An Industry Ban for Stealing $40 Million From a Bunch of NFL Players May Not Have Been the Worst Thing Jeffrey Rubin Had Coming to HimBy Jon Shazar
Football players are an enticing group of would-be fraud victims, being rich and seemingly very stupid. But the richness that makes them so tempting also allows them to hire lawyers smarter than they are. And those lawyers often have FINRA on speed dial. And so, when you rip off 31 current and retired NFL players, this is likely to happen. Read more »
A thing we sometimes like to do around here is use stories ripped from the headlines to illustrate to you, in case hypothetically this should ever be of any practical interest, how – and how not – to safely and effectively engage in financial fraud. This Rochdale guy was just arrested by the FBI, so I guess he’s a “how not” story, though I’m a little torn because I like part of his style. From the complaint:
[A] representative of Customer #1, who will be referred to as “Customer Rep. #1,” sent an instant message to [now-former Rochdale trader David] MILLER to buy Apple stock every half hour. Specifically, the message read “b 125 ok (per 1/2 hr).” MILLER confirmed that he would do so.
Records reflect that shortly after receiving this order, MILLER began trading in Apple. Over the course of the day, MILLER entered multiple, separate orders in Rochdale’s order management system in the amount of 125,000 shares. Each such order was executed over a period of time through various trading platforms to which Rochdale had access, including, but not limited to, a system that gave Rochdale direct electronic access to the New York Stock Exchange. Once MILLER fully executed one order for 125,000 shares, he would close out the order and promptly enter a new order into Rochdale’s order management system.
He ended up with a total of 1,625,000 shares, or 1,623,375 more than the customer ordered. Then of course the stock went down and so, more or less, did Rochdale. Reuters notes that “At the time, Miller told his superiors the purchases had been a fat finger error,” though you’ll note that the actual pattern of trading requires fifteen separate fat finger errors. Less “fat finger” and more “fat brain,” or “fat misreading of a client IM.” Still it has the whiff of almost plausibility about it; who among us has not misplaced three zeroes at some point in our financial lives?1
But then there’s this: Read more »
I don’t know much about this Autonomy thing – in brief, Hewlett-Packard acquired British software company Autonomy last year for $10.3 billion and today wrote that investment down by $8.8 billion, blaming $5 billion of that on “accounting improprieties, misrepresentations and disclosure failures” at Autonomy – but this sure sounds fake doesn’t it?
Today, Autonomy is firmly established as the leading provider of Pan-Enterprise Search and Meaning Based Computing (MBC) solutions. Autonomy’s unique Intelligent Data Operating Layer (IDOL) platform enables organisations to harness the full richness of human information by extracting meaning from the mass of unstructured information they handle every day, which analysts estimate to constitute over 80% of all enterprise data.
That’s from Autonomy’s last annual report as an autonomous company1 before HP bought it. Retrospective red flag perhaps? I would be wary of companies whose business involves “extracting meaning.” Meaning doesn’t come from software.2
Now of course HP is going to sue everyone and demand fraud investigations on two continents. Many people look bad here – HP first of all, whether or not its claims are true, then (if they’re true) Autonomy, Deloitte (Autonomy’s auditors), E&Y (HP’s auditors), HP’s bevy of bankers and others involved in due diligence who seem to have been unduly undiligent, and to some extent Autonomy’s bankers who marketed it to HP.3 I have plenty of sympathies with both sets of bankers, of course; their job is mainly to harness the full richness of human information by extracting meaning from the mass of stuff that companies make public, not to know whether that stuff is true.4 Bankers are an intelligent data operating layer; if you give them bad data then their operating layer is less intelligent. It’s possible that some of those words mean things. Read more »
It was a con basically
Law-Abiding Man Forced By Criminal Mastermind To Commit Securities Fraud Redeemed Himself The Only Way He Knew HowBy Matt Levine
Sure, Geoffrey H. Lunn of Sheridan, Colorado, may seem like an inveterate fraudster. True, he and his two recruits, Darlene Bishop and Vincent Curry, “solicited investors throughout the U.S. and in several foreign countries for their ‘.44 Magnum Leveraged Financing Program’ that they promised could turn an investment of just $44,000 into $2 million within 10 to 12 banking days.” Yes, “Lunn portrayed himself as the vice president of Dresdner Financial, a firm whose executives he claimed had connections to Dresdner Bank,” in order to further polish the realism of his investment scheme named after a gun and promising 5,000% two-week returns.1 And, admittedly, none of this was true. “Admittedly” in the sense of “Lunn admitted in sworn testimony during the SEC’s investigation that, ‘It was a con, basically.’”
But hear him out. You may think he’s a con man, but if so, he’s a con man with a heart of gold:
The SEC alleges that Lunn did not invest any investor funds as promised and instead began making cash withdrawals after the very first investor deposit. In October 2010, Lunn began making payments to three women he met in Las Vegas whom he described as “call girls.” Lunn testified that he gave at least $848,500 to the three women so that they could have “a better type of life.” In November 2010, Lunn used investor money to make a $1 million Ponzi-like payment2 to a favored investor who he thought “was a deserving person.”
