Behind the Blinds at...
Fidelity Investments
Sightings from The Catbird Seat
~ o ~
March 5, 2008
Lynch Faulted in
Fidelity Gifts Probe
By MARK JEWELL, AP
BOSTON (AP) - Federal regulators on Wednesday fined Fidelity Investments $8 million and brought civil charges against former star money manager Peter Lynch and 12 others for receiving improper gifts from outside brokers vying to win Fidelity's lucrative trading business.
The Securities and Exchange Commission's order settles a long-running case against the nation's largest mutual fund manager, which was found to have accepted more than $1.6 million in perks from 2002 to 2004. The gifts included tickets to the Super Bowl and Rolling Stones concerts, private jet trips to exotic destinations, and fine wine and cigars, the SEC said.
The agency said some Fidelity traders accepted illegal drugs and trips to strip clubs paid for by brokers, and one trader's illegal gambling was facilitated by a broker.
In another case, a Fidelity equity trader organized his own three-day bachelor party in Miami, paid for by brokers at a cost of $160,000, the SEC said.
"Brokers hired two women to entertain the attendees at the party, and provided a bag filled with illegal drugs (ecstasy pills)" to the trader, the SEC said.
The investigation also found family and romantic relationships involving Fidelity employees and outside brokers influenced Fidelity's selection of brokers to handle trading business and receive millions of dollars in commissions.
Three of those charged, including Lynch, agreed to settle without admitting or denying the allegations. Ten others are contesting the charges, which will be argued in administrative hearings similar to a court cases. The ten could face financial penalties and orders to give up ill-gotten gains, but not prison time.
"The broker selection process on Fidelity's equity trading desk was compromised when gifts and lavish entertainment swayed the flow of brokerage business," said Walter Ricciardi, the SEC's deputy director of enforcement. "This misconduct created a serious risk of investor harm and violated Fidelity's duty of allegiance and loyalty to investors."
The $8 million fine that Boston-based Fidelity was ordered to pay is in addition to $3.75 million that four Fidelity brokerage units were fined a year ago by the an industry self-policing organization now called the Financial Industry Regulatory Authority. And, after Fidelity ordered an independent review, the mutual fund manager said in December 2006 it would pay at least $42 million in penalties to its funds as punishment over gifts its traders received from brokers.
Fidelity said in a prepared statement that by agreeing with the settlement, the company neither admits nor denies the SEC findings.
"Although the order makes no finding of financial harm to our shareholders or our funds, we do recognize the seriousness of the misconduct found by the SEC," Fidelity said.
At issue is whether investors may have paid higher costs because Fidelity directed trading business to brokerages that enticed Fidelity traders with gifts but not necessarily the best service. Mutual funds are required to disclose payments that might affect their decisions, and industry rules prohibit such gifts if they are worth more than $100.
After the abuses surfaced more than three years ago, Fidelity disciplined more than a dozen employees. The case also led to an industrywide probe of gift-giving practices. In December 2006, Jefferies & Co. Inc. agreed to pay $9.7 million to settle regulators' civil charges that it illegally lavished nearly $2 million in gifts on Fidelity mutual fund traders.
The SEC says Fidelity oversight was lax.
"As one trader commented to another, 'Word is out that order flow is for sale,"' the SEC order said.
Fidelity said it has worked to correct the problems that led to the abuses, and none of the individuals cited by the SEC remain on its trading desk. Most are no longer with Fidelity.
The case against Lynch accuses him of obtaining free tickets to concerts, theater and sporting events paid for by brokers through his requests to two traders on Fidelity's trading desk. The order requires Lynch to pay $15,948 in allegedly ill-gotten gains, and interest totaling $4,183.
[Catbird Note: Compare that fine and interest to the case of Office of the United States Trustee, David C. Farmer, Trustee vs. Harmon, where the Defendant was ordered by Judge David A. Ezra to pay nearly HALF A MILLION DOLLARS plus interest of $115 a day for the “crime” of exposing illegal activities of his former bosses at one of the nation’s wealthiest charitable organizations, Kamehameha Schools/Bishop Estate. And, Harmon never received “MILLIONS IN COMMISSIONS” or ANY “ILL-GOTTEN GAINS” to return.]
A statement from Lynch said, "In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate, and I regret having made those requests."
As manager of Fidelity's Magellan Fund, Lynch posted consistently market-beating returns in the 1980s. Magellan averaged a 29 percent annual return from 1977 to 1990 under Lynch.
Since leaving as Magellan portfolio manager in 1990, Lynch, now 64, has served as vice chairman and a director of Fidelity's parent company. He was a trustee of Fidelity Funds from 1990 until February 2003.
