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A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts:

An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.

Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”

It’s also pleasing to hear that a CFO’s guilty conscience over his earnings manipulation seeps directly into his prose. Though the article is a little light on the details of the SEC’s earnings-manipulation model, which I guess makes sense, since “companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency’s computers,” which I would really like to see.1 That could be a mixed bag; the Journal hints that it might result in easier-to-read but more grandiose filings:2 Read more »

As those well-educated in the life and times of Raj Rajaratnam know, pre-prison, the big guy loved to 1. Make trades based on material non-public information and 2. Play pranks on his employees at Galleon, like introducing them to a dwarf and claiming he’d been brought on to analyst small-cap stocks, and bet them thousands of dollars they didn’t have the stomachs or balls to stand at the back of a room and allow a Taser International executive to use their bodies to demonstrate what kind of heat the company’s latest products were packing. How else did Raj-Raj keep the yuks coming (in addition to asking junior female analysts researching Lululemon to don a pair of black spandex pants and walk back and forth across the conference room table in them so people could really get a good look under the hood)? According to a new book called The Billionaire’s Apprentice: The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund, vetting potential employees in between lap dances and making male staffers wear g-strings played a part. Read more »

Opening Bell: 05.28.13

Valeant to Buy Bausch & Lomb for $8.7 Billion (DealBook)
Bausch & Lomb, the eye care company, agreed on Monday to sell itself to Valeant Pharmaceuticals International of Canada for about $8.7 billion, sidestepping the lengthier process of an initial public offering. Under the terms of the deal, Valeant will pay $4.5 billion to the investor group that owns Bausch & Lomb, led by the private equity firm Warburg Pincus. It will also spend about $4.2 billion to repay Bausch & Lomb’s debt. The agreement continues the flurry of deal-making in the health care industry, as companies seek to buy the growth they are hard-pressed to generate on their own. Announced merger volume in the sector this year is up 14 percent from the period a year earlier, even as takeovers have fallen 8 percent.

U.K. Banks Cut 189,000 With Employment at Nine-Year Low (Bloomberg)
Britain’s four biggest banks will have eliminated about 189,000 jobs by the end of this year from their peak staffing levels, bringing employment to a nine-year low amid a dearth of revenue. More cuts may follow. Royal Bank of Scotland Group Plc, HSBC Holdings Plc, Lloyds Banking Group Plc and Barclays Plc will employ about 606,000 people worldwide by the end of 2013, according to data compiled by Bloomberg. That’s 24 percent below the peak of 795,000 in 2008 and the least since 2004, when they employed 594,000 globally.

Accounting Fraud Targeted (WSJ)
An initial step in the SEC’s new effort is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects. Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.

Credit Suisse warns of U.S. tax spat escalation if talks fail (Reuters)
Credit Suisse’s chairman warned that a long-running tax dispute with the United States over hidden Swiss bank accounts could easily escalate and spill over to rivals if not settled. “What looks to be a painful solution at first glance is better for everyone than none at all,” Urs Rohner was quoted as telling the Neue Zuercher Zeitung daily on Tuesday.

Morgan Stanley Said to Move Asia Hedge-Fund Event to U.S. (Bloomberg)
Morgan Stanley will hold a gathering in New York to showcase Asian hedge funds to investors after pulling its capital introductions event in China because of the bird flu, said three people with knowledge of the matter. Morgan Stanley told managers and investors last month the annual forum scheduled for Shanghai between May 21 and May 23 would be postponed and relocated to New York in July because of health concerns after the avian flu outbreak earlier this year, said the people, who asked not to be identified as the information is private. Xu Li, a Beijing-based spokeswoman of Morgan Stanley, declined to comment on the delay.

One Man’s Oodles of Doodles Draw a Picture of Life in Finance (WSJ)
Mr. Silton doodled through many of his meetings, he says, filling at least 75 spiral-bound notebooks with about 600 drawings by the time he retired in 2011. In one doodle, a bull-like creature with one horn pointing up and the other down peers at Mr. Silton’s notes about the weak economy. At a showdown between rival management teams, he drew what looks like a sharp-toothed lizard crawling out from beneath a building of intricate arches and squares. By the end of a 1997 meeting with a potential buyer of a subsidiary of the investment firm where he worked, a looming tower toppled over notes that included “stick to what we’re doing” and “do not look at watch.” “I look at the eyes in some of my pictures and they look frightened and troubled,” says Mr. Silton. He isn’t quite sure how much his art imitated his life as a money manager.

Princeton Alums Attempt Tennis Outfit Record (ABC)
Alumni from Princeton University plan on having a “net”-working event at their reunion this year. At their 15-year celebration next month, the Class of 1998 will attempt to set a Guinness world record for the largest gathering of people in tennis outfits on the university campus. “It was something we could accomplish, as well as having a really fun reunion,” Beth Brett, 36, LA, Calif., reunion co-chair and president of the Class of 1998, told ”Our competitive spirits are high at Princeton.” … Tennis costumes will be provided to all registered participants, even including tennis “onesies” for infants and toddlers.
Read more »

Write-Offs: 05.24.13

$$$ Fifth Executive at SAC Capital Receives Subpoena [BusinessWeek / Sheelah Kolhatkar]

$$$ Tudor’s Jones Apologizes for Remarks on Female Traders [Bloomberg]

$$$ Goldman Sachs Links Bonuses to Protecting Firm Reputation [Bloomberg]

$$$ Woman, 47, Faces Domestic Violence Rap For Clobbering Guy In Head With Garden Gnome [TSG]

$$$ That’s it for us today. Enjoy the long weekend and we’ll see you back here Tuesday! Read more »

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SeaWorld Entertainment’s Antarctica: Empire of the Penguin attraction, opening today at the company’s namesake theme park in Orlando, features 50-foot glaciers, 2,500 glass icicles and up-close encounters with 230 penguins, dusted daily with 6,000 pounds of snow. “It is the coolest attraction in the world,” President and Chief Executive Officer Jim Atchison said in an interview. “You kind of check out of the rest of SeaWorld and find yourself in Antarctica.” To Atchison, it’s also an example of how private-equity firms, often criticized for dismantling the companies they buy, can jumpstart a business like SeaWorld. Blackstone Group LP bought the company, which owns 11 parks in five states, for $2.3 billion from Anheuser-Busch InBev NV in December 2009. As a small part of the world’s largest brewer, SeaWorld was starved. Atchison, who took Orlando, Florida-based SeaWorld public last month in an $807 million share sale, called the last years under the brewer’s ownership “a drought period.” [Blackstone] gave Atchison, who has held executive roles with SeaWorld since 1998, the go-ahead to crank up capital spending — from $120 million in 2010 to $225 million the following year and $192 million in 2012. [Bloomberg, related]

  • 24 May 2013 at 4:59 PM

The Final Days of Gary Gensler

Gary Gensler is very close to getting his wish to not be CFTC chairman anymore. As for his wish for a better job than CFTC chairman, well, this certainly can’t have helped. Read more »

So they raided it, as part of a totally non-retaliatory tax investigation. So non-retaliatory, in fact, that the federal tax agency felt it could casually mention in its press release that Ken Dart is among the “vultures” using “judicial colonialism” to deprive Argentina of its sovereignty without raising any suspicions at all. Read more »

  • 24 May 2013 at 3:25 PM

Citadel Would Like The Fees It Wrongly Paid Back

We’re going to guess that the options exchanges being sued by Citadel and three other firms plan to dispute the following statement. Read more »