors with dementia.

A nursing assistant from the state of Washington was charged with stealing more than $770,000 from the elderly woman she was caring for.

In a Florida case, a man called authorities to report his 80-year-old mother's hairdresser had stolen her checks. The stylist was accused of taking $25,000 from the woman's checking account. But get this: During the investigation, police charged the victim's 52-year-old son -- who first alerted police -- with fraudulently cashing $6,900 in checks from his mentally incompetent mother.

Last month in Virginia, a home health caregiver was sentenced to six months in jail for taking $15,000 from an 85-year-old woman suffering from dementia. The victim was bedridden.

The financial abuse of seniors has become so prevalent that the NASAA and the National Adult Protective Services Association recently united to develop tips and strategies to protect them.

"A silent crime is taking its toll on America -- silent because so many of these cases go unreported," said Kathleen Quinn, executive director of the protective services association. "This announcement is the first step in a partnership we hope will grow to close the gap on elder abuse."

Following are some red-flag warnings the NASAA will be providing to adult protective services workers to help them spot and stop potential elder financial abuse:

-- Is the senior receiving information about or being asked to invest in unregistered securities or start-up companies? (You'll have to do some research to find this out.) Securities fraud can be detected by checking with your state securities regulator. Contact information is available at

-- Is the investment high-risk or possibly speculative, involving such things as oil and gas exploration, new or untested technologies, rare metals, or currency trading?

-- Has the senior been asked to sign blank paperwork or to give discretionary authority over her accounts to an adviser?

-- Is the senior complaining that his investment adviser won't give him his account statements or documentation?

-- Has the senior made out a check directly to the adviser or broker for the purchase of an investment?

There's information on NASAA's Web site that will assist you in helping seniors avoid these problems. Go to and search for "Senior Investor Resource Center." To report elder abuse you can contact an adult protective services office at or through the National Center on Elder Abuse at or 800-677-1116.

"This type of crime just sets me off," Joseph said. "You get victims who are in their 70s and 80s being taken for their life savings. What do they do? They can't earn it back."

If you suspect a senior is being financially exploited, report it -- even if the suspected scoundrel is a family member.

-- By mail: Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

-- By e-mail:
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Jun 03, 2009 10:22 pm

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
We don't know precisely how much Depfa got for the loans,
but it was substantial.

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

The following is an excerpt from Les
Leopold's new book, "The Looting of America
582053> " (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
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
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
"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
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
582053> (Chelsea Green Publishing, 2009).

Canada's Royal Bank SOLD Leveraged C.D.O.'s to U.S. School
Boards !!


November 2, 2008
The Reckoning
From Midwest to M.T.A., Pain From Global Gamble
/index.html?inline=nyt-per> and CARTER DOUGHERTY
"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
ns/wisconsin/index.html?inline=nyt-geo> 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
s/index.html?inline=nyt-classifier> 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
index.html?inline=nyt-org> 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
index.html?inline=nyt-org> , which had a relationship with Mr. Noack's
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
"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
litan_transportation_authority/index.html?inline=nyt-org> 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
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
x.html?inline=nyt-org> , 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
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
ngs_inc/index.html?inline=nyt-org> went bankrupt. Short-term lending
markets froze up. Ratings agencies, including Standard & Poor's
dex.html?inline=nyt-org> , 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
index.html?inline=nyt-per> , 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
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
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
"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: Financial Abuse by "Trusted Professionals"

Postby admin » Sun May 10, 2009 11:17 am

The lone investor fights back
Retiree got hit from all sides but won't give up

Jonathan Chevreau, Financial Post
When Canadian investors lose money to the nation's giant financial institutions, they often settle out of court and sign "gag orders" agreeing not to publicize their experience.

But rarely does the financial industry come up against a customer as ornery as retiree Mary Diwell of Chelsea, Que. Diwell, 60, has a small RRSP but the major source of her retirement income is her husband's pension. She has a Masters degree in history and political science and hoped to use her non-registered investments to pursue a PhD.

