Slouching Towards Wall Street… Notes for the Week Ending Friday, February 11, 2011
You Can Hide, But You Can’t Run
- Robert E. Brennan, First Jersey Securities
The Brinks Mat Warehouse robbery of 1983. The Brazil Central Bank break-in of 2005. The Great Train Robbery of 1963. The Antwerp Diamond Center heist of 2003.
Unsolved thefts are, if not the stuff of legend, certainly the stuff of movies, ranging from “The Maltese Falcon,” to “Topkapi” to “The Bank Job.” Wall Street offers thefts of a mundane variety, not the stuff of action films — though we assume someone is already working on Madoff, the Movie (“Bernie!”). But boring white collar stuff can involve staggering amounts of money and, like some of history’s more colorful heists, the money can remain unaccounted for long after the criminals have been brought down.
In a famous television commercial in the early years of the high-flying 1980’s, a low-flying helicopter swooped out of the clouds and out clambered the lean and clean-cut chairman of First Jersey Securities, Robert E. Brennan. Shouting over the whir of the propeller blades, Brennan would exhort investors across the nation to “Come grow with us!” His clarion call to capitalism was answered by hundreds of thousands, nearly all of whom lost every penny. And pennies is what they lost, because Brennan was a dominant player in the penny stock game.
Brennan — until last month A/K/A Federal Prisoner #23444-050 — was found guilty of securities fraud in 1994, seven years after the collapse of First Jersey Securities, his famously infamous penny-stock firm. According to the SEC (101 F.3d 1450 SEC v. First Jersey Securities, Inc. and Robert E. Brennan) from 1982 through 1985, when the SEC commenced their action against Brennan and his firm, First Jersey gained “more than $27 million in illegal profits from their fraudulent scheme,” reportedly scamming the majority of their more than half a million customers nationwide. The Commission says that First Jersey employed more than 1,200 registered reps operating in “32 branch offices throughout the United States and 36 offices in foreign countries.” The SEC filing is from 1996, which from the perspective of Wall Street makes it positively ancient history, but it gives a thorough picture of how a successful retail stock scam operation worked, with great specificity and clarity. It is well worth reading for anyone who cares to know how money gets stolen in this industry. It is also instructive because it reflects a time when, under the chairmanship of Arthur Levitt, the SEC was considered a noble place to work and staffers took to heart their mandate to keep the securities markets on the up and up.
In light of the recent scams that have come to light, First Jersey’s ill-gotten gains appear absolutely pikerish — the SEC originally sought $1.2 billion in total restitution from Brennan and his firm. As a side note, Brennan was a pipsqueak next to Meyer Blinder, the penny stock king. Head of the penny-stock firm of Blinder, Robinson & Co, Blinder fought a running battle with the SEC, throwing up legal challenges starting in 1982, until he was finally barred for life from the securities industry in 1990 (NY Times, 28 April 1990, “Blinder, Robinson Chief Barred By SEC Judge.”) While it is not clear how much investors lost over the life of this enterprise, the SEC charged that his firm sold over one billion shares of stock on which they charged a greater than ten percent markup. As these were penny shares, we are talking about trades where, for example, a customer would buy 100,000 shares of stock at six cents a share, and the brokerage firm would net one to two cents a share in spreads and commissions. That means the customer would send in a check for $6,000, and $2000 of that would go directly to the house, a not uncommon scenario.
At one time Blinder, Robinson was the tenth largest securities firm in the country by head count of registered brokers, and Meyer spoke ostentatiously of taking on Merrill Lynch for top spot. Ostentation was Blinder’s trademark. He sported a collection of gold jewelry worthy of Elizabeth Taylor and arrived for his criminal hearings in a top of the line Jaguar. Blinder’s company was liquidated in 1990, and in 1992 he was convicted of racketeering, money laundering, and securities fraud, spending 40 months in prison. As a side-note to a side-note, the SEC judge who barred Blinder for life from the securities industry was Brenda P. Murray.
