Political Contribution Daisy Chains Help Funds Of Funds Market To Public Pensions

In marketing a fund of funds investment vehicle to public pensions, targeted political donations from dozens of underlying money manager sub-contractors can be helpful. Confused? That’s the point.

Most retail investors have never heard of an incredibly complicated, opaque and costly investment known as a “fund of funds.” State and local retirement plans for government workers—public pensions—on the other hand, have committed tens of billions to these preposterous, underperforming investment vehicles.

Why have the largest, supposedly most sophisticated institutional investors have fallen for a scam that has left small investors unscathed? Because the fund of funds structure—which facilitates the formation of political contribution daisy chains—is tailor-made for marketing to public pensions.

The fund of funds structure—which facilitates the formation of political contribution daisy chains—is tailor-made for marketing to public pensions. (Photo by Dan Kitwood/Getty Images)

A fund of funds (FOF) is an investment vehicle or fund that invests in a number of underlying funds, typically 20 or more. Sometimes FOFs are called multi-manager funds. There are all types of FOFs, including FOFs that invest in mutual funds, hedge and private equity funds.

The FOF manager is paid hefty fees, say 1 percent of assets and 10 percent of performance, to select and invest the FOF assets in underlying funds—funds which also have fees and expenses, say the traditional 2 percent of assets and 20 percent of performance. As a result, FOF investors pay astronomically high expenses for hedge and private equity funds, in particular. (There are also two layers of applicable operational expenses.)

While FOFs may offer diversification, over-diversification at an outrageous cost makes no sense.

For example, I have encountered FOFs that charge all-in fees as high as 10 percent. Good luck winning a race carrying a fee load that heavy.

Source Article from http://www.forbes.com/sites/edwardsiedle/2017/06/13/fund-of-funds-use-political-contribution-daisy-chains-in-marketing-to-public-pensions/
Political Contribution Daisy Chains Help Funds Of Funds Market To Public Pensions
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How To Steal A Lot of Money From CalPERS, The Nation’s Largest Public Pension

How hard would it be to steal millions from CalPERS, the nation’s largest public pension with $320 billion in assets? Easy-peasy.

Yesterday the Wall Street Journal reported a disturbing fact—a fact well known to pension insiders for years. That is, officials at CalPERS do not know the full extent of the fees the pension’s private equity managers take out of the pension.

At a 2015 meeting, the chief operating investment officer openly acknowledged that no one knew the performance fees paid.

Let’s clarify what’s going on here. Presumably the mega-pension knows, or can readily establish, all the fees—asset-based and performance—it pays its money managers pursuant to fee invoices. (A breakdown of other operational fees—which can be significant—can either be gleaned from investment fund financial statements or specifically requested from managers.)

If you want to steal millions, escape detection and prosecution, then set your sights on the mother of all pension honey-pots, CalPERS. (Photo by Max Whittaker/Getty Images)

What CalPERS doesn’t know is the performance and other fees its managers take directly from the funds they manage for CalPERS without asking, disclosing or invoicing.

At the same 2015 meeting, the chief operating investment officer admitted, “We can’t track it today.”

CalPERS claims to have turned to “big data” computer models—algorithms—to understand private equity costs. Supposedly, a software program developed by outside firms determined at the end of 2015 that the pension paid $3.4 billion in performance fees over the past quarter-century to private-equity firms. In 2016, that number was said to be $490 million. Don’t believe these figures for a second.

Source Article from http://www.forbes.com/sites/edwardsiedle/2017/05/24/how-to-steal-a-lot-of-money-from-calpers-the-nations-largest-public-pension/
How To Steal A Lot of Money From CalPERS, The Nation’s Largest Public Pension
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Emerald Isle Exploration Ltd.

Modified: Sept. 11, 2015

Source Article from https://www.sec.gov/litigation/admin/2017/33-10357.pdf

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Robert B. Crowe, Esq.


Source Article from https://www.sec.gov/litigation/admin/2017/34-80643.pdf

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Barclays Capital Inc.



Source Article from https://www.sec.gov/litigation/admin/2017/33-10355.pdf

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Binary Options Follow-Up Schemes: Don’t Lose Money Twice

We’ve said it before: Binary options trading can be risky. What’s more, some scammers are targeting binary options customers with follow-up frauds, such as recovery scams and IRS impersonation scams.

FINRA is issuing this alert to warn anyone involved in binary options trading—specifically through unregistered non-U.S. companies offering binary options trading platforms or services—to be on guard for potential follow-up frauds. 

What Are Binary Options?

