Securities Attorney Briefing for 7 July 2016

Securities Attorney Tom Krebs


Islamic State tightens grip on captives held as sex slaves

KHANKE, Iraq (AP) — The advertisement on the Telegram app is as chilling as it is incongruous: A girl for sale is “Virgin. Beautiful. 12 years old…. Her price has reached $12,500 and she will be sold soon.” The posting in Arabic appeared on an encrypted conversation along with ads for kittens, weapons and tactical gear. It was shared with The Associated Press by an activist with the minority Yazidi community, whose women and children are being held as sex slaves by the extremists. While the Islamic State group is losing territory in its self-styled caliphate, it is tightening its grip on the estimated 3,000 women and girls held as sex slaves. In a fusion of ancient barbaric practices and modern technology, IS sells the women like chattel on smart phone apps and shares databases that contain their photographs and the names of their “owners” to prevent their escape through IS checkpoints. The fighters are assassinating smugglers who rescue the captives, just as funds to buy the women out of slavery are drying up. The thousands of Yazidi women and children were taken prisoner in August 2014, when IS fighters overran their villages in northern Iraq with the aim to eliminate the Kurdish-speaking minority because of its ancient faith. Since then, Arab and Kurdish smugglers managed to free an average of 134 people a month. But by May, an IS crackdown reduced those numbers to just 39 in the last six weeks, according to figures provided by the Kurdistan regional government. Mirza Danai, founder of the German-Iraqi aid organization Luftbrucke Irak, said in the last two or three months, escape has become more difficult and dangerous. “They register every slave, every person under their owner, and therefore if she escapes, every Daesh control or checkpoint, or security force – they know that this girl … has escaped from this owner,” he said, using the Arabic acronym for the group. U.S. State Department spokesman John Kirby told the AP that the U.S. continues “to be appalled by credible reports that Daesh is trafficking in human beings, and sex slavery in particular.” “This depravity not only speaks to the degree to which Daesh cheapens life and repudiates the Islamic faith, it also strengthens our resolve to defeat them,” he said. More:–politics.html?ref=gs

Italy’s Plan for Banks Could Roil Europe

Even as Europe grapples with repercussions of Britain’s vote to leave the European Union, a dispute over tens of billions of dollars is also threatening to roil the region’s $16 trillion economy. The Italian government, according to some estimates, needs to spend $45 billion to shore up its banks burdened with bad loans. Fears that European authorities will bar the government from providing that support are adding to the turbulence caused by “Brexit.” It may seem difficult at first to understand how the lenders of a medium-size country, none of which are particularly large, or engage much in risky Wall Street activities, could be spreading fear through global financial markets. But they are, and their problems reveal what can happen when well-intentioned regulations bump into reality. And this is creating tension among the leaders of Europe. The situation may drag through the summer, keeping investors around the world on edge. So how bad could this get? The steep declines in shares of Italian banks suggest that a storm is ahead. The stock price of Banca Monte dei Paschi di Siena, one of Italy’s most troubled lenders, is down 80 percent in the last 12 months. Its shares also trade at under 10 percent of its book value — a measure of its net worth — a sign that investors really think that the bank needs new capital. Also, when bank stocks sink that much, banks find it almost impossible to raise new capital in the markets. The good news is that, over all, Italy’s banks don’t appear to need an overwhelmingly large sum to get them on a firmer footing. The problem centers on the banks’ approximately 200 billion euros, or about $222 billion, of bad loans. The banks have already set aside significant reserves to absorb losses in these loans, effectively valuing them at 40 percent of their original value, according to some analyses. Investors appear to think that these loans are worth even less, however. The theory is that the banks would now have to bite the bullet and value the loans at an even lower level. But this could produce losses, and some banking experts say €40 billion of support is needed to help the banks take those hits. A simple response would be for the Italian government to hold its nose and plow that sum into the banks, roughly mimicking what the United States government did with its TARP spending in 2008. But such a bailout may be illegal under relatively new European rules that aim to protect taxpayers and instead force investors in the banks to provide financial support in times of trouble. Investors lend money to banks by buying their debt securities. Under the anti-bailout rules, those securities would be forcibly turned from debt into new equity, which could absorb any new losses taken on the bad loans. Under such a so-called bail-in, the equity would in theory be worth less than the debt securities, leading to losses for investors who held the debt. It sounds straightforward, but in Italy it is not.

