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SLCG's Own Dr. Tim Dulaney to Join the SEC

I am sad to report that one of SLCG Blog's commentators, Dr. Tim Dulaney, will be leaving us for an exciting opportunity at the Division of Investment Management at the Securities and Exchange Commission. While we will greatly miss his skills and camaraderie, we are glad that he will not be going far.

Dr. Dulaney has made enormous contributions to our research and advocacy work over the past two and a half years. He has co-authored eleven working papers and peer-reviewed publications (!),...

SEC Litigation Releases: Week in Review - February 7th, 2014

Court of Appeals Denies Stay of Order Compelling Investigative Testimony; Affirms District Court's Exercise of Discretion
February 6, 2014, (Litigation Release No. 22920)
This week the court issued a "summary order denying Edward Daspin's motion for a stay" on a December 2013 order. This means that Daspin is required "to appear for investigative testimony in compliance with an SEC investigative subpoena" and was denied a "request that the SEC be required to pay for Daspin's physician to attend...

Willow Fund's Hedging, Investing and Speculating in Distressed Debt With Credit Default Swaps

In a recent post we demonstrated how the Willow Fund's purchase of credit default swaps evolved from hedging a portion of its distressed debt to swamping the portfolio with enormous short positions in distressed debt. In this post, we explain why the Willow Fund's use of credit default swaps was inconsistent with its repeated disclosures that:
... The Fund may use a variety of special investment techniques to hedge a portion of its investment portfolio against various risks or other factors...

SEC Litigation Releases: Week in Review - January 31st, 2014

Court Enters Final Judgment Against Broker in Settlement of Claims Arising from Fraudulent Misrepresentations and the Misappropriation of Funds
January 30, 2014, (Litigation Release No. 22914)
A final judgment was entered this week against David L. Rothman based on charges that "Rothman,...who was the Vice President and minority owner of Rothman Securities, Inc....creat[ed] and issu[ed] false account statements to certain elderly and unsophisticated investor/clients that materially overstated...

Credit Default Swaps on Steroids: UBS's Willow Fund

We previously published a working paper on how investors in Oppenheimer's Champion Income Fund lost 80% in 2008 when peer group funds lost about 25%. Our Champion Income Fund paper is available on our website. Oppenheimer had increased Champion Income Fund's exposure to CMBS through credit default swaps and total return swaps in 2007 and 2008. Figure 1 reproduces a figure from our 2010 paper which demonstrates that the leverage Oppenheimer took on through the swaps fully explained the...

Another Example of Non-Traded REITs' Wealth Destruction: Columbia Property Trust (Wells REIT II) Cost Investors $4.4 Billion

Non-traded REITs are illiquid investments, not listed on public exchanges and with little to no secondary market trading. Their offering documents typically claim that after some period of time, perhaps 5-10 years, the REIT intends to list on an exchange, merge with another company, or in some other way allow investors to sell their shares but for many non-traded REITs, this "liquidity event" never occurs.

However, even if a non-traded REIT lists on a major exchange, that does not mean that...

SEC Litigation Releases: Week in Review - January 24th, 2014

Final Judgments Entered Against Former Hedge Fund Manager and His Company
January 23, 2014, (Litigation Release No. 22908)
Final judgments were entered against Berton M. Hochfeld and his "wholly-owned entity, Hochfeld Capital Management, L.L.C.," for allegedly "misappropriating assets and making material misstatements to investors in the Heppelwhite Fund L.P., a now defunct hedge fund." Previously, the court had ordered injunctions and an asset freeze, and granted "the Commission's motion to...

El Uso de Apalancamiento en Los Fondos Cerrados UBS Puerto Rico Magnifica Las Pérdidas

Durante el año 2013, los fondos de bonos de UBS Puerto Rico sufrieron grandes pérdidas. Estas pérdidas fueron agresivamente rápidas, especialmente considerando que los títulos de renta fija tienden a ser inversiones más seguras. En entradas anteriores a nuestro blog hemos argumentado algunas de las razones de las precipitosas pérdidas y hemos hablado de las sutilezas transaccionales de los bonos. Además, hemos discutido los conflictos de intereses entre los gestores de los fondos y los...

The Use of Leverage in the UBS Puerto Rico Closed-End Funds Magnified Losses

The massive declines that hit investors in the UBS Puerto Rico closed-end bond funds in 2013 were especially quick and brutal for fixed income securities which are usually safer investments. In previous posts we have discussed some of the reasons for the precipitous fall in the values of the bond funds and some of the nuances of bond transactions that may have given rise to conflicts of interest between the fund managers and investors. In this post, we will discuss another culprit in the...

SEC Litigation Releases: Week in Review - January 17th, 2014

SEC Charges Former Senior Executives of Public Company Subsidiary with Falsifying Financial Records and Circumventing Internal Controls
January 15, 2014, (Litigation Release No. 22906)
This week, the SEC announced charges against Christopher Hohol and Brian Poshak, "formerly the senior vice president for operations and the controller, respectively, of Veolia Special Services, a fourth-tier United States subsidiary of Veolia Environnement S.A." According to the SEC, the defendants falsified...

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