Stock Scam Alert

South Florida scams busted: Ponzis, pump ‘n’ dumps, Forex

South Florida Business Journal by Paul Brinkmann, Reporter

Date: Monday, June 4, 2012, 5:11pm EDT


A concerted attack on investment fraud in South Florida over the past three years has netted 85 people busted and more than $1.5 billion in restitution ordered.

Federal and state authorities announced the results Monday, along with a list of 12 new cases that included Clean Coal Technologies.

Clean Coal’s president, Douglas Hague, 65, of Boca Raton, was charged Monday along with 15 other new defendants.

The charges allege that Hague paid kickbacks to a third party with the purpose of pumping up the stock price for Clean Coal Technologies (OTC: CCTC). The company purportedly converted low-grade coal to high-grade clean-burning coal. But the charges allege that Hague paid kickbacks to the manager of a pension fund to buy stock at inflated prices.

The federal district for South Florida ranks second in the nation in securities and investment fraud investigations and prosecutions.

According to the news release from the U.S. Attorney’s office, other new cases included:

Cleland Ayison, 32, of Tampa, arrested Monday on charges of possessing a fraudulent $500 million Federal Reserve Note.

Michael Cimino and Joseph Repko: Cimino, 59, of Philadelphia, Penn., the director and chairman of the board for Sure Trace Security Corporation (SSTY), and Repko, 63, of Hobe Sound, SSTY’s chief financial officer and president, were arrested Monday on charges of conspiring to commit mail fraud by paying kickbacks to a pension fund fiduciary for buying stock at inflated prices. SSTY, a Utah corporation, was purportedly involved in the anti-counterfeiting technology business.

Ryan Coblin, 41, of Boca Raton, president of Delivery Technology Solutions, a delivery company. Coblin was charged in September and pleaded guilty March 8 to engaging in a scheme to pay kickbacks to a hedge fund fiduciary in a stock scheme. Sentencing is scheduled for July 13.

Scott Haire, 42, of Coral Springs, was president of Wound Management Technologies, Inc. (WNDM), a Texas corporation that purportedly developed advanced wound care products. Haire was charged with engaging in a scheme to manipulate the publicly quoted share price and trading volume of WNDM common stock. Haire is expected to surrender on June 6.

According to the news release, authorities arrested several other people from other states who held meetings in South Florida to further their stock schemes.

Ponzi Schemes

Juan Carlos Rodriguez, 49, of Miami, indicted March 6 for alleged wire fraud in the execution of a Ponzi scheme. According to the indictment, Rodriguez was the sole officer and director of MDN Financial Group, a Miami company that solicited approximately $5.2 million from investors with promises that the company would invest in stocks, bonds, and precious metals. Rodriguez would recruit colleagues and friends to invest in MDN Financial, promising them 20 to 50 percent returns. He used more than $1 million of the money to pay for personal expenses like credit card bills.

George Elia, 68, formerly of Fort Lauderdale, scheduled to be arraigned June 6 on charges of operating a Ponzi scheme in which he recruited investors by making false claims about the potential returns on investments. Elia was the president of Fort Lauderdale-based International Consultants & Investment Group, LC. The Business Journal previously wrote about the alleged fraud.

Aner Menendez, arrested Monday on charges of mail fraud and wire fraud. As the sole member of Key Biscayne-based De Forcade LLC, he recruited investors claiming he was a skilled foreign currencies trader (foreign exchange or For-ex). He exploited social relationships to convince his victims to invest savings with him, but spent the money on himself and friends.

The SEC also said it filed nine separate civil injunctive actions against 12 individuals and eight microcap companies, charging them with violations of the antifraud provisions of the federal securities laws and seeking, among other relief, permanent injunctions, disgorgement and financial penalties.

Led by U.S. Attorney Wifredo Ferrer, the initiative includes the U.S. Securities and Exchange Commission and the state’s Office of Financial Regulation. Other cooperating agencies include the IRS, FDIC and FTC.

Ferrer said in a news release, “Too often, we hear from victims who have lost their entire lives’ savings or their retirement nest egg to one of these unscrupulous schemers. Today, we hope to educate the public about the need to be alert and to verify before trusting and investing. If something sounds too good to be true, it usually isn’t.”

IDENTIY FRAUD AND YOUR TAX RETURN ( from irs.gov, creditcard.com)

Taxpayer Guide to Identity Theft





What is identity theft?
Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes.

How do you know if your tax records have been affected?
Usually, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.

You may be unaware that this has happened until you file your return later in the filing season and discover that two returns have been filed using the same SSN.

Be alert to possible identity theft if you receive an IRS notice or letter that states that:

More than one tax return for you was filed,
You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return, or
IRS records indicate you received wages from an employer unknown to you.
What to do if your tax records were affected by identity theft?
If you receive a notice from IRS, respond immediately. If you believe someone may have used your SSN fraudulently, please notify IRS immediately by responding to the name and number printed on the notice or letter. You will need to fill out the IRS Identity Theft Affidavit, Form 14039.

For victims of identity theft who have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free, at 1-800-908-4490.

How can you protect your tax records?
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, etc., contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.

How can you minimize the chance of becoming a victim?
Don’t carry your Social Security card or any document(s) with your SSN on it.


Don’t give a business your SSN just because they ask. Give it only when required.


Protect your financial information.


Check your credit report every 12 months.


Secure personal information in your home.


Protect your personal computers by using firewalls, anti-spam/virus software, update security patches, and change passwords for Internet accounts.


Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with


============


ID Theft Tool Kit
Are you a victim of identity theft?
If you receive a notice from the IRS, please call the number on that notice.

If not, contact the IRS at
800-908-4490


Fill out the IRS Identity Theft Affidavit, Form 14039

(Please write legibly and follow the directions on the back of the form that relate to your specific circumstances.)


--------------------------------------------------------------------------------

Credit Bureaus
Equifax
www.equifax.com
1-800-525-6285

Experian
www.experian.com
1-888-397-3742

TransUnion
www.transunion.com
1-800-680-7289


--------------------------------------------------------------------------------

Other Resources

Visit the Federal Trade Commission or call the FTC toll-free identity theft helpline:
1-877-ID-THEFT
(1-877-438-4338)

Visit the Internet Crime Complaint Center (IC3) to learn more about their internet crime prevention tips


--------------------------------------------------------------------------------

Report Suspicious Emails
Report suspicious online or emailed phishing scams to:
phishing@irs.gov

For phishing scams by phone, fax or mail, call:
1-800-366-4484


--------------------------------------------------------------------------------

For More Information
IRS.gov/identitytheft
IRS.gov/phishing


===============================================================
Tax ID theft skyrockets; thieves feasting on a refund bonanza

They steal your identity and go on a spree with Uncle Sam's debit card

By Susan Ladika
Published: March 26, 2012



If it can happen to a slain police officer, it can happen to anyone.

Taxpayers are having hundreds of millions -- or perhaps billions -- of dollars in tax refunds swiped by crooks who file fraudulent tax returns using the victim's Social Security number, then pocket the refunds. The victim has no idea the fraud has occurred until they try to file their own return and it bounces back.

"Nobody's immune from this crime," says Sal Augeri, a police detective in Tampa, Fla. The Tampa Bay area, along with South Florida, appear to be ground zero for the crime. But Florida is by no means alone. Just in the last week of January, the Internal Revenue Service (IRS), working with various other agencies, cracked down on suspected fraudsters in 23 states from New York to California.

The situation is so bad, Augeri testified March 20 before the U.S. Senate Subcommittee on Fiscal Responsibility and Economic Growth about what he's observed. During the hearing it was revealed one of the tax fraud victims was Tampa police officer David Curtis, who was gunned down in 2010. His widow is still struggling to get the tax refund.

"It's a growing problem that undermines confidence in the tax system," says Mark Steber, chief tax officer at Jackson Hewitt Tax Service and chairman of the IRS Electronic Tax Administration Advisory Committee.

Problem runs into billions
While it's impossible to get a handle on exactly how much money is swiped, in the Tampa Bay area alone Augeri estimates it totals up to $1 billion and could be as high as $10 billion nationwide.



HOW THE SCHEME WORKS

While the methods employed can vary, in Tampa the scheme generally works like this:
• Fraudsters find willing accomplices who have access to Social Security numbers at places such as doctor's offices and insurance companies or from credit card applications. The accomplices may steal 100 names and Social Security numbers, and get paid $1,000.
• The thieves use that information to file a fake tax return in your name -- usually beating you to the punch and filing early in the tax season.
• They take the refund -- which may come in the form of a check or prepaid debit card -- and bring it to a business they're in cahoots with.
•The business cashes the check or cashes out the debit card, gives the fraudster a cut, then keeps the rest, laundering it through the business.