More than a decade after Blinder and Brennan were the object of unrelated securities fraud cases, the SEC was investigating market manipulation of another kind. As the penny stock market had become inhospitable to fraudsters, the evil geniuses had moved up-market. In 2005 the SEC fired attorney Gary Aguirre, their own lead investigator in the matter of hedge fund Pequot Capital. Aguirre subsequently wrote in a letter to Congress that “today’s pools” — comparing the unregulated hedge funds to the trusts and syndicates that figured prominently in the 1929 crash — “have advanced and refined the practice of manipulating and cheating other market participants.” Aguirre’s investigation included an insider trading probe involving John Mack that was abruptly sidelined by newly-appointed SEC Enforcement Chief Linda Chatman Thomsen when she tipped Morgan Stanley’s counsel that there was “smoke, but no fire” to the allegations around Mack. This was good news, not just for Mack, but for Morgan Stanley, who proceeded to appoint Mack chairman.
Aguirre’s firing was reviewed by the Senate Judiciary Committee, which found that he had acted properly and said they were “deeply troubled” that the SEC did not pursue Aguirre’s concerns. Instead, the Commission shut down the investigation altogether. The sorry episode led to the SEC’s Inspector General issuing a 190-page report finding that Aguirre had acted properly, and recommending formal action against Director Thomsen and other senior Enforcement officials who had participated in ousting Aguirre.
Enter none other than administrative judge Brenda P. Murray — who had honed her fraud-detecting skills since she barred Meyer Blinder in 1990. In short order, Murray found it entirely proper for Thomsen to discuss an ongoing SEC investigation. In fact, Thomsen not only discussed it, she also pre-adjudicated it, making a formal finding a foregone conclusion, even though the Commission had not yet closed its investigation. Murray said Thomsen was rightly concerned about the impact on the financial markets “if Morgan Stanley hired someone as CEO who Enforcement believed engaged in insider trading.” Judge Murray wrote it would be too bad that “Morgan Stanley might not hire a qualified individual because Enforcement indicated somehow that he was in violation of the federal securities laws.” Whew! Good thing the Enforcement Director knew where her priorities lay.
The badly damaged Pequot investigation was re-opened under SEC Chairman Schapiro. In May 2010 Pequot settled insider trading charges and paid a fine of $28 million. The firm’s founder, the legendary Arthur Samberg, agreed to be barred from ever working as an investment adviser. At the same time, the SEC paid Gary Aguirre $755,000 to settle his wrongful termination suit. In case you are wondering, John Mack remains chairman of the board of Morgan Stanley.
Federal Bureau of Prisons records indicate Robert Brennan was released from the Fort Dix (NJ) Federal Correctional Institute on 7 January. Following his conviction on securities fraud he filed bankruptcy, but did not disclose all his assets, which led to a second conviction for bankruptcy fraud in 2001. Only a little over $5 million was ever recovered for victim compensation, and New Jersey has an outstanding judgment against Brennan for $45 million. Absconded assets included $4 million in bearer municipal bonds and half a million dollars in uncashed casino chips, but our money — and perhaps Brennan’s — is on accounts hidden in parts of the world that refuse to speak to US authorities.
The State of New Jersey has brought an action to re-open the now freed Brennan’s bankruptcy (Newark Star-Ledger, 1 February, “Brennan Trust Fund Tied To Ponzi Scheme”). The State says that Brennan’s family trust, which was worth $6.4 million in 1998, is “in the hands of a Caribbean investor convicted of running a massive Ponzi scheme.” This is a story whose outlines are reminiscent of the movie “It’s A Mad, Mad, Mad, Mad World,” or perhaps a Gilbert and Sullivan operetta. Brennan established a trust for his children in 1994. The trust was first set up in Gibraltar, but was moved to Mauritius, then to Nevis before mysteriously migrating to an undisclosed location in the Bahamas and coming under the control of a shadowy individual who “refused to turn over the funds to American authorities.” This schemer further invested the money with one Eric Resteiner, a citizen of the Seychelles who says he met Brennan’s representatives in Switzerland where he learned that Brennan “was hiding money all over the world.”
Resteiner appears to be the last person who admits to knowing where the trust money is. He said he returned it to the Bahamian connection, withholding some $400,000 as his fee. Resteiner has pleaded guilty to defrauding the Christian Science Church, reportedly using his investors’ money to buy himself a 176-room villa in St. Moritz, a110-foot yacht, two Rolls Royces, and a helicopter. Resteiner was sentenced to 87 months in prison and is serving his sentence in Texas.
