US Economy – Credit Default Swaps – Illegal Securities and Financial Derivatives Activities and their misrepresentation of reality, values, and fact

Discrimination in mortgage lending is prohibited by the federal Fair Housing Act and HUD’s Office of Fair Housing and Equal Opportunity actively enforces those provisions of the law. The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability):

* Refuse to make a mortgage loan
* Refuse to provide information regarding loans
* Impose different terms or conditions on a loan, such as different interest rates, points, or fees
* Discriminate in appraising property
* Refuse to purchase a loan or set different terms or conditions for purchasing a loan

Filing a Complaint

If you have experienced any one of the above actions, you may be the victim of discrimination. Recognizing the signs of lending discrimination is the first step in filing a complaint. HUD investigates your complaints at no cost to you. If you believe you have experienced lending discrimination, visit our housing discrimination complaint website to learn more about the complaint process.

HUD Fair Lending Studies

Pre-application inquiries about mortgage lending financing options represent a critical phase in the homebuying process. If potential homebuyers cannot obtain full and fair access to information about mortgage financing, they may give up on their pursuit of homeownership, their housing search may be restricted, or they may be unable to negotiate the most favorable loan terms. HUD has conducted a number of studies to determine whether minority homebuyers receive the same treatment and information as whites during the mortgage lending process. Read more on mortgage lending discrimination studies.

Subprime Lending

Subprime loans play a significant role in today’s mortgage lending market, making homeownership possible for many families who have blemished credit histories or who otherwise fail to qualify for prime, conventional loans. A recent HUD analysis, based on HMDA and related data, shows that the number of home purchase subprime applications increased from 327,644 in 1997 to 783,921 in 2000.

While the subprime mortgage market serves a legitimate role, these loans tend to cost more and sometimes have less advantageous terms than prime market loans. Additionally, subprime lenders are largely unregulated by the federal government. Data shows blacks are much more likely than whites to get a subprime loan, and many of the borrowers who take out these loans could qualify for loans with better rates and terms. As such, many have expressed fair lending concerns about the subprime market. Read more on Subprime Lending.

Predatory Lending

Some lenders, often referred to as predatory lenders, saddle borrowers with loans that come with outrageous terms and conditions, often through deception. Elderly women and minorities frequently report that they have been targeted, or preyed upon, by these lenders. The typical predatory loan is: (1) in excess of those available to similarly situated borrowers from other lenders elsewhere in the lending market, (2) not justified by the creditworthiness of the borrower or the risk of loss, and (3) secured by the borrower’s home. HUD is working hard to fight against predatory lending.

Minority Homeownership

HUD is committed to increasing homeownership opportunities for all Americans. HUD is engaged in a special effort to boost the minority homeownership rate since the rate for black and Hispanic Americans lags behind that of others. Read more about HUD’s efforts to Increase Minority Homeownership.

http://www.hud.gov/offices/fheo/lending/index.cfm

http://www.usdoj.gov/crt/housing/title8.php

***

NEW YORK (Reuters) – A former mortgage lender pleaded guilty on Thursday to conspiring to commit fraud in a $44 million theft of payoff proceeds for refinanced mortgage loans funded by Fannie Mae.

“When the fraudulent scheme was revealed, Fannie Mae held nearly $44 million in unpaid, but refinanced, underlying mortgage loans from Olympia Mortgage,” the U.S. Attorney’s office in Brooklyn said at the time of the indictment.

Thu Sep 11, 2008 5:50pm EDT

http://www.reuters.com/article/domesticNews/idUSN1117127920080911

***

The Organized Crime Control Act of 1970 (Pub.L. 91-452, 84 Stat. 922 October 15, 1970), was an Act of Congress signed into law by U.S. President Richard Nixon. It prohibits the creation or management of a gambling organization involving 5 or more people if it has been in business more than 30 days or accumulates $2000 in gross revenue in a single day. It also gave grand juries new powers, permitted detention of unmanageable witnesses, and gave the attorney general authorization to protect witnesses, both state and federal, and their families. This last measure helped lead to the creation of WITSEC, an acronym for witness security.

Part of the Act created the Racketeer Influenced and Corrupt Organizations Act.

http://en.wikipedia.org/wiki/Organized_Crime_Control_Act

***

Indiana (and probably elsewhere – in the Secretary of State office)

The Prosecution Assistance Unit was created within the Enforcement Section of the Securities Division to assist law enforcement agencies in prosecuting white collar criminals. Currently the unit includes two attorneys and two investigators devoted exclusively to the enforcement of the criminal provisions of the Indiana Securities Act, the Indiana Loan Broker Act and related statutes. The Unit operates under the direction and supervision of the Securities Commissioner and the Senior Investigator. PAU Home page

- On April 24, 2006, Michael Boehm was sentenced by the St. Joseph Superior Court to eight (8) years imprisonment upon his guilty plea to four (4) counts of selling unregistered securities to residents of South Bend. In exchange for the guilty plea, twenty-six (26) remaining counts of securities fraud and transacting business as an unregistered broker-dealer or agent were dismissed.

The case was presented by St. Joseph County Prosecutor, Michael A. Dvorak, on a referral from the Prosecution Assistance Unit. Boehm caused his company, M & D Whirlwind to issue approximately $4.5 million in promissory notes with interest rates of up to thirty percent (30%) to 65 Indiana residents. Boehm used part of the proceeds to make high risk loans to persons who were not credit worthy and who ultimately defaulted on their loans to Boehm’s company.

http://www.in.gov/sos/securities/pau/news.html

***

http://www.uscourts.gov/courtlinks/

http://en.wikipedia.org/wiki/U.S._District_Court

Jurisdiction

Unlike some state courts, the power of federal courts to hear cases and controversies is strictly limited. Federal courts may not decide every case that happens to come before them. In order for a district court to entertain a lawsuit, Congress must first grant the court subject matter jurisdiction over the type of dispute in question. Though Congress may theoretically extend the federal courts’ subject matter jurisdiction to the outer limits described in Article III of the Constitution, it has always chosen to give the courts a somewhat narrower power.

The district courts exercise original jurisdiction over—that is, they are empowered to conduct trials in—the following types of cases:

• Civil actions arising under the Constitution, laws, and treaties of the United States;^[6]
• Certain civil actions between citizens of different states;^[7]
• Civil actions within the admiralty or maritime jurisdiction of the United States;^[8]
• Criminal prosecutions brought by the United States;^[9]
• Civil actions in which the United States is a party;^[10] and
• Many other types of cases and controversies^[11]

For most of these cases, the jurisdiction of the federal district courts is concurrent with that of the state courts. In other words, a plaintiff can choose to bring these cases in either a federal district court or a state court. Congress has established a procedure whereby a party, typically the defendant, can “remove” a case from state court to federal court, provided that the federal court also has original jurisdiction over the matter. For certain matters, such as intellectual property disputes and prosecutions for federal crimes, the jurisdiction of the district courts is exclusive of that of the state courts.^[12]

In addition to their original jurisdiction, the district courts have appellate jurisdiction over a very limited class of judgments, orders, and decrees.^[13].

Other federal trial courts

There are other federal trial courts that have nationwide jurisdiction over certain types of cases, but the district court also has concurrent jurisdiction over many of those cases, and the district court is the only one with jurisdiction over criminal cases. The United States Court of International Trade addresses cases involving international trade and customs issues. The United States Court of Federal Claims has exclusive jurisdiction over most claims for money damages against the United States, including disputes over federal contracts, unlawful takings of private property by the federal government, and suits for injury on federal property or by a federal employee. The United States Tax Court has jurisdiction over contested pre-assessment determinations of taxes.

http://en.wikipedia.org/wiki/U.S._District_Court

***

Recent Convictions, Indictments and Investigations of Members of Congress and Executive Branch Officials

* = linked to Abramoff scandal

I.   Congressional Members

A.   Convicted

• Rep. Randy “Duke” Cunningham: pleaded guilty to conspiracy to commit bribery, mail fraud, wire fraud, and tax evasion; sentenced to 100 months in prison and $1.8 million in restitution.
• *Rep. Bob Ney: pleaded guilty to conspiring to commit fraud and making false statements in connection with Abramoff; sentenced to 30 months in prison, $6,000 in fines, and 200 hours of community service.
• Sen. Larry Craig: pleaded guilty to disorderly conduct in a sex solicitation case in Minneapolis; also under investigation by the senate ethics committee for covering up the case.

B.   Indicted

• Rep. Tom DeLay: indicted by a Texas grand jury on charges of conspiracy and money laundering. A Texas county court judge threw out the charge that he violated state campaign finance laws, and the Texas Third Court of Appeals and Texas Court of Criminal Appeals upheld the ruling. Additionally, he was named in the Abramoff investigation when two of his staffers entered guilty pleas, but he was never indicted.
• Rep. William Jefferson: indicted for wire fraud, soliciting bribes, violating the Foreign Corrupt Practices Act, money laundering, racketeering, and obstructing justice.
• Rep. Rick Renzi: under FBI investigation for land-swap and military-contractor legislation that benefits his former business partner and his father’s employer, respectively. Indicted on 35 charges, including conspiracy and money laundering.
• Former Rep. Mark D. Siljander: representative 1981-1987; indicted in 2008 for funding (possibly in a fraudulent manner) an Islamic charity accused of funneling money to an Islamic warlord during 2003-2004.

C.   Under Investigation

• *Rep. John Doolittle: under investigation by the DOJ in connection with Abramoff. Not seeking another term in 2008.
• *Rep. Tom Feeney: under FBI investigation in connection with Abramoff; named as “Lawmaker #3” in Zachares’s guilty plea.
• Rep. Mark Foley: under investigation by the House Committee on Standards of Official Conduct, FBI, and Florida Attorney General’s Child Predator Cybercrime Unit for “Pagegate.”
• Rep. Jerry Lewis: under federal investigation for trading legislative favors for campaign contributions.
• Rep. Allan Mollohan: under FBI investigation for receiving (but not reporting) campaign contributions from officials connected to organizations that profited from earmarks.
• Sen. Ted Stevens: under FBI and IRS investigation for trading home renovation for congressional support for Alaskan oil giant VECO. He is also under FBI investigation for procuring $50 million in earmarks for the Alaska SeaLife Center in connection with his son and former aide.
• Rep. Don Young: under investigation for taking bribes, illegal gratuities, and unreported gifts from VECO in connection with Stevens. Additionally, a senior staffer pleaded guilty in the Abramoff case, but he was never indicted.
• Rep. Robert Menendez: under investigation for unfairly funding projects of a lobbyist / former aide.
• Rep. Gary Miller: under investigation for allegedly using his congressional influence to evade taxes on a $10 million land deal, receiving a $7.5 million loan from a campaign contributor, and using his office to close an airport that affected a land development project of the campaign contributor.
• Sen. Lisa Murkowski: a complaint with the senate ethics committee is pending regarding a sweet-heart land deal between Murkowski and a campaign contributor; Murkowski has since backed away from the land deal.
• Rep. Ken Calvert: under investigation for sponsoring several different earmarks that increased the value of property owned by Calvert. One such earmark profited Calvert and a partner an estimated $500,000 in one year.

II.    Congressional Staff

A.    Convicted

• *John Albaugh: former chief of staff to Rep. Istook; pleaded guilty to conspiracy with Ring; sentencing scheduled for September 2008.
• *William Heaton: Ney’s former executive assistant on the House Administration Committee and chief of staff; pleaded guilty to conspiracy to commit fraud in connection with Abramoff and sentenced only to community service and 2 years probation because of assistance provided to investigators.
• Brett Pfeffer: former Jefferson aide; pleaded guilty to conspiracy to commit and aiding and abetting bribery; sentenced to 8 years in prison.
• *Tony Rudy: former DeLay deputy chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentencing scheduled for September 2008.
• *Michael Scanlon: former DeLay press aide; pleaded guilty to conspiracy to commit bribery in connection with Abramoff; sentencing late June 2008.
• *Neil Volz: former Ney chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentenced to 2 years probation and fined $2,000.
• *Mark Zachares: former Young senior staffer on the House Transportation and Infrastructure Committee; pleaded guilty to conspiracy to commit wire fraud in connection with Abramoff; sentencing September 2008.

B. Indicted

• Jim Ellis: former DeLay PAC executive director; indicted in Texas for violating election laws, criminal conspiracy, and money laundering in connection with DeLay’s PAC.

B. Under Investigation

• *Ed Buckham: former DeLay chief of staff-turned-chairman of the lobbying firm Alexander Strategy Group; under investigation in connection with Abramoff. Rudy’s guilty plea includes Buckham as “Lobbyist B.” It also names him as a beneficiary of Rudy’s scheme to take other congressional aides on a trip to the Northern Mariana Islands.
• Trevor McCabe: former Stevens aide; under FBI and Department of Interior investigation for a series of Stevens-sponsored earmarks that benefit the Alaska SeaLife Center, a nonprofit involved in a land deal with McCabe in connection with Stevens’ son.
• Jeff Shockey: deputy staff director for Rep. Lewis; under investigation for participating in an earmarks-for-benefits scheme. Accepted a $2 million buy-out from the Copeland et al. lobbying firm as he returned to work for Rep. Lewis. Federal investigation ongoing.
• Leticia White: former staffer for Defense earmarks; now employed as a lobbyist at Copeland et al., a lobbying firm alleged to be involved in an earmarks-for-benefits scheme. She accepted a cut in congressional salary allegedly to avoid the revolving door restriction as she moved back into the lobbying community.

III. Executive Employees

A. Convicted

• Claude Allen: former Assistant to the President for Domestic Policy; pleaded guilty to misdemeanor theft for a $5,000 refund scam; sentenced to $850 in fines and 1 month of probation.
• Lester Crawford: former commissioner for the Food and Drug Administration; pleaded guilty to filing a false financial disclosure and conflict of interest for falsely claiming to have sold his stock in the companies that he was responsible for regulating; sentenced to $90,000 in fines and 3 years of probation.
• *Robert Coughlin: former deputy chief of staff at the Justice Department’s criminal division; pleaded guilty to conflict-of-interest charge for accepting various gifts from Abramoff and Ring; sentencing September 2008.
• Brian Doyle: former deputy press secretary for the United States Department of Homeland Security; pleaded no contest to sending sexually explicit IMs and clips to an undercover officer posing as a 14-year-old girl; sentenced to 5 years in state prison.
• *Italia Federici: former political aide to Interior Secretary Norton; facilitated communication between Abramoff and Griles; pleaded guilty to obstruction of the Senate’s Abramoff investigation; avoided prison sentence due to cooperation.
• Robert Fromm: former program manager at the Army’s National Ground Intelligence Center; investigated in connection with Cunningham; defense contractor Wade’s guilty plea identified from as the “Official” who traded Wade’s job offers for government contracts; pleaded guilty to violating lifetime post-employment ban; sentenced to 1 year on probation and fined $2,500.
• *J. Steven Griles: former deputy secretary for the Department of Interior; pleaded guilty to obstruction of justice in connection with Abramoff; sentenced to 10 months in prison and $30,000 in fines.
• Lewis “Scooter” Libby: former Assistant to the President, Chief of Staff to the Vice President, and Assistant to the Vice President for National Security Affairs; convicted of obstructing justice, perjury, and making false statements to federal investigators in the leak of CIA agent “Valerie Plame’s” identity; sentenced to 30 months in federal prison, $250,000 in fines, 2 years of supervised release, and 400 hours of community service. President Bush commuted the prison term.
• *David Safavian: former chief of staff for the Office of Management and Budget; convicted of making false statements and obstructing justice in connection with Abramoff; sentenced to 18 months in prison.
• *Roger Stillwell: former officer in charge of the Northern Mariana Islands Stillwell in the Office of Insular Affairs at the Department of Interior; pleaded guilty to filing a false financial statement in connection with Abramoff; sentenced to $1000 in fines and 2 years of probation.
• Brent Wilkes: GOP fundraiser/Bush pioneer/finance co-chair for the Bush campaign in California; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with Foggo, including fraud, conspiracy, and money laundering. Convicted on 13 counts; sentenced to 12 years in prison.

B. Indicted

• Kyle “Dusty” Foggo: former executive director of the CIA; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with defense contractor Wilkes, including fraud, conspiracy, and money laundering.
• Daniel Gonzalez: chief of staff for FCC chairman Kevin Martin; on board of energy company which participated in fraudulent Ponzi scheme.

C. Under Investigation

• Alberto Gonzales: former Attorney General; under investigation for improperly firing at least seven U.S. attorneys. Numerous other administration officials are also under investigation in this matter.
• Jose Rodriguez: former CIA official; under investigation for purposely destroying tapes depicting CIA torture of detainees.

IV. Abramoff Scandal Convictions

NOTE: not all Abramoff-related convictions are included on the above list, as businessmen and lobbyists do not fall into the categories under analysis; the list below is more complete. Most of the Abramoff-related corruption cases are being handled by Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia.

Plead guilty
Jack Abramoff
John Albaugh
Jared Carpenter
Robert Coughlin
Italia Federici
J. Steven Griles
William Heaton
Adam Kidan
Bob Ney
Tony Rudy
Michael Scanlon
Roger Stillwell
Neil Volz
Mark Zachares

Convicted
David Safavian

Named but not charged
Ed Buckham
Tom DeLay
Tom Feeney
Ernest Istook
Kevin A. Ring

Source: Matthew DuPont, Xenia Tashlitsky and Craig Holman
Public Citizen
215 Pennsylvania Avenue, SE
Washington, D.C. 20003

Updated June 5, 2008

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http://www.citizen.org/congress/articles.cfm?ID=17803

***

UNIFORM SECURITIES ACT
Act 265 of 1964
AN ACT to enact the uniform securities act relating to the issuance, offer, sale, or purchase of securities; to
prohibit fraudulent practices in relation to securities; to establish civil and criminal sanctions for violations of
the act and civil sanctions for violation of the rules promulgated pursuant to the act; to require the registration
of broker-dealers, agents, investment advisers, and securities; to make uniform the law with reference to
securities; and to repeal acts and parts of acts.

[ . . . ]

PART I
FRAUDULENT AND OTHER PROHIBITED PRACTICES
451.501 Offer, sale, or purchase of security; unlawful practices.
Sec. 101. It is unlawful for any person, in connection with the offer, sale, or purchase of any security,
directly or indirectly:
(1) To employ any device, scheme, or artifice to defraud.
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are made, not misleading.
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or
deceit upon any person.

451.502 Investment adviser; unlawful practices.
Sec. 102. (a) Except as otherwise provided in this subsection, an investment adviser, a federally covered
adviser, or a person who represents an investment adviser or a federally covered adviser shall not, directly or
indirectly, do any of the following:
(1) Employ a device, scheme, or artifice to defraud a client or prospective client.
(2) Engage in an act, practice, or course of business that operates or could operate as a fraud or deceit upon
a client or prospective client.
(3) Acting as principal for his or her own account, knowingly sell any security or purchase any security
from an investment advisory client, or acting as a broker for a person other than that client, knowingly effect
any sale or purchase of any security for the account of that client, without disclosing to the client in writing
before the completion of the transaction the capacity in which he or she is acting and obtaining the consent of
the client in writing to the transaction. The prohibitions of this subdivision do not apply to a federally covered
adviser or to any transaction with a customer of a broker-dealer if the broker-dealer is not acting as an adviser
in relation to the transaction.
(b) It is unlawful for any investment adviser to enter into, extend, or renew any investment advisory
contract unless it provides in writing all of the following:
(1) That the investment adviser shall not be compensated on the basis of a share of capital gains upon or
capital appreciation of the funds or any portion of the funds of the client.
(2) That no assignment of the investment advisory contract may be made by the investment adviser without
the consent of the other party to the contract.
(3) That the investment adviser, if a partnership, shall notify the other party to the investment advisory
contract of any change in the membership of the partnership within a reasonable time after the change.
(c) It is unlawful for any investment adviser acting as a finder to do any of the following:
(1) Take possession of funds or securities in connection with the transaction for which payment is made for
services as a finder.

[ . . . ]

(4) Participate in the offer, purchase, or sale of a security without obtaining information relative to the risks
of the transaction, the direct or indirect compensation to be received by promoters, partners, officers,
directors, or their affiliates, the financial condition of the issuer, and the use of proceeds to be received from
investors, or fail to read any offering materials obtained. This section does not require independent
investigation or alteration of offering materials furnished to the finder.
(5) Fail to inform or otherwise ensure disclosure to all persons involved in the transaction as a result of his
or her finding activities of any material information which the finder knows, or in the exercise of reasonable
care should know based on the information furnished to him or her, is material in making an investment
decision, until conclusion of the transaction.

[ etc.]
Rendered Wednesday, October 22, 2008 Page 1 Michigan Compiled Laws Complete Through PA 300 of 2008
Ó Legislative Council, State of Michigan Courtesy of www.legislature.mi.gov

(State of Michigan)

http://www.legislature.mi.gov/documents/mcl/pdf/mcl-act-265-of-1964.pdf

***

• To state an actionable RICO claim under 18 U.S.C. §1962, a private plaintiff must plead seven elements:

(I)  that the defendant

(2)  through the commission of 2 or more acts

(3)  constituting a ‘pattern’

(4)  of ‘racketeering activity’

(5)  directly or indirectly invests in, or maintains an interest in, or        participates in

(6)  an ‘enterprise’ [undertaking]

(7)  the activities of which affect interstate or foreign commerce

Plaintiff seeks treble monetary damages,

• The RICO statute defines an “enterprise” as “any individual, partnership, corporation association, or other legal entity and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. §1961 (c).

*  Under the statute, “racketeering activity” includes state offenses involving murder, robbery, extortion, and several other serious crimes punishable by imprisonment for more than one year and more than 70 serious federal crimes including extortion, interstate theft, narcotics violations, mail fraud, securities fraud, currency reporting violations and certain immigration offenses when committed for financial gain.

[However - ]

Counterfeiting, 18 U.S.C. §§ 471-73.

Mail & Wire Fraud, 18 U.S.C. § 1341.

Obstruction of Justice, 18 U.S.C. § §1503-1513.

Bribery, 18 U.S.C. § 201.

[ and ]

• §1862(a) investing the proceeds of a pattern of racketeering activity or from collection of an unlawful debt in an enterprise affecting interstate commerce.

• §1862(b) acquiring or maintaining an interest in an enterprise affecting interstate commerce through a pattern of racketeering or collection of an unlawful debt.

[ etc. ]

*  In 1978, amended to add as predicate act cigarette bootlegging.
* In 1984, amended to add as predicate acts dealing in obscene matters, currency violations, and certain automobile-theft violations.
* In 1986, added provisions relating to tampering with and retaliating against witnesses, victims or informants, money laundering and forfeiture of substitute assets.
* In 1988, amended to provide for life sentence where predicate offense also carried life sentence and added new predicate offenses: murder for hire, sexual exploitation of children, certain narcotics offenses.
* In 1996, Civil RICO could not be predicated on the purchase or sale of securities, but could be based on immigration fraud and alien smuggling as well as various infringements on intellectual property.

From – A Brief Overview of Federal Racketeering Laws – US

http://74.125.45.104/search?q=cache:oKHWr-4FDfYJ:policy-traccc.gmu.edu/resources/publications/burgerpres/Federal%2520Racketeering%2520Laws-ENG.ppt+conspiring+to+commit+fraud+in+the+sale+of+securities&hl=en&ct=clnk&cd=19&gl=us

***

SEC Botches Another Case – January 3, 2008

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digg_bodytext = “David Patch\r\n\r\n \r\n\r\nFederal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.\r\n\r\n \r\n\r”;

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David Patch

Federal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.

For the second time in barely 2 months the SEC has lost a case in federal court regarding illegal short sales associated with a Private Placement in Public Entity (PIPE) offering.

To start the New Year a federal judge in Manhattan threw out, with prejudice, the SEC’s case against Gyrphon Partners brought forth by the Division of Enforcement. The SEC’s case alleged that between 2001 and 2004 Gryphon Partners had defrauded PIPE issuers and violated securities-registration rules by shorting shares ahead of a PIPE placement and later covering their short position with the shares received in that placement.

Gryphon, on the other hand, contested that they legally “naked short” the stock through Canada where the US laws pertaining to a stock locate and borrow did not exist.

Apparently the federal judge has agreed with Gryphon and has terminated the SEC’s case on those charges. The US Judge finding that the SEC based its claim on agency materials with “negligible support” for its view of the short sale regulations and that it quoted “selectively” and “misleadingly” from one of them to support their case. The judge allowed the charges of insider trading relative to those short sale trades to remain however.

It was last October that a federal judge in North Carolina dismissed the SEC’s case against John Mangan for similar short sale activities in 2001 involving a PIPE deal with a small Maryland based Security and Protection company called Compudyne.

Why the difficulty in bringing enforcement cases of this nature to fruition?

Consider first that the loophole used by Gryphon Partners was no secret to those that commit this type of fraud. In 2000 the NASD recognized the loophole identified where shorts executed through Canada would fail settlement to the US purchasers of those trades. Unlike the US where a locate to borrow was required prior to the execution of a short sale, Canada had no such rules and thus allowed for short sales to trade without an equity share backing the trade.

In the exact years that Gryphon Partners was trading through the use of this loophole the SEC sat on the NASD proposed rule change to NASD Rule 3370. It was not until October 2003 that the SEC approved the NASD proposal with a delayed incorporation date of April 2004. By June 2004 the rule became obsolete under the SEC’s newly released Regulation SHO.

The SEC has also had difficulties recognizing the damage the illegal short sale can have on the investing public and public issuer.

According to records, as early as 1995 the SEC, working with the federal agencies, provided immunity to short seller Anthony Elgindy for taking bribes to manipulate securities while working for boiler room operations. Instead of prosecution Elgindy was enlisted as an informant to aid the authorities on the identification of and enforcement against pump and dump operations.

As the SEC followed Elgindy’s leads Elgindy continued to engage in illegal activities and was soon arrested by the federal authorities in May 2003 on charges of stock fraud, manipulation, and racketeering. Elgindy was using a private pay web site he set up to disseminate illegal information obtained and to enlist a group trading strategy to manipulate markets. Elgindy was later sentenced in 2006 to 9 years in a federal prison for his illegal acts.

Similarly John Fiero, with links to organized crime, money laundering, and short sale fraud was also an informant of securities regulators after being found guilty of fraud and manipulation.

In 1995 John Fiero colluded to drive down the price of 10 Nasdaq securities underwritten by now-defunct Hanover Sterling & Co. through illegal short selling of those securities. In 1998 the NASD brought Fiero up on enforcement charges and in January 2001 barred Fiero, fined him $1 Million, and expelled his firm Fiero Brothers (FSCO) from the industry.

But on October 1, 2001 Elgindy posted on his private web site, where Fiero was a paying member that “the NASD which barred and banned FSCO and fined him 1,000,000 bucks, gave him machines and room to trade from at their offices.”

So Elgindy takes bribes to manipulate markets and is given immunity to become an informant and John Fiero illegally shorts stocks, puts a brokerage house Hanover Sterling out of business along with the clearing firm Adler Coleman and the NASD is setting him up an office in their facility.