[CB: Harmon was fired from both his positions as Risk/Insurance & Safety Manager for Kamehameha Schools/Bishop Estate and as the president of their captive insurance company, P&C Insurance Company, Inc., and was never rehired even after the former five trustees were ousted.]
Along with Lynch, another former executive who agreed to settle the SEC's charges was Bart A. Grenier. The 49-year-old is a former Fidelity senior vice president who was responsible for Fidelity's equity trading desk and other business groups. The SEC found he accepted $38,500 worth of tickets to 21 concerts and sporting events. He was ordered to pay a total $51,316.
Among the 10 contesting the SEC charges, one is a former executive, and nine are former traders.
December 7, 2006
Gates exits with Fidelity
probe undone
Defense secretary led trustees'
inquiry into effect of gifts
By Ross Kerber, Boston Globe
Incoming US Defense Secretary Robert M. Gates is leaving behind some unfinished business in the private sector: an investigation into the spree of gifts that traders at Fidelity Investments received a few years ago.
Until his confirmation by the Senate yesterday, Gates had led a group of independent trustees charged with protecting investors in the mutual funds sold by Fidelity, the Boston mutual-fund giant.
Now these trustees are conducting a probe of $2 million in gifts received by a group of Fidelity traders from 2002 to 2004. Details of the gifts were spelled out in regulatory filings as part of a $10 million settlement on Monday with a brokerage Fidelity used to place trades, Jefferies & Co.
Jefferies did not admit or deny wrongdoing, and Fidelity was not a party to the settlement. But regulators continue to review Fidelity's actions, and the firm could face penalties if they determine that investors suffered financial harm as a result of the gifts .
The trustees also are studying whether the acceptance of gifts and gratuities, ranging from plane trips to tickets to the Wimbledon tennis tournament and Super Bowl festivities, wound up harming investors, said attorneys involved in the situation.
Fidelity has acknowledged problems with gifts and entertainment and disciplined about two dozen employees. But the company says it can't be shown its funds or clients were harmed financially.
At the start of this year Gates became chairman of the 10 independent trustees on Fidelity's 13-member funds board that oversees vehicles like the Magellan mutual fund. After his confirmation yesterday, Fidelity said he would leave the board and be replaced as independent chairman by Ned C. Lautenbach, a partner at a New York private equity firm.
Yesterday, Fidelity spokeswoman Anne Crowley confirmed the independent trustees are investigating the situation but said she could not discuss their specific interests. A lawyer representing the trustees said they wouldn't comment, Crowley said.
"The trustees, as is the case with all matters related to the funds, have been appraised of the matter and have been conducting a review for a long time," Crowley said. She added Fidelity has cooperated with both the SEC and the independent trustees' investigations, "which we hope will conclude shortly."
David Bergers, head of the SEC's Boston office, declined to comment. Gates and seven other independent trustees -- those who do not work for Fidelity -- did not return messages this week. Two others declined to comment.
Crowley said the three trustees employed by Fidelity, including chief executive Edward C. Johnson III and Fidelity president Robert L. Reynolds, cannot comment because of the ongoing investigation.
A recurring question in the mutual-fund industry is the degree of independence trustees at all mutual-fund companies have . Despite their large salaries -- Gates was paid $362,250 by Fidelity in 2004, in addition to his compensation of $416,020 as president of Texas A&M University for the academic year starting in 2004 -- many boards failed to detect or prevent problems like market-timing issues and other scandals that engulfed other companies in recent years. The defense secretary post paid $183,500 in fiscal year 2006.
At Fidelity, independent trustees have backed Johnson in his opposition to proposed rules that would force him to give up power on the trustees board, and they rarely speak publicly.
Gates, a former director of the Central Intelligence Agency, also plans to resign from Texas A&M.
The attorneys said they did not know Gates's exact role in the probe.
The details of the gift-giving were fleshed out Monday when Jefferies & Co. agreed to pay more than $10 million to resolve regulators' claims that one of its brokers went overboard in showering Fidelity traders with free plane rides and other largess to win Fidelity's business.
Fidelity's commissions to Jefferies rose from $4 million in 2001 to $30 million in 2003, according to filings by the NASD, formerly the National Association of Securities Dealers. Fidelity has said other reasons helped drive the new orders to Jefferies.
In a press release disclosing the settlement with Jefferies, SEC deputy director of enforcement Walter Ricciardi said that "the traders' loyalty and allegiance are owed solely to investors and such compensation may harm investors by impairing the traders' objective judgement."
The SEC hasn't publicly specified how much harm investors may have suffered from the gift-giving, however.
Michael Goldstein, associate professor of finance at Babson College, who has designed ways to measure the quality of brokerages' work, said that it will be very hard for the SEC to prove harm occurred. As the owner of shares in several Fidelity funds, he said, "my belief about Fidelity is that they really do negotiate on prices and [trade] execution quality."
But he added he would prefer rule changes that would give independent trustees more influence and more rights to see information that now could be restricted to Johnson and other internal trustees. "Even the former director of the CIA would know that it's hard to interpret information if you don't get the information," Goldstein said.
Ross Kerber can be reached at kerber@globe.com.
For more on bonus bonanzas - and another George W. Bush cabinet member, Treasury Secretary Henry Paulson, GO TO > > > Dirty Gold in Goldman Sachs
And, for more “unfinished business”, GO TO > > > Nests in the Pentagon; Halliburton from Hell; It’s the OIL, STUPID!
And for more unspeakable GREED, GO TO > > > The Great Nest Egg Robberies; The World’s Greatest Greed!
Dec 14, 2006
FIDELITY INVESTMENTS BEING SUED BY WORKERS & DEERE & CO. OVER MANAGEMENT OF THEIR RETIREMENT PLAN
BOSTON (Reuters) - Fidelity Investments is being sued by workers at Deere & Co. (NYSE:DE) who claim the world's largest mutual fund company charged them "unreasonable" fees and expenses to manage their retirement savings
Four Deere workers sued their employer plus Fidelity, which acts as a trustee and record keeper for the farm equipment maker's 401(k) plan.
The plaintiffs have asked a federal judge to rule that this suit, filed in U.S. District Court for the Western District of Wisconsin last week, can include thousands of other participants in the 401(k) plan as part of a class action.
The suit charges the defendants assessed plan participants expenses that "were, or are, unreasonable and/or not incurred solely for the benefit of Plan participants."
They argue that administrative fees and expenses can weigh on participants' returns and that "even seemingly small reductions in a participant's return in one year may substantially impair his or her accumulated savings at retirement."
The suit also charges that Deere and Fidelity engaged in so-called revenue sharing where the mutual fund firm administering the plans shares some the fees it charges with the customer. The Deere employees said they were not told about the revenue sharing.
Millions of Americans are relying more heavily on 401(k) plans to save for retirement as company pension plans are becoming increasingly scarce.
Fidelity is a powerhouse in the industry, administering 401(k) plans for roughly 10.9 million people and managing roughly $662.3 billion in record-kept 401(k) plans.
Spokesman Vin Loporchio of Fidelity said, "We disagree with many of the factual and legal assertions in the complaint and we intend to defend against the suit vigorously."
Privately-held Fidelity as a rule does not comment on ongoing litigation and Loporchio said he could not elaborate on what steps the firm may take next.
Jerome Schlichter, whose law firm Schlichter, Bogard & Denton filed this suit and has filed others against firms that administer 401 (k) plans, was not immediately available to comment.
In the $10 trillion mutual fund industry, Fidelity is generally known for charging what industry analysts have called relatively low fees.
http://news.yahoo.com/s/nm/20061214/bs_nm/fidelity_lawsuit_dc
August 12, 2005
Civil fraud charge
eyed for Fidelity
SEC said to believe fund company's lapse unintentional
By Andrew Caffrey, Boston Globe
Federal securities regulators are considering a civil fraud charge against Fidelity Investments for its alleged negligence involving the company's stock trader gift scandal, according to an official who has been briefed on the investigation.
The Securities and Exchange Commission is making no accusation that Fidelity deliberately defrauded its clients, but regulators are considering a lesser charge in which the fraud is unintentional.
Fidelity two weeks ago said it was told by the SEC that the agency's staff was considering a civil charge against the fund company stemming from its traders allegedly taking excessive gifts and entertainment from brokers who did business with the company. Fidelity and the SEC have declined to identify the specific violation under consideration.
An official, who has firsthand knowledge of the investigation, said the SEC is focusing on a potential violation of federal law that reads it is ''unlawful" for an investment adviser such as Fidelity to ''engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client."
Fidelity spokeswoman Anne Crowley declined to comment on the specifics of the government case. She said the SEC has not charged the company, and that Fidelity intends to argue to ''why it believes an action should not be brought." Should the company be charged, she added, Fidelity will ''vigorously" defend itself.
She pointed out that Fidelity had already disciplined 14 traders for violations of the company's policies, but said the company's own investigation to date has not turned up instances where fund shareholders have been harmed.
''We by no means minimize the seriousness of these lapses. We are committed to taking appropriate steps to prevent their recurrence. Based on our own reviews to date, we don't believe that the evidence establishes that our mutual fund shareholders and institutional clients sustained financial loss," she said. ''We are continuing our reviews and analyses and if, in the future, we were to conclude that there had been a financial loss to investors, we would step up and make our investors whole."
The SEC declined to comment.
Revelations of bacchanalian pursuits by Fidelity's traders and brokers from other firms, which included a bachelor party involving scantily clad women and a dwarf for entertainment, are at odds with the sober, buttoned-down image the mutual fund company has cultivated over decades under the leadership of chairman Edward C. ''Ned" Johnson III.
Moreover, a criminal investigation by the US attorney's office is focusing on whether brokers from other firms offered drugs or prostitutes to Fidelity traders as a reward for getting Fidelity's business, according to attorneys involved in the case.
Scott DeSano, the firm's former head of stock-trading and one of the most powerful trading figures on Wall Street, was disciplined by the company, according to attorneys involved in the case, and then recently reassigned to a new post dealing with new business ventures. DeSano also recently received notice that the SEC is considering charging him in the case. His attorney declined to comment.
The SEC has even questioned Johnson, his daughter Abigail, who ran the company's money management arm until earlier this year, and former star fund manager Peter Lynch. Fidelity has said the executives accepted only typical business gifts and entertainment.
While the federal investigation has been proceeding for almost a year now, the SEC's recent notice to Fidelity of a potential violation is the first indication of the kind of case the government is forming. Among the issues the SEC has been investigating is whether Fidelity failed to get the best deals on stock trades because its traders instead sent business to brokers who offered them the best goodies, and not necessarily the best price or fastest service. That could have led holders of Fidelity funds to lose money.
What Fidelity allegedly might have done wrong is unclear. But a securities law specialist said the violation cited by the SEC is essentially a form of negligence.
''It could either be failing to ensure Fidelity got good trades, or that they represented they had careful controls but they didn't," said Steve Thel, professor of securities law at Fordham University. Either way, ''it suggests the SEC focus is on improper procedures at the corporate level. This could be more about sloppiness at the Fidelity level than intentional wrongdoing."
This distinction is important. The SEC has in its arsenal more serious antifraud provisions in which it can accuse investment firms or other companies of deliberately setting out to commit fraud or deceive investors. If proved, those cases typically result in larger monetary penalties and more extensive internal changes at the company than ones involving the fraud provision the agency is considering in the Fidelity matter.
An attorney who is involved in the investigation told the Globe that the SEC is still gathering evidence but decided to notify Fidelity of this one potential violation with the idea the agency could add other charges at a later date. Ordinarily the SEC waits until a case has reached critical mass, and bundles potential violations into a single notification.
But in the Fidelity matter, the attorney said, the agency has decided to proceed now in order to keep up momentum in the investigation because other aspects of the case could drag out for months.
Still, a fraud charge of any degree would be a blow to the nation's largest mutual fund company, which wasn't tainted by the improper trading scandal that swept the investment world over the last several years.
November 14, 2003
Fidelity cuts holdings
in fund companies
NEW YORK (Reuters) — Fidelity Investments pulled away from several big U.S. mutual fund companies recently amid the scandal in the $7 trillion industry, regulatory documents released Friday show.
Analysts say Fidelity's moves indicate that the mutual industry's biggest player lost faith in some of its competitors in the third quarter. They also say this could point to some of the consequences the scandal may have on where 95 million Americans invest their savings.
"This is certainly a commentary on how Fidelity recognizes that the fund industry is in for a tough period and that fund companies stand to lose a lot in assets," says John Bonnanzio, editor of independent newsletter Fidelity Insight.
Documents filed with the Securities and Exchange Commission Friday, show Fidelity slashed holdings in Putnam Investments, Prudential Financial (PRU), T. Rowe Price Group (TROW) and Franklin Resources (BEN).
A Fidelity spokesman said the company generally does not comment on what it buys or sells.
Fidelity made the sharpest cutbacks at Marsh & McLennan (MMC), parent company of Putnam Investments, the biggest fund company mired in the scandal. Fidelity funds sold 72% of their Marsh holdings, reducing the number of shares owned to 1.3 million from 4.6 million, the documents show. The documents do not show which Fidelity funds sold Marsh holdings.
Marsh shares fell 1.7% Friday to close at $44.65.
"The sell-off was too big for Fidelity's analysts not to have sat down and said: 'This is an area we don't want to own right now'," Bonnanzio says.
In September, regulators subpoenaed Putnam for information and later charged that the company and some managers committed securities fraud by letting certain clients break internal rules by engaging in so-called market timing. The quick buying and selling of mutual fund shares to profit from stale prices is prohibited at many companies, including Putnam, because it drives up trading costs and hurts long-term investors.
Also Friday (AP file):
Spitzer
• At Reuters Finance Summit, New York Attorney General Eliot Spitzer said he was prepared to prosecute mutual fund companies and executives who have defrauded investors, promising that those who broke the law would "pay the price."
Spitzer's investigations of the mutual fund industry, joined lately by federal and state securities regulators, have produced subpoenas and charges, and he raised the prospect of criminal trials that could result in convictions and jail time.
Spitzer used the threat of prosecution to help resolve his probe of stock analysts, when he won a $1.4 billion settlement from banks and brokerages he charged were issuing tainted stock research.
Scrapping exorbitant fees that mutual fund companies charge investors should be the industry's major reform, Spitzer added.
Spitzer, who blasted Thursday's settlement between the SEC and Putnam as too weak, said the issue of fees is crucial because most investors are unaware just how big a bite they take out of investments.
"The real nugget here is getting to the exorbitant fee structure ... instead of reaching insignificant settlements that only encourage the industry to sit tight," he said.
Fees came to the fore in the stock market's bear years, when investors began to look closer at how much they pay for their funds.
• Charles Schwab Corp. (SCH) disclosed that a handful of its mutual funds engaged in improper trading practices, becoming the first major discount brokerage linked to an industrywide scandal. The company's stock fell 8%.
The inappropriate trades, which allowed institutional investors to rapidly trade in and out of mutual funds at the expense of longer-term shareholders, occurred in the Excelsior family managed by Schwab's U.S. Trust subsidiary, the company said in its quarterly shareholder report.
A "limited number" of trades in Schwab's broader mutual fund service, which includes offerings managed by the company and other vendors, may have been improperly processed after the weekday closing time of 4 p.m. ET, the company said.
The betrayal felt by Schwab customers may run especially deep because the brokerage has always marketed a "squeaky clean image" while railing against rampant conflicts of interest at its rivals, Lehman Bros. analyst Mark Constant said in a note issued Friday.
U.S. Trust uncovered its troubling trading patterns in an internal investigation prompted by inquiries from the SEC and Spitzer, who has been spearheading a broad examination of the mutual fund industry.
• American Express (AXP) said that regulators plan to recommend legal action for its failure to deliver appropriate breakpoint discounts to investors making large mutual fund purchases.
Prudential Financial also disclosed in its quarterly report that it had recently received an information request on fund trades from the New York Stock Exchange.
American Express said the SEC and the NASD recently notified several brokerage firms, including the broker-dealer for American Express Financial Advisors (AEFA), that charges may be forthcoming.
"While AEFA is continuing to engage in discussions with the SEC and NASD staffs, (American Express) does not currently expect the resolution of this matter to have a material impact on the results of operations or financial position," it said in a quarterly report filed with the SEC.
Prudential also received an additional formal request from the New York state Attorney General's Office in connection with its variable annuity business.
AEFA and Prudential both said they are cooperating with authorities and were conducting their own reviews.
www.usatoday.com/money/perfi/funds/2003-11-14-funds_x.htm
July 6, 2000
Cisco Systems Watered Stock Fraud Scheme Implications: Fidelity Investments, Janus, AXA, Pricewaterhouse Coopers, Brobeck, Phleger & Harrison LLP, Lockheed Martin, Microsoft, Goldman Sachs, Estate Tax, Pooling Method of Acquisitions, Insurance Industry, Ralph Nader, Phil Gramm and Organized Labor
Parish and Company Press Release
PORTLAND, OR., -- What could all these organizations, financial practices and individuals have in common? They have all become key players or been affected by what is clearly the greatest financial fraud in the last 50 years.
Cisco Systems now has 8 billion shares outstanding, including stock options, even though annual sales are less than $20 billion. The company is implementing a yet to be disclosed campaign of watered stock fraud. Cisco is also incurring massive losses hidden behind accounting illusions, duping even some of the most influential members of the business press including James Cramer of www.thestreet.com.
Meanwhile Fidelity Investments, Cisco's largest shareholder, and other investment firms are extracting high management and trading fees from Cisco Systems shares without disclosing this scheme to investors. These investment companies are clearly violating the 404C provision of the ERISA pension law and should be subject to significant legal liability when this fraud is exposed.
Cisco Systems has now become an even more substantial financial fraud than the Microsoft Corporation and rather than spawning innovation, like Microsoft, Cisco's scheme is crushing smaller competitors and leading to a more stagnant technology sector, resulting in many significant innovations now occurring outside the United States. Cisco boasts that it will acquire 25 companies this year. In addition to destroying many promising smaller technology firms, Cisco is also breeding an unhealthy consolidation in the media, legal and financial services industries as there are fewer promising companies to write about and provide with legal and financial services.
Both Cisco Systems and Microsoft, as reported in a NY Times Front Page Story,now pay no federal income tax due to the success of the scheme. Cisco will argue that many companies use similar financial techniques yet that is false. Their situation, although difficult to understand, is a unique and a massive financial fraud no matter their sales grow 20, 40 or 60 percent. No amount of public relations or glowing press releases on Business Wire and PR Newswire, two services that together have a virtual monopoly over Internet based press releases, can disguise this fact.
This report will explain the unique nature of financial fraud at Cisco Systems and why it is even more significant that the financial pyramid scheme being utilized by the Microsoft Corporation. It will also explain why repealing the estate tax and the pooling method for acquisitions together is good government policy and could unravel a major part of this watered stock fraud at Cisco Systems and help restore integrity to the markets. More importantly, this will stimulate interest in more innovative smaller and medium sized companies and reinvigorate the economy. Cisco is no longer able to innovate aggressively because such innovation takes time. Their focus is now sustaining a watered stock fraud scheme. This requires purchasing research and development along with any significant competitors.
Other topics include why Fidelity Investments, Goldman Sachs, Janus, AXA and Pricewaterhouse Coopers may well be subject to successful multi-billion dollar legal actions for not disclosing this risk to investors in addition to having a variety of conflicts of interest. Pricewaterhouse Coopers currently joint markets and installs Cisco's products in addition to auditing their financial statement and many leading pension funds, in which Cisco is a primary holding. Pricewaterhouse Coopers is also Goldman Sachs auditor, one of Cisco's key investment bankers involved in numerous merger transactions.
Fidelity is currently engaged in what is called "flipping" in the real estate markets. This involves continually buying and selling Cisco's shares in order to generate brokerage fees and leaving the last investor with inflated shares. More surprising to me are Fidelity's relationships with many "boutique" investment firms. These firms provide research to Fidelity regarding certain companies and are compensated on how well the stock moves subsequent to delivering the research to Fidelity.
If the stock researched goes up then Fidelity will direct a certain amount of trading activity to be credited to the research firm through that research firm's clearing firm. This may be for securities completely unrelated to those researched. It surprises me that this is supposedly legal, especially when Fidelity has a fiduciary duty to retirement plan investors and is clearly trying to manipulate stock prices rather than make sound long-term investments.
Fidelity is the largest outside holder of Cisco Systems, owning more than $19 billion in shares, more than Cisco's total annual revenues. In addition, Cisco is often the most actively traded stock on the Nasdaq exchange.
Cisco is now also seeing significant trading volumes on the Instinet, often the most actively traded security. The Instinet is owned by Reuters of the UK. Reuters has been known for the quality and independence of its wire service reports which are reprinted in top publications including the NY Times. They have yet to disclose this situation even though Retuers now issues a much larger volume of stories on Cisco. Individual investors who have come to rely on Reuters deserve to have this analysis affirmed by Reuters.
Even the Associated Press, the other major wire service, has failed to disclose this situation at Cisco. In a wire story by Cliff Edwards that appeared the day following this press release the AP wrote "Tech Earnings Harder to Evaluate." This story focused on Intel and other tech firms posting large investment gains and in the last paragraph highlighted that Cisco was one company that could still be counted on for solid growth. The irony is that Intel is a beacon of financial integrity compared to Cisco. This was clearly a coup for Cisco's public relations department since the story was reprinted both on Yahoo and in the New York Times.
To understand Pricewaterhouse Coopers relationship with Cisco Systems one need only look to Microstrategy, another Pricewaterhouse Coopers client. Pricewaterhouse Coopers also co-markets Microstrategy's products. The question becomes, will similar accounting irregularities be disclosed and Cisco's stock plummet 55 percent in one day? One area to watch closely is leasing disclosure to determine whether Pricewaterhouse Coopers adequately discloses Cisco's leasing activity and product financing arrangements given their significance to Cisco's financial statements.
Cisco generally doesn't announce large sales but rather the provision of "vendor financing." This is the link to one such deal. Hanaro Telecom Signs $200 Million Pact with Cisco. Is Cisco really making genuine sales or rather providing financing to secure sales that it would otherwise lose to competitors more reliable products?
This report will also examine Lockheed Martin's selection of Cisco as a primary vendor in its multi-billion dollar "Blue Team" bid for the next generation of Naval Destroyers in addition to legal actions against Cisco with respect to their business practices now filed in several states, as reported by CNET.
With the long history of financial procurement controversy in major contracts with the Pentagon one might wonder why Lockheed Martin would risk choosing Cisco Systems as a key vendor when many other top quality alternatives exist. Especially given the significance of Cisco's watered stock fraud scheme to government employees pensions and fact that they earn billions and don't pay a dime of federal income tax. These key facts should be of interest to Lockheed.
Lockheed Martin is now competing directly with Litton Industries for a multi-billion dollar naval destroyer contract. See two page summary of Naval Destroyer Contract for details.
More than 75 percent of Lockhead's sales are to the federal government, including the Pentagon and Commerce departments. Interestingly, a respected former legislator and top ranking Lockheed executive was just appointed to be the Secretary of Commerce by President Clinton. One has to wonder why Lockheed does not remove Cisco from the project and chose another vendor from the quality pool of such vendors available. Perhaps it is Cisco's aggressive sales techniques as summarized on CNET news, "Cisco Faces Lawsuit Over Gear, Business Practices."
In addition to the watered stock fraud and non payment of federal income tax issues, CNET has also reported that Cisco is being sued over quality of service problems, patent infringement in the fiber optic area and conflicts of interest with respect to its business practices. One company in Louisiana, AMC, according to CNET, rejected a $40 million settlement offer from Cisco. Ideally, Lockheed should chose a top quality medium sized firm with higher quality products.
As with Microsoft, Cisco is attempting to access significant government contracts and this is their right. The problem is that we can't afford to have these marketing and legal driven companies, like Microsoft and Cisco, who are leveraging growth via financial fraud, responsible for our national security and the efficiency of government. Too many excellent alternatives exist....
A Closer Look at The Estate Tax and Pooling Method of Acquisitions
The idea behind the estate tax is to transfer wealth upon death to a broader segment of society, thereby invigorating the economy. The stated objective of the pooling method of acquisitions is to make it easier for companies to merge and thereby also invigorate the economy by accelerating innovation. In reality, both the estate tax and pooling should be repealed because they are manufacturing unemployment and underemployment, igniting variable annuity and other insurance abuses, creating false inflation, destabilizing the stock market and most importantly undermining the economy. The estate tax represents less than 5 percent of federal tax receipts. Unfortunately, repeal of the estate tax is viewed as unfairly rewarding wealthy individuals yet those it will reward the most are ordinary citizens.
The two most important figures in achieving such a repeal could be Ralph Nader and Phil Gramm, without whose support repealing both the Estate Tax and Pooling may fail. Nader needs to first understand the economic mechanics in each area and the glaring hypocrisy of having one third of his assets in Cisco Systems stock while trying to appeal to organized labor and saying he will only speak with "big media" going forward.
Gramm needs to stand down Cisco Systems intense lobbying effort and support an end to pooling in exchange for repealing the Estate Tax, which will delight his constituencies. This will be a tough fight since Cisco knows its watered stock could implode if pooling is repealed. Failure to do so by Gramm, however, could also identify him as one of the great enablers of the biggest financial fraud since Charles Keating pilfered the Savings and Loan Banks.
Many prominent politicians from both parties were tarnished by that episode, including John Glenn and John McCain.
In Nader's case he will be a central figure in this scandal given his outspoken positions on Pension Rights and Corporate Welfare at the same time he has one third of his assets in Cisco Systems stock
Cisco is now pilfering the retirement system and pays no federal income tax due to the success of its scheme. In Nader's recent acceptance speech for the Green Party he referred to the average worker paying more tax than GE in 1983. Imagine the ridiculousness of that speech given his investment in Cisco Systems. Nader needs to freshen up his perspectives because it is as if he is trying to write "Unsafe At Any Speed" while having one-third of his assets in General Motors.
Equally remarkable is that Mr. Nader is making overtures to the Teamsters Union, saying he is pro jobs and a friend of labor, when Cisco is the leader in issuing watered stock via the pooling method for acquisitions. This is forcing significant layoffs and resulting in underemployment in many areas of the economy including key sectors of union membership, in particular the Communications Workers of America.
Reasons For Repealing The Use of The Pooling Method For Acquisitions
1) Pooling essentially involves using a photocopy machine to print stock to pay for acquisitions without accounting for the cost of such activity in the financial statements. Many eloquent arguments exist to justify pooling but it's that simple. If a merger makes sense, pooling is not necessary.
One need only look to other leading technology firms that regularly engage in mergers, including the Intel Corporation and IBM, that generally do not use pooling. Goldman Sachs will fight for pooling because it is a useful tool for generating investment banking fees resulting from such mergers.
As reported in USA Today on July 3, 2000 "But a recent study by McKinsey & Company, a consulting firm, labels Cisco's argument a myth. According to McKinsey, rules banning "pooling" wouldn't damage profits or shareholder value. Rather they would require companies to look more closely at deals and communicate more with stockholders."
Cisco's position is understandable since they could now be viewed as the champion of watered stock fraud. One effect of this situation is that the SEC has prohibited Cisco Systems from doing any share repurchases since 1996. This amazing fact is largely unreported in the press. Other leading technology companies, including Intel, regularly repurchase shares to offset some of the dilution created by stock options and other factors.
2) Although legal, pooling grossly overstates future net income by excluding the cost of acquisitions and thereby fuels interest in a company's stock price. For this reason Cisco buys its research and development in the form of other companies rather than using internal development which would require the wage costs to be reflected as a charge against earnings.
This in effect crushes many small promising competitors and often has become part of their long-term strategy, at which point to sell out to Cisco.
This staggering financial fraud at Cisco is prior to considering stock option related issues, which combined with pooling, make Cisco Systems without question the greatest financial fraud of the last 50 years. Microsoft has also clearly erected a financial pyramid yet Microsoft does have a monopoly yet Cisco doesn't even manufacture its own products and has become nothing more than a marketing, legal and financial machine.
3) Pooling causes other companies stock prices that do not use this technique, those that pay wages to employees who develop new products and services, to decline correspondingly, no matter what industry they are in or how well they are managed. This eventually leads to cost cutting measures including job and benefit reductions, in order to compete for interest in their stock in the capital markets with Cisco Systems. The result is an accelerating destabilization of the economy.
This is the irony of Mr. Nader's position. Nader is focusing on those companies which are an effect of Cisco's watered stock fraud scheme rather than going to the source. One might say he is only looking at the "usual suspects." Many of these companies would not be converting to cash balance pension plans and adopting other worker unfriendly measures if it were not for a need to compete with Cisco's scheme for capital.
Businesses will do what is necessary to survive, even if that means battling within and adapting to a system of financial fraud and corruption.
4) Pooling destroys quality jobs and destabilizes many communities whose tax base is removed due to the effect of unproductive mergers that would not occur without pooling. The Sprint/MCI proposed merger is a good example as MCI is desperate to gain a presence in the wireless industry, even though Sprint can succeed fine as an independent company.
Pooling, when combined with aggressive stock option grants, has also become a means for CEO's to rob workers, pension participants, their communities and their customers. In Sprint's case somehow William Esprey, even though a great visionary leader, believed he could walk with almost $1 billion. This is an absurdity that would never occur but for pooling. It would also represent the loss of a key employer for the city of Kansas City where Sprint is headquartered.
5) Pooling is now the greatest source of inflation risk. This technique has led to many industries being dominated by a few large competitors and this is quickly resulting in higher prices due to a lack of competition. Higher inflation is bad for both consumers and investors....
Bill Parish, Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR 97223
Tel: 503-643-6999 - Fax: 503-221-3161
email: bill@billparish.com
www.billparish.com/20000705ciscowateredstockfraud.html
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< < < FLASHBACK ... WAY BACK < < <
(Nothing ever changes!)
Dec. 26, 1938
"Fraud and Deceit"
Growing mushrooms in a subterranean room on his Cleveland estate is the hobby of pudgy, sleepy-eyed Carmi Alderman Thompson, onetime Treasurer of the U. S. (1912-13) and currently president of Fidelity Investment Association.
Old Financier Thompson may soon have more time for his mushrooms, for last week SEC asked a Federal judge in Detroit for injunctions whose effect might put Fidelity out of existence "as a fraud and deceit."
SEC has already jumped on nine other "thrift plans" this year, but mostly for minor offenses in their business of selling their shares on the installment plan. Charges in Fidelity's case are more grave: That Fidelity obtained money and property by means of untrue statements, had failed to maintain required reserves against its $276,000,000 in outstanding certificates, had resorted to interfund transfers to write up the book value of securities by "well over $1,000,000," had used investors' funds for the benefit of trie officers and directors of the company.
Fidelity was founded by Joseph Fry Paull as a loan company in Wheeling, W. Va. 27 years ago, later bought an annuity bond business, now has branches in 57 cities with 2,000 salesmen in the field selling certificates with a face value of some $6,000,000 every month. Carmi Thompson has been president for only three years. Actual boss is Founder Paull's son-in-law, onetime Assistant U. S. Attorney General John Marshall, whose family are the biggest stockholders. Sleek, bright-eyed Mr. Marshall, who is chairman of the board, said Fidelity would fight.
A good deal more wrought up than slow-spoken Carmi Thompson, Chairman Marshall pointed out that a Department of Justice investigation four years ago found nothing wrong. Snapped he: "If the SEC followed the same liquidity rule they are trying to force on us they would ruin a good many insurance companies."
From the Dec. 26, 1938 issue of TIME magazine
www.time.com/time/magazine/article/0,9171,772219,00.html
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FOR MORE BUZZARDS BEHIND THE BLINDS,
SNEAK TO...
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THE SECRET NESTS
PART IV - THE NATIONAL SECURITY AGENCY
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BIRDS THAT DRINK FROM CESSPOOLS
CONFESSIONS OF A WHISTLEBLOWER
DIRTY MONEY, DIRTY POLITICS & BISHOP ESTATE
HUD: THE HOUSING & URBAN DISASTER
NESTS OF THE INSURANCE VAMPIRES
MARSH & McLENNAN’S PUTNAM INVESTMENTS
OFFICE OF THE U.S. TRUSTEE vs. HARMON
TRANSYLVANIA TRAVELERS IN ST. PAUL
WHO'S GUARDING THE HEN HOUSE ???
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Last update March 6, 2008, by The Catbird