• July 18, 2017

    Fed employee nest eggs – less safe than you would think

    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 http://media.ca11.uscourts.gov/opinions/pub/files/201616479.pdf 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! http://law.justia.com/cases/federal/appellate-courts/ca11/16-16479/16-16479-2017-07-17.html

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  • July 17, 2017

    The long strange trip that is the Martin Shkreli trial

    It is a little weird that Martin Shkreli is being prosecuted for criminal securities fraud even though investors did not lose money. That is no bar to criminal prosecution, but unusual. The jury could decline to find guilt without losses. The New Yorker’s Sheelah Kolhatkar also notes this unusual prosecution of fraud with no investor losses. It is a gutsy move on the part of the prosecutors (these are not members of the Chickenshit Club). http://www.newyorker.com/sections/business/the-strange-defense-of-martin-shkreli. Kolhatkar also took notice of the unusual Benjamin Brafman defense strategy — calling client Shkreli “strange” and like “Rain Man.” This strategy make sense to me. Even if it were possible to have  Shkreli change his persona for trial, it would not be credible. This is making this most of the client you have — rather trying to make over the client. While we are on the subject, there is something even weirder that the LA Times reported. A Shkreli mentor sent an email about wanting to touch Shkreli’s “soft skin.” I did not make this up. You can verify it here:  http://www.latimes.com/business/la-fi-martin-shkreli-trial-20170713-story.html   http://www.latimes.com/business/la-fi-martin-shkreli-trial-20170705-story.html  Will a skin care line be next for Shkreli? Its been a long strange trip already.    

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    July 13, 2017

    It’s a family affair – offering fraud

    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. https://www.sec.gov/litigation/litreleases/2017/lr23876.htm

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  • July 12, 2017

    Measuring uncertainty about economic policy

    Here is a shout out to Steven J. Davis from my alma mater — the University of Chicago– for his work creating the Economic Policy Uncertainty Index. While the VIX index measures volatility in the markets, the Economic Policy Uncertainty Index provides clues about how politics might be shaping the economy. Professor Davis developed the index with Scott Baker from the Kellogg School of Management at Northwestern University and Nicholas Bloom at Stanford University. The three saw a need for this kind of measure after the recent financial crisis. The index is used as the basis for research by economists and finance experts looking for connections between political economic uncertainty and different parts of the economy. You can listen to an NPR Marketplace story about the index here: http://<iframe src=”https://www.marketplace.org/2017/07/12/economy/government-policy-uncertainty-and-economy/popout” frameborder=”0″ width=”100%” height=”240px”></iframe>

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