A conventional option is an agreement that gives you the right to buy or sell a security for a fixed price during a set period of time, at which point the option expires. In contrast, a binary option is an “all-or-nothing” proposition that does not bestow any such rights. When a binary option expires, it makes either a pre-specified amount of money or nothing at all—and if the latter happens, you lose your entire investment.

Some binary options are listed on registered exchanges (regulated by the Securities and Exchange Commission) or traded on a designated contract market (overseen by the Commodity Future Trading Commission). However, as FINRA, the SEC and the CFTC have warned, an increasing number are sold through online platforms that do not comply with US regulations and can be fraudulent. 

Types of Potential Follow-Up Frauds

Investors with binary options accounts on suspect platforms may be targets for the following follow-up frauds.  

Advance Fee: FINRA is aware of instances in which a customer of a binary options platform hears from individuals who claim they can help the customer get back lost money—but an advance fee applies. The tactics can vary, but hallmarks of these schemes generally include:

  • Urgent correspondence and high-pressure calls that specifically refer to your binary options accounts.
  • Claims that the caller is with, or acting at the behest of, a U.S. government agency. 
  • Subsequent communications with official-looking documents presented as “proof” that money is available for investors to recover—albeit for a fee. 

The upshot is that you should be wary of any person or organization claiming to know about your binary options accounts and offering to help return money to you. 

IRS Impersonator: Another scam involves phone calls purportedly from an IRS representative. In its most basic form: 

  • The IRS imposter claims that you owe money in taxes because of your binary options trading, and may threaten to bring in police or other government agencies if you do not pay up immediately. 
  • The IRS imposter asks for your debit or credit card number, or may pressure you to pay with a prepaid debit card.

There can be twists to the standard IRS impersonator scam. In one instance, an investor who called FINRA described speaking with a man who identified himself as “a representative from the IRS” and told her she must pay a fee for an “indemnity letter.” He claimed the indemnity letter was required because the financial institution she was dealing with in conjunction with her binary options account was not registered with the Securities and Exchange Commission. While it was true the financial institution was not registered with the SEC, the caller completely fabricated the need for such a letter. He further threatened that if the investor didn’t pay for the indemnity letter, the IRS would levy a heavy fine.   

In all of these cases, the bottom line is that you are asked to send money. But if you do, you most likely will never see it again so it is important that you not offer your credit or debit card, or make other forms of payment, during the call.  If you are contacted by someone purporting to be from the IRS, or if the IRS is mentioned by the caller, you can call the IRS at 1-800-366-4484 to determine whether the call is legitimate.  As the IRS makes clear, it never calls taxpayers and demands that they wire or send money—instead the IRS sends a written notification of any tax due through the U.S. mail.

Investor Checklist

Follow-up scams tend to target investors who may be unwittingly involved in “shady” binary options businesses. Before getting involved in binary options trading—and before you send any money:

  • Check the CFTC’s website to see if the binary options trading platform is a designated contract market. If it is not registered, do not do business with the organization or individuals associated with it.
  • Check the SEC’s EDGAR system to see if the binary options trading platform has registered the offer and sale of the product with the SEC. 
  • Check the SEC’s website regarding exchanges to determine if the binary options trading platform is registered as an exchange. 
  • Check FINRA BrokerCheck® and the National Futures Association’s Background Affiliation Status Information Center (BASIC) to determine the registration status and background of any firm or financial professional that you are considering.

If you are involved with a binary options firm and are not sure it is legitimate—or think you are the target of a binary options fraud or follow-up scam—you can contact FINRA at (240) 386-HELP (4357). You can also share that complaint or tip with the FBI’s Internet Crime Complaint Center at www.IC3.gov—or call the CFTC at 1-866-FON-CFTC or the SEC at 1-800-SEC-0330.

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Binary Options Follow-Up Schemes: Don’t Lose Money Twice
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Updated: Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio

If you own bonds or have money in a bond fund, there is a number you should know. It is called duration. Although stated in years, duration is not simply a measure of time. Instead, duration signals how much the price of your bond investment is likely to fluctuate when there is an up or down movement in interest rates. The higher the duration number, the more sensitive your bond investment will be to changes in interest rates.

If you hold outstanding bonds, particularly those with a low interest rate and high duration, you may experience price drops as interest rates rise along the way. If you have money in a bond fund that holds primarily long-term bonds, expect the value of that fund to decline, perhaps significantly, when interest rates rise.

How Duration Risk Affects Price

Many factors impact bond prices, one of which is interest rates. A maxim of bond investing is that when interest rates rise, bond prices fall, and vice versa. This is known as interest rate risk. But just as some people’s skin is more sensitive to sun than others, some bonds are more sensitive to interest rate changes than others. Duration risk is the name economists give to the risk associated with the sensitivity of a bond’s price to a one percent change in interest rates.

