Former Prudential Broker Pleads Guilty to Timing
Justin F. Ficken, a former broker with Prudential Securities, pled guilty before U.S. District Judge Patti B. Saris last Monday to deceptively market timing mutual funds for seven hedge funds between January 2001 and September 2003, earning himself and two other brokers a combined $6 million in commissions.
The announcement came from U.S. Attorney General Michael J. Sullivan and Acting U.S. Postal Inspector in Charge Gerard Carmody.
The charge was one count of conspiracy, three counts of wire fraud and two counts of securities fraud. Ficken faces 105 years in jail and a $12 million fine. Sentencing is scheduled for Dec. 10.
The two other brokers, Martin Druffner and Skifter Ajro, previously pled guilty to wire and securities fraud. Ajro was freed on two years' probation, and Druffner awaits sentencing.
The U.S. Postal Inspection Service investigated the case, and Assistant U.S. Attorney Jack Pirozzolo prosecuted it.
Market Turmoil Expected To Hit a Number of Funds
A number of leading mutual and pension funds are invested in AIG, Lehman and Merrill Lynch, and could seriously suffer both in performance and redemptions. How badly the shock to investors' retirement savings will be, has yet to be sorted out, however.
"This is an extreme sort of event, and it will take days and months to figure out the precise consequences," Amiyatosh Purnanandam, an assistant finance professor at the University of Michigan told the Toledo Blade.
Two of the largest fund firms to have exposure to Lehman as of June 30 are Fidelity and Vanguard, with respective exposures of 6% and 3%.
While Lehman stock is expected to drop to nothing, Merrill Lynch shares were exchanged for 0.8595 shares of acquirer Bank of America.
Some analysts believe the shakeout will be felt for months to come. John Carusone, president of the Bank Analysis Center, an investment banking consultancy, told the Stamford Advocate: "It'll be the financial equivalent of Hurricane Ike for the next few months. If you invested in Lehman Brothers, then those portions of your investments will take it on the chin."
Ciaran O'Hagan, a credit strategist at Societe Generale, had a dire outlook: "The losses look to be widespread, hurting the public through their mutual and pension funds. It's clearly a disaster for public confidence."
Some Fund Investors Ask About Lehman Exposure
With Lehman Brothers in Chapter 11, Bank of America acquiring Merrill Lynch, Fannie Mae and Freddie Mac bailed out by the government, Bear Stearns acquired by JPMorgan and the future of AIG and Washington Mutual now hanging in the balance-mutual fund investors are calling complexes to find out about potentially treacherous exposure. But so far, The Wall Street Journal reports, they are holding steady and not seeking mass redemptions.
"Investor behavior is taking the longer-term view," said Waddell & Reed Senior Vice President Tom Butch. Acknowledging that stock funds have seen some redemptions, overall, Butch said, investors are remaining calm and looking to the long term. Waddell, PIMCO and American Beacon Funds saw no increase in call volume last Monday, when the Dow Jones Industrial Average plummeted 504 points. At Vanguard, calls surged in the early part of the day but then subsided, according to a company spokesman.
Funds More Conscientious About Fair Value: Deloitte
Market unrest, the credit crisis and an updated FAS 157 are prompting mutual fund companies to be more meticulous about fair value pricing, Deloitte reported last Monday in its "2008 Fair Value Pricing Survey," its seventh annual such report.
Seventy-four percent have altered their valuation policies and procedures in the past year, with 63% saying FAS 157 was directly responsible for doing so.
Thirty-seven percent said they have added internal controls as a result of the credit crisis, and 50% seek more than one quote for fixed income securities.
More than 75% are asking pricing services and brokers for details about how they arrive at prices, and 46% said that their portfolio managers and/or traders are creating pricing reports for fund accounting top management executives.
Today, more than 46% have at least two full-time staffers devoted to fair value, whereas only 29% did last year. The report was based on surveys of 50 asset managers running more than 2,700 funds with aggregate assets of $3.5 trillion.
"Mutual funds have been challenged over the last year to perform daily pricing in very uncertain times," said Cary Stier, head of asset management services for Deloitte.
Bent in Favor of New Money Market Fund Rules
Bruce Bent, chairman of The Reserve and the creator of the first money market mutual fund, is breaking from the pack that has been critical of the Securities and Exchange Commission's proposal of the rule governing money funds to lessen their reliance on credit rating agencies.
Bent agrees that the SEC's proposed amendments to Rule 2a-7 will force money market funds to become better skilled at assessing credit risk. The effect of the rule, Bent said in a letter to the SEC, "will either be increased credit expertise at money fund providers or a winnowing of the funds offered, both of which would increase the integrity of money market funds."
Bent is in the minority in the mutual fund industry; a number of large fund companies, including Vanguard and Fidelity, have opposed the proposed change, saying it would put too great an onus on mutual funds to perform the duties of rating agencies. While such agencies fell short of their duties in the subprime crisis, major mutual fund companies still have faith in their abilities.
Thain Says Merrill Brokers Happy with Takeover Deal
John Thain, chief executive officer of Merrill Lynch, said the reaction of his firm's "thundering herd" of more than 16,000 financial advisers to the Bank of America sale has been almost 100% positive.
Speaking at a press conference at Bank of America's headquarters in New York City last Monday, Thain said the deal provided Merrill brokers with access to Bank of America's customer base, particularly the "sweet spot" of investors with net worths of between $500,000 and $5 million.
Thain said he sees "a lot of opportunities and a lot of leads," as well as a "stable base to work from" once the $50 billion deal is completed. Ken Lewis, Bank of America's chief executive officer, said he recognized that the wealth management business was the "crown jewel of Merrill Lynch." He added that Merrill had "created the best wealth management organization in the world" and he intended to "keep the name and organization intact."
Regulators Assure Lehman Investors Funds Are Safe
With Lehman Brothers filing for Chapter 11 bankruptcy protection last week, investors are fearful their holdings could be decimated, but regulators have been stepping in to reassure them that their mutual fund and brokerage accounts are safe. The Securities and Exchange Commission said that some of its staff were working within Lehman's offices to ensure customer accounts are protected.
"Lehman Brothers' customers will benefit from extensive protections under SEC rules, including segregation of customer securities and cash as well as insurance by the Securities Investor Protection Corporation," the SEC said in an announcement.
Certainly, because the firm excluded Neuberger Berman from the bankruptcy filing, that company is protected, analysts said. And while investment banks have been hard hit by the credit crisis, strong management and the recurring revenue stream from management fees at investment houses are insulating them.
"The factors all provide a level of stability with earnings and growth potential going forward," Michael S. Kim, an analyst with Sandler O'Neill & Partners told The Wall Street Journal. The Neuberger brand will be able to "survive independently," agreed William Katz, an analyst with Buckingham Research.
(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.
http://www.mmexecutive.com http://www.sourcemedia.com/
