Friday, December 28, 2007

Minority Bank Regulation (From the Viewpoints section of the American Banker Newspaper, 12/28/07)

On October 30, 2007, the Subcommittee on Oversight and Investigations of the House Committee on Financial Services held a hearing to review “the role of minority-owned financial institutions.” My organization has been researching women- and minority-owned banks and thrifts since 1989. We feel minority banks, specifically African-American banks, need one thing and one thing only: Capital.

That regulators do not recognize this is indicative of their decidedly lax approach to the sector. It also suggests that they may not be meeting their responsibilities under the Financial Institutions Reform, Recovery and Enforcement Act, which requires regulators to take steps to preserve minority banks.

Banking is a field that depends upon precise numerical data, but federal banking regulators do not have a valid estimate of the number of minority banks in the U.S. According to our data, by June, 2007, there were 225 minority owned banks and thrifts in the U.S., up from 190 at the end of 2005. The Federal Reserve Board counts 200 minority depositary institutions. The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Financial Management Service of the U.S. Treasury, all have differing estimates. If banking agencies cannot agree on the number of institutions, it is unlikely they will be very effective in preserving them.

Consider the case where the Department of the Interior Office of the Special Trustee for American Indians awarded the Alliance Capital Management a contract to manage $404 million in Federal Government trust funds. This firm had been fined $250 million by the U.S. Securities and Exchange Commission in 2003 for defrauding mutual fund investors.

An imaginative approach would have moved the trust funds to one or more of the 21 Native American banks in the U.S. instead, since placing Alliance in a position of trust is, given the SEC’s enforcement action, inconsistent with common sense, with the interests of justice and efficiency and with the interests of Indian beneficiaries. Giving federal banking regulators the power to take such an action is one legislative fix required.

Minority banks lead the industry with respect to asset growth. By June, 2007, annualized asset growth was 17.43% at minority institutions, compared to an industry growth rate of 6.38%. This reflects continued expansion at Hispanic institutions and remarkable growth at Asian institutions. Income has not followed suit…yet. From January, 2007 to June, 2007, minority bank and thrift net income totaled $616,416,000, almost twice what they earned in the full twelve months of 1998, $373,404,000.

Profitability is an issue. Minority bank return on assets averaged 0.09% by 6/30/07. For all FDIC-insured institutions, ROA was 1.21% by June, 2007.

Regulators underestimate the severity of the issues these institutions face, and do not give them sufficient credit when they perform well.

In light of the subprime problems impacting major financial institutions, we note that minority banks outperformed the industry with respect to loan performance. By June, 2007, net charge offs as a percentage of average loans totaled 0.21% at minority institutions and 0.47% at all FDIC-insured institutions. In 2006, charge offs as a percentage of average loans totaled 0.27% at minority institutions and 0.39% at all FDIC-insured institutions. In 2005, percentages were 0.20% and 0.50%, respectively.

Different ethnic groups have different financial needs. A “one size fits all” regulatory strategy may not make sense. Banks founded by newer Hispanic and Asian immigrants are more concerned with business financing. These groups are growing fast and do not require much assistance from banking regulators, other than training and technical assistance.

On the other hand, African American institutions face pressures other minority banks do not. They are the only group within this sector facing a significant decline in number. The only assistance offered by the banking regulators consists of training and technical assistance, important, to be sure, but insufficient to preserve the number of African-American institutions.

By lumping Asian, African American, Hispanic, Native American and Women-owned banks and thrifts into one large category, regulators do the sector and the country a disservice. Again, more precision is needed.

We believe regulators should focus on capital and capital related issues at minority banks, specifically African-American banks. A training and technical assistance program targeting minority banks announced by the Federal Reserve takes a step in the right direction: the first training module includes guidance for accessing capital. More help is needed.

In 1992, we developed the first CRA securitization, a Fannie Mae MBS security backed by home mortgage loans originated by minority banks and thrifts. This innovation spurred the development of over $100 billion in non-subprime, safe and sound CRA lending. Likewise, we believe the promotion and implementation of capital access tools will significantly increase the flow of capital to minority banks, and by extension, to all sectors in society. This increase will, in turn, result in significantly increased general economic activity in the communities served by minority banks.

We estimate that a $1 billion dollar minority bank capital facility will generate $10 billion dollars in economic impact over five years, assuming a capital access system operating without significant falsification and fraud.

We believe this is an investment worth making.

Friday, December 21, 2007

New Internet Tool With Instant Comparisons of Executive Pay

According to the SEC:

"Securities and Exchange Commission Chairman Christopher Cox today launched the first-ever online tool that enables investors to easily and instantly compare what 500 of the largest American companies are paying their top executives. The new database highlights the power of interactive data to transform financial disclosure.

The Executive Compensation Reader - available today on the SEC's Web site at http://www.sec.gov/xbrl - builds on the Commission's new requirements that went into effect earlier this year to dramatically enhance clarity and completeness of executive compensation disclosure."

Tuesday, December 18, 2007

"Framework" to Help Prevent Foreclosures

We have been attempting to review the Bush Administration's plan to help stop foreclosures. We have not been able to find coherent, consistent documentation, thus we believe there is no plan. There is, however, a public relations effort designed to feign concern.

According to the Jacksonville Business Journal,

"Nationwide, nearly 1.1 million homes entered the foreclosure process so far this year, up 93 percent from the 559,750 foreclosures filed during the same period last year. About 526,936, or more than six out of every 1,000 households in the United States, were repossessed by banks or lenders during the first 11 months of the year, up 41 percent from the same time last year."

HUD notes that the FHA Secure Plan " has helped 33,000 homeowners prevent foreclosure in three months; More than 50,000 to be helped by end of year. " Thus 33,0000/1,100,000 or three percent of homeowners in foreclosure have been helped. That is three out of one hundred. Even under the Administration's most optimistic scenario, only 240,000, or 21.8% of homeowners facing foreclosure are eligible for assistance, meaning that 78.2% are not.

On the basis of these numbers, we judge this effort to be ineffective and cynical, giving false hope to those facing one of the most stressful life events possible.

Recent news articles point to the fact that the "Fed Shrugged as Subprime Crisis Spread." The Fed's mantra in 2001, according to a Governor of the Federal Reserve, speaking at a Board meeting of a faith-based pension fund (a speaker, by the way, we suggested) was "subprime good, predatory bad." This was, in hindsight, wrong. This was, also, no accident.

As we noted on November 9th, in 2000 and 2001, most of the people losing their homes were low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

This, too, was no accident.

Monday, December 17, 2007

The SEC threads the needle

We note efforts by the SEC to "thread the needle" after approving what many had considered restrictive Proxy Access policies. (Our viewpoint is that things could have been worse, that Mr. Cox is still, by far, the most competent Bush appointee, and that there is still room for negotiation.) Consider the following:
  • On December 5th, the "SEC's Office of Interactive Disclosure Urges Public Comment as Interactive Data Moves Closer to Reality for Investors" This is tied to efforts to create electronic shareholder forums. In the run up to the Proxy Access vote, many missed the fact that the SEC created, in October, an "Office of Interactive Disclosure..to lead the transformation to interactive financial reporting by public companies. A free taxonomy review tool is publicly available on the Internet at http://usgaap.xbrl.us along with other information."
  • On December 6th, "The Securities and Exchange Commission announced a record $468 million settled enforcement action in an options backdating case against William W. McGuire, M.D., the former Chief Executive Officer and Chairman of the Board of UnitedHealth Group Inc. The settlement is the first with an individual under the 'clawback' provision (Section 304) of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors."
  • On December 7, 2007, "The U.S. Securities and Exchange Commission announced that it filed civil actions alleging securities fraud in five separate kickback schemes uncovered by an FBI sting operation conducted pursuant to a recent cooperation agreement between the FBI and the Commission. The defendants are insiders or promoters of publicly traded companies who made stock sales to a hedge fund in exchange for illegal kickbacks to an individual whom they believed to be the hedge fund manager, but who was in reality an undercover FBI agent." This is one of the first times that the SEC has used an undercover vehicle of this type. Also notable is the cooperation of the FBI. It is important because it send a signal that the SEC has adopted this tactic to uncover fraud and malfeasance in the marketplace.
  • On December 11th, "The Securities and Exchange Commission approved changes that will give smaller companies faster and easier access to capital when they need it or market conditions are favorable. Specifically, the Commission adopted amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to certain restrictions, including the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period." This may help small minority-owned firms.

  • On December 11th, "The Securities and Exchange Commission asked for public comment on possible revisions to disclosure requirements for oil and gas reserves given the extent and nature of changes that have occurred in the oil and gas industry in the nearly three decades since the Commission first adopted its oil and gas disclosure rules." Social investors may be able to use this effort to call for other disclosure rules. In any event, this is a matter that social investors have been requesting for years.
All in all, these are signs that the SEC is not as hostile to shareholder interests as some, including this blogger, may have thought.

Thursday, November 29, 2007

Communists and the SEC Proxy Access vote

We attended the SECs open meeting yesterday.

Seated directly behind us were Mr. Thomas Lehner, a representative from the Business Roundtable and Ms. Amy Goodman, a former Chief of the SEC Task Force on Corporate Accountability and, currently, a Partner at Gibson, Dunn and Crutcher. (According to a press release issued when Mr Lehner testified at an SEC-sponsored Roundtable on Proxy Access, the Financial Times cited the Business Rountable as "the most influential chief executive lobbying group in the U.S.") The two were in good spirits, celebrating what they perceived to be an impending victory with respect to the vote on Shareholder Proposals relating to the Election of Directors.

At one point in their conversation, we believe they discussed branding opponents to the Shareholder Proposal vote as "communists." They may have been referring to the AFL-CIO and related labor interests. We bring this up to note the type of unfair, unethical tactics used by opponents to open proxy access.

Of course, they may have only been kidding.

