In 1964 The Bank of England discovered that someone was stockpiling vast quantities of gold and suspected international bullion dealer Auric Goldfinger of being the man involved. The bank requested that our good friend, British agent James Bond 007, to be sent to investigate. Bond soon uncovered an audacious plan to commit “the crime of the century” and bring economic chaos to the West. Operation “GRANDSLAM” was a market manipulation scheme that would have artificially driven the price of gold to incredible heights. Mr. Bond fortunately avoided a laser to the heart, a head-slicing henchman and managed to save the markets and meet a few lovely young ladies along the way. Unfortunately for Goldfinger, he picked the wrong time to manipulate markets; he would have fared much better today.
MASSACHUSETTS FINANCIAL SERVICES
Massachusetts Financial Services Co. (MFS) paid the piper this past month with a $225 million slap on the wrist from state and federal regulators. MFS also agreed to cut its fees by $125 million and two of their head honchos agreed to a three-year ban from serving as officers or directors in the fund industry. New York Attorney General Eliot Spitzer stated that illegal trading at MFS cost investors $175 million.
These executives allowed market timing despite warnings and complaints from internal staff. The Wall Street Journal reported that in a June 2000 presentation an unidentified senior MFS employee included a chart entitled “Market Timing Wheel of Terror” and warned “long-term investors are being penalized by market timers.”
FRANKLIN RESOURCES INC.
Regulators recently charged Franklin Resources Inc. with fraud over a scheme that allowed a wealthy Las Vegas investor to “market time” $45 million in Franklin Mutual Funds in exchange for a $10 million investment in a Franklin hedge fund. The Secretary for the Commonwealth of Massachusetts William Galvin stated: “This case is another example of a mutual fund having one standard for the ordinary investor and an entirely different one for someone able to move millions and millions of dollars through it in market timing trades.”
LABRANCHE & COMPANY and VAN der MOOLEN HOLDINGS
The SEC is bringing civil charges against the specialty trading firms LaBranche and Van der Moolen for using their position on the floor of the New York Stock Exchange to disadvantage customers. These firms serve as auctioneers making markets in stocks by matching buyers and sellers. These firms have been accused of “interpositioning” by getting between the buyer and seller to pocket improper profits.
The SEC has started an investigation into MetLife Inc. for improper trading of insurance contracts. The SEC is focusing on market timing and late trading of a “limited number” of privately placed variable insurance contracts. Last month the NASD assessed a MetLife subsidiary, State Street Research with a $1 million fine for allowing improper trading of mutual fund shares. MetLife neither admitted nor denied wrongdoing.
Goldman Sachs will pay $45 million to settle regulators’ allegations that their Spear, Leeds & Kellogg group had improperly traded ahead of customer orders. Goldman violated securities laws and New York Stock Exchange rules from 1999 through 2003. This settlement involves no admission or denial of wrongdoing. Goldman also announced that it has received subpoenas from several government bodies related to investigations into mutual-fund trading practices. In other news Goldman’s CEO, Henry Paulson, received a $20 million stock award for 2003.
The SEC accused two former financial executives of Conseco for conducting a “fraudulent accounting scheme” which led to overstating results by “hundreds of millions of dollars.” The civil complaint filed in U.S. district court in Indianapolis accuses Conseco’s former chief financial officer and former chief accounting officer of committing a number of securities-law violations in their efforts to avoid writing down the value of certain securities held by the company. The motivation was the large amounts of Conseco stock they purchased through loan programs for directors and executives. Both men borrowed over $100 million and paid back nothing. The SEC wants the men to return only $5.7 million.
What do all these stories have in common besides the fact that they are all egregious examples of lies, greed and manipulation? The answer is that white-collar crime does pay, not a single one of these crooks spent a single second behind bars. These people were responsible for defrauding investors, which is synonymous to stealing. None of the above are paying any fine personally and will be back in action after a short South Pacific vacation.
The fact of the matter is if I were to rob Fort Knox in a conventional manner of $175 million in gold they would lock me up and throw away the key. However, if I were to manipulate the market in gold like the late Goldfinger was attempting and the way our Wall Street friends have successfully accomplished in other ways I would pay a fine and walk away. Auric Goldfinger was going to use a nuke to manipulate a market; today all he needed to do is hire an investment bank.