UPDATE: Ex-Money Manager Vilar Sentenced To 9 Years Prison For Fraud

Ex-money manager Alberto Vilar and his business partner Gary Tanaka were sentenced to prison terms Friday after they were convicted in 2008 of bilking investors out of millions of dollars.

At a hearing Friday, U.S. District Judge Richard J. Sullivan in Manhattan sentenced Vilar, one-time head of defunct Amerindo Investment Advisors, to nine years in prison, while ordering Tanaka, a one-time Amerindo director and officer, to serve five years in prison.

On Friday, the judge found the loss to victims who testified at trial was about $21.9 million.

“People need to be able to trust their financial adviser,” Sullivan said before imposing sentence.

Vilar, 69 years old, also was ordered to forfeit more than $22 million; to pay restitution of $21.9 million, plus interest; and to pay a fine of $25,000.

The judge said he expected to impose restitution and forfeiture against Tanaka, in the neighborhood of $20 million. Tanaka also was ordered to pay a $20,000 fine.

In November 2008, Vilar was convicted on securities fraud, mail fraud, wire fraud, investment-adviser fraud and money-laundering charges.

Vilar, who was subject to home confinement pending trial, was ordered detained in December 2008 and has been in custody since then.

At the time, Tanaka, 66, was convicted of conspiracy, securities fraud and investment-advisor fraud, but acquitted on nine other counts.

In a rambling statement in court Friday, Vilar defended the firm’s trading strategy and said that $48 million was available to cover about $20 million in claims from victims. As a result, he said he didn’t “intellectually understand” the loss amount alleged by prosecutors.

“I deeply regret any inconvenience our 14,000 clients may have suffered,” Vilar said. “Fortunately, there are only five victims. I’m 95% confident they will be paid and not suffer a loss.”

Prosecutors from the U.S. Attorney’s office in Manhattan had alleged that Vilar, a longtime opera patron, and Tanaka misappropriated client funds for personal expenses, charitable contributions and Amerindo’s operating expenses.

One of the victims was Lily Cates, the mother of actress Phoebe Cates.

The men, who were originally arrested in 2005, also had been accused by prosecutors of engaging in a scheme to defraud investors in so-called guaranteed fixed-rate deposit accounts, or GFRDAs.

During the hearing, Glenn Colton, Tanaka’s lawyer, argued that his client was different from Vilar, saying Tanaka traveled coach on airlines, while Vilar traveled first class. He described the crimes Tanaka was convicted of as an “aberration.”

“They’re different,” Colton said. “They did different things and, I submit, they should be treated different.”

Prosecutors said the men didn’t invest in short-term debt instruments as promised, discouraged investors from redeeming their investments and diverted money from other Amerindo clients to repay its obligations to GFRDA investors when those funds didn’t perform as promised.

“The last several years–from the age of 82 to 89–have been frightful years for me,” said Herbert Mayer, an 89-year-old retired surgeon and a victim of the scheme. He spoke during the hearing from a wheelchair.

Prosecutors said Mayer and his two daughters, who live in Yonkers, N.Y., suffered a loss of more than $11 million.

“They have robbed my family’s hard earned fortune,” said Debra Mayer, one of his daughters, in reference to Tanaka and Vilar.

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In Insider Trading Inquiry, Old and New Cases Linked

Federal prosecutors unsealed criminal charges on Tuesday against an informant who had secretly recorded conversations with people charged in the insider trading case involving the Galleon Group hedge fund.

The move demonstrates how prosecutors and officials at the Securities and Exchange Commission are using people charged in previous cases to uncover other insider trading operations on Wall Street, including at Galleon.

The informant, David R. Slaine, worked as a top trader at Morgan Stanley during the technology boom of the late 1990s before joining Galleon. After Mr. Slaine left Galleon to set up his own firm, DSJ International Resources, he began receiving tips about research reports from Mitchel S. Guttenberg, a former executive at UBS Securities, before they were disseminated to the public, according to his guilty plea entered in December and revealed by prosecutors on Tuesday.

In mid-2007, authorities learned that Mr. Slaine had information about other people involved in insider trading who were not part of the UBS investigation. He then began assisting officials in an investigation of Galleon and another trading ring involving Craig C. Drimal, who worked out of Galleon’s offices, people close to the case said. Part of Mr. Slaine’s cooperation included wearing a hidden recording device in meetings with Mr. Drimal and others who have been charged in the Galleon case.

According to records unsealed on Tuesday, Mr. Slaine admitted that he and Erik R. Franklin, another associate at DSJ, traded on the tips, making more than $3 million in profits for the hedge fund, and $500,000 for himself. During the investigation into the tips in July 2007, Mr. Slaine agreed to plead guilty and cooperate with investigators in the hope of receiving a reduced sentence.

Mr. Slaine on Tuesday was also charged with insider trading in a civil lawsuit filed by the S.E.C. He faces up to 25 years in prison when he is sentenced on June 25.

