Erin Arvedlund on the LIBOR financial scandal. Thanks to Marti Moss Coane for interviewing me about the book “Open Secret” on the Libor rate-rigging scandal.
Investing in You: The hunter who trapped the ‘Wolf’
Stock flippers and ratholes: That was the dirty business of true-life Wolf of Wall StreetJordan Belfort, says Gregory Coleman, the FBI special agent who ensnared the notorious criminal.The real story is even better than the movie. And, like every good story, it has lessons for us.
Coleman was invited to tell the tale at the recent Economic Crimes Conference at the Philadelphia FBI offices by Assistant Special Agent-in-Charge John Brosnan, formerly of Coleman’s old New York squad.
Coleman (his character in the movie, Patrick Denham, is played by Kyle Chandler) and federal prosecutor Joel Cohen spent six years trailing, interrogating, and ultimately arresting Belfort (played by Leonardo DiCaprio) and his partner Danny Porush (played by Jonah Hill). Victims of Belfort’s Long Island brokerage, Stratton Oakmont, lost $110 million.
The scam worked this way: Belfort and his army of young brokers would buy and manipulate small-cap stocks, making sure also to donate shares to friendly parties such as Steve Madden – yes, that Steve Madden, founder of the shoe company. Belfort’s brokers would drive up the price of stock parked with Madden, known as a “rathole.” Then Belfort, Madden, and the inner circle sold first, split the profits, and dumped the stock, sandbagging retail customers.
The red flags were not hard to spot, Coleman says.
In the early 1990s, other brokerage firms were barely profitable or losing money. Belfort earned 89 cents on every dollar, taking in $15.6 million in 1994. His performance was an outlier, especially while the stock market was on a losing streak.
Lesson One: Compare your investments to their peers. Are they doing so much better that it’s almost too good to be true?
The Securities and Exchange Commission sued Belfort for fraud and barred him from the business for life – the worst thing that could have happened, Coleman believes. “At that point, he was no longer a regulated person” and was off the radar.
Lesson Two: Nonregulated persons or firms are a red flag. Arm yourself with information at Finra.org/brokercheck, where you can look up brokers’ disciplinary history.
Despite the SEC ban, Belfort continued making millions, stuffing cash into safe-deposit boxes. Then he began laundering the money.
The couriers. Belfort opened foreign bank accounts under nominee, or a different name, in Geneva, Switzerland. He employed Todd Garrett, a drug dealer, whom Coleman says finked on his boss and “cried like a baby” upon arrest.
Garrett and his girlfriend acted as couriers for Belfort and even kept receipts. Coleman shows one bank deposit slip with Union Bancaire Price in Switzerland that reported a Belfort courier deposited $300,000 one day.
“Documents speak to us. How come this slip doesn’t show a deposit in Swiss francs? Because Belfort’s guy walked into the bank with a Louis Vuitton bag full of dollars.”
Foreign nominee bank accounts were key to money-laundering charges against Belfort.
Accountants, take heed on behalf of your clients: If you’re doing your due diligence, focus on bank accounts, not shell companies, and on to whom the money flows. “Follow the money. It’s a cliche, but it’s true,” Coleman says.
“White-collar fraud is everywhere,” he adds. Currently, he’s investigating a $50 million-plus fraud against the U.S. government by bodega owners buying $10 food-assistance vouchers and paying customers $8 each, pocketing the difference.
Proceeds of fraud. A Coco Chanel-owned yacht that Belfort bought – then cut in half and had built even longer, to 175 feet – actually existed, just like the one in the movie. But in real life, Belfort’s arrogance sank that yacht. He and 17 other people almost drowned because he insisted on sailing out into rough seas. The Coast Guard saved them, but the yacht went down in the Mediterranean.
Otherwise, the FBI would have auctioned it along with the diamond ring belonging to Belfort’s wife, Nadine, and his houses in the Hamptons.
“These were all proceeds of fraud, and we sold them to pay back the victims,” Coleman says.