At the IRS, the agency caught 262,000 fraudulent returns in 2011, seeking $1.45 billion in refunds, an agency spokesman says. That's an 81 percent increase since 2010, when the agency identified 49,000 suspicious returns, seeking $247 million in refunds. But if the fraudulent return isn't caught and slips through the system, the burden will fall on you to prove your identity, and the problem can take months to resolve, the IRS representative admits. Ultimately, you'll receive your refund, with the federal government coughing up the cash.

No one can pinpoint precisely why the crime is booming, but Steber says, "identity theft goes hand in hand with tax fraud."

A Federal Trade Commission report says that of the 1.8 million complaints it received in 2011, 15 percent involved identity theft. Of those, almost one-quarter were related to tax or wage fraud.

Criminals also are drawn to it because it's less risky than many other types of crime, Augeri says. Rather than trying to sell a kilo of cocaine for a few thousand dollars, and running the risk of being shot by other bad guys, the crooks can sit in their living room and crank out returns, netting tens of thousands or hundreds of thousands of dollars. "It's more lucrative and the punishment isn't as bad."

The 'TurboTax' scheme
On the street, it's a scheme known as "TurboTax" and evidence of the fraud can be found when police show up at all kinds of cases, Augeri says. In one recent suicide, the dead teen was found with two prepaid tax refund debit cards in his pocket.

The problem started popping up in Tampa in the second half of 2010. Police would pull over vehicles and find ledgers filled with Social Security numbers and stacks of prepaid debit cards.



The U.S. Postal Service also started noticing stacks of IRS mailings going to certain addresses, and the names on the envelopes didn't correspond with the names of the residents, Augeri says. That led postal inspectors to confiscate stacks of refund checks and debit cards.

"Over the past few years, the IRS has seen a significant increase in refund fraud schemes in general and schemes involving identity theft in particular," said Steven T. Miller, deputy commissioner for services and enforcement for the agency, in written testimony to the Senate committee. "Fighting identity theft will be an ongoing battle for the IRS and one where we cannot afford to let up. The identity theft landscape is constantly changing, as identity thieves continue to create new ways of stealing personal information and using it for their gain."

Steps to prevent tax ID fraud
While there's no way to guarantee you won't fall victim to tax return fraud, you can take steps to try to prevent it.

Rather than joining the crush of millions of Americans filing at the last minute, Steber recommends submitting your tax return early. "You effectively lock out people from trying to file your (fraudulent) return."

If you try to e-file your return and it bounces back, you'll have to file a paper return, and the IRS spokesman recommends you immediately fill out an Identity Theft Affidavit and submit it to the agency so it flags your account.

The agency has begun issuing special identification numbers called Identity Protection PINs to taxpayers whose identities are known to have been stolen. That prevents others from using their identities. As of mid-March, the agency had issued more than 250,000 such IP Pins in the 2011 filing season, says Miller.

Don't let your SSN out
If you successfully file your return, it's crucial that you keep the information stored somewhere safe. Steber says he often stops at various tax preparers' offices while traveling, and he'll invariably finds taxpayers have tossed their completed returns in the dumpster. That's like handing fraudsters a treasure trove of personal information.

You also need make sure to keep your Social Security number, as well as those of family members, safe and secure. Often the IRS will give less scrutiny to the Social Security number of a deceased person or a child than to an adult filing a return, and it's not unusual for fraudsters to scour obituaries and birth announcements, trying to obtain information, Steber says. The IRS's Miller says that so far, 66,000 returns for the 2011 filing year have been stopped for review because they appear to come from recently deceased taxpayers who have no filing requirements

Steber cautions consumers to guard their Social Security numbers at all costs. "You should protect that information like you would a valuable piece of jewelry or other asset."


Read more: http://www.creditcards.com/credit-card-news/id-identity-theft-steal-tax-refunds-returns-1282.php#ixzz1qe6786Ie
====================================================

Where NOT to use a Debit Card (bankrate.com)

4 risky places to swipe your debit card
By Claes Bell • Bankrate.com


Would you give a thief direct access to your checking account?

No? Unfortunately, you may be doing just that by regularly using your debit card. Debit cards may look identical to credit cards, but there's one key difference. With credit cards, users who spot fraudulent charges on their bill can simply decline the charges and not pay the bill. On the other hand, debit cards draw money directly from your checking account, rather than from an intermediary such as a credit card company.

Because of that, even clear-cut cases of fraud where victims are protected from liability by consumer protection laws can cause significant hardship, says Frank Abagnale, a secure-document consultant in Washington, D.C.

He cites the example of the The TJX Companies Inc.'s T.J. Maxx data breach that exposed the payment information of thousands of customers in 2007. The incident resulted in $150 million in fraud losses, and much of it was pulled directly from customers' bank accounts. While credit card users got their accounts straightened out and new cards in the mail within a few days, the case created major problems for debit card holders who waited an average of two to three months to get reimbursed, Abagnale says.

While debit card fraud is always a possibility, being careful where you use it can help keep your checking account balance out of the hands of criminals.

SKIMMING ATMS

The idea that outdoor ATMs are among the most dangerous places to use a debit card seems a little bit absurd. But some ATMs present a perfect opportunity for thieves to skim users' debit cards, says Chris McGoey, a security consultant based in Los Angeles.

Skimming is the practice of capturing a bank customer's card information by running it through a machine that reads the card's magnetic strip. Those machines are often placed over the real card slots at ATMs and other card terminals.

"Any transaction you do outdoors at an open ATM is going to be higher risk exposure," McGoey says. "If the public has access to it, then someone has the ability to add skimming devices to it, position cameras on it and position themselves in a way where they could surveil it."

He says you're better off using an ATM inside a retail outlet or other high-trafficked, well-lit place.

Julie McNelley, senior analyst for Aite Group LLC, a Boston-based financial services research firm, says even the card terminals that card users must swipe to get into ATM vestibules are being used as a skimming site by criminals. You can spot ATM skimmers by checking for ATM components that look beat-up or askew, she says.


GAS STATIONS


Gas stations are another danger zone for debit card use.

"You go to a gas station and you stick your debit card in there, and you swipe it through a machine," Abagnale says. "I'm sitting across the street with a laptop and an antenna. I put a skimmer in there, and I'm picking up all the information. Before you even get home, I've debited your account."

Gas station payment terminals have many of the characteristics card fraudsters love, McNelley says.

"In a gas station where you do have a whole bunch of pay-at-the-pump kinds of things and minimal supervision, it's pretty easy for a bad guy to put a skimming device on and put a little pinpoint camera there and compromise debit cards that way," McNelley says. Thieves often use small cameras to capture footage of debit card users entering their PINs so they can have free access to their money.

She says even if the thief doesn't manage to get your debit card personal identification number, or PIN, from such a device, he still may be able to duplicate the card's magnetic strip and use it for "sign and swipe" Visa or MasterCard transactions.

With the high potential for fraud in pay-at-the-pump debit transactions, it might make sense to use an alternative such as cash or credit cards the next time you fill up.

ON THE WEB



Debit cards are a convenient way to buy products online, especially for those who don't like to use credit cards. Unfortunately, the Web is one of the most dangerous places to make purchases, McNelley says.

"Online is the No. 1 place where consumers should not use their debit cards," she says. "It's susceptible at so many points. The consumer could have malware on their computer, so it could be at their endpoint that the data get compromised. It could be a man-in-the-middle attack where somebody is eavesdropping on their communications via the wireless network. And then at the other end, that data goes into a database at the merchant. As we've seen with some of the higher-profile breach events over the last year or so, that data is going to be vulnerable if (they're) not properly cared for."

Aside from the potential for hacking at many different points in a transaction, Abagnale says a fundamental problem with using debit cards online is it's impossible to know who is handling your information.

"Buying stuff online, you have to be careful because you have to know who you're doing business with. When you buy things online, what always kills me about that is people say, 'This is a safe site,'" Abagnale says. "Who works there?"

RESTAURANTS


"Would you care for a side of debit card fraud with that?"

Restaurant servers don't ask that question, but they might as well with the standard practice of taking customers' debit cards to run them behind closed doors.

"Any place where the card is out of hand" can increase the chances of fraud, says McGoey. "The guy comes to your table, takes your card and disappears for a while, so he or she has privacy," giving the person the opportunity to copy your card information.

Even restaurants without sit-down service can present a threat. McNelley says using debit cards to order delivery can be risky because cashiers tend to keep customer payment information on file. That may make future orders more convenient, but small businesses rarely take the steps necessary to safeguard payment information, she says.

Overall, she says, regardless of whether you use your debit card at a small restaurant or a big-box store, the possibility of fraud is always there. She cites the example of Michaels Stores Inc., which saw its customers' debit card information stolen in May by debit card terminals doctored by thieves.

