Medium Term Notes (MTN’s) ?

One must be careful to differentiate among Prime Bank Notes (PBN’s), Prime Bank Debentures (PBD’s) and Medium Term Notes (MTN’s). The two former do not exist but MTN’s do. One must be careful to discern the difference(s) since some times PBN’s and PBD’s are linked together and the fraudster will package them as MTN’s. In an article entitled, “Anatomy of the Medium Term Note Market” published in the “Federal Reserve Bulletin”, Volume 7, Number 8, 1993 which appeared in a monthly publication of the Publications Committee of the Board of Governors of the Federal Reserve System, Washington, D.C. (you can log on to their website at www.federalreserve.gov, or phone at 202 452 3244), there is much discussion of MTN’s.

Following are some of the topics discussed:
♦ Mechanics of the Market
♦ Discreet Funding with MTN’s
♦ Reverse Inquiry in the MTN Market
♦ Principal Transactions
♦ EURO-MTN’s”

There is nothing in that bulletin that indicates the validity or credibility of the transactions that fraudsters promote in their High Yield Investment Programs (HYIP). Again, the fact that MTN’s exist does not under any circumstances suggest, imply nor prove that the HYIP programs that fraudsters promote utilizing MTN’s exist.

Here are a few capsulized comments extracted from that bulletin that are for informational purposes only!

“…MTN’s have emerged as a major source of funding for U.S. and foreign corporations, federal agencies, supra-natural institutions and foreign countries.”

“Although MTN’s are generally offered on an agency basis, most programs permit other means of distribution. For example, MTN programs usually allow the agents to acquire notes for their own account and for resale at par or at prevailing market prices.”

“The MTN market also provides corporations with the ability to raise funds discreetly because the issuer, the investor, and the agent are the only market participants that have to know about a primary transaction.”

“Another advantage of MTN’s is that investors often play an active role in the issuance process through the phenomenon known as reverse inquiry.” “…(here) the investor relays the inquiry to an issuer of the MTN’s through the issuer’s agent. If the issuer finds the terms of the reverse inquiry sufficiently attractive, it may agree to the transaction even if it was not posting rates at the maturity that the investor desires.”

“…in the distribution process…a larger share of MTN’s are sold on a principal basis, rather than on an agented basis. In a principal transaction, the MTN dealer purchases an MTN for its own account and later resells it to investors. In a “riskless principal” transaction, when the dealer buys the MTN, it has already lined up an investor that has agreed to the terms of the resale.”

“MTN’s have become a major source of financing in international financial markets, particularly in the Euro-market. Like Euro-bonds, Euro-MTN’s are not subject to national regulations, such as registration requirements. Although Euro- MTN’s and Euro-bonds can be sold through the world, the major underwriter and dealer are located in London, where most offerings are distributed.”

It is important to be repetitive here: the above excerpts are for informational purposes only and under no circumstances should one believe that HYIP programs that are promoted by fraudsters in the buying and selling of MTN’s are real. They are not!

Standby Letters of Credit ?

Standby letters of credit are bank instruments that are regulated by the International Chamber of Commerce (ICC) Uniform Customs and Practice, Publication No. 500, the International Standby Practices ISP98, ICC Publication No. 590 and the Uniform Commercial Code (UCC). The ICC 500 and the ICC 590 are sets of rules and the UCC is law.

Standby letters of credit are quite versatile. The ISP98 offers the following descriptive list, however, keep in mind that this is only a list of convenience and it could be expanded as needed depending on a specific function or application required.

♦ Performance Standby
♦ Advance Payment Standby
♦ Bid Bond/Tender Bond Standby
♦ Counter Standby
♦ Financial Standby
♦ Direct Pay Standby
♦ Insurance Standby
♦ Commercial Standby

Standby letters of credit are conditioned upon default or non-performance bythe applicant, the party who had the credit issued by his bank to the beneficiary.These instruments, of themselves, are not negotiable nor is the obligation theyrepresent readily transferable. The ICC 500 Article 48 b, states “A credit can be transferred only if it is expressly designated as “transferable” by the issuing bank” and, c, “The Transferring bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank.”