Who were Fiero’s working associates, beyond Elgindy that is?

In September 2000 Richard H. Walker SEC’s Director, Division of Enforcement testified before a House subcommittee about the involvement of Organized Crime on Wall Street. Walked specifically addressed Hanover Sterling stating “In May 1997, a FBI sting operation led to charges by the U.S. Attorney for the Eastern District of New York against Louis Malpeso, Jr., a reported Colombo crime family associate, for conspiring to commit securities fraud. The indictment alleged that Malpeso conspired with stock broker Joseph DiBella and Robert Cattogio, one of the heads of the Hanover Sterling brokerage firm, to inflate the price of a penny stock.”

Hanover Sterling was a mobbed up brokerage and the firm Fiero executed his illegal trades through.

Could it be any clearer why the SEC couldn’t get this issue straight in 2000 when the NASD first presented it and in 2008 as reforms continue to lack teeth?

Will the SEC learn from their mistakes and draft rule making that is less ambiguous and more straightforward? Not likely.

Present reforms to the latest short sale loophole, the Options Market Making exemption, has been out for public comment for near 18 months now covering two separate comment sessions. The SEC’s offerings, beside the straightforward elimination, would require extensive tracking and complicated auditing to identify areas of abuse. The result will be more confusion, reason to claim ignorance when violations are identified, and compliance violation levels of enforcement instead of the premeditated fraud actions.

And this is exactly how the SEC likes it.

In October 2007, during a Q&A at the PIPES conference held in New York City by DealFlow Media, David Markowitz SEC’s New York Bureau Asst. Director of Enforcement informed the audience of PIPE players that there were no strict guidelines on when a trade was legal or illegal relative to a PIPE contract. Markowitz claiming, each case needed to be looked at as a case-by-case basis relative to the circumstances surrounding the trading.

It was clear in an interview I had with Markowitz afterwards that the attorney was out of touch with the audience reactions to his case-by-case, attorney-by-attorney responses. Markowitz fully believed that the audience was in full understanding of the laws and the consistent application of the laws.

Since that speech two separate SEC cases for illegal PIPE trading practices have been tanked by two separate US Federal Judges who believe the SEC interpretations of the law do not comply with the interpretations as understood by the plaintiff nor the judge.

I suggest the SEC print up more get out of jail free cards to the crooks and criminals. The agency should stick to the small compliance violations that yield little resistance. Anything bigger than that and the SEC attorney’s are outclassed and out lawyered by people who take this game much more seriously. Should they take me up on my suggestion there will be no need to worry, the collateral damage that will ensue are generally the ones that don’t carry a voice in the markets anyway, they being be the silent retail investors and small business issuers.

For more on this issue please visit the Host site at www.investigatethesec.com

http://www.investigatethesec.com/drupal-5.5/node/9

***

Monday, November 12, 2007

Basel II Brings New Securitization Framework

As financial institutions move towards an originate and distribute model of securitizing loans into asset-backed securities, the Basel II Accord just adopted by the Federal Reserve Board provides a new securitization framework with concomitant disclosure mandates. A central principle of Basel II is that external ratings for securitization exposures retained by an originating bank, which typically are not traded, are subject to less market discipline than rating for exposures sold to third parties,. In the Fed’s view, this disparity in market discipline warrants more stringent conditions. Thus, Basel II requires that two external ratings be obtained

Basel II also requires that banks disclose the amount of credit risk transferred and retained by the organization through securitization transactions and the types of products securitized. These disclosures are designed to provide users a better understanding of how securitization transactions impact the credit risk of the bank.

Generally, the Fed believes that banks will be able to fulfill some of their disclosure requirements by relying on disclosures made in accordance with accounting standards, SEC mandates, or regulatory reports. In these situations, banks must explain any material differences between the accounting or other disclosure and the disclosures required under Basel II.

As recently noted by Jean-Pierre Landau, Deputy Governor of the Bank of France, the current model of securitization has two distinctive features. One is the increasing complexity of customized derivatives, which has made valuation and risk assessment more difficult. The second is the fragility of off-balance sheet structures and vehicles which underpin securitization. Structured investment vehicles are not built to absorb shocks.

Their relationships with sponsor banks are sometimes very ambiguous, he noted, and there may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements and the true level of responsibility they felt obliged to take to protect their reputation. But the central banker predicted that the implementation of Basel II will bring significant improvements in risk management of securitization exposures. Had it been in place some years ago, he speculated, current problems may have been avoided.

Echoing these remarks, Fed Governor Randall Kroszner said that the enhanced public disclosures under Basel II should allow market participants to better understand a bank’s risk profile, adding that recent market events have underscored the importance of such transparency.

In his view, Basel II requires banks to assess the creditworthiness of borrowers and individual loans and investments, such as highly structured asset-backed securities, and to hold capital commensurate with that risk. This enhanced risk-sensitivity requires banks to hold a larger capital cushion for higher-risk exposures and thereby creates positive incentives for banks to lend to more creditworthy counterparties.

posted by James Hamilton @ 11/12/2007 09:11:00 PM

http://jimhamiltonblog.blogspot.com/2007/11/basel-ii-brings-new-securitization.html

***

http://www.ncjrs.gov/

NCJ Number:	78845
Title:	Securities Fraud and RICO (Racketeer Influenced and Corrupt Organizations) (From Techniques in the Investigation and Prosecution of Organized Crime – Materials on RICO, P 154-210, 1980, G. Robert Blakey, ed. See NCJ-78839)
Author(s):	N Flaherty
Format:	document
Publication Date:	1980
Pages:	57
Type:	Studies/research reports
Origin:	United States
Language:	English
Notes:	Available in microfiche from NCJRS as NCJ-78839.
Annotation:	The application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to securities fraud is discussed.
Abstract:	In securities fraud cases, the RICO law provides greater penalties for the perpetrator and greater monetary recovery for the victim than do the securities laws. Under RICO, defendants face a maximum criminal penalty of 20 years in prison, a fine of $25,000, or both. Offenders would also forfeit any interest obtained through securities fraud (the profits) or any interest or security in a business operated or controlled by securities fraud. RICO mandates that successful civil plaintiffs shall recover a monetary amount that triples their actual losses. Recovery of attorney fees is mandated rather than subject to a judge’s discretion. A civil court could also order the defendants to divest themselves of their interests in the defendant corporation, dissolve the corporation, or obey restrictions on future securities‘ activities. Recovery of triple damages under RICO requires proof of two instances of securities fraud. Such fraud occurs when a purposeful, knowing, or reckless misrepresentation or omission of a material fact is made in connection with an actual sale or purchase of securities. After securities fraud is established, the plaintiff must also satisfy the RICO law’s requirements. The acts of fraud must emanate from an enterprise that affects interstate commerce, be connected by a common scheme, and fall within the time limits of law. The case of King v. United States (10th Cir. 1976) is presented to illustrate the application of RICO to securities fraud. A total of 215 footnotes are listed. (Author summary modified)
Index Term(s):	Federal law violations ; Case studies ; Securities fraud ; Racketeer Influencd n Corrpt Org Act
	To cite this abstract, use the following link: http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=78845

Global and United States Economic Crisis – not a crisis of confidence – A CRISIS OF FACTS and credit propped up by HOT AIR and POLITICS

For More Information

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre12.shtm

***

Predatory Lending Practice

Do you feel that you have been taken advantage of by a mortgage lender involved in a predatory lending practice? Have you been pressured into accepting mortgage terms, or for that matter, have you been cornered into applying for a mortgage against your best interest or wishes? If you answered yes to any of the above questions then you are a victim of predatory lending. Immediately contact a Real Estate Lawyer if you suspect being a victim of any predatory lending practice. Predatory lending practice is illegal, contact a Real Estate Lawyer now, to find out what your rights are. A Predatory Lending Practice is any unfair and abusive practice whereby a mortgage broker or a mortgage lender uses any type of information about the borrower, to the borrower’s disadvantage, and then proceeds to convince the borrower to accept loan programs and or loan terms that were not in the best interest of the borrower. This practice also includes imposing higher interest rates, cost and fees, along with pre-payment penalties when more favorable terms could have been offered. In response to the escalating trend in foreclosures Shelia Blair, Chairman of the Federal Deposit Insurance Corporation, recently expressed to the House of Representatives, “The time has come for national anti-predatory lending standards applicable to all mortgage lenders”. Furthermore, Blair indicated that regulations be imposed upon lenders to determine a borrower’s ability to repay a loan at its true cost, rather than on artificially low rates offered through aggressive advertising campaigns. Other areas needing immediate improvement include, Loan Flipping, Pre-Payment Penalties, Escrow of Taxes, and Fiduciary Obligations of Mortgage Originators. Common Predatory Lending Practice Violations: Foreclosure: Homeowners should not be misled about their rights and remedies when facing foreclosure. Loan Flipping: Mortgage companies should not be engaged in the practice of persuading homeowners to refinancing their homes with little or no apparent significant improvement of the homeowner’s situation. Red Lining: This would involve imposing higher interest rates and or steeper prepayment penalties in areas of a city considered to be less desirable. Adjustable Rate Mortgages: Some lenders have steered homeowners into adjustable rate mortgages with low teaser rates without considering the borrowers capacity to reasonably meet future increases in the monthly payments. Failure to Disclose: Each and every lender has the legal responsibility to fully disclose and completely explain each and every aspect of the mortgage for which you are applying. Housing Discrimination: If you feel that your race, creed, religion, national origin, marital status, health status, sex or sexual orientation may have impacted your mortgage terms, your rights may have been violated. The House of Representatives Financial Services Committee is facing estimates that 2.2 million homeowners are currently at risk of losing their homes. The subcommittee reviewed “predatory lenders” that gave loans to people who were either unaware or unable to repay the loans. The common concern is that this may be the most devastating real estate disaster since the Great Depression. Lenders are not allowed to take advantage of a homeowner’s circumstances to make excessive profits on a loan application. The law also precludes lenders from exploiting to their own advantage, the consumer’s lack of knowledge on various mortgage programs, offerings and qualifying guidelines. You do not have to settle for less than what you are entitled to. Do not allow any lender to take advantage of you or your situation. See Also: RESPA Adjustable Rate Mortgage Index Mortgage Fraud Closing Cost Immediately contact a Real Estate Lawyer if you suspect being a victim of any predatory lending practice. Predatory lending practice is illegal, contact a Real Estate Lawyer now, to find out what your rights are. Content Related to Topic Bush Administration Announces 44 Million in Housing Counseling Grants to Nearly 400 Agencies National and regional agencies distribute much of HUD’s housing counseling grant funding to community-based grassroots organizations. HUD Sues Property ID Corp & 4 Real Estate Brokerages in Kickback Scheme Federal lawsuit seeks permanent injunction and return of illegitimate profits.

http://www.realestatelawyers.com/Predatory-Lending-Practice.cfm

***

Ex-Citigroup worker alleges illegal lending norms
15 June 2001
Reuters
By F. Brinley Bruton

A Citigroup Inc. unit deliberately targeted low-income, uneducated borrowers for loans and insurance they did not need or understand, a former employee alleged in a government lawsuit. The financial services giant has consistently denied such practices.

The charges, filed in an affidavit by part-time branch assistant manager Gail Kubiniec of Citigroup unit CitiFinancial, are part of the lawsuit filed by the Federal Trade Commission (FTC) against Associates First Capital Corp., a consumer lending unit that is part of CitiFinancial. The suit alleges predatory lending and deceptive marketing.

“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level,” Kubiniec said in the affidavit, a copy of which was provided to Reuters by a New York-based consumer advocacy group.

“If someone appeared uneducated, inarticulate, was a minority, or was particularity young or old, I would try to include all the coverages CitiFinancial offered,” she said in reference to insurance and other products often tied to real estate or personal loans.

Citigroup has not admitted to predatory lending, but said in March it had dealt with the FTC’s concerns by putting into place a program that addresses lending practices at Associates First, which Citigroup bought last year.

CITIGROUP DENIES ALLEGED ABUSES

Citigroup on Thursday denied alleged abuses at CitiFinancial, a longtime Travelers Group unit known as Commercial Credit until 1999. The unit changed its name shortly after financial services group Travelers merged with global bank Citicorp to form Citigroup.

The company said the allegations are against Citigroup policy.

“Ms. Kubiniec’s allegations are an affront to the tens of thousands of CitiFinancial employees who strive every day to act in their customers’ best interest,” Citigroup spokeswoman Leah Johnson said. “If true, the unethical sales tactics she describes would constitute serious violations of the company’s policies and standards.”

Kubiniec’s affidavit was filed on May 16 in a case brought by the FTC against Associates First in federal court in Atlanta. The FTC has charged Associates First with systematic and widespread abusive loan practices, often described as predatory lending. They include deceptive marketing to induce consumers to refinance existing debts into home loans with high interest rates, costs and fees.

The suit, which also names Citigroup and CitiFinancial as successors to Associates First, seeks redress for all borrowers who were harmed as a result of the alleged practices.

Federal Trade Commission officials could not immediately be reached.

Citigroup merged Associates First into CitiFinancial in March, but Kubiniec’s affidavit covers practices at CitiFinancial before the two units were combined.

“As soon as we learned of her allegations, we commenced a thorough review that has reassured us that these alleged practices are in no way characteristic of how CitiFinancial employees treat their customers and sell products,” Citigroup’s Johnson said.

Last year, Citigroup said it would take steps to improve the consumer lending practices at Associates First.

HARASSMENT ALLEGED

The affidavit was provided to Reuters by Inner City Press/Community on the Move and Inner City Public Interest Law Center, which is campaigning against Citigroup over its takeover plans and lending practices.

Kubiniec, who could not be reached for comment on the affidavit, alleges that she saw CitiFinancial employees “harass and intimidate borrowers” who were behind with payments. “Managers condoned whatever tactics an employee used, as long as he obtained payment,” she said.

“Typically, employees would only state the total monthly payment amount in selling a proposed loan. Additional information, such as the interest rate, and the financed points and fees, closing costs, and ‘add-ons’ like credit insurance, were only disclosed when demanded by the borrower,” she said. “It was also common practice to try to sell borrowers the largest possible loan.”

Kubiniec worked for CitiFinancial and its predecessor from 1995 until February in Lansing, Michigan and the New York towns of Tonawanda and Depew.

http://www.fbrinleybruton.com/story9.html

***

The phrase “loan shark” came into usage in the United States late in the nineteenth century to describe a certain type of predatory lender. Earlier variations of this vernacularism include “land shark” and “money shark.” The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt peons. As Cobleigh explains, “The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity.”^[1]

http://en.wikipedia.org/wiki/Loan_shark

There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and “non-standard consumer credit” are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.

Payday loan operations have also come under fire for charging inflated “service charges” for the service of cashing a “payday advance” — effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the ‘service’ of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.

A loan shark is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are unwilling or unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal.

Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender the debtor often took out another loan in a process that was called “pyramiding.” The loan sharks frequently colluded in encouraging this expanding chain of debt.^[2]

http://en.wikipedia.org/wiki/Loan_shark

Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latin usuria, “interest” or “excessive interest”, from the Latin usura “interest”) originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles and Riba is the corresponding Islamic term. The primary focus in this article is on the Christian tradition.

The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money: particularly the Act ‘In restraint of usury’ of Henry VIII in England in 1545 (see book references).

http://en.wikipedia.org/wiki/Usury

Usury and the law

“When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.” (Blackstone’s Commentaries on the Laws of England, p. 1336).

In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of “unlawful debt” which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that “unlawful debt”.^[17]

It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.

Usury statutes in the United States

Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.

If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab-initio^[18]

However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally-chartered banks to charge the legal rate of interest in their state regardless of the borrower’s state of residence.^[19] In 1980, due to inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits . This effectively overrode all state and local usury laws.^[20][21] The 1968 Truth in Lending Act does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges.^[22]

http://en.wikipedia.org/wiki/Usury

***

Usury

Definition: Usury is defined as the act of lending money at an unreasonably high interest rate, this rate is defined at the state level. Repayment of loans at a usurious rate makes repayment excessively difficult to impossible for borrowers. This is also called “loan sharking” or “predatory lending”.

Usury has recently come back into legal conversations due to the emergence of payday loans and sub-prime lending. These types of loans are aimed at those who are at greater risk of defaulting, those with lower incomes. Payday loans are supposed to be used as short term loan to help people make it to their next paychecks by paying bills that are due before they receive it. Unfortunately these get abused and the lendees can get into further financial trouble.

Sub-prime loans, again, are for lower income individuals that are more at risk of not being able to fulfill their obligation in payments. These loans have higher rates, but obviously fall just below their state’s usury level to be legal.

Many are now asking for changes in how we define usury to eliminate these types of loans.

The usury laws, predatory lending, and loan sharking rules apply more to local banks. Since the passing of a federal law stating that the state usury laws do not apply to banks that label themselves with the words “national”, these banks have been able to offer loans above the state usury limit. These “national” banks are allowed to apply interest rates a number of points higher than the Federal Reserve Discount Rate. The Federal Reserve Discount Rate is the rate banks get when borrowing directly from the Federal Reserve Bank for short term funds.

However, at the Federal level, there is a criminal limit, as defined by Congress, for interest rates. This rate is twice the amount of the particular state’s usury limit.

here are a number of different lending tactics that are considered predatory lending. Some lenders dispute whether these are unethical, often citing that consumers have choices of who they get their loans from. Below are the most common practices labeled “predatory”.

Fees & APR. Common compaints on predatory lending involve fees incurred which are not included in the APR. Borrowers may not know they have a no-fee line of credit, or may not be able to get a no-fee line of credit. Lenders may take advantage of this by offering a reasonable interest rate, but tacking on a fee. The APR may appear attractive, but the fee is not considered in the APR, if it were the rate would appear significantly higher.

Risk-based lending. This is the practice of charging higher interest rates to the consumers who are labeled as high-risk, meaning there is a higher risk that the consumer will not be able to pay back the loan and thus default. Lenders argue they need the higher interest rates in order to offset the losses from those that default. Consumer groups, however, counter that the higher interest rates themselves make it more difficult for the individuals to pay back the loan, and the lenders are simply price-gouging.

Credit Insurance. Lenders will push single premium credit insurance stating that the insurance will pay off the loan if the homebuyer passes away. The cost of the insurance is often added to the loan, making it more appealing since it does not have to be paid in one lump sum. This makes the loan more expensive, and compounds the interest of the insurance over the life of the loan.

Interest Negotiation. Lenders often do not tell consumers that they may be able to negotiate the interest rate of the loan. By not communicating this to the consumer, the lending company increases profits.

http://www.usurylaw.com/

State Usury Laws

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana

Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington Washington, DC West Virginia Wisconsin Wyoming

http://www.usurylaw.com/

***

ORGANIZATION OF ILLEGAL MARKETS: ECONOMIC ANALYSIS

UNITED STATES. NATIONAL INSTITUTE OF JUSTICE, 1985

http://www.unicri.it/wwk/documentation/lmsdb.php?id_=10735&vw_=f

***

Competition law, known in the United States as antitrust law, has three main elements:

• prohibiting agreements or practices that restrict free trading and competition between business entities. This includes in particular the repression of cartels.
• banning abusive behaviour by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others.
• supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to “remedies” such as an obligation to divest part of the merged business or to offer licences or access to facilities to enable other businesses to continue competing.

The substance and produce of competition Acts vary from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatisation of state owned assets and the establishment of independent sector regulators. In recent decades, competition law has been viewed as a way to provide better public services.^[1]

http://en.wikipedia.org/wiki/Antitrust

***

“The fact that secrets do not remain guarded
forever is the weakness of the secret society.”
-Georg Simmel, The Secret Society
“Free enterprise,” “open markets,” and
similar expressions are standard business
rhetoric, but in practice economic organizations
strive to limit, curtail, and restrict the
operation of competitive markets. Their tactics
include planning (Galbraith 1967), entry barriers
(Baker 1984; Porter 1980c), joint ventures,
mergers, director interlocks, political activity

(Pfeffer 1987; Pfeffer and Salancik 1978; Burt
1983), direct manipulation of market ties
(Baker 1990), and embeddeding business decisions
in social relationships (Granovetter
1985). These market-restricting tactics are legal,
but business organizations also indulge in
practices proscribed by law that flagrantly subvert
the market mechanism.

* Order of authorship is alphabetical to indicate
equal contributions. Direct correspondence to
Wayne E. Baker, Graduate School of Business,
University of Chicago, 1101 E. 58th Street, Chicago,
IL 60637. Funding was provided in part by
the Graduate School of Business, University of Chicago.
We benefited from the insightful and thorough
reviews provided by anonymous ASR reviewers.
We are grateful for comments received during
presentations at the 1992 annual meeting of the International
Sunbelt Social Network Conference
(San Diego, CA), the Decision Research Workshop
at the University of Chicago, and seminars at the

University of Michigan, Northwestern University,
and the Stanford Center for Organization Research.
We especially thank Elizabeth Knier, J.D., for meticulous
and diligent research assistance, and our
informants in the heavy electrical equipment industry
for sharing their insights and knowledge with
us. We thank Michele Companion and Timothy
Harrington for additional research assistance. We
appreciate the helpful comments provided by Gene
Fisher, Andy Anderson, Anthony Harris, Gerald
Platt, Doug Wholey, David Sally, and Paul Cowan.

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

WAYNEE. BAKER ROBERTR. FAULKNER
University of Chicago University of Massachusetts
We analyze the social organization of three well-known price-fixing conspiracies in the
heavy electrical equipment industry. Although aspects of collusion have been studied by
industrial organization economists and organizational criminologists, the organization
of conspiracies has remained virtually unexplored. Using archival data, we reconstruct
the actual communication networks involved in conspiracies in switchgeal; transformers,
and turbines. We find that the structure of illegal networks is driven primarily by the
need to maximize concealment, rather than the need to maximize efficiency. Howevel;
network structure is also contingent on information-processing requirements imposed by
product and market characteristics. Our i’ndividual-level model predicts verdict (guilt or
innocence), sentence, and fine as functions of personal centrality in the illegal network,
network structure, management level, and company size.

BACKGROUND
Collusive agreements in the heavy electrical
equipment industry go back to the 1880s, but
the price-fixing “schemes of the 1950s were
given special impetus when repeated episodes
of price warfare proved incompatible with top
management demands for higher profits”
(Scherer 1980, p. 170). Top executives imposed
unrealistic profit objectives in an industry
characterized by chronic overcapacity, increasing
foreign competition, and stagnating
demand (Ohio Valley 1965, p. 939). To cope,
managers decided to conspire rather than compete.
Their elaborate conspiracy involved as
many as 40 manufacturers and included more
than 20 product lines, with total annual sales
over $2 billion. The conspiracy was pervasive
and long-lasting; it became, insiders said, a
“way of life” (U.S. Senate Committee on the
Judiciary 1961, pp. 16879-84 [henceforward
Kefauver Committee]).

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

The study of the organization of conspiracy
is important for both theory and policy. We
contribute to research on organizations by
studying illegal networks involving companies
and their agents (employees). Most knowledge
about interorganizational networks is based on
studies of legal practices. Interorganizational
conspiracies, however, are a perduring feature
of capitalist societies. Our study explores the
extent to which theories based on legal networks
can be generalized to illegal networks.
Most sociological knowledge about organizational
crime is based on studies of corporate
offenders and their offenses (Shapiro 1980, p.
29). We move beyond this focus by analyzing
the organization of criminal activity, as well as
its effect on outcomes.
Studies of the social organization of conspiracy
also provide new insights relevant to
public policy, especially regarding the investigation
of antitrust violations and the enforcement
of antitrust laws. The anticompetitive activity
we study here is so common that uncovering
it is a chief purpose of major “guardians
of trust” (Shapiro 1987) like the U.S. Department
of Justice. Price-fixing and other
anticompetitive practices reduce consumer and
societal welfare (Scherer 1980). Successful
conspiracies artificially raise prices above the
competitive norm (Lean et al. 1982; Scherer

1980; Ohio Valley Electric Corp. v. General
Electric Co. and Westinghouse 1965, p. 915
[henceforward Ohio Valley 19651).

+++    ++++   +++

The Tennessee Valley Authority's (TVA)
planning in 1958 for the Colbert Steam Plant
exposed the conspiracy. The TVA complained
about possible bid rigging to the U.S. Justice
Department because it had received identical
or nearly identical bids for electrical equipment,
ranging from $3 for insulators to
$17,402,300 for a 500,000 kilowatt steam turbine
generator (Walton and Cleveland 1964,
pp. 24-29). The Justice Department's investigation
in 1959 revealed extensive collusion and
grand jury indictments followed in 1960.

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

***

The Sherman Act defines neither the practices that constitute restraints of trade nor monopolization. The second important antitrust statute, the Clayton Act, passed in 1914, is somewhat more specific. It outlaws, for example, certain types of price discrimination (charging different prices to different buyers), “tying” (making someone who wants to buy good A buy good B as well), and mergers—but only when the effects of these practices “may be substantially to lessen competition or to tend to create a monopoly.” The Clayton Act also authorizes private antitrust suits and triple damages, and exempts labor organizations from the antitrust laws.

http://www.econlib.org/library/Enc/Antitrust.html

Anticompetitive Practices

In referring to contracts “in restraint of trade,” or to arrangements whose effects “may be substantially to lessen competition or to tend to create a monopoly,” the principal antitrust statutes are relatively vague. There is little statutory guidance for distinguishing benign from malign practices. Thus, judges have been left to decide which practices run afoul of the antitrust laws.

An important judicial question has been whether a practice should be treated as “per se illegal” (i.e., devoid of redeeming justification, and thus automatically outlawed) or whether it should be judged by a “rule of reason” (its legality depends on how it is used and on its effects in particular situations).

To answer such questions, judges sometimes have turned to economists for guidance. In the early years of antitrust, though, economists were of little help. They had not extensively analyzed arrangements such as tying, information sharing, resale price maintenance, and other commercial practices challenged in antitrust suits. But as the cases exposed areas of economic ignorance or confusion about different commercial arrangements, economists turned to solving the various puzzles.

[ . . . ]

The recent era of antitrust reassessment has resulted in general agreement among economists that the most successful instances of cartelization and monopoly pricing have involved companies that enjoy the protection of government regulation of prices and government control of entry by new competitors. Occupational licensing and trucking regulation, for example, have allowed competitors to alter terms of competition and legally prevent entry into the market. Unfortunately, monopolies created by the federal government are almost always exempt from antitrust laws, and those created by state governments frequently are exempt as well. Municipal monopolies (e.g., taxicabs, utilities) may be subject to antitrust action but often are protected by statute.