Four U.S. investment banks vow to help London after Brexit vote

Four U.S. investment banks promised British finance minister George Osborne on Thursday that they would help London keep its top spot as a global financial center following the country’s vote to leave the European Union. Since the June 23 referendum there have been fears of an exodus from the City of London if access to the EU’s single market becomes significantly harder. Banks like JPMorgan have said they could move thousands of jobs. On Thursday JPMorgan, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley, as well as Britain’s Asia-focused Standard Chartered said they would try to support London’s financial sector. “Today we met and agreed that we would work together … with a common aim to help London retain its position as the leading international financial center,” the banks said in a joint statement with Osborne. The statement said no other city in Europe had capital markets as deep as those of London, but the banks made no commitment about keeping jobs in Britain. The French government pledged on Wednesday to make its tax regime for expatriates the most favorable in Europe in a landgrab for London banking business. Goldman Sachs and Morgan Stanley have denied speculation they were poised to shift London-based staff and operations to Frankfurt. Jamie Dimon, the head of JPMorgan Chase, said before the referendum that the bank could have to move up to 4,000 staff from the UK in the event of a Brexit vote. On Wednesday, the municipal authority for the City of London, the district in the capital that is home to many large banks, said the government needed to ensure EU exit talks preserved financial services firms’ “passporting” rights that allow them to use London as a base for EU-wide activities. Osborne, who was senior figure in the failed campaign to keep Britain in the EU, has spent years trying to expand London’s role as a global hub for trade in China’s renminbi and India’s rupee, as well as Islamic finance. On Tuesday, he met British domestic banks, whose share prices have tumbled since the Brexit vote, and encouraged them to make more funds available for UK lending after the Bank of England eased capital rules.


Wall Street scion Caspersen pleads guilty to $38 million fraud

Former Wall Street executive Andrew Caspersen pleaded guilty on Wednesday to charges that he defrauded investors out of over $38 million, blaming his conduct on a gambling addiction he could not control. Caspersen, who worked at a unit of investment banker Paul Taubman’s PJT Partners Inc prior to his arrest in March, pleaded guilty in federal court in Manhattan to securities fraud and wire fraud.

Caspersen, who graduated from Princeton University and Harvard Law School, choked up in court as he admitted to cheating numerous people, mostly family and friends, through what he called a “simple” fraud.

“It was just a means for me to get money to feed a gambling addition that was all consuming at the time,” Caspersen said. As part of a plea deal, Caspersen, 39, agreed to not appeal any sentence beyond 15-2/3 years in prison and to forfeit over $45 million, though his lawyer, Paul Shechtman, said he cannot afford that sum. He is scheduled to be sentenced on Nov. 2. Prosecutors said Caspersen, the son of late Wall Street financier Finn M.W. Caspersen, from November 2014 to March 2016 tried to defraud over a dozen investors by claiming he would use their funds to make loans to private equity firms. During the scheme, Caspersen worked at Park Hill Group, which he joined in 2013. The advisory firm was spun off from private equity group Blackstone Group LP in October and is now part of PJT Partners. In court, Caspersen said he told friends and family that a private equity firm had given him an allocation in a “practically riskless debt instrument” and then offered them a chance to invest with him. Instead, prosecutors said he used the $38.5 million he raised to make options trades, to pay earlier investors, and to replace over $8 million he had misappropriated from Park Hill Group, which Caspersen said he also used for gambling. In total, he attempted to raise almost $150 million, prosecutors said. His victims included a foundation affiliated with hedge fund Moore Capital Management and one of the fund’s employees, who together were cheated out of $25 million, prosecutors said. Caspersen, who said he also gambled away $20 million of his own money, in court apologized for harming the people he cared for the most. “I could not be more sorry or ashamed for my crimes,” he said. The case is U.S. v. Caspersen, U.S. District Court, Southern District of New York, No. 16-cr-0414.

