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The Securities Exchange Commission has announced enforcement actions against 27 different entities and individuals connected to the deceptive dissemination of promotional news about stocks. The actions allege that these entities and individuals promoted stocks or investments without disclosing financial ties to the stock or investment.

Specifically, the individuals and entities were charged with deceiving investors by failing to disclose that published information was not independent, nor unbiased. Under federal securities law, if a company or individual publishes information promoting a stock or investment, the writer or publisher must clearly state whether the information was paid-for, or if the writer or publisher has a self interest in promotion.

Everything seems automated these days. And the amount of data out there seems infinite. This is especially true in the investment world, where computer programs can execute trades in nanoseconds and the smallest piece of information can make the difference between profits and pitfalls. So it only seems natural that, at some point, robots would replace humans as financial advisors.

So-called "robo-advisors" are the hot new thing, and, as with any new invention, the regulators are on their way. The Securities and Exchange Commission (SEC) has, for the first time, included "electronic investment advice" on its annual list of examination priorities. So what regulations are in store for robo-advisors?

SEC Warns Investors of Impersonators Offering Fake Relief

Last month, the Securities and Exchange Commission (SEC) issued a frightening warning to investors who've been the targets of fraud. There are impersonators targeting these victims again, offering fake legal services and other fraudulent relief.

The SEC warns that not all correspondence appearing to come from the agency is real. Whether or not you have been the victim of an investment fraud in the past, be very careful when considering mail supposedly originating from the government. Let's consider what the SEC knows and how you can spot a fake.

There is one group of people with job security in Silicon Valley these days, and that's the legal team at chip giant Intel. No sooner than a cease fire in the decades-old war with major rival AMD is announced, a new fight breaks out with the FTC over alleged anti-competitive practices. Oh, and there is a small matter to settle over unfair business practices with European regulators and a suit by New York AG Andrew Cuomo, but that's another story. Or two.

Today, the FTC announced that despite settlement talks with Intel, it has filed its complaint against the company, citing "illegal monopolization, unfair methods of competition and deceptive acts and practices in commerce." This broad language doesn't quite reveal what is likely to be the crux of the action, issues surrounding Intel's product pricing, whether it purposely designed its software to run better on computers containing its chips than on machines containing its competitor's products, and alleged threats it made to major computer suppliers (such as Dell and HP) to coerce them into using Intel chips in their products.

According to Keith Hylton, antitrust professor at Boston University's school of law, the FTC may have a tough time proving its case that Intel manipulated its prices to cut out competition. However the issue over design, which was the core of the United States' landmark case against Microsoft earlier this decade, will likely be more successful.

In addition to the allegations in the FTC's complaint, the Commission is concerned about where the empire will strike next. They have their eye on Intel's actions in the graphics processing unit (GPU) market and are concerned that Intel will take its monopolistic practices to this new arena. Needless to say, up and coming graphics chip maker Nvidia, "applaud[s] today's action by the U.S. Federal Trade Commission."

As always, Intel came out swinging. In its press release this morning, the company called the FTC case "misguided." Intel senior vice president and general counsel Doug Melamed added, "Settlement talks had progressed very far but stalled when the FTC insisted on unprecedented remedies – including the restrictions on lawful price competition and enforcement of intellectual property rights set forth in the complaint -- that would make it impossible for Intel to conduct business."

AMD had no comment.

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Pelosi: "The Party's Over," New Bank Regs Pass House

Financial reform is one step closer after the House passed legislation concerning new regulations, agencies and oversight on a 223-202 vote. As Nancy Pelosi remarked, "We are sending a clear message to Wall Street, the party is over. Never again will reckless behavior on the part of the few threaten the fiscal stability of our people." This bill overall appears to be good news for the financial consumer, but there were a few things left undone as well. The bill does accomplish several things that will set up some strong new regulations and oversight abilities to reign in potentially risky financial activities. The following is a quick breakdown of the bill's main accomplishments:

  • Sets up the Consumer Financial Protection Agency, which will be responsible for the regulation of consumer products such as credit cards and mortgages.
  • Allows congress to audit the activities of the Federal Reserve.
  • Extends new regulation over derivatives, one type of financial product blamed for the current financial crisis.
  • Creates a new counsel to conduct oversight on major problems at large financial firms.
  • Gives regulators more powers to break up companies that have grown to big.
  • Give shareholders a right to a non-binding proxy vote on corporate pay packages.