About the Author -

Fred S. McChesney is the Class of 1967 James B. Haddad Professor of Law at Northwestern University School of Law and a professor in the Kellogg School of Management at Northwestern.

http://www.econlib.org/library/Enc/Antitrust.html

***

The basic goal of safety-and-soundness regulation is to protect “fixed-amount creditors” from losses arising from the insolvency of financial institutions owing those amounts, while ensuring stability within the financial system. Fixed-amount creditors are bank depositors, beneficiaries and claimants of insurance companies, and account holders at brokerage firms who are owed fixed amounts of money. Investors in a stock or bond mutual fund are not fixed-amount creditors because the value of their investments is determined solely by the market value of the fund’s investments. Financial institutions with fixed-amount creditors include banks, S&Ls, credit unions, insurance companies, stockbrokers, and money-market mutual funds (MMMF). Compliance regulation broadly seeks to protect individuals from “unfair” dealing by financial institutions and in the financial markets and to impede such crimes as “money laundering,” although this crime is hard to define.

http://www.econlib.org/library/Enc/FinancialRegulation.html

Financial regulation in the United States is carried out by an alphabet soup of federal and state agencies. The federal bank regulators include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. The Securities and Exchange Commission (SEC) regulates stockbrokers, MMMFs, stock and bond mutual funds, stock trading—including the stock exchanges—and financial disclosures by publicly traded corporations. State regulators oversee state-chartered banks, savings institutions, and credit unions as well as all insurance companies. State securities regulators are a junior partner to the SEC in that field.

Safety-and-Soundness Regulation

Safety-and-soundness, or solvency, regulation seeks to prevent financial institutions with fixed-amount creditors from becoming insolvent. Because government regulation cannot prevent all insolvencies, however, governments have created mechanisms to protect at least small fixed-amount creditors from any loss when a depository institution, insurance company, or brokerage firm has become insolvent—that is, has “failed.” These mechanisms, such as deposit insurance, insurance guaranty funds, and investor protection funds, can properly be viewed as a product warranty for solvency regulation. That is, they protect fixed-amount creditors against losses when the “product,” regulation, which is supposed to protect fixed-amount creditors, fails to prevent a financial institution’s insolvency.

For the more than three centuries that banks and insurance companies have been chartered by governments, notably with the founding of the Bank of England in 1694, governments have imposed regulations to ensure that these institutions remain both solvent (the value of their assets exceeds their liabilities) and liquid (they can meet payment requests, such as checks and insurance claims, when presented). The principal solvency regulation today centers on capital regulation; that is, the financial institution must maintain a positive capital position (its assets exceed its liabilities) equal to at least a certain portion of its assets. Other solvency regulations force asset diversity by limiting loan and investment concentrations among various classes of borrowers or the amount of credit extended to any one borrower.

[ . . . ]

Solvency regulations are enforced by examiners who assess the value of an institution’s assets and determine the scope of its liabilities, a particularly important function in property and casualty insurance companies. A financial institution can become insolvent (its liabilities exceed the value of its assets) if it suffers a large sudden loss or a sustained period of smaller losses. Likewise, a seemingly solvent bank or insurance company can turn out to be insolvent if examiners find hidden losses—assets have been overvalued or liabilities have not been recognized. Quite often, fraud is the underlying cause of those losses.

Compliance Regulation

Compliance regulation seeks to ensure “fair” and nondiscriminatory treatment for customers of financial institutions and to prevent financial institutions from being used for criminal or terrorist purposes. Compliance regulation has recently become a major responsibility for the regulators and a major cost burden for financial institutions.

Congress has enacted numerous protections for customers of federally regulated financial institutions; sometimes these protections extend to other types of financial firms, such as small-loan companies. These laws include the Truth in Lending Act, the Truth in Savings Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Expedited Funds Availability Act, and various privacy protections, to name just a few. In recent decades, Congress also has enacted legislation barring discrimination in bank lending, including the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Consumer Credit Protection Act, and the Community Reinvestment Act. Each new law increases compliance costs for banks and other financial institutions.

Congress enacted the Bank Secrecy Act in 1970 not to enhance secrecy but to reduce it: the act’s intent was to prevent banks from being used as money-laundering conduits. Under this act, banks are required to submit Currency Transaction Reports to the Treasury Department for individual currency deposits and withdrawals exceeding ten thousand dollars unless the bank customer, such as a grocery store, regularly engages in large cash transactions with the bank. Banks also are required to submit Suspicious Activity Reports for any banking transaction that seems suspicious or out of the ordinary for that customer. According to Lawrence Lindsey, an economist and former governor of the Federal Reserve System, for the seventy-seven million currency-transaction reports filed between 1987 and 1995, the government was able to prosecute only three thousand money-laundering cases. The three thousand cases produced only 580 guilty verdicts. That amounts to more than 130,000 forms filed per conviction.

The USA PATRIOT Act, passed in the aftermath of the 2001 terrorist attacks, broadened the Bank Secrecy Act’s reach. Since then, the federal government has stepped up its enforcement of the Bank Secrecy Act, including the levying of multimillion-dollar fines against banks for violations. As a result, financial institutions of all types have increased their spending on compliance. Much of the cost of this spending is borne by customers of these institutions through higher fees and lower returns.

Conclusion

While financial institution regulation has changed dramatically over the centuries, its goal has not changed: to protect fixed-amount creditors against loss should their financial institution fail and to ensure timely payment of checks, insurance claims, and other obligations of these institutions as they come due. However, financial regulation has sometimes failed badly. Hence the need for a product warranty—in the form of deposit insurance, insurance guaranty funds, and the like—to protect depositors, insureds, and brokerage customers from regulatory failure.

About the Author -

Bert Ely, the principal in Ely & Company, Inc., is a financial institutions and monetary policy consultant in Alexandria, Virginia. In 1986, he was one of the first people to publicly predict the U.S. S&L crisis.

http://www.econlib.org/library/Enc/FinancialRegulation.html

***

At an SEC roundtable that looked at lessons from the credit crisis, Chairman Cox discussed the need to give investors more useful, timely, and transparent information, and the need for Congress to fill a U.S. regulatory gap and provide statutory authority for government oversight of credit default swaps.

SEC Protecting Investors, Markets During Credit Crisis

During the current turmoil in the credit markets, the SEC has worked closely with other regulators in the U.S. and around the world to protect investors and the markets.

• SEC Actions During Credit Crisis

SEC Expands Sweeping Investigation of Market Manipulation

Work Begins on Congressionally Mandated Accounting Standards Study

http://www.sec.gov/

The SEC News Digest

The SEC News Digest provides daily information on recent Commission actions, including enforcement proceedings, rule filings, policy statements, and upcoming Commission meetings.

Current Issue

• October 22, 2008 issue (dig102208.htm)

http://www.sec.gov/news/digest.shtml

***

US economic crisis – Global economic crisis – Fall Out Zones from fru-fru economics and imprudent financial industry choices

III. Significant Cases

RESERVE FOUNDATION TRUST (DENVER): On May 29, 2007, Norman Schmidt and Charles Lewis were found guilty of conspiracy to commit mail fraud, wire fraud, securities fraud, and money laundering. From April 1999 through April 2003, Schmidt and Lewis developed a scheme to defraud investors using a “high-yield investment program.” Schmidt and Lewis, with assistance from others, falsely stated that they would invest the victims’ money, promising rates of return from two percent to 400 percent per month. To perpetuate the scheme, the defendants sent investors fraudulent monthly statements, which falsely reflected the growth of and earnings on their invested funds. To lure and reassure investors, the defendants made false representations that the investments were safe because invested funds could not be moved and that the investments were insured from loss by various high profile insurance companies. Entities involved in the scheme include the Reserve Foundation Trust, Smitty’s Investments, Capital Holdings, Monarch Capital Holdings, and Fast Track. The scheme unraveled as the FBI and IRS conducted a detailed financial analysis of subpoenaed bank and investment documents. This analysis revealed that the defendants used investor funds for loan payments, personal expenses, acquisition of unrelated businesses, and lavish personal items. Many of these items were seized and forfeited, including the Redstone Castle, valued at $6.3 million, seven NASCAR race cars, two semi-trucks, two trailers, and $17 million from 66 bank accounts. A $24 million money judgement was also ordered by the court. The proceeds will be distributed to up to 1,200 victims.

CASHTARICA (NEW YORK): On July 18, 2007, a felony Information was filed in the Southern District of New York against NETeller PLC, an Internet-payment business based in the Isle of Man. NETeller has admitted to criminal wrongdoing and has agreed to forfeit $136 million in illegal proceeds through a civil forfeiture action as part of an agreement to defer prosecution of NETeller for its participation in a conspiracy to promote Internet gambling businesses and to operate an unlicensed money transmitting business. The information also contained a criminal forfeiture allegation against all property involved in or derived from the criminal wrongdoing in the amount of at least $1 billion. The investigation into this criminal enterprise, conducted by the New York Division of the FBI, revealed that Stephen Eric Lawrence and John David Lefebvre developed an Internet-payment system that was used by NETeller and its predecessors to provide online payment services to Internet gambling companies. Lawrence and Lefebvre have pleaded guilty to charges that they conspired with others to operate an unlicensed money transmitting business and to promote illegal gambling by providing payment services to enable offshore Internet gambling businesses to access customers in the United States. Lawrence and Lefebvre also admitted to forfeiture allegations requiring them to personally forfeit an additional $100 million, which they are expected to pay in full prior to sentencing.

Acronyms

BCBSA Blue Cross and Blue Shield Association
BICE Bureau of Immigration and Customs Enforcement
CAIF Coalition Against Insurance Fraud
CEO Chief Executive Officer
CFTC Commodities Futures Trading Commission
CI Criminal Investigative
CMS Centers for Medicare and Medicaid Services
DEA Drug Enforcement Agency
DOJ Department of Justice
EBRI Electronic Bank Records Initiative
FDA Food and Drug Administration
FIFU Financial Institution Fraud Unit
FinCEN Financial Crimes Enforcement Network
FTC Federal Trade Commission
FSP Forfeiture Support Project
GDP Gross Domestic Product
HF Hedge Fund
HHS Health and Human Services
HIPAA Health Insurance Portability and Accountability Act
HUD Housing and Urban Development
ICE Immigration and Customs Enforcement
IFTF Insurance Fraud Task Force
IRS Internal Revenue Service
MARI Mortgage Asset Research Institute
MBA Mortgage Bankers Association
MEDIC Medicare Drug Integrity Contractor
MICA Mortgage Insurance Companies of America
NAIC National Association of Insurance Commissioners
NAMB National Association of Mortgage Brokers
NHCAA National Health Care Anti Fraud Association
NICB National Insurance Crime Bureau
OIG Office of Inspector General
PEO Professional Employer Organization
RCMP Royal Canadian Mounted Police
SAR Suspicious Activity Reports
SEC Securities and Exchange Commission
UCO Undercover Operation
USAO U.S. Attorney’s Office
USPIS U.S. Postal Inspection Service
WCCP White Collar Crime Program

Accessibility | eRulemaking | Freedom of Information Act/Privacy | Legal Notices | Legal Policies and Disclaimers | Links
Privacy Policy | USA.gov | White House
FBI.gov is an official site of the U.S. Federal Government, U.S. Department of Justice.

http://www.fbi.gov/publications/financial/fcs_report2007/financial_crime_2007.htm

Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.” RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

When the U.S. Attorney decides to indict someone under RICO, he or she has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant’s assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction and/or performance bond ensures that there is something to seize in the event of a guilty verdict.

In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney. Despite its harsh provisions, a RICO-related charge is considered easy to prove in court, as it focuses on patterns of behavior as opposed to criminal acts.[2]

There is also a provision for private parties to sue. A “person damaged in his business or property” can sue one or more “racketeers.” The plaintiff must prove the existence of a “criminal enterprise.” The defendant(s) are not the enterprise; in other words, the defendant(s) and the enterprise are not one and the same. There must be one of four specified relationships between the defendant(s) and the enterprise. A civil RICO action, like many lawsuits based on federal law, can be filed in state or federal court. [1]

Both the federal and civil components allow for the recovery of treble damages (damages in triple the amount of actual/compensatory damages).

Although its primary intent was to deal with organized crime, Blakey said that Congress never intended it to merely apply to the Mob. He once told Time, “We don’t want one set of rules for people whose collars are blue or whose names end in vowels, and another set for those whose collars are white and have Ivy League diplomas.”[2]

http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act

Insurance-Related Corporate Fraud – Although corporate fraud is not unique to any particular industry, there has been a recent trend involving insurance companies caught in the web of these schemes. The temptations for fraud within the corporate industry can be greater
during periods of financial downturns. Insurance companies hold customer premiums which are forbidden from operational use by the company. However, when funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses. This leads to financial statement fraud because the company is required to “cover its tracks” to conceal the improper utilization of customer premium funds.

Premium Diversion/Unauthorized Entities – The most common type of fraud involves insurance agents and brokers diverting policyholder premiums for their own benefit. Additionally, there is a growing number of unauthorized and unregistered entities engaged in the sale of insurance-related products. As the insurance industry becomes open to foreign players, regulation becomes more difficult. Additionally, exponentially rising insurance costs in certain areas (i.e., terrorism insurance, directors’/officers’ insurance, and corporations), increases the possibility for this type of fraud.

Workers Compensation Fraud – The Professional Employer Organization (PEO) industry operates chiefly to provide workers compensation insurance coverage to small businesses by pooling businesses together to obtain reasonable rates. Workers compensation insurance accounts for as much as 46 percent of a small business owners’ general operating expenses. Due to this, small business owners have an incentive to shop workers compensation insurance on a regular basis. This has made it ripe for entities who purport to provide workers compensation insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance. The focus of these investigations is on allegations that numerous entities within the PEO industry are selling unauthorized and non-admitted workers compensation coverage to businesses across the United States. This insurance fraud scheme has left injured and deceased victims without workers compensation coverage to pay their medical bills.

With the cooperation of the insurance industry, through referrals from industry liaison and other law enforcement agencies, the FBI continues to target the individuals and organizations committing insurance fraud. The FBI continues to initiate and conduct traditional investigations as well as utilize sophisticated techniques, to include undercover investigations, to apprehend the fraudsters.

http://www.fbi.gov/publications/financial/fcs_report2007/financial_crime_2007.htm

***

RICO offenses

Under the law, racketeering activity means:

• Any violation of state statutes against gambling, murder, kidnapping, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in the Controlled Substances Act);
• Any act of bribery, counterfeiting, theft, embezzlement, fraud, dealing in obscene matter, obstruction of justice, slavery, racketeering, gambling, money laundering, commission of murder-for-hire, and several other offenses covered under the Federal criminal code (Title 18);
• Embezzlement of union funds;
• Bankruptcy or securities fraud;
• Drug trafficking;
• Money laundering and related offenses;
• Bringing in, aiding or assisting aliens in illegally entering the country (if the action was for financial gain);
• Acts of terrorism.

Pattern of racketeering activity requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity. The U.S. Supreme Court has instructed federal courts to follow the continuity plus relationship test in order to determine whether the facts of a specific case give rise to an established pattern. Predicate acts are related if they “have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” H.J. Inc. v. Northwestern Bell Telephone Co. Continuity is both a closed and open ended concept, referring to either a closed period of conduct, or to past conduct that by its nature projects into the future with a threat of repetition.

http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act

***

Mortgage Debt Elimination Schemes

• Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.
• There is no easy method to relieve yourself of debts you have incurred.
• Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

Foreclosure Fraud Schemes

Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner, without preventing the foreclosure. The victim suffers the loss of the property, as well as the up-front fees.

• Be aware of offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.
• Seek a qualified credit counselor or attorney to assist.

Predatory Lending Schemes

• Before purchasing a home, research information about prices of homes in the neighborhood.
• Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home.
• Beware of “No Money Down” loans. This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan.
• Do not let anyone convince you to borrow more money than you can afford to repay.
• Do not let anyone persuade you into making a false statement, such as overstating your income, the source of your down payment, or the nature and length of your employment.
• Never sign a blank document or a document containing blanks.
• Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness, and omissions.
• Be aware of cost or loan terms at closing that are not what you agreed to.
• Do not sign anything you do not understand.
• Be suspicious if the cost of a home improvement goes up if you accept the contractor’s financing.

• Never sign any loan documents that contain “blanks.” This leaves you vulnerable to fraud.
• Check out the tips on the MBA’s website at http://www.StopMortgageFraud.com for additional advice on avoiding Mortgage Fraud.
MORTGAGE FRAUD INDICATORS

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses – Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances
• Requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple “Holding Companies” utilized to increase property values

COMMON MORTGAGE FRAUD SCHEMES

Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

Silent Second – The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers – The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.

Fictitious/Stolen Identity – A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information, and credit history are used without the true person’s knowledge.

Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes – The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner. The three most used foreclosure schemes are identified as: phantom help; bust-out; and the bait and wwitch.

Equity Skimming – An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

Air Loans – This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

FBI.gov is an official site of the U.S. Federal Government, U.S. Department of Justice.

http://www.fbi.gov/publications/financial/fcs_report2007/financial_crime_2007.htm

***

Securities fraud, also known as stock fraud and investment fraud, is a practice in which investors make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws.^[1]

Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.^[2]

Securities fraud includes outright theft from investors and misstatements on a public company’s financial reports. The term also encompasses a wide range of other actions, including insider trading and front-running and other illegal acts on the trading floor of a stock or commodity exchange.^[3][4]

According to the FBI, securities fraud includes false information on a company’s financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.^[5]

http://en.wikipedia.org/wiki/Securities_fraud

***

** NOTE **

When it is me or you or anyone else we know – this is what judges tell us in the United States – (my note) -

Ignorantia juris non excusat or Ignorantia legis neminem excusat (Latin for “ignorance of the law does not excuse” or “ignorance of the law excuses no one”) is a public policy holding that a person who is unaware of a law may not escape liability for violating that law merely because he or she was unaware of its content; that is, persons have presumed knowledge of the law.

[edit] Explanation

The rationale behind the doctrine is that if ignorance were an excuse, persons charged with criminal offenses or the subject of civil lawsuits would merely claim they were unaware of the law in question to avoid liability, even if they know what the law in question is. Thus, the law imputes knowledge of all laws to all persons within the jurisdiction no matter how transiently. Even though it would be impossible, even for someone with substantial legal training, to be aware of every law in operation in every aspect of a state’s activities, this is the price paid to ensure that willful blindness cannot become the basis of exculpation. Thus, it is well settled that persons engaged in any undertakings outside what is common for a normal person, such as running a nuclear power plant, will make themselves aware of the laws necessary to engage in that undertaking. If they do not, they cannot complain if they incur liability.

http://en.wikipedia.org/wiki/Ignorantia_juris_non_excusat

***

** NOTE ** -

When it is the social upper classes, securities fraud, political and business leaders – they use this law -

(my note)

In Western jurisprudence, concurrence, (or contemporaneity or simultaneity), is the apparent need to prove the simultaneous occurrence of both actus reus (“guilty action”) and mens rea (“guilty mind”), to constitute a crime; except in crimes of strict liability. In theory, if the actus reus does not hold concurrence in point of time with the mens rea then no crime has been committed.

Discussion

Suppose for example that, by accident while driving, the accused injures a pedestrian. Aware of the collision, the accused rushes from the car only to find that the victim is a hated enemy. At this point, the accused literally jumps up and down with joy proclaiming how pleased he or she is to have caused this injury. The conventional rule is that no crime has been committed

http://en.wikipedia.org/wiki/Concurrence

** NOTE **

which means that unless it is proven that the brokers, bankers, traders, ratings agencies, investment bankers, hedge fund managers and corporations both knew and intended to keep the truth about securities and financial derivatives hidden while expressing greater than true value – their crime isn’t a crime.

*

Now – if it was any other citizen in the US – it would be a crime – even jaywalking is a crime – and having an id that doesn’t match every other official document is a crime (whether we know it or intended fraud or not.) Many married women, not changing one document or another has spent time in jail and paid fines for simply not having documents that match (in the United States.)

*

But, in the case of these tremendously destructive white collar crimes in Wall Street and in banking and in the regulating industries concerning securities, trades, financial derivatives, credit derivatives and collusion, insider trading, unfair representation of values, etc. – then, intent must be proven among other things. What is wrong with that picture? (my note)

&*

“Nevertheless, the idea of imposing liability on another despite a lack of culpability never really disappeared and courts have developed the principle that an employer can incur liability for the acts and omissions of an employee if committed by the employee in the course of employment and if the employer has the right to control the way in which the employee carries out his or her duties (respondeat superior).” Imposition of vicarious liability in these circumstances has been justified on the following grounds:

• Exercise of control: If penalties are serious enough, it is assumed that rational employers will take steps to ensure that employees avoid injuring third parties. On the other hand, rational employers may choose to rely on independent contractors for risky operations and processes.
• Risk spreading: Many consider it socially preferable to impose the cost of an action on a person connected to it, even if a degree removed, rather than on the person who suffered injury or loss. This principle is also sometimes known as the “deep pocket” justification.
• Internalizing the social costs of activities: The employer usually (though not always) passes on the cost of compensating injury or loss to the customers and clients. As a result, the private cost of the product or service will better reflect its social cost.

This is generally applied to crimes that do not require criminal intent, e.g., those that affect the public welfare but which do not require the imposition of a prison term. The principle is that in such cases, the public interest is more important than private interest, and so vicarious liability is imposed to deter or to create incentives for employers to impose stricter rules and supervise more closely.

http://en.wikipedia.org/wiki/Vicarious_liability_(criminal)

Universal jurisdiction or universality principle is a controversial principle in international law whereby states claim criminal jurisdiction over persons whose alleged crimes were committed outside the boundaries of the prosecuting state, regardless of nationality, country of residence, or any other relation with the prosecuting country. The state backs its claim on the grounds that the crime committed is considered a crime against all, which any state is authorized to punish, as it is too serious to tolerate jurisdictional arbitrage . The concept of universal jurisdiction is therefore closely linked to the idea that certain international norms are erga omnes, or owed to the entire world community, as well as the concept of jus cogens – that certain international law obligations are binding on all states and cannot be modified by treaty.

http://en.wikipedia.org/wiki/Universal_jurisdiction

The concepts

The imposition of criminal liability is only one means of regulating corporations. There are also civil law remedies such as injunction and the award of damages which may include a penal element. Generally, criminal sanctions include imprisonment, fines and community service orders. A company has no physical existence, so it can only act vicariously through the agency of the human beings it employs. While it is relatively uncontroversial that human beings may commit crimes for which punishment is a just desert, the extent to which the corporation should incur liability is less clear. Obviously, a company cannot be sent to jail, and if a fine is to be paid, this diminishes both the money available to pay the wages and salaries of all the remaining employees, and the profits available to pay all the existing shareholders. Thus, the effect of the only available punishment is deflected from the wrongdoer personally and distributed among all the innocent parties who supply the labour and the capital that keep the corporation solvent.

Because, at a public policy level, the growth and prosperity of society depends on the business community, governments recognise limits on the extent to which each permitted form of business entity can be held liable (including general and limited partnerships which may also have separate legal personalities).

[edit] Criminal or civil controls?

[edit] Using the criminal law

• Represents formal public disapproval and condemnation because of the failure to abide by the generally accepted social norms, codified into the criminal law. Police powers to investigate can be more effective, but the availability of relevant expertise may be limited. If successful, prosecution reinforces social values and shows the state’s willingness to uphold those values in a trial likely to attract more publicity when previously respected business leaders are called to account. The judgment may also cause a loss of corporate reputation and, in turn, a loss of profitability.
• Justifies more severe penalties because it is necessary to overcome the higher burden of proof to establish criminal liability. But the high burden means that it is more difficult to secure a judgment than in the civil courts, and many corporations are cash-rich and so can pay apparently immense fines without difficulty. Further, if the corporation knows that the fine is going to be severe, it may seek bankruptcy protection before sentencing.
• The theoretical value of punishment is that the offender feels shame, guilt or remorse, emotional responses to a conviction that a fictitious person cannot feel.
• If a state turns too often to the criminal law, it discourages self-regulation and may cause friction between any regulatory agencies and businesses that they are to regulate.

[edit] Using the civil law

• With the lower burden of proof and better case management tools, civil liability is easier to prove than criminal liability, and offers more flexible remedies which can be preventative as well as punitive.
• But there is little moral condemnation and no real deterrent effect so the general management response may be to see civil actions as a routine cost of business which is tax deductible.

[edit] Criminal laws

Most states use criminal and civil systems in parallel, making the political judgment on how infrequently to use the criminal law to maximise the publicity of those cases that are prosecuted. Some states enact specific legislation covering health and safety, and product safety issues which lay down general protections for the public and for the employees. The difficulty of proving a mens rea is avoided in the less serious offences by imposing absolute, strict liability, or vicarious liability which does not require proof that the accused knew or could reasonably have known that its act was wrong, and which does not recognise any excuse of honest and reasonable mistake. But, most legislatures require some element of fault, either by way of an intention to commit the offence or recklessness resulting in the offence, or some knowledge of the relevant circumstances. Thus, companies are held liable when the acts and omissions, and the knowledge of the employees can be attributed to the corporation. This is usually filtered through an identification, directing mind or alter ego test which proves that the employee has sufficient status to be considered the company when acting.

In the criminal law, corporate liability determines the extent to which a corporation as a fictitious person can be liable for the acts and omissions of the natural persons it employs. It is sometimes regarded as an aspect of criminal vicarious liability, as distinct from the situation in which the wording of a statutory offence specifically attaches liability to the corporation as the principal or joint principal with a human agent.

http://en.wikipedia.org/wiki/Corporate_liability

In criminal law, strict liability is liability for which mens rea (Latin for “guilty mind”) does not have to be proven in relation to one or more elements comprising the actus reus (Latin for “guilty act”) although intention, recklessness or knowledge may be required in relation to other elements of the offence. The liability is said to be strict because defendants will be convicted even though they were genuinely ignorant of one or more factors that made their acts or omissions criminal. The defendants may therefore not be culpable in any real way, i.e. there is not even criminal negligence, the least blameworthy level of mens rea.

It is used either in regulatory offences enforcing social behaviour where minimal stigma attaches to a person upon conviction, or where society is concerned with the prevention of harm, and wishes to maximise the deterrent value of the offence. The imposition of strict liability may operate very unfairly in individual cases. For example, in Pharmaceutical Society of Great Britain v Storkwain (1986) 2 ALL ER 635, a pharmacist supplied drugs to a patient who presented a forged doctor’s prescription, but was convicted even though the House of Lords accepted that the pharmacist was blameless. The justification is that the misuse of drugs is a grave social evil and pharmacists should be encouraged to take even unreasonable care to verify prescriptions before supplying drugs. Similarly, where liability is imputed or attributed to another through vicarious liability or corporate liability, the effect of that imputation may be strict liability albeit that, in some cases, the accused will have a mens rea imputed and so, in theory, will be as culpable as the actual wrongdoer.

http://en.wikipedia.org/wiki/Strict_liability_(criminal)

United States

As a jurisdiction with due process, the United States makes only the most minor crimes or infractions subject to strict liability. One example would be parking violations, where the state only needs to show that the defendant’s vehicle was parked inappropriately at a certain curb. But serious crimes like rape and murder require some showing of culpability or mens rea. Otherwise, every accidental death, even during medical treatment in good faith, could become grounds for a murder prosecution and a prison sentence.

http://en.wikipedia.org/wiki/Strict_liability_(criminal)

***

http://en.wikipedia.org/wiki/Corporate_liability

Aggregation test in United States

By “aggregating” the acts and omissions of two or more natural persons acting as the corporation, the actus reus and mens rea can be constructed out of the conduct and knowledge of several individuals. This is termed the Doctrine of Collective Knowledge. In United States v Bank of New England (1987) 821 F2d 844 the charge of wilfully failing to file reports relating to currency transactions was proved because the bank’s knowledge was the totality of what all of the employees knew within the scope of their authority. The Court of Appeals’ confirmed a collective knowledge is appropriate because corporations would compartmentalise knowledge and subdivide duties and avoid liability.

