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Corruption at Hedge Funds Even More Rampant Than You Think, Study Shows


Michael Steinberg of hedge fund SAC Capital Advisors, charged with insider trading.

 

Are Hedge funds managers responsible for the current financial woes and should they be punished. Up to to you to make up your own mind 

If a new report about hedge fund corruption is to be believed, the industry is overrun with unethical and illegal activity. Some 46% of people at hedge funds believe their competitors break the law or act unethically and 30% say they’ve seen wrongdoing themselves.  Less than a week after F.B.I. agents handcuffed SAC Capital portfolio manager Michael Steinberg and escorted him from his Park Avenue apartment, the  report, released yesterday, says that more than a third of hedge fund professionals believe they have to break the rules to get ahead.

The report was released by New York law firm Labaton Sucharow, which specializes in representing plaintiffs in securities class action cases and whistleblower actions, together with HedgeWorld, a news and research service, and the Hedge Fund Association, a trade group. They commissioned an anonymous online survey  of 127 hedge fund professionals conducted between Feb. 25 and March 17.

According to Jordan Thomas, chair of the whistleblower practice at Labaton Sucharow, the survey was an attempt to gauge the extent of wrongdoing inside of hedge funds and the likelihood that hedge fund professionals would report illegal activity to the authorities.

A portion of the Dodd-Frank financial reform law, which passed in 2010, was intended to make it easier for people in the securities industry to report wrongdoing. Whistleblowers can remain anonymous, their jobs are protected by law and they are entitled to 10%-30% of the monetary sanctions the SEC gets in such cases.

Despite those protections the survey found that 29% of respondents still think they could experience retaliation if they report wrongdoing at their fund.

In addition, 28% said that if leaders of their firm learned that a top performer had engaged in insider trading, the leaders would be unlikely to report the misconduct. Thirteen percent said they believe firm leaders who find out about wrongdoing  would just ignore the problem. Another 13% said that people who work at hedge funds may need to do unethical or illegal things to be successful and the same number admitted they would commit a crime–insider trading–if they could make a guaranteed $10 million and get away with it.

More than half of the respondents, 54%, said they though the SEC was ineffective in detecting, investigating and prosecuting securities violations.

Thomas, who worked as the assistant chief litigation counsel in the SEC’s enforcement division until July 2011, says there is a silver lining to the new survey. It asked whether respondents would report wrongdoing if they were protected by the provisions of the Dodd-Frank whistleblower law. Eighty-seven percent said they would. Eighty-three percent said they were already aware of the program. But seriously? They say corruption is rampant, and the vast majority would report it—when few actually do.

“The 87% represents hope,” says Thomas. “It is likely that the law will lead to more reporting in the industry.”

Still, there is obviously a disconnect between that hope and the reality that nearly a third of respondents say they believe that they would be retaliated against if they reported wrongdoing at their firm. It also could be that the protections and potential monetary awards just aren’t  enough to motivate people to come forward. Or cheating in the hedge fund industry simply remains, far too much, business as usual.

via Corruption at Hedge Funds Even More Rampant Than You Think, Study Shows – Forbes.

via Corruption at Hedge Funds Even More Rampant Than You Think, Study Shows – Forbes.

The Government Has It Bass-Ackwards: Failing To Prosecute Criminal Fraud by the Big Banks Is Killing – NOT Saving – the Economy


The Morale of this story is that the real criminals are getting away Scot free  whilst the story concerns the USA it is in reality a worldwide phenomena

U.S. Attorney General Eric Holder said today:

I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy

As we’ve repeatedly noted, this is wholly untrue.

If the big banks were important to the economy, would so many  prominent economists, financial experts and bankers be calling for them to be broken up?

If the big banks generated prosperity for the economy, would they have to be virtually 100% subsidized to keep them afloat?

If the big banks were helpful for an economic recovery, would they be prolonging our economic instability?

In fact, failing to prosecute criminal fraud has been destabilizing the economy since at least 2007 … and will cause huge crashes in the future.

After all, the main driver of economic growth is a strong rule of law.

Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.

***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.

***

Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.

Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we’ve known of this dynamic for “hundreds of years”. And see this, this, this and this.

(Review of the data on accounting fraud confirms that fraud goes up as criminal prosecutions go down.)

The Director of the Securities and Exchange Commission’s enforcement division told Congress:

Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public’s fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.

Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank’s Research Department and Public Sector Governance Department) wrote a paper called Trust and Growth, showing that enforcing the rule of law – i.e. prosecuting white collar fraud – is necessary for a healthy economy.

One of the leading business schools in America – the Wharton School of Business – published an essay by a psychologist on the causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. “Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG.” The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. “Normal expectations of what is safe and dependable were abruptly shattered,” Sachs noted. “As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred.”

People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.

He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. “She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.

“By no means a sophisticated economist, she knew … that some people had become fantastically wealthy by misusing other people’s money — hers included,” Sachs said. “In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished.”

Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

Indeed, it is beyond dispute that bank fraud was one of the main causes of the Great Depression.

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy.

In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.

***

The government that permits this to happen is complicit in a vast crime.

