FBI joins SEC in computer trading probe

The FBI has joined securities regulators to tackle the potential threat of market manipulation posed by sophisticated computer trading strategies that have taken markets beyond the scope of traditional policing.

FBI agents have joined forces with a new unit within the Securities and Exchange Commission that examines hedge funds and other firms that are using algorithm trading strategies.

The SEC’s Quantitative Analytics Unit is looking at abuses that might arise from the emergence of high-frequency trading firms and the use of dark pool (off exchange) trading. Traders using these methods can manipulate the market by flooding it with quotes, known as quote stuffing, or placing millions of orders that are quickly cancelled, to drive others to trade in ways that benefit their position, a practice known as layering. Continue reading "FBI joins SEC in computer trading probe"

Goldman Sachs: Bump in the road or crisis on the way?

Last Friday, the Securities and Exchange Commission (SEC), brought charges against Goldman Sachs for selling mortgage-backed securities that the firm allegedly knew were bound to fail, costing investors $1 billion dollars. The news forced the major indices to decline and U.S. stocks to slump, but was this only a hiccup, or are worse things to come?

Vote below and give us your opinion on what the future holds in our comments section:

A dead Italian, an ex-NASDAQ chief, and a missing $50 billion.

A dead Italian, an ex-NASDAQ chief, and a missing $50 billion.

In 1949, Charles Ponzi died in Italy. Ponzi died in poverty, so he probably never fathomed that his name would live on forever in the investment world. Here we are, almost 60 years later and we are just beginning to uncover one of the biggest Ponzi schemes of all time.

Anyone in the investment industry knows that you cannot guarantee consistent returns of 10% to 12% year after year without undertaking a fair level of risk. These are the kinds of returns that Bernard L. Madoff was offering to investors. As a former chairman of the NASDAQ with over 50 years of Wall Street experience under this belt, Madoff had some impressive credentials. However, his investment program has turned out to be the biggest Ponzi scheme on record. It's funny that this unethical investment practice wasn't even uncovered by the SEC, but instead by the sons of Madoff himself.

It always amazes me that with all the investment industry regulation, a scheme of this proportion can go on for years without the SEC catching on. The SEC had multiple reports to check this guy out, but failed to do so in a timely manner. The question becomes, do we need any regulation if the regulators fail to regulate?

For those of you who don't know how a Ponzi scheme works, you can read all about here But basically it works like this: The first investor will be paid a nice return (at the rate or higher than what was promised). Once the first investor gets his money back, they tell a friend to invest money and those investors get their return from the next set of investors and so on and so forth. Little or no money ever goes into the market for trading or investing. It works up until a point and that is when there is no new money coming in. At that point, the Ponzi scheme collapses and either the organizer of the Ponzi scheme escapes on a long international trip, or they go to jail. For Bernie Madoff it looks like he's going on a trip alright, a trip to jail!

The Ponzi scheme can never work for an extended amount of time, because mathematically you run out of new investors and money. This was the case for Bernard Madoff. When the market made a downturn, Madoff did not have enough replacement funds to hush concerned investors who were eager to take back their initial investment. Eventually, the pressure became too much for Madoff when he blurted out to his two sons that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."

Madoff is the founder of the market-making firm, Bernard L. Madoff Investment Securities, LLC, which he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management. Many investors and several hedge funds have exposure by investing through Madoff's investment advisory business.

Walter Noel's, Fairfield Greenwich Group (worth $7.3 billion) and Kingate Management's, Kingate Global Fund (worth $2.8 billion) were the two most prominate hedge funds that invested with Madoff.

There has been rumors circulating throughout the years of how Madoff was making this money. I don't believe that anyone every flat-out-said that he was running a Ponzi scheme, but there were always whispers of doubt as to the legitimacy of his practice. Some argued that he was front running customer orders so he was virtually guaranteed no losses. This has yet to be proven.

Unfortunately, his family's name will be forever tied to this Ponzi scheme. What is really unfortunate is that thousands of people lost fortunes trusting Madoff.

So what is the take away from all of this is? In a nutshell, if it sounds too good to be true, it probably is!

As I am writing this around noon (EST), the price of gold is higher for the week and indices are all lower for the week. This tells you yet again, that gold seems to be a better bet than stocks right now.

Enjoy the weekend,

Adam Hewison
President, INO.com
Co-creator, MarketClub

The rules have changed again!!!! Only this time it may be a good thing.

This from our business partner AP News

Government to clarify accounting rules for banks

AP Business Writer (AP:WASHINGTON) Federal regulators on Tuesday clarified accounting rules for banks in a way immediately embraced by the industry, which has been seeking relief that could boost its balance sheets in the financial crisis.46 minutes ago


The Securities and Exchange Commission and the Financial Accounting Standards Board issued clarifications to the current rules, and said more detailed guidance is coming later this week from the standard-setting FASB.

The banking industry, which has seen its mortgage-backed assets plummet in value, has been pressing the SEC to suspend the so-called "mark-to-market" accounting rules that require banks to value their holdings at current market prices, even if they plan to hold the assets for years. A possible addition to the $700 billion bailout bill being considered by Congress would reaffirm the authority of the SEC to suspend them.

But the head of a policy group backed by the biggest accounting firms warned lawmakers against such a suspension, saying it would hurt the interests of investors and the capital markets.

The principles of mark-to-market accounting "are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital," Cynthia Fornelli, executive director of the Center for Audit Quality, wrote in a letter to members of Congress.

The clarification issued Tuesday says that when an active market for a security doesn't exist, "the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

The guidance will apply to companies' financial statements for the just-completed third quarter. It is "intended to provide increased clarity related to the practices that may be used to determine an appropriate fair value in the light of current market conditions," said James Kroeker, the SEC's deputy chief accountant.

The arcane accounting rules even intruded into the battle for the White House, with Republican presidential contender John McCain's campaign lauding the SEC's release. Democrat Barack Obama's campaign did not immediately return requests for comment Tuesday evening.

The American Bankers Association also applauded the action, saying the new guidance "will help auditors more accurately price assets that are difficult to value under current market conditions."

McCain's campaign said he "is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets."

Game Over - Finally Mr. Cox wakes up!!

SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses


Washington, D.C., Sept. 17, 2008 — The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against “naked” short selling. The Commission’s actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

“These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling,” said SEC Chairman Christopher Cox. “The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation.”

In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.

Today’s Commission actions, which are the result of formal rulemaking under the Administrative Procedure Act, go beyond its previously issued emergency order, which was limited to the securities of financial firms with access to the Federal Reserve’s Primary Dealer Credit Facility. Because the agency's exercise of its emergency authority is limited to 30 days, the previous order under Section 12(k)(2) of the Securities Exchange Act of 1934 expired on Aug. 12, 2008.

The Commission’s actions were as follows:

Hard T+3 Close-Out Requirement; Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

If a short sale violates this close out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.

Exception for Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed

The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective five days after publication in the Federal Register.

As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.

Rule 10b-21 Short Selling Anti-Fraud Rule

The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This new rule is effective immediately.