How to hire a corporate attorney?

Hiring an attorney for your business is not an easy task. You can spend days phoning friends and browsing the internet and paging through Yellow Pages and still not find the person you think is capable of representing you in court. Sometimes, the opposite can happen. You get so many recommendations that it becomes all but impossible to decide whom to hire.

If you find yourself in a situation described in the paragraph above, then here is a relief: this blog will help you choose a lawyer best suited for your needs.

Three qualities to look for in a lawyer:

●      Relevant Experience

Start with relevant experience. If you run a business and need someone to help you negotiate a deal; a criminal lawyer can’t help you much. You will have to hire a corporate lawyer or someone with an long experience in corporate law.

●      Reviews

Once you have settled down on a few lawyers who fit the experience that you need for your case, start asking for reviews. If you friend has recommended a lawyer  and says the person is a professional, you can more or less take your friend’s word for it. But if you have found a lawyer online or through Yellow Pages, ask him or her to let you talk to his or her previous clients.

●      Cost

For peanuts you get only monkeys. But that doesn’t mean you have to mortgage your home to hire a lawyer. You can get a good lawyer who will help you win your case relatively inexpensively. It doesn’t mean that good lawyers come cheap. But it doesn’t mean either that good lawyers ought to cost you an arm and a leg.

About Hartley Bernstein: Mr. Hartley Bernstein represents clients in regulatory and enforcement proceedings. Also, he regularly represents the law firm’s clients in state and federal court proceedings. He previously served as a Trustee of Temple Israel of the City of New York.

WITH FRIENDS LIKE THESE…

“Trust me.” That’s the mantra of every securities scam artist. Investors are more likely to jump into an investment if it is recommended by someone they trust – particularly somebody from their “group.”
“Affinity fraud” refers to a particularly insidious form of investment scam that targets members of an identifiable group – such as race, religion, ethnic heritage, age or special interests. As a rule, people are inclined to believe – and trust - someone who claims to have the same background or beliefs. Unfortunately, con artists know this, and are fully prepared to take advantage of that inclination.
Take, for example, a complaint filed by the SEC on September 13, 2000. In that case the Commission charges that Bernard Taalib-Din Hasan (a/k/a Bernard Caldwell), and his common law wife Maria Elena Gonzalez, targeted Hispanic investors as victims of their scheme. According to the Complaint, the defendants allegedly raised approximately $1.5 million while misrepresenting the risks and potential returns of “overseas trading” in rice, diamonds and precious metals. Investors are believed to have lost about $860,000 – more than half of the total funds that were invested.
The North American Securities Administrators Association (NASAA) cautions investors to be on guard against infinity fraud, telling the public to “Beware of swindlers who claim loyalty to your group.” That is often more easily said than done. As NASAA points out,
[e]veryone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust – sometimes to our detriment.
The warning rings true. After all, at one time or another we have all been solicited to contribute money to a place of worship, a community club, an alumni association or some other common cause. So how can individuals differentiate legitimate fund raising activities from scams? It is not always easy, particularly when the con artist’s message goes something like: “You can trust me because we have a common bond.”
How do these scamsters locate their prey? Sometimes they really are members of the “group.” On other occasions, they join organizations, go to meetings or obtain membership lists. Sometimes they do not bother to actually join the “group.” Instead, they begin by soliciting some of the more prominent members of a community or organization. Then they invoke those prominent names to attract other investors.
The Internet has made it even easier to find and communicate with members of a particular group. Chat rooms, message boards and web sites are specifically geared to special interests, religions and ethnic groups. In the past, sophisticated scam artists might buy a mailing list that identified people of a particular age group, religious belief or ethnic background. Today, they can buy e-mail lists containing even more detailed information, and communicate almost instantaneously with hundreds or thousands of potential victims.
How can you recognize “affinity fraud?” Start by keeping in mind these few examples:

• Seven officials of the Tampa-based Greater Ministries International Church were charged with operating a massive Ponzi scheme that may have defrauded investors around the country out of as much as $200 million. Greater Ministries quoted from the bible as they told investors that their money would soon double.
• The Illinois Securities Department claimed a promoter allegedly targeted Christians by saying that he had a device that could find oil based upon visions he received from God. About 150 investors are believed to have lost an aggregate of $1 million through this scheme.
• A Milwaukee, Wisconsin man was charged with allegedly raising money from hundreds of Milwaukee residents, many of whom were reached through their churches, to finance a minority owned and operated telephone company. Soon after raising the money, the promoter’s company filed for bankruptcy.
• In Indiana, the NASSA says, elderly investors were duped into buying bogus promissory notes by three men "who often got on their knees and prayed with their victims to gain their trust."
• The SEC alleged that four men bilked approximately 100 elderly persons out of about $2.5 million by promising "guaranteed" returns. According to the SEC, the defendants first obtained information about the assets and investments of the senior citizens and then encouraged them to invest in phony promissory notes issued by companies with little or no business. The SEC says that these defendants preyed on the fears and insecurities of the elderly by disseminating literature designed to alarm senior citizens with claims that the Texas probate process was costly and lengthy.
• The SEC charged a stockbroker raised and misappropriated at least $1.7 million from victims, including elderly church members, through the sale of a fictitious “Interim Church Loan Fund.”
• In another SEC action, charges were brought against a defendant who allegedly bilked 375 investors, most of whom were African-American, out of $2.8 million. Victims were falsely promised that they would have an opportunity to participate in investments and reap profits not normally available to African-Americans.

How can you protect against affinity fraud? A few tips:

• Always ask for, and review, written materials detailing the proposed investment. If it involves an Initial Public Offering, make sure you receive a prospectus that has been filed with the SEC. If someone is reluctant to provide this information, or says it is not available, you should avoid the investment.
• Discuss the investment with someone who is outside the “group” – preferably an accountant, attorney, investment advisor or broker with whom you have a long-standing, and satisfactory relationship.
• Be wary of anyone who repeatedly emphasizes his or her connection to the “group” in order to gain your trust.
• Stay away from anyone who asks you to make an investment on faith alone.
• Be skeptical of someone who invokes the names of “group” leaders or who offers testimonials from other “group” members. Many affinity frauds involve “Ponzi” schemes, where the earliest investors get high payouts at the expense of later subscribers. Those early investors may then become unwitting pawns in the scheme, speaking enthusiastically about their successful investments.
• As always, stay away from “guarantees” of profits or “risk-free” investments. There are no “sure things.”
• Always check out the person who is soliciting the investment with the SEC, NASD and your state regulators. You will not be betraying a “group” member by checking on credentials. You will, however, be following a prudent course of conduct to protect your assets.