The bill will also shift $1 billion of bailout money into federal neighborhood stabilization programs to develop abandoned or foreclosed homes and transfer $3 billion from the federal bailout program for emergency loans to prevent foreclosure.

What did the house fail to add to this bill? First, there will be no regulation of auto loans, one of the most common consumer loans. Another amendment, that would have given bankruptcy judges new powers to lower balances on mortgages in order to prevent homeowners from losing their homes in foreclosure, was also voted down and will not be included in the bill.

Still, President Obama believes the bill will help protect consumers overall. In a statement he said, "This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road... ."

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On Monday, Merck & Co., and the investors who filed securities suits against it, had their day in court. Investors in Merck are suing the company over the misrepresentation of the safety of Vioxx (or lack thereof) which allegedly caused them to pay an inflated market price for company stocks.

(To begin with, the risks associated with Vioxx are not at issue in this Vioxx suit. Vioxx has already paid out billions to settle claims by the people physically harmed by the drug. This case is simply about whether Merck also screwed its shareholders in its handling of the Vioxx debacle.)

The Supreme Court heard arguments from the parties centering around the question of whether the shareholders had waited too long to file their lawsuit. In federal court, the securities fraud statute of limitations deems that any lawsuits suit must be brought within two years of the time investors knew about or should have suspected fraud.

Here, Merck made a novel argument. Merck lawyers claimed that the shareholders' suit should be dismissed because they knew or should have known about the possible fraud committed by Merck as early as 2001, but instead, waited until 2003 to file suit. In September of 2001, the FDA sent a warning letter to the company, alleging misrepresentations regarding the drug's potential to increase a patients' risk of heart attack. On the other hand, Merck said, the investors don't have a enough evidence against the company to prove securities fraud.

Simply put, the shareholders should have known about the fraud that did not occur, and filed the suit earlier. This would mean that the plaintiffs should have known that Merck was lying as it denied the risks associated with Vioxx for years, but at the same time that the plaintiffs could not make a case that the company lied.

A tough sell, no doubt. 

Some of the judges were justifiably skeptical about this line of reasoning. Justice Anthony Kennedy told the Merck attorneys, "Companies can't have it both ways."  Justices Scalia and Ginsburg considered another distinction that might assist the shareholders, asking Merck lawyers whether the FDA letter demonstrated only "misrepresentations" on the part of Merck, not the out and out fraud that would start the securities fraud statute of limitations clock ticking.

Attorneys for the investors faced slightly less difficult questions. However, Justice Sotomayor asked why investors filed their suit a whole year before the Wall Street Journal article supposedly central to their case was even published. Mr. David Frederick, for the investors, replied that the initial suit was prompted by a Harvard study regarding increased heart attacks in Vioxx users and was actually amended later to include information from the WSJ article when it was available.

A decision is expected early next summer.

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The California Attorney General's Office has launched an investigation into the role played by ratings agencies in the financial meltdown.

In very brief sketch, when a corporation, state, municipality, or other entity issues debt, that debt often comes with a rating from a ratings agency such as Moody's, Standard & Poor's or Fitch. The rating is meant to indicate the likelihood that the debt will be repaid. The same thing happens when investment banks bundle up and issue securities, including the now loathed subprime motgaged backed securities blamed for touching off the worst financial crisis in a generation.

Like many, the question California's Attorney General wants answered is how so many of those securities backed by bundles of risky mortgages were sold with AAA ratings, and whether cozy relationships between ratings agencies and investment banks were to blame.

California is by no means the first to the party. Other states, including New York and Connecticut are investigating. Investors, including the California Public Employees Retirement System, have also sued the ratings agencies.

Here's what Attorney General Jerry Brown wants to know regarding the ratings agencies:

  • Did they fail to conduct adequate due diligence in the rating process?
  • Did they give high ratings to particular securities when they knew or had reason to know that high ratings were not warranted?
  • Did they fail to comply with their own codes of conduct in rating certain securities?
  • Did they profit from giving inaccurate ratings to particular securities?
  • Did they make fraudulent representations concerning the quality or independence of their ratings?
  • Did they compromise their standards and safeguards for profits?
  • Did their statistical models capture the risk inherent in subprime and other risky assets and, if not, what was the rating agencies' response? and
  • Did they conspire with the companies whose products they rated to the detriment of investors?