A blameworthiness test

Gobert argues that if a corporation fails to take precautions or to show due diligence to avoid committing a criminal offence, this will arise from its culture where attitudes and beliefs are demonstrated through its structures, policies, practices, and procedures. This rejects the notion that corporations should be treated in the same way as natural persons (i.e. looking for a “guilty” mind), and advocates that different legal concepts should underpin the liability of fictitious persons. This reflects the structures of modern corporations which are more often decentralised and where crime is less to do with the misconduct by or incompetence of individuals, and more to do with systems that fail to address problems of monitoring and controlling risk.

Specific issues

Fraud

In some instances of fraud, the court may pierce the veil of incorporation. Most fraud is also a breach of the criminal law and any evidence obtained for the purposes of a criminal trial is usually admissible in civil proceedings. But criminal prosecutions take priority, so if civil proceedings uncover evidence of criminality, the civil action may be stayed pending the outcome of any criminal investigation.

http://en.wikipedia.org/wiki/Corporate_liability

***

For example, the common law crime of larceny requires the taking and carrying away of tangible property from another person, with the intent to permanently deprive the owner of that property.

Under the merger doctrine as this term is used in criminal law, lesser included offenses generally merge into the greater offense. Therefore, a person who commits a robbery can not be convicted of both the robbery and the larceny that was part of it. The major exception to this rule is conspiracy, which does not merge into the crime that the conspirators intended to commit.

Solicitation to commit a crime and attempt to commit a crime, although not strictly speaking lesser included offenses, merge into the completed crime. As an important exception, however, the crime of conspiracy does not merge into the completed crime. Some states have eliminated the doctrine, permitting defendants to be convicted of both the lesser included and the greater charge.

http://en.wikipedia.org/wiki/Merger_doctrine_(criminal_law)

In the criminal law, a conspiracy is an agreement between natural persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement. There is no limit on the number participating in the conspiracy and, in most countries, no requirement that any steps have been taken to put the plan into effect (compare attempts which require proximity to the full offence). For the purposes of concurrence, the actus reus is a continuing one and parties may join “the plot” later and incur joint liability and conspiracy can be charged where the co-conspirators have been acquitted and/or cannot be traced.

http://en.wikipedia.org/wiki/Conspiracy_(crime)

Conspiracy in the United States

Conspiracy has been defined in the US as an agreement of two or more people to commit a crime, or to accomplish a legal end through illegal actions. For example, planning to rob a bank (an illegal act) in order to raise money for charity (a legal end) remains a criminal conspiracy because the parties agreed to use illegal means to accomplish the end goal. A conspiracy does not need to have been planned in secret in order to meet the definition of the crime. One legal dictionary, law.com, provides this useful example on the application of conspiracy law to an everyday sales transaction tainted by corruption. It shows how the law can handle both the criminal and the civil need for justice.

[A] scheme by a group of salesmen to sell used automobiles as new, could be prosecuted as a crime of fraud and conspiracy, and also allow a purchaser of an auto to sue for damages [in civil court] for the fraud and conspiracy.

Conspiracy law usually does not require proof of the specific intent by the defendants to injure any specific person in order to establish an illegal agreement. Instead, usually the law only requires the conspirators have agreed to engage in a certain illegal act. This is sometimes described as a “general intent” to violate the law.

http://en.wikipedia.org/wiki/Conspiracy_(crime)

Conspiracy against rights

The U.S. has a specific statute dealing with conspiracies to deprive a citizen of rights justified by the Constitution.^[1]

***

One important feature of a conspiracy charge is that it relieves prosecutors of the need to prove the particular roles of conspirators. If two persons plot to kill another (and this can be proven), and the victim is indeed killed as a result of the actions of either conspirator, it is not necessary to prove with specificity which of the conspirators actually pulled the trigger. (Otherwise, both conspirators could conceivably handle the gun—leaving two sets of fingerprints—and then demand acquittals for both, based on the fact that the prosecutor would be unable to prove beyond a reasonable doubt, which of the two conspirators was the triggerman). In order to achieve a conviction on charges of conspiracy, is sufficient to prove that a) the conspirators did indeed conspire to commit the crime, and b) the crime was committed by an individual involved in the conspiracy. Proof of which individual it was is usually not necessary.

It is also an option for prosecutors, when bringing conspiracy charges, to decline to indict all members of the conspiracy (though their existence may be mentioned in an indictment). Such unindicted co-conspirators are commonly found when the identities or whereabouts of members of a conspiracy are unknown; or when the prosecution is only concerned with a particular individual among the conspirators. This is common when the target of the indictment is an elected official or an organized crime leader; and the co-conspirators are persons of little or no public importance. More famously, President Richard Nixon was named as an unindicted co-conspirator by the Watergate special prosecutor, in an event leading up to his eventual resignation.

And, from English Law -

Conspiracy to defraud

Although most frauds are crimes, it is irrelevant for these purposes whether the agreement would amount to a crime if carried out. This gives the prosecution a choice whether to charge statutory or common law conspiracy where the agreement would amount to the commission of an offence if carried out. If the victim has suffered of any financial or other prejudice there of, there is no need to establish that the defendant deceived him or her. But, following Scott v Metropolitan Police Commissioner (1974) 3 All ER 1032, it is necessary to prove that the victim was dishonestly deceived by one or more of the parties to the agreement into running an economic risk that he or she would not otherwise have run, if the victim has not suffered any loss. For the mens rea, it is necessary to prove that “the purpose of the conspirators (was) to cause the victim economic loss” (per Lord Diplock in Scott). For the test of dishonesty, see R v Ghosh (1982) 2 All ER 689.

http://en.wikipedia.org/wiki/Criminal_conspiracy

***

Corporate fraud

Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at Enron. It beame a problem of such scope that the Bush Administration announced what it described as an “aggressive agenda” against corporate fraud.^[6] Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May of 2008.^[7] FBI director Robert Muller predicted in April of 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.^[8]

http://en.wikipedia.org/wiki/Securities_fraud

sider trading

Main article: Insider trading

Insider trading is the trading of a corporation’s stock or other security by corporate insiders such as officers, key employees, directors, or holders of more than ten percent of the firm’s shares.^[13]

Some insider trading is illegal. In illegal insider trading, an insider or a related party trades based on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise misappropriated.^[14]

***

Insider trading

From Wikipedia, the free encyclopedia

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Criminal law

Part of the common law series

Elements

Actus reus · Causation · Concurrence Mens rea · Intention · Recklessness Criminal negligence Ignorantia juris non excusat Strict / Corporate / Vicarious liability

Crimes against people

Assault · Battery · Robbery Sexual offences · Rape · Pimping Kidnapping · Manslaughter · Murder

Crimes against property

Damage · Arson Theft · Burglary · Deception

Crimes against justice

Obstruction · Bribery Perjury · Malfeasance in office

Inchoate offenses

Attempt · Conspiracy · Accessory

Criminal defenses

Automatism · Intoxication · Mistake Insanity · Diminished responsibility Duress · Necessity Provocation · Self-defense

Other common law areas

Contract · Tort · Property Wills, trusts and estates Evidence

Portals

Law · Criminal justice

v • d • e

Insider trading is the trading of a corporation‘s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise in breach of a fiduciary duty or other relationship of trust and confidence or where the non-public information was misappropriated from the company.^[1]

In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm’s equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While “legal” insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)

Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.^[2]

http://en.wikipedia.org/wiki/Insider_trading

Definition of “insider”

In the United States, for mandatory reporting purposes, corporate insiders are defined as a company’s officers, directors and any beneficial owners of more than ten percent of a class of the company’s equity securities. Trades made by these types of insiders in the company’s own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the trust or the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has made a contract with the shareholders to put the shareholders’ interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his contract with the shareholders.

For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.

In the United States and many other jurisdictions, however, “insiders” are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where the a corporate insider “tips” a friend about non-public information likely to have an effect on the company’s share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.

Liability for insider trading

Liability for insider trading violations cannot be avoided by passing on the information in an “I scratch your back, you scratch mine” or quid pro quo arrangement, as long as the person receiving the information knew or should have known that the information was company property.

For example, if Company A’s CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred.^[5]

[edit] Misappropriation theory

A newer view of insider trading, the “misappropriation theory” is now part of US law. It states that anyone who misappropriates (steals) information from their employer and trades on that information in any stock (not just the employer’s stock) is guilty of insider trading.

http://en.wikipedia.org/wiki/Insider_trading

Proof of responsibility

Proving that someone has been responsible for a trade can be difficult, because traders may try to hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity.

[edit] Trading on information in general

Not all trading on information is illegal inside trading, however. For example, while dining at a restaurant, you hear the CEO of Company A at the next table telling the CFO that the company will be taken over, and then you buy the stock, you might not be guilty of insider trading unless there was some closer connection between you, the company, or the company officers.

***

U.S. insider trading prohibitions are based on English and American common law prohibitions against fraud.

***

SEC Rule 10b-5 is one of the most important rules promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under the Securities Exchange Act of 1934. The rule prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security, including insider trading.

http://en.wikipedia.org/wiki/SEC_Rule_10b-5

Language of the rule

The rule itself is relatively short, and to the point. The formal title is “Rule 10b-5: Employment of Manipulative and Deceptive Practices”, and the complete text reads:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

http://en.wikipedia.org/wiki/SEC_Rule_10b-5

http://en.wikipedia.org/wiki/Insider_trading

There are several methods used to value companies and their stocks. They attempt to give an estimate of their fair value, by using fundamental economic criteria. This theoretical valuation has to be perfected with market criteria, as the final purpose is to determine potential market prices.

Stock Valuation Methods Described

http://en.wikipedia.org/wiki/Security_analysis

• iStockResearch: Free intrinsic value (or fair value) calculation tool for US, Canadian and Russian companies based on original stock valuation model.
• http://www.moneychimp.com/articles/valuation/dcf.htm: Discounted Cash Flows Calculator that assumes that a higher growth can be sustained for a limited number of years.
• http://intelligentinvesting.googlepages.com/DCF.xls: A DCF spreadsheet that allows different growth rates to be specified for years 1, 2 to 4, 5 to 7 and 8 to 10.
• Baseline evaluation: Automatically fetches baseline data for popular stocks. Allows valuation with different assumptions like variable excess return period.
• Public Company Valuations: Free discounted cash flow (DCF) valuation tool for major listed companies.

See also

• Stock selection criteria
• Bond valuation
• Real estate valuation
• Active portfolio management
• List of valuation topics
• Capital asset pricing model
• Value at risk
• Mosaic theory
• Fundamental analysis
• Technical analysis
• Fed model Theory of Equity Valuation
• Undervalued stock
• John Burr Williams: Theory

References

1. ^ Corporate Finance, Stephen Ross, Randolph Westerfield, and Jeffery Jaffe, Irwin, 1990, pp. 115-130.
2. ^ Discounted Cash Flow Calculator for Stock Valuation

External links

• Development of the PE Valuation Method
• MIT Open Course Ware

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Fundamental criteria (fair value) Citation for “Discounted Cash Flow Method” = ^[1] Alakel (talk) 13:07, 28 July 2008 (UTC)

Retrieved from “http://en.wikipedia.org/wiki/Stock_valuation“

Categories: Fundamental analysis | Valuation

US and Global Economic Crisis – have the laws been changed such that no recourse is possible or – IS IT Still Illegal?

Collusion is an agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law typically involving fraud or gaining an unfair advantage. It can involve “wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties.”^[1] All acts affected by collusion are considered void.^[2]

http://en.wikipedia.org/wiki/Collusion

Collateralized debt obligations (CDOs) are an unregulated type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided by the ratings firms that assess their value into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. Since 1987, CDOs have become an important funding vehicle for fixed-income assets.

Some news and media commentary blame the financial woes of the 2007-2008 credit crunch on the complexity of CDO products, and the failure of risk and recovery models used by credit rating agencies to value these products. Some institutions buying CDOs lacked the competency to monitor credit performance and/or estimate expected cash flows. On the other hand, some academics maintain that because the products are not priced by an open market, the risk associated with the securities is not priced into its cost and is not indicative of the extent of the risk to potential purchasers.^[1] As many CDO products are held on a mark to market basis, the paralysis in the credit markets and the collapse of liquidity in these products led to substantial write-downs in 2007. Major loss of confidence occurred in the validity of the process used by ratings agencies to assign credit ratings to CDO tranches and this loss of confidence persists into 2008.

http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Market history and growth

The first CDO was issued in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc. for Imperial Savings Association, a savings institution that later became insolvent and was taken over by the Resolution Trust Corporation on June 22, 1990.^[2][3][4] A decade later, CDOs emerged as the fastest growing sector of the asset-backed synthetic securities market. This growth may reflect the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles.

CDOs offered returns that were sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

It may also reflect the greater profit margins that CDOs provide to their manufacturers.

A major factor in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs. ^[5][6]

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007.^[7] Research firm Celent estimated the size of the CDO global market to close to $2 trillion by the end of 2006.^[8]

[edit] Concept

CDOs vary in structure and underlying assets, but the basic principle is the same. Essentially a CDO is a corporate entity constructed to hold assets as collateral and to sell packages of cash flows to investors. A CDO is constructed as follows:

• A special purpose entity (SPV) acquires a portfolio of credit. Common assets held include mortgage-backed securities, Commercial Real Estate (CRE) debt, and high-yield corporate loans.

• The SPV issues different classes of bonds and equity and the proceeds are used to purchase the portfolio of credits. The bonds and equity are entitled to the cash flows from the portfolio of credits, in accordance with the Priority of Payments set forth in the transaction documents. The senior notes are paid from the cash flows before the junior notes and equity notes. In this way, losses are first borne by the equity notes, next by the junior notes, and finally by the senior notes. In this way, the senior notes, junior notes, and equity notes offer distinctly different combinations of risk and return, while each reference the same portfolio of debt securities.

***

Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to play a certain strategy without explicitly saying so.

http://en.wikipedia.org/wiki/Tacit_collusion

The RICO Act

On October 15, 1970, the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. §§ 1961-1968), commonly referred to as the “RICO Act”, became law. The RICO Act allowed law enforcement to charge a person or group with racketeering, defined as committing multiple violations of certain varieties within a 10 year period. The purpose of the RICO Act was stated as “the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce.” S.Rep. No. 617, 91st Cong., 1st Sess. 76 (1969). However, the statute is sufficiently broad to encompass illegal activities relating to any enterprise affecting interstate or foreign commerce. Section 1961(10) of Title 18 provides that the Attorney General may designate any department or agency to conduct investigations authorized by the RICO statute and such department or agency may use the investigative provisions of the statute or the investigative power of such department or agency otherwise conferred by law. Absent a specific designation by the Attorney General, jurisdiction to conduct investigations for violations of 18 U.S.C. § 1962 lies with the agency having jurisdiction over the violations constituting the pattern of racketeering activity listed in 18 U.S.C. § 1961.^[2]

http://en.wikipedia.org/wiki/Racketeering

A racket is an illegal business, usually run as part of organized crime. Engaging in a racket is called racketeering.

Several forms of racket exist. The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of “protection” against crimes that the racketeers themselves instigate if unpaid. A second well known example is the numbers racket, a form of illegal lottery.

The term racket comes from the Italian word ricatto (blackmail) and is also used as a pejorative term for legitimate businesses. Typically, this usage is based on the example of the “protection racket” and indicates that the speaker believes that the business is making money by selling a solution to a problem that it created (or that it intentionally allows to continue to exist), specifically so that continuous purchases of the solution are always needed.

***

http://en.wikipedia.org/wiki/Portal:Criminal_justice

Criminal Justice Portal on wikipedia

For relevant case law, see Public order crime case law in the United States

In criminology public order crime is defined by Siegel (2004) as “…crime which involves acts that interfere with the operations of society and the ability of people to function efficiently”, i.e. it is behaviour that has been labelled criminal because it is contrary to shared norms, social values, and customs. Robertson (1989:123) maintains that a crime is nothing more than “…an act that contravenes a law.” Generally speaking, deviancy is criminalized when it is too disruptive and has proved uncontrollable through informal sanctions.

Public order crime should be distinguished from political crime. In the former, although the identity of the “victim” may be indirect and sometimes diffuse, it is cumulatively the community that suffers, whereas in a political crime, the state perceives itself to be the victim and criminalizes the behaviour it considers threatening. Thus, public order crime includes consensual crime, victimless vice, and victimless crime. It asserts the need to use the law to maintain order both in the legal and moral sense. Public order crime is now the preferred term as against the use of the word “victimless” based on the idea that there are secondary victims (family, friends, acquaintances, and society at large) that can be identified.

For example, in cases where a criminal act subverts or undermines the commercial effectiveness of normative business practices, the negative consequences extend beyond those at whom the specific immediate harm was intended. Similarly, in environmental law, there are offences that do not have a direct, immediate and tangible victim, so crimes go largely unreported and unprosecuted because of the problem of lack of victim awareness. In short, there are no clear, unequivocal definitions of ‘consensus’, ‘harm’, ‘injury’, ‘offender’, and ‘victim’. Such judgments are always informed by contestable, epistemological, moral, and political assumptions (de Haan, 1990: 154).

http://en.wikipedia.org/wiki/Public_order_crime

In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals that may be identified with a corporation or other business entity (see vicarious liability and corporate liability).

Corporate crime overlaps with:

• white-collar crime, because the majority of individuals who may act as or represent the interests of the corporation are employees or professionals of a higher social class;
• organized crime, because criminals can set up corporations either for the purposes of crime or as vehicles for laundering the proceeds of crime. Organized crime has become a branch of big business and is simply the illegal sector of capital. It has been estimated that, by the middle of the 1990s, the “gross criminal product” of organized crime made it the twentieth richest organization in the world — richer than 150 sovereign states (Castells 1998: 169). The world’s gross criminal product has been estimated at 20 percent of world trade. (de Brie 2000); and
• state-corporate crime because, in many contexts, the opportunity to commit crime emerges from the relationship between the corporation and the state.

http://en.wikipedia.org/wiki/Corporate_crime

***

Securities fraud, also known as stock fraud and investment fraud, is a practice in which investors make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws.^[1]

Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.^[2]

Securities fraud includes outright theft from investors and misstatements on a public company’s financial reports. The term also encompasses a wide range of other actions, including insider trading and front-running and other illegal acts on the trading floor of a stock or commodity exchange.^[3][4]

According to the FBI, securities fraud includes false information on a company’s financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.^[5]

http://en.wikipedia.org/wiki/Securities_fraud

Corporate fraud

Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at Enron. It beame a problem of such scope that the Bush Administration announced what it described as an “aggressive agenda” against corporate fraud.^[6] Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May of 2008.^[7] FBI director Robert Muller predicted in April of 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.^[8]

***

Accountant fraud

Further information: Accounting scandals

In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies’ financial status. In several cases, the monetary amounts of the fraud involved are in the billions of USD.

http://en.wikipedia.org/wiki/Securities_fraud

utual Fund fraud

Main article: 2003 Mutual-fund scandal

A number of major brokerages and mutual fund firms were accused of various deceptive acts that disadvantaged customers. Among them were late trading and market timing. Various SEC rules were enacted to curtail this practice.^[16] Bank of America Capital Management was accused by the SEC of having undisclosed arrangements with customers to allow short term trading.^[17]

[edit] Short Selling Abuses

Abusive short selling, including certain types of naked short selling, are also considered securities fraud because they can drive down stock prices. In abusive naked short selling, stock is sold without being borrowed and without any intent to borrow.^[18] The practice of spreading false information about stocks, to drive down their prices, is called “short and distort.” During the takeover of The Bear Stearns Companies by J.P. Morgan Chase in March of 2008, reports swirled that shorts were spreading rumors to drive down Bear Stearns’ share price. Sen. Christopher Dodd, D-Conn., said this was more than rumors and said, “This is about collusion.”^[19]

Ponzi schemes

Main article: Ponzi scheme

A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (“profits“) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.^[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.

http://en.wikipedia.org/wiki/Ponzi_scheme

A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going.

The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

Hypothetical example

1920 police mugshot of Charles Ponzi

An advertisement is placed promising extraordinary returns on an investment – for example 20% for a 30 day contract. The precise mechanism for this incredible return can be attributed to anything that sounds good but is not specific: “global currency arbitrage“, “hedge futures trading“, “high-yield investment programs“, “Offshore investment“, or something similar.

With no proven track record for the investors, only a few investors are tempted, usually for smaller sums. Sure enough, 30 days later the investor receives the original capital plus the 20% return. At this point, the investor will have more incentive to put in additional money and, as word begins to spread, other investors grab the “opportunity” to participate. More and more people invest, and see their investments return the promised large returns.

The reality of the scheme is that the “return” to the initial investors is being paid out of the new, incoming investment money, not out of profits. No “global currency arbitrage”, “hedge futures trading” or “high yield investment program” is actually taking place. Instead, when investor D puts in money, that money becomes available to pay out “profits” to investors A, B, and C. When investors X, Y, and Z put in money, that money is available to pay “profits” to investors A through W.

One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, for example 50% return per month for one year. They then get new cash flows as investors are told they could not transfer money from the first plan to the second.

The catch is that at some point one of three things will happen:

1. the promoters will vanish, taking all the investment money (less payouts) with them;
2. the scheme will collapse of its own weight, as investment slows and the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads and more people start asking for their money, similar to a bank run);
3. the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise they find that many of the “assets” that should exist do not.

http://en.wikipedia.org/wiki/Ponzi_scheme

A bubble. A bubble relies on suspension of belief and an expectation of large profits, but it is not the same as a Ponzi scheme. A bubble involves ever-rising (and unsustainable) prices in an open market (be that shares of a stock, housing prices, the price of tulip bulbs, or anything else). As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. And there doesn’t need to be a schemer behind a bubble. (In fact, a bubble can arise without any fraud at all – for example, housing prices in a local market that rise sharply but eventually drop sharply because of overbuilding.) Bubbles are often said to be based on “greater fool” theory. Although, according to the Austrian Business Cycle Theory, bubbles are caused by expanding the money supply beyond what genuine capital investment supports, and in this case would qualify as a Ponzi scheme, with expanded credit taking the place of an expanded pool of investors.

Some examples -

In June 2005, in Los Angeles, California, John C. Jeffers was sentenced to 168 months (14 years) in federal prison and ordered to pay $26 million in restitution to more than 80 victims. Jeffers and his confederate John Minderhout ran what they said was a high-yield investment program they called the “Short Term Financing Transaction.” The funds were collected from investors around the world from 1996 through 2000. Some investors were told that proceeds would be used to finance humanitarian projects around the globe, such as low-cost housing for the poor in developing nations. Jeffers sent letters to some victims that falsely claimed the program had been licensed by the Federal Reserve and the program had a relationship with the International Monetary Fund and the United States Treasury. Jeffers and Minderhout promised investors profits of up to 4,000 percent. Most of the money collected in the scheme went to Jeffers to pay commissions to salespeople, to make payments to investors to keep the scheme going, and to pay his own personal expenses.^[29]

In February 2006, Edmundo Rubi pleaded guilty to bilking hundreds of middle and low-income investors out of more than $24 million between 1999 and 2001, when he fled the U.S. after becoming aware that he was under suspicion. The investors in the scheme, called “Knight Express”, were told that their funds would be used to purchase and resell Federal Reserve notes, and were promised a six percent monthly return. Most of those bilked were part of the Filipino community in San Diego.^[30]

12DailyPro was a version of what is commonly known as a “paid autosurf” program where “investors” deposited money and received an extremely high profit (44%) within a short period (12 days). Charis Johnson created what authorities considered one of the largest modern day versions of the Ponzi scheme. She accumulated a total of over US$1.9 million from the program. More than 300,000 people joined over the course of 8 months, spending over $500 million.^[32] When a federal investigation of 12DailyPro took place, its main payment processor, Stormpay, froze all funds related to it. Stormpay has since refused to return any of these funds. On February 24, 2006, the United States Securities and Exchange Commission (SEC) ordered 12DailyPro and its parent company to cease and desist all operations. On February 28, a Los Angeles judge ordered all company assets and records to be turned over to an appointed receiver for investigation. Charis F. Johnson now faces criminal and civil suits from both local and federal agencies.

• In May 2007, the Florida Office of Financial Regulation and the Florida Department of Law Enforcement announced they were investigating local Bradenton investment broker Michael O. Traynor, 56, and his son, Matthew O. Traynor, 28, on complaints from at least a dozen residents in Sarasota and Manatee counties alleging that the Traynors defrauded clients out of approximately $8 million in investor funds. On November 16, 2007, Michael Traynor, who had found many of his clients though his church social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. At least 10 investors filed complaints with state regulators, and many had unfruitful meetings with Traynor to have money returned, including those who met him through Bradenton Christian Reformed Church and Bradenton Christian School.

Representatives of the Florida Department of Law Enforcement called Traynor’s scam a “classic Ponzi-scheme”. Traynor had sold investments in Manatee County for InterSecurities Inc., also known as ISI, since 1997, and was the company’s Bradenton branch manager before he was fired in February 2007.

Currently (May 2008) the Finnish National Bureau of Investigation is investigating a long running scheme where possibly over 10,000 people could have lost up to €100 million investing in WinCapita‘s WinClub “investment club”, supposedly a currency trading scheme. Investigators now say they have found no evidence that WinCapita ever engaged in any legitimate currency trading at all.^[37]

http://en.wikipedia.org/wiki/Ponzi_scheme

***

Some manifestations of this white collar crime have become more frequent as the Internet gives criminals greater access to prey. The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants.

Securities fraud is becoming more complex as the industry develops more complicated investment vehicles. In addition, white collar criminals are expanding the scope of their fraud and are looking outside the United States for new markets, new investors, and banking secrecy havens to hide unjust enrichment.

A study conducted by the New York Stock Exchange in the mid-1990s reveals approximately 51.4 million individuals owned some type of traded stock, while 200 million individuals owned securities indirectly. These same financial markets provide the opportunity for wealth to be obtained and the opportunity for white collar criminals to take advantage of unwary investors.^{[citation needed]}

Recovery of assets from the proceeds of securities fraud is a resource intensive and expensive undertaking because of the cleverness of fraudsters in concealment of assets and money laundering, as well as the tendency of many criminals to be profligate spenders. A victim of securities fraud is usually fortunate to recover any money from the defrauder.

Sometimes the losses caused by securities fraud are difficult to quantify. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.^[22]

http://en.wikipedia.org/wiki/Securities_fraud

Potential perpetrators of securities fraud within a publicly-traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to:

1. overstate assets
2. overstate revenues
3. understate costs
4. understate liabilities

***

The United States Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses.

