Colling, Gilbert, Wright & Carter Securites Fraud

According to an Associated Press article released on October 16, 2009, a former Goldman Sachs employee has been appointed to the recently created post of Chief Operating Officer of the Securities & Exchange Commission's enforcement division. The position was created in part due to the fallout from the Bernie Madoff fraud scandal that observers say should have been detected by the SEC long before the scheme blew up. The AP article appears below.

A Goldman Sachs executive has been named the first chief operating officer of the Securities and Exchange Commission's enforcement division. The market watchdog agency said Friday that Adam Storch, vice president in Goldman Sachs' Business Intelligence Group, is assuming the new position of managing executive of the SEC division.

The move came as the SEC has been revamping its enforcement efforts following the agency's failure to uncover Bernard Madoff's massive fraud scheme for nearly two decades despite numerous red flags.

Storch, who will be responsible for project management and operations, will report to SEC Enforcement Director Robert Khuzami.

Along with the enforcement division's deputy director, Storch also will supervise the SEC's Office of Market Intelligence, with an eye to improving the monitoring, collection and analysis of the hundreds of thousands of tips and complaints the agency receives annually.

Before joining Goldman Sachs, Storch was a senior consultant at accounting firm Deloitte & Touche. He is a certified public accountant and certified fraud examiner, and has an MBA from New York University and bachelors of science in business administration from the State University of New York in Buffalo.

Storch has a strong background in technology systems and project management, Khuzami said in a statement. "He will help to make us more efficient and nimble, and permit us to put more of our investigators on the front lines to detect and stop fraud," Khuzami said.

Khuzami, a former federal prosecutor who came to the SEC in March from Wall Street investment firm Deutsche Bank, says he has undertaken the most extensive restructuring of the enforcement division in at least 30 years.

In addition, SEC Chairman Mary Schapiro ended a policy requiring agency enforcement attorneys to get approval from the SEC commissioners before negotiating fines and penalties with companies accused of violations.

The SEC inspector general recently recommended a new system for handling tips and complaints to prevent another breakdown like the one that allowed Madoff's Ponzi scheme to flourish for 16 years.

The proposals from SEC Inspector General David Kotz for the enforcement and inspections operations also include making it easier for junior-level enforcement attorneys to bring their concerns to top managers.

In a report issued in August, Kotz detailed how the SEC bungled five investigations of Madoff's business between June 1992 and last December, when the financier confessed the scheme to his sons. He found that enforcement staff lacked adequate guidance on how to properly analyze complaints, and therefore failed to thoroughly review a complaint on Madoff brought to them in 2001 by private fraud investigator Harry Markopolos.

Madoff, who pleaded guilty in March, is serving a 150-year sentence in federal prison in North Carolina for what could be the biggest Ponzi scheme in history. It destroyed thousands of people's life savings, wrecked charities and gave the financial system another big jolt.
If you have experienced losses due to brokerage fraud, please contact Colling Gilbert Wright & Carter for a free case evaluation. Thank you.

The Financial Industry Regulatory Authority (FINRA) recently issued the following press release:


Washington, DC — The Financial Industry Regulatory Authority (FINRA) today announced that it has fined Citigroup Global Markets Inc. $600,000 and censured the firm for failing to supervise complex trading strategies designed in part to minimize potential tax liabilities. The firm also failed to report to an exchange trades executed under these strategies and to adequately monitor Bloomberg messages.

Specifically, Citigroup failed to supervise and control trading activities by lacking procedures designed to detect and prevent improper trades between the firm and certain counterparties, and among entities within the firm.

"Increasingly complex trading strategies must be governed by supervision that is equally sophisticated and detailed," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "In this case, Citigroup's inadequate supervision resulted in improper trading related to the execution of strategies involving transactions with a principal purpose of limiting tax liability."

The first trading strategy involved the purchase of stock by Citigroup's equity finance desk in New York from a customer — particularly foreign, broker-dealer clients. Then after a period of time, during which the taxable dividends were paid, the stock was sold back to the customer.

