What is White Collar Crime?

Business Law 251 Spring 2011 March 2011

Table of Contents Intro/ Part I.....................................................................3 Part II............................................................................................5 Part III............................................................................................7 Part IV............................................................................9 Reference Page...........................................................................11

Part I In todays economy most investors use the market as a source of generating extra income. With that extra income, it is essentially used to buy homes, pay for college educations for children and general savings. With all of that being said, having fortification for investors is imperative in todays economy. It is very evident that a common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC's actions must be taken with an eye toward promoting the capital structure that is necessary to maintain economic growth. The laws and rules that govern the securities industry in the United States originate from a uncomplicated concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions. What is SEC? SEC is an acronym Securities Exchange Commission, they are a government commission created by Congress to regulate the securities markets and protect investors. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in business,
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through the mail or on the internet must be registered with the SEC. SEC is not just limited to providing regulation and protection for investors; it also monitors the corporate takeovers in the U.S. The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud. Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. The SEC acts as the primary manager and watchdog of the U.S. securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and various private sector organizations. In particular, the Chairman of the SEC, together with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the Commodity Futures Trading Commission, serves as a member of the President's Working Group on Financial Markets.

Part II Charles Schwab Investment Management is a company that provides investment services including online investing, financial advice and banking solutions. Charles Scwab & Co. and Charles Schwab Investment Management (CSIM) was charged by the SEC for making misleading statements in regards to their Schwab YieldPlus Fund product and failing to establish, uphold and put into effect the policies and procedures to prevent the misuse of material and nonpublic information. The SEC also charged CSIM and Schwab Investments with conflicting from the YieldPlus fund's attention policy without obtaining the required shareholder approval. In addition, charges were also filled against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus as well as other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund. The YieldPlus Fund that was offered by CSIM m was the largest ultra-short bond fund in the category; it is an ultra-short bond funds that, at its peak in 2007. At one point, the fund had $13.5 billion in assets and more than 200,000 accounts. Once the economy began to tumble, the fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.

CSIM failed to inform investors effectively about the risks of investing in the YieldPlus Fund. For instance, CSIM in most cases described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was absolutely more than slightly riskier than money market funds, and the CSIM, Merk and Daifotis did not effectively inform investors about the differences between YieldPlus and money market funds. During the investigation conducted by the SEC, they noticed that the YieldPlus Fund strayed from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS).There is a policy in place that states, mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. When recognized, a fund may not stray from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including privateissuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.

In conclusion, without CSIM admitting or denying any of the SECs allegations and complaints. The SEC will order CSIM and CS&Co. to pay a total of $118 Million dollars, totaling fees and fines. Furthermore, CSIM, CS&Co. and Schwab Investments had to consent to an SEC order requiring them to cease and desist from committing or causing future violations of
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the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. The primary goal of the SEC, it to ensure that all investors are entirely aware of all risks and potently risk while investing in mutual funds or money markets. With all of the correct policies and procedures in place, investors would be able successfully generate money; as well has business for the corporation. On the other hand, investor will be able to put money back into the economy, and everyone will be triumphant at the end. Part III Countrywide Financial Corporation became a $500 billion home loan machine with 62,0 900 offices and assets of $200 billion. When the housing and mortgage market was at its highest point beginning in 2000, no company pursued growth in home loans more forcefully than Countrywide. The company was founded by David Lobe and Angelo R. Mozilo, Lobe passed away in 2003 and Mozilo left the company, once Bank of America acquired the company in 2008. Once Mozilo, left Countywide the value of the shares for the company took a traumatic turn for the worst. In June 2009, the Securities and Exchange Commission filed civil fraud and insider trading charges against Mr. Mozilo and his top lieutenants: David Sambol, the companys former president, and Eric Sieracki, the former chief financial officer. The case has attracted widespread attention because it is one of the only securities enforcement actions to emerge from the mortgage crisis that has resulted in charges against top executives at a company at the heart of the mortgage mania.

The S.E.C. lawsuit contends that from 2005 through 2007, Mr. Mozilo, Mr. Sambol and Mr. Sieracki held Countrywide out as a maker of high-quality mortgage loans that was qualitatively different from competitors who engaged primarily in riskier lending. But in order to feed the companys continued growth, the agency says, the three men began to progressively loosen the companys lending standards, writing and selling more loans that were exceptions to the companys written guidelines without disclosing the changes to investors. The S.E.C. charged Mr. Mozilo, Mr. Sambol and Mr. Sieracki with securities fraud for failing to disclose Countrywide's lax lending standards in Countrywide's 2006 annual report. The SECs complaint further alleged that Mozilo engaged in insider trading in the securities of Countrywide by establishing four 10b5-1 sales plans in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywides increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans. In addition to the financial penalties, Mozilo and Sambol consented to the entry of a final judgment that provides for a permanent injunction against violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Mozilo also consented to the entry of a permanent officer and director bar, and Sambol consented to the entry of a threeyear bar. Sieracki agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and consented to a one-year bar under the Commissions Rule of Practice 102(e)(3).

In October, Mr. Mozilo agreed to repay $45 million in ill-gotten profits and $22.5 million in civil penalties as part of a settlement with the SEC in which he admits no wrongdoing. Countrywide Home Loans and its mortgage servicing unit, which are now part of Bank of America, agreed to pay $108 million to settle federal charges that the company overcharged customers who were struggling to hang onto their homes. Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SECs charges, the former executives neither admit nor deny the allegations against them.

Part IV In recent reports there was a case of insider trading charges filed against a business consultant in who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman. According to the SECs Division of Enforcement Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleons hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider
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trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam. When it comes to giving financial advice to customers or clients, the company will have to do so with caution. Reason being is because there is a fine line. Some advise could be deemed as inside trading, so there for one would have to be careful how they administer financial advice. Inside trading should in fact be illegal because it doesnt not give everyone a fair chance in earning money in the market. All of the insiders will make massive amounts of money while other investors suffer horribly. Inside trading laws are put into place so that everyone can have a fair chance, in the mean time the SEC will act as a custodian. While doing so, they protect investors and level out the playing field. Another reason is because inside trading takes way from the reasonability that Officers of a company have with the stockholders, and they could have a possibility of being taken advantage of.

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Reference Page http://www.sec.gov/news http://www.wallstreetwindow.com/content/Why-Is-Insider-Trading-Illegal http://financecareers.about.com/od/overview/a/SEC.htm www.sec.gov/about/whatwedo.shtml

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