So remember when Citi did that thing that was all the rage in 2007 where they constructed a synthetic CDO referencing mortgage-backed securities in order to facilitate their own prop bet against those MBS, but then maybe inadequately disclosed to investors that they were in fact naked short those MBS? And then they got sued by the SEC for fraud, and settled that case for $285mm, or tried to anyway*? Well the SEC also sued one Brian Stoker, the Citi VP who structured that deal, because it’s important for the SEC to pursue powerful individuals responsible for financial crisis wrongdoing and who could be more powerful than the vice president of Citigroup? And unlike Citi, Brian Stoker chose to roll the dice, and today he won big but with an asterisk:
A jury on Tuesday cleared a former Citigroup executive of wrongdoing connected to the bank’s sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government’s effort to hold Wall Street executives accountable for their conduct during the financial crisis.
In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.
“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,” said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.
Thanks jury! Bringing lawsuits about mortgage CDO marketing practices has been the major focus of the SEC’s response to the financial crisis,** and this was the first time that approach was tested in court, and the SEC’s lawyers spent building the case only to see a jury shoot them down in two days, and they have no courtroom victory or precedent to show for their work, but they won the one thing that is truly important in this vale of tears: an encouraging note from a group of anonymous strangers. Read more »
UBS announced earnings today and I tell you, it is hard work to get people to focus on the strong fundamentals of your business when you keep distracting them with enormous screw-ups. Today’s:
Due to the gross mishandling of Facebook’s market debut by NASDAQ, we recorded a loss of CHF 349 million [$356mm] in our US Equities business as a result of our efforts to provide best execution for our clients. As a market maker in one of the largest IPOs in US history, we received significant orders from clients, including clients of our wealth management businesses. Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS’s loss resulted from NASDAQ’s multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties.
Remember Matthew Kluger? To recap, he’s the mergers and acquisitions lawyer who spent two decades feeding inside information to convicted insider trader Garrett Bauer, that he picked up from partners at the six different law firms he worked at over the years. The operation, which included Kenneth Robinson, an old friend of Kluger who acted as the tips mule between MK and GB, went very smoothly for a very long time (17 years), and would have continued going smoothly had Robinson stuck with the plan instead of deciding to start making the same trades as Bauer, raising suspicion with SEC, which was watching the men and used “relationship analysis” to determine they were “part of the same trading scheme and had a common source: Kluger.” In March 2011, federal agents showed up to Robinson’s house and after thinking it over for a couple days, he decided to cooperate by giving prosecutors a step-by-step guide to how the scam operated, telling them Kluger’s name, and recording conversations with Kluger and Bauer in which the two said things like “I went right up to my apartment and I broke the phone in half and went to McDonald’s and put it in two different garbage cans” and “I can’t sleep. I can’t sleep. I’m waiting for the FBI to ride into my apartment” and “We have to get all the fingerprints off that money. Like you wearing gloves or something and wiping every bill down or something” and “There is no way [these cell phone conversations] could ever be recorded.”
Robinson was ultimately sentenced to 27 months in prison, Bauer got nine years (despite his 147 speeches about how insider trading is a bad idea on the college lecture), and Kluger was handed 12 years, beating Raj Rajaratnam for “the longest insider trading U.S. history.”
Recently, Kluger sat down with Bloomberg to offer a few more specifics re: how the scheme went down (“Sometimes it was a deal I was working on, sometimes it was a deal I heard being discussed in the office”; “I would call Ken and say ‘X/Y/Z company is considering a takeover of Q company”) but what he really wants to talk about? What was the biggest surprise and hardest punch to the gut in all of this? Is what it was like finding out that his buddies were stiffing him on cuts of their ill-gotten gains. Read more »
“The problem to date has been that those that have been laid off have been sitting on their couches because they do not want to take a downgrade in pay. They are not going back to work and the longer you are out of work, the more difficult it is to get a new job. My advice to them is take what you can get. It is very hard to transfer skills from a high-paying job…so recalibrate your expectations.” [BloombergTV]