Monday, 3 August 2015

2015-059: Mapping Heat in the U.S. Financial System

Otmane El Rhazi, David Aikman, Michael T. Kiley, Seung Lee, Michael G. Palumbo, and Missaka N. Warusawitharana. We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer. Full Text

Regards,
Otmane El Rhazi
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2015-058: Changes in the Distribution of After-Tax Wealth: Has Income Tax Policy Increased Wealth Inequality?

Otmane El Rhazi, Adam Looney and Kevin B. Moore. A substantial share of the wealth of Americans is held in tax-deferred form such as in retirement accounts or as unrealized capital gains. Most data and statistics on assets and wealth is reported on a pre-tax basis, but pre-tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well-being of families. In this paper, we describe the distribution of tax-deferred assets in the SCF from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after-tax net worth. The results of our analysis suggest that, relative to published statistics on pre-tax net worth, the distribution of after-tax wealth is slightly less concentrated at each point in time and the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long-term capital gains rate is the primary reason for the muted effectiveness of the income tax system in reducing wealth inequality. Full Text

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Otmane El Rhazi
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SEC Charges Houston-Area Businessman in Ponzi Scheme

Otmane El Rhazi,

The Securities and Exchange Commission today charged a Houston-area businessman with operating a $114 million Ponzi scheme that defrauded investors, some of whom were told that their money would fund technology to prevent accidents caused by drowsy driving.

The SEC’s case filed in federal court in Houston charged Frederick Alan Voight of Richmond, Texas with defrauding more than 300 investors in multiple offerings of promissory notes issued by two partnerships he owns, F.A. Voight & Associates LP and DayStar Funding LP.  While Voight’s latest offering promised investors returns as high as 42 percent a year from loans to small public companies, most of the funds went to pay earlier investors, the complaint alleges.  Approximately $22 million of Voight’s allegedly ill-gotten gains remain unaccounted for to date.

“Voight wooed investors with promises of outsized returns and once-in-a-lifetime investment opportunities.  But, like all Ponzi schemes, we allege that this one collapsed when Voight couldn’t find enough new money to keep up with his false promises,” said David L. Peavler, Acting Regional Co-Director of the SEC’s Fort Worth Regional Office.

According to the SEC’s complaint, Voight recently raised $13.8 million that he said would be loaned to a startup named InterCore Inc. to fund its deployment of a “Driver Alertness Detection System,” or DADS.  Starting in October 2014, Voight allegedly wrote to prospective investors about a “tremendous” opportunity to help InterCore install the DADS technology into “several million trucks and buses,” which he said was enough for the company to pay the 30 to 42 percent annual interest rates on the promissory notes “many, many times over.” 

Voight knew the claims were false because he served on InterCore’s board and was aware that the Delray Beach, Florida public company was financially troubled and had no means to pay back the loans, the complaint alleges.  The SEC alleges that Voight used funds from the DADS investors to make Ponzi payments to earlier investors or funneled them to InterCore through two of his other partnerships, Rhine Partners LP and Topside Partners LP.  The complaint alleges that InterCore sent the funds to its Montreal-based subsidiary, InterCore Research Canada, Inc., where the funds seemingly disappeared.  By routing funds through Rhine and Topside, Voight is alleged to have garnered benefits – including fees and InterCore stock warrants – that he never disclosed to the DADS investors.

The SEC’s complaint charges Voight and DayStar with securities fraud and with conducting unregistered securities offerings.  Voight and Daystar, without admitting or denying the allegations, agreed to settle the SEC’s complaint by consenting to permanent injunctions against committing these violations in the future.  They also agreed to asset freezes and other emergency relief, and to pay civil penalties and return allegedly ill-gotten gains with interest in amounts to be set later by the court.  Voight also consented to being barred from serving as a public company officer or director and to be barred permanently from participating in the offer, purchase, or sale of any security except for his own personal account.

The SEC named F.A. Voight & Associates, Rhine, Topside, InterCore, and InterCore Research Canada as relief defendants for the purpose of recovering any allegedly ill-gotten gains they received from the fraud.  F.A. Voight & Associates, Rhine, and Topside have agreed to asset freezes and other emergency relief and to return allegedly ill-gotten gains in amounts to be set by the court.  The SEC will litigate its claims against relief defendants InterCore and InterCore Research. 

The SEC’s investigation was conducted by Senior Counsel Jeff Cohen, Senior Staff Accountant Keith Hunter and Assistant Regional Director Jessica Magee of the Fort Worth office.  The SEC’s litigation will be led by Jennifer Brandt.  

Full Text

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Otmane El Rhazi
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Friday, 31 July 2015

SEC Charges Man With Microcap Fraud Involving Shares of Cynk Technology Corp.

Otmane El Rhazi,

The Securities and Exchange Commission today charged a Canadian citizen with conducting a scheme to conceal his control and ownership of a microcap company whose price quickly spiked last year.  The SEC suspended trading in the stock, Cynk Technology Corp., before the alleged schemer, Phillip Thomas Kueber, could profit on the gains from the stock’s rise to more than $21 from less than 10 cents per share.

The SEC alleges that Kueber was behind a false and misleading registration statement filed by Cynk and enlisted a small group of straw shareholders and sham CEOs to conceal his control of purportedly non-restricted shares in Cynk stock.  The complaint alleges that the straw shareholders – mainly Kuber’s family members and associates in British Columbia and California – never received the shares they “purchased.”  Kueber allegedly transferred the shares to brokerage accounts and offshore shell companies he secretly controlled and misled broker-dealers about his ownership of the shares to create the false appearance of a company with publicly held shares.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Kueber was unable to cash in on selling his Cynk shares when the SEC suspended trading in Cynk on July 11, 2014 amid suspicious activity surrounding the company’s stock.  Once trading resumed, the share price fell, closing at 60 cents per share on July 28, 2014.

“We allege that Kueber used straw shareholders, offshore dummy corporations, and puppet corporate officers to gain and conceal control over the majority of Cynk shares,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Law enforcement has again pierced through the layers of deceit to hold an alleged wrongdoer accountable, in this case before he could liquidate his shares in the open market and realize ill-gotten profits.”

The SEC’s complaint alleges that Kueber violated the antifraud provisions of federal securities laws and related SEC antifraud rules.  The SEC is seeking to impose a civil monetary penalty, to bar Kueber from serving as a public company officer or director or participating in a penny-stock offer, and to be subject to a court-ordered injunction against future antifraud violations.

The SEC’s continuing investigation has been conducted by Joshua R. Geller, Joseph G. Darragh, and Michael Paley of the Microcap Fraud Task Force along with Wendy Tepperman of the New York office.  The litigation will be conducted by Preethi Krishnamurthy and Mr. Geller.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, Federal Bureau of Investigation, Internal Revenue Service, Department of Homeland Security, and Financial Industry Regulatory Authority.

Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.