Posted On: March 31, 2011

AIG Reorganizes Property and Casualty Insurer Chartis

American International Group Inc. is reorganizing Chartis, its property and casual insurer, into two global groups—one consumer and one commercial. AIG executive vice president, finance, risk and investments Peter D. Hancock has been named Chartis’s chief executive officer, while current Chartis CEO Kristian P. Moor is to become vice chairman.

John Q. Doyle, who was formerly Chartis US’s CEO will head the global commercial business, while current chief administrative officer Jeffrey L. Hayman will be in charge of the global consumer business group. Both men will report to Hancock. The reorganization will section Chartis into four regions: U.S./Canada, Europe, Growth Economies, and Far East.

It was just this February that Chartis had to put aside $4.2 billion for loss reserve increases. According to AIG CEO Robert Benmosche, strengthening claims management, underwriting, risk management, and reserving so that the right risk-adjusted returns are earned remain top priorities. Benmosche promised to rebuild businesses needed to pay back the firm’s $182.3 billion government rescue. Benmosche, who is undergoing treatment for cancer, intends to step down in 2012.

Chartis has over 45 million clients internationally located in over 160 nations. Last year, the insurer wrote $31.6 billion in net premiums. Meantime, AIG’s stock performance has been less than stellar with a 26% drop since the start of the year.

Related Web Resources:
AIG Revamps Chartis, Makes Hancock Head After Reserve Boost, Bloomberg, March 31, 2011

AIG Reorganizes Chartis, Its Global Property Casualty Business; Peter Hancock Named Chartis CE, Market Watch, March 31, 2011

Continue reading " AIG Reorganizes Property and Casualty Insurer Chartis " »

Posted On: March 30, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans

Rep. Randy Neugebauer (R-Texas), who is the Financial Services Oversight Subcommittee chairman, and Rep. Spencer Bachus (R-Ala.), the House Financial Services Committee chairman, have sent a letter to US Securities and Exchange Commission Chairman Mary Schapiro asking her about Boston Consulting Group Inc.’s recent report on the recent report on SEC reform. Even though BCG is an independent consultant, the two GOP members are questioning the report’s impartiality.

In their letter, they asked Schapiro to disclose what (if any) editorial input the SEC provided on the content of the BCG report. They also want to see any earlier drafts that BCG may have sent the SEC Chairman. Neugebauer and Bachus said that given the regulatory failures from the 2008 economic collapse, it was important that BCG was allowed compete independence to do its job and that the report did not undergo any editorial deletions, review, or insertions by the SEC.

Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967 had directed the SEC to retain the services of an independent consultant to analyze the agency’s structure and operation, as well as suggest reforms. BCG issued its report on March 10. Among its recommendations: for the SEC:

• Hire staff with “high-priority” skills
• Invest in key technology systems,
• Improve oversight over SROs (self-regulatory organizations)
• If Congress determines that the SEC cannot fulfill expectations by further optimizing its resources, the lawmaking body should “relax” funding constraints

BCG has said that it stands by the report’s “integrity and independence.” Meantime, Schapiro has said that the report confirms her own worries that the SEC lacks the resources to do all that it is expected to accomplish.

Our institutional investment fraud lawyers have successfully represented clients throughout the US.

Related Web Resources:
Integrity of report on SEC questioned, Washington Post, March 18, 2011

Statement From Chairman Schapiro on Independent Consultant Report of SEC Organization and Operations, SEC, March 10, 2011

Read the BCG Report (PDF)

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

Continue reading " Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans " »

Posted On: March 29, 2011

SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing

As Bloomberg News columnist Ann Woolner points out, in most US Securities and Exchange Commission where a settlement is reached, the defendant usually ends up not having to admit to doing anything wrong. Instead, the securities fraud agreement is accompanied by the boilerplate caveat that says that by settling, the plaintiff is doing so without “without admitting or denying” wrongdoing.

Granted, there are certain cases where a conviction or guilty plea in a related criminal case makes it clear that a wrongful action did take place. One might also say that by agreeing to settle and pay a huge financial sum, the plaintiff is admitting to the wrongdoing without actually admitting to doing anything wrong. However, as Woolner points, not all defendants of US Securities and Exchange Commission cases are also charged in criminal court over the alleged securities fraud. Even when a settlement is reached, without an admission, the exact nature of the fraud is often left unclear.

SEC spokesperson John Nestor says that of the over 600 securities lawsuits filed every year, only about 20 of them ever go to trial. Nestor notes that the SEC’s primary objective in any civil case is to secure the proper sanctions against wrongdoers and not making them admit wrongdoing is a way to get this done. Many violators will give up a great deal to avoid being held liable in civil court. They also have little incentive to confess because this could help the securities fraud lawsuits of plaintiffs.