We’ve said it before, but it bears repeating. If it sounds too good to be true, it probably is.
One final word. If you believe you have been the victim of an affinity fraud, contact your state regulator and the SEC immediately. (See CONTACT THE REGULATORS for the addresses of these agencies). Do not hesitate because you are reluctant to turn against a “group member.” After all, with friends like these …


About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

Three REasons To Hire a Bankruptcy Attorney

Bankruptcy is not a pleasant thing. To hire an expensive lawyer is the last thing on the to-do list of people preparing to file for a bankruptcy. Yet, it is the wisest thing you can do - says New York based corporate lawyer Hartley Bernstein. In this blog he shows three excellent reasons to hire an attorney when filing for bankruptcy:

Harassment Protection

To hire an attorney is an effective way to protect yourself against potential harassment against lenders. An expert attorney will phone your collectors; thereby stopping them from giving calls to you. This way you can guard yourself against harassment.

Little Room for Uncertainty

Bankruptcy petitions are complex. There are communications from court. The trustees and creditors communicate. All this can be very stressful for you. Hiring a lawyer can offer you an easy way to navigate this stressful land. Your attorney can guide you on how to proceed and keep everything on schedule.

Fewer or No Mistakes

Paperwork is not always the easiest thing to do when you are filing for bankruptcy, says New York based corporate lawyer Hartley Bernstein. Mistakes can happen. A lawyer can help you navigate through all the paperwork without making costly mistakes.


About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

TELEMARKETING HOAX

Regrettably, there always seem to be unscrupulous individuals seeking to profit from a crisis and the misfortunes of others. In the wake of Tuesday's terrorist attack, authorities have warned the public to beware of telemarketers who have been fraudulently soliciting funds by claiming that the money they collect will be used to help victims and their families. According to reports, these telemarketers do not represent any recognized charitable group.

If you have been contacted by a telemarketer soliciting such donations contact us at editor@stockpatrol.com, and we will report that activity to appropriate authorities.

Persons wishing to make contributions should contact established charitable organizations whose credentials can be checked and verified, such as the American Red Cross or the United Way. The Red Cross can be reached at 1-800-HELP-NOW. The United Way/New York Community Trust Fund can be contacted at 1-800-710-8002 or visit the United Way of New York City website at www.uwnyc.org

Anyone wishing to contribute food, clothing or supplies can contact the Salvation Army at 1-800-SAL-ARMY


About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

AT DEATH’S DOOR

Death Spiral Financing. The name says it all. It conjures up the image of a process that is spinning out of control, toward inevitable doom. It is a disaster for companies and their shareholders. Yet desperate companies, needing immediate financial help, succumb to the temptation of short-term aid, only to suffer its long-term ill-effects.

How did death spiral financing earn its unsavory reputation? It works like this. A lender agrees to loan money to a company in exchange for a convertible debenture that bears a reasonable rate of interest. But there’s a catch. The lender is entitled to convert the debenture into shares of the company’s common stock, but the conversion rate is a moving target rather than a fixed, predetermined number of shares.

For example, in exchange for a loan of $1.5 million, the debenture holder may elect to receive $1.5 million of the company’s stock – usually at a discount from the prevailing market price. The number of shares the holder receives will depend on the stock price at the time of conversion. Consequently, the lower share prices go, the more stock the debenture holder gets.

This presents a problem, and an opportunity for abuse, since the debenture holder benefits if stock prices decrease. Unfortunately, in order to take advantage of this process, some debenture holders sell the company’s shares short, hoping to drive down the price. As share prices dip, the debenture holders keep on selling short, pocketing more and more proceeds on the way down.

To illustrate this, consider the case where an investor is entitled to convert a debenture into $1.5 million worth of common stock. If the debenture holder were entitled to convert the debenture into a fixed number of shares – say 500,000 – he or she would have no incentive to see the stock price go down. To the contrary, if the stock price increased, so would the value of those 500,000 shares.

But look at what can happen if the debenture holder stands to get more shares as the stock price decreases. If the company’s shares were trading at $5 when the debenture was issued, the debenture holder might start out by selling short 500,000 shares and pocketing proceeds of $2.5 million. If the stock is not heavily traded (as is the case with most microcap companies) those sales could help drive the price of the stock downward.
As prices fall to $3, the debenture holder can short another 500,000 shares and realize $1.5 million more. There would be no need to stop. When the stock decreases to $2 per share the debenture holder can short 500,000 more shares for another cool $1 million. At that point he or she will have profited to the tune of $5 million.

In our hypothetical situation, when the stock reaches $1, the debenture can be converted into 1.5 million shares. The debenture holder may then deliver those shares to cover the outstanding short position. It’s that simple. For a $1.5 million loan, the debenture holder winds up with $5 million – a cool $3.5 million profit.

Death spiral financing can be a death knell for the company whose stock is battered by this practice.

Regulators are taking notice of this problem, as reflected in an action initiated by the Securities and Exchange Commission on February 26, 2003 against an unregistered investment advisor, Rhino Advisors, Inc., and Rhino’s President, Thomas Badian.

Rhino and Badian were charged with engineering a death spiral financing scheme to benefit one of their clients. The SEC complaint alleged that Rhino and Badian manipulated share prices for the common stock of Sedona Corporation by engaging massive short selling in order to enhance the value of a $3 million Convertible Debenture that had been issued by Sedona on November 22, 2000.

Rhino’s client had provided $2.5 million in financing to Sedona in exchange for a $3 million 5% Convertible Debenture that was due on March 22, 2001. The Debenture included a conversion formula that permitted the client to convert all or any portion of the Debenture into Sedona common stock at a discount to the market price – roughly, 85% of the price of Sedona stock during the five days immediately prior to conversion. Based upon this formula, the lower the share price on the conversion date, the more shares the client would receive.
Although the Debenture prohibited Rhino's client from selling Sedona's stock short while the Debenture "remained issued and outstanding," Rhino allegedly engaged in extensive short selling on behalf of its client before the Debenture was converted. According to the SEC, that short selling increased the supply of shares in the market and depressed Sedona's stock price. Consequently, Rhino’s client received more shares when it converted the Debenture. Following the conversions, Rhino allegedly engineered the trades to conceal the client's involvement in the scheme.

Rather than contest the SEC’s charges, Rhino and Badian consented to the entry of an injunction for violation of the anti-fraud provisions of the federal securities laws, and agreed to pay a $1 million penalty.
Commenting on the case, Thomas Newkirk, Associate Director of the SEC’s Division of Enforcement, noted the potentially poisonous effect of death spiral financing, stating

Certain convertible securities, particularly those referred to as ‘toxic’ or ‘death spiral’ convertibles, present the temptation for persons holding the convertible securities to engage in manipulative short selling of the issuer's stock in order to receive more shares at the time of conversion.

The results can be disastrous for issuers and investors alike.
Regrettably, this is just one example.