Currently, Belfort is traveling on the “bad guy circuit,” Coleman says, selling seminars on the techniques he used to defraud investors, making money again.
“He’s got to pay it back. He has said he’s going to. Will he?” Coleman asks. “He’s capable of it – he’s bright and charismatic, like a Southern preacher. The morality wires in his brain, though, were never spliced together.”
Convicted of money-laundering and securities fraud in 2003, Belfort was sentenced to four years in prison (he served 22 months) and ordered to repay the $110.4 million to a victim-compensation fund.
Thanks to my friend Peter Crivelli for inviting me to speak to his class. Here are the details:
Wilmington, Delaware native and author Erin Arvedlund will share insights with UD business school students and faculty on Monday, Oct. 6, at Peter Crivelli’s class at the Lerner College of Business & Economics.
This year’s lecture will begin at 7 p.m. in Purnell Hall, Room 188, and Arvedlund will discuss her book “Open Secret” (Penguin 2014) http://www.amazon.com/Erin-Arvedlund/e/B002FZ23L2/ref=sr_ntt_srch_lnk_2?qid=1406135546&sr=8-2 . The book details the LIBOR interest rate rigging scandal; why the Federal Reserve and other regulators want to replace the benchmark, the ethics behind the manipulations of the rate and why it’s still in use today.
For your listening pleasure, some outlets have been interviewing me about my new book “Open Secret” (Penguin 2014) on the Libor interest rate rigging fallout.
Bloomberg’s “Taking Stock, the Texas Public Radio show “The Source” and Jim Blasingame’s Small Business Advocate
It’s a funny acronym that may have cost you big bucks.
LIBOR, the London Interbank Offered Rate, is a global benchmark for interest rates. It’s tied to everything from mortgage rates and student loan rates to complex financial derivatives. And guess what? For a very long time it was rigged.
Now, multiple lawsuits are pending, and that could mean some money back for some investors, traders and consumers.
LIBOR is set each day by a group of bankers, based on estimates of rates at which banks would expect to borrow money from each other. It’s a system built on trust, not math. Regulators were tipped off back in 2007 that banks were fixing rates, and by the summer of 2012, an ugly scandal was revealed. An estimated $300 trillion in financial securities worldwide are based on LIBOR.
Philadelphia Inquirer writer and author Erin Arvedlund says more people should have been outraged because the scandal revealed that “even interest rates are being rigged by Wall Street.” Arvedlund’s new book, “Open Secret: The Global Banking Conspiracy that Swindled Investors out of Billions,” gives details of the scandal that involved banks lowballing rates or artificially inflating them to boost profits or appear more credit-worthy.
The investigation into LIBOR rate-rigging has led to several lawsuits here in the U.S. and many more abroad. They involve some of the biggest banks in the world as well as individual traders. More than $6 billion in fines has been levied as a result of the scandal already.
It may seem like just another tale of bankers behaving badly, says Arvedlund, but this scandal casts a wide net. Fannie Mae (FNMA) and Freddie Mac (FMCC) are suing on behalf of mortgage holders. Charles Schwab (SCHW) is suing on behalf of some of its investors. The U.S. Supreme Court has agreed to hear an appeal related to a bondholder who filed a class action lawsuit claiming she lost out on interest on bonds she owns. Citigroup (C), Credit Suisse (CS), Bank of America (BAC), JPMorgan Chase (JPM), HSBC (HSBC), Barclays (BCS), UBS (UBS), and Royal Bank of Scotland (RBS) are all named in that suit.
But while many of the suits are held up in courts around the globe, not much has changed since the scandal was revealed, Arvedlund points out. Despite the investigations and lawsuits, rates are still based on Libor. However, NYSE Euronext now oversees the rate. “It’s like we found out the Equator is in the wrong place, but we’re still going to use it,” says Arvedlund. She says it “remains to be seen” if the new administrator will be tougher.
The Federal Reserve is actively looking into an alternative benchmark to LIBOR.
