SEC investigating brokerage firms role in market selloff

The New York Times - WASHINGTON — The enforcement division of the Securities and Exchange Commission is investigating whether market makers and brokerage firms fulfilled their legal obligations to provide liquidity in the markets by buying and selling stock during the sharp market drop of May 6, the chairwoman of the agency said Thursday.

The S.E.C. is also looking into whether market makers and brokers executed investors’ trades correctly.

Mary L. Schapiro, the S.E.C. chairwoman, said the agency was also considering whether to establish market participation mandates for professional traders like high-frequency traders who were not obligated to continue trading during periods of extreme market stress.

The comments came during testimony to the Senate Subcommittee on Securities, Insurance and Investment, which, like a House subcommittee last week, had called the leaders of various market regulators and exchanges to testify on the causes of the May 6 market plunge.

On May 6, stock prices fell by about 6 percent in a matter of minutes before recovering nearly as quickly. Earlier this week, the S.E.C. said that in reaction to the market tumult, circuit breakers would be installed for individual stocks in the Standard & Poor’s 500-stock index on a six-month test basis beginning in June. Those circuit breakers would halt trading for five minutes in stocks that fell or rose by more than 10 percent in a five-minute period.

Ms. Schapiro said the commission would also re-examine its rules concerning circuit breakers for the overall market, which were not tripped on May 6 because the Dow Jones industrial average did not drop by 10 percent. In addition to reviewing whether that percentage level was appropriate, Ms. Schapiro said, the agency would examine whether the trigger should be based on a broader stock index, like the Standard & Poor’s 500.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, said that his agency would also examine its circuit breakers, as well as whether there should be new rules governing the use of computer-driven, or algorithmic, trading.

Mr. Gensler noted that while human traders could react to an unusual event like the one that occurred on May 6, computers simply did what they were instructed to do, repeatedly. That, he added, was part of the problem on May 6.

During the period of highest market stress on May 6, many institutional investors stopped trading, according to a review of the day’s trading activity by the S.E.C. and the C.F.T.C. .

Among those that legally stepped back from the market during that time were several of the firms that employ computer programs to trade millions of shares a second and that are usually the biggest providers of liquidity in the stock market.

SEC Poised to Charge Mozilo With Fraud

The Wall Street Journal - The Securities and Exchange Commission staff is readying civil fraud charges against Countrywide Financial Corp. co-founder Angelo Mozilo, in what would be the highest-profile government legal action against a chief executive connected to the financial crisis.

The SEC staff sent a so-called Wells notice to Mr. Mozilo several weeks ago alerting him to the potential charges, people familiar with the matter said. Mr. Mozilo's lawyers could still persuade the SEC's commissioners that there isn't sufficient evidence to bring a case.

David Siegel, a lawyer for the 70-year-old Mr. Mozilo, declined to comment on the investigation and said there is no "fair basis" for any allegations against the former Countrywide chief executive.

The charges the SEC is considering include alleged violations of insider-trading laws and alleged failure to disclose material information to shareholders, according to people familiar with the matter.http://online.wsj.com/article/SB124224647957816523.html

SEC Accuses Texas Financier of 'Massive' $8 Billion Fraud

The Securities and Exchange Commission charged Texas financier R. Allen Stanford with an $8 billion fraud, alleging in a civil complaint that he lured investors with promises of high returns on certificates of deposit but poured their money into a "black box" of hard-to-trade assets.

The second huge alleged fraud to emerge in three months -- following Ponzi-scheme charges against Bernard L. Madoff -- reverberated around the world, given Mr. Stanford's status as an international cricket sponsor, Washington political donor and private banker to Latin America's wealthy. Federal agents searched the Houston buildings that are home to his Stanford Financial Group, and customers lined up to withdraw money from a bank he owns in Antigua, the Caribbean island nation where Mr. Stanford's offshore banking operations are based.

According to the SEC, Stanford representatives told people who bought CDs from Stanford International Bank that it was putting their money in easy-to-trade assets; had more than 20 analysts monitoring the portfolio; and underwent yearly audits by Antiguan regulators. In fact, the SEC alleged, the bulk of the money went into real estate and private equity, and the investments were reviewed by only two people: Mr. Stanford and James M. Davis, the bank's chief financial officer and Mr. Stanford's onetime classmate at Baylor University.http://online.wsj.com/article/SB123489015427300943.html

Senators Bid to Regulate Hedge Funds

The New York Times - WASHINGTON — Two senior senators introduced legislation on Thursday to impose government oversight of hedge funds.

The legislation by Senator Carl Levin, Democrat of Michigan, and Senator Charles E. Grassley, Republican of Iowa, was filed as the Obama administration was preparing a broader legislative overhaul of the regulatory system, including an effort to more tightly regulate hedge funds.

State regulators and a panel created by Congress to oversee the $700 billion Troubled Asset Relief Program issued separate but similar regulatory proposals on Thursday. The proposals also seemed to closely mirror many of the provisions that administration officials say will be part of their plan.

The regulatory overhaul is one piece of the administration’s effort to restore confidence in the financial system.

Other pieces include a stimulus bill that the House passed on Wednesday and that is moving through the Senate, and an overhaul of the financial assistance program for the nation’s largest banks.

Senior administration officials have been in discussions this week with Wall Street executives over proposals for managing the remaining $350 billion in the troubled assets program. A new plan is expected to be announced soon.

At the same time, the administration is preparing to propose tighter regulation of credit rating agencies, new federal oversight of mortgage brokers and greater supervision of credit-default swaps, the unregulated financial instruments that experts say contributed to the economic crisis.http://www.nytimes.com/2009/01/30/business/30bailout.html?partner=permalink&exprod=permalink