The PSLRA imposes new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions. It mandates full disclosure to investors of proposed settlements, including the amount of attorneys’ fees. It bars bonus payments to favored plaintiffs, and permits judges to scrutinize lawyer conflicts of interest.

Background: Overview of Securities Fraud Actions Under Section 10(b) and Rule 10b-5

The Securities Exchange Act of 1934 (commonly known as the “Exchange Act” or the “1934 Act”) gives shareholders the right to bring a private action in federal court to recover damages the shareholder sustained as a result of securities fraud. The majority of securities fraud claims are brought pursuant to Section 10(b) of the Exchange Act (codified at 15 U.S.C. § 78j), as well as SEC Rule 10b-5, which the SEC promulgated under the authority granted to it by Congress under the Exchange Act. (This article refers to federal securities fraud actions as “Rule 10b-5 actions” or “Rule 10b-5 cases” as convenient shorthand.)

The Supreme Court has held that there are six elements that a plaintiff must allege and prove in order to prevail in a Rule 10b-5 action:

1. The defendant made a “material misrepresentation or omission”;

2. the defendant acted with “scienter”, or a “wrongful state of mind” (typically understood to mean that the defendant intended to make the material misrepresentation or omission, or acted with recklessness in making the misrepresentation or omission);

3. the material misrepresentation or omission was made “in connection with the purchase or sale of a security”;

4. the plaintiff who was allegedly victimized by the fraud relied upon the material misrepresentation or omission (if the security is traded on a public stock exchange, such as the New York Stock Exchange or NASDAQ, the law will typically presume that shareholders rely on the integrity of the market, and therefore that the price of the stock reflected material misrepresentation and that shareholders relied upon the integrity of the market);

5. the plaintiff suffered an economic loss as a result of the alleged fraud; and

6. the plaintiff can allege and prove “loss causation”, which means that the allegedly fraudulent misrepresentation or omission caused the plaintiff’s economic loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

Each of these elements has been heavily litigated in thousands of cases over the past 70 years, and the courts have applied these six elements in a multitude of different factual situations.

http://en.wikipedia.org/wiki/Private_Securities_Litigation_Reform_Act

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FindLaw > Library

The Private Securities Litigation Reform Act of 1995

By Pillsbury Winthrop Shaw Pittman LLP

On December 22, 1995, the U.S. Senate voted to override President Clinton’s December 19, 1995 veto of the Private Securities Litigation Reform Act of 1995 (the “bill” or the “Reform Act”). With the House of Representatives having similarly voted on December 20, 1995 to override the veto, the Reform Act, which affects dramatically the ability of companies to defend themselves against class actions brought under the Federal securities laws, became law on December 22, 1995; its provisions do not apply, however, to any private action commenced before that date.

The bill is a complex piece of legislation. This bulletin is intended to outline only some of the most important provisions of the bill and their effect on corporate disclosure issues. All companies should immediately review their practices to take advantage of the new provisions. We can provide further analysis to anyone who is interested.

The following are the main provisions in the Reform Act, which are discussed in more detail below:

• Safe Harbor for Forward-Looking Information
• Limitations on Joint and Several Liability
• Increased Pleading and Proof Requirements
• Limitation on Damages
• Class Action Procedural Reforms
• Enhanced Attorney Sanction Provisions
• RICO Amendment Eliminating Sanctions Claims
• Auditor Duty Regarding Financial Fraud
• Additional SEC Rulemaking Authority

Safe Harbor for Forward-Looking Information

For most companies, the most important provision of the Reform Act is the “safe harbor” for forward-looking statements or projections. As finally crafted, this provision will greatly increase protection for such statements and also will provide a mechanism for getting lawsuits dismissed at a very early stage in a proceeding, before legal costs mount and executive time is squandered in depositions and other discovery. The safe harbor applies to actions brought under both the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”), although its scope as to types of forward-looking statements covered is limited. For example, forward-looking information contained in GAAP financial statements is not protected by the safe harbor (see below). Nor does the provision apply to any initial public offering

Under the bill, a written or oral statement that predicts the future prospects of a company is immune from civil liability (although not from actions brought by the SEC) if either (1) the statement is identified as a forward-looking statement and also identifies “important” factors that may cause actual results to differ materially from those predicted or (2) the statement was not made with actual knowledge of its falsity.

“Bespeaks Caution” Doctrine

Reflecting Congressional supporters’ belief that the U.S. capital markets will benefit from an increased flow of forward-looking information, the Reform Act adopts a strong form of the case law that has become known as the “bespeaks caution” doctrine. Under the formulation in the Reform Act, an issuer (and others covered by the safe harbor) will be immune from civil liability if the forward-looking statement is identified as a forward-looking statement. The legislative history accompanying the bill makes clear that it is unnecessary to state explicitly that “This is a forward-looking statement.” Instead, cautionary words such as “we estimate” or “we project” likely will be sufficient.

In order for a company to benefit from the protections offered by the “bespeaks caution” prong of the safe harbor, a forward-looking statement must also be accompanied by one or more qualifiers stating “important factors” why the results predicted in the forward-looking statement may not come true. It will not be necessary to identify all the factors that might cause the statement not to “pan out” or even to identify the factor that causes the final result to differ from the prediction. The point is to identify enough factors so that an investor should realize the risks involved in relying on the forward-looking statement.

What is a Forward-Looking Statement?

The Reform Act contains a thorough definition of “forward-looking statement,” including those items that one might expect, i.e., projections of revenue or losses, plans and objectives for future operations, products or services and statements relating to future economic performance that would normally be included in a “Management Discussion & Analysis” section. It also includes any underlying or related assumptions that are stated.

Financial Statements Exclusion

Projections and other forward-looking statements contained in GAAP financial statements are not protected by any provision of the safe harbor. Thus, contingent liability disclosure that is protected by the provisions of the safe harbor when contained in the body of a document (such as a Form 10-K) may not be protected by the safe harbor to the extent that it is also contained in the financial statement footnotes. Existing SEC Rule 175, which is promulgated under the Securities Act, provides a much narrower regulatory safe harbor for certain forward-looking information, including, according to some judicial interpretations, information contained in financial statements. Rule 175 is not affected by the Reform Act.

Additional Exclusions

The safe harbor does not apply to statements made in connection with initial public offerings, rollup transactions, tender offers or partnership or limited liability company offerings, among other things. Issuers who are subject to judicial or administrative decrees or orders or who have been convicted of crimes relating to violations of the securities laws are prohibited from relying on the safe harbor for three years after the date of such conviction or the entry of such decree or order.

Oral Statements

In addition to the general safe harbor coverage for both written and oral statements, the bill affords special “bespeaks caution” treatment for oral forward-looking statements made by issuers and their officers, directors and employees. As to such statements, the general requirement that a forward-looking statement be accompanied by a listing of “important factors” can be met by a statement identifying the information as forward-looking along with a further statement clearly conveying the message that actual results may differ materially from the results predicted in the forward-looking statement and referencing a “readily available written document” that contains cautionary language meeting the standard discussed above. The document reference may be to an SEC filing or to any publicly disseminated document, including those posted by an issuer on-line, as, for example, an earlier press release. Thus, in an oral presentation to analysts or any other group, a company spokesman should refer to the fact that the presentation contains predictions, should identify those by reference to “estimates” or “projections” or similar terms and should refer to written information that is available to the listeners that contains meaningful cautionary language or identifies important factors that could cause actual results to differ from the oral projections.

Requirement to Show Knowledge of Falsity

Persons covered by the safe harbor are not limited to reliance on the “bespeaks caution” prong; in fact, the bill provides that unless a plaintiff proves that a forward-looking statement was made with actual knowledge of its falsity, then the maker of the statement will be immune from liability based on the statement, even where the maker of the statement has not met the “bespeaks caution” requirements. In a colloquy on the Senate floor, the bill’s proponents made it clear that recklessness does not suffice for a finding of actual knowledge under this provision.

[ Etc.]

http://library.findlaw.com/1999/Sep/1/129878.html

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Ten Things We Know and Ten Things We Don’t Know
About the Private Securities Litigation
Reform Act of 1995

JOINT WRITTEN TESTIMONY OF
JOSEPH A. GRUNDFEST AND MICHAEL A. PERINO

Stanford Law School

Before the
Subcommittee on Securities
of the Committee on Banking, Housing, and Urban Affairs
United States Senate
on July 24, 1997

{ . . .}

“Much of the information reported in this testimony exists only because of the substantial efforts of a hardworking team at Stanford Law School who have built the first Designated Internet Site for the posting of litigation materials on the World Wide Web. This site, which can be viewed at http://securities.stanford.edu, was nominated by the Smithsonian Institution as one of the five best applications of information technology by an educational institution in 1997. As of July 22, 1997, the site lists 202 companies that have been sued in federal securities class actions governed by the Reform Act, together with the full text of more than 100 complaints, as well as myriad briefs, decisions, opinions, and orders relating to securities fraud class action litigation in federal and state court. The site has recently been described as the on-line “mecca” for information on securities class action lawsuits.”²

2. State court class action securities fraud litigation against publicly-traded issuers has become a material factor in the litigation process since passage of the Act. These cases were rare prior to the Act’s passage.

The relative stability of the aggregate litigation rate masks a significant shift of activity from federal to state court. In the first eighteen months after the Reform Act, a total of ninety-two issuers were sued in state court proceedings.¹¹ As detailed in Mr. Perino’s separate testimony, there has been some decline in state court filings in 1997, but overall approximately ninety-two of 238 post-Reform Act litigations (38.6%) involve at least some state component. There is widespread agreement that these figures represent a substantial increase in state court litigation.¹² Two phenomena seem to explain the bulk of this shift. First, there appears to be a “substitution effect” whereby plaintiffs’ counsel file state court complaints when the underlying facts appear not to be sufficient to satisfy new, more stringent federal pleading requirements, or otherwise seek to avoid the substantive or procedural provisions of the Act. Second, plaintiffs appear to be resorting to increased parallel state and federal litigation in an effort to avoid federal discovery stays or to establish alternative state court venues for the settlement of federal claims.¹³

In addition to this increase in state class action activity, Figure 1 suggests that there has been a significant shift in the kinds of defendants appearing in state litigation. Prior to the Reform Act, most state cases (approximately 89%) alleging fraudulent activity in connection with the purchase or sale of securities involved non-publicly-traded securities.¹⁴ By contrast, the vast majority of state court class actions filed since the Reform Act (81.5%) involve securities that trade on national markets.¹⁵ These cases typically involve allegations that the price of the company’s securities was inflated due to misrepresentations or omissions affecting transactions on national markets, precisely the kinds of claims that were most often filed in federal court prior to the Act. In 1997, these actions continue to be filed in state court, despite overall declines in state filings. The sudden increase in the appearance of these cases in state court strongly supports the inference that the shift in forum selection was driven by the passage of the Reform Act.

3. Plaintiffs are alleging accounting fraud and trading by insiders more frequently than before the Act’s effective date.

Along with the shift to state court, one of the most significant effects associated with passage of the Reform Act are the changes in the style of litigation that has evolved in response to the Reform Act’s requirements

In particular, there has been a significant increase in the number of federal complaints alleging trading by insiders during the period when the fraud was allegedly alive in the market and a significant increase in the number of cases alleging misrepresentations or omissions in financial statements as the basis for liability. Approximately 59% of a sample of post-Reform Act federal complaints allege a misrepresentation or omission in financial statements.¹⁶ Allegations of misstated financials account for 67.4% of Section 10(b) complaints involving publicly-traded companies.¹⁷ In sharp contrast, similar allegations are found in only 34% of pre-Reform Act cases.¹⁸ Allegations of trading by insiders now appear in about 57% of post-Reform Act cases, whereas these allegations are found in only 21% of pre-Reform Act cases. Alleged trading by insiders is particularly important in cases against high technology companies, appearing in 73% of those cases, but that statistic must be interpreted with caution because of the prevalence of option-based compensation in the high technology sector.

http://securities.stanford.edu/research/articles/19970723sen1.html

Some of what is listed as “not known” – (1997)

1. How will the courts interpret the Act’s requirement that complaints “state with particularity all facts” on which an allegation of fraud is based?

Section 21(D)(b)(1) of the Reform Act provides that:

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. (emphasis supplied)

A major question raised by this provision relates to the vigor with which courts will interpret the statutory language calling for an articulation of all facts upon which a plaintiffs’ information or belief underlying a complaint is based. For example, the court in In re Silicon Graphics, Inc. Securities Litig., Fed. Sec. L. Rep. ¶99,468 (CCH), 1997 WL 285057 (N.D. Cal. May 23, 1997), held that plaintiffs’ allegations in a 73-page amended complaint were too generic and that in order to provide sufficiently detailed information about alleged negative internal reports the allegations “should include the titles of the reports, when they were prepared, who prepared them, to whom they were directed, their content, and the sources from which plaintiffs obtained this information.” Id. at 97,133.

The court also observed that the degree of specificity required by the Reform Act was the subject of specific debate in Congress, and quoted the statement of Rep. Dingell who expressed concern on the record that, under the legislation as drafted, names of confidential informants, employees, competitors, and others who provided information leading to the filing of the case would be required to be disclosed. Id. at 97,130-97,131. The court found that Congress had enacted precisely the language as to which Rep. Dingell had complained, and that plaintiffs must plead the sort of information described by Rep. Dingell to meet the requirements of the Reform Act.⁴² Id. at 97,131. Plaintiffs did not meet this burden and the complaint was dismissed.

2. How will the courts interpret the Reform Act’s “strong inference” pleadings standard? Will they adopt the Second Circuit standard or move to a stricter standard?

Under the Reform Act, plaintiffs are now required to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”⁴⁵ The interpretation of this standard has been the subject of considerable disagreement among district courts. The debate focuses on whether the Reform Act simply adopts the Second Circuit standard, or goes further. Several courts have held that the Reform Act adopted the Second Circuit pleading standard,⁴⁶ while other courts have found that the Reform Act standard goes beyond the Second Circuit standard.⁴⁷ No Court of Appeals has directly addressed this issue. Accordingly, we are uncertain if, in the long run, courts will adopt the Second Circuit standard or move to a stricter standard such as that employed by the Silicon Graphics court.

Again, we expect that the resolution of this uncertainty will materially affect the future evolution of federal securities fraud litigation. The higher the standard courts set, the more difficult it becomes for plaintiffs to withstand motions to dismiss and the lower the volume of anticipated litigation in the federal courts.

http://securities.stanford.edu/research/articles/19970723sen1.html

***

In law, a class action or a representative action is a form of lawsuit where a large group of people collectively bring a claim to court. This form of collective lawsuit originated in the United States and is still predominately a US phenomenon, at least the US variant of it. However, in several European countries with civil law (as opposed to the Anglo-American common law principle, which is used by US courts), changes have in recent years been made that allow consumer organisations to bring claims on behalf of large groups of consumers.

Federal class actions

In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d).

Class action lawsuits may be brought in federal court if the claim arises under federal law, or if the claim falls under 28 USCA § 1332 (d). Under § 1332 (d) (2) the federal district courts have original jurisdiction over any civil action where the amount in controversy exceeds $5,000,000 and either 1. any member of a class of plaintiffs is a citizen of a State different from any defendant; 2. any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or 3. any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.^[1] Nationwide plaintiff classes are possible, but such suits must have a commonality of issues across state lines. This may be difficult if the civil law in the various states have significant differences. Large class actions brought in federal court frequently are consolidated for pre-trial purposes through the device of multidistrict litigation (MDL). It is also possible to bring class action lawsuits under state law, and in some cases the court may extend its jurisdiction to all the members of the class, including out of state (or even internationally) as the key element is the jurisdiction that the court has over the defendant.

***

Class members often receive little or no benefit from class actions. Examples cited for this include large fees for the attorneys, while leaving class members with coupons or other awards of little or no value; unjustified awards are made to certain plaintiffs at the expense of other class members; and confusing notices are published that prevent class members from being able to fully understand and effectively exercise their rights.

http://en.wikipedia.org/wiki/Class_action

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Subject: Warning – Selling Unregistered Securities

Last-Revised: 29 Mar 1995
Contributed-By: Michael R. Mitchell (mitchel4 at ix.netcom.com)

Under the U.S. Securities Laws, specifically The Securities Act of 1933, the mere offer to sell a security — unless there is an effective registration statement on file with the SEC for the offer — via the Internet can be a felony subjecting the offeror to a 5 year federal prison term. See the Securities Act of 1933, Section 5(c) Of course, sales and deliveries after sale of unregistered securities is unlawful (Section 5(a)) as is failure to deliver a prospectus (Section 5(b)).

Listen to an example from my own experience as a securities lawyer in Los Angeles. Many years ago a young man came into my office and asked my advice about whether he could advertise in the Hollywood Reporter for investors in a movie he wanted to make.

I explained to him that such a course would be fraught with peril for him because it would violate the federal securities laws. He said, “Everybody does it; there are a bunch of ads soliciting people to invest in movies there every day.” He said, “Well, I’m going to do it.”

About a week later, he phoned me up and said he had got a letter from the SEC requiring him to refund any money he had collected and requiring him to visit the LA office of the SEC. It appears that the SEC reads the Hollywood Reporter. It also reviews the Internet newsgroups.

Certain transactions are exempted from the prohibition (See Section 4) and certain securities are exempted from the prohibition (See Section 3). How a security is defined is set forth in Section 2(1) — and includes, among other things, any note, stock, bond, investment contract, put call, straddle, option, etc.

You can determine whether a registration statement is or was in effect as to a security by accessing the free SEC Edgar search machine at this URL:
http://www.sec.gov/cgi-bin/srch-edgar

http://invest-faq.com/cbc/warn-unreg-secur.html

***

Twelve Firms Unite For Trading In Unregistered Securities

Twelve Wall Street firms that had started competing platforms for trading unregistered securities known as 144a issues have agreed to cooperate on a single platform operated by the Nasdaq stock market, the exchange said yesterday.

The move, the result of two months of negotiations between the firms and Nasdaq, the country’s second-largest stock exchange after the New York Stock Exchange, will bring liquidity and transparency to a market that has so far been opaque, the chief executive of Nasdaq, Robert Greifeld, said.

Bank of America, Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS and Wachovia will join with Nasdaq to form the market, called the Portal Alliance.

Mr. Greifeld said the 144a market would experience strong growth in trading volume.

Companies are increasingly turning to private investors, known as qualified institutional buyers with at least $100 million in assets, to raise capital through 144a offerings without the regulatory burden of a public offering.

In recent months, many securities firms had started 144a platforms, including GSTrUE by Goldman Sachs and OPUS-5, begun by a group of five banks including Citigroup, Merrill Lynch and Lehman Brothers Holdings. Nasdaq started a portal market this year to trade these private placements of stock.

Nasdaq data show the private placement market reached $162 billion last year, outpacing the $154 billion value of overall public offerings.

By REUTERS

Published: November 13, 2007

http://query.nytimes.com/gst/fullpage.html?res=9C0DE4D61F31F930A25752C1A9619C8B63

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Investment Firm Sold Millions in Unregistered Securities

April 5, 2006
Missouri Attorney General Jay Nixon has filed a lawsuit to shut down a St. Louis company that sold at least $3.8 million in unregistered securities to investors on the promise of exorbitant rates of return.

Investors in Global Power Global Wealth (GPGW) Enterprises not only didn’t realize those returns, Nixon says; in most cases, the investors lost their principal investments

as well.

The lawsuit cites GPGW and its subsidiaries, Global Wealth Investments, Opportunity Lives and Global Wealth Builders, for numerous violations of the Missouri Securities Act of 2003 and the Missouri Merchandising Practices Act. Also named as defendants in the lawsuit are GPGW president, Andre E. Mitchell of O’Fallon, Ill., and vice president Henry L. Allen of St. Louis.

The lawsuit claims Mitchell and the other defendants sold investments to at least 461 persons nationwide, including at least 66 residents from Missouri, at a total value of at least $3,867,000. Documents provided to investors by the defendants promised rates of return of up to 500 percent to 800 percent within four to 24 months.

Investors also were falsely promised that their principal investment would always be secure, the lawsuit says. The defendants ignored two previous cease and desist orders issued by the Missouri Commissioner of Securities, Nixon and Missouri Secretary of State Robin Carnahan say.

“The defendants offered staggering rates of return on investments and brazenly continued to sell unregistered securities even after they were ordered twice to cease and desist,” said Nixon. “We are working with Secretary of State Carnahan and have filed this lawsuit to ensure that the defendants are prohibited from operating in Missouri and that investors who fell prey to this scam are made whole.”

“Along with the Missouri Securities Division of my office, I am committed to protecting Missouri investors,” said Carnahan. “Unfortunately, this individual continued to defraud investors even after he was ordered by the Missouri Securities Commissioner to stop selling the unregistered investments.”

The lawsuit asks the court to grant a permanent injunction against the defendants to prevent them from continuing to engage in unlawful, unfair and deceptive acts while selling securities. It also asks the court to:

• Freeze all accounts and sequester all funds held by the defendants;
• Authorize the Commissioner of Securities to take control of the defendants’ property, including investment accounts, rent and profits; to collect debts and to acquire and dispose of property;
• Order the defendants to provide full restitution to all consumers from whom the defendants defrauded;
• Impose appropriate civil penalties on the defendants;
• Order the defendants to pay to the investor education and protection fund an amount of money equal to ten percent of the total restitution paid to consumers; and
• Order the defendants to pay all court, investigative and prosecution costs in the case.

http://www.consumeraffairs.com/news04/2006/04/mo_securities.html

***

A U.S. appeals court has ruled that a lawsuit

brought by credit card holders against a group of major banks over the use of forced arbitration in lending agreements can go forward.

The plaintiffs charged that the banks had conspired to universally institute the practice of mandatory arbitration for disputes, rather than allowing claims to be heard in court, and that their actions violated antitrust law.

The Second Circuit Court of Appeals’ ruling overturned the ruling of a lower court that threw the suit out on procedural grounds. The appellate judges on the case, Ross v. Bank of America, ruled that there was sufficient evidence to indicate that violations of the Sherman Antitrust Act were taking place.

“According to [the plaintiffs], the banks conspired in order ‘to immunize themselves from economic responsibility for antitrust and consumer protection violations, and to reap supra-competitive profits from their cardholders,’” the court said in its ruling.

“The cardholders also contend that the alleged collusion produced several market effects, including the creation of a ‘non-price trade advantage over cardholders’ and the removal of any economic incentive for the banks to comply with antitrust and other laws, thereby shifting the risk and cost of their non-compliance to cardholders.”

“Even if the individual plaintiffs could not demonstrate injury from their claims, the court said, “the [c]omplaint alleges that reduced choice and diminished quality in credit services result directly from the banks’ illegal collusion to constrict the options available to cardholders.”

“These harms are sufficiently ‘actual or imminent,’ as well as ‘distinct and palpable,’ to constitute…injury in fact,” the court said.

Defendants in the case include Bank of America, Citigroup, J.P.Morgan Chase, Providian, and Discover Financial Services

.

April 29, 2008

Court Rules Credit Card Arbitration Lawsuit Can Go Forward

Suit charging collusion between banks and creditors against customers

http://www.consumeraffairs.com/news04/2008/04/cc_arbitration.html

***

A list of recent class action outcomes and info

http://www.consumeraffairs.com/class_actions/

***

http://www.law.cornell.edu/uscode/15/usc_sec_15_00000078—u004-.html

TITLE 15 > CHAPTER 2B > § 78u–4

Prev | Next

§ 78u–4. Private securities litigation

***

Legislative History

The PSLRA was enacted into law by the U.S. Congress over a veto by President Bill Clinton. The U.S. House of Representatives approved the bill by a 319-100 margin, and the U.S. Senate approved it 68-30. Every Republican in the House voted in favor of the legislation, and only four Republicans in the Senate voted against it: William Cohen, John McCain, Richard Shelby, and Arlen Specter. Prominent liberals in the Democratic Party like senators Tom Harkin, Ted Kennedy, Claiborne Pell, and Carol Moseley Braun voted in favor of the legislation while many conservative-to-moderate Democrats such as senators John Breaux, Robert Byrd, Fritz Hollings, and Sam Nunn and representatives such as John Murtha and Gene Taylor voted against it. Both the current Senate majority leader, Harry Reid, and the current Speaker of the House, Nancy Pelosi, voted for the bill. This event was one of two times during Bill Clinton’s entire two terms in office that Congress successfully overrode one of his 37 presidential vetoes to enact a bill into law.

The PSLRA was originally developed as part of Newt Gingrich‘s Contract With America. Its principal authors in the House were Representatives Thomas Bliley, Jack Fields and Chris Cox. Senators Chris Dodd and Pete Domenici sponsored the legislation in the Senate.

The Dura Decision and Loss Causation

The Dura decision held that a plaintiff in a Rule 10b-5 case had not adequately pleaded loss causation by merely alleging that he “paid artificially inflated prices for Dura securities” at the time of purchase. The Supreme Court observed that an investor who purchases a stock at an artificially inflated price suffers no economic loss at the time of purchase. The loss occurs only when the truth is disclosed and the stock price falls as a result. Thus, a plaintiff who sells his shares “before the relevant truth begins to leak out” does not suffer any economic damage. The plaintiff in Dura failed to allege that the “share price fell significantly after the truth became known”, and therefore the complaint had not alleged loss causation.

The United States Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses.

The PSLRA imposes new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions. It mandates full disclosure to investors of proposed settlements, including the amount of attorneys’ fees. It bars bonus payments to favored plaintiffs, and permits judges to scrutinize lawyer conflicts of interest.

http://en.wikipedia.org/wiki/Private_Securities_Litigation_Reform_Act

***

Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.

In public companies, this type of “creative accounting” can amount to fraud and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States.

In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence in the execution of their duty^{[citation needed]} as auditors to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies’ financial status.^{[citation needed]} In several cases, the monetary amounts of the fraud involved are in the billions of USD.

http://en.wikipedia.org/wiki/Accounting_scandals

American International Group, Inc. (AIG) (NYSE: AIG) is a major American insurance corporation based at the American International Building in New York City. The British headquarters are located on Fenchurch Street in London, continental Europe operations are based in La Défense, Paris, and its Asian HQ is in Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest company in the world. It was on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. The London unit of the world’s largest insurer by assets sold credit protection Credit default swap (CDS) on collateralized debt obligations (CDOs) that declined in value. ^[1] The United States Federal Reserve loaned money to AIG at AIG’s request, to prevent the company’s collapse, in order for AIG to meet its obligations to post additional collateral to trading partners. The Federal Reserve announced the creation of a credit facility of up to US$85 billion in exchange for warrants for a 79.9% equity stake and the right to suspend dividends to previously issued common and preferred stock.^[2][3][4][5] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank’s rescue package.^[6] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.^[7][8]

On October 9, 2008, the company borrowed an additional $37.8 billion from the Federal Reserve Bank of New York.

[ . . .]