More from Yahoo Finance
ERIN E. ARVEDLUND, INQUIRER STAFF WRITER
Published Monday, September 22, 2014, 1:08 AM
If you read the fine print in your mortgage, student-loan documents, or credit-card statements, you may discover you’re paying an obscure interest rate on your borrowing. And you may be owed some money.
Students, homeowners, mortgagees, and bond investors are accusing a slew of banks of rigging their interest rate, known as the London Interbank Offered Rate, or LIBOR.
In lawsuits, they allege a global conspiracy to manipulate LIBOR.
Some of their cases, and their lawyers, are from the Philadelphia area.
Kirby McInerny is among the lead plaintiff lawyers in New York representing traders and other professional investors who lost money trading in LIBOR-linked securities. The Center City law firm Berger & Montague is helping out in those cases.
Two other local firms, Weinstein Kitchenoff & Asher in Center City and Morris & Morris in Wilmington, represent bondholders in another class-action case.
Consumers are getting in on the action, too. Homeowners are suing, saying they overpaid on mortgages when LIBOR was rigged too high.
Others, like the brokerage Charles Schwab, allege banks manipulated rates lower, so money-market funds lost money.
Linda Zacher of Bryn Mawr is suing as a bondholder. She argues that she lost out on interest paid to her on her bonds.
What is LIBOR anyway? It’s a daily benchmark at which banks set the rate for short-term borrowing from one another. It’s the “wholesale” interest rate banks use in their club; then they turn around and lend us money at “retail” interest rates.
But rigging LIBOR upward – or downward – made the banks more money for their bottom line, and we, the public, had no clue.
Zacher’s bonds were earning interest rates indexed to LIBOR from August 2007 through May 2010. The banks setting her bond rate were in the U.S. dollar LIBOR club, which included almost every major Wall Street, British, and global bank: Credit Suisse Group, Bank of America, JPMorgan Chase, HSBC, Barclays, Lloyds Banking Group, UBS, Royal Bank of Scotland Group, Deutsche Bank, Citigroup, Bank of Tokyo-Mitsubishi, HBOS, and Royal Bank of Canada. She’s suing all of them.
This month, the U.S. Supreme Court agreed to hear an appeal related to the case Zacher brought. Her petition called LIBOR “the most important benchmark for short-term interest rates in the United States and around the world.” We can’t wait to hear what the Supremes think.
If you think you’ve been affected financially by LIBOR manipulations, it’s not too late take similar steps.
Erin Arvedlund’s book “Open Secret” (Penguin, 2014), about the LIBOR rate-rigging scandals, is due out Thursday.
Bernie Madoff is in prison. Now, one son and another’s estate are being sued. By Erin E. Arvedlund, Inquirer Columnist Looking for some sleazy beach reading? Here’s a tale of a whole family ripping off investors: Bernie Madoff and his sons are back in the news. More precisely, surviving son Andrew Madoff and deceased son Mark Madoff’s estate have been sued, yet again, by a court-appointed trustee for over $150 million. They are accused of stealing directly from accounts of their clients, faking trades, deleting incriminating e-mails, and taking fake “loans” from the family business. I’ve long argued that Bernie Madoff’s crime was too complicated to do alone, and earlier this year, five of his former employees were found guilty of helping him – they now face prison sentences. Madoff himself took the blame entirely, in an effort to shield his brother, sons, and niece. He is serving 150 years in prison, and his brother is in jail. His niece has been granted her freedom in exchange for her assets. Now, vivid details of his sons’ involvement are emerging, and offer a roadmap of how a family-run investment shop sloshed money in and out of bank accounts and abused client money as a personal “piggy bank” (as the trustee Irving Picard called the crime). In all, Picard alleges, the brothers stole $153.3 million over the decades they worked with their father. That’s a small portion of the $20 billion or so ultimately stolen, but if successful, the suit would show the family was, it can perhaps appropriately be said, thick as thieves. Andrew and Mark are also accused of deleting e-mails that linked them to their father’s Ponzi scheme during a 2005 U.S. Securities and Exchange Commission investigation. The trustee also