The ISP98 Rule 6.02 states “a. A standby is not transferable unless it so states, b. A standby that states that it is transferable without further provisionmeans that drawing rights: i. may be transferred in their entirety more than once, ii. may not be partially transferred, and iii. may not be transferred unless the issuer (including the confirmer) or another person specifically nominated in the standby agrees to and effects the transfer requested by the beneficiary.

As with the bank guarantee described above, fraudsters oftentimes will sell a standby letter of credit to an uninformed party for a small percentage of its face value. Never revealing that the credit is no longer valid since the applicant hasalready fulfilled his obligation to the beneficiary. Another facet of a fraudster’s scheme Is to offer investment opportunities through standby letters of credit and independent bank guarantees. Remember these instruments expire and of themselves are not negotiable, and, furthermore, the obligation that they represent is not readily transferable.

The fraudster will represent that these instruments are discounted, have coupons attached and pay interest. None of this is true! These instruments cannot be bought,sold or traded and there is absolutely no secondary market in which they can be traded. Any investment program that states it invests in discounted standby letters of mcredit or zero standby letters of credit is blatantly fraudulent

bANK GUARANTEE ?

Foreign banks issue bank guarantees much like US banks issue standby letters of credit. There are many types of bank guarantees and basically they serve the same overall purpose as the standby letters of credit, namely protection against nonperformance. Following is a list of the most common:

-TENDER GUARANTEE

-PERFORMANCE GUARANTEE

-MAINTENANCE GUARANTEE

-REPAYMENT GUARANTEE

-RETENTION GUARANTEE

-PAYMENT GUARANTEE OR PERSONAL GUARANTEE

It is with the Payment or Personal Guarantee, however, that fraudsters usually set their traps.

Important: Proper bank guarantees are issued subject to the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees, Publication No. 458 (1992).

Let’s assume that Party A (the applicant) agrees to pay Party B (the beneficiary) a certain amount by a certain date and has his bank issue a guarantee on his behalf.

First, the guarantee must come from a reputable bank. The guarantee is subject to the rules of the country in which it was issued, thejurisdiction or province where the issuing bank is located and of even more importance, the bank and the ICC Uniform Rules for Demand Guarantees, Publication No. 458.

Although an applicant can instruct a bank to execute a guarantee on his behalf, the ICC458, Article 7a clearly states, “Where a guarantor has been given instructions for the issue of a guarantee but the instructions are such that, if they were to be carried out, the guarantor would by reason of law or regulation in the country of issue be unable to fulfill the terms of the guarantee, the instruction shall not be executed and the guarantor shall immediately inform the party who gave the guarantor his instructions by telecommunication…”.

Further to this, Article 27 states, “Unless otherwise provided in the guarantee or counter guarantee, its governing law shall be that of the place of business of the guarantor or instructing party (as the case may be), or, if the guarantor or instructing party has more than one place of business, that of the branch that issued the guarantee or counter guarantee”.

Article 28 clearly warns, “Unless otherwise provided in the guarantee or counter guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee or between the instructing party and the guarantor relating to the counter guarantee shall be settled exclusively by the competent court of the country of the place of business of the guarantor or instructing party (as the case may be), or, if the guarantor or instructing party has more than one place of business, by the competent court of the country of the branch which issued the guarantee or counter guarantee”.

Now, let’s get back to the responsibility of Party A to Party B. A agrees to pay B, for example, $100,000 by December 30, 2001. If Adefaults and does not pay B then B would take the guarantee and the drafts attached to the bank for payment, as would be indicated in the text of the guarantee. Now if A would pay B sometime before December 30, 2001, the guarantee would no longer be valid since A fulfilled his obligation to B in accordance with the terms of the guarantee. And, it is in this instance that fraudsters dupe the uninformed into buying a guarantee that is no longer valid.

For example, B (the fraudster) approaches Mr. X and offers him a bank guarantee whose period of validity is December 30, 2001. Bconcocts a story that he does not want to wait until December 30 for his money and offers X the guarantee for $50,000. X agrees since he would be paying $50,000 for a guarantee whose value, he believes, is $100,000. Unbeknown to X, A has already fulfilled his obligation to B, he will not be in default and therefore the guarantee cannot be presented to the bank on December 30. So, in this instance X has purchased a guarantee that is not valid since the applicant A had already fulfilled his obligation to B, the beneficiary.