In the mid-2000s AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General‘s Office. Greenberg was ousted amid an accounting scandal in February 2005. The New York Attorney General’s investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970.^[3]

[ . . . ]

September 2008 concerns about stability

AIG’s share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.^[9][10]. AIG’s Financial Product division headed by Joseph Cassano had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans.^[11] CNN named Cassano as one of the “Ten Most Wanted: Culprits” of the 2008 financial collapse in the United States. ^[12]

http://en.wikipedia.org/wiki/American_International_Group

***

As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman.^[9] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company.^[9] The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, [ . . . ]

*** NOTE ***

How could Morgan Stanley give a fair and objective determination about AIG – now there’s collusion at work.

(my note) – cricketdiane

***

US economic crisis – Global economic crisis based in credit derivatives – gambling by Wall Street – by Banks – by Hedge Funds – by The Rich Upper Class – by Traders – by Ratings Agencies

Also, stock index futures and options are known as derivative products because they derive their existence from actual market indices, but have no intrinsic characteristics of their own. In addition to that, one of the reasons some believe they lead to greater market volatility is that huge amounts of securities can be controlled by relatively small amounts of margin or option premiums. One reason derivatives are popular is that they can be transacted off-balance-sheet.

http://en.wikipedia.org/wiki/Derivative_security

Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates,

**or indices (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs. Credit derivatives have become an increasingly large part of the derivative market.

***

A bank may have substantial sums in off-balance sheet accounts, and the distinction between these accounts may not seem obvious. For example, when a bank has a customer who deposits $1 million in a regular bank deposit account, the bank has a $1 million liability. If the customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank, the $1 million would not be a liability of the bank, but an amount held in trust for the client (formally as shares or units in a form of collective fund). If the funds are used to purchase stock, the stock is similarly not owned by the bank, and do not appear as an asset or liability of the bank. If the client subsequently sells the stock and deposits the proceeds in a regular bank account, these would now again appear as a liability of the bank (although the same funds held in a brokerage account may or may not be off-balance sheet). However, it’s been argued that the contrary is also feasible.

http://en.wikipedia.org/wiki/Off-balance-sheet

Off balance sheet (OBS) usually means an asset or debt or financing activity not on the company’s balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. It also involves loan commitments, futures, forwards and other derivatives except such derivatives pertaining to equity securities, ESOP, or phantom stock, which usually must be held as reserves in the Long Term Debt section of a Balance Sheet (See Also Backdating Options), when-issued securities (famous in the US)^[clarify] and loans sold.

***

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

• Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.
• Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by “asset class” depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

http://en.wikipedia.org/wiki/Financial_instrument

* See chart on this page – very good

Some instruments defy categorization into the above matrix, for example repurchase agreements.

***

OTC and exchange-traded

Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:

• Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)^[1]. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty’s solvency and ability to honor its obligations.

• Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world’s largest^[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world’s derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or “rights”) may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

Common derivative contract types

There are three major classes of derivatives:

1. Futures/Forwards, which are contracts to buy or sell an asset at a specified future date.
2. Options, which are contracts that give a holder the right to buy or sell an asset at a specified future date.
3. Swappings, where the two parties agree to exchange cash flows or returns.

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

CME Group

From Wikipedia, the free encyclopedia

Jump to: navigation, search

CME Group Inc.

Type	Public
Headquarters	Chicago, IL, USA
Key people	Craig S. Donohue
Industry	Security & Commodity Exchanges
Market cap	19.7 billion USD[1]
Employees	1970[1]
Website	www.cme.com

CME Group Inc. (NASDAQ: CME) is the world’s largest futures exchange. CME Group was created July 12, 2007 from the merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). On March 17, 2008, it announced its acquisition of NYMEX Holdings, Inc., parent company of the New York Mercantile Exchange, which was formally completed on August 22, 2008.[1]

http://en.wikipedia.org/wiki/CME_Group

***

Other examples of underlying exchangeables are:

• Property (mortgage) derivatives
• Economic derivatives that pay off according to economic reports ([1]) as measured and reported by national statistical agencies
• Energy derivatives that pay off according to a wide variety of indexed energy prices. Usually classified as either physical or financial, where physical means the contract includes actual delivery of the underlying energy commodity (oil, gas, power, etc.)
• Commodities
• Freight derivatives
• Inflation derivatives
• Insurance derivatives^{[citation needed]}
• Weather derivatives
• Credit derivatives

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

Cash flow

The payments between the parties may be determined by:

• the price of some other, independently traded asset in the future (e.g., a common stock);
• the level of an independently determined index (e.g., a stock market index or heating-degree-days);
• the occurrence of some well-specified event (e.g., a company defaulting);
• an interest rate;
• an exchange rate;
• or some other factor.

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money or the derivative becomes worthless. Depending on the terms of the contract, the potential gain or loss on a derivative can be much higher than if they had traded the underlying security or commodity directly.

***

VALUATION -

Market and arbitrage-free prices

Two common measures of value are:

• Market price, i.e. the price at which traders are willing to buy or sell the contract
• Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts; see rational pricing

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

Criticisms

Derivatives are often subject to the following criticisms:

Possible large losses

See also: List of trading losses

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:

• The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government^[3]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.^[4] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
• The loss of $7.2 Billion by Société Générale in January 2008 through mis-use of futures contracts.
• The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted.
• The bankruptcy of Long-Term Capital Management in 2000.
• The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.^{[citation needed]} Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:^[5]
• The Nick Leeson affair in 1994

Counter-party risk

Derivatives (especially swaps) expose investors to counter-party risk.

[ Etc. ]

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

http://en.wikipedia.org/wiki/Derivative_(finance)#Common_derivative_contract_types

Common derivative contract types

***

Here’s an interesting perspective in light of reality that we know today -

“Remember the bankruptcy of Orange County, California, and the Barings Bank due to poor investments in financial derivatives? At that time many policymakers feared more collapsed banks, counties, and countries. Those fears proved unfounded; prudent use, not government regulation, of derivatives headed off further problems. Now, however, the Financial Accounting Standards Board, the Federal Reserve, and the Securities and Exchange Commission are debating the merits of new rules for derivatives. But before adopting regulations, policymakers need to separate myths about those financial instruments from reality.”

10 Myths About Financial Derivatives

by Thomas F. Siems

Thomas F. Siems is a senior economist and policy adviser at the Federal Reserve Bank of Dallas. The views expressed here are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Cato Institute
1000 Massachusetts Ave, NW
Washington DC 20001-5403
Phone (202) 842-0200
Fax (202) 842-3490
Contact Us

Also in this text:

“Most financial derivatives traded today are the “plain vanilla” variety–the simplest form of a financial instrument. But variants on the basic structures have given way to more sophisticated and complex financial derivatives that are much more difficult to measure, manage, and understand. For those instruments, the measurement and control of risks can be far more complicated, creating the increased possibility of unforeseen losses.” – Thomas F. Siems

http://www.cato.org/pubs/pas/pa-283.html

The largest appeal of derivatives is that they offer some degree of leverage. Leverage is a financial term that refers to the multiplication that happens when a small amount of money is used to control an item of much larger value. A mortgage is the most common form of leverage. For a small amount of money and taking on the obligation of a mortgage, a person gains control of a property of much larger value than the small amount of money that has exchanged hands.

Derivatives offer the same sort of leverage or multiplication as a mortgage. For a small amount of money, the investor can control a much larger value of company stock then would be possible without use of derivatives. This can work both ways, though. If the investor purchasing the derivative is correct, then more money can be made than if the investment had been made directly into the company itself. However, if the investor is wrong, the losses are multiplied instead.

http://www.wisegeek.com/what-are-financial-derivatives.htm

Derivatives made the news in 1995 when rogue trader Nick Leeson single-handedly caused the failure of the Barings bank of England. Nick Leeson was a derivatives trader whose trades did not work out, and due to the enormous leverage of the trades used, the losses became so large that the bank was bankrupt when the results of his trades become due. Warren Buffet, a much revered and very successful investor, has stated in one of his annual reports that he is very much against the use of derivatives and he expects that they will lead to eventual failure for anyone who uses them. In spite of all this negative press, derivatives have long been a normal part of business and investing and are likely to be so for many more years.

***

Unlike Warren Buffet, Sir Julian Hodge, the Welsh banker, issued his apocalyptic warning three years before the first rash of derivatives disasters involving Metallgesellschaft, Orange County, Sears Roebuck, Proctor & Gamble, happened in 1994. More was to come in 1995 in the form of the Daiwa and Barings scandals. None of those on their own, however, threatened to bring the world financial system to its knees. Until recently the crisis that came closest to doing so involved LTCM in September 1998. Nearly 10 years later, in March 2008, the FED took emergency action to avoid what was called derivatives Chernobyl. That action seems to have worked … so far, but could a mega-catastrophe lie around the corner …?

http://projects.exeter.ac.uk/RDavies/arian/scandals/derivatives.html

Derivatives and Speculation

The job of a derivatives trader is like that of a bookie once removed, taking bets on people making bets.

The description above comes from In Into the Fire a novel about fraudulent trading in derivatives (now out in a new edition), by Linda Davies. Why on earth should anyone want to be a bookie once removed? The answer was given 63 years earlier by John Maynard Keynes in his best-known work.

Keynes on Speculation

“Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.”

“It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

Keynes, John Maynard The general theory of employment, interest and money. London : Macmillan, St. Martin’s Press, 1936. page 156.

http://projects.exeter.ac.uk/RDavies/arian/scandals/derivatives.html

***

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.

http://www.investopedia.com/terms/d/derivative.asp

Introduction To Weather Derivatives
by Felix Carabello,Associate Director, Environmental Products, Chicago Mercantile Exchange (Contact Author | Biography)

Even in our advanced, technology-based society, we still live largely at the mercy of the weather. It influences our daily lives and choices, and has an enormous impact on corporate revenues and earnings. Until recently, there were very few financial tools offering companies’ protection against weather-related risks. However, the inception of the weather derivative – by making weather a tradeable commodity – has changed all this. Here we look at how the weather derivative was created, how it differs from insurance and how it works as a financial instrument.

http://www.investopedia.com/articles/optioninvestor/05/052505.asp

Temperature as a Commodity

Until recently, insurance has been the main tool used by companies’ for protection against unexpected weather conditions. But insurance provides protection only against catastrophic damage. Insurance does nothing to protect against the reduced demand that businesses experience as a result of weather that is warmer or colder than expected.

In the late 1990s, people began to realize that if they quantified and indexed weather in terms of monthly or seasonal average temperatures, and attached a dollar amount to each index value, they could in a sense “package” and trade weather. In fact, this sort of trading would be comparable to trading the varying values of stock indices, currencies, interest rates and agricultural commodities. The concept of weather as a tradeable commodity, therefore, began to take shape.

[ . . . ]

In 1997 the first over-the-counter (OTC) weather derivative trade took place, and the field of weather risk management was born. According to Valerie Cooper, former executive director of the Weather Risk Management Association, an $8 billion weather-derivatives industry developed within a few years of its inception.

CME Weather Futures and Options on Futures

In 1999, the Chicago Mercantile Exchange (CME) took weather derivatives a step further and introduced exchange-traded weather futures and options on futures – the first products of their kind. OTC weather derivatives are privately negotiated, individualized agreements made between two parties. But CME weather futures and options on futures are standardized contracts traded publicly on the open market in an electronic auction-like environment, with continuous negotiation of prices and complete price transparency.

Broadly speaking, CME weather futures and options on futures are exchange-traded derivatives that – by means of specific indexes – reflect monthly and seasonal average temperatures of 15 U.S. and five European cities. These derivatives are legally binding agreements made between two parties, and settled in cash. Each contract is based on the final monthly or seasonal index value that is determined by Earth Satellite (EarthSat) Corp, an international firm that specializes in geographic information technologies. Other European weather firms determine values for the European contracts. EarthSat works with temperature data provided by the National Climate Data Center (NCDC), and the data it provides is used widely throughout the over-the-counter weather derivatives industry as well as by CME.

http://www.investopedia.com/articles/optioninvestor/05/052505.asp

***

In finance, a credit derivative is a derivative whose value derives from the credit risk on an underlying bond, loan or other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself.^[1] This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt.^[2] Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.^[3]

The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:

• bankruptcy (the risk that the reference entity will become bankrupt)
• failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)
• obligation default (the risk that the reference entity will default on any of its obligations)
• obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)
• repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity’s obligations)
• restructuring (the risk that obligations of the reference entity will be restructured).

Where credit protection is bought and sold between bilateral counterparties this is known as an unfunded credit derivative. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.

This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic CDOs; credit linked notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.

http://en.wikipedia.org/wiki/Credit_derivative

Credit default products are the most commonly traded credit derivative product^[4] and include unfunded products such as credit default swaps and funded products such as collateralized debt obligations (see further discussion below).

The ISDA^[5] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion (ISDA’s Website). As reported in Times Sept. 15.08 “Worldwide credit derivatives market is valued at $62 trillion”. ^[6]

Although the credit derivatives market is a global one, London has a market share of about 40%, with the rest of Europe having about 10%.^[4]

The main market participants are banks, hedge funds, insurance companies, pension funds, and other corporates.^[4]

Unfunded credit derivative products include the following products:

• Credit default swap (CDS)
• Total return swap
• First to Default Credit Default Swap
• Portfolio Credit Default Swap
• Secured Loan Credit Default Swap
• Credit Default Swap on Asset Backed Securities
• Credit default swaption
• Recovery lock transaction
• Credit Spread Option
• CDS index products
• Constant Maturity Credit Default Swap (CMCDS)

Funded credit derivative products include the following products:

• Credit linked note (CLN)
• Synthetic Collateralised Debt Obligation (CDO)
• Constant Proportion Debt Obligation (CPDO)
• Synthetic Constant Proportion Portfolio Insurance (Synthetic CPPI)

http://en.wikipedia.org/wiki/Credit_derivative

***

Proposals for a makeover of the financial system include reform of the credit derivatives market, which offers over $50 trillion of default insurance coverage. Do investors need that much insurance, or is this mainly a dangerous casino operating under the radar of regulators — until a major financial institution like AIG needs a bailout? What sort of reform is needed?

The seller of protection in a credit derivatives contract receives premiums from the buyer of protection until maturity, or until default of the named borrower. Contracts are negotiated over the counter, not on an exchange, so it is difficult to know how much insurance exists on each borrower, or to know who has insured whom, and for how much.

That privacy is not unusual in the normal course of business contracts. What is unusual is the size of the potential claims. There is a public interest in knowing that systemically important sellers of protection have not overdone it. If a large bank or insurance company does not have enough capital to cover settlement claims, then its failure, or the threat of it, can cause mayhem, as we have just seen.

• OPINION
• OCTOBER 22, 2008

Derivatives and Mass Financial Destruction

Complex financial products can be useful if regulated properly.

By DARRELL DUFFIE

http://online.wsj.com/article/SB122463222894556573.html?mod=googlenews_wsj

The Fed is pressing dealers to quickly establish clearing in credit derivatives. The dealers have expressed an interest in using their own clearing counterparty, the Chicago Clearing Corporation. Alternatively, they could clear credit derivatives with a new joint venture of the Chicago Mercantile Exchange and Citadel (a large hedge fund). Either way, regulators should ensure that a clearing counterparty is extremely well capitalized and has strong operational controls.

Unfortunately, the urgency to set up clearing for credit derivatives may lead us to miss the opportunity to reduce exposures even further by clearing credit derivatives along with other forms of over-the-counter derivatives, such as interest-rate swaps and equity derivatives, which represent similarly large amounts of risk transfer.

Mr. Duffie is a professor of finance at Stanford University’s Graduate School of Business.

Please add your comments to the Opinion Journal forum.

http://online.wsj.com/article/SB122463222894556573.html?mod=googlenews_wsj

***

A credit derivative is an OTC derivative designed to transfer credit risk from one party to another. By synthetically creating or eliminating credit exposures, they allow institutions to more effectively manage credit risks. Credit derivatives take many forms. Three basic structures include:

credit default swap: Two parties enter into an agreement whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs. Credit events are typically defined to include a material default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs, the party makes a payment to the first party, and the swap then terminates. The size of the payment is usually linked to the decline in the reference asset’s market value following the credit event.

http://www.riskglossary.com/link/credit_derivative.htm

***

[PDF]

THE J.P. MORGAN GUIDE TO CREDIT DERIVATIVES

File Format: PDF/Adobe Acrobat – View as HTML
Blythe Masters, global head of credit derivatives marketing at J.P. Morgan in New … performer in credit derivatives rankings. J.P. Morgan was was placed: …
www.investinginbonds.com/assets/files/Intro_to_Credit_Derivatives.pdf -

(from Google)

***

[PDF]

A Beginner’s Guide to Credit Derivatives

File Format: PDF/Adobe Acrobat – View as HTML
This document will attempt to describe how simple credit derivatives can be. formally represented, shown to be replicable and ultimately priced, using rea- …
www.probability.net/credit.pdf -

(from Google)

***

When Delphi filed for bankruptcy October 8, investors had to start assessing their losses on more than $2 billion in the auto parts maker’s bonds, which have recently traded at around 60% of their face value. As bad as that is, there is more. Looming over the market like an invisible and unpredictable giant is an estimated $25 billion in credit derivatives, a form of insurance whose value is directly linked to the ups and downs of Delphi debt.

What happens to these complex contracts as the underlying bonds plunge in value? Will ripple effects amplify the Delphi damage, spreading harm to institutional and individual investors who otherwise have no stake in Delphi?

The Delphi situation points to a broader question: Is the credit derivative market, which grew from next to nothing in the mid-1990s to an estimated $5 trillion at the end of 2004 — and is perhaps more than twice that size today — pumping new, poorly-understood risk into the financial markets? Or are these exotic products helping to mitigate the shock from corporate crises, as their proponents claim?

The Ballooning Credit Derivatives Market: Easing Risk or Making It Worse?

Published: November 02, 2005 in Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1303

***

Calls to curb credit derivatives market

By Joanna Chung and Aline van Duyn in New York and Paul J Davies in London

Published: September 23 2008 23:30 | Last updated: September 23 2008 23:30

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Pressure to regulate the $62,000bn credit derivatives market mounted on Tuesday as the main US market regulator called on Congress to pass laws to supervise the industry.

Christopher Cox, chairman of the Securities and Exchange Commission, told the Senate banking committee that “significant opportunities” for manipulation existed in the market for credit default swaps, which offers a kind of insurance against companies defaulting on their debt.

http://www.ft.com/cms/s/0/d52898c4-89b9-11dd-8371-0000779fd18c.html

***

(compiled by Cricket Diane C Sparky Phillips, 10-22-08)

US Census Bureau figures off in la-la land – why don’t they match up?

Housing Vacancies and Homeownership   chart icon CHART

Homeownership Rate (HR)
The homeownership rate at 68.1 percent for the current quarter was not statistically different from the second quarter 2007 rate (68.2 percent) or the rate last quarter (67.8 percent).

New Home Sales   chart icon CHART

Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000. This is 11.5% below the revised July 2008 estimate of 520,000.

Construction Spending   chart icon CHART

Total construction activity for August 2008 ($1,072.1 billion) was nearly the same as the revised July 2008 ($1,071.8 billion). Please see our web site for further details: http://www.census.gov/constructionspending

Quarterly Financial Report – Retail Trade   chart icon CHART

After-tax profits for retail corporations with assets greater than $50 million averaged 2.3 cents per dollar of sales for the second quarter 2008, up 0.1 (+/- 0.1) cents from the average of 2.2 cents for the first quarter 2008.

Housing Starts/Building Permits   chart icon CHART

Privately-owned housing starts in September 2008 were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent below the revised August 2008 estimate of 872,000.

http://www.census.gov/cgi-bin/briefroom/BriefRm

U.S. Census Bureau
Economic Indicators

***NOTE***

Something is very wrong with these numbers – it is not possible to have this many foreclosures and have the same number in home ownership. With the credit crunch crisis that has been prevalent and pervasive enough to “bailout” the banks lending programs – how could new single family housing and construction starts have anything close to these numbers?

The profits at around two cents per dollar of sales couldn’t possibly be correct unless there is more crooked accounting going on in these arenas as well. Of course, if lay-offs accounted for this somewhere and actual profits were being hidden in continued growth or what? There is something very off about all these numbers.

note by cricketdiane

US economy in turn was planning to use Basel II accord guidelines – eventually – they could’ve done it already in 2005 –

*** NOTE ***

This indicates very clearly how much our regulators knew before this crisis started unfolding. Obviously, they were not expecting to enact these things quickly that would have averted the economic crisis we are now experiencing. – cricketdiane

***

“Regulators in most jurisdictions around the world plan to implement the new Accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States of America‘s various regulators have agreed on a final approach – see [5] for the Notice of Proposed Rulemaking. They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will not be available to anyone. In India, RBI has implemented the Basel II norms.” – from this entry below

***

http://en.wikipedia.org/wiki/Basel_II

Basel II Accord

From Wikipedia, the free encyclopedia

(Redirected from Basel II)

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;
2. Separating operational risk from credit risk, and quantifying both;
3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.

Contents 1 The Accord in operation 1.1 The first pillar 1.2 The second pillar 1.3 The third pillar 2 September 2005 update 3 November 2005 update 4 July 2006 update 5 November 2007 update 6 July 16, 2008 update 7 Basel II and the regulators 7.1 Implementation progress 8 See also 9 References 10 External links

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The Accord in operation

Basel II uses a “three pillars” concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system.

The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for “Internal Rating-Based Approach”.

For operational risk, there are three different approaches – basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA.

For market risk the preferred approach is VaR (value at risk).

The second pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved ‘tools’ over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk.It gives bank a power to review their risk management system.

The third pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately.

September 2005 update

On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced their revised plans for the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months [1].

November 2005 update

On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005. [2]

July 2006 update

On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version. [3]

November 2007 update

On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks [4].

July 16, 2008 update

On July 16, 2008 The federal banking and thrift agencies ( The Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; the Office of the Comptroller of the Currency, and; the Office of Thrift Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to the supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the advanced approaches rule, which took effect on April 1, 2008. http://www.occ.gov/ftp/release/2008-81a.pdf

Basel II and the regulators

One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural models, and the complexities of public policy and existing regulation. Banks’ senior management will determine corporate strategy, as well as the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries’ legislatures and regulators.

To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several software applications available. These include capital calculation engines and extend to automated reporting solutions which include the reports required under COREP/FINREP.

Implementation progress

Regulators in most jurisdictions around the world plan to implement the new Accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States of America‘s various regulators have agreed on a final approach – see [5] for the Notice of Proposed Rulemaking. They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will not be available to anyone. In India, RBI has implemented the Basel II norms.

In response to a questionnaire released by the Financial Stability Institute (FSI)[6], 95 national regulators indicated they were to implement Basel II, in some form or another, by 2015.

The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already report their capital adequacy ratios according to the new system. All the credit institutions will adopt it by 2008.

See also

• http://www.occ.gov Office of the Comptroller of the Currency
• Operational risk
• Operational risk management
• Risk
• Capital adequacy
• Solvency II
• Procyclical

References

• http://www.occ.gov/ftp/release/2008-81a.pdf
• http://www.occ.gov/ftp/release/2007-123.htm OCC Approves Basel II Capital Rule for U.S. Banks
• http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS)
• http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
• http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
• http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)
• http://www.basel-ii-association.com Association of Basel II Compliance Professionals
• http://www.globalriskregulator.com Basel news and resources
• http://www.baselcert.org Basel II Certification Institute: Certification for Basel II Accord
• http://www.basel-ii-training.com: Basel II Training: Impact on IT and Information Security
• http://www.basel-ii-risk.com: Basel II information and chatroom
• http://www.Basel-II.info Basel II: Portal site with studies and latest news (German language)
• Basel 2 skilled work of Michael Winters (German language)
• http://www.basel2.hk Basel II Portal for Asia-Pacific Region
• Impact of Basel II on IT investments Global Data and Risk Management Survey 2005
• http://www.math.ethz.ch/~baltes/ftp/Responsev3.pdf An academic response to Basel II
• http://www.math.ethz.ch/~delbaen/ftp/preprints/CoherentMF.pdf Coherent measures of risk. a widely quoted paper
• http://www.bos.frb.org/economic/wp/wp2006/wp0613.htm FRB Boston paper on measurement of operational risk.
• Daníelsson, Jón. “The Emperor Has No Clothes: Limits to Risk Modelling.” Journal of Banking and Finance, 2002, 26, pp. 1273-96.
• http://www.basel-ii-accord.com: The text sections of the accord in an easy to read format.
• http://ozrisk.net: A blog covering the Australian Basel II implementation process
• http://www.info.gov.hk/hkma/eng/bank/spma/attach/CA-G-4.pdf Validating Risk Rating Systems under the IRB Approaches, HKMA
• http://www.info.gov.hk/hkma/eng/basel2/index.htm Return of capital adequacy ratio (final version) – Completion instructions, HKMA
• http://www.info.gov.hk/hkma/eng/bank/retform/pdf/MA(BS)3.pdf Return Templates of capital Adequacy Ratio, HKMA
• http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/car_a1_e.pdf Canada Capital Adequacy Requirements, OSFI
• http://finance.groups.yahoo.com/group/Basel_Accords a discussion group

External links

• Articles on Risk Management & Modelling
• http://bis2information.org: Practical articles, on BIS2 and risk modelling, submitted by professionals to help create an industry standard.
• Approaches and Challenges in implementation of Basel II

Retrieved from “http://en.wikipedia.org/wiki/Basel_II_Accord“

Categories: Banking | Financial regulation

***

“If the American people ever allow the banks to control the issuance of their currency, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. I sincerely believe that banking institutions are more dangerous than standing armies.”
Thomas Jefferson, the Writings of Jefferson, vol. 7, “Autobiography, Correspondence, Reports, Messages, Addresses and other Writings”, Committee of Congress: Washington D.C., 1861, page 685

***

Leading Economic Indicators – US economic crisis – these statistics aren’t even a scientific wild ass guess – unbelievable -

“The truth is the truth regardless of how the government “frames” it by manipulating numbers and viewpoints.”

quote – Cricket Diane C “Sparky” Phillips, 10-20-08

I intended to understand the numbers a little better. So, I made a search on google using the terms “leading economic indicators” which yielded lots of interesting information. It also makes it clear that the way these are constructed doesn’t even qualify as a scientific wild ass guess – or “SWAG” statistic.

Take a look – along with a few other resources, it appears there are references being used that bear little on the reality most people in the United States are facing.

** Note **

I hear a lot of experts now saying that because the news is so negative about the economy and that people don’t understand what it all really means to them – that they are fear-filled and anxious, maybe making bad decisions for their futures in the investments they have and hoarding money, resources and not spending.

It occurred to me earlier today that these experts saying this seem to all be Wall Street experts, investment advisers, traders and brokers that have more to gain by people continuing to invest or move investments than by any other actions. I’m not sure that such experts are capable of telling the truth, even if they know what the truth might be. In fact, if they had ever been telling the truth in the first place, we wouldn’t be in the mess that we have now.

Anyway, here is how the national numbers for the GDP and leading economic indicators are created. Its a real sleight of hand.

leading economic indicators

What exactly? A composite index (1992 = 100) of ten economic indicators designed to predict economic activity six to nine months in future. These indicators include:

1.