Legendary Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

Patent application no. 14/451,356 has one goal: to outrun the speed demons of Wall Street. The 16-page document was quietly published by the U.S. Patent and Trademark Office in February. Replete with schematic drawings, the filing describes a novel way for “executing synchronized trades in multiple exchanges.” The invention consists of not only sophisticated algorithms and a host of computer servers, but atomic clocks — precisely calibrated to vibrations of irradiated cesium atoms — to sync orders to within a few billionths of a second. And if it works as advertised, one of the most illustrious names in the hedge-fund business could gain exclusive U.S. rights to a weapon capable of thwarting even the most predatory of high-speed traders. The application belongs to Renaissance Technologies, the ultra-secretive and highly profitable $32 billion firm founded by mathematician and former code breaker Jim Simons. And the lengths it’s been willing to go to build and patent its own computer-driven technology — at a potential cost of tens of millions of dollars — underscores just how big a threat high-frequency traders have become to the industry’s largest and savviest players. For a QuickTake explainer on high-frequency trading, click here.


Senate rejects ‘sanctuary cities’ defunding bill

The Senate quickly put an end to an election-year fight on Wednesday when Democrats blocked legislation targeting sanctuary cities — a controversial immigration policy that Republican Sen. Pat Toomey has seized on in his competitive reelection bid in Pennsylvania. In a replay of a similar vote last fall, most Senate Democrats united against a measure that would strip funding from sanctuary cities, which are cities and counties where local police and jails decline cooperation with the feds on immigration enforcement. The issue grabbed national headlines last year when 32-year-old Kate Steinle was shot and killed on a San Francisco pier by a Mexican immigrant who was in the country illegally after having been deported multiple times. San Francisco has a policy of not abiding by requests from federal immigration officials to inform them when local officials have an immigrant in custody who has been targeted for deportation. The vote Wednesday was 53-44. The Senate also voted on legislation from Sen. Ted Cruz (R-Texas) that would toughen mandatory minimums for immigrants who repeatedly try to enter the United States illegally, but that was also blocked, on a 55-42 vote. Both measures needed 60 votes to advance. “Americans from both parties know it would be incredibly dishonest to pretend this bill is aimed at law-abiding immigrants who enrich our country,” Senate Majority Leader Mitch McConnell (R-Ky.) said Wednesday morning. “Americans from both parties also understand that extreme sanctuary city policies can inflict incredible pain on innocent victims and their families.” Senate Minority Leader Harry Reid (D-Nev.) had hinted earlier Wednesday that Democrats could advance the legislation solely to secure votes on measures they favor, such as funding for the Zika virus, gun control and comprehensive immigration reform. But separate from procedural tactics, Reid made clear he and most other Senate Democrats detested the legislation written by Toomey and Cruz. “Republicans want red meat going into their convention,” Reid said. “Americans deserve a real solution to our broken immigration system, not dog-whistle politics.”



Man charged in $1.5 million securities fraud involving Tuscaloosa church

An Pike County man has been charged with violation of the Alabama Securities Act after he allegedly made false promises to a Tuscaloosa County church involving $1.5 million in church money. Terry Earl Hester, 66, of Banks, on June 15 turned himself in to the Tuscaloosa County Jail on charges stemming from a six-count indictment issued in April by Tuscaloosa County grand jury, according to a statement released Wednesday by Lyn Head, District Attorney for the 6th Judicial Circuit, Tuscaloosa County, Alabama; and Joseph Borg, Director of the Alabama Securities Commission (ASC). Hester was released from jail after posting a $90,000 bond. Efforts to reach Hester for comment Wednesday were unsuccessful. The indictment charges Hester with one count of Sale of Unregistered Securities and one count of Sale of Securities by an Unregistered Agent. Each charge carries a range of punishment from one year and one day to 10 years’ imprisonment and a fine of up to $15,000 upon conviction.  Also the indictment charges Hester with four counts of Fraud in Connection with the Sale of Securities for making untrue statements of, or omitting to state, material facts to an investor; for engaging in an act, practice or course of business which operates as a fraud or deceit upon an investor; and for employing a device, scheme or artifice to defraud an investor.  Each of those charges are punishable by not more than 20 years or less than 2 years imprisonment and a fine of not more than $30,000 per charge, upon conviction. The indictment alleges the incidents occurred between January 2012 and December 2013. During that period, the indictment alleges, Hester sold investment contracts for a “Private Placement Funding Agreement” and a “Standby Letter of Credit” to a West Highland Baptist Church in Tuscaloosa. Hester, among other things, misrepresented to the church that he could invest their money in these programs to generate $3,000,000 to fund construction of a new church, according to the statement from Head and Borg.  Hester convinced the church to appoint him as the finance director, and then obtained two investments from the church, totaling $1,530,000, according to the statement. Hester promised that $1,500,000 of the invested funds would remain in an attorney trust account in the church’s name until the transaction was completed, but they did not, according to the statement.  Hester also opened undisclosed accounts in the church’s name over which he was the sole signatory and, without informing the church, and spent the church’s funds on Hester’s personal expenses, according to the statement. Hester also overpaid a man for services related to the investment transactions, according to the indictment. Hester told the church that he was paying a man $100,000 for the transaction when Hester actually paid the man $300,000, according to the indictment. Neither Hester nor the investment contracts he sold were registered with the Alabama Securities Commission, as required by the Alabama Securities Act, according to the statement.