Another scheme fraudsters use is to transfer a bank guarantee to a third party when there is no provision in the guarantee for a transfer. In fact, there is no provision in the ICC 458 for a transfer of a bank guarantee. The closest provision to a transfer is in Article 4 where it addresses the assignability of a guarantee: “The Beneficiary’s right to make a demand under a Guarantee is not assignable unless expressly stated in the Guarantee or in an amendment thereto. This Article shall not, however, affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under the Guarantee.”

So, a fraudster who claims to have a bank guarantee, already in existence and transferable at a discount to a third party, whose identity he did not know prior to meeting him, must be telling an untruth, at best!

Ponzi

If you think Bernie Madoff or Allen Stanford were the only Ponzi operators hard at work fleecing investors in the past few years, think again. The Securities and Exchange Commission and FBI have seen Ponzi-scheme cases soar this year, even if many of those cases don’t get the kind of attention that the multibillion-dollar con jobs have received.

The amounts of money involved in the Madoff and Stanford schemes are, of course, truly monumental. Madoff swindled an estimated $65 billion from thousands of investors over the course of two decades before the whole house of cards came tumbling down last year as the economy crashed and the money to pay off old investors with new money dried up. Now Madoff is serving a monumental prison sentence—150 years. Stanford is accused of running a $7 billion scheme involving fraudulent certificates of deposit.

But in a more quiet way, the number of other Ponzi schemes—some of them involving some pretty big numbers themselves—that have come to light this year is just as staggering. In fact, you could call 2009 the year the Ponzi bubble burst. The contracting economy hasn’t just hurt legitimate businesses. It’s made it tough on Ponzi fraudsters as well. They rely on new investors to pay old investors, and new investors have made themselves scarce as a result of the contraction.

The FBI has 632 open cases of Ponzi schemes or high-yield investment fraud so far this year, said David Nanz, chief of the Economic Crimes unit at the FBI. “It’s a dramatic increase,” he said. In all of 2008, the FBI handled 429 such cases, and in 2007, it handled 389. Ponzi schemes are pyramid schemes named after Charles Ponzi, who in the 1920s duped thousands of New England residents with the promise that he could bring in big returns by investing in foreign stamps. He used money from later investors to pay off some early investors.

“The Ponzi schemes have always been with us,” Nanz said. “We have seen a dramatic increase in identifying them as they collapse.” He attributes the increase to the economy. As the economy worsened, Ponzi operators had a harder time drawing new investors, and their schemes collapsed. “When the tide goes out, you see who’s not wearing their bathing suits,” Nanz said.

Afghanistan and drugs

It is common knowledge that Afghanistan remains the primary source of the world’s supply of opium and heroin. A recent United Nations’ report claims that three quarters of the world’s heroin comes from the provinces of Helmand and Kandahar. But there is also recognition that poppies are grown in almost all of the country’s 34 provinces.

The western media argues that most of the production of illegal drugs is being done by the Taliban or that the Taliban is protecting the farmers. The fact that there are well known drug lords in the government of President Hamid Karzai, and many are members of the parliament, is usually ignored. Yet the Asian press carries photos of "narco palaces" in Kabul and describes the local "narcotecture." The Afghan population is well aware of the close ties between the drug lords and the government.

Of course this is quite embarrassing to the U.S. government, which put Karzai in office and created the present Afghan constitution and system of government. Thus high level officer US , created quite a shock when they referred to Afghanistan as a "narco state" in their testimony before the U.S. Senate.

Forgotten in all this is the key role that the U.S. government played in the development and expansion of the illegal drug industry in Afghanistan. It goes back to the decision made in July 1978 by the administration of Jimmy Carter to give aid and assistance to the radical Islamists in their rebellion against the leftist government of the Peoples Democratic Party of Afghanistan.

