Monday, September 25, 2006

Republic Bank Corruption Charges...

Insider information on Republic Bank...
If I could add my two cents here…. when reviewing the Martin Armstrong situation it's important to note the following:

1)Republic Bank, the securities firm his company traded thru and kept client funds, was in the middle of a merger negotiation for $10 billion with HSBC when the Japanese FSA started investigating Cresvale/PEI. So when the FSA inquired with Republic for confirmation of client funds Republic then started closing positions without PEI/Amstrong approval and then contacted US authorities before Armstrong new what was going on. This resulted in substantial losses, and their objective was clear: make Armstrong the scapegoat and save the merger with HSBC - which they did by knocking off $500 million from their price tag, which ultimately re-surfaced in the form of payment to the supposed victims in Japan a couple of years later when they finally had to admit guilt for mishandling client funds. But by that time it didn’t matter, they already secured their acquisition and Armstrong was already publicly made out to be the villain. $500 million was a small price for them to pay.

2)Although Armstrong flat out admitted being on the wrong side of trades towards the end and losing a sizeable amount of money, that is no crime. Moreover it's inaccurate to reference quotes from those at Republic Bank as a source for Armstrong's trading performance. In particular, the individual who made the quote you reference regarding Armstrong's performance being no better than "flipping a coin" was later found to have been stealing from PEI accounts while working at Republic. The government later found that this individual, along with one colleague at Republic and a senior person at PEI, orchestrated a scheme in which he siphoned winning trades from PEI and allocated them into personal accounts while taking losing trades and putting them into PEI accounts. Hence, he had every reason to tell people Armstrong's trading was much worse than it really was because he himself was taking millions in winning trades. I believe he is coming up for sentencing of his own soon.

3)One final note, what Armstrong recently plead guilty to is a far cry from what he was originally charged with. He admitted to bad trades, shared accountability with Republic for failing to keep client funds segregated from each other, and took responsibility for allowing sales/marketing materials to continue to go out to prospective clients that promoted favorable trading performance even as he/PEI continued to lose money (hence, the “misleading of clients”).

I'm not here to proclaim Armstrong was without fault, he obviously made mistakes and has paid for them, but there is more that meets the eye in his case and there is a big difference between a legitimate, well intentioned business failing and a business the set out to deceive and defraud from the outset. Clearly Armstrong is the former, not the latter, and his research and contributions to the industry (see earlier post about his discovery of 8.6yr cycle) should be recognized independently.

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