The just released Brennan has not appeared in court in these new hearings into the fraud perpetrated against him. Or allegedly perpetrated against him. After all, the State’s purpose is to help not Brennan, but themselves. And what better way to hide your own money than to arrange for someone else to steal it from you? On paper, Brennan has paid his debt to society. We doubt the SEC will ever be able to get him to pay his court-ordered debt to his investors. We can just see the denouement as the older and craftier Brennan boards Resteiner’s helicopter. As he heads off for parts unknown, undisclosed, and un-extraditable, he will no doubt once more utter those famous words, “Come grow with us!” We wonder who will play Brennan in the movie.
Way back in the ancient days of Wall Street — around about 1983 if memory serves us — we came across a red herring for a proposed new stock offering. The company was called Indian Bingo (we’re not making this up) and the business plan was predicated on the idea that Indian reservations could benefit from their sovereign status to permit gambling, drawing business from surrounding states where the activity was forbidden.
This has since become a major revenue driver for some Indian nations — gaming, not bingo (and Native American, not Indian). Now, just when you thought Congress had finally passed a law to protect people from rapacious loansharks and usurious credit practices, along comes the next big thing in regulatory flight. The Wall Street Journal reports (10 February, “Payday Lenders Join With Tribes”) that one of the most unsavory sectors of consumer finance has found what may prove to be the ultimate loophole.
Payday lenders, by their very nature, prey on the lowest wage earners in our society. The average payday loan, according to the Journal, is around $400 and is cash advanced against the borrower’s next paycheck. Because of their status as sovereign nations, Indian tribes are not only exempt from federally-imposed interest rate caps, the Journal reports “tribal lenders can even lend in the 12 US states where lawmakers have kicked out the rest of the payday-loan industry.”
Payday loans are another of the financial loophole products, like no-income mortgages, allegedly designed for exceptional cases, but which an industry has converted into the norm, then reaped a fortune flogging to everyone with a pulse. Payday loans were supposedly intended to cover extraordinary payments — a wedding or funeral, a tax bill, or the deal of a lifetime on a Hasselblad H4D-50 digital SLR camera — and bridge an otherwise frugal and securely employed person to the next predictable payday. A decade ago Consumers Union reported that, while payday charge-offs were almost the same as major bank credit cards — both in the 3% range — banks were charging an APR in the 15%-22% range, while payday lenders were charging APRs in excess of 485%. The report also quoted securities analysts who say the average payday borrow runs 11 transactions a year, meaning that kicking the can down the road, far from being the exclusive bailiwick of the federal government, is very much a part of the American way of life.
The Journal says more than 1,000 payday lenders have expressed an interest in teaming up with willing tribes, and some are predicting “the number of tribes with payday-loan operations eventually could climb close to the 400 that now have casinos.” We wonder how the tribes will enforce collections. One outlet owner quoted by Consumers Union says he expects all their payday customers will default eventually. Assuming it is reasonable to expect that a financial disaster would be more likely to hit all low earners as a group, and not to pick them off in bits and pieces, the Perfect Storm of payday loan defaults could see the tribes requesting the US federal government to enforce their contracts cross-border, something the Feds may be reluctant to do, especially to succor the segment of the population that is Too Small To Not Fail.
The precedent of not touching foreign financial transactions is very much front and center in the matter of former Goldman whiz kid “Fabulous Fab” Fabrice Tourre, who is seeking to have the SEC’s suit against him dismissed (Financial Times, 8 February, “Tourre To Argue US Can’t Try Him For Fraud.”) Tourre says he can’t be held liable under US securities law, because the transactions took place outside of the US, and with non-US participants. He is basing his argument on a Supreme Court ruling that “prevents the SEC and Justice Department from bringing securities fraud cases on products sold outside the US to foreign investors.” While this loophole has presumably been sealed off by Dodd-Frankenstein, it is not immediately obvious that Fabulous Fab will not prevail when his case is decided on Valentine’s Day.