In the 1990s, she had a "good man" at BMO Nesbitt Burns who doubled her money from $40,000 to $80,000. But then he began investing in options with her account. She

balked and moved to Scotia Capital in 1995, opening a mar-gin account with an Ottawa broker named Frank Cestnik. From the original $80,000, she added funds to grow her account to more than $130,000. But by the year 2000, she says this plummeted to $17,000.

In 2004, Diwell sued Scotia Capital for gross negligence and fraudulent misrepresentation. She says the account was run as if it were discretionary and had given the bank authorization to make trades without her approval each time. The bank denies this. "In effect, he was selling off my property without my consent," she told me in a series of telephone interviews. "It changed our lives dramatically."

In its statement of defence, Scotia Capital denied Diwell's allegations and said her account "had a gain of $38,840 based on net investment of $132,411 and withdrawals of $167,251." If she suffered any losses, they "were caused or contributed [due] to her own negligence."

Finally, in 2007, the bank's legal counsel, Ogilvy Renault, made a non-negotiable offer of $20,000, complete with gag order. ScotiaMcLeod spokesman Frank Switzer says the offer was made to avoid the cost of trial. Cestnik is still with the firm, Switzer says, but ceased to be Diwell's advisor by September, 2000.

At this point, many investors roll over, take the money and are never heard from again.

In a departure from the usual pattern, Diwell claims she rejected the offer and told her lawyers at Toronto-based Lerners LLP to fight it out in court. Minutes before the March 31, 2007, deadline, Diwell says Lerners accepted the bank's settlement offer "without my knowledge or consent." She refused to sign the release, which included the gag order. When she refused to sign,

Scotia brought a motion to enforce the settlement Lerners had accepted. In February, the Ontario Superior Court of Justice sided with the bank, leaving Diwell in contempt.

"I'm not gagged because I signed nothing," Diwell says, and describes Lerners' stance this way: "It was not a case of take it or leave it. It was take it or we'll take it for you." She claims she never received the $20,000.

Her contract specified that if she won in court the lawyers would get 23% of the proceeds, rising to 38% if it reached appeal.

When asked whether the firm had proceeded without its client's authorization, Peter Jervis, a veteran lawyer with Lerners, responded in an e-mail: "you have very likely been misinformed." In a subsequent phone interview, he said he was unable to talk about the case. The firm may have concluded that a small case such as Diwell's was not worth fighting in court. It is also possible she is regarded as a nuisance--Diwell had tried other legal counsel before landing at Lerners and has made complaints to the Law Society of Upper Canada.

She had been referred to Lerners by Stan Buell, president of the Small Investor Protection Association (SIPA). "The fact Lerners took it on a contingency fee basis suggests there was some merit to the case and the fact Scotia offered her money to keep her quiet also suggests there was some merit to the case," Buell says, "It's not unusual for brokerages to offer a pittance to settle a case."

ScotiaMcLeod's Switzer says "we negotiated what we believe was a fair settlement with her lawyer. We were prepared to follow through on this. The dispute appears to be between her and her lawyer."

Duff Conacher, co-ordinator for Democracy Watch, says Diwell "is being courageous in not rolling over." He says her situation is typical of the lone investor pitted against big financial institutions. The solution, he says, is to create a consumer-oriented body that allows investors to share legal resources. He'd like to see all financial institutions forced to include information on such a body in mailings to customers.

The playing field "is completely tilted in favour of sellers and against consumers," Conacher says. "Mary is on her own." - Jonathan Chevreau blogs at
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sun May 10, 2009 10:57 am

Looking at the case of retiree Mary Diwell of Chelsea, Que.

With the help of a bank employee, who was licensed and registered (and paid) in the category of "salesperson", but representing himself to the public as a professional "advisor".