Items on the Agenda were:

1. Electronic Shareholder Forums
2. Shareholder Proposals relating to the Election of Directors

Item One was approved in a 4 to 0 vote. Several questions remain unanswered, including the following:
a. How will identity fraud issues be handled?
b. What strategies will be adopted to limit someone from spamming the Forums?
c. How will investors choose between competing Forums?
d. Will these Forums be susceptible to company management censorship or abuse? How, when and why would this occur?

Item Two (Shareholder Proposals Relating to the Election of Directors. [Release No. 34-56161; File No. S7-17-07]) was approved in a 3 to 1 vote, with Commissioner Nazareth voting against. The item was approved in substantially the format issued, and can be found online at: http://www.sec.gov/rules/proposed/2007/34-56161.pdf

This would exclude shareholder proposals if:

Proposed Amendments to Rule 14a-8(i)(8)

"If the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election."

The regulation will go into effect 30 days after publication in the Federal Register. We expect an implementation date of 12/31/2007 or 1/4/2008.

Monday, November 26, 2007

Black Leadership Missing in SEC Proxy Debate

We note that none of the policy groups claiming to speak for African Americans have submitted comments concerning the SEC's controversial shareholders rights proposal. According to the Washington Post,

"The leader of the Securities and Exchange Commission (Christopher Cox) told lawmakers yesterday that he is poised to move ahead with a controversial shareholders rights proposal, drawing sharp criticism from Democratic lawmakers and officials from unions and pension funds. In July, Cox voted to seek comment on two conflicting proposals. One would codify the way the SEC has typically done business in a manner that allows companies to exclude investor proposals from proxies sent to a company's shareholders. The second, broader plan would have allowed investors that hold at least 5 percent of a company's stock greater leeway in proposing board candidates in exchange for more disclosure about their operations."

According to another source, the "SEC chief cites legal ‘confusion’ as reason to curtail shareholders’ ability to nominate directors, but says he’ll revisit the issue in spring."

Shareholder proposals have helped to increase the number of women and minorities serving on corporate boards. They have also helped encourage diversity initiatives at these same corporations.

To ignore the risk these SEC proposals pose to efforts to better manage corporations is to ignore demographic trends. We invited the Operation PUSH sponsored Wall Street Project to a meeting we had on 11/20/07 with staff in the SEC Chairman's Office to discuss the matter. We never received a reply. Of course, we went without him, (or the Urban League or the NAACP, for that matter.)

Of course, these groups may comment in a year or two, once the more restrictive of the two proposals has been adopted and black board membership and black employment starts to fall.

This is the lack of vision that ultimately leads to reduced income and reduced prospects for the country as a whole, and for African Americans.

Where there is no vision....

Friday, November 16, 2007

Senate Banking Committee hearing on Proxy Access

On November 14th, the Senate Banking Committee held a hearing on Proxy Access. The hearing was chaired by Senator Jack Reed.

In his testimony, SEC Chairman Christopher Cox noted:

" Last autumn, the U.S. Court of Appeals for the Second Circuit invalidated the SEC’s interpretation of our existing proxy access rule that had been applied at least since 1990. Indeed, in the SEC’s view, that interpretation had been in effect since 1976. But the court found the SEC’s view since 1990 to be inconsistent with its prior interpretation. At the same time, the court said that it would “take no side in the policy debate regarding shareholder access to the corporate ballot,” noting that “such issues are appropriately the province of the SEC.” This decision applies only in one of the 12 judicial circuits in America. And it has created great uncertainty and danger for every stakeholder in our public markets.

This uncertainty is compounded by a recent decision of the U.S. Supreme Court, which creates doubt about the state of affairs even in the Second Circuit. The Supreme Court reversed another panel of the Second Circuit in a similar case of an agency that changed its interpretation of its rules. Just as in the proxy access case, the Second Circuit rejected the agency's more recent interpretation. Justice Breyer’s opinion for the unanimous Court held that the agency’s interpretation of its own regulations is controlling unless plainly erroneous."

Senator Reed, chairing the hearing in Senator Dodd's absence, appeared stunned by this line of reasoning:

1. Reed implied that citing the 2nd Court of Appeals decision and the Supreme Court ruling was a sign desperation. The Commission is stretching the limits of legal rationality to find any justification, however tenuous, that will support approving the more restrictive proxy access proposal.

2. Reed clearly believed there is no truth to the claim (as with other claims concerning the existence of WMD in Iraq, the use of torture, lack of warning about Katrina, etc.), that heightened uncertainty requires the SEC to act now.

3. The Senator acknowledged that he is powerless to do anything to stop the SEC from approving the more restrictive proxy access proposal. Thus, we believe they will do so, despite SEC claims that "shareholder proxy access is 'a work in progress' that could end with a plan different from proposals floated this summer." We regard this statement a "head fake," designed to freeze opponents in their tracks.

We note CalPERS today announced that "Eight of the leading U.S. and international pension funds representing more than $300 billion in U.S. public equities, and the Council of Institutional Investors, with member assets exceeding $3 trillion, will hold a telephonic press conference to make an announcement and discuss the issue of access to corporate ballots to nominate directors and pending proposals before the U.S. Securities & Exchange Commission."

We believe they may announce their intention to bring a lawsuit, thus blocking (or at least slowing) any changes to current proxy access rules.

Friday, November 9, 2007

On Shareholder Proposals: Update

After hearing from a few people, let me clarify:

1. The purpose of the SEC may be to protect investors, but on April 28, 2003, every major US investment bank was found to have aided and abetted efforts to defraud investors. Ethical problems have continued and grown worse: since late 2006, 182 major U.S. lending operations have "imploded" due to subprime lending issues. Most people losing their homes are low to moderate income people of color. This is no accident. Those with new ideas and solutions to the problem have been carefully excluded from the discussion, due to the same bigotry that gave rise to it. This, too, is no accident. We do not mean to sound cynical. We see what is, not what we would like to see.

2. The real issue is Hedge Funds, nothing else. In our comments to the SEC on the matter, we noted: "Any significant concern about proxy access rests with hedge funds, by their nature neither long term investors or sensitive to broader social concerns. The strategy of using proxy access to enhance shareholder value has been co-opted by certain hedge funds, now using the practice for selfish, potentially destructive purposes." As above, those with new ideas and solutions to the problem have been carefully excluded from the discussion. Again, this is no accident.

3. Restricting proxy access until something can be done about hedge funds may not be a bad thing, as long as full access is returned to small shareholders at some point.

4. All other concerns (special interest directors, electronic forums, state's rights, 5% ownership thresholds, etc.) are, for the most part, irrelevant.

The problem is the iceberg, not the lifeboats.

Thursday, November 8, 2007

On Shareholder Proposals: the Big Dogs Weigh In

In a November 1st letter to the Chairman of the SEC, Christopher Cox, 9 members of the Senate Banking Committee, or almost ten percent of the full U.S. Senate, wrote urging the SEC to maintain the current set of proxy rules and regulations. In the view of these members, "neither proposal should be adopted."

(For our response, see:
http://twisri.blogspot.com/2007/10/response-to-sec-shareholder-proposals.html
)

Current federal law leaves regulation of the proxy process up to the SEC. Period. In a side conversation at a House Financial Services Committee hearing on Proxy Access held on 9/27, we warned Tim Smith, Chairman of the Social Investing Forum against believing that pushing to hold a hearing or getting letters written will block implementation of one of the two proposed rules. The issue is similar to what occurred in Florida (2000) and Ohio (2004:) what matters is the relevant vote, not the popular vote. In this case, the relevant vote is that of the Commission. Unless you have a seat on the Commission, you don't get to vote on the matter.

The views of the other 91 U.S. Senators are not known at this time. This means there is a good chance Mr. Cox will be able to approve one of these proposals and stay in his position, at least for the next twelve months.

We see nothing here to change our opinion that the more restrictive of the two proposals, S7-17-07 and S7-16-07, will be adopted.

Wednesday, November 7, 2007

Urban Trust Bank links success to business lenders

In a November 2, 2007 article in the Tampa Bay Business Journal, Senior writer Margie Manning writes that "Urban Trust Bank expects to provide an alternative business lending option with its two new offices in the Tampa Bay area."

We were quoted in the article stating that " Minority owned banks in general have struggled with business lending,"

Urban Trust "opened branches in the Wal-Mart SuperCenters in Gibsonton and Palmetto Oct. 29."

Tuesday, November 6, 2007

Preserving Minority Banks

House Financial Services Committee
Oversight and Investigations Subcommittee
Hearing on Preserving Minority Banks

On October 30, 2007, the House held a hearing on Minority Banks. While we did not testify, the ranking Republican member, Representative Gary Miller (CA), read extensive portions of our research into the record.

We have called for the development of tools to get capital into the best of these institutions, those with solid financial performance and outstanding performance in helping to meet community credit needs.

Tuesday, October 9, 2007

Response to SEC Shareholder Proposals

On October 8th, we filed our response to the following SEC proposed rules:

1. Shareholder Proposals. Other Release No.: IC-27913. File No.: S7-16-07 and
2. Shareholder Proposals Relating to the Election of Directors. Other Release No.: IC-27914. File No.: S7-17-07.

