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Generational Dynamics Web Log for 13-Mar-07
Massachusetts issues criminal investigation subpoenas to analysts

Web Log - March, 2007

Massachusetts issues criminal investigation subpoenas to analysts

This is the beginning of a flood. It's time to put your affairs in order. On Tuesday afternoon, Massachusetts issued subpoenas to UBS Securities LLC and Bear Stearns & Co. Inc.

Mass. Sec'y of State William Galvin on CNBC, announcing criminal investigation of analysts. <font size=-2>(Source: CNBC)</font>

Mass. Sec'y of State William Galvin on CNBC, announcing criminal investigation of analysts. (Source: CNBC)

As I wrote yesterday, this is hardly a surprise. Analysts gave New Century Financial Corp. an upgraded rating, even as it was obvious that the market was collapsing and New Century's exposure was growing.

Appearing on CNBC on Tuesday afternoon, here's what Massachusetts Secretary of State William Galvin said:

"We've taken note of the fact that in these two cases, despite the fact the New Century restated its earnings on February 7, they got an upgrade from UBS on February 23; despite the fact that on March 1, New Century indicated they were going to delay their annual report, they got an upgrade from Bear Stearns.

These raise some very serious questions for us. We were very involved in the research analysts cases of 2003 and the global settlement - we were among the lead states. We thought we'd put thsese types of problems behind us. But this type of activity raises some very serious questions.

What relationships would cause such a grievous error. Were the relationships transparent? Were there other relationships between these two firms and New Century. Was there something else that was coloring these recommendations. Was their independent research relied upon, as there was supposed to be under the global settlement?"

The "global settlement" refers to the what happened after the Nasdaq crash in 2000. Leading up to that crash, analysts were giving glowing reports to stocks that were clearly overvalued, and the analysts were accused of having lied on their reports in order to aid the analyst firm in getting investment management business. In 2003, a "global settlement" was reached between several states and several analyst firms, in which the analyst firms insisted they had never done anything like that, and that they wouldn't do it again. Now they're being accused of doing it again.

Galvin was asked whether there was any additional evidence:

"The fact that their reserves were combined - a very critical issue when it comes to matters relating to a firm like this. Their reserves to deal with problem issues were combined shortly beforehand - which should have been a red flag - was ignored. There seems to be a real problem here. And obviously, we're concerned because our past experience suggests when we see a problem in one area, there are problems in other areas."

I don't know what the "reserves were combined" issue is. It should appear in Wednesday's papers.

Galvin was asked about the "most sinister interpretation":

"The most sinister interpretation is that something was corrupting the analysis -- that the coverage was being corrupted by some other factor. We don't know that - that's why we've issued subpoenas. We can only find that out by issuing subpoenas. We feel there's a reason to be concerned because of the impact that this is going to have. And it's not just the impact on the market - frankly here in Massachusetts we've seen a dramatic surge in foreclosures - this is hurting real people as well. The activities that apparently were condoned by these coverage houses. We thought we'd put this kind of mistake behind us after the tech bubble of the early 2000s that we dealt with - we were one of the lead states dealing at the time with Credit Suisse. We have an obligation I think to do the follow-up. It's one thing to announce a global settlement, but if it's not being followed then that's a serious problem.

We expect them to cooperate. We think that it's urgent that we move on this as rapidly as possible. The potential for contamination here is quite great. The impacts it's having on the marketplace is obvious. The impact on individual citizens certainly here in Massachusetts is significant. So for all these reasons, we want to move on as rapidly as possible. I think the relationships between the houses in this sector, the subprime sector, has to be vigorously reviewed."

There's no doubt that these crimes occurred. The craziness and stupidity of investors, analysts and journalists alike can't be explained any other way. The global investment industries have turned into a worldwide pyramid scheme (or Ponzi scheme), and there will be plenty of opportunity for investigations into criminal activity.

The Massachusetts investigation is only the beginning of what is going to be a huge flood of investigations.

The criminal investigations will extend to anyone who violated a professional or fiduciary duty in making an investment recommendation that turns out, in retrospect, to have been wrong. Other obvious things, such as misuse of money, will also be prosecuted.

It may seem unfair to hold analysts to their opinions retrospectively, but no one can be convicted without evidence. One of the biggest sources of evidence will be answers to this question: Did the professional follow his own advice, and suffer along with his clients, or did the professional save himself at the expense of his clients.

Here are some examples of people who will be targets of investigation:

Financial advisors who tell their clients that the market is doing great and they should "buy." If the adviser makes money in any way from this, especially earning commissions from clients who "buy," then he will be under suspicion, and will be subject to lawsuits from clients. If it turns out that he saved himself by deciding to "sell," as he was telling his client to "buy," then he will go to jail.

Analyst firms that provide positive advice for failing companies, in order to gain consulting or investment clients.

Individual homeowners who lied or exaggerated on their mortgage applications.

Construction firms or real estate brokers who overprice real estate in order to earn larger commissions or kickbacks.

Individuals who "borrow" money inappropriately, hoping not to be noticed. They'll end up being charged with embezzlement.

If you fit in any of the above categories, or any other category where you gave questionable advice for pay, or misued money for personal gain, then you should take action immediately.

Decide that it's time to cut your losses. You are going to go bankrupt, no matter what you do. You're going to lose your home, no matter what you do.

Do you want to be a criminal as well?

You should see a lawyer right away and determine what your options are. In some cases, admitting your crime or changing your ways now may save you.

Incidentally, it's perfectly OK to call a lawyer's office and ask to have an initial consultation for no charge. You can then tell the lawyer your story and get some advice. If the lawyer continues representing you, then of course you'll have to pay him.

Whatever you do, do NOT NOT NOT admit any crimes to family or friends, other than lawyers. This is VERY IMPORTANT. Don't tell someone, "I feel very guilty; I took some money from an escrow account and I can't pay it back. I don't know what to do. Sob."

If you do that, then, in many cases, your friend has an obligation to report your crime. If he does not, he will become an accessory after the fact, and may also go to jail. So do NOT put your friends' future in jeopardy by confessing to them.

And it goes without saying that you should NOT send me an e-mail message confessing to a crime. I'm not a lawyer, so I couldn't help you anyway. Go talk to a lawyer. At least it will give you some peace of mind. (13-Mar-07) Permanent Link
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Generational Dynamics Web Log for 13-Mar-07 Massachusetts issues criminal investigation subpoenas to analysts

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Generational Dynamics Web Log for 13-Mar-07
Massachusetts issues criminal investigation subpoenas to analysts