The average manufacturing-worker workweek (from the employment report)
2. Initial jobless claims
3. Manufacturers’ new orders for consumer goods and materials (from the factory orders report)
4. Vendor performance (from the Purchasing Managers’ Index report)
5. Manufacturers’ new orders for nondefense capital goods (from the factory orders report)
6. Building permits (from the housing starts report)
7. The level of the S&P 500
8. The inflation-adjusted measure of the M2 money supply
9. The interest-rate spread between the 10-year Treasury note and the fed funds rate
10. The expectations portion of the University of Michigan’s Consumer Sentiment Index

Source: The Conference Board

Frequency: Monthly

Released when? Around the end of the month at 10 a.m. Eastern. Data for prior month.

Market importance: None. Never moves market owing to fact that most components have already been reported separately by the time the index is released.

Other notes: Until 1995 the Commerce Department compiled the leading index.

http://www.thestreet.com/tsc/basics/tscglossary/leadingeconomicindicators.html

consumer sentiment index

What exactly? A consumer confidence index (1966 = 100).

Source: The University of Michigan

Frequency: Monthly

Released when? First around the 15th of the month (a preliminary reading) and then around the last business day of the month (a final reading) at 10 a.m. Eastern. Data for current month.

Market importance: Little. Sometimes moves markets. Used in conjunction with other confidence measures to gauge consumer moods.
Other notes: (a) The Michigan index is released only to subscribers and gets publicized through leaks. (b) The consumer expectations portion of the Michigan survey is a component of the leading economic indicators index.

http://www.thestreet.com/tsc/basics/tscglossary/consumersentimentindex.html

money supply

Money supply is measured in a variety of ways, but the most widely cited measurements are M1, M2 and M3 — the  monetary aggregates.  M1 is chiefly currency in circulation and bank checking accounts. M2 is M1 plus savings accounts, CDs under $100,000, retail money-market fund shares and overnight repurchase agreements. M3 is M2 plus CDs over $100,000, institutional money-market funds and term repurchase agreements.

The Fed sets target ranges for the growth rates of M2 and M3. The 1999 ranges are the same as 1998′s: 1% to 5% for M2, and 2% to 6% for M3. In 1998, M2 grew 8.5%, while M3 grew 10.9%. In 1999, M2 is growing at a 3.4% pace, while M3 is growing at a 3.7% pace.

Money-supply growth depends on interest rates, specifically the fed funds rate. Raising the fed funds rate curbs money supply growth, while cutting the rate accelerates it.

From 1979 to 1982, monetary policy focused on achieving a certain rate of M1 money supply growth. Changes in demand for money (loan demand) were allowed to influence the fed funds rate. For example, if money supply growth outpaced the target rate, the Fed would raise the fed funds rate to curb it. This reflected the monetarist tenet that the money supply is the main determinant of economic activity.

The Fed stopped targeting money supply growth and started targeting the fed funds rate because, it explains,  the combination of interest rate deregulation and financial innovation disrupted the historical relationships between M1 and the objectives of monetary policy.  In other words, the development of new types of financial products complicated measurement of the money supply.

http://www.thestreet.com/tsc/basics/tscglossary/moneysupply.html

housing starts

Official name: Housing Starts and Building Permits

What exactly? Measures privately-owned housing units started (commonly known as just housing starts). Also measures privately-owned housing units authorized by building permits (commonly known as just building permits). Geographical breakdown provided for both starts and permits.

Source: Census Bureau
Frequency: Monthly

Released when? Around the 18th of the month at 8:30 a.m. Eastern. Data for prior month.

Market importance: Some. Sometimes moves markets. Considered good leading indicators of home sales and spending in general. Starts used to predict the residential investment portion of gross domestic product.

Other notes:(a) Permits typically translate into starts in roughly three to four months — they are also a component of the leading economic indicators index. (b) Single-family starts typically account for roughly 74% of all starts. Multi-family units account for the rest.

http://www.thestreet.com/tsc/basics/tscglossary/housingstarts.html

factory orders

Official name: Preliminary Report on Manufacturers’ Shipments, Inventories, and Orders.

What exactly? A measure of shipments (sales), inventories and orders at the manufacturing level.

Source: Census Bureau

Frequency: Monthly

Released when? During the first week of the month at 8:30 a.m. Eastern. Data for two months prior.

Market importance:Little. Hardly ever moves markets. Not timely. Considered old news. Total factory orders break down into 57% durable and 43% nondurable — and durable goods orders are reported on an advance basis a week earlier.

Other notes:The manufacturing inventory numbers in this report are used — along with inventories at the wholesale and the retail levels — to calculate aggregate business inventories.

http://www.thestreet.com/tsc/basics/tscglossary/factoryorders.html

Manufacturing ISM Report On Business

Official name: ISM Index: Manufacturing

What exactly? A national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies. Signals expansion when the PMI is above 50 and contraction when below.

Source: Institute for Supply Management
Frequency: Monthly

Released when? First business day of the month at 10 a.m. Eastern. Data for prior month.

Market importance: High. Nearly always moves markets. Extremely timely — and this is the king of all manufacturing indices. Considered the single best snapshot of the condition of the factory sector.

Other notes:The ISM Index calculates nine different sub-indices. These include new orders, production, employment, supplier deliveries, inventories, prices, new export orders, imports and backlog of orders. The production index is used to help predict industrial production. The prices index is used to help predict the Producer Price Index. The new orders index is used to help predict factory orders. The employment index is used to help predict manufacturing employment. And the supplier deliveries index is a component of the leading economic indicators index.

http://www.thestreet.com/tsc/basics/tscglossary/purchasingmanagersindex.html

initial jobless claims

What exactly? A measure of the number of people filing first-time claims for state unemployment insurance.

Source: Labor Department

Frequency: Weekly

Released when? Thursday at 8:30 a.m. Eastern. Data for week ended prior Saturday.

Market importance: Some. Occasionally moves market. Timely. Considered a good gauge of the condition of the labor market and good indicator of the tone of the employment report.

Other notes: Series is volatile and subject to big revisions. The four-week average is used to gauge the underlying trend in claims.

http://www.thestreet.com/tsc/basics/tscglossary/initialjoblessclaims.html

employment report

Official name: Employment Situation

What exactly? A measure of net new jobs created. Also measures the unemployment rate, average hourly earnings and the length of the average workweek.

Source: Labor Department

Frequency: Monthly

Released when? First Friday of the month at 8:30 a.m. Eastern. Data for prior month.

Market importance: High. Almost always moves markets. Very timely. Contains information about both job and wage growth and is considered the single best measure of the health of the economy. The tone of the employment report generally sets the tone for the other economic indicators that are released throughout the month.

Other notes: (a) Two key pieces of this report — the unemployment rate and average hourly earnings — appear in many inflation models. And various pieces of this report are used to help predict a host of other economic indicators. Average hourly earnings are used to help predict both personal income and the wages and salaries component of the Employment Cost Index. The index of aggregate manufacturing hours is used to help predict industrial production. The change in construction jobs is used to help predict both housing starts and construction spending. (b) For average hourly earnings, the headline number is the percent change from the prior month, but we also graph the year-on-year change. That way you can see the rate at which earnings are increasing or decreasing.

http://www.thestreet.com/tsc/basics/tscglossary/employmentreport.html

personal income and consumption

Official name: Personal Income and Outlays

What exactly? A measure of changes in personal income and personal consumption expenditures (or spending).

Source: Commerce Department

Frequency: Monthly

Released when? First business day of the month at 8:30 Eastern. Data for two months prior.

Market importance: Some. Considered somewhat dated (employment report already indicated income and retail sales report already indicated consumption) but occasionally moves markets — consumption typically accounts for roughly 68% of gross domestic product. Attained a somewhat higher profile in February 2000 when the Federal Open Market Committee began forecasting inflation in terms of the personal consumption expenditures deflator — a component of the report — instead of the timelier Consumer Price Index.

Other Notes: Report also includes a measure of the personal saving rate.

http://www.thestreet.com/tsc/basics/tscglossary/personalincomeandconsumption.html

retail sales

Official name: Advance Monthly Retail Sales

What exactly? A measure of sales at retail establishments. Does not include spending on services.

Source: Census Bureau

Frequency: Monthly

Released when? Around the 12th of the month at 8:30 a.m. Eastern. Data for prior month.

Market importance: High. Nearly always moves markets. Very timely — usually released just two weeks after the month ends. Also sets the tone for personal consumption expenditures to be released later in the month — and hence gives a peek at a good chunk of gross domestic product.

Other notes: The headline number is the percent change from the previous month, but we also graph the year-on-year change. That way you can see the rate at which sales are increasing or decreasing.

http://www.thestreet.com/tsc/basics/tscglossary/retailsales.html

gross domestic product

What exactly? A measure in the change in the market value of goods, services and structures produced in the economy.

Source: Commerce Department

Frequency: Quarterly

Released when? At 8:30 a.m. Eastern. The first-pass estimate of GDP is called the advance report and is released on the last business day of January, April, July, and October (data for prior quarter). The second-pass estimate is called the preliminary report and is released a month later; the third-pass estimate is called the final report and is released yet another month later.

Market importance: High. The actual pace at which the economy is growing or shrinking — especially as it relates to expectations — frequently moves markets.

Other notes: (a) The GDP release also includes a key inflation measure called the price index for gross domestic purchases. It measures the prices of everything — including imports — that Americans buy. (b) Personal consumption expenditures typically account for roughly 68% of GDP. Investment, government spending and net exports account for the rest.

http://www.thestreet.com/tsc/basics/tscglossary/grossdomesticproduct.html

federal open market committee

The Federal Open Market Committee, or FOMC, is the Fed’s monetary policy committee. It meets eight times a year in Washington (the schedule is on the Fed’s Web site) to set the fed funds rate.

Announcements of changes in monetary policy are at about 2:15 p.m. Eastern Time (on the second day if it’s a two-day meeting), and the minutes of the meetings are released within a few days of having been approved by the committee at its subsequent meeting.

The FOMC has 12 voting members and five alternates. The seven Fed governors always vote, as does the president of the New York Fed. The other 11 District Fed presidents vote on a rotating schedule. The Chicago Fed president votes in odd-numbered years, while the Cleveland Fed president votes in even-numbered years. The remaining nine presidents vote every third year, according to this schedule: Philadelphia, Dallas, Minnesota (1999, 2002); Richmond, Atlanta, San Francisco (2000, 2003); Boston, St. Louis, Kansas City (2001, 2004).

Alternates vote only if a District Fed president can’t make the meeting. The first vice president of the New York Fed is the New York Fed president’s alternate. The Chicago and Cleveland Fed presidents alternate for each other. And the other District Fed presidents are alternates the year before they vote. For example, if the Philly Fed president is absent, the Richmond Fed president votes instead.

http://www.thestreet.com/tsc/basics/tscglossary/federalopenmarketcommittee.html

Fed funds rate

The fed funds rate — short for federal funds rate — is the interest rate at which banks lend to each other overnight. As such, it is a market interest rate. But the Fed sets a target for the fed funds rate, and keeps the rate on target via open market operations. Unless otherwise specified, references to the fed funds rate are actually to the fed funds rate target (on any given day, the actual rate may differ from the target rate slightly).

The fed funds rate target is set by the Federal Open Market Committee, the Fed’s monetary policy committee. As the U.S. short-term benchmark, it influences market interest rates throughout the world.

http://www.thestreet.com/tsc/basics/tscglossary/fedfundsrate.html

federal reserve

The Federal Reserve, commonly referred to with no disrespect as the Fed, is the central bank of the U.S. It conducts monetary policy, regulates banks, maintains the stability of the financial system, and provides financial services to U.S. banks, foreign governments and the public.

The Federal Reserve System consists of a seven-member Board of Governors headquartered in Washington, D.C. and 12 Reserve Banks located in major cities throughout the country. The District Feds, as they are called, are in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. Each Federal Reserve Bank serves financial institutions and the public in a multistate district. A map on the Fed’s Web site shows the 12 districts.

Fed governors are nominated by the president, who nominates two governors to serve as Fed chairman and vice chairman.

The Fed conducts monetary policy through its Federal Open Market Committee, which sets a target for the fed funds rate. The Fed then keeps the fed funds rate on target through open market operations.

The Fed’s purposes and functions are spelled out in much greater detail on its Web site.

http://www.thestreet.com/tsc/basics/tscglossary/federalreserve.html

district feds

The District Feds are the 12 Federal Reserve Banks in the Federal Reserve System. Each bank serves financial institutions and the public in a multistate district, hence the nickname District Feds. A map on the Fed’s Web site shows the 12 districts.

Each District Fed has a president, appointed by its board of directors to five-year terms that end on the last day of February in years ending in 1 and 6. Official bios appear on the Fed’s Web site. District Fed presidents serve on the Federal Open Market Committee on a rotating basis.

Here is a list of the District Feds, with links to their Web sites.

* Boston Fed
* New York Fed
* Philadelphia Fed
* Cleveland Fed
* Richmond Fed
* Atlanta Fed
* Chicago Fed
* St. Louis Fed
* Minneapolis Fed
* Kansas City Fed
* Dallas Fed
* San Francisco Fed

http://www.thestreet.com/tsc/basics/tscglossary/districtfeds.html

http://www.federalreserve.gov/otherfrb.htm

The Federal Reserve officially identifies Districts by number and Reserve Bank city.

In the 12th District, the Seattle Branch serves Alaska, and the San Francisco Bank serves Hawaii. The System serves commonwealths and territories as follows: the New York Bank serves the Commonwealth of Puerto Rico and the U.S. Virgin Islands; the San Francisco Bank serves American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. The Board of Governors revised the branch boundaries of the System in February 1996.

open market operations

Open market operations are what the Fed does to keep the fed funds rate close to the target set by the Federal Open Market Committee. The fed funds rate is the rate at which banks lend to each other overnight, and the Fed keeps it on target by supplying as much liquidity as there is demand for at the target rate. If the Fed failed to supply enough liquidity, the fed funds rate — the cost of money — would rise as the supply fell. Conversely, if the Fed supplied too much liquidity, the fed funds rate would fall as supply outstripped demand.

The open market operations by which the Fed supplies liquidity to the banking system are purchases from and sales to dealers of Treasury and other debt securities. It works this way: When the Fed buys securities from a dealer, the dealer’s bank see its reserves increase by the amount the Fed paid for the securities.

Open market operations are either permanent or temporary. The Fed buys or sells securities on a permanent, or outright, basis, when its forecasts indicate that the amount of liquidity in the banking system will continue to need adjustment. It buys or sells them on a temporary basis when a shortage or excess of liquidity in the system is viewed as short-lived.

An outright purchase of Treasury notes or bonds by the Fed is called a coupon pass. A temporary purchase is called a repurchase agreement, since the dealers agree to buy the securities back from the Fed on a certain date. Permanent and temporary sales of securities by the Fed to dealers are much less common than purchases.

Open market operations are conducted by the Fed’s Domestic Trading Desk (a.k.a. the Open Market Desk) at the New York Fed.

http://www.thestreet.com/tsc/basics/tscglossary/openmarketoperations.html

coupon pass

A coupon pass is a purchase of Treasury notes or bonds by the Fed from dealers. Coupon refers to the coupons that distinguish Treasury notes and bonds from Treasury bills, which are discount instruments. When the Fed purchases Treasury bills from dealers, it’s called a bill pass.

Coupon and bill passes are two of the tools at the Fed’s disposal in open market operations.

http://www.thestreet.com/tsc/basics/tscglossary/couponpass.html

The Federal Reserve Board eagle logo links to home page
System Publication. The Federal Reserve System Purposes and Functions.

A publication of the Board of Governors of the Federal Reserve System

This book is available in Adobe Acrobat format, as a complete publication or by chapter.

Complete publication

(29 MB PDF)

1 Overview of the Federal Reserve System

(15.6 MB PDF)
Background
Structure of the System
Board of Governors
Federal Reserve Banks
Federal Open Market Committee
Member Banks
Advisory Committees

2 Monetary Policy and the Economy

(953 KB PDF)
Goals of Monetary Policy
How Monetary Policy Affects the Economy
Limitations of Monetary Policy
Guides to Monetary Policy
Monetary Aggregates
Interest Rates
The Taylor Rule
Foreign Exchange Rates
Conclusion

3 The Implementation of Monetary Policy

(721 KB PDF)
The Market for Federal Reserve Balances
Demand for Federal Reserve Balances
Supply of Federal Reserve Balances
Controlling the Federal Funds Rate
Open Market Operations
Composition of the Federal Reserve’s Portfolio
The Conduct of Open Market Operations
A Typical Day in the Conduct of Open Market Operations
Securities Lending
Reserve Requirements
Recent History of Reserve Requirements
Contractual Clearing Balances
The Discount Window
Types of Credit
Eligibility to Borrow
Discount Window Collateral

4 The Federal Reserve in the International Sphere

(662 KB PDF)
International Linkages
Foreign Currency Operations
Sterilization
U.S. Foreign Currency Resources
International Banking

5 Supervision and Regulation

(1.9 MB PDF)
Responsibilities of the Federal Banking Agencies
Federal Financial Institutions Examination Council
Supervisory Process
Risk-Focused Supervision
Supervisory Rating System
Financial Regulatory Reports
Off-Site Monitoring
Accounting Policy and Disclosure
Umbrella Supervision and Coordination with Other Functional Regulators
Anti-Money-Laundering Program
Business Continuity
Other Supervisory Activities
Enforcement
Supervision of International Operations of U.S. Banking Organizations
Supervision of U.S. Activities of Foreign Banking Organizations
Supervision of Transactions with Affiliates
Regulatory Functions
Acquisitions and Mergers
Other Changes in Bank Control
Formation and Activities of Financial Holding Companies
Capital Adequacy Standards
Financial Disclousres by State Member Banks
Securities Credit

6 Consumer and Community Affairs

(1 MB PDF)
Consumer Protection
Writing and Interpreting Regulations
Educating Consumers about Consumer Protection Laws
Enforcing Consumer Protection Laws
Consumer Complaint Program
Community Affairs
Consumer Protection Laws

7 The Federal Reserve in the U.S. Payments System

(9.8 MB PDF)
Financial Services
Retail Services
Wholesale Services
Fiscal Agency Services
International Services
Federal Reserve Intraday Credit Policy

Appendixes

(439 KB PDF)
A    Federal Reserve Regulations
B    Glossary of Terms

Index

(354 KB PDF)

Home | About the Fed
Accessibility | Contact Us
Last update: July 5, 2005

http://www.federalreserve.gov/pf/pf.htm

governors

A seven-member Board of Governors is the core of the Federal Reserve System, a.k.a. the Fed. The chairman and vice chairman of the Fed are members of the Board of Governors.

Governors are appointed by the president and confirmed by the Senate to staggered 14-year terms that begin on Feb. 1 of even-numbered years. Appointees to unexpired terms may be reappointed; servers of full terms may not. The chairman and vice chairman are named by the president and confirmed by the Senate to four-year terms within the governor’s term.

http://www.thestreet.com/tsc/basics/tscglossary/governors.html

consumer price index

What exactly? An index (1982-84 = 100) that measures the change in cost of a representative basket of goods and services such as food, energy, housing, clothing, transportation, medical care, entertainment and education.

Source: Labor Department

Frequency: Monthly

Released when? Around the 15th of the month at 8:30 Eastern. Data for prior month.

Market importance: High. Timely. All inflation measures routinely move markets.

Other notes: (a) The  core  CPI excludes the often-volatile food and energy sectors and gives a clearer picture of the underlying inflation trend. (b) The CPI for medical care is used to help predict the benefit costs portion of the employment cost index. The CPI for gasoline is used to predict the gasoline stations portion of the retail sales report. The CPI for new vehicles is used to predict the vehicle portions of the retail sales and personal income and consumption reports. (c) The headline number is the percent change from the prior month, but we also graph the year-on-year change. That way you can see the rate at which consumer inflation is increasing or decreasing.

http://www.thestreet.com/tsc/basics/tscglossary/consumerpriceindex.html

employment cost index

What exactly? An index (1989 = 100) designed to measure the change in the cost of labor, free from the influence of employment shifts among occupations and industries, based on the changes in two things: Wages and salaries, and employer costs for employee benefits.

Source: Labor Department
Frequency: Quarterly

Released when? Last business day of January, April, July and October at 8:30 a.m. Eastern. Data for prior quarter.

Market importance: High. Timely. Almost always moves markets. Generally considered the most important leading inflation indicator available.

Other notes: The headline number is the percent change from the prior month, but we also graph the year-on-year change. That way you can see the rate at which employment costs are increasing or decreasing.

http://www.thestreet.com/tsc/basics/tscglossary/employmentcostindex.html

industrial production and capacity utilization

Official name: Federal Reserve Statistical Release G.17

What exactly? A measure of the change in the production of the nation’s factories, mines and utilities. Also includes a measure of their industrial capacity and how much of it is being used (commonly known as capacity utilization).

Source: Federal Reserve

Frequency: Monthly

Released when? Around the 15th of the month at 9:15 a.m. Eastern. Data for prior month.

Market importance: Much. Frequently moves markets. Timely. Considered a key factory-sector gauge. Capacity utilization considered a telling inflation indicator.

Other notes: (a) The level of industrial production divided by the level of industrial capacity equals the capacity utilization rate. (b) The headline numbers are the percent change in production from the prior month and the capacity utilization rate. We also graph the year-on-year change in both production and capacity, alongside capacity utilization, to illustrate the relationship between the three.

http://www.thestreet.com/tsc/basics/tscglossary/industrialproductionandcapacity.html

construction spending

Official name: Value of Construction Put in Place

What exactly? A measure of the value of new private (including residential and nonresidential) and public (meaning government) construction put in place
Source: Census Bureau

Frequency: Monthly

Released when? First business day of the month at 10 a.m. Eastern. Data for two months prior.

Market importance: Little. Rarely moves markets. Dated. Public construction used to predict the government spending portion of gross domestic product. Residential and nonresidential construction used to help predict the investment portion of GDP.

Other notes: The headline number is the percent change from the prior month, but we also graph the year-on-year change. That way you can see the rate at which construction spending is increasing or decreasing.

http://www.thestreet.com/tsc/basics/tscglossary/constructionspending.html

leading economic indicators

What exactly? A composite index (1992 = 100) of ten economic indicators designed to predict economic activity six to nine months in future. These indicators include:

1. The average manufacturing-worker workweek (from the employment report)
2. Initial jobless claims
3. Manufacturers’ new orders for consumer goods and materials (from the factory orders report)
4. Vendor performance (from the Purchasing Managers’ Index report)
5. Manufacturers’ new orders for nondefense capital goods (from the factory orders report)
6. Building permits (from the housing starts report)
7. The level of the S&P 500
8. The inflation-adjusted measure of the M2 money supply
9. The interest-rate spread between the 10-year Treasury note and the fed funds rate
10. The expectations portion of the University of Michigan’s Consumer Sentiment Index

Source: The Conference Board

Frequency: Monthly

Released when? Around the end of the month at 10 a.m. Eastern. Data for prior month.

Market importance: None. Never moves market owing to fact that most components have already been reported separately by the time the index is released.

Other notes: Until 1995 the Commerce Department compiled the leading index.

http://www.thestreet.com/tsc/basics/tscglossary/leadingeconomicindicators.html

***

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U.S. Census Bureau
Economic Indicators

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Select an indicator
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Housing Starts/Building Permits   chart icon CHART

Privately-owned housing starts in September 2008 were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent below the revised August 2008 estimate of 872,000.

Current

-6.3
% change
September 2008

Previous

-8.1
% change
August 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1995 – present
* Historic Time Series – 1959 – present
* Released:  October 17, 2008
* Next release:  November 19, 2008
* Frequency:  Monthly
* Program Overview

Manufacturing and Trade Inventories and Sales   chart icon CHART
U.S. total business sales for August were $1,192.3 billion, down 1.8% from last month. Month-end inventories were $1,511.8 billion, up 0.3% from last month.

Current

-1.8
% Change in sales
August 2008

Previous

+0.1
% Change in sales
July 2008

* Current Press Release:
* pdf icon  PDF    html page icon  HTML
* text icon  TXT
* Archived Releases -  1996 – present
* Historic Time Series -
* Sales, 1992 – present
* Inventories, 1992 – present
* Ratios, 1992- present
* Released:  October 15, 2008
* Next release:  November 14, 2008
* Frequency:  Monthly
* Program Overview

Advance Monthly Sales for Retail and Food Services   chart icon CHART

U.S. retail and food service sales for August reached $375.5 billion, a decrease of 1.2 percent from the previous month.

Current

-1.2
% change
September 2008

Previous
-0.4
% change
August 2008

* Current Press Release:
* pdf icon  PDF    html page icon  HTML
* text icon  TXT   excel file icon  XLS
* Archived Releases -  1953 – present
* Historic Time Series – 2002 – present
* Released:  October 15, 2008
* Next release:  November 14, 2008
* Frequency:  Monthly
* Program Overview

U.S. International Trade in Goods and Services   chart icon CHART

The Nation’s international deficit in goods and services decreased to $59.1 billion in August from $61.3 billion (revised) in July, as imports decreased more than exports.

Current

-59.1
$ billion
August 2008

Previous

-61.3
$ billion
July 2008

* Current Press Release:
* pdf icon  PDF
* text icon  TXT   excel file icon  XLS
* Archived Releases -  1991 – present
* Historic Time Series -
* US Trade Data (various)
* Country & Product Data (various)
* Released:  October 10, 2008
* Next release:  November 13, 2008
* Frequency:  Monthly
* Program Overview

Monthly Wholesale Trade: Sales and Inventories   chart icon CHART

August 2008 sales of merchant wholesalers were $404.9 billion, down 1.0 percent from last month. End-of-month inventories were $445.4 billion, up 0.8 percent from last month.

Current

0.8
% change in Inv
August 2008

Previous

1.5
% change in Inv
July 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1990 – present
* Historic Time Series -
* 1992 – present, adjusted
* 1992 – present, not adjusted
* Released:  October 9, 2008
* Next release:  November 7, 2008
* Frequency:  Monthly
* Program Overview

Quarterly Financial Report – Retail Trade   chart icon CHART

After-tax profits for retail corporations with assets greater than $50 million averaged 2.3 cents per dollar of sales for the second quarter 2008, up 0.1 (+/- 0.1) cents from the average of 2.2 cents for the first quarter 2008.

Current

+0.1
cents
2nd Qtr. 2008

Previous

-1.0
cents
1st Qtr. 2008

* Current Press Release:
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* excel file icon  XLS
* Archived Releases -  1993 – present
* Historic Time Series -
* Released:  October 8, 2008
* Next release:  January 7, 2009
* Frequency:  Quarterly
* Program Overview

Manufacturers’ Shipments, Inventories, and Orders   chart icon CHART

New orders for manufactured goods in August decreased $18.6 billion or 4.0 percent to $444.4 billion.