In our response, we note the following:

  • Our position with respect to capital markets regulation recognizes the primacy of protecting investors. Investor interests, broadly speaking, are not served by growing levels of fraud and malfeasance. As is clear from recent events, securities laws have failed both to protect investors and to promote efficiency. “Facilitating the exercise of shareholders’ rights” will help prevent fraud from occurring.
  • We recognize that the right to submit shareholder resolutions impacting corporate operations, governance and ownership has economic value, like any option. This option value was first uncovered by faith based investors, who found their ability to implement positive social change diminished as the social order moved to a market-based culture. Submitting shareholder resolutions allowed them to move with the social order. This strategy has been co-opted by certain hedge funds, now using the practice for selfish, potentially destructive purposes.
  • Any significant concerns about expanding proxy access rests with these hedge funds, by their nature neither long term investors or sensitive to broader social concerns. We suggest the SEC permit hedge funds to make their proxy voting records public, as mutual funds are required to do. To incentivize this suggestion, the Commission should rule that those hedge funds choosing not to make their proxy voting records public forfeit any legal right to file shareholder resolutions.
  • The 5% ownership threshold proposed in File Number S7-16-07 and S7-17-07 should be much lower. The threshold should tie to length of ownership. For owners holding the stock over 10 years, there should be a nominal requirement based on number of shares held, say, 100 shares, and a pledge to hold onto the stock for another 10 years. For five year holders, there should be a 1,000 share requirement, and a pledge to hold onto the stock for another 5 years. For one year holders, there should be a 10,000 share requirement.
  • The 5% ownership threshold is equivalent to a “poll tax,” effectively disenfranchising large groups of investors. Fraud in the marketplace (detailed in our comments) mandates that options for exercising shareholder rights be enhanced, not diminished.
  • The exercise of voting rights without an economic interest in the underlying security should be disallowed. This is an administrative anachronism created by the fact that publically traded companies do not register individuals as owners of their shares.
  • Any person serving on any corporate board signs a binding contract to act as a fiduciary. This means putting the interests of all shareholders first, so, legally, there are no “special interest directors.”[1] Having an interest in and advocating for a long term issue of perceived future significance to a corporation need not be inconsistent with competent board service.
  • We believe the reference to “states rights” is code for an attitude that supports the resistance of certain entrenched corporate interests to the rights of outside shareholders who are not part of management. Federal law should dominate, given that state law failed to stop the fraud and malfeasance noted.

  • The fundamental problem is the continuing and legal disenfranchisement of the majority of shareholders. To fully address the proxy access issue means first addressing two regulatory loopholes: those that allow hedge funds to operate without supervision and those that allow publically traded companies to avoid registering individuals as owners of their shares.
We continue to believe that efforts to block these rule changes will be ineffective. We suggested a coalition-based approach to this issue in 2004, in a presentation at SRI In The Rockies, a social investing conference. Unfortunately, social investing groups are not immune from the same bigoted and exclusionary tendencies that impact society at large. For these groups to wait until 2007 to create the coalition we suggested is, in our opinion, simply too little, too late.


[1] In fact, if there are any “special interest directors” currently serving on corporate boards, they are those whose sole interest is self enrichment at the expense of other shareholders.

Friday, October 5, 2007

"Bill Pushes Diversity Among Senior (Government) Executives"

According to the Washington Post,

"Legislation to promote diversity in the government's career executive ranks was introduced yesterday by the chairmen of the House and Senate federal workplace subcommittees.
Rep. Danny K. Davis (D-Ill.) and Sen. Daniel K. Akaka (D-Hawaii) said their bill would address the lack of diversity in the Senior Executive Service, the group of about 6,300 career executives who manage the day-to-day operations of the government.

The bill would establish a Senior Executive Service program office in the Office of Personnel Management. The proposed office would collect and maintain data on the race, ethnicity, gender and any disabilities of people who have been certified as qualified to serve in the SES.

The bill also would require federal agencies to establish SES evaluation panels to review the qualifications of applicants for SES jobs. Each panel would have three members. One must be a woman and one other a member of a racial or ethnic minority group.

'We are doing this really to try to bring about some improvement in the management of the Senior Executive Service and to enhance diversity,' Akaka said.

Davis said 'diversity is valuable because it can bring a wider variety of perspectives and approaches to policy development and implementation. Minorities and women need to be at the table to contribute when strategic planning, problem solving and decision making take place.'
Davis added, 'What I see as I visit federal agencies is a senior-level workforce that is not reflective of the diverse people we serve.' "

Monday, October 1, 2007

Emerging Markets & Diversity Conferences

Two conferences on Diversity highlight the growing recognition of market opportunities in this sector.

The first is the 3rd Annual Mortgage Industry Emerging Markets and Diversity Conference. This is being billed as an opportunity to compete for origination opportunities and to preserve communities. It will be interesting to see if they mention recent reports noting racial bias in subprime mortgage lending.

The second is the 14th Annual Ethnic and Multicultural Marketing Omnibus. November 1 - 2, 2007 in Chicago. We (Creative Investment Research, Inc.) are a media sponsor for this event, billed as an opportunity to

"join a star team of Fortune 1000 clients and trail-blazers in multicultural marketing on the most successful ways of engaging the still growing and booming Multicultural Economy in the United States. One fifth of the nearly $10 Trillion in total U.S. buying power will come from the diverse multicultural segments. Learn how your brands can get a lion’s share of this robust market opportunity at a time when the general market’s buying power has considerably slowed down."

Tuesday, September 25, 2007

House Hearing on SEC Proxy Access Proposals

Full Committee Hearing


SEC Proxy Access Proposals: Implications for Investors

Thursday, September 27, 2007, 10:00 a.m., 2128 Rayburn House Office Building

Saturday, September 22, 2007

High Growth, Low Returns Found at Minority Banks

From: American Banker Newspaper
Wednesday, September 19, 2007
By Katie Kuehner-Hebert

Banks that target minority groups, particularly Hispanics and Asian-Americans, are reporting asset growth well above the industry average, largely because of an influx of immigrants.

However, on average these banks are less profitable and less efficient than mainstream ones, according to a report published last week by Creative Investment Research Inc., a Washington consulting firm that focuses on minority banking.

Assets at minority-owned banks are on pace to increase by an average of 17.43% this year, compared with the overall industry average of 6.38%, according to the report, which cited data from the Federal Deposit Insurance Corp. and other sources.

William Michael Cunningham, the consulting firm's president and chief executive, said the trend reflects both the increased number of start-ups targeting Hispanics — about a dozen have opened since the end of 2005 — and the continued asset growth at new and existing Asian-American banks.

Mr. Cunningham attributed the asset growth at the niche banks mainly to the surging Hispanic and Asian populations. The Hispanic population increased about 26% between July 2000 and July 2006, to 44.3 million, according to Census Bureau data, while the Asian population grew 45%, to 14.9 million.

But he also said he believes it is easier for these banks to attract ethnic groups, because they hire people who speak the group's language, and they have flexible underwriting policies to more accurately reflect the creditworthiness of their customers, particularly immigrants with no established credit histories in the United States.

Many immigrants have just checking accounts at mainstream banks, and language barriers or conventional underwriting policies may be stopping such customers from taking out personal or business loans or investing in securities with the banks.

Jose Reyna, Zions Bank's regional president for Utah and Idaho, said he does not agree that minority-owned banks necessarily serve minorities, paticularly immigrants, better than mainstream banks.

"We have strict credit policies and a very conservative portfolio, but we believe [minorities] deserve a very thorough look...and we're willing to support them for both personal and business loans," he said.

The $10.8 billion-asset East West Bancorp in Los Angeles caters to Asian-Americans, and its assets have increased an average of 21% a year for the last decade, said Dominic Ng, the chairman, president, and CEO of the company and its East West Bank.

(On 2/28/06, we profiled a set of Asian Banks.)

Much of the company's asset growth has come from the fact that many Asian-Americans tend to own businesses or buy commercial real estate and bank with East West as commercial customers, he said.

Still, not all of the growth in recent years can be attributed to an increase in Asian-American customers. Mr. Ng said that his company also is gaining non-Asian customers, particularly business owners who import and/or export goods and services and need its trade finance services.

"We have done well in serving minority businesses and have applied that same approach to mainstream businesses," he said.

On average, though, minority-owned institutions have not performed as well as the industry as a whole, largely because they tend to be smaller and less efficient. As of June 30 the efficiency ratio for women- and minority-owned banks was 91.36%, versus the industry average of 56.52%.

The report also showed that the ROAs of these banks has dropped of dramatically in the last 18 months, though Mr. Cunningham was quick to attribute this to an increase in start-ups targeting minorities. (There were 225 minority-owned banks and thrifts as of June 30, versus 190 at the end of 2005.)

Return on assets at minority institutions averaged 0.09% at June 30, compared with 0.78% at the end of 2005. For all FDIC-insured institutions, the ROA was 1.21%, compared with 1.3% at the end of 2005.

Mr. Cunningham said that he suspects that the minority start-ups mature, their returns will move closer to the industry average.

Broken down by ethnicity, Native American banks performed the best, with an average return of 0.84% at June 30. The average was 0.22% for Asian-American banks, 0.11% for Hispanic banks, and negative-0.6% for African-American banks. (For the new category of banks that have minority boards and serve African-American communities but are not majority owned by African-Americans, the average was 0.52%.)

Mr. Cunningham said that Native American banks topped the list because of strong revenue from casinos.

Banks owned by African-Americans have not had as strong as demographic growth as the others and have struggled with cost control, he said.

Though the increased number of start-ups may have skewed minority banks' performance ratios, chargeoff ratios for the group on average have been better than the industry as a whole, the report said.

Net chargeoffs as a percentage of average loans totaled 0.21% at minority institutions as of June 30, compared with the average of 0.47% for all FDIC-insured institutions.

Mr. Cunningham said that nonperforming assets at minority-owned banks may be in line or even higher than the industry average, but the banks tend to work with their customers much longer in resolving credit problems, so chargeoffs tend to be lower.

Thursday, September 13, 2007

New Math at the SEC

As we noted on August 10th, turmoil at the SEC means that paths to an optimized shareholder access and proxy policy, while then still present, are fewer in number. We continue to believe the SEC will limit shareholder rights. A 9/12/07 article in the Washington Post supports this belief. Thus, we are now almost certain that the restrictive shareholder access proposal we discussed on July 20th will be adopted.

According to Portfolio.com, "The Social Investment Forum, the Interfaith Center on Corporate Responsibility and Ceres, a coalition of investors, environmental groups and others, unveiled a new web site to attract 500 institutions and financial professionals to sign a joint statement against proposed S.E.C. changes."