"Even if you do exercise caution … there are still the Michaels-type incidents that will happen," McNelley says.

How to Get Cheaper Cable TV (Wall St Journal)

Customers Say to Cable Firms, 'Let's Make a Deal'

By LAUREN A. E. SCHUKER
Want cheaper cable television? Try asking for it.

Every three to six months, when his most recent promotional deal expires, Carey Anthony blocks out an hour of his day to negotiate with his cable company. Each time, the president of a software company in Los Angeles says he can knock $20 to $30 off his monthly bill.

Lauren Schuker on The News Hub has some tips on how to trim your cable bill, such as asking your service provider for unadvertised deals.

"Negotiating works every time," says Mr. Anthony, 46, who estimates he has saved more than $350 a year over the past decade. "Sometimes you have to threaten to cancel service, or switch to another provider, or sit on hold for an hour, but I've never failed to get a discount," he says. "You just have to be diligent."

As prices for cable services have surged over the past 10 years and the faltering economy has pressured household incomes, a growing number of cable customers face skyrocketing bills.

Today, the average cable TV subscriber pays about $128 a month in fees for all services, including TV, Internet and phone—nearly three times the $48 they paid each month in 2001, according to estimates by research firm SNL Kagan.

The increase is largely the result of sharply rising costs of programming, particularly sports. The TV networks pass those additional costs onto the operators, which in turn pass them onto consumers.

Cable-company executives have said publicly that they're worried rising costs could drive consumers away. The largest U.S. cable company, Comcast Corp., lost 442,000 video subscribers in the first nine months of this year, though this was fewer than in the same period last year. No. 2 Time Warner Cable Inc. lost 319,000 over the same period.

.Telecommunications companies including Verizon Communications Inc. and AT&T Inc. are now offering more competitive services. And a growing number of early adapters are severing ties to cable altogether to rely on broadcast TV and Internet distributors, such as Netflix Inc. and Amazon.com Inc., though getting live sports can be difficult for these so-called cord cutters. Even in rural areas, where customers often have only one cable TV option, competition from satellite service is increasing, though satellite providers are facing similar cost pressures and passing on higher bills.

To stanch the bleeding, some cable companies have begun to quietly offer stripped-down plans to retain viewers. They frequently go unadvertised in many regions and customers might have to hunt for them on providers' websites to find out exactly what to ask for.

Comcast, for example, has a "digital economy" tier that sells for between $29.99 and $39.99, depending on the area. The next tier up in service Comcast offers, which includes ESPN, often sells for around $58 a month.

The digital economy tier includes local broadcast channels, as well as popular cable channels, such as USA, Lifetime, but no ESPN. The company says it will work with customers to find a package to fit their needs.

Time Warner Cable late last year introduced a "TV Essentials" package in the same vein. It can cost as much as $49.99 but the company also offers promotional rates as low as $29.99 a month. It includes broadcast channels as well as 38 additional channels, but not ESPN.

Fans of premium channels and their shows, such as HBO's 'Game of Thrones,' can add them to the most basic cable service.
."TV Essentials is geared towards a segment of our customers who are having trouble affording the larger packages, even though they want [them]," a spokeswoman for Time Warner Cable says, adding most people who call about it end up taking a "more robust" package.

Some cable operators and DirecTV also offer a family packages, which usually cost $30 to $40, and give households all the broadcast channels as well limited cable channels such as the Disney Channel and Food Network.

Other subscribers are dumping bulky packages of 190 channels or more in favor of the most basic service—often known as the "Lifeline" tier in the industry. These usually include public broadcast stations and the handful of over-the-air channels, and usually cost $13 to $16, compared to the $40 to $60 it usually costs to get the more widely-distributed level of digital cable service, which includes ESPN, MTV, TNT and other basic cable channels.

Although cable operators don't widely market it, a federal law requires them to allow consumers to tack on premium channels such as HBO or Showtime for roughly $17 a month, even if they only have the most basic cable package.

Some consumers say they can finagle long-term extensions of special promotional rates used to attract new subscribers that normally expire after a year or two.

Getting Down to Basics
Negotiate. Many providers offer less-expensive packages with fewer channels but don't advertise them widely. Providers often will allow customers to continue cost-saving promotions well after they expire. Other providers will cut you a new deal every six months—but you have to call and ask. Often, if customers threaten to cancel service, they are transferred to the "retention department" staffed with representatives who are trained to offer customers deals to stay put.

Don't be beholden to the bundle. Service representatives are trained to push various bundled services (cable, Internet, telephone) because it's more profitable for the company. Some customers don't need a landline and can save a lot by avoiding that service. If you are offered a promotion or discount, suggest how it could be modified to meet your needs and make the company a counter-offer.

Go basic. If you love premium channels, you can still get HBO, Showtime and others with the most basic, broadcast-channels-only service—and knock your bill down to less than $50 a month. Just ask to add those channels onto the most basic offering.

Give up the DVR. Digital video recorders can increase bills by as much as $20 to $30 in some cases. When companies introduced the DVR in the early 2000s, charges were roughly $8 to $9 in addition to the cable box. Now they often cost as much as an additional $12.

Keep tabs on promotions. Place reminders on your calendar for when a special offer expires so you can negotiate a new deal before the promotion ends and you end up paying full price.

Russell Bailyn, a 29-year-old wealth manager in New York City, says he has threatened to switch service in order to keep the new-subscriber promotional rate for television, broadband, and telephone service, even though he originally signed up for Time Warner Cable back in 2004.

Mr. Bailyn says he keeps meticulous notes of his conversations, but it isn't always an easy negotiation. "Time Warner has people trained to deal with people like me," he adds. "They won't just give into an angry, articulate New Yorker easily."

A spokesman from Time Warner Cable declined to comment on customer negotiations and extending promotional pricing.

Other subscribers say they bend the truth to score promotional rates years after signing up by cancelling service and asking someone else in the household—a spouse, grandparent, or older child—sign up for service at the cheaper, "new customer" rate.

Switching to a bundled TV, phone and Internet package can work, if you really need all three services.

Mark Nitzberg, who lives with his wife and two kids in Westmont, N.J., says he now saves about $70 a month as a result of switching his family from Comcast TV and Internet service and Verizon phone service to bundling everything together with Verizon's FIOS service earlier this year.

They used the extra money to buy a new flat-screen TV and upgrade the living room couch to a new sectional sofa. "After seeing how much we're saving, our friends constantly ask how we got the $79.99 deal," he says.

Write to Lauren A. E. Schuker at lauren.schuker@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Beware those low-priced stocks (South Florida Business Journal)

Task force continues penny stock crackdown

Florida Business Journal - by Kevin Gale
Date: Thursday, June 30, 2011, 4:33pm EDT


Eric Bustillo, the SEC's regional director in Miami, said agencies are combining their limited resources to fight fraud.
Government agencies in South Florida are continuing a crackdown against penny stock promoters with undercover work that resulted in a flurry of conspiracy charges and an SEC action on Thursday.

Those charged live in Coconut Creek, California, Texas and Nevada – an indication of the broad geographic reach of the multi-agency effort.

The investigation is targeting what Eric Bustillo, director of the SEC’s Miami regional office, calls the "securities fraud underworld. Unfortunately, it has many of the players located down here."

In a telephone interview, Bustillo said investigators follow the trail of evidence as it unfolds.

It's not unusual for promoters and consultants to reach out to others for help raising money or fraudulently manipulating the price of stock, he said.

Historically, penny stock cases often involve promoters and telephone sales boiler rooms that make inflated claims. Cases are getting new twists these days through the use of websites and social media.

Most of the schemes listed Thursday involved kickbacks to a purportedly corrupt pension fund trustee in exchange for having the fund buy stock in microcap companies, the SEC said in a news release.

Another scheme involved a bribe that was to be paid to a purportedly corrupt broker who agreed to buy microcap shares on behalf of investors with discretionary accounts, the SEC said.

A final scheme involved a stock promoter who created a website to tout a penny stock company through a volley of e-mail blasts, and who posted phony testimonials from fake investors, the SEC said.

What the insiders and promoters did not know was that the people who were counterparties to the illegal transactions were actually undercover FBI agents or confidential sources participating in an undercover operation, the SEC said.

The latest charges follow a series of cases, filed in October and December 2010, in which the SEC sued more than a dozen companies and penny stock promoters with similar stock manipulation schemes.

On Thursday, Brian Gibson, 63, of Coconut Creek, was charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Xtreme Motorsports International stock, according to a news release from Wifredo A. Ferrer, U.S. attorney for the Southern District of Florida, and John V. Gillies, special agent in charge for the FBI in Miami.

