The Los Angeles County Bar Blog

CALPERS to Sue Ratings Agencies?

According to Securities Docket, "California Public Employees Retirement System, the nation’s largest public pension fund, has filed a lawsuit in state court in California alleging that it suffered $1 billion in losses caused by 'wildly inaccurate' credit ratings from the three leading ratings agencies." The Wall Street Examiner has comments.

Protecting Madoff Investors

It is bad enough that most of the people who invested with Madoff will lose a significant amount of their wealth. It is also possible, in fact, likely, that many of the investors who received distributions from Madoff or pulled their money out in time may have to return the money.

When the inevitable bankruptcy engulfs Bernard L. Madoff Investment Securities, the bankruptcy trustee will have the ability to require a return of previously paid distributions to share them with other victims of the Ponzi scheme.

The bankruptcy trustee's ability to seize distributions from what turned out to be a Ponzi scheme is based on the theory of a fraudulent conveyance, and may nab even those investors who were innocent victims of Madoff's scheme. This may impact even those investors who received distributions years ago.

The ability of the trustee to get at a person's assets will depend on a number of factors, including the state in which the investor lives, and whether the investor is married or single.

A lot of Madoff investors live in Florida, and their residences may be fully protected by Florida law. However, a lot of Madoff investors may be New York snowbirds who cannot claim Florida as their state of residence. For these investors and all others, the long reach of the bankruptcy trustee should be a call for immediate action.

Even in a high-profile case like this one, assets may be shielded with proper asset protection planning.

The Market Got Caught without Its Shorts

On September 19, the SEC banned "short selling" of financial stocks. Short-selling is the "art" of borrowing shares in a stock, selling them, and buying the shares back later; hopefully at a lower price, thus making a profit. This may also be described as betting against the market. The SEC banned short selling of many stocks on the theory that "unscrupulous" short sellers were driving the price of stocks down and damaging strong and reputable companies (such as Lehman Brothers, Fannie Mae, and Freddie Mac).  Without the shady shorts interfering (so the theory goes), the stock market would go up.

Here is a brief evaluation of the efficacy of that new law:

The DOW closed around 11,400 on September 19. As I write, it is around 9700.  A staggering loss of almost 15% in less than a month.

There are many reasons for this decline (rising unemployment, a decline in mortgage equity withdrawal, etc.). But the short ban made things worse by eliminating a solid base of stock buyers. 

Although short sellers sell stock, they also borrow those shares, and they are forced to buy (or "cover") those shares back at some point.  When the stock market drops, the shorts cover, which then drives the prices up.

With the ban on short selling in effect, the shorts are not there to cover as the market goes down.