Hartley Bernstein and StockPatrol.com have been featured in The New York Times, The Wall Street Journal, Forbes, Barrons, Crain’s New York Business, Details Magazine, Chief Security Officer Magazine, and Investment Dealers Digest.

DISCLOSURE — OPENING WINDOWS

Information is the word of the moment. The SEC has released details of proposed rules that would require companies to disclose a broader scope of major corporate events, and do it on a speedy basis. (See Taking Responsibility).

Companies currently are required to file a Form 8-K within 5 business days (to disclose certain changes in the company's independent accountant and resignations of directors) or within 15 calendar days (all other required disclosures). The new rules would require all Forms 8-K to be filed within two business days, subject to a possible two day extension.

The new rules would require companies file a Form 8-K disclosing the following:

• Whenever the company enters into, or terminates, any material agreement not made in the ordinary course of business;
• Termination or reduction of a business relationship with a customer that accounts for a specified portion of the company's revenues;
• Entering into, or triggering, a direct or contingent financial obligation that is material to the company, including any default on, or acceleration of, the obligation;
• Exit activities including any material write-off or restructuring;
• Any material impairment;
• Changes in the ratings given to the company by any credit agency, the issuance of a credit watch, or any change in projected company outlook;
• If the company's securities are (i) moved from one national securities exchange or inter-dealer quotation system to another, or delisted; or (ii) if the company is advised that it does not comply with a listing standard;
• If the company’s present (or former) independent auditor indicates that it is withdrawing a previously issued audit report or that the company may not rely on a previously issued audit report;
• Any material limitation, restriction or prohibition regarding the company's employee benefit, retirement and stock ownership plans, including the beginning and end of lock-out periods.
• Unregistered sales of equity securities by the company; and
• Material modifications to shareholders’ rights.

The SEC also wants to enhance existing Form S-8 disclosures by requiring the following:

• Current rules require a company to file a Form 8-K when a director departs because of a disagreement or is removed for cause. The new rules will require a Form 8-K to be filed whenever a director departs;
• The appointment or departure of a principal executive officer;
• The election of new directors; and
• Any material amendment to a company's certificate of incorporation or bylaws.

The expanded Form 8-K disclosure was only one part of a comprehensive rule proposal that also will require Chief Executive Officers and Chief Financial Officers to certify that they have reviewed their company’s quarterly and annual financial reports. As part of that new responsibility, those executive officers will have to assure the public that the financial reports are true, and that they contain all information that a reasonable investor would want to know.

This enhanced disclosure is designed to provide investors with more detailed, more timely information so that they can make informed investment decisions.

TEN TIPS FOR REVIEWING ANNUAL REPORTS

Annual reports can be a valuable tool for investors, but they also may foster unrealistic expectations. Companies, like politicians, can be masters of spin, and annual reports provide a valuable opportunity to paint a corporate picture in the most appealing strokes. Investors need to look beyond the luster, at the company’s performance and potential. In other words, it is important to separate the facts from the fluff.
Annual reports are intrinsically more appealing than the average prospectus or financial report. Why? They generally have pages of pictures and colorful charts. Shareholders get an instant peek at officers, directors, plants and products – in color no less. But appearance is far less important than substance, particularly where investment dollars are involved. A photogenic management team is no substitute for profitability. From an investor’s point of view, a successful business presents the prettiest picture.
What should shareholders focus on when they are reviewing an Annual Report? We offer a few suggestions:
1. It’s Fair to Compare. How does the company characterize the state of its business and its future plans? Take a look at the previous year’s report. Did the company perform up to last year’s expectations or did it fall short? Did the business meet last year’s projections, and were projects started or completed as previously anticipated? If not, is there a reasonable explanation? If a company did not follow through on previous promises, there is good reason to be uneasy about future projections. An annual report offers the company a good opportunity to present its vision for the future, but having done so, it needs to fulfill those goals.
2. The Bottom Line. In the end, every public company is measured by its financial performance. Focus on the financial statements, although they may be the least colorful and most tedious section of the Annual Report. Have revenues been steady, or increasing? If not, is there a logical explanation, or a troubling one? If shrinking revenues were caused by the overall economic environment, and the company remains sound, shareholders may decide to stay the course. They may be far less comfortable, however, if revenues dwindled because the company lost a major customer, or its principal product became obsolete.
3. Cash is King. In the same vein, the financial statements will tell the shareholder how much money the company has available. Has the corporate bank account grown over the past year? Does the company have access to additional financing or lines of credit? In difficult economic times it is important to determine whether the company has sufficient resources to weather a bad year or two and survive.
4. What’s Happening? Does the company’s business have forward momentum? Has it explored new products, new partnerships or promising acquisitions? Is the company warning that it may fail to meet prior expectations? A warning is not necessarily a signal to panic, but it may be a sign of deeper problems. Why does the company plan to fall short of earlier projections? The company should provide an explanation – which may be as simple as the fact that the economy has slowed and sales are down. Shareholders need to review these facts and determine whether the company, or its industry, is likely to recover in the foreseeable future.
5. Explanation for Compensation. Executive compensation has become one of the hottest topics on Wall Street, and with good reason. When the stock market was soaring in the late 1990s, companies did not hesitate to provide generous compensation packages to their top management. High salaries, astronomical bonuses and piles of stock options were handed out like candy on Halloween. It did not seem to matter whether the company was making or losing money, as long as stock prices remained high, investors did not question the exaggerated amounts being handed to corporate leaders.
Revelations of corporate corruption exposed some of the excessive practices that had been lining the pockets of management. That does not mean, however, that every company has abandoned the practice. Review management compensation with care. Have salaries and bonuses continued to increase while revenues have remained steady or dropped? Do existing long-term compensation agreements seem out of step with the current state of the company’s business and revenues? Has there been any effort to renegotiate those agreements – downward – in view of existing conditions?
6. Stability of Management. The annual report should provide detailed information about the company’s officers and directors. Has the management team remained intact? Determine whether any key employees have departed, and how that is likely to affect business. For example, if the principal investigator has resigned from a bio-tech company, has a suitable replacement been hired? Why did the employee leave and what are his or her successor’s qualifications?
These biographies should offer some insight into each officer and director’s prior experience. Have they been involved in the industry for an extended period of time? If not, what skills and experience have they brought to the company? Be wary of a management team that is comprised principally of promoters or former stock brokers who are looking to build the value of the stock rather than the quality of the business.
7. Taking Stock. Has the company issued stock or options in the past year? If so, what has it received in return? Some companies hand out stock in exchange for services – a warning sign that they lack cash. Are options due to be exercised? If they are, that may mean dilution for existing shareholders.
8. Declaring Independence. Has the company established an Audit Committee? Are there Independent Directors? What are their qualifications? Under the Sarbanes-Oxley Act of 2002 companies that are listed on any U.S. Exchange are required to have an audit committee comprised of “independent” directors. To be independent, a director may not be affiliated with the company (other than as a director) and may not receive any compensation from the company (other than as a director).
9. Subsidiaries and Affiliates. Has the company provided detailed information about subsidiaries and affiliates? This is particularly important if a significant amount of the company’s business is constructed through those affiliated corporations. The Annual Report and accompanying financial statements should offer information about those subsidiaries and affiliates, including their revenues, profits and losses. Does the company use offshore corporations as affiliates? If it does, it should offer a reasonable explanation, particularly in light of recent revelations showing that some businesses – Enron in particular – hid losses offshore.
10. Gloss is not Enough. Annual reports may be printed on slick, expensive paper, and can be filled with appealing pictures of smiling faces, sunsets and corporate offices. Try not to be overly impressed by the packaging. Content remains the key. Thumb through the pictures quickly, and take your time reviewing the state of the business, the condition of its finances, and the qualifications of its management team. In the end it’s what is on the page that counts – not the quality of the paper.
The Annual Report is a useful tool, but investors should seek additional information. Check out research reports issued by reliable analysts, review the company’s public filings, and discuss any questions with a trusted financial advisor. As always, before you invest, investigate.