Gibson was a marketing consultant for Xtreme Motorsports International who conspired with others to create a promotional website that encouraged investor interest in the company, the U.S. attorney’s press release said.

The website contained false and fraudulent statements, including false testimonials, the U.S. attorney said. Gibson faces up to five years in prison, three years of supervised release and substantial monetary fines, as do the others charged, according to the U.S. attorney:

Donald W. Klein, 40, of Frisco, Texas, who faces a count of conspiracy to commit securities fraud by engaging in deceptive and manipulative trading practices in connection with KCM Holdings, of which he was president and CEO. Klein is charged with engaging in a “pay-to-play” scheme to cause a stockbroker to purchase company stock in return for a kickback payment.
Douglas Newton, 66, of Rancho Mirage, Calif., who was charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Real American Brands, of which he was president. Newton is charged with engaging in a “pay-to-play” scheme to cause a pension fund fiduciary to purchase shares in return for a kickback.
Charles Fuentes, 66, of Dana Point, Calif., and Thomas Schroepfer, 54, of Las Vegas, who were charged with one count of conspiracy to commit securities fraud in connection with a scheme to defraud the investing public by engaging in deceptive and manipulative trading practices in connection with Smoke Free Innotec Inc. stock. Fuentes was a consultant and Schroepfer was the president. Fuentes and Schroepfer are charged with engaging in a “pay-to-play” scheme to cause a pension fund fiduciary to purchase shares in return for a kickback.
Ferrer said the case show the risks associated with thinly traded microcap stocks.

"The defendants charged today abused their knowledge of the capital markets hoping to misappropriate money held in pension fund and brokerage accounts to enrich themselves and their co-conspirators,” he said in a news release.

“Investors deserve better than secret investment strategies based on kickbacks and bribes,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a news release. “As our charges make clear, these CEOs got more than they bargained for, but exactly what they deserved, for making illicit payments to manipulate microcap stocks.”

Bustillo said the federal agencies are combining their limited resources to bring the microcap cases, and more are likely down the road.

kgale@bizjournals.com | (954) 949-7520 On Twitter: @kevingale

Beware Penny Stocks (WSJ)

JUNE 7, 2011, 10:15 A.M. ET.

SEC Suspends 17 OTC-Traded Stocks, Questions Disclosures
.


DOW JONES NEWSWIRES

The Securities and Exchange Commission suspended 17 microcap stocks that trade on the over-the-counter market, citing questions about the adequacy and accuracy of publicly disclosed information.

"They may be called penny stocks, but victims of microcap fraud can suffer devastating losses," said Robert Khuzami, director of the SEC's division of enforcement. "The SEC's new Microcap Fraud Working Group is targeting the insiders and promoters, as well as the transfer agents, attorneys, auditors, broker-dealers, and other gatekeepers who flourish in the shadows of this less-than-transparent market."

The 17 companies suspended are American Pacific Rim Commerce Group (APRM), Anywhere MD Inc. (ANWM), Calypso Wireless Inc. (CLYW), Cascadia Investments Inc. (CDIV), CytoGenix Inc. (CYGX), Emerging Healthcare Solutions Inc. (EHSO), Evolution Solar Corp. (EVSO), Global Resource Corp. (GBRC), Go Solar USA Inc. (GSLO), Kore Nutrition Inc. (KORE), Laidlaw Energy Group Inc. (LLEG), Mind Technologies Inc. (METK), Montvale Technologies Inc. (IVVI), MSGI Security Solutions Inc. (MSGI), Prime Star Group Inc. (PSGI), Solar Park Initiatives Inc. (SOPV) and U.S. Oil & Gas Corp. (USOG).

The trading suspensions result from a joint effort among several SEC regional offices, its Office of Market Intelligence and the new Microcap Fraud Working Group, which looks to detect fraud involving microcap securities.

The SEC said stock-touting websites, twitter users and often anonymous individuals posting to message boards have influenced the investment decisions of the public, which often doesn't have adequate information about the securities.

As an example, the SEC said Calypso Wireless hasn't filed periodic reports since February 2008. In spite of this, the shares rose to an intra-day high of 17 cents on Sept. 24, the same day a stock-promoting website allegedly encouraged investors to continue buying the stock. The stock traded at 4 cents on Sept. 21.

-By Melodie Warner, Dow Jones Newswires; 212-416-2283; melodie.warner@dowjones.com

Permanent FDIC Insurance

Basic FDIC Insurance Coverage Permanently Increased to $250,000 Per Depositor
Date: 7/21/2010 Source: FDIC
Author: Andrew Gray (202) 898-7192

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, in part, permanently raises the current standard maximum deposit insurance amount to $250,000. The standard maximum insurance amount of $100,000 had been temporarily raised to $250,000 until December 31, 2013. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The temporary increase from $100,000 to $250,000 was effective from October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013.

"With this permanent increase of deposit insurance coverage to $250,000, depositors with CDs above $100,000 but below $250,000 will no longer have to worry about losing coverage on those CDs maturing beyond 2013. We strongly encourage all bank depositors who have questions about their insurance coverage to go to our Web site at www.fdic.gov and use our Electronic Deposit Insurance Estimator (EDIE) or call our toll-free number at 1-877-ASK-FDIC. Insured deposits provide the comfort and peace of mind to depositors that their money is 100 percent safe – provided they keep their deposit balances within the insurance limits," said FDIC Chairman Sheila C. Bair.

To help consumers, bankers and others understand how the new law affects deposit insurance coverage and to help consumers verify whether their deposit accounts are fully protected, the FDIC provides the following resources:

Information on deposit insurance on the FDIC Web site: Updated brochures on deposit insurance coverage (including the basic guide, Deposit Insurance Summary, and the more comprehensive guide, Your Insured Deposits) and a new version of the "Electronic Deposit Insurance Estimator" (EDIE), an interactive service that allows consumers to quickly and easily check whether their accounts are fully protected, are now available on the FDIC's Web site (www.fdic.gov).
A toll-free consumer assistance line: Help and information about deposit insurance and other matters of interest to bank customers are available at 1-877-ASK-FDIC (1-877-275-3342) Monday through Friday from 8:00 a.m. to 8:00 p.m., Eastern Time. For the hearing-impaired, the number is 1-800-925-4618.
# # #

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insured deposits at the nation's 7,932 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring the addressing risks to which they are exposed.

The FDIC receives no federal tax dollars – insured financial institutions fund its operations. FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200). PR-161-2010

Top 10 Investment Warnings for 2011 (Utah Division of Securities)

01/03/2011

Utah Division of Securities identifies Top Ten Investment Alerts for 2011

Francine A. Giani, Executive Director for the Utah Department of Commerce announced that the Division of Securities has released a top ten list of investment warnings for 2011. The list details fraudulent activity tracked by the Division of Securities over the past year and offers predictions on which investment schemes to watch for in 2011.

“Securities fraud continues to make headlines so we are asking citizens to add financial resolutions to their New Years list,” said Francine A. Giani, Executive Director of the Utah Department of Commerce.

“During fiscal year 2010, our office had over $5.3 million dollars in total fines for fraud cases which is more than twice what was assessed in 2009,“ said Keith Woodwell, Director of the Division of Securities, ”As consumers look to re-energize their retirement investments in the New Year, we urge investors to protect their nest egg by checking out a promoter’s background and any investment offer with our Division.”

Utah Division of Securities Top Ten Investment alert predictions for 2011

1. Affinity Fraud - Affinity fraud is when someone abuses membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Common affinity groups include religion, ethnicity, profession, education, common handicaps, language, age and any other common likeness or shared characteristics that allow investors to trust members of the group. Rather than trusting a person or company due to a common affiliation with a given group, investors should obtain and review a disclosure document that explains the investment opportunity, the background of the management, the amount of money to be raised, the intended use of the money raised, and all the risks associated with making an investment. Upon receipt, investors should review all disclosures with an independent accountant, attorney, or investment professional to receive an unbiased opinion of the investment and the person offering the investment.

2. Inverse and Leveraged ETFs - Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track—or both—are growing in number and popularity. While such products may be useful in some sophisticated, short-term trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Most leveraged and inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time, particularly in volatile markets. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session.