Alabama Medicaid Agency announces 1st major cut due to budget crisis

MONTGOMERY, Ala. (AP) — Alabama’s Medicaid program has announced its first major cut due to budget cuts. The Medicaid Agency announced Wednesday that it would end enhanced reimbursement payments for primary care doctors beginning Aug. 1. Medicaid Commissioner Stephanie Azar said it was a “difficult, but necessary cut due to the budget crisis the Medicaid Agency is facing.” The “primary care bump” put some Medicaid primary care reimbursement rates on par with Medicare rates. It was designed to get more doctors to serve Medicaid patients. Alabama lawmakers this spring approved a budget that was $85 million short of what Gov. Robert Bentley said was needed to fund the state’s Medicaid program.

The payment cuts are expected to save $14.7 million. Agency officials have said additional cuts are expected. Examples of payment changes:



Morning Money

JOBS DAY PREVIEW — S&P Global Ratings economist Satyam Panday on Fridays’ number: “S&P Global Ratings estimates the U.S. added between 150,000 to 200,000 jobs in June, a slightly more positive forecast than the disappointing numbers in May. If job gains stay within this range in July, then it may help ease Federal Reserve officials’ doubts about the U.S. economy’s resilience …

“Of course, this would also depend on other key economic drivers holding steady such as domestic producer sentiment and consumer activity, as well as the specter of a wider Brexit contagion receding.”

THE BIG IDEA: BREXIT’S BRIGHT SIDE FOR BRITAIN — BMO’s Jack Ablin: “European equities and the banks in particular are getting punished … The currency market action is even more interesting. Japan may be geographically removed from the EU mayhem but the yen has been caught in the blowback. Japan’s currency has surged eight percent against the euro since ‘Brexit’ and is 17 percent stronger this year. … Notwithstanding the uncertainty and the financial turmoil, British goods and services are on sale.

“The price of a Starbucks tall latte in London is £2.20, or about $2.90. In New York City, the price of a tall latte is $2.95, suggesting the pound is back to fair … With the weaker pound putting British assets on sale, it shouldn’t be a surprise that the FTSE 100 index … is six percent higher this year in local currency terms. While the British economy will be troubled by economic adversity as a result of the decision to leave the European Union, sterling will provide a welcome offset”

MORE ROOM FOR POUND TO FALL — Bloomberg: “The pound’s plunge isn’t over yet, according to three of the world’s top currency traders. After falling to a 31-year low Wednesday, sterling may sink another 7 percent to 11 percent this year in the aftermath of the U.K.’s Brexit vote, according to Goldman Sachs Group Inc., Deutsche Bank AG and Citigroup Inc.”

