More on the long strange trip – Martin Shkreli trial

August 2, 2017

More on the Martin Shkreli trial The jury has been deliberating for days now. Yesterday, they submitted a few questions to the judge. This is always exciting and cause for much speculation and pontificating in legal circles. One question was a request for the definition of “fraudulent intent.” According to the New York Times, the defense considered that a good sign given their position that everything Shkreli did was in good faith. How could they not take heart that the jury was wrestling with the issue of intent? Another question was a request for the definition of “assets under management” and clarification whether that includes just assets in the funds at issue or other funds. There was evidence that Shkreli told investors that he had $30 to $40 million of assets under management when he reported to the SEC that he only had $3 million under management. Shkreli may have been including assets of a wealthy investor who had withdrawn his funds. I see this as another positive for the defense. See my earlier July 17, 2017 post for more on the Shkreli trial.

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Investor trust is important, but how important?

July 19, 2017

According to a Cornell University study of investments after the Bernie Madoff Ponzi scheme was revealed, people who knew Madoff’s victims or who lived in areas where victims were concentrated dramatically changed their investment behavior. According to the  study, investors withdrew $363 billion invested with financial advisors — even though many had nothing to do with Madoff. A significant portion of the withdrawals were put in safe assets like bank deposits. Even four years after the fraud was revealed, investors had not reinvested these funds in the markets. Financial advisory firms take note:  the $363 billion in investment withdrawals is nearly 20 times the $17 billion in restitution the courts ordered Madoff to pay his investors. According to one of the study’s authors Steve Yonker, “That’s a pretty big effect. The withdrawals were so hefty in some areas that some investment firms ended up shutting their doors and going out of business.”  Investment firms with clients in regions that were affected by the fraud were over 40 percent more likely to close than firms in a control group. “We show the importance of trust in investors’ allocation decisions,” Yonker said. “At the macro level, economic growth critically depends on the efficient allocation of capital.” “Capital flows stemming from distrust in intermediaries instead of the underlying investment opportunities can potentially lead to suboptimal allocations.” Fraud is bad for business. Investors fled when they lost trust in the markets. Perhaps the brokerage industry should work harder to maintain the trust of investors rather than opposing investor protection regulation. It’s good business. The Cornell study is published in The Review of Financial Studies. Thanks to for its reporting on this study.

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Fed employee nest eggs – less safe than you would think

July 18, 2017

When federal government employees recommend an investment adviser who steals employee retirement funds, “sovereign immunity” prevents recovery against government. In many ways the retirement savings of federal employees are safer than employees of private companies. The Thrift Savings Plan and other 401(k)-like plans offered by the federal government have fewer of the inappropriate investment options that are in many private employer retirement plans. But, as a recent Eleventh Circuit Court of Appeals decision reveals, federal employee retirement savings are still at risk. Alvarez v. U.S., Case No. 16-16479 (11th Cir. July 17, 2017), available at According to the Eleventh Circuit: In the late 1980s, Kenneth Wayne McLeod began contracting with various federal agencies to provide retirement advice to federal law enforcement employees in Florida. McLeod founded and ran the Federal Employee Benefits Group, Inc. (“FEBG”) Bond Fund. Most of the federal employee investors met McLeod at retirement seminars hosted by their agency employer, where McLeod spoke generally about finances and retirement and also pitched his fund. McLeod would sometimes follow up with individual employees, promising high, secure returns in the FEBG Bond Fund. Not surprisingly, federal employees invested in the FEBG Bond Fund.  In 2010, when investigators questioned McLeod, he admitted the FEBG Bond Fund was a Ponzi scheme and committed suicide. In an attempt to recover $30 million in losses, investors filed suit alleging that federal agency employees had failed to exercise reasonable care and made misrepresentations in recommending McLeod and the FEBG Bond Fund. So far, this is similar to many cases against private companies who recommend investment advisers to their employees. But, unlike private employers, the government must consent to be sued. It has discretion to invoke the defense of sovereign immunity — a doctrine that protects the government against lawsuits that it does not expressly authorize. Investors brought claims that the federal government was negligent in contracting with McLeod and that by doing so it gave the appearance of undue confidence in McLeod. They sought to fall within the Federal Tort Claims Act (“FTCA”), which authorizes certain tort claims against the federal government. But, as the Eleventh Circuit said, a court must strictly observe the ‘limitations and conditions upon which the Government consents to be sued’ and cannot imply exceptions not present within the terms of the waiver.” One such exception is the [FTCA] intentional tort exception, which bars: [a]ny claim arising out of assault, battery, false imprisonment, false arrest, malicious prosecution, abuse of process, libel, slander, misrepresentation, deceit, or interference with contract rights . . . The Eleventh Circuit ruled that that the alleged omissions during McLeod’s seminars, which gave investors “undue confidence in McLeod’s credibility,” constituted misrepresentations. The court found that all of the alleged negligent conduct of the agency employees from their failure to stop McLeod’s solicitation (non-communications) and their endorsement of McLeod was fundamentally based upon misrepresentations. As a result, the federal government is immune from liability for recommending this scoundrel to its own employees. Federal employees beware!