3. FOREX Trading Programs - The most successful perpetrators of investment scams cloak their scam in a veil of legitimacy. FOREX is a term used to describe the legitimate foreign currency exchange market. The value of one nation’s currency, as compared to another nation’s currency, fluctuates on a continuous basis. These fluctuations can sometimes be quite dramatic and depend on innumerable complex factors. Due to the complexity of factors affecting the exchange rate of one currency to another, speculative FOREX trading bears a high level of risk. Despite the risk inherent in FOREX trading, there is always someone new who thinks they can simplify this complex market into a “fail-safe,” “low risk” or “no risk” system that “guarantees” the preservation of capital and significantly higher rates of return than can be achieved investing elsewhere. These FOREX trading programs are often designed to automatically engage in currency trades based on predetermined events or algorithms that the designer has “developed after years of personal experience and working with the top minds in the financial services industry.” The FOREX trading program designer may simply want an individual to purchase this trading system as an investment. Then it is up to the investor to generate the returns or, more likely, discover the flaws in the “fail-safe” system. The investor may also be enticed to invest directly with the individual who has developed this system, who will then trade on investors’ behalf. Unfortunately, under these common circumstances, the person who collected the money may or may not ever invest the funds before they regrettably inform investors some tragic unforeseen event has caused the loss of capital. In fact, in several cases investigated by the Division of Securities, promoters who have promised “guaranteed” returns in their “proprietary” FOREX trading programs have simply stolen the money and spent it on supporting their own lifestyles.

4. Structured Investment Products - Structured investment products are securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency. As the definition suggests, there are many types of structured products from market-indexed CDs offering protection of the principal invested, to a multitude of other structured notes and investments that offer limited or no protection of the principal. The Division’s greatest concern with structured products is the investors’ ability to fully understand the investment. Structured product disclosures are generally complex, making it difficult for the average investor to comprehend them. Without an effective understanding of the investment the investor can have a difficult time knowing the risks, costs, liquidity, and tax-consequences associated with the investment.

5. Promissory Notes - Promissory notes are a written promise to pay a specified amount, to a specific entity at a specific time or upon demand, with or without interest. Promissory notes offered to retail investors carry significant risk. When investing, higher returns are accompanied by a proportionate amount of risk. A track record of paying high interest and even repaying principal is not an assurance that you will get your money back if the company fails. Early investors in a Ponzi scheme often receive interest payments and in some cases principal. Promissory notes are rarely suitable for retirement money, or money borrowed against equity in ones home.

6. Start-up Companies on the Verge of “Going Public” - The lure of getting in on the “ground floor” of a hot start-up business is a classic temptation for investors. Promoters know this, but they also know the deal will be much sweeter if they can promise not only great profits, but also a way for the investor to cash out those profits relatively quickly, if necessary. Unscrupulous persons will often claim that the shares being sold to investors are on the verge of “going public” and will be freely traded on a major exchange. Frequently, promises are made that the shares will trade at a specific future price of $5.00 to $10.00 or more per share. In most of these cases, the reality is that no such public offering is being seriously pursued. “Going public,” in the sense promised by these promoters, is actually a highly expensive and time-consuming process that requires considerable assistance from legal, accounting, and investment banking firms. Only larger, more well-established businesses are usually in a position to register their shares for trading on a major exchange and to pay the ongoing regulatory costs of public registration. If approached by promoters making such promises, investors should contact the Division of Securities and the Securities and Exchange Commission to verify that the required registration statements have been filed.

7. Investment Pools Purchasing Non-Performing Loans - By the time the housing bubble burst, the mortgage and banking industries had made many loans they shouldn't have. As the housing and commercial real estate markets folded, those loans (and pools of those loans) stopped producing revenue, freezing lines of credit in the economy and contributing to the Great Recession. Many financial institutions have since collapsed under the weight of these non-performing loans, leaving the institution's assets to be auctioned off to willing buyers. The Division of Securities has seen a rising number of Utahns seeking to earn big returns by purchasing these non-performing loans. However, as with all investments, investors should remember the risk-reward principal: the greater the potential return, the greater the risk. Despite the ads on late-night television and the Internet, or the stories told during seminars and sales pitches, turning a profit on non-performing loans is a complicated and difficult undertaking. Enterprising individuals have created funds to pool investor money and purchase these non-performing loans. These pooled investment funds present additional risk to the investor and should be fully disclosed in a disclosure document (e.g., private placement memorandum). Investors should read the disclosure document carefully before investing in any pooled investment fund and only invest funds which they can afford to lose. Lastly, investors should always verify whether their investment professional (or the fund manager) is properly licensed and whether the fund itself is properly registered by contacting the Division of Securities.

8. Automatic Trading Software Packages - Some investors have resorted to using a computer to make investing decisions for them. Companies are selling computer software programs that analyze the market and make trades for the investors. Typically, an investor purchases the program, sets up a brokerage account, and places money into the account. The computer program will “track” and “analyze” the market and decide which trades to make. The account is linked up to a brokerage firm which will then make the actual trades based on the computer’s recommendation, using the funds from the investor’s account. Often, a promoter will not just sell the computer package, but will have “openings” for investors to participate in the program. Investors are charged a start up fee and commission fees in addition to the investment funds. Investors should be cautious when evaluating offers of such automatic-trading software packages. The Division encourages investors to do their own due diligence on those selling the programs or promoting them and ensure that you are dealing with licensed professionals. The Division of Securities also cautions any purchasers of such packages against the common practice of allowing family members or friends to “piggy back” on the purchaser’s account by co-mingling funds. The purchaser of the package may expose himself to liability for acting as an unlicensed investment adviser.

9. Iraqi Dinars - Since the beginning of the Iraq War in 2003, speculators have sought to profit by purchasing Iraqi Dinars. Unfortunately, the likelihood of investors seeing any return on their dinars is slim to none. This scam comes in three parts: the hyped returns that play on an investor's greed, the deceptive practices of Iraqi Dinar dealers, and the fundamental misunderstanding of international finance. Currently valued around 1,200 dinars to 1 U.S. Dollar, any appreciation in the value of the Iraqi Dinar would theoretically generate profit, but many websites selling Iraqi Dinars boast these returns could reach up to 1000 percent. Investors need to understand these figures for what they are: speculation and hype. Websites selling dinars also exaggerate or misrepresent history as proof that such profits are possible, but history teaches a vastly different lesson. First, the rapid appreciation of any currency's value is extremely rare (the opposite is much more likely), meaning investors should consider this a long-term gamble not a short-term guarantee. Second, investors may confuse the appreciation of a currency's value with demonitization, which is the process of governments replacing their old currency with a new currency. While Iraq is not likely to do so again (Iraq demonitized from October 2003 to January 2004), exchanging old currency for new currency still keeps the value in U.S. Dollars roughly the same. So new currencies do not generally indicate a new value. While hard currency scams are not new, the methods have evolved. Currency dealers previously avoided regulation by relying on the currency's numismatic value (treating the currency as a collector's item), now these dealers often register with the U.S. Treasury as a Money Service Business (MSB). An MSB registration is nothing more than a check-cashier or a money transmitter; it does not reflect any experience in trading currency nor entail any qualifications on the part of the dealer. The reason dealers seek this meaningless registration is to lend legitimacy to their scam and avoid proper regulation, which would entail oversight and require full disclosure be made to investors. Additionally, since no exchange exists for the Iraqi Dinar, dealers can charge whatever they want to sell and buy back the dinars. Investors should fully understand that a small increase in value will not likely be enough to breakeven after these fees are considered. Worst of all, some websites have even been selling counterfeit dinars. Ultimately, however, the power of hard currency scams come down to a subject most are unfamiliar with: international finance. The market determines currency values based on numerous factors. In the case of Iraq, many of these factors are political and unpredictable, making dinars a risky bet at best. Of all the risks though, inflation is the greatest. As an economy improves, workers find jobs and earn more money, increasing demand and, therefore, prices. As prices rise, the value of the currency falls. Another inflationary pressure may be the Iraqi government itself. As the Iraqi government seeks to improve conditions, it may be tempted to monetize their debt (essentially, print more money) and drive inflation further. Combating inflation is difficult for established governments and economies, let alone one emerging from a dictatorship, a war, and an ongoing insurgency, so even the best scenario of an improved Iraqi economy may not lead to profits for investors in Iraqi Dinars.

10. Unsuitable Variable Annuity Sales Practices - Aggressive marketing of variable annuity insurance products are a concern, especially when seniors are targeted. Sales pitches, which are frequently offered in conjunction with free lunch seminars, are sometimes used in an attempt to scare or confuse investors by claims that these products will protect or insure them against any market losses. While variable annuities can be appropriate as an investment in some circumstances, investors should be aware of restrictive features including potential surrender charges, tax penalties for early withdrawals, and limitations on the insurance guarantees. Brokers and investment advisers recommending variable annuities must collect information about your financial status to assess if a variable annuity is suitable for your individual circumstances. Protect yourself by asking the sales person to explain guarantees, liquidity issues, fees and market risks.

Three questions every investor should ask:


1.Is the person offering the investment licensed? Find out by calling the Division of Securities at (801) 530-6600.
2.Is the stock offering registered? All securities sold in the state must be registered or exempt. Before you invest your money, call the Division of Securities to make sure it is a legitimate offering.
3.Did the promoter give you a written prospectus summarizing the investment? Did he or she give you a copy of the financial statements showing how the company is doing? Has the promoter disclosed his or her prior business success or any previous criminal convictions or bankruptcies?