For a number of reasons, these efforts will probably be ineffective.

Friday, August 31, 2007

This Week's Events and News

Social Investors Launch Campaign to Halt Proposed Changes to Proxy Access Rules

According to Portfolio.com, "Socially concerned investors groups say they won't stand by and see Securities and Exchange Commission chairman Christopher Cox crimp their right to demand company accountability on important issues like the business risks of climate change. The Social Investment Forum, the Interfaith Center on Corporate Responsibility and Ceres, a coalition of investors, environmental groups and others, unveiled a new web site to attract 500 institutions and financial professionals to sign a joint statement against proposed S.E.C. changes."

As we noted earlier,

"Those most directly impacted by the policy change are large in number but divided and unorganized. These include shareholder groups like the Interfaith Center on Corporate Responsibility, labor-related funds, faith-based pension funds, 'socially responsible' mutual funds, and individual stockholders...these groups have been unable to mount the type of strategic, sustained effort, or bring forward the new ideas and analysis required to prevent the imposition of a more restrictive shareholder access policy."

This effort is an attempt to even the field. We are not sure it will work, but time will tell.

President of Standard and Poors Steps Down


"Kathleen Corbet, president of the credit rating company Standard and Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages."

Terror Free Investment Product

To divest their money from terror-sponsoring nations got another push Wednesday with a new plan aimed at making college savings investments "terror-free."

Last year, Missouri became the first state to order its employee pension funds to dump shares of companies that deal with Iran, North Korea, Sudan and Syria, all of which are on the U.S. State Department's list of terror-sponsoring nations."

As we noted, we think the SEC was on the right track when it posted online tools to assist in this process. See: http://twisri.blogspot.com/2007/07/sec-backs-off.html

SEC News and Enforcement Actions

On August 23, 2007, the Securities and Exchange Commission "filed an emergency action to shut down a $25 million Ponzi scheme that victimized hundreds of senior and other investors nationwide who bought fractional ownership interests in life insurance policies. The Commission alleges that Donald Neuhaus of Redding, Calif., his daughter Kimberley Snowden, and their company Secure Investment Services, Inc., orchestrated the Ponzi scheme that falsely promised safe, secure and profitable interests in life insurance policies known as "viaticals" while failing to disclose the dire financial condition of the investment venture. Many of the investors were elderly and invested their retirement savings. The Commission also alleges the father-daughter fraudsters pocketed $700,000 for their personal use while the scam was on the verge of collapse."

On August 28, 2007, the Securities and Exchange Commission announced "fraud charges against a Bay Area attorney for her role in illegally backdating stock option grants. The Commission charged Lisa C. Berry with routinely backdating option grants from 1997 to 2003, first as General Counsel of KLA-Tencor Corporation and then as General Counsel of Juniper Networks, Inc. The Commission alleges that Berry's misconduct caused the two companies to conceal hundreds of millions of dollars in stock option compensation expenses relating to undisclosed in-the-money options provided to company executives and employees. "

Also on August 28, 2007, The Commission "filed a settled enforcement action against Juniper, an information technology company based in Sunnyvale, Calif. Without admitting or denying the allegations, Juniper has consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws. KLA, a San Jose-based semiconductor equipment company, previously settled charges brought by the Commission"

The Diversity Portfolio

The Creative Investment Research, Inc. Diversity Portfolio contains equity investments in some of the largest U.S. companies. These companies have been selected for inclusion because they have outstanding financial and diversity performance. Diversity performance is calculated by reviewing several key measures: Human capital, CEO commitment, and supplier diversity. From 4/7/06 to 8/30/07, the model portfolio returned 15.56% versus an 15.48% return for the market, as measured by the S&P 500 Index, a major stock market index (without considering dividends. Returns calculated before fees deducted. Past performance is no guarantee of future returns.) See DiversityFund.net for more information...

Angels Descend on Minority Business Enterprises

Investors gather to consider investments in top minority-owned ventures.

Virginia Housing and Community Development Corporation (VHCDC) continues its pioneering initiatives to facilitate the flow of capital to Minority Business Enterprises (MBEs) with the announcement of the 2007 MBE Capital Call Conference, Exhibition, and Venture Forum -- September 20 & 21 in Hampton, Virginia. The MBE Capital Call presents entrepreneurs with innovative and marketable business ideas the opportunity to secure capital, and other essential resources, by "Pitching" their business plans to active, accredited investors. This event invites Entrepreneurs, aspiring entrepreneurs, Investors, aspiring investors, and College/University Students to Hampton, Virginia for a rewarding two day conference aimed at facilitating investment in minority- and women-owned businesses.

VHCDC created the MBE Capital Call to expose and connect MBEs, particularly African-American, Hispanic, and Native American entrepreneurs, to capital (funding) to start and grow or expand their business. This year, twenty-one (21) entrepreneurs will be selected to pitch their business plans to active, accredited investors. A team of active investors and business development professionals will select the presenters from among registrations received thru August 10, 2007. Presenters will be judged on several criteria and may pitch plans for virtually any industry/business sector.

Registration is easy, and there's no additional cost to enter the competition. Business owners, aspiring entrepreneurs, investors, lenders, and students may register by visiting the MBE Capital Call website: www.mbecapitalcall.com now for complete details, registration, and terms and conditions.

Thursday, August 23, 2007

This Week's Events and News

SEC News and Enforcement Actions

On August 9, 2007, the Securities and Exchange Commission "filed a civil injunctive action against former senior officials of Nicor, Inc., a major Chicago-area natural gas distributor, alleging financial fraud lasting from 1999 to 2002. The SEC's complaint alleges that former Chairman, CEO and President Thomas Fisher, former CFO and Executive Vice-President Kathleen Halloran, and former Treasurer and Vice-President George Behrens engaged in or approved improper transactions, and misrepresented Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based utility rate plan."

On August 13, 2007, the Securities and Exchange Commission announced "the distribution of approximately $55.6 million in Fair Funds to more than 200,000 investors who were harmed by fraudulent market timing in certain Banc One mutual funds (One Group Funds). The Fair Fund resulted from a settled enforcement action in which Banc One Investment Advisors Corporation (BOIA) agreed to pay $10 million in disgorgement and $40 million in civil penalties to settle charges of unlawful market timing. The entire Fair Fund, plus accumulated interest, has been distributed to investors."

On August 17, 2007, the Securities and Exchange Commission "filed fraud charges against Michael J. Byrd, a former Chief Financial Officer and Chief Operating Officer of Brocade Communications Systems, Inc., alleging that he disregarded indications that other senior corporate executives were improperly backdating stock option grants at the company. The Commission alleges that Byrd, of Saratoga, Calif., learned of instances in which Brocade's then-CEO and others were backdating options for certain individuals, yet failed to ensure that the company properly accounted for the option expenses and disclosed them to investors."

Greenbacks in green investing -Investment funds likely to grow

"Green is good. At least that's the bet of an increasing number of investment fund managers, retirees and armchair stock pickers who are pouring billions into so-called green stocks, and not necessarily for the love of nature.

They're chasing lucrative returns from companies that promise new ways to recycle, power automobiles and harness the wind and sun. Many have had success.

Green investment funds that have been around for at least a year report double-digit gains for the past 12 months. The KDL Global Climate 100 Index, which tracks companies working to offset global warming or its effects, is up nearly 25 percent."

See: http://www.montereyherald.com/business/ci_6677264?nclick_check=1

Investing with your values

According to The Truro Daily News,"While the primary goal of investing is to earn a reasonable profit, for many people it is important that their profit not come at the expense of compromising their social values.

In an era of increased awareness of social issues, many investors may be thinking about the social and environmental effects of their investment portfolios.

Socially responsible investing can encompass a variety of themes. The most common considerations are avoiding “sin stocks” such as firearms, alcohol, tobacco or gaming companies and avoiding companies with questionable labour or environmental practices. In more recent times there has also been a trend to favour companies that demonstrate sound corporate governance practices."

See: http://trurodaily.com/index.cfm?sid=55710&sc=73

We cannot ignore the environment - Climate change will be one of the biggest investment themes of the next 20 years

According to an 8/20/07 comment by published in Financial News Online, "With parts of Britain under water and forest fires in southern Europe this summer as well as the worst of the annual hurricane season yet to hit the Caribbean and southern US, it is hard to get away from news of climate change and how it is affecting daily life.

Without wanting to praise those who led the argument that climate change is the most serious issue facing the human race, it also represents one of the biggest investment themes for the next 20 years.

As such, it is time investors understood how and why climate change and investing are related and how they can adjust their portfolios accordingly.

This is not just about socially responsible investing or even whether you believe the scientific evidence. As an asset manager we have a fiduciary responsibility to provide investors with the best risk-adjusted returns looking at market trends and emerging sectors. It is becoming apparent that our responsibility extends to include environmental considerations in this analysis."

See: http://www.financialnews-us.com/?page=uscomment&contentid=2348577733

The Diversity Portfolio

The Creative Investment Research, Inc. Diversity Portfolio contains equity investments in some of the largest U.S. companies. These companies have been selected for inclusion because they have outstanding financial and diversity performance. Diversity performance is calculated by reviewing several key measures: Human capital, CEO commitment, and supplier diversity. From 4/7/06 to 8/22/07, the model portfolio returned 16.58% versus an 15.93% return for the market, as measured by the S&P 500 Index, a major stock market index (without considering dividends. Returns calculated before fees deducted. Past performance is no guarantee of future returns.) See DiversityFund.net for more information...

Angels Descend on Minority Business Enterprises

Investors gather to consider investments in top minority-owned ventures.

Portsmouth, VA (PRWEB) July 17, 2007 -- Virginia Housing and Community Development Corporation (VHCDC) continues its pioneering initiatives to facilitate the flow of capital to Minority Business Enterprises (MBEs) with the announcement of the 2007 MBE Capital Call Conference, Exhibition, and Venture Forum -- September 20 & 21 in Hampton, Virginia. The MBE Capital Call presents entrepreneurs with innovative and marketable business ideas the opportunity to secure capital, and other essential resources, by "Pitching" their business plans to active, accredited investors. This event invites Entrepreneurs, aspiring entrepreneurs, Investors, aspiring investors, and College/University Students to Hampton, Virginia for a rewarding two day conference aimed at facilitating investment in minority- and women-owned businesses.

VHCDC created the MBE Capital Call to expose and connect MBEs, particularly African-American, Hispanic, and Native American entrepreneurs, to capital (funding) to start and grow or expand their business. This year, twenty-one (21) entrepreneurs will be selected to pitch their business plans to active, accredited investors. A team of active investors and business development professionals will select the presenters from among registrations received thru August 10, 2007. Presenters will be judged on several criteria and may pitch plans for virtually any industry/business sector.

Registration is easy, and there's no additional cost to enter the competition. Business owners, aspiring entrepreneurs, investors, lenders, and students may register by visiting the MBE Capital Call website: www.mbecapitalcall.com now for complete details, registration, and terms and conditions.

Tuesday, August 21, 2007

Motley Fool on GS Sustain

In an August 3rd article titled "Do Gooders Do Well" on the Motley Fool website, Selena Maranjian noted our concerns about the GS Sustain Index and methodology, Goldman Sach's list of “companies from established industries, which have been selected by incorporating our proprietary Environmental, Social and Governance (ESG) framework into long-run industry drivers and returns-based analysis and valuation in order to pinpoint structural improvement and sustainable competitive positioning.”

The article went on to say that "Of course, not every socially responsible investing advocate is anti-Goldman -- the Calvert Large Cap Growth Fund (CLCIX) recently had nearly 2% of its value invested in the company." (The stock is down 12.9% from 12/29/06 to 8/20/07. The S&P 500 is up 1.92% over the same period.)

For the record, we are not anti-Goldman. We correctly listed factual data concerning ethical and diversity lapses at the firm, and tied these to their work on SRI. As we stated, we applaud Goldman's incorporation of the ten principles of the UN Global Compact into an investment analysis framework and the firms’ tacit recognition of “socially responsible” investing.

Monday, August 13, 2007

Black-owned banks in North Carolina to merge

According to the Winston-Salem Journal, "M and F Bancorp Inc. said yesterday (August 10, 2007) that it has agreed to buy Mutual Community Savings Bank Inc. and merge it with M and F’s bank subsidiary, Mechanics and Farmers Bank. The banks, both based in Durham, are two of the nation’s oldest black-owned financial institutions."

We believe the merger is a positive development, and will insure that black banks remain a factor in North Carolina. We also note that this is the third transaction in the Black banking sector over the last 60 days.

Friday, August 10, 2007

Turmoil at the SEC

According to the SEC, "Commissioner Roel C. Campos..announced that he intends to leave the Commission in a month's time and plans to return to the private sector. Currently serving his second term, Mr. Campos was first appointed by President George W. Bush and confirmed by the U.S. Senate as a Commissioner in August 2002." This follows the August 6, 2007 announcement that "Martin P. Dunn, Deputy Director of the Division of Corporation Finance, will leave the agency at the end of August to join O'Melveny & Myers LLP as a partner in its Washington D.C. office."

We believe Mr. Campos and Mr. Dunn may have been implicated in, or administratively responsible for, the leak of a draft proxy access proposal (SEC Proxy-Access Proposal Draws Fire from Investors. The Wall Street Journal. By JUDITH BURNS. July 11, 2007; Page D2). This leak led to concerns about the early and selective distribution of proposed public policies only to moneyed interest groups. We note that, at the last Open Meeting, Wednesday, July 25, 2007, Mr. Campos complained that he did not receive a copy of the second, revised shareholder access proposal until 11 pm on July 24th. This was done to insure confidentiality of the new proposal, released internally only after press publication deadlines had passed. The revised proposal was not leaked.

These changes mean that paths to an optimized shareholder access and proxy policy, while still present, are fewer in number. Thus, chances are greater now that the restrictive shareholder access proposal we discussed on July 20th will be adopted.

Thursday, August 9, 2007

This Week's Events and News

Presbyterian Foundation cited for socially responsible investing

According to The Presbyterian News Service, "The Social Investment Forum Foundation listed the Presbyterian Foundation as one of the leading United States foundations using social or environmental screening along with traditional financial analysis as criteria for their investment strategy. Other foundation leaders in social and environmental screening recognized include the United Methodist Foundation and the United Church Foundation."

SEC News and Enforcement Actions

On August 7, 2007, the Securities and Exchange Commission "filed financial fraud charges against First BanCorp, alleging that former senior management of the NYSE-listed, Puerto Rico-based bank holding company concealed the true nature of more than $4 billion worth of transactions involving "non-conforming" residential mortgages. Non-conforming mortgages have income verification and credit history standards that are generally more flexible than those required for sale or exchange under Fannie Mae and Freddie Mac programs and can constitute 'subprime' mortgages."

On August 3, 2007, the Securities and Exchange Commission announced "that a federal jury found Michael J. Pietrzak and Maurice W. Furlong liable for securities fraud and other charges in their operation of Hexagon Consolidated Companies of America, Inc. (HCCA), a development stage mining company headquartered in Reno, Nev. Pietrzak was HCCA's general counsel, CFO, and executive secretary, as well as a director. Furlong was HCCA's chairman, president and CEO."

Also on August 3, 2007, the Securities and Exchange Commission "charged a London, England resident with insider trading ahead of the July 14, 2006, announcement that San Diego-based Petco Animal Supplies, Inc. would be purchased by two private equity firms."

On August 1, 2007, the Securities and Exchange Commission "announced that it started distribution of the $267 million Fair Fund created as part of settlements with Qwest Communications International Inc. and several of its former executives. The funds will be distributed to approximately 200,000 investors who purchased Qwest's securities between July 27, 1999, and July 28, 2002."

Also on August 1, 2007, the Securities and Exchange Commission "filed charges against Silicon Valley semiconductor company Integrated Silicon Solution, Inc. (ISSI) and its former Chief Financial Officer, Gary L. Fischer, alleging that they engaged in a long-running fraudulent scheme to backdate stock option grants."

On July 26, 2007, the Securities and Exchange Commission "announced that Cardinal Health, Inc., a pharmaceutical distribution company based in Dublin, Ohio, has agreed to pay $35 million to settle charges that it engaged in a nearly four-year long fraudulent revenue and earnings management scheme, as well as other improper accounting and disclosure practices."

Also on July 26, 2007, the Securities and Exchange Commission "filed a civil fraud action against Robert J. Therrien, former President and CEO of Brooks Automation, Inc., a Massachusetts software company, alleging that he received millions of dollars in undisclosed compensation by fraudulently backdating his exercise of an option to purchase company stock."

City Recycles, but Its Investments Aren't Necessarily Green

According to the Seattle Weekly, "the Seattle City Employees' Retirement System—which maintains an investment portfolio of about $2 billion on behalf of current and former employees—has no criteria for how socially responsible a company must be to receive its financial backing. The city's current policy is to make investments that yield the highest returns with a reasonable amount of risk."

SRI Growing in Australasia

“According to the Ethical Investment Association of Australasia, managed SRI portfolios in Australia grew by a staggering 56 percent in the 2006 financial year, growing from AUD$7.76 billion, to AUD$11.98 billion. Managed mainstream portfolios grew by just 15.5 percent over the same period.”

Ways to Do Your Share

According to the Wall Street Journal, "Many twentysomethings want to do something positive for the world but don't have large sums to give to charitable organizations whose efforts they admire. Beyond giving what you can, though, there are numerous other ways, small and large, that you can reach out to address problems such as poverty and global warming. Consider socially responsible investing (SRI). In selecting stocks, SRI funds typically screen out companies that deal in alcohol and tobacco, or which are deemed undesirable for such things as a record of pollution or worker exploitation. Some funds attempt to use their ownership stakes in various companies to push for social, political or ethical revisions. These funds are increasingly becoming available in 401(k) retirement plans, which is good news for younger workers who may have limited investment resources."

The Diversity Portfolio

The Creative Investment Research, Inc. Diversity Portfolio contains equity investments in some of the largest U.S. companies. These companies have been selected for inclusion because they have outstanding financial and diversity performance. Diversity performance is calculated by reviewing several key measures: Human capital, CEO commitment, and supplier diversity. From 4/7/06 to 8/8/07, the model portfolio returned 18.72% versus an 15.59% return for the market, as measured by the S&P 500 Index, a major stock market index (without considering dividends. Returns calculated before fees deducted. Past performance is no guarantee of future returns.) See DiversityFund.net for more information...

Angels Descend on Minority Business Enterprises

Investors gather to consider investments in top minority-owned ventures.

Portsmouth, VA (PRWEB) July 17, 2007 -- Virginia Housing and Community Development Corporation (VHCDC) continues its pioneering initiatives to facilitate the flow of capital to Minority Business Enterprises (MBEs) with the announcement of the 2007 MBE Capital Call Conference, Exhibition, and Venture Forum -- September 20 & 21 in Hampton, Virginia. The MBE Capital Call presents entrepreneurs with innovative and marketable business ideas the opportunity to secure capital, and other essential resources, by "Pitching" their business plans to active, accredited investors. This event invites Entrepreneurs, aspiring entrepreneurs, Investors, aspiring investors, and College/University Students to Hampton, Virginia for a rewarding two day conference aimed at facilitating investment in minority- and women-owned businesses.