California has subpoenaed Standard & Poor's, Moody's and Fitch in search of answers.

Whether and how they would be held to account if the answer to those questions is yes remains a somewhat open question.

Hundreds of homeowners in Massachusetts will get foreclosure relief in the form of more affordable restructured home loans, as a result of a settlement between the state and Goldman Sachs & Company, over the investment firm's sub-prime lending practices.

Under the settlement announced Monday by Massachusetts Attorney General Martha Coakley, Goldman Sachs agreed to provide $50 million in loan re-structuring for about 700 Massachusetts homeowners who are struggling with sub-prime mortgages held by Goldman entities. Specifically, Goldman will:

  • Reduce the principal of first mortgages by up to 25 to 35%.
  • Reduce the principal of second mortgages by up to 50% or more.
  • Require borrowers whose first mortgage is "significantly delinquent" to "make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell his or her home, Goldman will reduce the principal owed on the existing loan to assist the borrower," according to a Press Release from the Massachusetts Attorney General.  

The settlement is part of the state's investigation into the securitization of subprime mortgages given to the state's consumers, a probe that began in late 2007. In addition to the $50 million in loan re-structuring, Goldman Sachs will pay an additional $10 million to the state as a penalty.

According to the Wall Street Journal, yesterday's agreement is a small victory in the ongoing investigation over the undoing of the real estate market: "The settlement follows a probe into how major Wall Street players were involved in writing loans to borrowers with poor credit, and then underwriting securities made up of those loans. Goldman Sachs and other banks were accused of encouraging underwriting of risky loans."

IRS Offers Top 10 Tips on IRA Contributions

As the April 15th income tax filing deadline approaches, the Internal Revenue Service is offering some last-minute tips for taxpayers, including helpful advice on how contributions to your Individual Retirement Arrangement (IRA) can affect your tax situation. Take a look at a few highlights from the top 10 below:

Tip #1. You may be able to deduct some or all of your contributions to your IRA and you also may be eligible for a tax credit equal to a percentage of your contribution.

Tip #2. Contributions can be made to your traditional IRA at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means contributions for 2008 must be made by April 15, 2009.

Tip #5. For 2008, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts: $5,000 or the amount of your taxable compensation for the year. Taxpayers who are 50 or older can contribute up to $6,000.

Tip #8. To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.

Learn more: Top Ten Tips for IRA Contributions, from the IRS

Some have suggested that Bernard "Bernie" Madoff's Ponzi scheme was far too large and widespread for him to have pulled it off alone. Various reports have suggested that his wife, Ruth, would be pursued for her assets, and also possibly charged. Then their sons' assets were targeted by the government. However, according to the AP, it turns out that CPA "David Friehling, 49, who ran a small storefront firm in a New York suburb, is the first person besides Madoff to be arrested on criminal charges in the long-running fraud."

The AP summarized the allegations indicating that Friehling:

"'pretended' to conduct audits of the confessed swindler's investment firm, authorities said Wednesday in charging him with fraud going back 17 years in the biggest investment scheme on Wall Street."

Further, the AP noted how the SEC's complaint alleged Friehling and his CPA firm:

"did not perform anything remotely resembling an audit" of Madoff's money management firm or try to confirm that stocks that Madoff had purportedly bought for customers even existed.

Undoubtedly many will wonder what, if any, oversight failures were involved in this case. However, the SEC's complaint indicates that Friehling "falsely represented" to the American Institute of Certified Public Accountants (AICPA) that he was not engaged in accounting work. In this manner, he "avoided the AICPA's peer review requirements" which could well have discovered the misconduct far earlier. Nevertheless, the allegations in the civil and criminal complaints are far-reaching and may leave the door open to the possibility that the web of fraud is just starting to unravel.

As noted by the AP, "Friehling's fraud ran from 1991 to 2008, and according to the SEC, he 'essentially sold his license to Madoff for more than 17 years while Madoff's Ponzi scheme went undetected.'" Below are links to key legal documents and news coverage in the case.