The higher a bond’s duration, the greater its sensitivity to interest rates changes. This means fluctuations in price, whether positive or negative, will be more pronounced. If you hold a bond to maturity, you can expect to receive the par (or face) value of the bond when your principal is repaid, unless the company goes bankrupt or otherwise fails to pay. If you sell before maturity, the price you receive will be affected by the prevailing interest rates and duration. For instance, if interest rates were to rise by two percent from today’s low levels, a medium investment grade corporate bond (BBB, Baa rated or similar) with a duration of 8.4 (10-year maturity, 3.5 percent coupon) could lose 15 percent of its market value. A similar investment grade bond with a duration of 14.5 (30-year maturity, 4.5 percent coupon) might experience a loss in value of 26 percent1. The higher level of loss for the longer-term bond happens because its duration number is higher, making it react more dramatically to interest rate changes.

Duration has the same effect on bond funds. For example, a bond fund with 10-year duration will decrease in value by 10 percent if interest rates rise one percent. On the other hand, the bond fund will increase in value by 10 percent if interest rates fall one percent. If a fund’s duration is two years, then a one percent rise in interest rates will result in a two percent decline in the bond fund’s value. A two percent increase in the bond’s fund value would follow if interest rates fall by one percent.

Variables such as how much interest a bond pays during its lifespan as well as the bond’s call features and yield, which may be affected by changes in credit quality, play a role in the duration computation. Maturity—the length of time before the bond’s principal is repaid—also plays a role.

Math aside, once you know a bond’s or bond fund’s duration, you can predict how it will react to a change in interest rates.

Duration Details

To find your bond fund’s duration, look for it in the fund’s Fact Sheet, often in the Bond Holding Statistics section. Finding the duration of an individual bond can be a bit trickier. Start by asking your investment professional or the bond’s issuer. There are also online calculators available that compute an individual bond’s duration.

In some cases, more than one duration number is computed. For example, Macaulay Duration calculates a bond’s basic duration, while Modified Duration is a modified Macaulay computation that directly measures price sensitivity. Effective duration, on the other hand, is often the calculation cited for bonds with features that change when interest rates change, such as redemption features.

Also, duration for floating rate securities is different and generally shorter than fixed-rate securities of equal maturity, due to the periodic interest rate resets.

Finally, duration assumes that for every movement in interest rates, there is an equal change in bond price in the opposite direction. However, this isn’t always the case. For example, when interest rates drop, a residential mortgage-backed security (a bond backed by home loans) might not see an equal increase in the bond’s price, because it might prompt homeowners to refinance their loans. This in turn may limit increases in the bond’s price as it loses interest paying loans being paid off. Investment professionals use the term “convexity” to describe this relationship.

Low Duration Does Not Mean Low Risk

Just because a bond or bond fund’s duration is low, it does not mean your investment is risk-free. In addition to duration risk, bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factors. These factors will be discussed in a bond’s offering document or a bond fund’s prospectus. For a more complete discussion of bond risk factors, visit FINRA’s Bond area.

Additional Resources

1 Fitch Ratings, Macro Credit Research Report, The Bond “Bubble”: Risks and Mitigants, 2012

Updated: Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio
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Mohamud Abdi Ahmed and 2waytrading, LLC


Litigation Release No. 23834 / May 12, 2017

Securities and Exchange Commission v. Mohamud Abdi Ahmed and 2waytrading, LLC, No. 17-cv-1478 (D. Minn. filed May 4, 2017)

SEC Halts Fraudulent Conduct by Recidivist and Unregistered Investment Adviser Firm

The Securities and Exchange Commission today announced that it obtained an asset freeze and court order halting an ongoing investment fraud, orchestrated by a recidivist, that falsely promised safe and unrealistic returns to convince clients to provide access to their brokerage accounts.

According to the SEC’s complaint, filed in federal court in Minneapolis on May 4, 2017 and unsealed this week, Mohamud Abdi Ahmed and 2waytrading, LLC have been offering investment advice to clients since 2014. The complaint alleges they have been falsely promising unrealistic double-digit investment returns and assuring clients that Ahmed’s risky options trading investment strategy is safe and secure. The complaint alleges that Ahmed and 2waytrading are also using these false claims to convince clients to give them access to their clients’ brokerage accounts so Ahmed can place trades on their behalf. The complaint further alleges that Ahmed hid the fact that the SEC previously stopped him from orchestrating a securities fraud targeting investors in the Somali immigrant community in San Diego, Seattle, and elsewhere and that Ahmed had been convicted of wire fraud and ordered to pay restitution of $551,250, serve 21 months in prison, and remain on three years’ supervised release after his release from prison.

