SEC’s Mary Schapiro testified today before the House Agriculture Committee on ways to regulate over-the-counter derivatives, which present a number of risks, “chief among them is systemic risk.”

Has anyone else wondered, Why did Mary Shapiro testify before the House Agriculture Committee?

Morningstar ran a report about how you can get Buffett-like returns by blending two funds…hmmm?

Buffett has been the luckiest investor the world has ever known. You cannot invest like Buffett. He gets calls, dealflow, that you’ll never get. He gets terms that you’ll never be offered. He’s also 78 and has invested through the largest and longest bull market the world has know.

What you see here, is an issue of Causation: Buffett is the richest man, therefore he has made nothing but prescient decisions during his life. This is of course a logical fallacy. I felt so strongly about this, and feel that the investing public is misled about how to trade and make money from investing, that I recorded a web tv episode on Buffett.

If you want to get returns like Buffett, buy the Berkshire Class A’s or B’s. That’s the ONLY way you’ll get Buffett-like returns – because he’s the only one getting them.

The regulatory plan also will include new oversight over largely unregulated derivatives markets and requirements on how banks turn their investments, such as mortgages, into complex securities — two issues that led to the crisis.

Citibank spend over $100 million in lobbying fees to have Glass-Steagall repealed. That figure puts it close to 22 cents per share. At least they didn’t repeal the FDIC back in ‘92 with the rest of the Act – the FDIC was created in the original Banking Act of 1933. I’m surprised that no one has stood up and taken credit for that. Maybe they’re reading their history…

I wonder how the current lobbying is hastening or slowing down the process? Maybe the Government is just going deliberately slow because they understand that they are capable of putting out the fire with gasoline.

I know Jamie Dimon and JP Morgan are in no hurry to see it completed…

It doesn’t make sense for America to try to enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad–something I don’t recommend–we’d still be losing manufacturing jobs. That’s mainly because of technology.

When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won’t have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.

Click for Forbes article

What does this say about the falling trend in Union membership?

As a Ponzi scheme progresses, the earlier investors often withdraw more money than they invested, thereby receiving fictitious profits. Broker-dealers are often paid handsome commissions for soliciting the investments. When the Ponzi scheme has failed and it is time to unwind the tangled financial web, questions then arise on the part of bankruptcy trustees and receivers as to how or whether they can recover funds transferred. Claims for recovery of funds are made against: (1) the investors (for both principal repayments and fictitious profits); and (2) the broker-dealers for return of commissions paid for soliciting the investments on behalf of the Ponzi debtor. Use of the fraudulent transfer laws in both the Bankruptcy Code and state statutes is the most common mechanism to seek to “claw back” the transfers made by the Ponzi debtor.

Claw back claims can be based on either an actual fraud theory (where the actual fraudulent intent of the Ponzi debtor is sufficient to establish the claim to recover the funds transferred), or a constructive fraud theory (where it must be established that the Ponzi debtor did not receive reasonably equivalent value in exchange for the transfers made at a time when the Ponzi debtor was insolvent). Under either theory, the good faith of the transferee is relevant, establishing a partial or complete defense depending on the circumstances.

The United States Court of Appeals for the Ninth Circuit has generated three significant opinions in the last year providing further guidance for bankruptcy trustees and receivers in their pursuit of these “claw back” claims. These cases distinguish between transfers that constituted a return of the principal amount originally invested versus profits or “interest” which might have been paid to an investor. In re AFI Holding, Inc., 525 F. 3d 700 (9th Cir. 2008)(repayment to investor as return of principal was not recoverable since the payment partially or fully extinguished the investor’s restitution claim, but “profits” paid to investor are recoverable); In re Slatkin, 525 F.3d 805 (9th Cir. 2008)(prejudgment interest may be awarded on recovery of profits from investors); and Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008)(investors’ good faith may be relevant as a defense regarding a return of principal, but will not protect them from claims to recover profits).

A particular category of transfers subject to avoidance claims in Ponzi scheme cases are the transfers made by the Ponzi debtor to its broker-dealers as commissions in order to solicit new investments. Some courts have found that, because a Ponzi enterprise has no legitimate purpose, there can be no value provided by a broker in furthering or assisting the debtor in perpetrating the fraud. Therefore, the commissions paid to them are recoverable by a trustee or receiver. See, e.g., Warfield v. Byron, 436 F.3d 551, 560 (5th Cir. 2006)(”It takes cheek to contend that in exchange for the payments he received, the [debtor’s] Ponzi scheme benefited from his efforts to extend the fraud by securing new investments”).

Other courts have looked more narrowly at the relationship between the debtor and the broker. They measure “what was given and received” by the debtor and the broker, looking at the market commission rates versus what was paid, finding that, “Money is valuable even when used for illegal purposes.” In re Churchhill Mortgage Inv. Corp., 256 B.R. 664 (Bankr.S.D.N.Y. 2000)(court should focus not the consequence of the debtor-broker transaction in the context of the entire Ponzi scheme, but “on a comparison of the values of the mutual consideration actually exchanged in the transaction between the Broker and the Debtor. . .”).

The bottom line is that both investors and broker-dealers may be subject to claw back claims in bankruptcy and receivership proceedings of Ponzi debtors. Their good faith status may or may not rescue them from litigation, depending on the type of claim brought and the precedent or opinion of the presiding court.

Kathy Phelps is a Partner at Danning, Gill, Diamond & Kollitz LLP in Los Angeles