U.S. District Judge Jed Rakoff says that letting securities defendants get away with not admitting what they have done is a “disservice to the public.” Meantime, SEC commissioner also says that he wants defendants to “take accountability” and “issue mea culpas.” He also wants companies to stop putting out press releases suggesting that the SEC overreacted.

Related Web Resources:
Uncle Sam Wants Your Cash, Not Confession: Ann Woolner, Bloomberg, March 24, 2011

US Securities and Exchange Commission


More Blog Posts:
Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investors Securities Blog, December 16, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC, Institutional Investors Securities Blog, September 30, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investors Securities Blog, September 29, 2010

Continue reading " SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing " »

Posted On: March 26, 2011

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO's Records Dismissed

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court's decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA's books and documents in order to expose the corporate wrongdoing related to the SRO's 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

In its motion to dismiss, FINRA argued that it should get complete immunity from legal challenge. Also, FINRA said that because the Amerivet can’t maintain a derivative lawsuit against the SRO, the broker-dealer lacks a proper purpose to inspect the books it wants to see. When the court decided not to dismiss the case, however, it noted that although FINRA is immune from private lawsuits asking for damages related to regulator activity, this complaint isn’t looking for recovery. Rather, it wants to be able to examine FINRA’s records.

Related Web Resources:
Amerivet Wins Round In Amerivet V. FINRA, Daily Markets, March 5, 2011

Delaware General Corporation Law

Brokerage Firm Amerivet Securities Inc. Sues FINRA for Alleged Misconduct, Stockbroker Fraud Blog, August 26, 2009

Read the 2009 Complaint

Posted On: March 23, 2011

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)


More Blog Posts:
Trueblue Strategies LLC Owner Settles SEC Charges that He Hid Investor Trading Losses in Hedge Fund Case, Institutional Investor Securities Blog, December 18, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010


Continue reading " Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets " »

Posted On: March 22, 2011

$277 Million Verdict Against Apollo Group for Alleged Misstatements to Investors Upheld by US Supreme Court

The US Supreme Court is upholding a $277 million securities fraud verdict against Apollo Group and two ex-Apollo executives over claims that they misled investors about a Department of Education review report dealing with student recruitment policies. Apollo is the University of Phoenix’s parent company. By issuing its order to uphold the U.S. Court of Appeals for the Ninth Circuit’s decision, which reverses the district court’s ruling to throw out the verdict, the justices denied the defendants' petition for certiorari. The plaintiffs of this securities case are a class of investors that bought Apollo Group, Inc. common stock.

In 2004, the Education Department gave Apollo a preliminary report noting that the University of Phoenix had violated department regulations. Although the market did not react significantly to the news, Apollo’s stock dropped dramatically after two analyst reports downgraded the stock. Policemen's Annuity and Benefit Fund of Chicago later submitted a securities class action case claiming that because misleading statements were made during the review, investors ended up sustaining losses when the analyst reports revealed the truth. A jury ruled in favor of the plaintiffs.

The verdict provides damages of $5.55/share for stock bought during the class period. Interest, which has been accruing since 2004, will be included, and may up the amount owed to plaintiffs to over $280 million.

Our securities fraud attorneys are here to fight for our institutional investor clients’ financial recovery. Over the years, we have successfully helped thousands of investors recoup their losses.

US High Court Rejects Review Of Apollo Group Securities Case, Wall Street Journal, March 22, 2011


Apollo Group, Inc. v. Policemen’s Annuity and Benefit Fund of Chicago, SCOTUS Blog, March 7, 2011


Related Web Resources:
Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives, Institutional Investor Securities Blog, December 31, 2010

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam, Institutional Investor Securities Blog, November 23, 2010

Court Rejects Defendants’ Challenge to Poptech LP’s Lead Plaintiff Status in Class Securities Fraud Lawsuit, Institutional Investor Securities Blog, November 10, 2010


Continue reading " $277 Million Verdict Against Apollo Group for Alleged Misstatements to Investors Upheld by US Supreme Court " »

Posted On: March 17, 2011

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.