This client saw her investment account dwindle from $130,000 to $17,000 with the help of the salesperson, whose commissions would be based, one assumes on the transaction activity in her account, or on the risk level of her account, (higher risk products pay higher comp) or on the number of other ways and means that the investment industry has of "helping" clients with their money.

The client also says that the bank person made trades in her account without her say so, which is called discretionary trading, and is considered the same as taking money out of your account. It is a no no.

She took the matter to court, with the help of a high priced lawyer who thought the case was strong enough, that they took it on contingency, meaning if they did not get some money, they did not get paid.

I will post the original article on next posting.

Well the lawyer got paid. Her case was offered $20,000 to settle, less than 15 cents on the dollar (good work for an investment firm if you can abuse clients, and keep 85% of what you get). Included in the offer was a gag order which the bank usually gets away with, making sure that not only do they get to keep 85% of abusively gotten gains, but that the victim never gets to talk about it publicly. This allows financial firms to do illegal things in secret, and to continue to repeat these behaviors, without ever being held accountable.

Real police and real charges never come about, since this is Canada, after all, and police do not get involved in financial matters. Those "high level" matters are dealt with by the investment industry itself. Convenient.

Mary was insulted by the offer, and the gag order she was being asked (forced?) to sign. (is there any duress here to sign......strong bank.....near pennyless client?) She did not accept. Whooops.

Her lawyer accepted the offer on her behalf (they say she allowed this) and they supposedly have kept the $20,000.

She has not one nickel of her money, but she does have a better understanding of financial abuse. And legal abuse. And corporate abuse. etc

Mary, I am so sorry for how you were treated. Without knowing more about the details of your case, I cannot say how right or wrong the arguments were. I will try to learn more, and say more. What I do know for a fact is that the system is stacked heavily in favor of the investment industry. And that the investment industry nearly owns the legal community. It is sad, but after thirty years in the industry, that is that way I see it. And I have no salary to make me see it that way, and no gag order.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Apr 29, 2009 11:27 am

Financial services vies with tobacco for least-loved

AIG got lowest score since Enron, according to Harris survey
By Sue Asci
April 29, 2009
What do the financial services industry and the tobacco
industry have in common? They are held in equally low regard by the public,
according to a survey released today.
Only 11% of those surveyed gave positive ratings to the
financial services — tying with the 11% for the tobacco industry.
This was the first year that financial services industry was
ranked as a category separate from the insurance industry in the survey,
conducted by Harris Interactive Inc., the Rochester, N.Y., market research
Technology remained the highest rated industry in the Harris
Reputation Quotient, an index that Harris launched 10 years ago.
But corporations in general are not well-regarded by the
public, falling to their lowest level in 10 years: A full 88% of those
surveyed said the reputation of corporate America is “not good” or
“terrible” in 2008, as opposed to 71% in 2007.
After rating the reputation of corporate America in general
and the various industry sectors, participants were asked to rate 60
companies that were deemed to be most “'visible.”
Unsurprisingly, of the 60 companies identified in the
survey, American International Group of New York came in dead last,
recording one of the lowest scores in the study's history. It had a score of
43.78. This was the lowest score since 2005, when the disgraced Enron Corp.
of Houston scored of 30.05.
“We would not comment on a report that we have not seen,"
said AIG spokesman Joe Norton. “But we will comment that AIG is committed to
re-paying the taxpayers.” The company has taken a $150 billion government
The only industry that moved up in the rankings in 2008 was
the pharmaceutical industry, where the number of companies with positive
rankings grew to 31 from 26, Harris reported.
The measurement includes two calculations, with the first
resulting from telephone and online interviews of 6,587 people, conducted in
September and October, to identify the most visible companies.
A second part of the process included an online survey with
20,483 people conducted from Dec. 31 through Feb. 2, which rated the
companies’ reputations on 20 attributes that fall into six areas: emotional
appeal, products and services, social responsibility, vision and leadership,
workplace environment and financial performance.
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