The CIA and the Afghan Drug Trade
The U.S. government devoted billions of dollars to the proxy war in Afghanistan. Most of this was funneled through the Pentagon’s infamous Black Budget, secret funds for secret operations. In 1981 this budget was estimated at $9 billion but rose to $36 billion by 1990. The CIA obtained cash to buy weapons and other equipment which was then channeled to the Islamist rebels.

In the Afghan operation the CIA provided cash to the Pakistan government, primarily through its accounts with the Bank of Credit and Commerce International (BCCI), best known for laundering illegal drug money. As John Cooley notes, "The CIA already had a history of using corrupt or criminal banks for its overseas operations." In the 1980s the CIA and the Pentagon’s Defense Intelligence Agency were using the BCCI for covert operations. First American, in Washington, D.C., was one of the CIA banks of choice, and it had been acquired by BCCI.

BCCI had close links to the Pakistan government. During the Afghan jihad BCCI officials actually took control of the customs house at the port of Karachi where shipments of arms were sent by the CIA to Pakistan’s Inter-Services Intelligence Directorate (ISI). They made cash payments to the ISI, part of which were payoffs, but large sums were also needed to finance the transportation of armaments to the Afghan border and beyond. As Brigadier Mohammad Yousaf reports, much of the CIA aid came in the form of cash. This was used to purchase hundreds of trucks and thousands of horses, mules and camels, in addition to the materials needed to build the training bases for the mujahideen fighters.

The CIA would inform the Pakistan government about the shipments. When the armaments and supplies were landed in Karachi they came under the control of the National Logistics Cell of the Pakistan army and the ISI. They trucked the materials north to the various bases. On the way back the trucks carried opium and heroin for export from Karachi, mainly to the United States. Some of the heroin factories were directly under the control of the ISI, and the whole operation had the support of Pakistan General Fazle Haq, the protector of the industry. President Muhammad Zia-ul-Haq had appointed him the military commander of the Northwest Frontier Province. He was also directly involved in the heroin trade and laundering money through the BCCI.

ETFs are dangerous

Exchange-traded funds (ETFs) that use leverage or perform inversely (opposite) to an index or benchmark they track are growing in number and popularity. The controversy and danger surrounding these products was featured in recent articles in the Wall Street Journal (“FINRA Urges Caution on Leveraged Funds,” by Daisy Maxey), and InvestmentNews (“Leveraged ETFs: Handle with care”), and in Regulatory Notice 09-31 published by the Financial Industry Regulatory Authority (FINRA). FINRA and others are concerned that leveraged and inverse ETFs are being inappropriately marketed and sold to retail investors for whom they are unsuitable without an adequate explanation of the risks.

Leveraged and inverse ETFs are extraordinarily risky and complex securities. Leveraged ETFs are designed to deliver multiple times the return of their benchmark, while inverse ETFs move in the opposite direction from their benchmark. Leveraged inverse ETFs multiply the inverse movement.

Like futures contracts and options, these products are designed to be used as a part of sophisticated trading strategies. Unlike futures contracts and options, they are typically not designed to be held more than one day. As a result of compounding, the price movement of such ETFs can differ markedly from their underlying index or benchmark, FINRA warns. In other words, you could lose a lot even when the underlying benchmark gains. FINRA’s illustrations are sobering:

• The Dow Jones U.S. Oil & Gas Index gained 2 percent, while an ETF seeking to deliver twice the index's daily return fell 6 percent and the related ETF seeking to deliver twice the inverse of the index's daily return fell 26 percent.

• An ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index fell 53 percent while the index actually gained around 8 percent. The related ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period.

With this in mind, FINRA has warned brokers about their sales practice obligations when selling leveraged and inverse ETFs. Among other things, brokers are required to thoroughly understand they products they sell, make a determination, backed by appropriate information, that the product is suitable for the customer’s investment objectives and risk tolerance. Furthermore, brokers are legally obligated to explain all material facts regarding an investment before the sale.

Given the complexity of these products and the realities of the securities brokerage industry, the chance that any retail broker thoroughly understands them is zero. According to FINRA, in its typically understated fashion, “inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.” In fact, they are not suitable for most retail investors, period.

If you have suffered losses in leveraged and/or inverse ETFs, you should contact qualified counsel to determine your potential rights and remedies.