ETFs face review by U.K. Serious Fraud Office


By Lindsay Fortado and Kevin Crowley
Bloomberg News
Wednesday, July 6, 2011

LONDON -- U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the proper tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

The Serious Fraud Office, which prosecutes white-collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England's Financial Policy Committee have warned of a lack of transparency in the ETF market.

ETFs are exchange-listed products that mirror indexes, commodities, bonds and currencies and allow investors to buy and sell them like stocks. They became more popular in the aftermath of the 2008 selloff that wiped $37 trillion from global equity markets because they carry lower fees than other funds, require lower initial investment than futures, can be traded throughout the day, and cover most indexes.

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Prophecy (TSXV: PCY) Secures Russian Far East Seaport Allocation
and Updates Ulaan Ovoo Mine Production

Company Press Release, June 14, 2011

VANCOUVER, British Columbia -- Prophecy Coal Corp. TSX-V: PCY)(OTCQX: PRPCF)(Frankfurt: 1P2) has arranged with the Port of Sovgavan in the State of Khabarovsk, Russia, so the company will have initial access to port allocation of 25,000 tonnes of coal per month starting this month, potentially expandable to 50,000 tonnes per month, representing 300,000 to 600,000 tonnes annually. Prophecy also will be assigned a coal storage area at the port.

This arrangement provides Prophecy's Ulaan Ovoo thermal coal mine with immediate access to the Asian seaborne export coal markets. Sovgavan is strategically located on the seaboard of the Russian Far East. The port is privately owned and can accommodate seagoing vessels of up to 160 meters in length, with the depth of loading site of 9.5 meters. The port has loading capacity of 6,000 tonnes per day and direct connections to Trans-Siberian railroads and uncongested Russian state highways.

Securing the port opens Prophecy to a significant number of coal buyers, and the company is placing top priority to conclude rail transport within Russia and coal offtake contracts.

Prophecy's Ulaan Ovoo mine commenced production in 2011. So far this year the mine has produced 200,000 tonnes of coal, which are being stockpiled. The average quality is 4,200 kcal/kg NAR with 5 percent ash and 0.5 percent sulphur. Those attributes compare favorably to the coal being purchased by local Russian and Mongolian power plants.

For the complete company statement, please visit:

Terry Smith, chief executive officer at London-based inter-dealer broker Tullett Prebon Plc, has said the products often fail to track the underlying asset whose behavior they're designed follow, are exposed to a provider going bankrupt, and vulnerable to short-selling.

The mixture of "people buying things they don't understand, complex structures, synthetic structures with counterparty risk, and huge short selling without enough assets in the underlying ETF" to meet demand makes the products sound like "something that we've been through before," Smith said.

"From the investor's point of view, I think there are question marks over whether synthetic ETFs really are appropriate for all types of the retail marketplace," FSA Chief Executive Officer Hector Sants said June 24.

Sam Jaffa, a spokesman for the SFO in London, declined to comment. Rachel Cohen, a spokeswoman at the FSA, declined to comment other than to refer to Sants' previous remarks. No specific companies or products have been targeted in the probe at this point, the person said.

"There are a lot of myths surrounding ETFs," said Alan Miller, founder and chief investment officer of SCM Private, which manages ETFs. "The average ETF has higher levels of transparency, better performance, and lower risk than the average mutual fund."

All the synthetic ETFs that Miller holds are 110 percent collateralized, he said. That compares well with the transparency of the absolute-return fund sector, which has "shocking" transparency, said Miller, the former chief investment officer of New Star Asset Management Group Plc.

At a meeting of the interim financial policy committee in June, the group warned that FSA bank supervisors should "monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by exchange-traded funds," according to a record of the meeting.

Some parts of the ETF market "warrant closer surveillance by regulatory authorities," the Financial Stability Board, a group of global regulators and central banking officials, said in April.

"Work is under way nationally and internationally to assess whether recent innovations and the related increase in complexity in some segments of the ETF market add to financial system risks," the FSB said, adding authorities would review whether regulations are needed to address potential shortcomings in transparency at the funds, or in how they manage risk.

ETFs are typically designed to mimic the performance of benchmark gauges such as the Standard & Poor’s 500 Index. Unlike mutual funds, whose shares are priced once daily, ETFs are listed on an exchange and bought and sold throughout the day. Global ETF assets grew to $1.37 trillion as of February from $74.3 billion in 2000, according to BlackRock Inc. (BLK), the world's biggest money manager.

"IShares remains concerned that as the market evolves, the diversity of products and their product design on offer from other providers is not always consistent," said Joe Linhares, head of iShares Europe, BlackRock's European ETF division. "We welcome any regulatory initiative to ensure standards such as robustness, disclosure, and transparency" across the sector.

The SFO began a broad probe in 2009 into whether banks sold credit-default swaps and collateralized debt obligations with flawed valuations. The review didn't result in a prosecution, and the agency wants to ensure it is more prepared if there is a crisis in the ETF market, the person said.

The agency is looking more closely at ETFs because they have similar characteristics to the CDOs that helped spark the financial meltdown in 2008, according to the person. Like CDOs, the quality of the underlying assets in synthetic ETFs can be unclear and there is the potential for firms to improperly sell assets that are being heavily short sold, the person said.

SFO director Richard Alderman is seeking legislation to create a corporate criminal liability enabling prosecutors to enforce fraud laws against companies or banks, the person said.

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Golden Phoenix Shareholder Conference Call To Discuss
Start of Gold Production at Mineral Ridge Gold Project

Company Press Release, June 27, 2011

SPARKS, Nevada -- Golden Phoenix Minerals, Inc. (GPXM) has scheduled its second quarter 2011 shareholder conference call for Tuesday, July 12. Shareholders are invited to participate in the call, will begin at 1 p.m. Pacific and 4 p.m. Eastern time.

Company management will provide updates on accomplishments in the second quarter and explain how the company's royalty mining growth strategy is expected to unfold in the second half of the year.

Topics to be updated include the start of gold production at Mineral Ridge, developments on the Vanderbilt Silver and Coyote Fault Gold projects, the Shining Tree and Peru projects, and drilling plans for 2011. Questions from shareholders will be answered as well.

"Thirteen months after closing the joint venture between Golden Phoenix and Scorpio Gold, the Mineral Ridge property has entered gold production," said Tom Klein, CEO of Golden Phoenix. "Last week both companies completed joint tours of Mineral Ridge. We look forward to providing a complete update on our conference call."

Participation in the shareholder conference call can be arranged by telephone, webcast, or Skype. To participate, dial 952-356-0015 and enter Conference ID 419582#.

For the company's full press release, please visit:

Golden Phoenix (GPXM) is a U.S. mining company with international exposure to gold, silver, and strategic metals. The company's business model combines project generation and royalty mining that offers the potential for exploration upside, coupled with the backing of production and future royalty streams. View company videos here: