Last week US SEC released a staff report recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws.
A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party typically receives a lump sum payment that exceeds the policy's cash surrender value, but is less than the expected payout in the event of death.
The staff report by SEC's Life Settlements Task Force, which SEC Chairman Mary Schapiro established in August 2009, notes that the market for life settlements has grown over the past decade, raising questions about its regulation and oversight.
In particular, the report notes that there is inconsistent regulation of participants in the life settlements market, including those who arrange for the buying and selling of policies and those who provide estimates of an insured's life expectancy. In addition, the report notes that investors in individual life settlement transactions, or pools of life settlements, would benefit from the application of baseline standards of conduct to market participants.
In the report, the staff outlines the Task Force's findings about the life settlements market and recommends ways to improve market practices and regulatory oversight. It recommends that the Commission should:
- Consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlements as securities.
- Instruct the staff to continue to monitor that legal standards of conduct are being met by brokers and providers.
- Instruct the staff to monitor for the development of a life settlement securitization market.
- Encourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters.
SEC also issued an investor bulletin regarding investments in life settlements, consistent with one of the recommendations of the Task Force.
Amending the federal securities laws to define life settlements as securities could have several benefits:
- The amendment would clarify the status of life settlements under the federal securities laws and provide for a more consistent treatment of life settlements under both federal and state securities laws.
- The amendment would bring intermediaries in the life settlement market within the regulatory framework of SEC and FINRA. This would subject them to regulatory requirements designed to protect investors from abusive practices and to promote business conduct that facilitates fair, orderly and efficient markets.
- The amendment would give SEC and FINRA clear authority to police the life settlements market, which could lead to early detection of abuses and help deter fraud.
Jack's comment: It appears that life settlement is not regarded as securities under SFO, but would they be treated as regulated investment agreement, or structured product in future?
Last week UK FSA has today outlined proposals to ensure all mortgages are carefully assessed to make sure borrowers can afford them.
Reflecting FSA's enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.
Some of the key proposals include:
- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
- Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
- Extra protection for vulnerable customers with a credit-impaired history.
The tough new proposals, published in the consultation paper, form part of a major review by FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
FSA found that:
- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
- Borrowers with a credit-impaired history are particularly vulnerable.
Jack's comment: While FSA is enforceing responsible lending, it may have failed to ensure responsible borrowing.
A FINRA hearing panel has permanently barred a former Deutsche Bank broker from the securities industry for manipulating the price of Monogram Biosciences (MGRM) stock in an effort to enrich a hedge fund client, himself and his family.
The panel found that Edward S. Brokaw, who worked in the Greenwich, CT branch office of Deutsche Bank Securities, engaged in a pattern of trading designed deliberately to drive the value of MGRM stock down and, in turn, drive up the value of contingent value rights (CVRs) on that stock. Included in the evidence against Brokaw were tape recordings of his phone calls to his firm's trading desk to place sell orders.
The MGRM CVRs were created and issued in December 2004, in connection with the merger of two firms to form MGRM. The CVRs were to be valued during a 15-day pricing period scheduled for 18 months after the merger – beginning on May 19, 2006, and ending on June 9, 2006.
The value of the CVRs was to be determined by the volume weighted average price (VWAP) of MGRM shares trading during that 15-day period. At the end of the pricing period, CVR holders were to receive a payment from MGRM, most or all of which would be in cash. If the final VWAP was at or above $2.90, the CVRs would be worthless. But if the final VWAP was below $2.90, CVR holders would receive a penny-for-penny payment for the amount below $2.90, down to $2.02. The maximum of $.88 per CVR would be paid if the final MGRM VWAP was at or below $2.02.
Brokaw's hedge fund client held approximately 18.5 million CVRs – nearly 30% of the 64.8 million MGRM CVRs outstanding. For every penny the final VWAP dropped below $2.90, the value of the hedge fund's CVRs increased by $185,000. If the maximum payout of $.88 per CVR were achieved, the hedge fund would receive approximately $16 million. Brokaw and his family owned 217,000 of the CVRs, with a potential maximum payout of $188,000.
The hedge fund owned 3 million shares of MGRM and told Brokaw that it wanted to sell off all of those shares during the pricing period. Prior to market open on the first day of the pricing period, the hedge fund placed an order with Brokaw to sell 50,000 MGRM shares close to the open and another 50,000 shares close to the close. In a tape-recorded phone call that morning, Brokaw told a Deutsche Bank sales trader, "Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000." According to the panel decision, the sales lasted little more than a minute – and MGRM shares dropped from $2.06 to $1.94.
The panel decision quotes another phone call from Brokaw to the sales trader that afternoon, in which he explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close, saying, "Just so you know what the target price is … So yeah, understand the game that's being played for the next 15 days."
The hedge fund's orders and Brokaw's aggressive placement of those sell orders continued for three trading days. But when Deutsche Bank's compliance personnel reviewed those orders, the firm decided it would no longer execute MGRM sales for the hedge fund's account. Deutsche Bank first suspended, then terminated Brokaw based on his MGRM sales orders for the hedge fund.
The hearing panel concluded that "the objective of the selling strategy was to drive down the price of MGRM shares rather than to obtain the best price … (Brokaw) placed the orders to artificially depress the price of MGRM to impact the pricing of the CVRs." The panel noted that for every penny MGRM stock dropped, the hedge fund lost $29,000 in value on its shares but gained more than $180,000 in value on its CVRs.
The panel also found that Brokaw violated Deutsche Bank's policy requiring the individual accepting a client order to create an order ticket "immediately upon receipt of an order." Instead, Brokaw's sales assistant completed one "booking ticket" each day, each showing a single 100,000-share order to sell, each with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw – thus circumventing automatic branch office compliance review of the orders.
Unless the hearing panel's decision is appealed, its ruling will resolve charges filed in a FINRA complaint against Brokaw filed in December 2008.
Jack's comment: Actually the design of CVR motivated this kind of "arbitrage" activities, but were incidentally regarded as "market manipulation".
US SEC has recently obtained an emergency asset freeze against a Canadian couple who fraudulently touted penny stocks through their website, Facebook and Twitter. It also charged two companies the couple control and obtained an asset freeze against them.
According to SEC's complaint, the defendants profited by selling penny stocks at or around the same time that they were touting them on www.pennystockchaser.com. The website invites investors to sign up for daily stock alerts through email, text messages, Facebook and Twitter.
Since at least April 2009, Carol McKeown and Daniel F. Ryan, a couple residing in Montreal, Canada, have touted U.S. microcap companies. They received millions of shares of touted companies through their two corporations, defendants Downshire Capital Inc., and Meadow Vista Financial Corp., as compensation for their touting. McKeown and Ryan sold the shares on the open market while PennyStockChaser simultaneously predicted massive price increases for the issuers, a practice known as "scalping."
McKeown and Ryan used all the modern methods to communicate with investors including the PennyStockChaser website, e-mail, text messages, Facebook, and Twitter yet failed to adequately communicate that their rosy predictions for touted stocks were accompanied by their sales of those very same stocks.
McKeown, Ryan together with their corporations failed to disclose the full amount of the compensation they received for touting stocks on PennyStockChaser, and they have realized at least $2.4 million in sales proceeds from their scalping scheme.
Jack's comment: If such scalping practice happened in Hong Kong, probably SFC would charged those scalpers for violating Section 300 of SFO - Offence involving fraudulent or deceptive devices, etc. in transactions in securities, futures contracts or leveraged foreign exchange trading.