VHCDC created the MBE Capital Call to expose and connect MBEs, particularly African-American, Hispanic, and Native American entrepreneurs, to capital (funding) to start and grow or expand their business. This year, twenty-one (21) entrepreneurs will be selected to pitch their business plans to active, accredited investors. A team of active investors and business development professionals will select the presenters from among registrations received thru August 10, 2007. Presenters will be judged on several criteria and may pitch plans for virtually any industry/business sector.

Registration is easy, and there's no additional cost to enter the competition. Business owners, aspiring entrepreneurs, investors, lenders, and students may register by visiting the MBE Capital Call website: www.mbecapitalcall.com now for complete details, registration, and terms and conditions.

Tuesday, August 7, 2007

Mortgage GSE's, Predatory Lending and Minority Banks

The Washington Post reported yesterday that "government-chartered mortgage funding companies Fannie Mae and Freddie Mac .. shares rose on speculation that regulators may relax restrictions on their investments to allow them to pick up slack in the troubled market for home loans." We believe equity markets will trend to the downside until the end of 2007, but believe an increase in lending limits will be good, over the long run, for both mortgage and stock markets.

We believe troubles at Fannie and Freddie allowed predatory lenders to enter the mortgage market in full force. While there is no question that Fannie and Freddie were hurt by their own fraudulent practices, large and small predatory lenders, using groups like FM Policy Focus as a shield and a proxy, were able to obtain a greater share of the profits being generated by an overheated home mortgage market. Significant profit increases depended, however, on an ability to engage in predatory practices. Given distractions caused by their own incompetence, the GSE's were unable or unwilling to protect mortgage borrowers.

Major market institutions are now, as the troubled Bear Stearns reveals, feeling the negative effect of allowing these practices to flourish. Bear Stearns may be in real danger - it's stock decreased in value by 27% over the last month. We do not expect, but would not be surprised if the firm failed, another casualty of arrogance and greed.

These issues also impact smaller, minority-owned institutions, especially black owned institutions, who have been struggling to reverse predatory lending practices in their markets. According to the Kansas City Business Journal, "Louisiana-based bank owner First Guaranty Bancshares Inc. has agreed to buy troubled Douglass National Bank of Kansas City."

This is the second black owned bank in as many months sold to a non-minority banking group. This seems a direct contradiction of FIRREA Section 308, which, according to the FDIC, "requires the Secretary of the Treasury to consult with the Director of the Office of Thrift Supervision and the Chairperson of the FDIC Board of Directors to determine the best methods for preserving and encouraging minority ownership of depository institutions."

Given the two transactions noted above, anecdotal evidence suggests these consultations have not taken place in any meaningful way.

Monday, July 30, 2007

SEC Posts Proposed Shareholder Access Rules

On July 27th, the SEC posted two Shareholder Access proposals. Commenters have 60 days to reply:

Shareholder Proposals Relating to the Election of Directors. No.: IC-27914. File No.: S7-17-07. Comments Due: Comments should be received 60 days after Federal Register publication.-->Submit comments on S7-17-07

Shareholder Proposals. Release No.: IC-27913. File No.: S7-16-07. Comments Due: Comments should be received 60 days after Federal Register publication.-->Submit comments on S7-16-07

Wednesday, July 25, 2007

Inspired

As we indicated they would, the SEC put forward a proposal that would eliminate or severely restrict shareholder access to the corporate proxy statement. The Agency also put forward a proposal to expand shareholder access to the proxy.

We believe trepidation about the leak of the restrictive proxy access proposal (SEC Proxy-Access Proposal Draws Fire from Investors. The Wall Street Journal. By JUDITH BURNS. July 11, 2007; Page D2) led to concerns about a possible due process lawsuit. In an inspired move, the Agency decided to simultaneously release a second, less restrictive proposal.

This action negates concerns about the early and selective distribution of proposed public policies only to moneyed interest groups and simultaneously provides a way to optimize shareholder access and proxy policy.

Monday, July 23, 2007

The SEC backs off

On July 20, 2007, "SEC Chairman Christopher Cox issued the following statement concerning disclosures filed with the Commission concerning public company activities in countries that the U.S. Secretary of State has determined to have repeatedly supported terrorism:


Since the SEC added to our Internet site a web tool that permits investors to obtain information directly from company disclosure documents about their business interests in countries the U.S. Secretary of State has designated 'State Sponsors of Terrorism,' the site has experienced exceptional traffic. Between June 25, when the web tool was unveiled, through July 16, visitors have 'hit' material posted on the site well over 150,000 times. Iran was the country most frequently clicked on, followed by Cuba, Sudan, North Korea, and Syria. Those who went to a country list most often clicked through to the text of companies' own disclosure (in the case of Iran, they did so overwhelmingly), indicating that the disclosures were allowed to speak for themselves."

The Chairman went on to add that, despite the unqualified success of the effort, the SEC is

"temporarily suspending the availability of the web tool while it undergoes reconstruction." Further SEC staff is "considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts and others to easily discover this disclosure without need of an SEC-provided web tool at all. In the interim, the companies' disclosure regarding their business contacts in the five nations will continue to be available through the SEC's EDGAR database, and findable using our new full-text search capability."


We fully supported the SEC's efforts, have called for the use of interactive data tags in exactly this way (page 17), and are disappointed to see the site go down. As the Chairman noted,

"The exceptional public interest that has been demonstrated in reading company disclosures on this topic indicates that it is an important subject for investors. Federal law and SEC regulations will continue to require public companies to report on their activities, if material, in a country the Secretary of State has formally determined to be a State Sponsor of Terrorism. Our role is to make that information readily accessible to the investing public, and we will continue to work to find better ways to accomplish that objective."

The effort reinforces our view that by showing a willingness to address, in a timely and creative manner, critical issues affecting his Agency, Chairman Cox is the single most competent appointment made by the Bush Administration. The Terrorism disclosure effort was incredibly entrepreneurial and successful, both highly unusual for this Administration. We can only surmise that business interests on both sides of the issue (those doing business in States designated as sponsors of terrorism, and those selling information about those doing business in States designated as sponsors of terrorism) combined to get the pages taken down. This does not bode well for efforts to enhance shareholder democracy.

Lets hope this service comes back on-line soon.

Friday, July 20, 2007

On Shareholder Proposals

The SEC has announced it will soon issue revised rules governing the conditions under which shareholders have the right to file resolutions. This follows a recent set of discussions, including a Roundtable on Proposals of Shareholders held at SEC HQ on May 25th.

We believe the SEC will limit shareholder rights. We do not believe they will eliminate shareholder access to the proxy outright. Rather, we expect the Commission to impose a number of rules that virtually eliminate shareholders’ ability to file resolutions. These may include a 5% ownership rule or unreasonably restrictive time limits governing the filing of resolutions. We believe the SEC will offer shareholders improved communications and access to corporate management via on-line tools, like bulletin boards or “chat rooms.” Having done so, they will claim to have improved shareholder access. Unless , as we suggested earlier, these boards or chat rooms reside on SEC servers, they will be wrong.

We base our opinion on several factors:

  • Comments made by presenters and others at the May 25th SEC Shareholder Access Roundtable meeting;
  • Comments made by SEC Chairman Cox before the Financial Services Committee of the US House of Representatives at a Review of Investor Protection and Market Oversight on Tuesday, June 26, 2007, 2:00 p.m., in room 2128 of the Rayburn House Office Building. While we believe Chairman Cox is the single most competent appointment made by the Bush Administration, in an earlier forum he noted that his ability to act independently and in the public interest with respect to this matter is limited;
  • Recent Supreme Court decisions which have, according to one observer, “ transformed the branch of government singularly devoted to the protection of our rights and liberties into a facilitator of discrimination and a guardian of powerful political and moneyed interests;”
  • The draft proxy access proposal was leaked to the Wall Street Journal (SEC Proxy-Access Proposal Draws Fire from Investors. By JUDITH BURNS. July 11, 2007; Page D2). Given this leak, moneyed interests probably had early access to the proposal, a violation of due process and of certain sections of the U.S. Code. The early and selective distribution of proposed public policies only to moneyed interest groups with a clear and abiding pecuniary interest is inconsistent with policy optimization. These groups "short circuited" the full, free and fair consideration of optimal policy recommendations.
  • We believe these interests successfully lobbied the SEC for a regulatory approach that limits shareholder access to the proxy ballot by raising the specter of falling U.S. competitiveness and by citing "costs" associated with increased shareholder access. Both a re faulty arguments. New York market institutions and Wall Street in particular are perceived, globally, to be marginally riskier places to do business: the risk of catastrophic market institution (exchange) failure has increased. This increase in risk perception implies an increase in IPO issuance cost. Add this increase to the increased cost due to investment bank fraud and malfeasance and any decline in the volume of foreign company stock issuance in New York based markets is readily explained. Further, we note that this "competitive crisis" has not limited the size of bonus payments to senior executives, a clear sign that most market makers are not facing dire circumstances.
  • Those most directly impacted by the policy change are large in number but divided and unorganized. These include shareholder groups like the Interfaith Center on Corporate Responsibility, labor-related funds, faith-based pension funds, “socially responsible” mutual funds, and individual stockholders. We have offered to help, but these groups have been unable to mount the type of strategic, sustained effort, or bring forward the new ideas and analysis required to prevent the imposition of a more restrictive shareholder access policy. Bottom line: they simply do not have the money. Given this, their voice does not count as much as that of those lobbying for moneyed interests. Without the ability to file resolutions, the already limited voice of these groups will be stilled, ushering in new and frightening excesses in an already gilded age.

This comes at a time of unprecedented corporate and market institution fraud and malfeasance. The following are the simple facts:

On April 28, 2003, every major US investment bank, including Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse First Boston, Lehman Brothers Holdings, J.P. Morgan Chase, UBS Warburg, and U.S. Bancorp Piper Jaffray, were found to have aided and abetted efforts to defraud investors. The firms were fined a total of $1.4 billion dollars by the U.S. Securities and Exchange Commission, triggering the creation of a Global Research Analyst Settlement Fund.