alleged the pair diverted tens of millions from the firm to engineer fake loans. They then used that money to buy real estate – million-dollar apartments in Manhattan and houses in Nantucket, Mass., and in Greenwich, Conn. Investment firms larded with family are a minefield for conflicts of interest. Here are some questions investors should ask before they give money to such a firm: Does the adviser have physical custody of your customer funds? Or are the assets held by a third party, such as a bank or custodian? Because they should be. Madoff had custody of his clients’ money, and that’s partly how he managed to cover up his fraud. Does an independent third party, unaffiliated with the family, administer your account? Will you get brokerage statements from an outside firm? You should. Madoff also issued false account statements to his clients, and wouldn’t provide online access. Who is the family firm’s auditor? Is the auditor related to the family in any way? He or she shouldn’t be. New rules target advisers with custody, or advisers who are affiliated with a third-party custodian, by requiring them to undergo an annual surprise audit by an independent auditor. Who has check-signing authority at the firm? If it’s family, take your business elsewhere. Don’t get tripped up by another Madoff. These types have stolen enough already. firstname.lastname@example.org 215-854-2808 @erinarvedlund
New fund aims to cash in on global opportunities
Published Monday, March 31, 2014
If you’re a fan of buying low and selling high, then some (but not all) markets outside the U.S. might represent value for your portfolio.
We interviewed Mebane Faber (his first name is Scottish, pronounced “meb-bin”), a portfolio manager running about $350 million in assets. His firm recently launched a new exchange-traded fund called the Cambria Global Value ETF (GVAL). This fund invests in roughly 100 stocks in the world’s most undervalued markets, and Faber says those are – brace yourselves – Greece, Russia, Hungary, Ireland, Spain, Czech Republic, Italy, and Portugal.
It’s not that Faber dislikes American stocks; they are just not a bargain now. He argues that based on a ratio called the Schiller CAPE model, the U.S. market is actually very expensive, and for this fund, he is currently not invested in American equities. And, yes, the Schiller is Yale University economist Robert Schiller.
Faber runs other ETFs, such as Cambria Shareholder Yield ETF (NYSE: SYLD), which do currently invest in U.S. stocks.
“Japanese equities in the 1980s were a big bubble, approaching half the world’s market cap. The U.S. market is almost there,” Faber said.
Moreover, “most investors have home-country bias,” Faber said, in an interview from his Los Angeles offices.
“This is a way to get more exposure to a globally market-weighted portfolio,” he added. “Plus, we are buying the value among value.” He means the cheapest, most liquid stocks in places where either political or economic crises have crushed stock prices.
Wesley Gray of Drexel University is one of Faber’s investment research partners, and their takeaway is to buy beaten-down stocks in beaten-down markets, what Faber calls “value among value.”
“Yes, the stocks could go down further before they rebound,” Faber said, but by investing in many markets, the fund is diversified.
We’ll keep an eye on Cambria’s newest ETF and report back when performance data are available.
We wrote about Ingrid Robinson, a defrauded investor from California in the Remington Financial advance-fee scam, and she spoke last week at the sentencing hearing of Andrew Bogdanoff, the head of Remington, which operated from Arizona and Philadelphia. Bogdanoff received more than 18 years in prison for financial crimes.
Robinson shows how one person who perseveres against criminals – in this case, commercial brokers Bogdanoff and Andrew McManus, who were convicted of stealing investors’ “due diligence” fees – promising loans that never arrived – can prevail.
Robinson also met with members of Congress to push for legislation regulating commercial brokers. If a commercial broker has victimized you, contact her at Ingrid.email@example.com
ERIN E. ARVEDLUND
Phila Inquirer Thursday, March 13, 2014, 1:08 AM
Second, a new study out of S&P Dow Jones confirms that Wall Street is getting one over on us when it comes to municipal bonds: If you try to buy individual munis yourself, you are getting hosed on the price.