“David Slaine used insider information in order to gain an illegal advantage over others who were playing by the rules,” Preet Bharara, the United States attorney for the Southern District of New York, said in a statement. “Slaine’s guilty plea represents another step in our ongoing effort to hold corrupt professionals on Wall Street accountable.”

Mr. Slaine’s lawyer, Stephen Kaufman, did not respond to a call and e-mail message seeking comment.

Mr. Guttenberg and Mr. Franklin have pleaded guilty to criminal charges. Mr. Guttenberg is serving a 78-month prison sentence for his role in the case. Mr. Franklin was sentenced to three years of probation in December.

The two men were among 13 people who pleaded guilty to fraud and conspiracy charges after authorities brought one of the largest insider trading cases in Wall Street history in 2007.

Mark E. Lenowitz, another hedge fund trader who pleaded guilty in the 2007 case and is cooperating with the government, is scheduled to be sentenced on Thursday.

Separately, seven people indicted last month on insider trading charges in the Galleon case pleaded not guilty on Tuesday at a hearing in Manhattan before United States District Judge Richard J. Sullivan.

Mr. Slaine had recorded meetings with at least two of the defendants who pleaded not guilty Tuesday, including Zvi Goffer, a former trader at Galleon who left to set up his own hedge fund, and Mr. Drimal, who worked out of Galleon’s offices but was not employed there.

Others who pleaded not guilty included Mr. Goffer’s brother Emanuel; Arthur Cutillo, a former intellectual property lawyer at Ropes & Gray; Jason Goldfarb, an associate at another New York law firm; and Michael Kimelman and David Plate, who worked at the hedge fund Incremental Capital.

In all, 22 people, including Mr. Slaine, have been criminally charged or face civil charges by the S.E.C. in connection with the Galleon case. Nine have pleaded guilty so far and several are cooperating with investigators. Raj Rajaratnam, the founder of Galleon, is among those charged and has pleaded not guilty. They are accused of making tens of millions of dollars in illegal profits by trading on nonpublic information.

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SEC Publishes Interpretive Guidance on Climate Change

The SEC posted on its website its interpretive release to provide guidance to public companies regarding the Commission’s existing disclosure requirements as they apply to climate change matters.

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The Perils Of Letting A Relative Manage Your Money

In journalism they say three makes a trend and regretfully my office has identified a disturbing one relating to investors who let a family member manage their money.  During the past few months we’ve been contacted by various individuals whose accounts were grossly mismanaged by a family member, including a father whose son put him into some investments that were patently unsuitable for his risk tolerance.  The father has a compelling case, but he’s torn about filing a case against his own flesh and blood.

In theory, choosing a relative to manage your money makes sense on the belief that a relative is more likely to act in one’s best interest.  Brokerage firms prey on this perception; when a broker enters the business he or she typically is instructed to contact family members to attract assets to the firm and build his or her book of business.  It’s tough saying no to young Johnny or Jane when they politely hit you up for some assets to manage at the outset of their careers.

More: The Perils Of Letting A Relative Manage Your Money

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US Banks Face Insider Trading Probe

Neil Barofsky, the special inspector-general overseeing the US government’s financial rescue efforts, is to probe allegations of insider trading among bank executives and their associates.

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.

“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”

Sig-Tarp, the office of the special inspector-general, published its quarterly report to Congress on Sunday, criticising the capital investments in banks as having failed to stimulate lending.

“Part of the problem is, when the Tarp funds were extended . . . although there was this public disclosure that the purpose of these programmes was to increase lending, very little, if anything, was done to encourage or direct lending,” said Mr Barofsky.

The Treasury is celebrating faster than expected Tarp repayments from the financial sector; it now expects relatively small losses, with some elements generating big profits.

While Mr Barofsky acknowledges this, he said there remained substantial problems with the struc-ture of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.

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Obama Calls for Increased Funding for SEC and CFTC

President Obama released the 2011 Budget today.  According to published reports, it calls for a 11 to 13% increase (varies in reports) in the SEC’s budget, to nearly $1.3 billion, and a 55% increase in the CFTC’s budget, to $261 million.  Some of the increases are contingent on Congress passing legislation expanding the agencies’ authority.  See: WPost, Obama 2011 budget request: SEC, CFTC

The SEC released the following statement:

The following is a statement from SEC Chairman Mary L. Schapiro regarding the President’s FY 2011 budget request of $1.258 billion for the SEC, which represents a 12 percent increase over its FY 2010 budget:

“If enacted, the President’s request will do a great deal to help us keep pace with the continuing growth of the markets and provide necessary resources to support important regulatory initiatives in 2011.”

