Reader Threatens To Sue Fed After Losses Incurred By Going Long Inverse Leveraged ETFs

Remember when double and even triple inverse leveraged ETFs were all the rage? That all occurred in the brief period of time before it became clear that Bernanke would first take down the global financial system before he let Citi get back to $1/share again. Apparently one reader recalls it all too well: "In 2008 at the bottom of the market I sold positions I owned in physical gold and banks stocks such as Bank of America (BAC), Citigroup (C) and also non financial companies such as Ford (F). I used these proceeds to purchased inverse ETF’s such as NYSE: FAZ (Direxion Financial 3x Short) and NYSE:SRS (Proshares Real Estate 2x Short). Since making these purchases, these ETF’s have suffered significant drops in value as reflected in their price. In fact NYSE: FAZ has plummeted from $1100 per share to $11 per share and SRS has reduced in price from $1000 per share to $19.50 per share. It is now apparent that the Fed spent trillions of dollars to raise the price of bank stocks and to inversely suppress the price of these inverse ETFs." Yet is this nothing but a case of fippers' remorse? Is there legal precedent for an actual claim? Was the Fed in breach of duty "by allowing investors to make investments into funds such as FAZ and SRS and other inverse ETF’s, while the Fed was performing transactions that the Fed knew or should have known would severely harm the investors in these publicly traded fund." Will Bernanke cave and make whole everyone who dared to put money into the market, even if it meant betting on a broad market decline? After all the whole purposes of the latest propaganda campaign is to get people to put money in the market with no fear of loss whatsoever: whether one is bullish or bearish (and as the lack of participation shows, most are certainly still bearish). Which is where it gets interesting: "Therefore, I appeal to your office to make due and just compensation in treble damages amounting to $__ million dollars for a full and good faith settlement of this matter. If this is agreeable, I am prepared to enter into a confidential good faith settlement." In our ridiculous bizarro world, in which nothing makes sense following each recurring Fed intervention, perhaps the Fed making whole those who lose money regardless of their bias, is just what is needed to break the 33 weeks of outflows...

Full letter submitted by Bill Pitts:

December 7, 2010
 
 
Mr. Ben Bernanke
Chairman
Federal Reserve Bank
20th Street and Constitution Avenue NW
Washington, DC 20551-0001
 
Re: Financial Loss Suffered By Owners of Inverse ETF’s
 
Dear Chairman Bernanke:

On or about March of 2009, the Federal Reserve Bank (The “Fed”) commenced in actions that involved making loans to banks, financial institutions, wholly owned Fed companies (i.e. Maiden Lane), lenders and publicly traded companies. Additionally evidence suggest that the Fed through these firms and at the direction of the Fed made direct purchases of equities in publicly traded companies for the purpose of raising stock prices. These transactions were undisclosed to the public and investors. Neither the Fed nor the recipient companies disclosed these material transactions to the investing public. Ostensibly, this assistance from the Fed was conducted with the objective of increasing the stock value of many troubled companies and banks. Additionally, under the plan by the Fed and U.S. Treasury, these banks and financial institutions used the Fed supplied funds to purchase each other’s stock. This was conducted to allow each bank to raise each other’s stock values to improve the assets values on one another’s balance sheets. These actions were supported encouraged, known about and assisted through actions of the Fed and the United States Treasury.

While these actions may have been helpful to those firms to abate the systemic problems within the market, assisted in working to make recipient banks more solvent and may have prevented additional bank failure, these actions resulted in severe detrimental damage to many individual  investors.

As you are keenly aware, most every market transaction has two sides to a trade. As a stock or asset class increases in value, some investors realize gain while simultaneously others who concluded that the stocks would NOT improve in price and made investments accordingly known as taking a “short” position would loose money. The inverse of this scenario is also true.
 
As stock prices decrease, those investors who purchased inverse Exchange Traded Funds (“ETF’s’) would gain value in their investments.

As I understand it, between the Fed and the SEC you all are charged with ensuring fairness, honesty and integrity in our markets and monetary system. It is also my understanding that the Fed professes to never intervene in the markets unless it is to prevent crisis.
 
I attempted to understand current events, market conditions and the fundamentals of financial and cash flow statements prior to making personal direct investments. I have always assumed that significant transactions with companies being publicly traded would be conducted in the open and that significant transactions would be disclosed to all investors to make informed decisions. Unfortunately, it appears that as a result of the Feds efforts to correct the current financial crisis these rules of disclosure and openness were set aside.
 
