, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

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.




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



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.



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.






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.



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

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

more resources

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Because Public Citizen does not accept funds from corporations, professional associations or government agencies, we can remain independent and follow the truth wherever it may lead. But that means we depend on the generosity of concerned citizens like you for the resources to fight on behalf of the public interest.



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.

[ . . . ]

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 http://www.legislature.mi.gov

(State of Michigan)

Click to access 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


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



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




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
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