The Honorable Paul A. Magnuson, Senior Judge of the U.S. District Court, issued a temporary restraining order that imposed the freeze on Ahmed’s and 2waytrading’s assets and prohibits them from making any investment decisions or accessing any brokerage accounts they do not own. The order also temporarily prohibits Ahmed and 2waytrading from violating the antifraud provisions, and Judge Magnuson has scheduled a hearing on May 18 for Ahmed to show cause why a preliminary injunction should not be entered against him.

The SEC’s complaint charges Ahmed and 2waytrading with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The SEC is seeking financial penalties and disgorgement of ill-gotten gains as well as permanent injunctive relief.

The SEC’s investigation was conducted by Brent W. Wilner and supervised by Diana K. Tani, John W. Berry, and Michele W. Layne of the Los Angeles office. The SEC’s litigation is being led by Lynn M. Dean, David J. Van Havermaat, and Mr. Wilner. The SEC appreciates the assistance of the United States Attorney’s Office for the District of Minnesota.

SEC Complaint



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Walter C. Little and Andrew M. Berke


Litigation Release No. 23833 / May 11, 2017

Securities and Exchange Commission v. Walter C. Little and Andrew M. Berke, Civil Action No. 1:17-CV-03536 (S.D.N.Y., filed May 11, 2017)

SEC Charges Law Firm Partner and his Neighbor in $1 Million Insider Trading Scheme

The Securities and Exchange Commission today charged a law firm partner and his neighbor with making more than $1 million in illicit profits by insider trading around corporate announcements.

The SEC alleges that Walter C. Little accessed confidential documents on his law firm’s internal computer network related to at least 11 impending announcements involving law firm clients, none of which he personally advised or billed for services. Little then allegedly traded in advance of each announcement and often tipped his neighbor Andrew M. Berke with material nonpublic information so he could similarly trade in company stocks before the announcements were made publicly. According to the SEC’s complaint, the insider trading occurred from February 2015 to February 2016.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Little and Berke.

The SEC’s complaint charges Little and Berke with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3, as well as Section 17(a) of the Securities Act of 1933. The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest, penalties, and permanent injunctions.

The SEC’s investigation was conducted by Richard Kutchey and Gregory Faragasso, and the litigation is being led by Kevin Lombardi and Charles Stodghill. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

# # #

SEC Complaint



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Douglas Roe and Donald Lindo


Litigation Release No. 23832 / May 11, 2017

Securities and Exchange Commission v. Douglas Roe and Donald Lindo, Case No. 8:17-cv-01293-TDC (D.Md., filed May 11, 2017)

The Securities and Exchange Commission today announced charges against two individuals involved in a fraudulent scheme to offer for sale a penny stock by filing false and misleading registration statements with the Commission.

According to the SEC’s complaint filed in U.S. District Court for the District of Maryland, Douglas Roe, a resident of Vancouver, British Columbia, teamed with Donald Lindo, a resident of Kingston, Jamaica, in an attempt to register for sale shares of Blue Mountain Eco Tours, Inc. The complaint alleges that Roe and Lindo engaged in a scheme to file the registration statements that they knew or were reckless in not knowing contained false statements.

The complaint alleges, among other things, that Blue Mountain’s registration statements:

  • Falsely identify Lindo as Blue Mountain’s sole officer, director and employee, when, in fact, Lindo was a mere figurehead The complaint further alleges that Lindo blindly signed management representation letters and loan verification documents sent to Blue Mountain’s auditors.
  • Fail to disclose that Roe was a control person of Blue Mountain. According to the complaint, Roe enlisted Blue Mountain’s attorney, auditors, and accountant and controlled the company’s communications with these professionals. Additionally, Roe used his own monies to pay professional fees for auditing services critical to facilitating Blue Mountain’s registration statements.
  • Falsely state that Lindo loaned money to Blue Mountain for working capital purposes; and
  • Falsely state that Blue Mountain had partially repaid the loan to Lindo.

The SEC’s complaint charges Roe and Lindo with violating Sections 17(a)(1) and (3) of the Securities Act of 1933. The SEC seeks financial penalties, permanent injunctions, officer-and-director bars and penny stock bars against both defendants.

In a related action, on February 26, 2016, the SEC instituted a stop order proceeding against Blue Mountain that led to the suspension of Blue Mountain’s registration statement on April 19, 2016.

The SEC’s investigation, which is continuing, is being conducted by Gary M. Miller in the Miami Regional Office as part of the Microcap Fraud Task Force. The case is being supervised by Elisha L. Frank, and the SEC’s litigation will be led by Christine Nestor. The SEC appreciates the assistance of the British Columbia Securities Commission.

SEC Complaint



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