The Seven most common warning signs of investment fraud are:


1.Promises of high returns. Any claim that you can double your money in six months is a fraud.
2.Claims that the investment is guaranteed or that it has little or no risk.
3.Pressure to invest immediately because there is a deadline or only a few openings left.
4.Encouraging you to borrow money from equity in your home to maximize the profit you can make. Because all investments involve risk, no legitimate securities broker will recommend using home equity to make an investment.
5.Vague descriptions about how your money will be used or what the company does.
6.Claims that other people have already checked out the investment and are investing. These may include well-known members of the community or people within your affinity group (your church, workplace, or service organization).
7.The assertion that this investment involves new technology that can solve a problem that big companies in this industry have been unable to solve (such as drilling for oil in new places, new pharmaceuticals that cure well-known diseases, or high-tech inventions).

Investors should do business with licensed securities brokers and advisers and report any suspicion of investment fraud to the Utah Division of Securities by calling (801) 530.6600; toll free at 1.800.721.7233 or logging on to www.securities.utah.gov.

Big New Bounty Program for Whistleblowers ( Boardmember.com on Dodd - Frank Financial Legislation)

October 28, 2010


Opening the Floodgates: The Dodd-Frank Whistleblower Provisions’ Impact on Corporate America


by Doug Clark, Wilson Sonsini Goodrich & Rosati
During Corporate Board Member and NYSE Euronext's Annual Boardroom Summit audit committee peer exchange, the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) excited discussion and concern. That’s not surprising, as a fair amount of government activity focused on Dodd-Frank is presently in the works. In October, the Securities and Exchange Commission (SEC) will report to Congress concerning its whistleblower bounty program, as well as the establishment of its own whistleblower office. In November, the SEC will propose rules to establish a Whistleblower Incentives and Protection Program and will appoint the head of the new whistleblower office. That sound you hear is the sound of our government growing. [1]

The corporate world should watch the evolution of this bounty program closely. To help set these developments in context, this article provides some background and thoughts about the future.

A Short Summary: Dodd-Frank requires the SEC, in any action in which it levies sanctions in excess of $1 million, to compensate whistleblowers who provide original information with between 10 to 30 percent of the amount of the sanctions. [2] Is This New News? Part I: Kind of. The SEC actually has had a bounty program in place for more than 20 years. This original bounty program rewarded whistleblowers for information leading to the recovery of a civil penalty from an insider trader, a tipper, or someone who controlled an insider trader. The bounty was limited to 10 percent of a civil penalty exacted pursuant to a court order. The decision to award a bounty, and to whom, was within the sole discretion of the SEC (as it will be under Dodd-Frank).

This bounty program was a fairly well-kept secret, as the Office of Inspector General (OIG) noted in a March 29, 2010, report: “[T]he Commission has not received a large number of applications from individuals seeking a bounty over this 20-year period. We also found that the program is not widely recognized inside or outside the Commission.” [3]

In fact, the OIG determined that between 1989 and 2009, the SEC had paid a total of seven bounties to five claimants amounting to less than $160,000 and had denied five bounty applications. Consequently, the OIG made a number of recommendations to improve the bounty program, including coming up with a communication plan to raise the profile of the program, posting an application form on the SEC website, and developing specific criteria for awarding a bounty. The OIG also suggested that the SEC incorporate best practices from more successful Department of Justice (DOJ) and Internal Revenue Service (IRS) bounty programs, both of which are discussed below.

For purposes of this discussion, the old bounty program is just an interesting reference point. The Dodd-Frank mandate to the SEC is broader and more lucrative for whistleblowers. The Whistleblower Incentive and Protection Program to be implemented by the SEC will not be limited to insider trading and will not cap bounties at 10% of a civil penalty. It’s also apparent that the new bounty program will not be a secret inside or outside the Commission.

Is This New News? Part II: Anyone outraged at the concept of our government paying whistleblowers for reporting unlawful activity might be surprised to find out that it’s been going on for a quite a while and that it’s a big, lucrative business. Two federal bounty programs stand out and are worthy of discussion.

The False Claims ActThe False Claims Act, 31 U.S.C. § 3729, et seq., generally creates liability for persons who make false claims to or defraud the government in order to receive money from the government. For example, a defense contractor who knowingly submits a false invoice to the government for payment would run afoul of this act. Section 3730 permits a whistleblower – called a relator in False Claims Act jargon – to bring an action for the government. The procedure for initiating and maintaining such an action, called a qui tam action, is complex and beyond the scope of this article. Where the government proceeds with an action brought by a whistleblower, the whistleblower is entitled to at least 15 percent and up to 25 percent of the proceeds of an award or a settlement. If the government declines to proceed with the case and the relator proceeds with it and obtains a recovery, the whistleblower is eligible for a higher percentage.

The False Claims Act, once known as the “Lincoln Law” was enacted in 1863 to address government contracting fraud during the Civil War. It was substantially amended most recently in 1986 (note that the old SEC bounty program went into effect in 1989). Since 1986, according to DOJ statistics, qui tam lawsuits have returned more than $15 billion to the government and have generated $2.5 billion in awards to whistleblowers. That’s real money, and it has attracted real plaintiff law firms to represent whistleblowers in qui tam actions. Needless to say, the SEC’s old bounty program did not spawn a thriving plaintiffs’ bar.

Early indications are that the plaintiffs’ securities class action and qui tam bar are acutely interested in the Dodd-Frank whistleblower provision. For example, one of the leading False Claims Act plaintiffs’ firms has created a portion of its website for this opportunity, as I’m sure others have. [4] In addition, a reference to the Dodd-Frank whistleblower provision has worked its way into the standard press releases seeking plaintiffs for securities class actions. One does not have to be an economist to see the direction in which this is heading. Plaintiffs’ lawyers follow the money, and they smell money in this new law.

Tax Fraud CasesIn 2006, the IRS seriously entered the whistleblower field with the passage of the Tax Relief and Health Act of 2006. The whistleblower provisions of that act offer a bounty to those who provide the IRS with information about tax underpayments of $2 million or more, with whistleblowers eligible for up to 15 to 30 percent of the amount recovered by the IRS. The program is young, but statistics for 2008 are illustrative of the kind of traction a whistleblower program can get in its early days: In that year alone, the IRS received 476 whistleblower complaints alleging tax underpayment by 1,246 taxpayers. It’s not clear how much money whistleblowers yielded from those complaints. [5]

It is not beyond belief that the whistleblower office the SEC will give birth to this month will administer a program that could generate a similar or greater number of complaints. The impact on the SEC’s Enforcement Division and Corporate America will be tremendous. More on that below.

What About My Hotline?: The Sarbanes-Oxley Act of 2002, passed in reaction to the spate of corporate scandals (Enron, Worldcom) that preceded the spate of corporate scandals that spawned Dodd-Frank (Countrywide, Bear Stearns, Lehman Brothers), required public company audit committees to establish procedures for “confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.” [6] Public companies faithfully complied, and it became a routine part of audit committees’ lives to review, examine, and investigate anonymous complaints. Most companies set up a hotline that employees could use to report potentially fraudulent activity.This provision of Sarbanes-Oxley worked. Employees registered complaints and Audit Committees considered them and, in many instances, retained counsel and experts to investigate them. Companies did not set up bounties, however, and are poorly positioned to compete with the SEC’s promise of a 15 to 25 percent cut of any potential fine. Let’s say you were a well-intentioned employee of a publicly listed company and are distressed when you learn that high-ranking employees at your company are bribing government officials in foreign countries. Do you call the audit committee hotline and sleep the sleep of the righteous? Or do you contact the SEC’s brand spanking new whistleblower office and, perhaps someday, sleep in Gstaad after a day on the slopes? In 2008, the SEC reached a settlement with Siemens AG for violations of the Foreign Corrupt Practices Act (FCPA) and obtained a $350 million disgorgement of profits. Feel free to pause and do the arithmetic. It is not unreasonable to assume that the Dodd-Frank whistleblower provisions will largely render moot the Sarbanes-Oxley audit committee procedures.