Galbraith also says:

There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Galbraith recently said that “at the root of the crisis we find the largest financial swindle in world history”, where “counterfeit” mortgages were “laundered” by the banks.

As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this, this and this.

No wonder Galbraith has said economists should move into the background, and “criminologists to the forefront.”

The bottom line is that the government has it exactly backwards.   By failing to prosecute criminal fraud, the government  is destabilizing the economy … and ensuring future crashes.

Postscript:  Unfortunately, the government made it official policy not to prosecute fraud, even though criminal fraud is the main business model adopted by the giant banks.

Indeed, the government has done everything it can to cover up fraud, and has been actively encouraging criminal fraud and attacking those trying to blow the whistle.

 

via The Government Has It Bass-Ackwards: Failing To Prosecute Criminal Fraud by the Big Banks Is Killing – NOT Saving – the Economy « naked capitalism.

via The Government Has It Bass-Ackwards: Failing To Prosecute Criminal Fraud by the Big Banks Is Killing – NOT Saving – the Economy « naked capitalism.

Can you Trust big business? Feburary review 2013


(1)Mail Online Friday, Feb 01 2013
Toxic hip implants sold by Johnson & Johnson subsidiary ‘which knew for THREE YEARS that they could be dangerous’
DePuy marketed metal-on-metal implants ‘despite surgeon’s warnings’
• Hips failed after 2.5 yrs far more regularly than other models, tests found
• They were suspected of causing potentially toxic metal to get into blood
• Revelations on warnings come in Los Angeles compensation court case

(2) The Guardian Feb 01 2013

Italy rocked by scandal at world’s oldest bank
Monte dei Paschi di Siena asks for €3.9bn bailout amid scandal over loss-making derivatives contracts and alleged fraud

(3) The Guardian Feb 01 2013

BP tried to manipulate gas market, alleges trader.

BP faces new embarrassment in America with a court case brought by one of its former traders, who claims the company was trying to manipulate the natural gas liquids market. Drew Sickinger, who joined BP’s Houston office in 2009, says the company “created a pretext” for disciplining him late last year and then unfairly dismissing him.

(4) • The Guardian, Friday 1 February 2013

Barclay’s boss waives bonus as bank rocked by new Qatar allegations.

pressure mounted on Barclays when it faced fresh allegations on Friday about its relationship with Qatar at the height of the 2008 financial crisis. The Qataris were the main contributors to a £7.3bn lifeline to Barclays that allowed it to avoid a taxpayer bailout. The Financial Times reported that the Serious Fraud Office and the Financial Services Authority are investigating whether Barclays lent Qatar funds to buy shares in the bank

(5)  Guardian.co.uk, Monday 4 February 2013 

The political crisis in Spain is deepening following allegations that a number of senior officials in the ruling People’s Party received secret payments from a so-called slush fund.
Prime minister Mariano Rajoy now faces calls to resign, following claims that he and other senor officials had received secret payments over almost two decades.

(6)Guardian.co.uk, 5th feb

Standard & Poor’s feels Justice’s lash, but can the law ever conquer greed?
The DOJ is making headlines with high-profile suits against Wall Street firms, but singling out a few won’t fix systemic wrongdoing
In politics, public humiliation can often be a useful motivator. Take the Department of Justice, which was hauled over the coals in a recent PBS Frontline documentary on its lack of vigor in Wall Street prosecutions. The DOJ has been on a rampage lately.
The DOJ has been reportedly planning to file charges against the Royal Bank of Scotland, and last night, it filed an actual lawsuit against Standard & Poor’s for misrating mortgage bonds before the financial crisis

(7) • The Guardian, Wednesday 6 February 2013

RBS fined £390m for ‘widespread misconduct’ in Libor-rigging scandal
Royal Bank of Scotland bankers continued to rig Libor rate until November 2010 – two years after it was bailed out by taxpayer

(8) 08 Feb 2013 Telegraph

Former boss of Next and JJB Sports charged
Sir David Jones, the man who turned Next into one of Britain’s largest retailers, has been charged over allegations of forgery and making misleading statements to the market while he was executive chairman of JJB Sports.

(9) • The Observer, Saturday 9 February 2013

British sugar giant caught in global tax scandal
Associated British Foods accused of Zambia tax avoidance after sending massive profits abroad

(10) • The Guardian, Monday 11 February 2013 

Britain’s top accounting regulator is investigating claims that Autonomy, a former darling of the technology sector, fraudulently misrepresented its profitability.

The Financial Reporting Council (FRC) said it had launched a rare investigation into Autonomy’s financial reporting between January 2009 and June 2011, three months before it was taken over by Hewlett-Packard in an $11bn (£7bn) deal.

(11)  Telegraph

26 Feb 2013

Tesco to pay £6.5m fine in dairy price fixing settlement
Tesco is to pay a £6.5m fine for its part in a dairy price fixing scandal, after losing a decade-long court battle.

tesco_2433974b

(12)The great  Horse meat s scandal

images (9)

The Justice System


I guess the above cartoon sums up not just the justice system in the US but Europe as well.

Ask yourself the question how many Banking criminals are being jailed?

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