Fiduciary Magazine

Archive for June, 2010

When markets get hammered, you see a lot of ponzi schemes undone. That’s because when the market craps out, no one puts new money into the market and the schemer can’t maintain his lifestyle and meet client redemptions at the same time.

Scott Rothstein, who swindled $1 billion from his clients was sentenced to 50 years today. He committed his crimes while licensed as an attorney. That’s a new take on attorney – client privilege.

But Rothstein isn’t the only dirtbag to get press.

Kenneth I. Starr, a Manhattan business manager and investment adviser, was found hiding – creatively – in a closet and was arrested for conning some of Hollywood’s best known stars out of millions. According to the NYT, “he was arrested on May 27. He remains behind bars at the Metropolitan Correctional Center in downtown Manhattan, after prosecutors argued that he might flee if released on bail.”

Dana Giacchetto and his Casandra Group Investment firm advised Mike Ovitz, Rick Yorn, and Leonardo. Giacchetto was in jail for stealing some $20 million from his star clients.

No one is safe people. You have to do your homework, even if you get referred to someone. You need to get their DNA code.

Here are some helpful links:

FINRA Brokercheck for people who work at brokerage firms.

Investment Advisor Public Disclosure for firms that claim to be Investment Advisors or Independent Advisors. You can also check if their asset under management claims are correct with this site.

National Futures Association’s Background Affiliation Status Information Center (BASIC) is to check the compliance history of those who are in the commodity futures business.

Are the financial markets just a charade? Are we so numb to what has happened (and continues to happen) on Wall Street that we just accept the fact that the game is rigged and we continue to play anyway?

The answer is too often, but not always “yes.” Not all corporations are playing their investors. When management thinks back dating stock options are ethically correct, even if it is legal because some hack lobbyist snowed some Congress Members to vote to make it legal or to abstain from voting to make it illegal; same with the government’s decision that Derivatives which are insurance policies are in fact not insurance policies; do you really believe you have a chance of winning at this “crap game?” Sure many of the companies flourish and really make profits, but how do you know until after the fact?

Least you get the wrong impression, I am a strong believer in the Capitalistic system, and it is the only system that works. However, it requires regulation by the government, but by regulators that are intelligent and are not out to kill a deal. My sadness is that those who lead the Capitalistic system have in fact killed the goose that laid the golden eggs. There was so much money to made without the greed factor, and now the country is financially shattered. Yes the big guys are in good shape, but the Capitalistic system needs the middle class and they are not in good shape. With 400,000+ new filers for unemployment every month, we haven’t seen the worst of the worst yet. It is going to be a long climb up a steep mountain.

Back when Enron first hit the fan, I met with a close friend who is an investment advisor. I asked him how in the world he could make any judgments based on company financial statements. We were not happy with the international firms that appeared to have sold their souls in some big name cases, which is proven by the large amounts paid out in damages, accompanied by the repetitive statement that the settling national CPA firm admits to no wrong doing. Of course it was a matter of saving the cost of litigation that caused the settlement. We can all agree that these cases are a small part of the total audits performed and that many of them are performed in a highly professional manner, but tell that to the investors who lost their money.

When Derivatives first hit the market I said “They were overly complex and that many of the people who were selling them and buying them really did not know the degree of risk involved, especially at the beginning. I admit that this is a generalization and that there are people, some of whom I know, who make money in trading these complex financial securities. To me they should never have been allowed to be marketed due to their complexities and that fact that there was no regulation of them by the SEC. Even now, and while there are those who trade with a more limited risk factor, I still feel the same way, and I know some, or many of you will disagree with feeling about Derivatives.

The fact is on most, but not all, Derivative sales (not daily trading) there is going to be a 100% loser and a 100% winner. My problem is the seller never, at least to the best of my knowledge, ever sets up a reserve for losses, the seller reports 100% of the gain, reports bloated profits and pays out gigantic bonuses. Then the public generally gets stuck with covering the losses of those too big to fail.

With Derivatives, the market place has found it impossible to evaluate the risk associated with them. Recently I read about a group of mathematicians using a super computer to try and determine the risk involved in some very complex Derivatives. After four days of calculating the computer couldn’t do it with any degree of accuracy. I also know that those working on the Lehman Bros case, trying to unravel the Derivatives are have a difficult time due to their complexities. Anything that complex should not be allowed to be sold, but that is one man’s opinion, what say you? The one thing you know is that the seller will generally win and the buyer will ultimately lose unless the United States Government steps in and bails out the seller.

Certainly the alleged accusations against Goldman Sachs that they were betting against the products they were selling tells the story. We were told they were hedging their risk, but if I had bought a suggested investment by a broker and the broker was betting I was going lose my money, I would not be a happy camper. However the most shocking thing about the Goldman Sachs fiasco is that some of the people across the table were supposed to be capable of making intelligent decisions and it appears that in many cases they were not.

The most difficult question to answer today is what you invest in to secure the savings you have accumulated by hard work, so it will be there to cover your retirement? That is a question that is harder and harder to answer.