S**t Hitting the Fan on SEC Probes and Criminal Charges

I am shocked at this moral bankruptcy. This is probably one of the worst cases that we have seen. - U.K. Prime Minster Gordon Brown

Really? You're shocked now? We've not shocked, we're shell shocked.

From the BBC:

"Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority to investigate it immediately. - Gordon Brown

Germany's Prime Minster is also taking about taking legal steps against Goldman Sachs.

Goldman Sachs Charged with Fraud!

Finally! The golden boys finally aren't going to get away with something. The actual SEC complaint is online here. First:

The Players are Goldman Sachs, Paulson & Co. (a hedge fund run by John Paulson) and one Goldman Sachs VP, Fabrice Tourre.

The fictional investment vehicle in question is ABACUS 2007-AC1.

The Victims are IKB Deutsche Industriebank, Royal Bank of Scotland.

The Money is $1 billion in rigged profits to Paulson, $1 billion in losses to the victims, $15 million to Goldman Sachs for rigging the CDO.

Here is the entire SEC press release:

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

SEC Chair Schapiro Slaps Swaps

In an letter to the Washington Post, SEC Chair Mary Schapiro calls for the need to regulate swaps, some of which you may have heard before as credit default swaps, or CDS. Boiling down what her criticisms of the financial reform legislation, her recommendations come down to:

  • All securities-based swaps should be regulated as securities; all commodity-based swaps should be subject to commodities laws.
  • Apply TRACE, a public disclosure & tracking system for debt securities, to swaps.
  • Use clearinghouses and exchanges in transactions for swaps.

SEC writes letter to ALL Executive Financial Officers Demanding Repo 105 Disclosure

The SEC has written a letter (full letter at Zero Hedge link) demanding to find out if anybody else used repo 105s as a shell game to hid losses.

please tell us whether you have offset securities owned (long positions) with securities sold, but not yet purchased (short positions), along with any basis for your presentation policy and the related gross amounts that are offset. Finally, if you accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and did not provide disclosure of those transactions in your

SEC may ban short sales for February - ominous sign

A most interesting story on the SEC banning short sales for February.

Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.

The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day, said Brian Hyndman, the senior vice president in transaction services at Nasdaq OMX Group Inc. In a short sale, an investor borrows an asset and sells it, hoping to profit from a decrease by repurchasing it later at a lower price.

SEC Subpoenas Goldman Sachs, Citigroup over CDOs

I can't find out much more information than this blurb from the Financial times:

Several leading international banks have received subpoenas from US regulators investigating one of the complex securities markets at the heart of the financial crisis, people familiar with the probe say.

The Securities and Exchange Commission sent subpoenas last month to banks including Goldman Sachs, Credit Suisse, Citigroup, Bank of America/Merrill Lynch, Deutsche Bank, UBS, Morgan Stanley and Barclays Capital, these people said. Requests for information were also made by the Financial Industry Regulatory Authority, which oversees broker-dealers.

SEC ban on Flash Trading might "violate" WTO rules

Remember the good news last week when the SEC banned flash trading?

Well, Public Citizen just put up a new blog post explaining WTO trade rules and how these rules might lead to the WTO trade complaint case against the SEC. The WTO might claim banning high frequency trading (known as HFT) is a barrier to trade.

HFT would almost certainly fall under the definition at Annex’s 5(a)(x): “Trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise.” Even if it didn’t, the list in the Annex is illustrative, not exhaustive.

Fines, Slaps on the Wrist & Business as Usual

Anyone else notice G.E. was fined $50 million? That's chump change for G.E. They spent $200 Million in legal fees trying to fight it.

We had BoA fined $33 million for Merrill Lynch bonuses. How big were those bonuses? $5.8 billion.

Earlier the SEC fined Stanford group, didn't deter much of anything as noted by the final arrests and $8 billion in fraud.

This problem goes way past Wall Street. Most fines and violations are more like a speed bump slow down as corporations throw change at the toll booth.

What Did SEC Chair Shapiro Say at Yesterday's Hearing?

SEC Chair Shapiro gave testimony in Congressional hearing SEC Oversight: Current State and Agenda

Parsing over the testimony, which EP readers should also scan via the link, some interesting sections.

Firstly it appears the SEC will monitor credit ratings agencies, and appear to be going after paid for ratings requests, which was at the heart of financial crisis. This Friday Night Video has some detailed video interviews, clips on credit ratings agencies and how they enabled the financial meltdown.

The SEC and the small fish versus the big fish

Joe Nocera's New York Times Column Saturday reviled a real S.E.C. horror show. Seems like they like to go after the small fish and ignore the more obvious fraud and violations. The S.E.C. is an independent agency, so one must wonder if policies of going after the vulnerable and ignoring the guilty have changed.

The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.