Four reasons to develop a conducting law firm culture

Culture is often relegated to the corners of human resource departments, because it is considered fluffy and non-essential to a law firm’s core work. Nothing could be farther from truth, thinks the New York corporate attorney, Hartley Bernstein. A firm's culture affects its performance in many ways. In this article, you see read about the four ways in which culture impacts a law firm's profitability, and consequently its survival.

Before we get down to the nitty-gritty of culture, let's first define what culture is. Bernstein thinks that the culture of a law firm is what its employees do everyday. It is a standard on which behavioural and performance expectations are set. It impacts productivity and the morale of employees. If culture deteriorates, a firm is bound to suffer the consequences.

Here are four ways in which the culture of a law firm impacts its business:

(a) Hiring of best lawyers

The culture of a law firm feeds its brand. Brand can be a major factor when best attorneys decide to join a law firm. The best candidates seek an environment that helps them in their work. They love to work for a firm that provides them with job satisfaction and a path to future career growth. It is through culture that law firms can convince the brightest attorneys that they possess these qualities.

(b) Retention

It is prohibitively expensive for a law firm to swap their existing attorney with a new hire. It can cost as much as three times the annual salary of the attorney. Hartley Bernstein says that these costs rack up pretty quickly if several attorneys decide to move on. Culture can be a powerful binding glue that keeps the brightest lawyers stay in the firm and save it financial losses due to attrition.

(c) Productivity

The culture of a law firm has a direct impact on productivity. When the culture is great, so that employees love it, they are apt to put in their best efforts. In contrast, if the culture is stifling to the creativity of attorneys, it is going to show up in the balance sheet of the firm – sooner than later.

(d) Client retention

Anyone who has studied business culture can tell that for the clients to fall in love with a company, its employees have to love fall in love with the company first. Law firms are not an exception. If the attorneys do not love and respect their firm, it is going to show up in client meetings. The clients will be able to see through the employees. Culture is one way to make employees love a company. When your attorneys take pride in being part of the law firm, the clients will be more loyal.

Hartley Bernstein is a New York based corporate lawyer. He is of the opinion that law firm culture has a major impact on the firm's profitability. Rich and liberating law firm culture attracts talent, retains it, enhances productivity, and makes clients more loyal.

Safe guard your property with real estate attorney

When you plan to buy a house or any other property, you plan to invest your funds in this major asset. At this part, great care becomes crucial and this is the scene when the need for a good real estate attorney comes in.

A real good attorney like Hartley Bernstein play the role of a safeguard who can guide you through the details and paperwork necessary in buying a property. The work of a real state attorney includes preparing and reviewing the sales contract and making sure you (buyer) are aware of what you are getting and not getting. Diligent lawyers like Hartley Bernstein act as a liaison between 2 parties to avoid any last minute surprises. His responsibility is to ensure that the titles are correct, getting all the documents properly registered and making sure owner’s paperwork is legal. Furthermore, he makes your buying experience less stressful by working with the financial institution.   

Runs history report

A real estate lawyer can also run history report for you, safeguarding you from any sort of long-term, short term or tax liens. If you are buying an older home that had several owners, this case can happen. Through a lawyer you can also find out any sort of easement or restriction on the use of property before signing any paper.

Always hire licensed and experience lawyer

While hiring a real estate attorney for your case, make sure he is experienced and licensed lawyer like Hartley Bernstein.  Because there are many who claim to do the same work at lesser cost, but those are not professional lawyers. This is possible, they are likely to do good job but only a trained lawyer can work with the courts for you and will work with higher level of ethics. Only a professional attorney carries insurance that covers any errors or omissions.

Convincing and negotiating skills

Finally, only a good real estate attorney has certain duties that make him worth the fees he charge.  This comprises good communication and convincing skills which can help you with negotiations with the sellers, reviewing the agreement for purchase. He will be with you during the closing so that everything goes and end up smoothly. Only a good lawyer like Hartley Bernstein makes sure that the deed is worded correctly and nothing is omitted.

Your buying experience can run smoothly, just do your homework and find the right and experienced real estate attorney. This will leave you with peace of mind so that you can enjoy your new home for year and years to come. However you should know that only a professional can provide you security and knowledge.

New York Corporate Lawyers(Hartley Bernstein LLP Firm): How to choose the right corporate lawyer for your lawyer

It is important that a business chooses the right corporate lawyer in New York that will represent its best interest. Every day crucial decisions need to be made and there is always some risk lurking around the corner. Instead of waiting for the problem to show up, it is important that you use the services of a corporate lawyer that will be available to work on various legal challenges facing your business. The goal is to realize a favorable outcome every time your business needs to make a legal decision.

Here are a few things that you need to look for when choosing a corporate attorney in New York City for your business.

Experience

A corporate lawyer needs to be well versed with the state and city’s corporate laws and regulations. When something goes wrong, or a question arises, you want to know that you have someone in your corner that has a sound grasp of the city’s present legal climate. It is important that you get a corporate lawyer who is capable of handling the legal challenges facing your business. During the initial consultations, feel free to ask the lawyer about his/her previous experience. While they may not get into the details of the other clients, it is possible for the lawyer to explain different situations that they have handled in the course of their practice, as well as the outcome of these situations. Hartley T. Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation

Communication

It is important that you and your New York corporate lawyer have an open line of communication at all times. You want to be sure that when you call with a question or concern, you are going to get a response from your lawyer in a timely manner. You want to have the peace of mind that should your business be caught up in a legal situation, there will be a professional ready to come to your aid. If you do not feel appreciated and valued during the initial consultation, or your communication breaks down and you experience difficulty meeting the lawyer, then you know that this might not be the right lawyer to contract for your business.