FCPA—Where the Real Money Is: Having mentioned the FCPA anecdotally, it’s appropriate to bring the point home. Pursuant to the FCPA’s anti-bribery provisions, it is unlawful for any issuer, domestic concern, or person acting in the United States to offer anything of value to members of a foreign government, international organization, or political party for the purpose of: (1) influencing duties; (2) inducing them to use their influence to affect a foreign government’s or agency's decision; (3) obtaining or retaining business for anyone; or (4) directing business to anyone. Fines and penalties for violating the FCPA tend to be higher than fines for violations of other aspects of the securities laws. The reason for that is simple: The fines are driven by the profits a company makes by virtue of the wrongful conduct. The SEC has made it clear through its public statements that it intends to focus on investigating and taking action on violations of the FCPA. More importantly, the SEC has made the point clear through its enforcement program. In 2010 alone, the SEC concluded 12 FCPA investigations and assessed monetary penalties totaling more than $360 million.Putting aside the Goldman Sachs settlement of $550 million this year for alleged unlawful activity relating to the financial crisis, these numbers are staggering compared to standard SEC settlements. Settlements in more typical SEC enforcement matters relating to insider trading and false financial reporting this year ranged from $20,000 to $28 million. While whistleblower activity under the new regulatory regime will be robust in all areas, the FCPA will be the belle of the ball.

You Can Be a Whistleblower: So can I. Anyone can. Renowned Enron whistleblower Sherron Watkins was an Enron employee and perhaps that created a perception that whistleblowers and corporate employees are one and the same. That’s not an accurate association, however. Dodd-Frank defines whistleblower as follows: “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” [7] This is drafted broadly enough to encompass, for example, forensic accountants poring through public filings for perceived inaccuracies. Could a competitor or customer become a whistleblower? Sure. Anyone can be a whistleblower, assuming they can dredge up information or an analysis indicating a violation of the securities laws.

Obvious Statements about the Future: Although the SEC has work to do to flesh out the Dodd-Frank whistleblower provisions, for the first time the agency has the benefit of a significant incentive program for people to identify corporate wrongdoing. The infrastructure and rules the SEC puts in place to implement the law will be modeled after the successful DOJ and IRS bounty programs. There will be hundreds of whistleblower complaints to the SEC annually, and the Division of Enforcement and the new whistleblower office will be under a severe burden to handle them all. Numerous investigations will ensue, prompting companies to respond to the SEC investigations and, in some cases, initiate audit committee investigations about the allegations. Follow-on class and stockholder derivative actions may be filed in reaction to SEC investigations.

Lastly, at some point in the next year or so, it is quite likely that the SEC will announce a substantial bounty payment arising from the Dodd-Frank whistleblower initiative. Then, the floodgates will truly open.


[1] See www.sec.gov for more information about the SEC’s Dodd-Frank implementation program and rulemaking/comment process.
[2] To see the Dodd-Frank text, go to http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html.
[3] See http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf.
[4] See http://www.phillipsandcohen.com/CM/Custom/Whistleblowers-for-SEC.asp.
[5] http://www.irs.gov/pub/whistleblower/annual_report_to_congress_september_2009.pdf
[6] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §301, 116 Stat. 776 (2002)
[7] http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html



Topic tags: audit committee, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protect Act

Why Did Your Credit Score Go Down? Common Mistakes (cardratings.com)

5 Common Mistakes That Can Cripple Your Credit Score
July 29, 2010
By: Beverly Blair Harzog

Have you ever been surprised when your FICO score dropped? Most likely, it's because you made one of the five mistakes below. Most people aren't aware of the impact some of these actions have. And what's interesting is that it appears that the higher your FICO score, the greater the drop when you make a mistake.

#1: Closing an account
People often decide to close a credit card account for one of two reasons. One, they think they have too many cards and that closing one will increase their score. Two, their credit limit has been decreased and they decide the card is no longer useful to them. But whatever your reasons are, closing an account can lower your score."There's a misconception that having too much available credit lowers your score. FICO scores don't take this into consideration. But when you close an account, it can often raise your utilization rate and that can lower your score," says Barry Paperno, Consumer Operations Manager for myFICO.com.

Your utilization rate is the ratio of your credit card balances to your credit limits. For instance, let's say you have two cards and one has a zero balance and one has a $1,000 balance. If each card has a $2,000 limit, your total limit (across both cards) is $4,000. Your utilization rate is $1,000/$4,000 = .25, or 25%. Not fabulous, but not too bad.

Close the account with the zero balance and your utilization rate jumps to 50% ($1,000/$2,000). Obviously, the amount of the impact on your score will vary according to your individual circumstances, but since the utilization rate may account for almost 30% of your score, you're FICO score will probably take a negative hit.

#2: Maxing out your credit cards
Many consumers make the mistake of thinking that their credit limit is an invitation to spend until it's gone. Now that you understand utilization rate, you probably now understand why maxing out your cards is a problem. Let's look at our example from #1 again. If you max out your two cards, you'll have a $4,000 balance with a $4,000 limit. It's doesn't take a math genius to quickly figure out that your utilization rate is now 100%.

Your FICO score will take a hit. How much? "It depends on a lot of variables, including what your FICO score was before you maxed out your cards," says Paterno. myFICO.com recently did a comparison of how much a score drops when one individual has a FICO score of 680 and the other individual has a FICO score of 780. Maxing out credit cards was one the "missteps" they used in the comparison.

Results showed that the consumer with the 780 score experienced a 25-45 point drop and the score fell into the 735-755 range. The person with the 680 score saw only a 10-30 point drop and the score fell into the 650-670 range. You can check out the study here.


#3: Making late payments
One problem with making late payments is that, depending on the terms and conditions of your card, you might trigger the penalty APR. The other problem with a 30-day or more delinquency is that it can make your score drop like a rock. "Someone with a 780 score could experience a drop of 100 points or more with a 30-day delinquent payment. If your score is in the 680 range, expect to lose about 60-80 points," says Paterno. Now, if this late payment stretches into collections, then expect a really big drop.

#4: Impulsively opening accounts to save 15%
This happens every holiday season, doesn't it? Whether it's a Labor Day sale or Black Friday, you're standing in line in your favorite department store holding a lot of merchandise, and then the cashier tempts you with a "get 15% off if you open an account today" offer. When you open a new account, this results in a hard inquiry, which affects your score. But that's only part of the problem.

"Typically, inquiries knock only about five points off your score. The bigger problem is opening an account with a high interest rate and putting yourself in a situation where you get behind on a payment," says Paterno. If you're on the bubble between having good credit and excellent credit, those five points can mean a lot. And of course, if you end up with late payments, matters deteriorate from there.

#5: Not understanding the importance of the length of credit history
This mistake often ties into the #1 mistake on this list. Sometimes when people close a card, they close one they've had a long time. The length of your credit history makes up 15% of your FICO score. Now, FICO scores are calculated based on the average length of time you've had your credit cards. The score considers both your current accounts and any closed accounts still included on your credit report. Credit bureaus typically keep account histories on your credit report for years after you close the account or pay off the loan. "If you close a card you've had for ten years, this can eventually bring down the average length of your credit history," says Paterno.



About the Author
Beverly Blair Harzog is a spokeswoman and contributing editor for CardRatings.com. She's a former CPA and an award-winning personal finance journalist. She's a former columnist for the Navy Federal Credit Union’s magazine, Home Port, and has written about credit issues for CNNMoney.com, FoxBusiness.com, Good Housekeeping, Bankrate.com, Bottom Line Wealth, CreditCards.com, AARP Bulletin Today, and more. She’s also the co-author of The Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Penguin, April 2009). Follow her on Twitter @beverlyharzog .

What Ever Happened to Eastern Financial Credit Union (NYTimes)

May 14, 2010
A Credit Union That Played With Fire
By GRETCHEN MORGENSON

WHEN Wall Street is accused — as it has been so often these days — of selling risky products to unwitting customers, it usually argues that investors in such exotic stuff are sophisticated adults capable of assessing any hidden dangers.

So it goes with collateralized debt obligations, or C.D.O.’s, which are bonds, loans and other assets that the Street pools together and sells as packages of securities. Purveyors of C.D.O.’s maintain that buyers who lost billions in these mortgage-related instruments were, of course, sophisticated.

But as a recent report from the inspector general of the National Credit Union Administration shows, it is neither credible nor factual that only savvy investors bought C.D.O.’s.
The report analyzes the April 2009 collapse of the Eastern Financial Florida Credit Union. Based in Miramar, Fla., this state-chartered institution was created in 1937 to serve the Miami employees of what later became Eastern Airlines. The institution added other Florida employee groups and was serving 208,000 members when it failed last year.
Eastern Financial had $1.6 billion in assets at the end of 2008. The company was placed in conservatorship on April 24, 2009. It was taken over by the Space Coast Credit Union of Melbourne, Fla. The failure will cost the National Credit Union Share Insurance Fund, the federal agency that guarantees credit union deposits, an estimated $40 million.

Because it was based in Florida, the doomed credit union had its share of bad real estate loans on its books. But the inspector general’s autopsy report said that the major cause of the Eastern Financial collapse was its decision to dive head-first into toxic C.D.O.’s just as the mortgage mania was faltering.