Current

-4.0
% change
August 2008

Previous

0.7
% change
July 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1992 – present
* Historic Time Series -
* 1992 – present (NAICS)
* 1958 – 2001 (SIC)
* Released:  October 2, 2008
* Next release:  November 4, 2008
* Frequency:  Monthly
* Program Overview

Construction Spending   chart icon CHART

Total construction activity for August 2008 ($1,072.1 billion) was nearly the same as the revised July 2008 ($1,071.8 billion). Please see our web site for further details: http://www.census.gov/constructionspending

Current

0.0
% change
August 2008

Previous

-1.4
% change
July 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  2003 – present
* Historic Time Series -
* 1993 – present (new format)
* 1964 – 2001 (legacy format)
* Released:  October 1, 2008
* Next release:  November 3, 2008
* Frequency:  Monthly
* Program Overview

New Home Sales   chart icon CHART

Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000. This is 11.5% below the revised July 2008 estimate of 520,000.

Current

-11.5
% change
August 2008

Previous

+4.0
% change
July 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1995 – present
* Historic Time Series – 1963 – present
* Released:  September 25, 2008
* Next release:  October 27, 2008
* Frequency:  Monthly
* Program Overview

Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders   chart icon CHART

New orders for manufactured durable goods in August decreased $9.9 billion or 4.5 percent to $208.5 billion.

Current

-4.5
% change
August 2008

Previous

0.8
% change
July 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1992 – present
* Historic Time Series -
* 1992 – present (NAICS)
* 1958 – 2001 (SIC)
* Released:  September 25, 2008
* Next release:  October 29, 2008
* Frequency:  Monthly
* Program Overview

Quarterly Services Survey   chart icon CHART

U.S. Information sector revenue for the second quarter of 2008, not adjusted for seasonal variation, holiday or trading-day differences, or price changes, was $284.9 billion, an increase of 2.5 percent (+/- 0.5) from the first quarter of 2008.

Current

2.5
% change
2nd Qtr 2008

Previous

-4.6
% change
1st Qtr 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  2004 – present
* Historic Time Series – 2004 – present
* Released:  September 11, 2008
* Next release:  December 11, 2008
* Frequency:  Quarterly

Quarterly Financial Report – Manufacturing, Mining and Trade   chart icon CHART

Manufacturing corporations’ seasonally adjusted after-tax profits averaged 6.1 cents per dollar of sales for the second quarter of 2008, down 1.1 (+/- 0.1) cents from the average of 7.2 cents for the first quarter of 2008.

Current

-1.1
cents
2nd Qtr 2008

Previous

-0.3
cents
1st Qtr 2008

* Current Press Release:
* pdf icon  PDF
* excel file icon  XLS
* Archived Releases -  1993 – present
* Historic Time Series -
* Released:  September 8, 2008
* Next release:  December 8, 2008
* Frequency:  Quarterly
* Program Overview

Housing Vacancies and Homeownership   chart icon CHART

Homeownership Rate (HR)
The homeownership rate at 68.1 percent for the current quarter was not statistically different from the second quarter 2007 rate (68.2 percent) or the rate last quarter (67.8 percent).

Rental Vacancy Rate (RVR)
National vacancy rates in the second quarter 2008 were 10.0 percent for rental housing, which was higher than the second quarter rate last year (9.5 percent), but was not statistically different from the rate last quarter (10.1 percent).

Homeowner Vacancy Rate (HVR)
For homeowner vacancies, the current rate (2.8 percent) was not statistically different from the second quarter 2007 rate (2.6 percent) or the rate last quarter (2.9 percent).

Current
68.1
percent
2nd Qtr 2008
(HR)

Previous

68.2
percent
2nd Qtr 2007
(HR)

* Current Press Release:
* pdf icon  PDF
* Archived Releases -  1994 – present
* Historic Time Series – 1956 – present
* Released:  July 24, 2008
* Next release:  October 28, 2008
* Frequency:  Quarterly

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A Beginner’s Guide to Economic Indicators
What are Economic Indicators?

By Mike Moffatt, About.com
See More About:

* economic indicators
* unemployment rate
* real gdp
* inflation rate

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Q: I’m constantly hearing about economic indicators in the news, but I’m never sure what they’re talking about. What are economic indicators and why are they important?

A: An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future. As shown in the article  How Markets Use Information To Set Prices  investors use all the information at their disposal to make decisions. If a set of economic indicators suggest that the economy is going to do better or worse in the future than they had previously expected, they may decide to change their investing strategy.

To understand economic indicators, we must understand the ways in which economic indicators differ. There are three major attributes each economic indicator has:

1. Relation to the Business Cycle / Economy
Economic Indicators can have one of three different relationships to the economy:

1. Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we’re in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.

2. Countercyclic: A countercyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic economic indicator.

3. Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.

2. Frequency of the Data

In most countries GDP figures are released quarterly (every three months) while the unemployment rate is released monthly. Some economic indicators, such as the Dow Jones Index, are available immediately and change every minute.

3. Timing

Economic Indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.

1. Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

2. Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

3. Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator.

In the next section we will look at some economic indicators distributed by the U.S. Government.

Be Sure to Continue to Page 2

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Mike Moffatt
Guide since 2002

Mike Moffatt
Economics Guide

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***

How Markets Use Information To Set Prices
The Use of Contingent Contracts

By Mike Moffatt, About.com
See More About:

* free market economy
* contingent contracts
* prices

Classical Economics Economics Theory What Is Economics Basic Economics Book Behavioral Economics
Markets, when they operate efficiently, can provide a great deal of information on the beliefs of the people who participate in that market. Prices, and changes in prices, convey a lot of information on what traders think is currently happening and what they believe will happen in the future. To see how this works, we’ll look the at the pricing of a simple asset known as a  contingent contract .

A contingent contract in finance generally refers to a contract in which the amount of money one agent pays to another in the future will differ depending on the realization of some future event. A simple example of a contingent contract would be a contract which gave the bearer of that contract nothing if it rains next Thursday but one dollar if it does not rain. These kinds of contracts are more common than you might believe at first glance. A farmer’s crop may depend rather heavily or whether or not it rains. If it does rain, he has a healthy crop which he can sell on the market. If it does not rain the crop will be ruined and the farmer will having nothing. The farmer can minimize this risk by buying many of these contingent contracts. If the farmer buys the contingent contracts and it does not rain, his crop will be worthless but he will get $1 for each contract he holds. Of course, if it does rain his crop will be valuable, but he’ll also have paid money for contingent contracts which are now worthless. If the farmer buys enough of the contracts, he can insure that he receives the same amount of money no matter what the weather does. This sort of risk-minimization is known as hedging and is used quite frequently, particularly in finance.

From an informational standpoint, contingent contracts (also known as  contingent claims ) are very nice because they tell how likely the market thinks some event will happen. Suppose our $1 if it doesn’t rain and $0 if it does rain contingent contract is selling for 70 cents. This implies that the market believes that there is a 70% chance it will not rain and a 30% chance that it will. This is because we believe that 70% of the time the contingent contract will be worth $1 and 30% of the time the contingent contract will be worth nothing. So on average, we’d expect the contingent contract to be worth 70 cents. Now suppose a number of people in the  rain  market got a new piece of information (say satellite photos) and now believed that the chance of it not raining on Thursday is now 90%. This would cause them to value the contract at 90 cents, but the price is currently at 70 cents. So they would buy these contingent contracts as they’d expect to make 20 cents on average. The increase in demand for the contracts will cause the price to rise and if enough people in the market believed the chance of a lack of precipitation was 90%, we’d expect to see the value of the contingent contract to rise to 90 cents.

To see a good example of price changes and contingent contracts, we’ll look at the world of baseball.

Be Sure to Continue to Page 2

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How Markets Use Information To Set Prices
The Baseball All-Star Game and Contingent Contracts

By Mike Moffatt, About.com
See More About:

* free market economy
* contingent contracts
* prices

Economics Dictionary Financial Market Markets Finance Finance Economics Economics Book
(Continued from Page 1)
While often used for serious purposes, contingent contracts can also be used as a form of entertainment. An Irish based website named TradeSports.com allows people to gamble on sports events using contingent contracts as a basis. You can buy contracts on all sorts of events, from who will win tomorrow’s Blue Jays vs. Red Sox game to who will win the next Superbowl. The contingent contracts work in a similar fashion as the one in the previous section. If you buy a $1 Blue Jay contingent contract and the Blue Jays win you get $1 but if they do not win the contract pays nothing. At the time of writing, the last trade price of the Tiger Woods contract for the 2003 British Open was 22 cents, meaning that the market believes that Tiger has a 22% chance of winning the tournament.

The 2003 Major League Baseball All-Star Game was expected to be a match between two equally capable teams. Before the game begin, the price of the American League contract had been hovering around 50 cents, so the market believed that the American League seemed equally as likely to win the game as the National League team. When the game began, the price was still around 50 cents, as investors had not learned any information which would cause them to change their beliefs about the outcome of the game. After an uneventful inning and a half, the American League started to make some noise. With two out in the inning, American Leaguer Edgar Martinez was hit by a pitch, then teammate Hideki Matsui hit a single, putting 2 men on base for Troy Glaus. Although there were two out, it looked like the American side had a chance to score some runs, which would obviously improve their chances of winning the game. During the inning the price of the American League contract rose from 48 cents to 55 cents as investors felt that having 2 men on base and 2 outs in a tie game in the 2nd inning raised the American League’s chances to win to 55%. Glaus struck out swinging and the price of the contingent contract fell almost immediately to 50 cents. A piece of new information (the Glaus strikeout) caused the price of the contingent contract to fall 10%, despite the fact that the game was nowhere near completion.

The National League side was unable to do much against American league pitcher Roger Clemens, but a single by Ichiro Suzuki, a wild pitch by National League pitcher Randy Wolf, and a single by Carlos Delgado put the American League up 1-0 and the price of the contingent contract up to around 65 cents. With Delgado on first and 2 outs, Alex Rodriguez grounded out to third base, and the price of the contingent contract slid to 60 cents.

Everything fell apart for the American League during the 5th inning. The first National League batter of the inning got to first base on a walk, and the second, Todd Helton, made the score 2-0 on a homerun. After the third batter of the inning, Scott Rolen, hit a single, the price of the contingent contract was down to 33 cents. The next two batters for the National League got out sending the price up to 38 cents, but a double by Andrew Jones and a single by Albert Pujols sent the score to 5-1 and the price to around 16 cents. The price did not seem to recover any after Barry Bonds struck out.

By the bottom of the 6th inning, the market believed that the American Leauge only had a 10% chance of winning. A two run homerun by Garret Anderson caused the price to double to twenty cents, but the price hike was short lived as a 7th inning homerun by Andruw Jones for the National League sent the price back down to 10 cents. Although the score was only 6-3, Fox, the network carrying the game, said that the American league did not stand much of a chance of winning since the National League’s closers were unbeatable. Even a homerun by Jason Giambi sending the score to 6-4 only moved up the contingent contract price to 15 cents.

Be Sure to Continue to Page 3

http://economics.about.com/cs/finance/a/pricing_info_2.htm

How Markets Use Information To Set Prices
How The All-Star Game Changed Prices

By Mike Moffatt, About.com
See More About:
* free market economy
* contingent contracts
* prices

Economics Finance Economics Dictionary Economics Book World Economics Markets Finance
(Continued from Page 2)
Things were looking pretty dire for the American League as they had to face Eric Gagne in the 8th inning and John Smoltz in the 9th inning while they had a 2 run deficit. With one out in the 8th, Garret Anderson hit a double, sending the contingent contract price up to 22 cents. Earlier in the game a hit that did not score a run would not have had much effect on the price, but since it was late in the game and the score was close, investors knew that even a small change in circumstances could change the outcome. As a result, the price changes became more dramatic near the end of the game. A ground-out by Carl Everett sent the price down to 19 cents, but a run-scoring double by Vernon Wells sent the game to 6-5, and caused the price to rise to 52 cents. Although the American League was still losing, investors believed that with a runner on 2nd and 2 outs, they were slightly more likely to win the game than the National League side. Hank Blalock, the next hitter, hit a towering homerun which caused the American league to take a 7-6 lead very late in the game, and caused the price to escalate all the way to 85 cents. In a matter of 10 minutes, the value of the contingent contract had increased 8-fold, and investors who bought at 10 cents suddenly had a very valuable asset. With the 8th inning over, the American League needed just three more outs to win the game. They would get those three outs and not score any runs. During the 9th inning the price of the contract rose from 85 cents to 1 dollar, the price it eventually paid to the holder.

The effect of the All-Star game was seen in other contracts. A day before the All-Star game, the contract which paid $1 if the Yankees won the World Series was selling for 20 cents. The league that won the All-Star Game would win home field advantage in the World Series. Teams win more often than not when they have the homefield advantage, so the outcome of the game was important. The Yankees, seen as the most likely American League team to make it to the World Series, were seen as slightly more likely to win the World Series by investors. A contract which pays $1 if the Yankees win the series was selling for 20 cents the day before the All-Star Game, but had climbed in price to 21 cents the day after. Investors took their new knowledge about homefield advantage in the World Series, and slightly upgraded the value of all the contingent contracts for American League teams and slightly downgraded the value of the National League teams.

Next we’ll look at some more practical applications of how information causes prices changes and how we can extract information from price changes.

Be Sure to Continue to Page 4

http://economics.about.com/cs/finance/a/pricing_info_3.htm

How Markets Use Information To Set Prices
Not Just Contingent Contracts
By Mike Moffatt, About.com
See More About:

* free market economy
* contingent contracts
* prices

Economics Finance Markets Finance Economics Dictionary Emerging Markets Economy Financial
(Continued from Page 3)
The effect of new information and changed beliefs are apparent in contingent contracts, but they also show up in the price of any asset. In quite a few articles, such as Canadian Dollar Slides Following Surprise Bank of Canada Interest Rate Cut I discuss the link between the differences in the interest rates in two countries and the exchange rate. In short, if the interest rate in country A falls and the rate in country B stays the same, we’d expect to see A’s currency become less valuable relative to B’s, all else being equal. As an investor, if I know that country A will be lowering its interest rate, I would expect that the A’s currency would soon become less valuable than B’s. So I’d do well for myself if I sold A’s currencies and bought B’s on the open market. Of course, if everyone believes the interest rate drop is coming, they’ll sell currency A and buy currency B, until the price of currency A falls to the level at which it would be after the interest rate drop was announced. So if we all expect that the central bank of country A will drop rates by 25 points, then they do, we should not expect to see any changes in the exchange rate at the time of the announcement. However, if they announce they’re not going to cause the interest rate to decline, we should see currency A rise back up to it’s former value, despite the fact that nothing tangible has changed. To the naive observer, it may even look like the drop in the exchange rate is causing the central bank of country A to lower its interest rate a few days later, an idea I look at in length in  Do changes in stock prices cause recessions?

By looking closely at these price changes we can also learn a great deal about what the market expects. Suppose we know that Alan Greenspan is going to make an announcement next Tuesday. This situation is not unusual, as it is usually known weeks in advance when the Federal Reserve Chairman is going to give a speech or make an announcement. We can tell what investors’ best predictions on the content of the announcement is going to be by looking at exchange rates. If the exchange rate drops or rises, we should expect to see a change in the interest rate, while if the exchange rate stays the same, it’s likely that no change will be made. Of course this is an oversimplification as announcements by the Federal Reserve influence all sorts of variables, not just the exchange rate. However it is apparent that if we watch how prices change we can determine what the investment community feels will happen in the future.

In a country with a free-market economy, prices are not set by a central planning bureau: they are set by supply and demand. Because supply and demand reflect the information and beliefs of investors in those markets, they contain the sum total of all the information and beliefs the investors have in a market. While we might not have the power to change people’s actions or beliefs, the price mechanism gives us the power to observe those actions and beliefs. Prices are far more than just what you have to pay for something, they are also a source of great knowledge if interpreted correctly.

If you’d like to ask a question about the information contained in prices, contingent contracts, baseball, or any other topic or comment on this story, please use the feedback form.

http://economics.about.com/cs/finance/a/pricing_info_4.htm

*** NOTE ***

What is the most bizarre to me, is that when the bailouts for corporations, banks, investment banks, Fannie Mae, Freddie Mac, lenders, mortgage companies, industries, lobbies, big business, Wall Street, stock brokers, mutual funds, money market funds, hedge funds, etc. happened and as they are happening – no one in the government or in the press call it socialism or communism or a dictatorship using its bailout funds that don’t belong to it.

But, the moment any help for homeowners, people in the United States, unemployed or health care or help to stimulate jobs in the country is suggested, then the socialism word is brought up as if that is the reason not to do it. So, then why do the other things that are being done which is also socialism, the founding principles of communism, and indicative of aristocracy and dictatorship – not capitalism, nor democracy – certainly, not representative government supporting the American people.

How could it be seen that way? There are also still people of the “experts” variety on the news in every show, every hour, every website of news and every broadcast that are saying things are not all that bad and that people in America simply are being misguided by all the negative news sensationalizing what is really okay.

I don’t think anyone in America is that stupid – not twelve year olds, not fifty year olds and not anyone between six and a hundred and three. These “experts” and government / political figures that are saying things are really okay obviously already have a job and don’t expect to lose it. They don’t shop for their own groceries in most cases and are not dependent on the little money coming in to assure their sustenance, or their retirement income. They don’t have to buy a car they can’t afford – that isn’t their problem.

Who are these people to be making decisions that any of us should have to live with? Why – they aren’t qualified to know what it is like for most people in America – or they would know why people across the US know there is a real economic disaster we are experiencing. That is because each of us are experiencing it – by homes lost, by jobs lost, by groceries higher every time we shop, by cars repossessed, by stores that aren’t open in our community anymore. After awhile, it gets to be real obvious.

- cricketdiane, 10-20-08

US economic crisis has its basis in credit, gambling, contingency contracts, unsecured loans and now socialism by corporate banking bailouts

How Markets Use Information To Set Prices
The Use of Contingent Contracts

http://economics.about.com/cs/finance/a/pricing_info.htm

By Mike Moffatt, About.com

Markets, when they operate efficiently, can provide a great deal of information on the beliefs of the people who participate in that market. Prices, and changes in prices, convey a lot of information on what traders think is currently happening and what they believe will happen in the future. To see how this works, we’ll look the at the pricing of a simple asset known as a  contingent contract .

A contingent contract in finance generally refers to a contract in which the amount of money one agent pays to another in the future will differ depending on the realization of some future event. A simple example of a contingent contract would be a contract which gave the bearer of that contract nothing if it rains next Thursday but one dollar if it does not rain.

These kinds of contracts are more common than you might believe at first glance. A farmer’s crop may depend rather heavily or whether or not it rains. If it does rain, he has a healthy crop which he can sell on the market. If it does not rain the crop will be ruined and the farmer will having nothing.

The farmer can minimize this risk by buying many of these contingent contracts. If the farmer buys the contingent contracts and it does not rain, his crop will be worthless but he will get $1 for each contract he holds. Of course, if it does rain his crop will be valuable, but he’ll also have paid money for contingent contracts which are now worthless.

If the farmer buys enough of the contracts, he can insure that he receives the same amount of money no matter what the weather does. This sort of risk-minimization is known as hedging and is used quite frequently, particularly in finance.

From an informational standpoint, contingent contracts (also known as  contingent claims ) are very nice because they tell how likely the market thinks some event will happen. Suppose our $1 if it doesn’t rain and $0 if it does rain contingent contract is selling for 70 cents.

This implies that the market believes that there is a 70% chance it will not rain and a 30% chance that it will. This is because we believe that 70% of the time the contingent contract will be worth $1 and 30% of the time the contingent contract will be worth nothing. So on average, we’d expect the contingent contract to be worth 70 cents.

Now suppose a number of people in the  rain  market got a new piece of information (say satellite photos) and now believed that the chance of it not raining on Thursday is now 90%. This would cause them to value the contract at 90 cents, but the price is currently at 70 cents.

So they would buy these contingent contracts as they’d expect to make 20 cents on average. The increase in demand for the contracts will cause the price to rise and if enough people in the market believed the chance of a lack of precipitation was 90%, we’d expect to see the value of the contingent contract to rise to 90 cents.

To see a good example of price changes and contingent contracts, we’ll look at the world of baseball.

While often used for serious purposes, contingent contracts can also be used as a form of entertainment. An Irish based website named TradeSports.com allows people to gamble on sports events using contingent contracts as a basis. You can buy contracts on all sorts of events, from who will win tomorrow’s Blue Jays vs. Red Sox game to who will win the next Superbowl.

The contingent contracts work in a similar fashion as the one in the previous section. If you buy a $1 Blue Jay contingent contract and the Blue Jays win you get $1 but if they do not win the contract pays nothing. At the time of writing, the last trade price of the Tiger Woods contract for the 2003 British Open was 22 cents, meaning that the market believes that Tiger has a 22% chance of winning the tournament.

How Markets Use Information To Set Prices
The Use of Contingent Contracts

http://economics.about.com/cs/finance/a/pricing_info.htm

By Mike Moffatt, About.com

***

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Housing Starts/Building Permits   chart icon CHART

Privately-owned housing starts in September 2008 were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent below the revised August 2008 estimate of 872,000.

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Manufacturing and Trade Inventories and Sales   chart icon CHART
U.S. total business sales for August were $1,192.3 billion, down 1.8% from last month. Month-end inventories were $1,511.8 billion, up 0.3% from last month.

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Advance Monthly Sales for Retail and Food Services   chart icon CHART

U.S. retail and food service sales for August reached $375.5 billion, a decrease of 1.2 percent from the previous month.

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The Nation’s international deficit in goods and services decreased to $59.1 billion in August from $61.3 billion (revised) in July, as imports decreased more than exports.

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Monthly Wholesale Trade: Sales and Inventories   chart icon CHART

August 2008 sales of merchant wholesalers were $404.9 billion, down 1.0 percent from last month. End-of-month inventories were $445.4 billion, up 0.8 percent from last month.

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Quarterly Financial Report – Retail Trade   chart icon CHART

After-tax profits for retail corporations with assets greater than $50 million averaged 2.3 cents per dollar of sales for the second quarter 2008, up 0.1 (+/- 0.1) cents from the average of 2.2 cents for the first quarter 2008.

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New orders for manufactured goods in August decreased $18.6 billion or 4.0 percent to $444.4 billion.

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Construction Spending   chart icon CHART

Total construction activity for August 2008 ($1,072.1 billion) was nearly the same as the revised July 2008 ($1,071.8 billion). Please see our web site for further details: http://www.census.gov/constructionspending

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Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000. This is 11.5% below the revised July 2008 estimate of 520,000.

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Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders   chart icon CHART

New orders for manufactured durable goods in August decreased $9.9 billion or 4.5 percent to $208.5 billion.

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Quarterly Services Survey   chart icon CHART

U.S. Information sector revenue for the second quarter of 2008, not adjusted for seasonal variation, holiday or trading-day differences, or price changes, was $284.9 billion, an increase of 2.5 percent (+/- 0.5) from the first quarter of 2008.

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Quarterly Financial Report – Manufacturing, Mining and Trade   chart icon CHART

Manufacturing corporations’ seasonally adjusted after-tax profits averaged 6.1 cents per dollar of sales for the second quarter of 2008, down 1.1 (+/- 0.1) cents from the average of 7.2 cents for the first quarter of 2008.

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Homeownership Rate (HR)
The homeownership rate at 68.1 percent for the current quarter was not statistically different from the second quarter 2007 rate (68.2 percent) or the rate last quarter (67.8 percent).

Rental Vacancy Rate (RVR)
National vacancy rates in the second quarter 2008 were 10.0 percent for rental housing, which was higher than the second quarter rate last year (9.5 percent), but was not statistically different from the rate last quarter (10.1 percent).

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For homeowner vacancies, the current rate (2.8 percent) was not statistically different from the second quarter 2007 rate (2.6 percent) or the rate last quarter (2.9 percent).

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A Beginner’s Guide to Economic Indicators
What are Economic Indicators?

By Mike Moffatt, About.com
See More About:

* economic indicators
* unemployment rate
* real gdp
* inflation rate

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Q: I’m constantly hearing about economic indicators in the news, but I’m never sure what they’re talking about. What are economic indicators and why are they important?

A: An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future. As shown in the article  How Markets Use Information To Set Prices  investors use all the information at their disposal to make decisions. If a set of economic indicators suggest that the economy is going to do better or worse in the future than they had previously expected, they may decide to change their investing strategy.

To understand economic indicators, we must understand the ways in which economic indicators differ. There are three major attributes each economic indicator has:

1. Relation to the Business Cycle / Economy
Economic Indicators can have one of three different relationships to the economy:

1. Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we’re in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.

2. Countercyclic: A countercyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic economic indicator.

3. Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.

2. Frequency of the Data

In most countries GDP figures are released quarterly (every three months) while the unemployment rate is released monthly. Some economic indicators, such as the Dow Jones Index, are available immediately and change every minute.

3. Timing

Economic Indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.

1. Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

2. Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

3. Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator.

In the next section we will look at some economic indicators distributed by the U.S. Government.

Be Sure to Continue to Page 2

Economic Indicator Links
Economic Indicators – Day TradingEconomic Indicators – Mutual FundsEconomic Indicators – U.S. Congress
More Economic Indicator Links

Economic Indicator Briefing RoomBusiness Cycle Economic IndicatorsCanadian Economic Indicators
Economic Resources

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Mike Moffatt
Guide since 2002

Mike Moffatt
Economics Guide

http://economics.about.com/cs/businesscycles/a/economic_ind.htm

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US economic bailout and Headline News Cigar Party Wall Street enjoying the Life Story – Tonight at 6:44 p.m. Headline News CNN – FAT CATS Story

FAT CATS Story about Wall Street Party – Cigar Party seen on CNN Headline News 6:44 p.m. ET, 10-17-08

There was a caller that said, government money is being used by these people and they shouldn’t get away with spending it like this. The anchors said, “Oh no. This isn’t taxpayers’ money – not government money.”

And those anchors and Wall Street bastards are wrong – it is OUR MONEY and taxpayers’ money/govt money.

How do you figure its not our money they are misusing playing with it like its their own little stash of monopoly money?

Isn’t it our retirement accounts they are using? The hard-earned money of Americans across the country have been paid into the funds and into the vast resources of savings, 401Ks, retirements accounts, mutual funds and other accounts. Isn’t that the money they are playing with?

ISN’T IT OUR MONEY deposited in the banks they’ve used for gambling and manipulated into any last dime they have?

Isn’t is our money they’ve borrowed and leveraged against?
and OUR jobs, OUR businesses, and OUR futures?

And, isn’t it OUR TAX DOLLARS bailing out their stupid choices of greed and manipulative gaming, gambling and insatiable thrill-seeking desire for money?

Why don’t they have to put together their party money, bonuses, stocks, savings, retirements, perks, over the top incomes and properties to bail out this mess?

Yes, it is government money they are using for their parties, bonuses, excesses and exorbitances now.

These are not the survival of the fittest – there isn’t one redeeming quality among them unless our survival depends on getting a shoe shine and only tipping a quarter.

They have nothing else to offer and if they had to live for three – six months where the rest of us live – they wouldn’t make it.

Thankyou for your story -
Any one of those cigars would pay for me to live an entire month and probably pay a down payment on a car, too.

- Cricket Diane C Sparky Phillips, 10-17-08, USA