Commitment and the relations

Apart from communication, you want an attorney who values you. You don’t want to be just another client; you want the lawyer to know you and the nature of your business. In a sense, you are looking to create a professional working relationship with the lawyer that will last over a period of time. Thus, before committing to the lawyer, feel free to ask all your questions upfront. Do not be afraid to ask how your business’ legal issues will be handled and what you can expect from the corporate lawyer.

It's Sho-Time - The FAQS About Regulation SHO

Short selling has become a lightening rod for controversy.  What is a short sale?  Put simply, a short sale is the sale of a stock you do not own.  A short seller must be prepared to buy or borrow those shares at some future time to cover that short position.  People sell short because they believe that the price of a stock will drop and they will be able to buy or borrow it at a lower price.  If the price drops the short seller realizes a profit, if it rises, the short seller incurs a loss.

The ability to deliver shares – in other words, to cover the short – is central to short selling.  A naked short sale exists when a short seller does not – or cannot – borrow shares to cover the short position,
Depending upon your perspective, short selling in general, and naked short selling in particular, can be a useful investment tool, an instrument for stock manipulation, or a convenient whipping boy for struggling companies seeking to pass the blame for their own shortcomings.  The truth lies somewhere in that mix.

In order to address some of these concerns, the Securities and Exchange Commission adopted Regulation SHO in January 2005.  Despite the new rules, some observers remain concerned that illegal short sales are depressing markets, while others continue to claim that such practices are being used to damage or destroy companies.  Exactly what aspects of short selling are addressed by Regulation SHO?  The statute itself is somewhat opaque – a challenge for non-lawyers to dissect. 
Thankfully, the SEC has now provided a series of answers to some of the most frequently asked questions in an April 11, 2005 release called – what else? – Key Points About Regulation SHO.  The full text of this release can be found at http://www.sec.gov/spotlight/keyregshoissues.htm.  

The SEC explains the distinctions between lawful and unlawful naked short sales.  Market makers may be entitled to make naked short sales in order to maintain an orderly market.  On the other hand, as might be expected, naked short sales designed to manipulate the market are unlawful – as, of course, is any market manipulation scheme.

The SEC sounds several notes of caution.  The commission reminds investors that short selling may not be the reason for a stock's depressed price.  Other factors may be responsible for loss of value.  Thinly traded speculative stocks that trade on the Pink Sheets are particularly susceptible to plummeting stock prices.  These stocks tend to be thinly traded and closely held.  More often than not, the companies have few assets, negligible assets and limited operating history.  Short sales are the least of their problems.

The SEC also warns investors to be wary of message board posters who speculate about the impact of short sellers.  Issuers, promoters, or shareholders sometimes circulate false rumors and unfounded statements about large naked short positions in chat rooms and on message boards in order to stimulate buying interest.  This is particularly true when it comes to stocks that trade on the OTCBB or Pink Sheets.  These manipulators may encourage investors to buy securities by claiming that there will be an imminent "short squeeze," in which the alleged naked short sellers will be forced to cover open short positions at increasing prices.  Often those claims are false.

We urge readers to review the SEC's comments and answers to Frequently Asked Questions about short sales for a succinct, easy to follow explanation.  Individual investors who have further questions or complaints should contact the SEC's Office of Investor Education and Assistance at 1-800-SEC-0330 or (202) 942-7040 or http://www.sec.gov/complaint.shtml.

This One Is In the Genes

Those Wolfson boys are at it again.  This time they have been accused of bilking investors out of $6.6 million.  According to reports in the Salt Lake Tribune, Allen Z. Wolfson, his son David M. Wolfson and Michael S. Newman have been indicted by a federal grand jury on nine counts of wire fraud. 
The three men purportedly established a bogus company called Stem Genetics, which claimed to be conducting stem cell research.  The indictment claims that Stem Genetics did not conduct any stem cell research – and did not employ anyone qualified to do so.  

The defendants reportedly dumped unregistered shares of Stem Genetic stock overseas, at inflated prices – targeting investors in Great Britain, Australia and New Zealand.  Potential investors were told that the Company's shares would soon trade on NASDAQ, at a price of $7 a share, around 20% more than the price they were paying.  Those customers were charged high commission, which were not disclosed.

The charges are reminiscent of those leveled in an earlier case against David Wolfson – also involving the sale of unregistered stock overseas.  In 2004, the Securities and Exchange Commission charged David Wolfson with orchestrating a scheme that involved the sale of shares under Regulation S, which permits oversea sale of unregistered shares to non-U.S. residents.  It seems that Wolfson and his colleagues found struggling U.S. companies that were hungry for cash (and occasionally formed the companies themselves) and then arranged for them to sell stock to a British Virgin Island corporation called Sukomo at a deep discount - 30% of the bid price.  

Since Sukomo was purportedly a non-U.S, citizen, the stock was sold without registration under Regulation S.  There were a few problems with this setup, as the SEC discovered.  First, Sukomo actually was a boiler room operating from Laos and Thailand, and looking for stock to dump on overseas investors. Second and more important as far as Regulation S is concerned, Sukomo may have been a non-U.S. resident but it never was a bona fide purchaser. In reality, Sukomo was simply acting as a broker and the proceeds from its boiler room operation were going back to Wolfson, his colleagues, and to a lesser extent, the issuing companies.  See, Beware The Evil Twins.

The Salt Lake Tribune reports that Allen Wolfson is awaiting sentencing in New York for securities fraud and Newman is serving a prison sentence in Laos for a financial crime.  A spokesperson for the U.S. Attorney's Office in Salt Lake City says that the SEC has recovered about $1.5 million of the funds lost by investors to the Stem Genetics scheme.

SEC Suspends Trading in Securities of One Price Clothing Stores, Inc.

The Securities and Exchange Commission has temporarily suspended trading in the securities of One Price Clothing Stores, Inc. (Pink Sheets: ONPRQ.  The suspension, which began on February 12, 2007, will end at 11:59 pm on February 26, 2007.

In issuing the suspension, the Commission cited the lack of current and accurate information because of the Company's failure to file required public reports.

In February 2004, One Price Clothing filed a bankruptcy petition in federal court in New York.  The Company last filed a quarterly financial statement in September 2003, for the quarter ended August 2, 2003.

Hartley T. Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.  As corporate counsel, Mr. Bernstein has represented both private and public companies in connection with various corporate issues, including governance, mergers/acquisitions, employee compensation agreements and contractual matters.

New York Corporate Lawyers: Why you need to hire Bernstein Cherney LLP

It is important that a business chooses the right corporate lawyer in New York that will represent its best interest. Every day crucial decisions need to be made and there is always some risk lurking around the corner. Instead of waiting for the problem to show up, it is important that you use the services of a corporate lawyer that will be available to work on various legal challenges facing your business. The goal is to realize a favorable outcome every time your business needs to make a legal decision--and this is where Bernstein Cherney LLP comes in.