In May, 2003, the U.S. Securities and Exchange Commission disclosed that several “brokerage firms paid rivals that agreed to publish positive reports on companies whose shares..they issued to the public. This practice made it appear that a throng of believers were recommending these companies' shares.” This was false. “From 1999 through 2001, for example, one firm paid about $2.7 million to approximately 25 other investment banks for these so-called research guarantees, regulators said. Nevertheless, the same firm boasted in its annual report to shareholders that it had come through investigations of analyst conflicts of interest with its ‘reputation for integrity’ maintained.”

On September 3, 2003, the New York State Attorney General announced he had “obtained evidence of widespread illegal trading schemes, ‘late trading’ and ‘market timing,’ that potentially cost mutual fund shareholders billions of dollars annually. This, according to the Attorney General, “is like allowing betting on a horse race after the horses have crossed the finish line.”

On September 4, 2003, a major investment bank, Goldman Sachs, admitted that it had violated anti-fraud laws. Specifically, the firm misused material, nonpublic information that the US Treasury would suspend issuance of the 30-year bond. The firm agreed to “pay over $9.3 million in penalties.” On April 28, 2003, the same firm was found to have “issued research reports that were not based on principles of fair dealing and good faith .. contained exaggerated or unwarranted claims.. and/or contained opinions for which there were no reasonable bases.” The firm was fined $110 million dollars, for a total of $119.3 million dollars in fines in six months.

On December 18, 2003, the U.S. Securities and Exchange Commission “announced an enforcement action against Alliance Capital Management L.P. (Alliance Capital) for defrauding mutual fund investors. The Commission ordered Alliance Capital to pay $250 million. The Commission also ordered Alliance Capital to undertake certain compliance and fund governance reforms designed to prevent a recurrence of the kind of conduct described in the Commission's Order. Finally, the Commission found that “Alliance Capital breached its fiduciary duty to (it’s) funds and misled those who invested in them.”

On October 8, 2004, the U.S. Securities and Exchange Commission “announced..enforcement actions against Invesco Funds Group, Inc. (IFG), AIM Advisors, Inc. (AIM Advisors), and AIM Distributors, Inc. (ADI). The Commission issued an order finding that IFG, AIM Advisors, and ADI violated the federal securities laws by facilitating widespread market timing trading in mutual funds with which each entity was affiliated. The settlements require IFG to pay $215 million in disgorgement and $110 million in civil penalties, and require AIM Advisors and ADI to pay, jointly and severally, $20 million in disgorgement and an aggregate $30 million in civil penalties.”

On November 4, 2004, the U.S. Securities and Exchange Commission “filed a settled civil action in the United States District Court for the District of Columbia against Wachovia Corporation (Wachovia) for violations of proxy disclosure and other reporting requirements in connection with the 2001 merger between First Union Corporation (First Union) and Old Wachovia Corporation (Old Wachovia). Under the settlement, Wachovia must pay a $37 million penalty and is to be enjoined from future violations of the federal securities laws.”

On November 17, 2004, the U.S. Securities and Exchange Commission announced “charges concerning undisclosed market timing against Harold J. Baxter and Gary L. Pilgrim in the Commissions’ pending action in federal district court in Philadelphia.” Based on these charges, Baxter and Pilgrim agreed to “pay $80 million – $60 million in disgorgement and $20 million in civil penalties.”

On November 30, 2004, the U.S. Securities and Exchange Commission announced “the filing..of charges against American International Group, Inc. (AIG) arising out of AIG’s offer and sale of an earnings management product.” The company “agreed to pay a total of $126 million, consisting of a penalty of $80 million, and disgorgement and prejudgment interest of $46 million.”

On December 22, 2004, “the U.S. Securities and Exchange Commission, NASD and the New York Stock Exchange announced..enforcement proceedings against Edward D. Jones & Co., L.P., a registered broker-dealer headquartered in St. Louis, Missouri.” According to the announcement, “Edward Jones failed to adequately disclose revenue sharing payments that it received from a select group of mutual fund families that Edward Jones recommended to its customers.” The company agreed to “pay $75 million in disgorgement and civil penalties. All of that money will be placed in a Fair Fund for distribution to Edward Jones customers.”

On January 25, 2005, “the U.S. Securities and Exchange Commission announced the filing in federal district court of separate settled civil injunctive actions against Morgan Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the firms during 1999 and 2000.”

According to the Associated Press, on January 31, 2005, “the nation’s largest insurance brokerage company, Marsh & McLennan Companies Inc., based in New York, will pay $850 million to policyholders hurt by” corporate practices that included “bid rigging, price fixing and the use of hidden incentive fees.” The company will issue a public apology calling its conduct "unlawful" and "shameful," according to New York State Attorney General Elliott Spitzer. In addition, “the company will publicly promise to adopt reforms.”

On Feb. 9, 2005, the U.S. Securities and Exchange Commission “announced the settlement of an enforcement action against Columbia Management Advisors, Inc. (Columbia Advisors), Columbia Funds Distributor, Inc. (Columbia Distributor), and three former Columbia executives in connection with undisclosed market timing arrangements in the Columbia funds. In settling the matter, the Columbia entities will pay $140 million, all of which will be distributed to investors harmed by the conduct. The SEC also brought fraud charges against two additional former Columbia senior executives in federal court in Boston.”

On March 23, 2005, the U.S. Securities and Exchange Commission “announced that Putnam Investment Management, LLC (Putnam) will pay $40 million. The Commission issued an order that finds Putnam failed to adequately disclose to the Putnam Funds' Board of Trustees and the Putnam Funds' shareholders the conflicts of interest that arose from..arrangements for increased visibility within the broker-dealers' distribution systems.”

On March 23, 2005, the U.S. Securities and Exchange Commission (Commission) “announced that it instituted and simultaneously settled an enforcement action against Citigroup Global Markets, Inc. (CGMI) for failing to provide customers with important information relating to their purchases of mutual fund shares.”

On April 12, 2005, the U.S. Securities and Exchange Commission “instituted and simultaneously settled an enforcement action against the New York Stock Exchange, Inc., finding that the NYSE, over the course of nearly four years, failed to police specialists, who engaged in widespread and unlawful proprietary trading on the floor of the NYSE.” As part of the settlement, the “NYSE agreed to an undertaking of $20 million to fund regulatory audits of the NYSE's regulatory program every two years through the year 2011.” On that same date, the Commission “instituted administrative and cease-and-desist proceedings against 20 former New York Stock Exchange specialists for fraudulent and other improper trading practices.”

On April 19, 2005, the U.S. Securities and Exchange Commission announced “that KPMG LLP has agreed to settle the SEC's charges against it in connection with the audits of Xerox Corp. from 1997 through 2000. As part of the settlement, KPMG consented to the entry of a final judgment in the SEC's civil litigation against it pending in the U.S. District Court for the Southern District of New York. The final judgment..orders KPMG to pay disgorgement of $9,800,000 (representing its audit fees for the 1997-2000 Xerox audits), prejudgment interest thereon in the amount of $2,675,000, and a $10,000,000 civil penalty, for a total payment of $22.475 million.”

On April 28, 2005, the U.S. Securities and Exchange Commission announced “that it has instituted settled enforcement proceedings against Tyson Foods, Inc. and its former Chairman and CEO Donald ‘Don’ Tyson. The SEC charged that in proxy statements filed with the Commission from 1997 to 2003, Tyson Foods made misleading disclosures of perquisites and personal benefits provided to Don Tyson both prior to and after his retirement as senior chairman in October 2001.”

On May 31, 2005, the U.S. Securities and Exchange Commission “announced settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. Under the settlement, the respondents are ordered to pay $208 million in disgorgement and penalties and to comply with substantial remedial measures, including an undertaking to put out for competitive bidding certain contracts for transfer agency services for the mutual funds.”

On June 2, 2005, the U.S. Securities and Exchange Commission “filed securities fraud charges against Amerindo Investment Advisors, Inc., Alberto William Vilar and Gary Alan Tanaka, Amerindo’s co-founders and principals, for misappropriating at least $5 million from an Amerindo client.”

On June 9, 2005, the U.S. Securities and Exchange Commission announced that “Roys Poyiadjis, a former CEO of AremisSoft Corporation, which was a software company with offices in New Jersey, London, Cyprus, and India, agreed to final resolution of fraud charges brought against him by the Securities and Exchange Commission in October 2001. In documents filed with the federal district court in Manhattan, Poyiadjis consented to disgorge approximately $200 million of unlawful profit from his trading in AremisSoft stock -- among the largest recoveries the SEC has obtained from an individual.”

On July 20, 2005, the U.S. Securities and Exchange Commission “announced a settled administrative proceeding against Canadian Imperial Bank of Commerce's (CIBC) broker-dealer and financing subsidiaries for their role in facilitating deceptive market timing and late trading of mutual funds by certain customers. The Commission ordered the subsidiaries, CIBC World Markets Corp. (World Markets), a New York based broker-dealer, and Canadian Imperial Holdings Inc. (CIHI), to pay $125 million, consisting of $100 million in disgorgement and $25 million in penalties.”

On August 15, 2005, the U.S. Securities and Exchange Commission “charged four brokers and a day trader with cheating investors through a fraudulent scheme that used squawk boxes to eavesdrop on the confidential order flow of major brokerages so they could ‘trade ahead’ of large orders at better prices.”

On August 22, 2005, the U.S. Securities and Exchange Commission “filed civil fraud charges against two former officers of Bristol-Myers Squibb Company for orchestrating a fraudulent earnings management scheme that deceived investors about the true performance, profitability and growth trends of the company and its U.S. medicines business.”

On August 23, 2005, the U.S. Securities and Exchange Commission “filed charges against two former top Kmart executives for misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy.”