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SEC Plans to Use Increased Funding to Reinvigorate Enforcement

The SEC released its 2011 Budget Justification which provides further information about how the SEC plans to spend its funds if the increased funding set forth in the Administration’s budget comes to pass.  The Executive Summary states:

Between fiscal years (FY) 2005 and 2007, the SEC experienced three years of flat or declining budgets, losing 10 percent of its employees and severely hampering key areas such as the agency’s enforcement and examination programs. Even with the funding increases provided by Congress in the last two years, under the SEC’s current funding level, the agency’s workforce still falls about one percent—or 35 full-time-equivalents (FTE)—short of the FY 2005 level. And yet while the workforce at the SEC has shrunk, the job that the SEC has been asked to do has grown even larger. Since 2005, the number of investment advisers registered with and overseen by the SEC has grown by 32 percent, and the number of broker-dealer branch offices has grown by 67 percent.

The SEC oversees a total of more than 35,000 registrants, including over 10,000 public companies, 7,800 mutual funds, about 11,500 investment advisers, 5,400 broker-dealers, 600 transfer agents, 12 securities exchanges, 10 nationally recognized statistical rating organizations (NRSROs), and self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and Public Company Accounting Oversight Board. While other financial regulators have close to parity between the number of staff and the number of entities they regulate, in recent years SEC staffing and funding simply have not kept pace with industry growth.
In order to provide sufficient resources to restore the agency as a vigorous and effective regulator of the nation’s securities markets, and to implement the Administration’s proposal for financial reform, the President has requested $1.258 billion in FY 2011 for the SEC. This represents an increase of approximately $139 million over the SEC’s FY 2010 funding level of $1.119 billion, and authority for 4,720 total positions (or 4,190 FTE), an increase of 380 positions (associated with 119 FTE) over FY 2010. Within this amount, $24 million in FY 2011 is requested contingent upon the enactment of financial reform legislation, to begin implementation of the SEC’s new and enhanced authorities under the Administration’s financial reform proposal.

It is important to note that this proposed increase in SEC spending would be fully offset by increased SEC collections of fees on securities transactions and registrations. In FY 2011, pursuant to the requirements of the Investor and Capital Markets Fee Relief Act (P.L. 107-123), the SEC will set fees at levels sufficient to raise $1.7 billion in collections, an increase of $220 million over FY 2010.

The SEC identifies as its top priority reinvigorating its enforcement program, and its plans to fill 1478 positions, an increase of 70 positions over FY2010.  It plans to fill 1033 positions in the Examinations program, an increase of 100 positions.  The new Division of Risk, Strategies & Financial Innovation will be allocated 102 positions, an increase of 30 positions.

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Plea Entered in NY in Massive Insider Trading Case

A former senior managing director at New Castle Partners hedge fund pleaded guilty Wednesday to securities fraud charges, admitting making $900,000 through inside trades in what authorities have said was the largest hedge fund insider trading case in history.

Mark Kurland, 61, of Mount Kisco, N.Y., remained free on $3 million bail after entering the plea in U.S. District Court in Manhattan. Kurland pleaded guilty to conspiracy to commit securities fraud and securities fraud three months after his October arrest.

Though the charges carry a potential maximum prison sentence of 25 years, Kurland’s plea agreement recommended that he spend between two-and-a-half years and three years in prison.

Kurland was the eighth person to plead guilty in a case that has resulted in charges against 21 people so far. They are accused of making tens of millions of dollars through inside trades.

At the center of the case is Raj Rajaratnam, the portfolio manager for the Galleon Group hedge fund who has been accused of pocketing as much as $50 million through a network of cheating executives at financial firms and companies privy to inside information.

Rajaratnam’s lawyer, John Dowd, has said his client looks forward to a trial to clear his name. Dowd has accused prosecutors of misrepresenting and misinterpreting conversations gleaned as a result of wiretaps, a tactic prosecutors say was unprecedented in a hedge fund case.

He also has disputed claims that Rajaratnam is a billionaire who is accurately ranked by Forbes magazine as being among the richest people in the world.

During his plea, Kurland admitted that he engaged in insider trading between August 2008 and January 2009.

“I knew that the inside information was received from a source who had an obligation to keep it confidential,” Kurland said.

Kurland’s plea deal called for him to forfeit $900,000, the proceeds of his crimes. A tentative sentencing date was set for April 27.

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SEC Approves Interpretive Guidance on Climate Change Disclosures

The SEC today voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.  The interpretive release approved today provides guidance on certain existing disclosure rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business. The relevant rules cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

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Galvin Announces $5.5m in Securities Fines

Massachusetts has almost $5.5 million in administrative fines coming in from four securities firms as a result of consent orders reached with the commonwealth’s Securities Division, Massachusetts Secretary of State William F. Galvin said today.

Three of the fines were imposed in cases that arose from the freezing of the auction rate securities market nearly a year ago, said Galvin’s office, which includes the Securities Division.

(Galvin is shown at left in a Globe file photo.)

The money in these administrative fines goes into the commonwealth’s general fund, Galvin’s office said.

The fines related to aution rate securities include fines to Morgan Stanley of roughly $930,000 and to Deutsche Bank of $3.2 million, a Galvin press release said; RBC Capital Markets is expected to pay $495,601.63 next week, and a separate fine of $860,350 was paid by Merrill Lynch as part of a global settlement that was based on the firm’s failure to properly register or supervise their client associates.

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