Tag Archives: business ethics

Case “closed” on accounting problems at RCS Capital, but were problems fixed?

It was only three months ago that RCS Capital Corp. told shareholders in a quarterly report  that it was in the process of remediating “several significant deficiencies” in its internal control over financial reporting. Since then, shareholders have been told that all is well — sort of. But the company has not specifically told shareholders that the deficiencies have been addressed and solved.

RCS is the holding company for a collection of brokerage firms and other financial companies. One of them, J.P. Turner Associates, was purchased by RCS this year, and has a horrific history of customer complaints and regulatory action against executives at the top of the company. Here’s my story about Turner.

Along with its bad judgment in picking acquisition targets, RCS also has the baggage of having employed Brian S. Block as its CFO for most of 2013. Block is the guy who resigned under a cloud on Oct. 29 as CFO of American Realty Capital Properties Corp., which announced that he and another senior financial executive had intentionally covered up an accounting error. Both RCS and American Realty Capital Properties are controlled by real-estate mogul Nicholas Schorsch.

On that news, shares of both RCS and American Realty Capital Properties plunged.

Since then, RCS has said publicly that it hired a law firm and forensic accounting firm to examine the books for the first nine months of 2013. That was a period when Block was signing off on the financials. Michael Weil, CEO of RCS, said in a conference call with analysts on Nov. 13 “We consider the question of RCS Capital’s accounting integrity as closed.” But the forensic probe was limited. For example, it didn’t include an examination of emails.

RCS first flagged its accounting deficiencies in its March 31, 2014 quarterly report. It subsequently mentioned the deficiencies in filings on May 6 and May 29. Among other problems, it noted in the May 29 filing that its auditors had been given “multiple versions” of the company’s books and records.

In other words, seven months before Block resigned in the American Realty Capital Properties scandal, RCS was noting significant problems in its accounting during the period Block was its CFO. The company of course could have brought that up in its analyst call last week, and if it was all fixed, management could have said so.

Instead, RCS carved out a nine-month period, authorized a limited investigation, and declared that the issue was closed. To really close it, though, RCS needs to tell what it did about the deficiencies it mapped out in that May 29 filing, and why investors can be assured that problems like that won’t happen again.

RCS, by the way, declined to comment when I sent a detailed list of questions to its outside PR firm. Here’s the story I wrote about it for TheStreet.

Goldman Sachs Doesn’t Want to Be Known as Misogynist ‘Vampire Squid’

On July 3, Goldman, Sachs & Co. submitted a 74-page memorandum of law and declarations of 27 Goldman Sachs witnesses to Judge James C. Francis of the U.S. District Court for the Southern District of New York and to three women who are suing the firm for gender discrimination.

So where are the documents?

The high-profile case of Cristina Chen-Oster et al. v. Goldman, Sachs & Co. et al. has been going on since Chen-Oster and two other former Goldman women sued in 2010. On July 1, the women’s lawyers filed a brief asking the court to certify them as a class. I wrote about the heavily redacted document in this story for TheStreet.

On July 3, Goldman filed its response. But 16 days later, it still is not on the court docket.

As it turns out, Goldman has been at work redacting that document over the past two weeks, and you can’t help but wonder what it is that the firm is so hellbent on keeping from the public. I raised that question in my latest column for TheStreet. You can read it here.

Do You Really Want to Learn Investing From These Guys?

“Customers first,” I always say, and who knew that the securities industry would actually come around to saying the same? The lobbying group for Wall Street, the Securities Industry and Financial Markets Association, unveiled some new battle cries for 2014 at a meeting in New York in November, “Customers First” and “Helping Main Street Prosper” among them.

I wrote about Sifma’s upcoming efforts to plant seeds of goodwill with the public in my new column for Investopedia.com this week:

The financial industry’s trade group is on a mission, and the public relations tour de force begins this month with the launch of a capital markets literacy effort that SIFMA calls “Invest it Forward.”

Sifma actually has a financial literacy winner in its popular “Stock Market Game” that gives school kids $100,000 in virtual money to trade. Kids who play the game improve their  literacy scores, but the champions can be a tad precocious:

A fifth grader from East Brunswick, N.J., took to the stage at the Marriott to receive her SIFMA award for investment prowess, and said the teamwork approach to investing sometimes cramped her style. “I hated when my team was arguing because we were just wasting time, and time wasted is virtual money lost,” she said. Could somebody spring for a copy of Graham and Dodd’s “Security Analysis” for this child?