On Puerto Rico, we circled back to David Kotok, chief investment officer at Cumberland Advisors of Vineland, N.J., to find out whether he liked Puerto Rico’s new bond issue last week.
“We have certain segregated accounts that are Puerto Rico-only, and we position certain P.R. debt in them. We do not do so for high-grade accounts,” Kotok said. “We must remember P.R. is a junk credit.”
Puerto Rico muni bonds have attracted some atypical buyers, such as corporate junk-bond investors and hedge funds.
“These are not typical high-grade muni buyers, so their pricing behavior is not a reflection” of how risky these muni bonds truly are, Kotok added. Still, an 8 percent yield tax free is tough to beat. Similarly rated corporate bonds yield about 4.8 percent, according to Bloomberg data.
Want to buy munis?
Don’t do it yourself. Leave it to your portfolio manager or an exchange-traded fund (ETF).
That’s the upshot from J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, who found that a retail investor pays about twice the transaction cost for a muni bond as for a corporate bond.
In December, the average cost to buy an individual municipal bond was 1.73 percent for retail investors. An investment-grade corporate-bond transaction cost roughly half that, at 0.87 percent.
“Buying a muni bond entails an unseen transaction cost, which may not always be clear to retail investors,” Rieger said in an interview. Because muni bonds are sold without commissions, brokers make up the difference by padding the price and building a markup into the muni bond.
“We don’t know what the markup is exactly,” Rieger said, but he suggested that retail investors stick with muni bonds in either mutual funds or ETFs.
Haverford Trust executive bullish on stocks
With continued mixed economic data dribbling into the market, Hank Smith, Haverford Trust’s chief investment officer, said we should expect more volatility than in the last few years. But, overall, he is extremely bullish on the stock market.
Overseeing $7 billion in client assets, Smith is a classic equities bull. Stocks still remain the best asset class, he said:
“Tailwinds are in U.S. stocks’ favor with reasonable valuations, great balance sheets, decent earnings growth, dividend increases and share buybacks, an accommodative [Federal Reserve], and very little risk of a recession.”
Where to buy? Smith likes so-called old technology companies and industrial sectors balanced with defensive sectors like health care.
“Any pullbacks should be short-lived, because there are a lot of investors who missed the bull market” that started after the crisis of 2008, Smith claimed. “We are five years from that bear market. There is healing taking place.”Haverford has traditionally favored equities over fixed income for its clients, and Smith said that was because the investment shop owns bonds mostly to “reduce volatility in a portfolio.”
Moreover, he said, some stocks today are yielding just as much – if not more – than their company’s corporate bonds. You would have to reach back to the mid-1950s for a similar period, when many stocks yielded more than bonds as a trade-off for the risk of investing in equities, he added.
Take McDonald’s Corp. (symbol: MCD), shares of which have a dividend yield of 3.4 percent, whereas a corporate bond issued by McDonald’s and maturing in, say, 2022, carries a 2.9 percent coupon.
“You get more yield owning the stock than the bond. If you buy the bond, you get the coupon for years. You’re not taking much risk,” Smith said.
“But McDonald’s dividend yield has increased every year, and that will likely continue,” perhaps as much as 8 percent to 10 percent annually, Smith said.
Through annual dividend increases and compounding, the total return on McDonald’s stock would be higher than the bond over the same period.
“So, if you own the stock for just as many years as the bond, you get 7 percent, even if the stock does nothing,” Smith said.
The trade-off? You, as an investor, experience more volatility for that period.
Haverford highlights other holdings for which the shares yield more in dividends than do the corporate 10-year bonds: Microsoft, Philip Morris, Mattel, Intel, Procter & Gamble, and Coca-Cola.
In fixed income, Haverford owns very few Treasury bonds for clients.
“It is the most overvalued asset class,” Smith said, adding that the firm was willing to miss any short-term rallies in Treasuries.