Related Web Resources:
Connecticut Hedge Fund Exec Admits Guilt In Ponzi Scheme, WIBW, March 7, 2011

Hedge fund mgr pleads guilty over Ponzi scheme, Reuters, March 7, 2011

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

Connecticut Hedge Fund Adviser Admits Running Massive Ponzi Scheme, Justice.gov, March 7, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011

Continue reading " Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam " »

Posted On: March 15, 2011

SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members

The Securities and Exchange Commission has filed and settled securities charges against DHB Industries Inc. without the US defense contractor receiving any penalty. The maker of bulletproof vests for US law enforcement and military agencies, now called Point Blank Solutions, has consented to not committing the alleged violations in the future. SEC charges, however, are still pending against ex-DHB Industries board members Gary Nadelman, Cary Chasin, and Jerome Krantz.

The SEC claims that between 2003 and 2005, the three men let senior managers overstate data in financial reports. The federal agency also contends that as a result of the ex-board members’ “willful blindness,” ex-DHB Industries CEO David Brooks was able to take $10 million from the company and move the funds into another company under his control. Brooks, who is also accused of using another $4.7 million for personal expenses, and ex-DHB Industries COO Sandra Hatfield, were convicted of securities fraud and other charges in criminal court last year.

The SEC wants restitution and civil fines from Krantz, Chasin, and Nadelman. According to the New York Times, it is surprising that the federal regulator has actually filed civil charges against the three men. Save for perhaps a tarnished reputation, corporate directors tend to remain unscathed in cases of securities fraud. For example, no financial firms’ outside directors were named as defendants in SEC cases related to the credit crisis.

While some are expressing hope that the SEC is charting a new course with this case, it is difficult to discern at this point whether this is a one-time deal or the start of a new trend. For a while, there were concerns that the independent director post, assigned specific duties under the Sarbanes-Oxley law in 2002, might be harder to fill because of fear of liability. However, the SEC has only filed cases against them in incidents of alleged severe recklessness. Also, in an attempt to bring in good directors, companies have been offering better pay.

Are board directors held to too low of a standard that allows them to get away with too much?


Related Web Resources:
SEC Charges Military Body Armor Supplier and Former Outside Directors With Accounting Fraud, SEC, February 28, 2011

SEC charges defense contractor, 3 ex-directors, Bloomberg, February 28, 2011

For Directors at DHB Securities, SEC Keeps the Bar Low, New York Times, March 3, 2011

The Sarbanes-Oxley Act of 2002


More Blog Posts:

Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam, Stockbroker Fraud Blog, September 16, 2010

$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court, Institutional Investor Securities Blog, October 21, 2010

Continue reading " SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members " »

Posted On: March 10, 2011

Countrywide Finance. Corp, UBS Securities LLC, and JPMorgan Securities LLC Settle Mortgage-Backed Securities Lawsuit Filed by New Mexico Institutional Investors for $162M

New Mexico’s State Investment Council and Public Employees Retirement Association have settled their securities lawsuit with Countrywide Finance Corp. and two underwriters for $162 million. These details, from the confidential settlement agreement, were was obtained by the Albuquerque Journal through an Inspection of Public Records request.

The Countrywide investments were made up of mortgage-backed securities that the company had written. JPMorgan Securities and UBS Securities LLC were the two underwriters.

The securities were obtained through securities lending, which involved the SIC lending one batch of securities in return for another batch that paid a slightly higher interest rate. Although securities lending is generally considered safe for institutional investors like the SIC and PERA, mortgage-backed securities played a key role in the recent financial collapse. Even now, since the market has rebounded, the Countrywide securities are still worth less than what the state got.

In their institutional investment fraud lawsuit, the SIC and PERA accuse the defendants of disregarding their own underwriting guidelines and dumping the securities on investors, including the state of New Mexico, “to generate high volume loan business regardless of credit risk.” The New Mexico agencies opted to file their complaint in state court instead of taking part in a class-action lawsuit with other US states.

Of the $162 million, $149 million goes to SIC, PERA gets $6 million, the Educational Retirement Board receives $100,000, and the lawyers hired by the state are to receive $7 million. Bank of America bought out Countrywide in 2008.

Related Web Resources:
State Nets $155 Million in Settlement, Albuquerque Journal, March 7, 2011

Countrywide sued by 3 New Mexico funds, Pensions & Investments, Pension and Investments, August 20, 2008

New Mexico State Investment Council

Public Employees Retirement Association of New Mexico

New Mexico Educational Retirement Board


More Blog Posts:
Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Countrywide Financial, Merrill Lynch, and Citigroup Executives Defend Their Hefty Compensations Following Subprime Mortgage Crisis, Stockbroker Fraud Blog, March 12, 2008

Continue reading " Countrywide Finance. Corp, UBS Securities LLC, and JPMorgan Securities LLC Settle Mortgage-Backed Securities Lawsuit Filed by New Mexico Institutional Investors for $162M " »

Posted On: March 8, 2011

Securities Lawsuit Accusing Merrill Lynch of Facilitating Sale of Mortgage-Backed Securities to King County, Washington Can Proceed, Says Court

The U.S. District Court for the Western District of Washington says that King County, Washington has pleaded sufficient facts to continue with its securities fraud lawsuit accusing Merrill Lynch, Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch Money Markets Inc. of facilitating its purchase of allegedly toxic mortgage-backed securities and violating the Washington State Securities Act. The defendants had sought to dismiss the securities fraud complaint.

