Citigroup To Pay $7 Billion In Sub-Prime Mortgage Settlement

Citigroup has agreed to pay approximately $7 billion for its part in the financial crisis of 2008, the WSJ reports. Citigroup is accused of downplaying the risks of sub-prime mortgages when packaging them selling them to hedge funds, mutual funds and pension funds.

“The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” Attorney General Eric Holder said, “The bank’s misconduct was egregious. As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.”

The Department of Justice initially asked for $12 billion, while Citigroup placed its opening bid at $363 million.  The end result consists of fines of $4 billion in cash to the DoJ, $2.5 billion in consumer relief, more than $200 million to the FDIC and just under $300 million to settle probes by five states.

“We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past.” Citi CEO Michael Corbat said.

The consumer relief will be in the form of financing provided for the construction and preservation of affordable multifamily rental housing, principal reduction and forbearance for residential loans, as well as other direct consumer benefits from various relief programs. Citigroup has agreed to provide the consumer relief by the end of 2018.

Citigroup today reported second quarter earnings per share of $0.03; $1.24, a net income of $181 million; $3.9 billion, and revenues of $19.3 billion, excluding the impact of the mortgage settlement.

Fraud, Hedge Funds

Hedge Funds Get $16.9 Billion in May but Underperform S&P 500

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BarclayHedge and TrimTabs Investment Research reported today that the hedge fund industry took in $16.9 billion (0.7% of assets) in May, down slightly from $19.1 billion (0.8% of assets) in April.

Hedge funds raked in $72.2 billion in the first five months of this year, the strongest January-May inflows since 2007,” said Sol Waksman, president and founder of BarclayHedge.

Industry assets climbed to a 5¾-year high of $2.3 trillion in May, according to estimates based on data from 3,426 funds. Assets rose 18% in the past 12 months but were down 6% from the all-time high of $2.4 trillion in June 2008.

The monthly TrimTabs/BarclayHedge Hedge Fund Flow Report noted that the hedge fund industry gained 1.2% in May, bouncing back from April’s 0.2% loss but underperforming the S&P 500, which gained 2.4%. In the past 12 months, the industry returned 7.6%, while the S&P 500 rose 18.0%.

“Funds targeting distressed securities are up 5.1% this year, outperforming all other fund categories,” said Waksman, who noted that macro funds fared the worst, losing 0.9%.
The monthly TrimTabs/BarclayHedge Survey of Hedge Fund Managers finds a plurality of respondents was neutral on the S&P 500 over the next 30 days, although bullish sentiment rose to a three-month high, and bearish sentiment dipped. The majority favoring developed markets grew larger, rebounding from a 15-month low in May. The proportion expecting crude oil prices to rise in the next six months hit a 17-month high, while the proportion expecting gold prices to climb rose to a four-month high.

Hedge Fund Strategy, Hedge Funds

Hedge Funds: January-May Inflow of $72.2 Billion Highest since 2007

BarclayHedge and TrimTabs Investment Research reported today that the hedge fund industry took in $16.9 billion (0.7% of assets) in May, down slightly from $19.1 billion (0.8% of assets) in April.

Hedge funds raked in $72.2 billion in the first five months of this year, the strongest January-May inflows since 2007,” said Sol Waksman, president and founder of BarclayHedge.

Industry assets climbed to a 5¾-year high of $2.3 trillion in May, according to estimates based on data from 3,426  funds.  Assets rose 18% in the past 12 months but were down 6% from the all-time high of $2.4 trillion in June 2008.

The monthly TrimTabs/BarclayHedge Hedge Fund Flow Report noted that the hedge fund industry gained 1.2% in May, bouncing back from April’s 0.2% loss but underperforming the S&P 500, which gained 2.4%.  In the past 12 months, the industry returned 7.6%, while the S&P 500 rose 18.0%.

“Funds targeting distressed securities are up 5.1% this year, outperforming all other fund categories,” said Waksman, who noted that macro funds fared the worst, losing 0.9%.

The monthly TrimTabs/BarclayHedge Survey of Hedge Fund Managers finds a plurality of respondents was neutral on the S&P 500 over the next 30 days, although bullish sentiment rose to a three-month high, and bearish sentiment dipped.  The majority favoring developed markets grew larger, rebounding from a 15-month low in May.  The proportion expecting crude oil prices to rise in the next six months hit a 17-month high, while the proportion expecting gold prices to climb rose to a four-month high.

Hedge Fund Strategy, Hedge Funds, hedge fund research

Two Executives and A Hedge Fund Portfolio Manager Sentenced To Federal Prison

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Eric M. Martin, Mark Megalli, and Richard T. Posey have been sentenced to federal prison for their roles in a multi-million-dollar insider trading conspiracy involving children’s clothing company Carter’s, Inc. stock.