ITALIAN BANKS IN CRISIS — NYT’s Peter Eavis: “Even as Europe grapples with repercussions of Britain’s vote to leave the European Union, a dispute over tens of billions of dollars is also threatening to roil the region’s $16 trillion economy. The Italian government, according to some estimates, needs to spend $45 billion to shore up its banks burdened with bad loans. Fears that European authorities will bar the government from providing that support are adding to the turbulence caused by ‘Brexit.’ …

“The situation may drag through the summer, keeping investors around the world on edge. So how bad could this get? The steep declines in shares of Italian banks suggest that a storm is ahead. The stock price of Banca Monte dei Paschi di Siena, one of Italy’s most troubled lenders, is down 80 percent in the last 12 months”

DRIVING THE DAY — FBI Director James Comey testifies at 10 a.m. before the House Oversight and Government Reform Committee on Hillary Clinton’s email setup at the State Department and his decision not to recommend charges to DoJ prosecutors … President Obama leaves for Poland … House Financial Services subcommittee has a hearing at 10:00 a.m. on “The Implications of U.S. Aircraft Sales to Iran” … ADP Employment at 8:15 a.m. expected to show a gain of 160K private sector jobs.

TRUMP CASH: $51 MILLION — Via POLITICO’s “2016 Blast” newsletter: “Trump’s campaign announced … it raised $51 million in June, an amount that trails Hillary Clinton’s haul but may assuage some emerging concerns about the presumptive GOP nominee’s fundraising operation.

“Trump’s campaign said that slightly more than half of donations came from the team’s new digital and small-dollar operation. Trump himself contributed $3.8 million to his campaign in June. By comparison, Clinton’s campaign announced last week it had raised a combined $70 million, with joint fundraising agreements included.”

MONEY LINE — “Though a majority of the convention delegates are bound to support Mr. Trump, Mr. Evans’s count shows just about 890 delegates are personally loyal to the New Yorker. Another 680 oppose Mr. Trump. That leaves 900 delegates who are presumed to be ‘in play,’ he said. The stop-Trump forces would have to take nearly two-thirds of them to block his nomination”

WORRED ABOUT BREXIT — FT’s Sam Fleming: “Most Fed … policymakers saw risks to the US economy and global markets from the UK’s referendum on its EU membership even before the Brexit vote. Minutes of the central bank interest rate setting committee show that even before the UK vote Fed policymakers had flagged up concerns about a possible slowdown in the US labour market following turgid hiring data for May. ”

HOT READ: COMEY’S HEDGE FUND PREP — Garrett M. Graff for POLITICO Magazine: “FBI Director James Comey is about to discover whether Rep. Jason Chaffetz, the 49-year-old Republican chair of the House Oversight Committee, can be scarier than a 25-year-old employee of the world’s largest hedge fund. Comey, who hasn’t spoken publicly since his political bombshell on Tuesday that the FBI wouldn’t recommend an indictment of Hillary Clinton, would probably argue no. …

“After he left government, Comey spent three years being grilled, or ‘probed,’ as an executive at Bridgewater Associates, the $150 billion hedge fund founded by Ray Dalio that the New Yorker has labeled ‘the world’s richest and strangest hedge fund.’ … It was just weeks after he joined Bridgewater … that Comey was cornered by a similarly new 25-year-old employee. The junior associate interrogated the former Justice Department official on a seemingly illogical stance that Comey had taken in an earlier meeting”

BIG BANKS GET CRUSHED — WSJ’s David Reilly: “Big banks are nearly half a trillion dollars in the hole. Since the start of 2016, 20 of the world’s bigger banks have lost a quarter of their combined market value. Added up, it equals about $465 billion, according to FactSet data. Brexit isn’t all to blame. True, bank stocks have plummeted since the U.K. voted last month to leave the European Union. But they have been losing value since the start of the year, when a group of factors — the Chinese economy, the path of U.S. interest rates, oil prices — weighed on the markets.

“More than pride is at stake. Sharp share-price falls will make it much more difficult, and expensive, for banks to raise capital if that is what is ultimately needed to shore up their balance sheets. Just as bad, a serious decline in market value can breed inaction among bank executives. Instead of selling equity when they can, executives may wait for share prices to recover, only to find themselves in a worse situation as stocks drop even further”

NEW THIS AM — ABA on consumer delinquencies:

CLEARING HOUSE ON NSFR — The Clearing House has a new paper out on the Net Stable Funding Ratio: “[T]he NSFR has no clear, defining objective and its benefits are in doubt. … [P]roblems with the design and calibration will lead to many unintended consequences that are likely to result in substantial economic costs”