After the September 2008 market crash I took a much more active role in managing my investments. Based upon reading financial data and analyst reports it was very obvious to me that there many commercial property REITS, banks and lending institutions were severely impaired, would suffer significant cash shortfalls and were insolvent or would go bankrupt. It appears that your office arrived at the same conclusion as evidenced by the subsequent injection of hundreds of billions of dollars of cash directed to these institutions by the Fed.

In 2008 at the bottom of the market I sold positions I owned in physical gold and banks stocks such as Bank of America (BAC), Citigroup (C) and also non financial companies such as Ford (F). I used these proceeds to purchased inverse ETF’s such as NYSE: FAZ (Direxion Financial 3x Short)  and NYSE:SRS (Proshares Real Estate 2x Short).
 
Since making these purchases, these ETF’s have suffered significant drops in value as reflected in their price. In fact NYSE: FAZ has plummeted from $1100 per share to $11 per share and SRS has reduced in price from $1000 per share to $19.50 per share. It is now apparent that the Fed spent trillions of dollars to raise the price of bank stocks and to inversely suppress the price of these inverse ETFs.
 
Now 20 months after these investments were originally made, your office disclosed that it had directly and indirectly injected hundreds of billions of dollars into numerous publicly traded companies. However, this information was not made public to investors by either the Fed or the institutions receiving these cash injections as these significant material transactions were occurring.
 
As a result, investors could not make informed investment decisions. By allowing investors to make investments into funds such as FAZ and SRS and other inverse ETF’s, while the Fed was performing transactions that the Fed knew or should have known would severely harm the investors in these publicly traded fund.
 
My damages had I continued to hold onto my shares of Ford and physical gold are in excess of $__ million.  Therefore, I appeal to your office to make due and just compensation in treble damages amounting to $__ million dollars for a full and good faith settlement of this matter. If this is agreeable, I am prepared to enter into a confidential good faith settlement. I would also be prepared to drop action in attempting to raise public awareness to prepare for a class action lawsuit against the Fed regarding this matter.
 
Should we not be able to resolve this matter I will be forced to file a claim in the Federal District Court and work to initiate a Class Action Lawsuits to represent all owners of these inverse ETF’s that suffered economic loss. Enclosed please find a few of the reports relied upon to arrive at the conclusions. I would seek to further explore this through depositions and discovery of the many recipients of funds from the Fed.
 
I do not envy your position and the challenges you face during these very difficult times. Had I been on the other side of these trades I may very well hold a higher opinion of the Fed and its actions. Unfortunately I have been damaged as a result of your decisions.

Should your office desire to discuss this, I can be reached at my office at XXX-XXX-XXXX or my mobile at XXX-XXX-XXXX
 
Regards,
 
 
William G. Pitts
 
Enclosures
 
Totally Busted: The Truth About Goldman's Bailout by the Fed

"Secret bailouts do not merely benefit recipients; they also deceive investors into mistaking fantasy for fact. Such deceptions often punish honest investors, like the honest investors who sold short the shares of insolvent financial institutions early in 2009.Based on all available public disclosures, the story remained fairly grim into the spring of 2009. Accordingly, the short interest – i.e., number of shares sold short – on Goldman Sachs common stock hit a record 16.3 million shares on May... 15, 2009 – about 3.3% of the public float. But over the ensuing six months, Goldman’s stock soared more than 30% – producing roughly $500 million in losses for those investors who had sold short its stock. Not surprisingly, the total short interest during that timeframe plummeted to less than 6 million shares, as short-sellers closed out their losing positions."

http://www.economicpolicyjournal.com/2010/12/totally-busted-truth-about-goldmans.html
 
 
12/1/10 Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms

http://www.washingtonpost.com/wp-dyn/content/article/2010/12/01/AR2010120106870.html 
 
12/1/10 Fed gave $3.3 Trillion to banks

http://www.youtube.com/watch?v=rTPa1hGtpJs
 
12/1/10 Fed made $9 trillion in emergency overnight loans

http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm?hpt=T1
 
12/1/10 Meet The 35 Foreign Banks That Got Bailed Out By The Fed (And This Is Just The CPFF Banks)

http://www.zerohedge.com/article/meet-35-foreign-banks-got-bailed-out-fed-and-just-cpff-banks
 
12/2/10 Federal Reserve May Be `Central Bank of the World' After UBS, Barclays Aid

http://www.bloomberg.com/news/2010-12-02/federal-reserve-may-be-central-bank-of-the-world-after-ubs-barclays-aid.html
 
Fed Releases Details on Bear Stearns, AIG Portfolios

http://www.bloomberg.com/apps/news?pid=20601087&sid=aymTlczlMmpA&pos=1
 
Fed in hot water over secret bailouts

http://www.csmonitor.com/Money/Robert-Reich-s-Blog/2010/0401/Fed-in-hot-water-over-secret-bailouts
 