Mark Megalli worked at New York hedge fund Level Global Investors was the contact point for some of the insider trading, the FBI says. Megalli in turn caused Level Global to execute multimillion dollar trades in Carter’s stocks based on the inside information received from Martin from September 2009 through July 2010. The former-Carter’s executives also tipped off others including NJ hedge fund Titan Capital Management LLC.

Eric Martin was Carter’s Director and later Vice President of Investor Relations, his actions, the FBI said, including illegal trading and tipping of others between 2005 and 2010 resulted in over $7 million in insider trading gains and losses avoided for Martin and his downstream tippees. Posey’s illegal trading and tipping of Martin between 2009 and 2010 resulted in over $5 million in insider trading gains and losses avoided. Megalli’s illegal trading between 2009 and 2010 resulted in over $3 million in insider trading gains and losses avoided for Level Global.

The FBI said: “On a consistent basis between early 2005 and his separation from Carter’s in March 2009, Martin disclosed material, non-public information about Carter’s upcoming earnings releases and other developments to a former Wall Street analyst identified by the government as “Cooperator Number 1,” for the purpose of making illegal insider trades. Cooperator Number 1 repeatedly bought and sold Carter’s stock on the basis of this information, earning substantial illegal profits and illegally avoiding substantial losses. Cooperator Number 1 also tipped others, including Titan Capital Management LLC, a New Jersey hedge fund that had retained him as an outside consultant. Martin disclosed this and other material, non-public information in exchange for friendship, reciprocal stock tips about other public companies to which Cooperator Number 1 had access, and future business and networking opportunities.”

After Martin separated from Carter’s in March 2009, Martin continued to obtain inside information in advance of Carter’s earnings releases and other events from Posey, who was his friend and former Carter’s co-worker. Posey was employed as a Vice President of Operations for various Carter’s brands and divisions and later as Vice President of Operations for the company’s wholesale sales business from in or about July 2002 until his termination in January 2013. Posey disclosed the information to Martin from early 2009 through July 2010 in exchange for friendship, reciprocal stock tips, and future business and networking opportunities.

A fourth defendant, Steven E. Slawson, 67, of Lebanon, New Jersey, was indicted by the grand jury on May 20, 2014. Slawson, a co-founder of Titan Capital Management, is alleged to have traded on tips obtained from Cooperator Number 1 and later directly from Martin from early 2005 through July 2010.

Fraud, Hedge Funds

Hedge Funds Go Bullish On Sugar As Drought Threatens Supply

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Hedge funds have increased their stakes in the sugar industry due to extremely dry weather in developing countries, Bloomberg reports.

Agricultural output in Brazil,which is the leading global sugar harvester, is suffering from the effects of a severe drought in the first-quarter. India, the second largest, is also under threat after an unusually dry start to its monsoon season. Bloomberg experts report that: “Global output will fall short of demand in the year ending Sept. 30, with the gap widening next season.”

India’s tea export business has also been hurt by the drought and more than half way into the monsoon season, many Indian states are reporting deficient rainfall. Experts at the International Rice Research Institute say that this monsoon is worse than even the 2009 season when drought reduced Indian rice production by more than 10 percent.

Bloomberg reports that: “In the five days through June 19, investors pulled almost $24 million from exchange-traded funds that track agriculture. Outflows across commodity ETFs were $119 million. Combined net-wagers across 18 U.S. traded commodities rose 1.3 percent to 1.19 million contracts as of June 17, the CFTC data show.”

Countries, Hedge Fund Strategy, Hedge Funds

Florida Hedge Fund Adviser Charged With $17 Million Fraud Scheme

A West Palm Beach-based hedge fund advisory firm and its founder have been charged by the SEC with fraudulently shifting money from one investment to another without informing investors, the South Florida Business Journal reports. The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

The SEC alleges that Weston Capital Asset Management LLC and its founder and president Albert Hallac illegally drained more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc. The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before. Weston Capital’s former general counsel Keith Wellner assisted the activities.

The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000 in payments from Swartz IP. Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately $230 million.

Fraud, Hedge Funds

Hedge Fund Manager Balboa Gets 4 Years In Prison

A  portfolio manager for the now collapsed hedge fund Millennium Global Investments has been sentenced to 4 years in prison and 3 years of supervised release, The Wall Street Journal reports.

Michael Balboa, a London-based hedge fund manager, was convicted in 2013 for providing fake valuations on Nigerian warrants at the height of the financial crisis. The scheme generated millions of dollars in management and performance fees for which he earned as much as $6.5 million, prosecutors said.