When dividends on stock in U.S. companies are paid to foreign investors, these dividends may be subject to withholding taxes, depending on the applicable treaty between the United States and the foreign investor's home country. However, Citigroup and certain clients understood that a "dividend equivalent" paid as part of a swap agreement would not be subject to such withholding taxes.

To take advantage of this strategy, a foreign client would sell U.S. equities to Citigroup's equity finance desk in New York. The New York desk then acted as custodian of this dividend-bearing stock for Citigroup's London affiliate.

The London affiliate then used the stock as the underlying equity hedge in a "total return swap" entered into with the customer. Under the swap, the London affiliate paid the customer a "total return," which was any income the stock generated, including any appreciation in value, as well as an amount equivalent to the dividend. In exchange for the "total return payments," the customer paid the London affiliate interest and covered any decline in the share price.

In the final step, the swap was terminated and the New York desk sold the stock on behalf of the London affiliate. The end result was the firm's foreign clients received the full value of dividends from American securities, the "dividend equivalent," free of applicable U.S. withholding tax. These transactions occurred from 2002 through 2005.

Citigroup paid about $24 million to the Internal Revenue Service in 2006, and earlier, in connection with this strategy. The payments were made after the firm determined there was a risk it could not substantiate the independence of some of the trades to the extent they could be distinguished from stock loans or stock repurchase agreements, and that the "dividend equivalents" would be subject to U.S. withholding tax.

For approximately two years after this strategy began, it was conducted without Citigroup having in place written procedures to govern it. After Citigroup implemented written procedures, trading staff conducted improper transactions that deviated from the procedures that Citigroup had put in place.

This activity included selling the stock to an interdealer broker with the understanding that the counterparty would go to the same broker to purchase the stock, and exchanging Bloomberg messages with counterparties as the swap was being unwound to facilitate the counterparties' repurchase of the underlying securities.

The second strategy was constructed to enhance — for the financial benefit of the firm itself — the after-tax yield on Italian stocks. In addition to the New York and London trading desks, this scheme also involved the firm's Swiss affiliate.

In the Italian equity trades, the London desk directed the New York equity finance desk to borrow stock in Italian companies expected to declare dividends. The New York desk, in turn, loaned the stock to the Swiss affiliate, which then sold the shares back to the New York desk.

In the next step, the New York desk sold these shares to an inter-dealer broker, who then sold them to the London desk. Lastly, the London and Swiss affiliates entered a swap agreement to cover the risk each took on as a result of taking a long (London) and short (Swiss) position. After the dividend was paid, the trades were unwound in reverse order.

The London affiliate held the Italian stocks and collected the dividend, in anticipation of receiving favorable tax treatment from the Italian authorities under a treaty, and in anticipation of generating additional tax benefits for the firm as a whole. This strategy was used from about 2000 to 2004.

Citigroup failed to establish written supervisory procedures specific to these trades. The firm also failed to prevent improper coordination between its related entities. Additionally, some of the stock trades by the New York desk in carrying out both trading strategies were not reported to an exchange, as required by securities regulations.

FINRA also found that the New York desk and counterparties used Bloomberg-terminal messages to communicate about the U.S. equity trades with foreign clients for approximately one year before the firm incorporated the review of the desk's Bloomberg messages into its email review system.

In settling this matter, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings. In determining the appropriate sanction, FINRA noted that Citigroup discovered and self-reported the violations giving rise to this matter; that the firm hired a law firm to conduct a review of these trades and to assist in remedial efforts; and that the firm and its outside counsel provided substantial assistance to FINRA staff during the investigation.
The attorneys at Colling Gilbert Wright & Carter are currently investigating and filing claims against Citigroup's brokerage arm Salomon Smith Barney for broker negligence and fraud. Salomon Smith Barney recently merged with Morgan Stanley to form Morgan Stanley/Smith Barney. If you have lost money related to a Morgan Stanley or Salomon Smith Barney brokerage account, please contact our office for a complimentary case evaluation. Thank you.

Washington, DC -- The Financial Industry Regulatory Authority (FINRA) announced today the expansion of its two-year pilot program that gives investors who are filing eligible claims the opportunity to select an arbitration panel composed of three public arbitrators instead of two public and one non-public.