Per the plaintiff, the defendants sold more than $100 million of the toxic assets to King County through the entities Mansail II and Victoria Finance in 2007. At the time, the county had wanted to make conservative investments. Not long after, Mansail failed and Victoria was downgraded to “junk” and placed on negative credit watch.

The county, claiming $60 million in losses, contends that the defendants played the role of seller or dealer of the commercial paper but did not fulfill its responsibility of ensuring there were sufficient procedures in place so that unwise investments were avoided and adequate warning of investment risks were provided. The county also contends that Merrill Lynch and its subsidiaries knew that the securities it was selling were toxic and had even made efforts to get rid of its MBS.

The district court says that under the state securities law, civil liability for omissions and misrepresentations attaches both the seller of the security and parties that played a substantial role in the sale. The court found that the defendants of this securities case, as pleaded by King County, are “sellers” under the Washington State Securities Act and that the county wouldn’t have bought the MBS if it hadn’t been working with Merrill Lynch and its subsidiaries. The court also found that the county had adequately pleaded control person liability, as well as sufficiently alleged that the defendants had omitted or misrepresented the facts. It decided not to dismiss the county’s breach of contract claim accusing the defendants of failing to warn about the risks involved in the MBS investments.

Related Web Resources:
King County's Pleadings Sufficient To Keep MBS Suit Against Merrill Lynch Alive, BNA Securities

Lawsuit: Merrill Lynch sold King Co. 'toxic' 'junk', Seattle PI, July 20, 2010


More Blog Posts:
$18M Credit Default Swap Case Against Merrill Lynch International Reinstated, Institutional Investors Securities Blog, February 18, 2011

Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court, Institutional Investors Securities Blog, December 22, 2010

Posted On: March 4, 2011

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed

The U.S. District Court for the District of Massachusetts says that, under the 1934 Securities Exchange Act and the Massachusetts’ Uniform Securities Act, Akamai Technologies Inc.’s (AKAM) auction-rate securities lawsuit that seeks to hold Deutsche Bank AG liable for $200 million in losses can proceed. The judge ruled that the Internet content delivery firm had properly pleaded a material misrepresentation or omission in violation of Section 10(b) of the '34 Securities Exchange Act, which is necessary for a control person claim under Section 20(a). The court also held that Akamai clearly pleaded Deutsche Bank's control over Deutsche Bank Securities Inc., the subsidiary that allegedly advised the company to buy the toxic ARS.

Per the court, DBS was the broker and investment adviser for Akamai Securities Corp. and Akamai Technologies Inc. Akamai told the investment adviser that it wanted to put money in securities that were liquid and safe so it could access the funds when needed. DBS told Akamai that ARS were safe, liquid, and never failed even though the financial firm allegedly knew that they had done so before and, in fact, posed a higher level of risk than what it led Akamai to believe. Even in August 2007, when Deutsche Bank knew that the demand for ARS was going down and the risk of ARS auctions failing was rising, the investment adviser still allegedly did not notify Akamai that the market was changing.

When the ARS market did fall in 2008, Akamai was left with over $200 million in illiquid securities. Its securities fraud lawsuit also claims that even as DBS continued to claim that the securities were liquid and safe, resulting in Akamai increasing its ARS investments, the investment bank was decreasing its own exposure to the market.


Related Web Resources:
Deutsche Bank Loses Bid to Dismiss Control Person Claims by ARS Investor, BNA

Frozen in time, Boston.com, February 16, 2010

Akamai Technologies, Inc. and Akamai Securities Corp. v. Deutsche Bank AG (PDF)

Massachusetts’ Uniform Securities Act


More Blog Posts:
Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations, Institutional Investors Securities Blog, February 12, 2011

Merrill Lynch Doesn’t Have to Arbitrate ARS Claims by LSED, Says Appeals Court, Institutional Investors Securities Blog, December 22, 2010

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investors Securities Blog, November 11, 2010


Continue reading " Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed " »

Posted On: March 2, 2011

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion, Institutional Investors Securities Blog, February 28, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Continue reading " Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims " »

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