This opens a particularly juicy can of worms. We are already imagining the nasty sentences that Matt Taibbi will craft as he excoriates Goldman Sachs for opening a prop trading desk next door to Mohegan Sun. Critics of financial reform, who charge that bankers, brokers, traders and other pond scum will merely search out new ponds to infest, do not need to search for bizarre locations — as Robert Brennan allegedly may have done, in placing his money in Nevis. Many Goldman executives live on the Platinum Parkway of Connecticut. No doubt a number of them have taken the odd plunge at the wildly successful descendant of that humble and long-forgotten IPO, Indian Bingo.
In fact, setting up banking and trading in Uncasville would be a pleasant change for a number of Goldman’s top brass — reverse commute, don’t you know, driving away from New York during rush hour — and would shield from the prying eyes of the SEC all their trading activities, their bonus arrangements and the hiring of strippers for birthday parties.
The Journal says all it takes to set up a payday loan operation on tribal land is “a willing tribe.” The lender incorporates on the tribal territory and agrees to “pay the chief a salary of a few thousand dollars a month.” Hmm… sound like being an outside director. We wonder what we have to do to get in on this?
Tribal-incorporated lenders do not even have to operate physically on the tribe’s land. Like Delaware corporations, or Liberian-flag ships, they parade their purchased immunity with impunity, come and go as they please, and charge whatever the traffic will bear. If the court decides in favor of Fabulous Fab and agrees that the SEC can not go after transactions that did not take place on US soil, then payday lenders is small potatoes. The Indian nations are not likely to miss one of the biggest boats in recent history. More to the point, even if the tribes are slow to take advantage of the moment, Wall Street has never been slow to take advantage of others. We bet Great White Father Blankfein has already scouted out a site for a co-located trading desk in Uncasville. And for those worried about continued weakness in the dollar, have you considered Wampum?
“Moonlighting” has re-entered the language, and it’s not good.
SEC Enforcement Chief Robert Khuzami says “it is illegal for company insiders who moonlight as consultants to sell confidential information about their companies to traders, and it is equally illegal to buy that corruptly obtained information and trade on it.” If you didn’t know, now you know.
Khuzami’s remarks are part of the Commission’s ongoing publicity campaign to show it knows how to get the bad guys, and Khuzami is certainly much higher on the Gangbusters scale than anything the Commission has come up with in many years.
To add to Enforcement’s public visibility, the Commission has created an eye-catching new logo. As reported in the WSJ Deal Journal blog (8 February, “The SEC Debuts An Insider Trading… Logo”) the Commission has long “played second fiddle in the government’s wide-reaching investigation into insider trading.” We guess that Khuzami is happy to play his role at Enforcement, and allow US Attorney Preet Bharara to play his at Justice. But someone at the Commission thought some market differentiation was in order. Check it out:
When you click on the “Insider Trading Charges Filed” portion, it takes you to the latest charges posted on the SEC website. We recognize that, in the aftermath of the Madoff debacle, the Commission is trying to rebuild its image, but we can’t understand the value added of having a logo devoted to a specific criminal activity. (We are trying to imagine what the NYPD Vice Squad logo would look like, for example.) We wonder whether the Commission will be selling T-shirts and baseball caps emblazoned with the logo. It might be a way to tide them over while the Republican Congress stonewalls their budget.
Speaking of moonlighting — or rather, of working in the moonlight — the New York Times reports new inroads in the regulation of a previously unregulated industry (8 February, “Romania: False-Prophecy Penalty”).
At the end of last year the Romanian government passed legislation imposing taxes on witches and fortunetellers. On nothing more than the evidence of a slew of low-budget Hollywood movies, this would seem to be a thriving sector in Romania (Transylvania is part of Romania, and while hard figures are difficult to come by, Romania is home to perhaps one-tenth of the world’s Roma population — also known as Gypsies, and commonly associated with fortune-telling and black magic.)
Romania’s parliament is now debating a bill that will provide for fines, and even imprisonment, for fortunetellers whose predictions fail to come true. Says the article, “the new bill would also require witches to have permits and provide their customers with receipts, and it would bar them from practicing near schools and churches.
A “queen witch,” speaking in defense of her profession, said it is ridiculous to blame the witches if things don’t work out. “They should condemn the cards,” said Bratara Buzea.
This sounds like a useful legislative concept. We like it, for example, for securities analysts and economists, not to mention Federal Reserve chairmen. Mr. Khuzami may want to do a bit of lobbying on Capitol Hill — perhaps wearing the new team sweatshirt.
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