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mother rhino and baby

It’s a family affair – offering fraud

July 13, 2017

Mother and son working together – it would be heartwarming but … it’s fraud The SEC filed a complaint in the U.S. District Court for the Central District of California alleging that Carol J. Wayland and her son, John C. Mueller, fraudulently offered and sold unregistered securities to investors using a boiler room operation, raising approximately $2.4 million from 41 investors nationwide. To solicit investors in “K-T 50 Wells”, Wayland and Mueller allegedly set up a boiler room under the fictitious name of “Sahara Wealth Advisors.” According to the SEC’s complaint, K-T 50 Wells was supposed to develop and operate oil wells, but had little legitimate business activity. Wayland and Mueller allegedly misappropriated K-T 50 Wells investor money for purposes not disclosed in the K-T 50 Wells private placement memorandum, taking at least $871,463, or 36%, to pay for their personal expenses, and using the money of some investors to make payments to other investors. The complaint also alleges that K-T 50 Wells made misrepresentations regarding Wayland and Mueller’s experience managing oil and gas investment projects. Not the best example of good parenting.

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Courts open for business claims but closed to more and more individual claims

July 8, 2017

Big business can get into court — individuals are forced into arbitration The public courts were available to Beef Products Inc (BPI) to sue ABC News for defamation — even the court in a tiny South Dakota town. Reports are that the South Dakota county where the case was filed spent $45,000 preparing a courtroom for the so-called “lean finely textured beef” defamation trial. That’s nice. It is not so nice that the legal system is not as accessible to an individual with a beef against a big business. Individuals with disputes against businesses are increasingly forced into arbitration — which means disputes will be decided behind closed doors usually by someone with connections to the business. No federal or state court judge, no jury of one’s peers, no appellate review, no public access for media and court watchers. Think this does not matter to you? Check your brokerage statement. Brokers require that you “agree” to mandatory arbitration if you want to open an IRA or other brokerage account. Check your internet and phone bills. Internet and telecommunication service providers require that you “agree” to mandatory arbitration if you want those services. Check your credit cards. Credit card companies require that you “agree” to mandatory arbitration if you want to use a credit card. If businesses can bring their disputes in the public court system, shouldn’t individuals be able to do the same?

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What motivates a financial advisor?

July 7, 2017

What motivates a financial advisor or anyone else? Dan Pink provides a great explanation. Hint – it is not always money. In some circumstances, offering incentive pay can DECREASE performance. Maybe brokerage firms do not need to pay commissions and bonuses to get financial advisors to perform at their best.

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The more you lie, the easier it gets

July 5, 2017

We now have brain research showing how the more you lie, the easier it gets. The researchers (including Professor Dan Ariely) used functional MRI scans to show how self-serving dishonesty increases with repetition. The findings uncover a biological mechanism that supports a ‘slippery slope’: what begins as small acts of dishonesty can escalate into larger transgressions.    

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What gets brokers to cheat less — or more?

June 29, 2017

Why do most people feel it is wrong to run out of a restaurant without paying the bill but not wrong to illegally download music, movies, or books? Or manipulate financial markets?      

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