On November 2, 2005, the U.S. Securities and Exchange Commission “filed enforcement actions against seven individuals alleging they aided and abetted a massive financial fraud by signing and returning materially false audit confirmations sent to them by the auditors of the U.S. Foodservice, Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.).”

On November 28, 2005, the U.S. Securities and Exchange Commission announced “that three affiliates of one of the country’s largest mutual fund managers have agreed to pay $72 million to settle charges they harmed long-term mutual fund shareholders by allowing undisclosed market timing and late trading by favored clients and an employee.”

On December 1, 2005, the U.S. Securities and Exchange Commission “announced settled enforcement proceedings against American Express Financial Advisors Inc., now known as Ameriprise Financial Services, Inc. (AEFA), a registered broker-dealer headquartered in Minneapolis, Minn., related to allegations that AEFA failed to adequately disclose millions of dollars in revenue sharing payments that it received from a select group of mutual fund companies. As part of its settlement with the Commission, AEFA will pay $30 million in disgorgement and civil penalties, all of which will be placed in a Fair Fund for distribution to certain of AEFA's customers.”

On December 1, 2005, the U.S. Securities and Exchange Commission “announced a settled administrative proceeding against Millennium Partners, L.P., Millennium Management, L.L.C., Millennium International Management, L.L.C., Israel Englander, Terence Feeney, Fred Stone, and Kovan Pillai for their participation in a fraudulent scheme to market time mutual funds. The respondents will pay over $180 million in disgorgement and penalties and undertake various compliance reforms to prevent recurrence of similar conduct.”

On December 19, 2005, the U.S. Securities and Exchange Commission “announced that it filed and settled insider trading charges both against an accountant and a former executive of Sirius Satellite Radio, Inc. who illegally profited from advance knowledge of radio personality Howard Stern’s $500 million contract with Sirius.”

On December 21, 2005, the U.S. Securities and Exchange Commission “sued top executives of National Century Financial Enterprises, Inc. (NCFE), alleging that they participated in a scheme to defraud investors in securities issued by the subsidiaries of the failed Dublin, Ohio company. NCFE, a private corporation, suddenly collapsed along with its subsidiaries in October 2002 when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors. The collapse caused investor losses exceeding $2.6 billion and approximately 275 health-care providers were forced to file for bankruptcy protection.”

On January 3, 2006, the U.S. Securities and Exchange Commission announced “that it filed charges against six former officers of Putnam Fiduciary Trust Company (PFTC), a Boston-based registered transfer agent, for engaging in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million.”

On January 4, 2006, the U.S. Securities and Exchange Commission “filed securities fraud charges against McAfee, Inc., formerly known as Network Associates, Inc., a Santa Clara, California-based manufacturer and supplier of computer security and antivirus tools. McAfee consented, without admitting or denying the allegations of the complaint, to the entry of a Court order enjoining it from violating the antifraud, books and records, internal controls, and periodic reporting provisions of the federal securities laws. The order also requires that McAfee pay a $50 million civil penalty, which the Commission will seek to distribute to harmed investors pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002.”

On January 9, 2006, the U.S. Securities and Exchange Commission “announced that Daniel Calugar and his former registered broker-dealer, Security Brokerage, Inc. (SBI), agreed to settle the SEC’s charges alleging that they defrauded mutual fund investors through improper late trading and market timing. As part of the settlement, Calugar will disgorge $103 million in ill-gotten gains and pay a civil penalty of $50 million.”

On February 2, 2006, the U.S. Securities and Exchange Commission “announced that it filed an enforcement action against five former senior executives of General Re Corporation (Gen Re) and American International Group, Inc. (AIG) for helping AIG mislead investors through the use of fraudulent reinsurance transactions.”

On February 9, 2006, the U.S. Securities and Exchange Commission announced “the filing and settlement of charges that American International Group, Inc. (AIG) committed securities fraud. The settlement is part of a global resolution of federal and state actions under which AIG will pay in excess of $1.6 billion to resolve claims related to improper accounting, bid rigging and practices involving workers’ compensation funds.”

On March 16, 2006, the U.S. Securities and Exchange Commission “announced a settled enforcement action against Bear, Stearns & Co., Inc. (BS&Co.) and Bear, Stearns Securities Corp. (BSSC) (collectively, Bear Stearns), charging Bear Stearns with securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and customers of its introducing brokers. The Commission issued an Order finding that from 1999 through September 2003, Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds. Pursuant to the Order, Bear Stearns will pay $250 million, consisting of $160 million in disgorgement and a $90 million penalty.”

On April 11, 2006, the U.S. Securities and Exchange Commission announced “charges against individuals involved in widespread and brazen international schemes of serial insider trading that yielded at least $6.7 million of illicit gains. The schemes were orchestrated by..a research analyst in the Fixed Income division of Goldman Sachs, and a former employee of Goldman Sachs.”

On April 17, 2006, the U.S. Securities and Exchange Commission announced “Settled Charges Against Tyco International Ltd. Alleging (a) Billion Dollar Accounting Fraud.”

On May 10, 2006, the U.S. Securities and Exchange Commission announced that the “Former Chairman and CEO of Gemstar-TV Guide International, Inc. was Ordered to Pay Over $22 Million For (his) Role in Accounting Fraud.”

On May 30, 2006, the U.S. Securities and Exchange Commission brought “Settled Charges Against Tribune Company for Reporting Inflated Circulation Figures and Misstating Circulation Revenues.”

On May 31, 2006, the U.S. Securities and Exchange Commission announced that “15 Broker-Dealer Firms Settle(d)..Charges Involving Violative Practices in the Auction Rate Securities Market.”

On June 7, 2006, the U.S. Securities and Exchange Commission filed “Fraud Charges Against Former Restaurant Executives for Undisclosed Compensation and Accounting Fraud; Former CEO Agree(d) to Pay $500,000 Civil Penalty.”

On June 27, 2006, the U.S. Securities and Exchange Commission charged “Morgan Stanley With Failure To Maintain And Enforce Policies To Prevent Misuse of Inside Information.”

On June 28, 2006, the SEC settled charges against “Raytheon Company, (its) Former CEO, and Subsidiary Controller for Improper Disclosure and Accounting Practices.”

On September 26, 2006, the U.S. Securities and Exchange Commission ordered “BISYS Fund Services to Pay $21 Million to Settle Fraud Charges in Connection with Improper Marketing Arrangements with 27 Mutual Fund Advisers.”

On September 27, 2006, the U.S. Securities and Exchange Commission charged the “Former CEO and Two Former Executives Affiliated with RenaissanceRe Holdings Ltd. with Securities Fraud.”

On October 24, 2006, the U.S. Securities and Exchange Commission announced that “David Kreinberg, Former CFO of Comverse Technology, Inc., Agree(d) to Settle SEC Charges in (an) Options Backdating Case.”

On October 30, 2006, the U.S. Securities and Exchange Commission charged “Delphi Corporation and Nine Individuals, Including the Former CEO, CFO, Treasurer and Controller, in Wide-Ranging Financial Fraud; Four Others (were) Charged With Aiding and Abetting Related Violations.”

On November 2, 2006, the U.S. Securities and Exchange Commission filed “Settled Charges Against Eight Former Officers and Directors of Spiegel, Inc.”

On November 8, 2006, the U.S. Securities and Exchange Commission ordered the “Hartford (Insurance) to Pay $55 Million to Settle Directed Brokerage Charges.”

On November 14, 2006, the U.S. Securities and Exchange Commission sanctioned “the City Of San Diego for Fraudulent Municipal Bond Offerings and Order(ed) the City to Retain an Independent Consultant.”

On December 4, 2006, broker-dealer “Jefferies settle(d) (U.S. Securities and Exchange Commission) Charges Involving Illegal Gifts and Entertainment.”

On December 20, 2006, the U.S. Securities and Exchange Commission filed a “Settled Enforcement Action Against Broker-Dealer Friedman, Billings, Ramsey & Co., Inc.”

On January 10, 2007, the U.S. Securities and Exchange Commission settled an “Options Backdating Case Against William Sorin, Former General Counsel of Comverse Technology, Inc.”

On January 18, 2007, the U.S. Securities and Exchange Commission announced that “Fred Alger Management and Fred Alger & Company (agreed) to Pay $40 Million to Settle Market Timing and Late Trading Violations.”

On January 29, 2007, the U.S. Securities and Exchange Commission announced that it had “settled securities fraud charges against MBIA Inc., one of the nation’s largest insurers of municipal bonds, arising out of a sham reinsurance transaction that was restated in 2005, which the company had previously entered into to avoid having to recognize a $170 million loss.”

On February 6, 2007, the U.S. Securities and Exchange Commission announced that “Reinsurer RenaissanceRe Settle(d) Securities Fraud Charges for (a) Sham Reinsurance Transaction.”

On February 6, 2007, the U.S. Securities and Exchange Commission filed “Actions Against Former CFO and Former Controller of Engineered Support Systems, Inc. Relating to Options Backdating Scheme.”

On February 7, 2007, the U.S. Securities and Exchange Commission filed “Settled Books and Records and Internal Controls Charges Against El Paso Corporation for Improper Payments to Iraq Under the U.N. Oil for Food Program.”

On February 14, 2007, the U.S. Securities and Exchange Commission announced a “$6.3 Million Settlement With Former Take-Two Interactive Software, Inc. CEO in Stock Option Backdating Scheme.”

On February 28, 2007, the U.S. Securities and Exchange Commission charged the “Former General Counsel of McAfee, Inc. for Fraudulently Re-Pricing Option Grants.”

On March 1, 2007, the U.S. Securities and Exchange Commission “charged 14 defendants in a brazen insider trading scheme that netted more than $15 million in illegal insider trading profits on thousands of trades, using information stolen from UBS Securities LLC and Morgan Stanley & Co., Inc.”

We continue to believe that without ongoing, meaningful reform, including broader shareholder proxy access, there is a significant and growing risk that our economic system will simply cease functioning.