In its second year, the pilot will expand from 11 to 14 broker-dealers, and the number of eligible cases will increase from 276 to 411, a rise of nearly 50 percent. Only the investor filing the claim can elect to participate in the program and the firms cannot choose which cases are eligible.

"With additional firms and more cases, the resulting information derived from the pilot will permit a more robust analysis of the process of using three public arbitrators," said Linda D. Fienberg, President, FINRA Dispute Resolution. "The expansion also recognizes that the total number of arbitration cases that have been filed in the forum has increased since we launched the pilot last fall."

Each participating firm has agreed to commit a specific number of cases to the pilot. Cases enter the pilot on a first-come, first-served basis at the sole discretion of the claimant, who is typically a retail brokerage customer. The program began on October 6, 2008, and will conclude on October 5, 2010.

The three new firms contributing cases to the pilot program are: Chase Investment Services, with 10 cases; Oppenheimer & Co, with 15 cases; and Raymond James Financial Services/Raymond James & Associates, with 10 cases. Of the 11 firms already participating, five are increasing the number of pilot cases from 40 to 60: Citigroup Global Markets, Merrill Lynch, Morgan Stanley Smith Barney, UBS Financial Services and Wells Fargo Advisors. Other participating firms are Ameriprise Financial Services, with 18 cases; Charles Schwab, with 10 cases; Edward Jones, with 18 cases; Fidelity Brokerage Services, with 10 cases; LPL Financial, with 10 cases; and TD Ameritrade with 10 cases.

The pilot program will be evaluated by a number of criteria, including the percentage of investors who opt in and, of those, the percentage who actually select an all-public panel. Currently, about half of the investors in the pilot choose to have a non-public arbitrator on their hearing panel.

FINRA also will compare the results of pilot and non-pilot cases, including the percentage of cases that settle before award and how quickly they settle, the length of hearings and the use of expert witnesses. FINRA also is conducting participant surveys. So far, investors have filed 474 eligible cases. With the initial year of the pilot nearly concluded, 51 percent of the eligible investors have opted into the pilot, resulting in 244 cases.

Investors who choose to have their claim heard under the pilot program
-- and the firm named in the claim -- receive the same three lists of
potential arbitrators that parties in non-pilot disputes receive: lists
of eight chair-qualified public arbitrators, eight public arbitrators
and eight non-public arbitrators. Investors participating in the pilot
may choose either an all-public three-member panel or a majority public
panel with one non-public arbitrator.

To date, in the 225 pilot cases where ranking lists have been returned,
investors have ranked one or more non-public arbitrators half the time
and struck all eight non-public arbitrators in the other half. Thus,
investors are choosing to have a non-public arbitrator in 50 percent of
the pilot cases.


The attorneys at Colling Gilbert Wright & Carer support this program and encourage participation by its securities arbitration clients. Please contact our offices for additional information on filing a FINRA arbitration claim and the public arbitrator pilot program. Thank you.

INVESTMENT COMPANY ACT RELEASE
Morgan Stanley Investment Management Inc., et al.
A notice has been issued giving interested persons until Oct. 28, 2009, to request a hearing on an application filed by Morgan Stanley Investment Management Inc., et al., for an order pursuant to Sections 6(c) and 17(b) of the Investment Company Act for an exemption from Sections 17(a) of the Act; and pursuant to Section 17(d) of the Act and Rule 17d-1 under the Act permitting certain joint arrangements. The order would permit (1) registered investment companies for which certain affiliates of Morgan Stanley act as an adviser to engage in certain securities transactions with certain affiliates of Citigroup Inc. (Citigroup) and (2) registered investment companies for which certain affiliates of Citigroup act as an adviser to engage in certain securities transactions with certain affiliates of Morgan Stanley. (Rel. IC-28941 - October 6)

The law firm of Colling Gilbert Wright & Carter is currently investigating claims against both Morgan Stanley and Salomon Smith Barney (Citigroup Global Markets) for stockbroker negligence and fraud. If you have had an investment account with either of these firms and feel your assets have been mismanaged, please contact our office for a free case evaluation. Thank you.