You might check to see if your wallet is still in your pocket when you’re listening to Sifma’s pro-investor pitch. You can read the column here.

About that Reformed ‘Wolf’ of Wall Street

Jordan Belfort, who did jail time for fleecing investors at Stratton Oakmont, the Long Island brokerage firm he founded, has put himself out there as a reformed man. Indeed, he has been making money legitimately, giving speeches to audiences enthralled with the idea of spending an hour or so in the same room as a convicted felon who claims to have seen the light.

Belfort is, of course, the author of the 2007 book “The Wolf of Wall Street,” which was made into a movie starring Leonardo DiCaprio (playing Belfort) that was released last month. He’s taken to social media to inform the public that he’s a good guy who is giving all the movie proceeds back to the investors he defrauded. But the prosecutors who put him in jail say he’s not telling the story just right. I write about it in my story today in The New York Times.

 

 

McKinsey Clients Shrugged at Scandals, Ignored Greed

McKinsey & Co. is the global fix-it firm of choice, whether you’re a company looking for an outsider to justify laying off thousands of employees or a government looking to get its managerial act together. A new book by Duff McDonald, a contributing editor at Fortune and The New York Observer, provides a good history of the firm but can’t seem to decide whether McKinsey is a valuable advisor or a waste of money.

I reviewed “The Firm: The Story of McKinsey and Its Secret Influence on American Business,” for Bloomberg Muse today. You can read it here.

Jury Largely Sides With Bank in Madoff-Related Case

A Hartford jury said Wednesday that the Connecticut bank that was custodian for two investors in Bernard Madoff’s Ponzi scheme was not liable for their losses.

I wrote about the Alice-in-Wonderland-style trial in a story for The New York Times on July 8. The bank’s former president said he didn’t know what due diligence the bank might have done to be sure the customer’s assets existed, and didn’t know how the bank maintained accurate records. The president, who’d been in the banking business for 36 years, had a degree in finance from Georgetown University.

Another doozy in the trial was the bank’s former custodial manager, who said he would get three or four “very thick envelopes” of trade confirmations from Madoff some weeks. He put them in a file drawer and never reviewed the documents. (Except that he occasionally took a peek because he was curious about what Madoff might be buying or selling, but not curious enough to do any checking on behalf of the bank’s customers.)

The Hartford trial began in June as a consolidation of three lawsuits with similar allegations. But two of those cases settled for $7.5 million just before the jury began its deliberations, leaving the jury with only the case of two elderly Florida investors to decide. You can read my story about the verdict today for The Times here. Take a lesson from this: When a financial outfit tells you it is your custodian, don’t make the mistake of assuming that means they have custody of your money.

Custodians don’t always take custody: investors beware

Custodial banks typically earn their fees based on a percentage of the value of the assets they’re holding for you. But do they have any obligation to confirm whether there are any assets there in the first place?

A Hartford jury is deliberating over that and other questions in a case brought by former customers of Bernard Madoff. Westport National Bank was custodian of the investors’ accounts. But, as it turns out, when the bank took over the accounts in 1999, no assets existed, and the bank didn’t bother to check.

The custodial issue is becoming ever-more important as investors increasingly put “alternative” investments such as hedge funds in their retirement accounts. Pricing those investments can be dicey, and you shouldn’t expect that your custodian is doing any analysis to ensure that the prices they show on your statements are realistic.

I attended several days of the trial against Westport National Bank in Federal court in Hartford in June. Here’s a story I wrote about it for The New York Times.

When markets come undone from crisis fraud, regulators investigate something else

The public was pretty peeved about the financial crisis in 2008, and regulators felt the pressure to produce a few scalps in response. So what did the regulators do? They investigated something that had nothing to do with the crisis.

I reviewed Charles Gasparino’s new book “Circle of Friends: The Massive Federal Crackdown on Insider Trading — And Why the Markets Always Work Against the Little Guy” for Bloomberg Muse this week.

Gasparino tells the story of the all-out war on insider trading that began in 2008, and he questions the regulators’ priorities in pursuing inside traders when there were people who’d just about brought down the economy roaming free.

The book has some problems, but Gasparino is right that our regulators are chasing all the wrong people. Here’s the review.