The Fed Admits To Breaking The Law

http://networkedblogs.com/21Xqv
 
Fed Opens Books, Revealing European Megabanks Were Biggest Beneficiaries

http://www.huffingtonpost.com/2010/12/01/fed-opens-books-revealing_n_790529.html
 
Paulson/Goldman/Center for Responsible Lending

http://www.youtube.com/watch?v=E10bHAI7U68&feature=player_embedded
 
Goldman CEO Visited WH 4 Times During SEC Investigation

http://www.thefoxnation.com/business/2010/04/22/goldman-ceo-visited-wh-4-times-during-sec-investigation
 
Goldman's White House connections raise eyebrows

http://www.mcclatchydc.com/2010/04/21/92637/goldmans-connections-to-white.html
 
Indymac Boys Get Sweetheart Deal

http://www.youtube.com/watch?v=ssl5yb7FewA
 
Obama’s $6.3 Trillion Scam Is America’s Shame:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.G6KFfaDdSc
 
Congress threatened with Martial Law if they do not give hundreds of billions to Bankers

http://www.youtube.com/watch?v=HaG9d_4zij8
 
Alan Grayson: "Which Foreigners Got the Fed's $500,000,000,000?" Bernanke: "I Don't Know."

http://www.youtube.com/watch?v=n0NYBTkE1yQ&feature=player_embedded
 
BoE Secretly Loaned $102.9 Billion to RBS

http://www.cnbc.com/id/34126826
 
Bank of England tells of secret £62bn loan to save RBS and HBOS

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6646923/Bank-of-England-tells-of-secret-62bn-loan-to-save-RBS-and-HBOS.html
 
Bank of England advisers not told about secret £62bn loan to HBOS

http://www.guardian.co.uk/business/2009/dec/03/bank-england-secret-loan-hbos
 
Federal Reserve refuses to tell the US Senate to Whom they have given $2.2 Trillion

http://www.youtube.com/watch?v=2EQDrVKYWmc
 

Bailouts could cost U.S. $23 trillion

http://www.politico.com/news/stories/0709/25164.html

 
Sticker Shock: $23.7 Trillion Bailout?

http://abcnews.go.com/Business/Politics/story?id=814
 
Tracking the $19 Trillion Bailout Funds

http://blog.newsweek.com/blogs/wealthofnations/archive/2009/09/22/tracking-the-19-trillion-bailout-funds.aspx
 
Fed Lends Two Trillion Without Oversight

http://www.youtube.com/watch?v=oxuqmPyKqcs&feature=player_embedded
 
How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

http://www.zerohedge.com/article/how-lehman-feds-complicity-created-another-illegal-precedent-abusing-primary-dealer-credit-f
 
Access to fed Money - One of few naked Short Sellers who destroyed Bear Stearns and Lehamn Bothers

http://www.youtube.com/watch?v=Q48eSoTNByQ&feature=related
 
Geithner: Pickpocketing Trillions from the People to Give to the Oligarchy Was "Deeply Unfair", But We ... Um ... WE Had To

http://www.washingtonsblog.com/2010/04/geithner-looting-country-for-trillions.html
 
Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are Unhedged)

http://www.zerohedge.com/article/why-fed-actively-managing-25-billion-maiden-lane-mbs-portfolio-when-its-24-trillion-soma-hol
 
Did The Fed Just (Surreptitiously) Bail Out Europe?

http://www.themarketguardian.com/2010/04/did-the-fed-just-surreptitiously-bail-out-europe/
 
Goldman Sachs pay out $111million in bonuses despite taking billions in bailout money

http://www.dailymail.co.uk/news/article-1339220/Goldman-Sachs-pay-111million-bonuses-despite-taking-billions-bailout-money.html#ixzz18NTzHyqF
 
Goldman's White House connections raise eyebrows

http://www.mcclatchydc.com/2010/04/21/92637/goldmans-connections-to-white.html
 
Israeli made partner at Goldman Sachs

http://www.ynetnews.com/articles/0,7340,L-3320118,00.html
 
Goldman Sachs was top Obama donor

http://articles.cnn.com/2010-04-20/politics/obama.goldman.donations_1_obama-campaign-presidential-campaign-federal-election-commission-figures?_s=PM%3APOLITICS
 
Israel OKs US ‘Gift’ of Billions of Dollars in Warplanes

http://news.antiwar.com/2010/09/16/following-fierce-debate-israel-decides-to-buy-f-35-warplanes/

h/t Will

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