Between March 2007 and June 22, 2007, the credit union committed nearly $100 million to buy 16 of these instruments; most contained dicey home equity loans.

The timing of these purchases is intriguing. The spring of 2007 was when Wall Street’s mortgage machinery was sputtering; New Century Financial, a big subprime lender, filed for bankruptcy that April. Brokerage firms that had provided funding to lenders like New Century and Countrywide began pulling in their credit lines. At the same time, it became a matter of some urgency for these firms to jettison mortgage-related securities in their pipelines.

Who sold Eastern Financial its toxic securities? Alas, the inspector general identifies neither the C.D.O.’s the credit union bought nor the firms that peddled them.

But the report did note that the instruments Eastern Financial bought were private placements, “which provided less readily available market data to perform analysis and provide better understanding of underlying assets and grading system, tranches, etc.” In other words, the most obscure C.D.O.’s imaginable.

“This situation illustrates yet again why over-the-counter securities and derivatives are not suitable for federally insured banks and other ‘soft’ institutional clients,” said Christopher Whalen, editor of The Institutional Risk Analyst. “Wall Street securities dealers who knowingly cause losses to federally insured depositories should go to jail.”

Credit unions are nonprofit entities and typically do not engage in the risky investing that bank executives did during the credit bubble. Federal credit unions are also limited in the types of securities they can buy. While they can purchase mortgage-backed securities, they are barred from buying C.D.O.’s.

State-chartered credit unions have more leeway to invest in exotic instruments if their home states allow it. Florida, California and Michigan are three such states. But according to the National Credit Union Administration, less than 1 percent of all credit union investments fall into the exotic category.
THOSE state-chartered institutions that can buy C.D.O.’s and other riskier investments must set aside reserves of 100 percent of mark-to-market losses in such securities when they decline in value. This is intended to deter credit union executives from venturing down the risk spectrum.

The Florida credit union met that requirement, but clearly the deterrence didn’t work. Eastern Financial’s failure may be an outlier, but it makes for a terrific case study.

Indeed, the inspector general’s analysis is depressingly familiar. Eastern Financial’s management and board “relied too heavily on rating agencies’ grading of C.D.O. investments,” it concluded, and failed to evaluate and understand their complexity.

Almost immediately after the credit union bought the C.D.O.’s, they fell in value. By September 2007, the credit union had recorded $63.4 million in losses on the products, almost two-thirds of the original investment. By the time of its failure, the credit union had charged off all 18 C.D.O. investments, resulting in total losses of nearly $150 million.

Richard Field, managing director of TYI, which develops transparency, trading and risk management information systems, says the Eastern Financial collapse is yet another example of why investors in complex mortgage securities need to be able to consult complete loan-level data on what is in these pools.

“A sizable percentage of the problems in the credit markets and bank solvency are directly related to this lack of information,” Mr. Field said.

But the Eastern Financial insolvency also illustrates why regulators should make Wall Street adhere to concepts of suitability for institutions as well as individuals, Mr. Whalen said.

“The dealers who sold the C.D.O.’s to this credit union should be sanctioned,” he said. “It might even be possible to pursue the dealer who sold the C.D.O.’s under current law. At a minimum, the Securities and Exchange Commission should impose retail investor suitability standards onto banks and public sector agencies to end the predation by large Wall Street derivatives dealers.”

Will the National Credit Union Administration pursue any of the credit union’s executives or the firms that sold it the toxic securities? “We always consider potential claims of third-party liability in cases of this magnitude," said John J. McKechnie III, director of public and congressional affairs at the administration.

Why Are CDs, Money Market Rates So Low? (NY Times)

December 26, 2009
At Tiny Rates, Saving Money Costs Investors
By STEPHANIE STROM
Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”

The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.

The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.

Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.

Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.

No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”

“What people are paying for is safety and security,” she said, “and that’s probably just right.”

People who rely on income from such investments for support, however, are being forced to consider new options.

Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.

“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”

She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.

Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.

“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.

But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

Alert: Annuities Sold in Banks (NY TImes)

December 10, 2009
A.I.G. Units Omit Name and Excel
By MARY WILLIAMS WALSH

Just months after dropping the telltale “A.I.G.” from its sales brochures, the company has leapfrogged its competitors and reclaimed a title it held for many years before its bailout — the top seller of fixed annuities to bank customers.

People buying the annuities in bank branches may be surprised to know they are signing up with A.I.G. The contracts are being offered under the names of two subsidiaries, Western National Life and First SunAmerica. Until last June, they carried the name of A.I.G. Annuity.

The booming annuity sales are a bright spot for American International Group, which must raise cash to pay back the federal government.

But some competitors and consumer advocates are questioning A.I.G.’s comeback, saying its ability to keep drawing federal money is giving it an unfair advantage just a year after its government rescue.

Often sold as alternatives to certificates of deposit, fixed annuities are insurance contracts that guarantee a set rate of return, unlike variable annuities, whose returns may track the ups and downs of the markets.

The people who buy them in banks tend to be looking for something safe, but which pays more than a certificate of deposit. Fixed annuity contracts usually run for many years, and even before A.I.G.’s bailout last year, its customers began to have qualms about tying up their money with a company whose future was uncertain.

After the bailout, they accelerated their withdrawals from A.I.G., even if they had to pay a penalty to get their money back. Most new buyers sought out other insurers, like Transamerica and New York Life, which had higher ratings and did not get assistance through the Troubled Asset Relief Program.

But since June, and the name change, the A.I.G. subsidiaries have slogged their way back to the top. In the third quarter, Western National sold more fixed annuities in banks than any other insurer, according to Kehrer-Limra, a research and consulting firm that tracks sales of insurance and investment products in banks.

New York Life, which had claimed the lead in the first half of this year, has now fallen back to third place, and Transamerica is fourth. Other former contenders, like Genworth and MetLife, are not in the top five anymore.

Even though fixed annuities can bring their issuer a lot of cash quickly, like bank deposits, they can also erode an insurer’s capital faster than sales of other types of insurance. That is because they require the company to set aside very large reserves from the outset.

The risks this can pose are not just theoretical. Another A.I.G. subsidiary — one that the Federal Reserve Bank of New York recently took a $9 billion stake in — sold such a large volume of fixed annuities through Japanese banks that it wound up with insufficient capital to support its businesses.

A spokesman for A.I.G., Mark Herr, said the unit, the American Life Insurance Company, had restored its capital by transferring risks “using coinsurance and modified coinsurance,” among other techniques. He said the problem had not recurred since 2007.

In normal times, only well-capitalized insurers tend to promote fixed annuities heavily, to avoid stretching their resources too thin.

But these are not normal times. Western National was one of a dozen A.I.G. insurance subsidiaries whose investment portfolios were dipped into by A.I.G. Securities Lending — an affiliate that pooled more than $80 billion worth of the insurers’ assets and lent them out to banks and Wall Street firms, to use in trading.
The securities lending program imploded. Western National’s share of the losses was $7.9 billion, and the company was recapitalized as part of the federal bailout of A.I.G.

Joseph M. Belth, editor of the Insurance Forum, a consumer-oriented newsletter that tracks the financial strength of insurance companies, said that at the very least, purchasers were entitled to know the extent to which A.I.G., the parent, was standing behind the annuities of its subsidiaries. Only the subsidiaries are monitored to make sure enough money stands behind their promises.

Competitors said they believed Western National was using the new money from the Treasury to finance some of the highest teaser rates in the industry.

“Some insurers are selling annuities at rates that suggest that they are either building more risk into the investment portfolio than might be prudent, or using this as a way of raising cash, perhaps to pay off other obligations,” said Gary E. Wendlandt, the chief investment officer and vice chairman of New York Life.

Judith Alexander, of Beacon Research, which tracks annuity terms, confirmed that Western National was offering some of the higher “bonus rates” on fixed annuities through banks, allowing customers to capture more than 5 percent for one year, but she said it also offered contracts that guaranteed lower rates, in the neighborhood of 2.6 percent, over a longer period.

The chief executive of Western National, Bruce R. Abrams, said customers were opting for the longer terms.

“We’re not selling much bonus-rate product,” he said. “It’s the multiyear guaranteed rate. That’s what the customers are looking for, and that’s what we’re selling them.”

He also cited Western National’s longstanding relationships with banks, which he said allowed the company to negotiate individual terms with banks every week, giving them a high degree of flexibility. For example, he said, if a bank wanted to capture the attention of customers by offering them a higher interest rate than Western National proposed, Western National might arrange for them to do so by offsetting the cost with a smaller commission. The bank would then try to make up the difference on volume.

“That’s unique,” he said. “We’ve been doing that for over 15 years.”