Debra Cherney

Here are a few reasons why you need to contract Bernstein Cherney LLP.

 Experience 

A corporate lawyer needs to be well versed with the state and city’s corporate laws and regulations. When something goes wrong, or a question arises, you want to know that you have someone in your corner that has a sound grasp of the city’s present legal climate. It is important that you get a corporate lawyer who is capable of handling the legal challenges facing your business. During the initial consultations, feel free to ask the lawyer about his/her previous experience. While they may not get into the details of the other clients, it is possible for the lawyer to explain different situations that they have handled in the course of their practice, as well as the outcome of these situations.  

Communication 

 It is important that you and your New York corporate lawyer have an open. It is important that a business chooses the right corporate lawyer in New York that will represent its best interest. Every day crucial decisions need to be made and there is always some risk lurking around the corner. Instead of waiting for the problem to show up, it is important that you use the services of a corporate lawyer that will be available to work on various legal challenges facing your business. The goal is to realize a favorable outcome every time your business needs to make a legal decision--and this is where line of communication at all times. You want to be sure that when you call with a question or concern, you are going to get a response from your lawyer in a timely manner. You want to have the peace of mind that should your business be caught up in a legal situation, there will be a professional ready to come to your aid. If you do not feel appreciated and valued during the initial consultation, or your communication breaks down and you experience difficulty meeting the lawyer, then you know that this might not be the right lawyer to contract for your business.  

Hartley Bernstein

Commitment and the relations  

 Apart from communication, you want an attorney who values you. At Bernstein Cherney LLP, you are not just another client; our lawyers want to know you and the nature of your business. In a sense, we are looking to create a professional working relationship with our clients that will last over a period of time. Thus, when doing engaging our services, feel free to ask all your questions upfront. Do not be afraid to ask how your business’ legal issues will be handled and what you can expect from our lawyers - Hartley Bernstein

Bernstein Cherney LLP

767 Third Avenue
30th Floor, New York
New York 10017
Tel: 212-381-9684
Cell: 917-656-4550 
e-mail: hbernstein@bernsteincherney.com
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http://www.bernsteincherney.com

Parent Shock: Children Are Not Décor By Hartley Bernstein

OTHERS, like Debra Cherney, 49, and Hartley Bernstein, 56, were more resigned to giving up control. They were possibly even happier than most late parents at the birth of their twins, a boy and a girl named Cole and Brooke, in 2003, having lost their daughter Raine to respiratory failure in 2001. When the twins became mobile, the couple realized that they would need to create a designated play space in their prewar Park Avenue apartment. Still, the room they sacrificed — the formal dining room — was tough.

“I’m pretty sensitive aesthetically, and it does something for me when I look at a pretty room,” Ms. Cherney said. “Looking at what the room used to be was the visual equivalent of listening to Bach or Mozart. Now it’s the visual equivalent of listening to Barney.”

She felt the full impact when she and Mr. Bernstein put their 18th-century mahogany dining table and chair set in storage. “When I bought the table I was envisioning these beautiful, lovely dinners with fine china,” she said. “Once you have kids and once you give up those things, it was like, ‘Who was I kidding?’ I remember thinking this room will look nice again — in about 18 years.”

The issue of safety, too, can pose vexing choices for parents in thrall to design. Even before Kipp Cheng and his partner of 15 years, Mark Jarecke, arrived home with their son, Beckett, last March, they could see that many of the furnishings in their Maplewood, N.J., colonial house, including a set of four Barcelona chairs and a glass-top Noguchi coffee table, were accidents waiting to happen. But they weren’t eager to act.

“We are both small-town guys who lived in the city and tried to establish an aesthetic point of view that was largely modernist and minimalist,” said Mr. Cheng, 40, a playwright and a publicist for the American Association of Advertising Agencies. “But when you become parents, you kind of have to throw that out the window.”

As difficult as the prospect of change was for Mr. Cheng, who recalls the details of nearly all the couple’s furniture purchases, it was even harder for Mr. Jarecke, 37, the creative director of CondéNet, the Web division of Condé Nast.

“We spent years collecting meaningful, quality pieces,” he said. “Getting those kinds of pieces — the handmade silk pendant lamp, the teak Danish sideboard — it’s a huge project. Basically each room was finally done, and then it all got blown apart.”

Among the most troubling matters was the fate of the Barcelona chairs, whose “corners are basically razor blades,” Mr. Cheng said. After much deliberation, they put three in the garage and wrapped the corners of the fourth in foam so it could stay in the living room. “It was just sad,” Mr. Cheng said.

As for the coffee table, they avoided doing anything until Beckett gave them no choice: while learning to walk last summer, he used it as his main training prop. “He’d cruise and trip and hit his face on the table’s edge,” Mr. Cheng recalled.

Mr. Jarecke initially refused to discuss parting with or altering the table in any way, but they eventually compromised and decided to wrap the edge of the top in foam. “As I’m taping it,” Mr. Cheng said, “I’m saying, ‘I’m taping over what makes the difference between this being a Noguchi table and a Kmart table.’ ” Mr. Jarecke was even more distraught. “It transformed this beautiful modernist piece of furniture into a piece you’d find in a ’70s rec room,” he said.

FOR some design-minded parents, certain compromises are too much.

In 2004, Bob Stratton, a design technologist who specializes in home automation, and his wife, Sandra McLean, 50, a food activist and writer, bought a former tool and die factory in Cobble Hill, Brooklyn, and set about turning it into a two-story, 4,000-square-foot loftlike home appropriate for themselves and their son, Vin, and daughter, Fia, then 2 and 5.

“We spent many, many hours designing a place that would be kid-friendly as well as sensitive to our need to live in a well-designed adult environment,” said Mr. Stratton, 48. Construction took a few years, and the family settled in last March.

They built a kitchen and dining area in the center of the first floor, using durable Corian for both the cabinets and a Parsons-style dining table designed by Mr. Stratton. “I wanted the Corian top so there would be no repeat of the famous carving incident,” Mr. Stratton said, referring to the time when Fia, at 4, used a pen to carve her name into a cherry dining table just delivered from France. (“I thought I would die,” Ms. McLean said.)

They put down cork tiles throughout, as protection for glassware and other breakables, including the children themselves, and they set up a 500-square-foot play area in the basement, with a trade-off that some parents would consider draconian: “They can play with a toy in the main living area, but it has to go away when they’re done,” Ms. McLean said. “I’m very concerned with what’s in my visual space. When people come into the house, I very much do not want them being bombarded with toys.”