WSJ reports: “Prosecutors said Mr. Balboa overvalued the warrants by as much as 13 times the known trading price. The warrants were one of the fund’s two largest holdings, prosecutors said. As a result, the hedge fund’s net assets were overstated in communications to investors, prosecutors had said. The fund collapsed in October 2008 after suffering nearly $1 billion in losses.”

Balboa was also ordered to pay more than $390 million in restitution and forfeit $2.2 million.

Fraud, Hedge Funds

AIMA Japan and Eurekahedge Gauge Asia Hedge Fund Sentiment

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In March and April 2014, a survey was conducted by AIMA Japan and Eurekahedge looking into investment trends and key regulatory challenges facing the Asian asset management industry; with a particular emphasis on the outlook for Japan.

Japanese investors plan to maintain the size of their hedge fund allocations this year, the survey says. Many respondents indicated that they intend to raise their exposure to long/short equity hedge funds and event-driven strategies, with allocations on average being reduced to CTA/managed futures funds, macro funds and fixed income strategies.

131 respondents contributed their insight from various financial sectors – a 39% majority from investment advisory, 14% from banking, 15% from consultancy and 11% from hedge funds, with the remainder from family offices, insurance companies, asset management, trust banks and pension funds.

Notable results from the survey, which were calculated on an average basis from the respondents, showed that Japanese investors remain bullish on the prospects of the Japanese economy, with 72% of survey respondents hopeful that Abenomics will continue to yield positive results in 2014.

Other findings from the survey found that investors plan to increase their allocations to Global, Asia ex-Japan and Middle East/Africa mandated funds, while trimming their portfolio exposure to Latin America and Europe. Their exposure to Japan would be maintained at the current level.

Survey results found that investors intend to increase their exposure to long/short equities and event driven strategies while curtailing exposure to CTA, macro and fixed income strategies. Ranked high on a list of anxieties were regulatory challenges such as increased J-FSA inspections, and the Dodd-Frank Act.  Amongst the geopolitical and economic issues, China was the topic that ranked first in the list of concerns going forward, followed by interest rate volatility triggered by the Fed’s QE phase out.

For the majority of the investors in the survey, performance, risk management and track record were the key factors behind their investment decisions. Brand names, governance structure and liquidity ranked lower on the scale.

Countries, Hedge Funds

House Passes Hedging Deregulation Bill

The U.S. House of Representatives yesterday passed legislation that would significantly weaken elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act put into place by Obama in 2010. The bill passed by a vote of 265-143.

“The purpose of this bill is to remove barriers to business growth that have been imposed by over-reaching and burdensome regulations,” NY Rep. Michael Grimm, said.

“H.R. 4413 provides some much-needed clarity to end-users, agriculture and energy producers who actually use the derivatives market to hedge against risk and did not cause the financial collapse,” House Agriculture Committee Ranking Member Collin Peterson, said, admitting that the legislation wasn’t perfect but saying “if you wait for perfection, you’ll be waiting forever and won’t be able to vote for anything.”

The Office of the President said in a statement.. “it strongly opposes the passage of H.R. 4413 because it undermines the efficient functioning of the Commodity Futures Trading Commission (CFTC) by imposing a number of organizational and procedural changes and offers no solution to address the persistent inadequacy of the agency’s funding. The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act resulted in significant expansion of the CFTC’s responsibilities. The proposed changes would hinder the CFTC’s progress in successfully implementing these critical responsibilities and would unnecessarily disrupt the effective management and operation of the agency, without providing the more robust and reliable funding that the agency needs.”

The Dodd-Frank Act contains more than 90 provisions that require SEC rulemaking, and dozens of other provisions that give the SEC discretionary rulemaking authority. The SEC reported that 1,504 advisers to hedge funds and other private funds have registered with the agency since the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated such registration.

Hedge Funds

SAC Affiliate Settles SEC Insider Trading Charges For $600 Million

The US courts have approved a $600 million fine to settle SEC charges that hedge fund advisory firm CR Intrinsic Investors participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug, Reuters reports. CR Intrinsic is an affiliate of SAC Capital.

Matthew Martoma, a former portfolio manager CR Intrinsic Investors was found guilty and is awaiting sentencing. “Martoma is scheduled to be sentenced on July 28. Court probation officers have recommended a prison term of up to 20 years, which would be a U.S. record for insider trading.” Reuters says.

“The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Ronald Dennis, who worked at the hedge fund advisory firm agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.

Steven A Cohen’s hedge fund SAC Capital Advisors has agreed pay approximately $2 billion. Another SAC affiliate, Sigma Capital, agreed to pay nearly $14 million to settle insider trading charges.

Events, Fraud, Hedge Funds