She also refused to babyproof furniture when the children were younger. She was “never one of those mothers” who put safety corners on coffee tables, she said. “That stuff is just gross, and I don’t feel you have to sacrifice living space to that degree.” And she decided not to install wire railings on the open side of the floating walnut staircase Mr. Stratton designed to connect the first- and second-floor living spaces.

“We couldn’t bear it,” she said. “It was too ugly. So basically what we did was we trained the kids to hold onto the handrail, and it’s worked. No one’s ever fallen off.”

Still, even extreme devotees of design seem to end up relaxing their standards over time. After several expensive pieces from Ligne Roset were delivered to the McLean-Stratton home last June — a brown microsuede one-arm sofa, a low white leather swivel chair, a white shag carpet and an arched chrome floor lamp — Ms. McLean instructed Fia and Vin not to eat on the couch, and told them half-jokingly not to “sit on it, stand near it or even look at it.”

But in the last several months she has grown to appreciate how the children delight in wrestling on the rug and using the swivel chair as an oversize Sit ’n Spin. “You know what?” she said. “They jump all over it, but it’s good furniture, and it actually holds up fine.”

No "Dr. Michel" in the House

Stock scamsters employ a seemingly endless variety of ploys to seduce unsuspecting investors.  Not long ago a group of pump and dumpers were leaving phony messages on telephone answering machines.  People receiving the messages were supposed to believe that the caller had dialed them by accident, intending to leave a stock tip for a friend.  StockPatrol.com warned investors when the scam surfaced in August 2004, and the SEC filed complaints against the wrongdoers in May 2005.  See Sorry Wrong Number and Phony Phone Calls.

But phony phone calls were not the only technique in vogue in 2004.  If telephone messages worked, why not try faxes?  This week the SEC caught up with a group of individuals who devised a scam to mislead investors into believing they had inadvertently received confidential stock tips faxed by a stockbroker to his customer.  The handwritten faxes seemed to embody an urgent message from a financial planner to his client, “Dr. Michel,” urging him to buy shares that were about to triple in price. 
There was, in fact, no broker and no Dr. Michel.  Instead, according to charges filed by the SEC on July 15, 2005, an individual named Joshua Yafa and his company, Global Media Marketing, distributed approximately 153,000 phony faxes in December 2004, urging recipients to buy shares of AVI Global, Inc.  AVI had hired Yafa as a public relations consultant and rewarded him with AVI shares.  According to the SEC, AVI’s stock price soared by 25% the day after the faxes were transmitted and Yafa dumped his shares, reaping more than $300,000 in proceeds.
That, however, was not the end of the story.  The SEC says that Yafa’s misleading fax soon engendered a copycat scam.  According to the Commission’s complaint, an individual named Michael O'Brien Pickens obtained a copy of Yafa's "Dr. Mitchel" fax and replaced AVI with three different microcap companies Pickens had been promoting - Data Evolution Holdings, Inc. (DTEV), Infinium Labs, Inc. (IFLB), and Soleil Film, Inc. (SFLM). The Commission claims that Pickens took Yafa’s scheme to a new level, sending out almost a million of the modified faxes.  He then made more than $300,000 when shares of all three companies increased by as much as 100%.
The Commission also filed fraud charges against Serafin Sierra, a salesman at Vision Lab Telecommunications, Inc., the "fax blasting" company that transmitted all of the "Dr. Mitchel" faxes.  The SEC asserts that it was Sierra who provided Pickens with a copy of the original Yafa fax, thereby facilitating the scheme.

The SEC action may be the least of the problems facing the individuals who orchestrated this scheme.  The United States Attorney's Office for the Southern District of New York has initiated a related criminal proceeding.

Hartley T. Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.  

Tis The Season

It is a Thanksgiving tradition that the Pilgrims and their Native American dinner guests never could have anticipated.  It happens each year, like clockwork.  The holiday dishes are back in the cupboard, the leftovers are in the fridge, and the shopping bell goes off.  The frenzy is on – with barely four weeks until Christmas.  Across the U.S. and around the world, shoppers set out in search of the perfect gift.
Looking for an innovative gift idea this year?  How about Super Bowl tickets, a ride on a private jet, a rare bottle of wine, or a day of golf at an exclusive private club?  If you head up a mutual fund you may already have received one of these items, or another luxury gift.  Regulators are now saying that these are some of the presents that brokerage firms gifted upon mutual fund executives to thank them for their business.

These revelations are the latest blow to a brokerage industry already reeling from a laundry list of scandals that include rigged research reports, price fixing, mutual fund abuses and as-yet unaddressed issues relating to the under-regulated world of hedge funds.   Just in time for the holidays, the securities cops are poised to knock the stuffing out of Wall Street once more. The Securities and Exchange Commission, and the industry’s self-regulatory arm, NASD, reportedly are conducting a “broad-based inquiry” that may involve as many as twenty brokerage firms.  

The regulators are concerned that some of those brokerage firms may have given gifts to employees of mutual fund advisors in order to curry favor.  Perish the thought.  

Those gifts – if they did occur – could violate SEC and NASD rules.  NASD places limits on gift-giving, while the SEC requires mutual funds to disclose conflicts of interest, including gifts that might sway their independent judgment.  The agencies are concerned that the interest of investors may not have been protected.  “The concern is whether the self-interest of gift recipients trumped the best interests of investors, according to SEC spokesman John Nestor.

The SEC is continuing to examine other aspects of the relationship between mutual funds and the brokers who market their shares and provide them with research reports.
Just another Thanksgiving, with plenty of turkeys and some expensive trimmings.

Bernstein Cherney LLP is a boutique New York City law firm with extensive experience  in corporate law, civil litigation and real estate matters.  The firm counsels its clients on a broad range of business-related and corporate matters, including, securities issues, mergers and acquisitions, broker-dealer regulation, commercial transactions, real estate matters. 

This One Is In the Genes

Those Wolfson boys are at it again.  This time they have been accused of bilking investors out of $6.6 million.  According to reports in the Salt Lake Tribune, Allen Z. Wolfson, his son David M. Wolfson and Michael S. Newman have been indicted by a federal grand jury on nine counts of wire fraud. 
The three men purportedly established a bogus company called Stem Genetics, which claimed to be conducting stem cell research.  The indictment claims that Stem Genetics did not conduct any stem cell research – and did not employ anyone qualified to do so.  The defendants reportedly dumped unregistered shares of Stem Genetic stock overseas, at inflated prices – targeting investors in Great Britain, Australia and New Zealand.

  Potential investors were told that the Company's shares would soon trade on NASDAQ, at a price of $7 a share, around 20% more than the price they were paying.  Those customers were charged high commission, which were not disclosed.

The charges are reminiscent of those leveled in an earlier case against David Wolfson – also involving the sale of unregistered stock overseas.  In 2004, the Securities and Exchange Commission charged David Wolfson with orchestrating a scheme that involved the sale of shares under Regulation S, which permits oversea sale of unregistered shares to non-U.S. residents.  It seems that Wolfson and his colleagues found struggling U.S. companies that were hungry for cash (and occasionally formed the companies themselves) and then arranged for them to sell stock to a British Virgin Island corporation called Sukomo at a deep discount - 30% of the bid price.  

Since Sukomo was purportedly a non-U.S, citizen, the stock was sold without registration under Regulation S.  There were a few problems with this setup, as the SEC discovered.  First, Sukomo actually was a boiler room operating from Laos and Thailand, and looking for stock to dump on overseas investors. Second and more important as far as Regulation S is concerned, Sukomo may have been a non-U.S. resident but it never was a bona fide purchaser. In reality, Sukomo was simply acting as a broker and the proceeds from its boiler room operation were going back to Wolfson, his colleagues, and to a lesser extent, the issuing companies.  See, Beware The Evil Twins.

Hartley T. Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.  As corporate counsel, Mr. Bernstein has represented both private and public companies in connection with various corporate issues, including governance, mergers/acquisitions, employee compensation agreements and contractual matters.  During his career, he has represented companies and broker/dealers with respect to public offerings, private placements of securities, corporate financing transactions and strategic planning.
 
The Salt Lake Tribune reports that Allen Wolfson is awaiting sentencing in New York for securities fraud and Newman is serving a prison sentence in Laos for a financial crime.  A spokesperson for the U.S. Attorney's Office in Salt Lake City says that the SEC has recovered about $1.5 million of the funds lost by investors to the Stem Genetics scheme.

 

IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com

The Hedge Fund Front - A System Failure in the Making?

The barn door is wide open – and the federal government is concerned.  Last week, a Treasury Department official warned legislators that steps need to be taken to reduce the likelihood that a "systemic risk event" could occur in "the private equity pools of capital industry."

In other words – government-speak aside – if hedge funds tumble the economy could suffer catastrophic consequences.  That should wipe the smiles off of a few faces.  After all, hedge funds have been Wall Street's superstars, rising to unparalleled prominence in the wake of the dot com disaster and helping to fuel an economy that has risen with investor confidence.  Is another bubble about to burst?

The government's cautionary thoughts were offered by Treasury Under Secretary for Domestic Finance, Robert Steel on July 11, 2007, in testimony before the U.S. House of Representatives Committee on Financial Services.  While recognizing the "many benefits" that hedge funds and other private investment vehicles bring to the capital markets, Mr. Steel acknowledged that "the growing size and scope of private pools of capital merit appropriate attention, particularly given possible challenges posed by private pools in areas of investor protection and the potential for systemic risk."

The Secretary's remarks seem timely considering recent tumult at hedge funds, led by the disastrous demise of two Bear Stearns hedge funds that bet on the sub prime mortgage market and lost big.  But while the observations may be opportune, efforts to address "systemic" problems may be far too late to help investors who have, or are about to feel the effects of improvident hedge fund positions. 

As StockPatrol.com recently pointed out, the Bear Stearns fund failures may simply be the opening act.  See, Is The Sky Falling?  Sub prime mortgages may continue to drag fund values downward – but they represent only one of the myriad illiquid investments that hedge funds have found so appealing.  Consider this thought from Under Secretary Steel: 

Innovations in financial products, such as complex derivatives and other structured products are expanding the ways in which market participants, such as hedge funds, can apply leverage. A concentration of market positions and high leverage may lead to market disruptions and illiquidity if traders simultaneously unwind their positions. Consistent with the growing complexity and often illiquid nature of these innovative products is the difficulty in valuing these securities.

Hedge fund managers are typically rewarded based upon fund value, so inflated asset values can trigger higher fees.  Since illiquid assets, by definition, have scant independent market, fund managers have had the luxury of placing high arbitrary values on them, and whistling in the dark while the economy remained strong.  As the investing public is rapidly learning, hedge funds increase their value by borrowing additional money and using their portfolios – including shaky illiquid holdings like sub prime mortgages – as collateral. 

As Under Secretary of Steel advised Congress, hedge funds have proliferated at an astonishing pace, doubling over the past five years, capturing an estimated 50% of current trading volume, and accounting for approximately $1.4 trillion in assets.  The Under Secretary lauded hedge funds as "significant providers of liquidity in our marketplace, making our markets attractive to investors," but with this caveat:  "The scale, complexity and dynamic nature of these business models and their investment strategies emphasize why we believe heightened vigilance is necessary. Managers are now relying more heavily on the use of leverage, transaction volumes are increasing, and the impact of hedge funds on markets continues to grow."

The Under Secretary outlined a goal of "mitigating the potential for systemic risk in financial markets and protecting investors" and, in so doing, hit upon an issue that is likely to resonate in the future.  As StockPatrol.com noted on June 26^th, "with cash flowing freely in recent years, a broad range of investors have jumped into hedge funds and their promise of even greater riches.  Institutional investors, including pension funds and endowments reportedly have increased their investments in hedge funds and other less liquid instruments." 

The government would appear to be painfully aware of that trend.  As Under Secretary Steele noted, "some concerns exist about indirect exposure of less sophisticated investors to hedge funds through their pension fund investments."  Consequently, he pointed out, "investment fiduciaries, such as pension funds managers, have a responsibility to perform due diligence to ensure that their investment decisions on behalf of their beneficiaries and clients are prudent and conform to established sound practices consistent with their responsibilities." 

The federal government, according to this testimony, encourages hedge funds to provide accurate, timely information to investors.  But, in a nod to hedge fund managers, who thus far have avoided many of the rigors of regulation, he stopped short of urging full disclosure.  "[T]his need for transparency and disclosure should not go so far as to materially discourage innovation in the marketplace. There needs to be some balance regarding disclosure. For example, we need to respect sensitive proprietary information, and individual positions should not necessarily be expected to be disclosed."

Is that enough?  Without detailed disclosure, including the nature of positions and the method of valuation, investors will remain in the dark.  The extent of proprietary positions or investor concentration can be a critical element of the due diligence process.  Participants in the Horizon ABS Fund may have been far less sanguine about the liquidity of their money if they had been aware that a single investor accounted for a quarter of the fund's purported $650 million in assets.

The government appears to see the potential pitfalls and problems – and to recognize that regulators have the ability to check abuses under existing anti-fraud statutes.  But those laws often address failure to disclose material information – and hedge funds are subject to few traditional disclosure obligations.  We would appear to be well past the time for studies and  commissions or a protracted process that ignores the urgency of the situation.  Until transparency means investors get a clear, unobstructed view of hedge fund investments, the picture will remain opaque, as will the prospect of that "systemic event" the Under Secretary fears.

Hartley T. Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com