And you know what? He wasn’t even a con man. This goes way, way beyond Geoffrey Lunn. He’s just a pawn in a far bigger game: Read more »
The SEC has a thing called the Aberrational Performance Inquiry that runs a screen of hedge funds, selects the ones whose performance looks too good to be true, then sees if it is. This raises questions from the empirical (what is the conversion rate of “looks too good to be true” to “is in fact too good to be true”?), through the practical (do they, like, investigate Bridgewater every quarter?), up to the philosophical, which goes something like “if your hit rate is, as theory predicts, above some threshold, where does that leave you?” I feel like this initiative stirs up deep questions and should have people worried, and not just the fraudsters. If I were advertising my hedge fund1 I would want to say “the SEC thinks we’re an aberration, but not the fraudy kind.” If your hedge fund can’t say that, why invest?
Securities regulators on Wednesday sued Yorkville Advisors LLC and its top executives, accusing the New Jersey hedge fund of reporting false and inflated values for some of its investments.
Named in the lawsuit, brought by the Securities and Exchange Commission, were Yorkville, which has been one of the largest funds specializing in thinly traded micro-cap and small-cap companies, founder and President Mark Angelo and Chief Financial Officer Edward Schinik.
The firm misreported values as the financial crisis hit in 2008 and 2009 and market conditions deteriorated, and its returns during the period consisted mostly of unrealized gains from marked-up investments, the SEC said.
The SEC’s release and complaint are deeply pleasant; we make fun of the SEC a bit around here so it’s worth saying that this is impressive work and I Like It A Lot. Yorkville had a pretty good plan, as the SEC lays it out. Here’s what you do: Read more »
SEC Advises Investors To Read Hedge Fund Documents, Especially The Secret Ones Containing All The FraudBy Matt Levine
I think if I were running a small hedge fund far from prying eyes, every quarter I’d take a look at my performance and decide if I felt good about it, and then (1) if I did I’d take a nice chunk of the profits for myself and (2) if I didn’t then I’d drink until I felt better and GOTO (1). Also I’m sure that when I started I’d plan to take a percentage of whatever I earned over some benchmark, and day one that benchmark would be, like, some relevant index matching the style of my fund, but over time it’d creep down to “well 0% is a benchmark” and then, I mean, negative 10% is a benchmark too is it not? What is special about zero? And if investors asked “can you explain your fees?” I’d just yell “can you explain YOUR fees?” and wander off muttering to myself. Scott Ferguson, hire us!1
According to the September 2001 Agreement, GEI Management was entitled to a quarterly annual management fee of three percent of the net asset value of the Fund. GEI Management also received a quarterly performance fee – called an “incentive allocation.” This fee was subject to a high water mark and a benchmark. The Fund paid a performance fee to GEI Management only if the Fund produced net profits over the prior quarter and on a cumulative basis from the Fund’s inception in 2001. If these conditions were met, GEI Management received an incentive fee equal to 25 percent of the amount by which net profits exceeded the performance of the S&P Healthcare Index.
But what if GEI underperformed the S&P Healthcare Index? A careful reading suggests that then they wouldn’t get performance fees, which hardly seems fair, because underperformance is after all a kind of performance. This is solvable by amending the agreement, which GEI did (deleting the cumulative high water mark and the benchmark, i.e. giving them all profits above zero). Further careful reading of the agreement suggests that they needed 75% of outside investors to agree to this amendment, but that was solvable by ignoring it: Read more »
Man Who Deceived Dying AIDS Patients Still Looks Like Kind Of A Hero Compared To Insurance Companies He Ripped OffBy Matt Levine
When the earnest scoldy public-interest journalists at ProPublica take it upon themselves to defend a financial scam artist who tricked terminally ill people into signing documents that they didn’t understand,* you have to figure there’s a pretty good story behind it. Oh God is there. I challenge you to find a better story about mispriced derivatives in the last week of August than ProPublica’s story this weekend about Joseph Caramadre.
The scam – and I say that with some affection – is this: life insurers offered products (call them variable annuities or death-put bonds, but you can abstract them to just one-period investments) that allowed you to invest your money in stuff and then, when a “reference life” or “annuitant” – a person, normally but not necessarily you – died, you got back the greater of (1) your original investment (plus interest sometimes!) and (2) the value of the stuff. So if the stuff went up, you profited; if it went down, you broke even (or did a little better). In exchange for this guarantee you paid a tiny fee every month, and I guess actuarially those fees were supposed to add up to the fair price of the put that the insurer was selling you.
But the trick comes when you decide, as amazingly you can, to make the annuitant not you but rather someone you found in an AIDS hospice and then bamboozled into signing up for the scheme by giving him a $2,000 payment that you told him was a charitable donation so he didn’t have to report it to the IRS. Then you end up paying almost nothing – well, $2,000 and change – for that put that the insurer is selling you, meaning that you get it for way under its fair value. And if you have a free put, you might as well combine it with the most volatile thing you can find. And our guy did. Actually he did a little better than that: Read more »
It’s Just So Hard To Know If It’s Wrong To Take Bribes To Let Day-Traders Eavesdrop On Your Customer Orders So They Can Front-Run ThemBy Matt Levine
- tell everyone who is looking to sell Facebook that he’s got a buyer, to try to find the best price possible, and
- tell no one else, so that no one steps in front of me to buy some of those shares and push up the price I have to pay.
And it would be great if he did that. But we live in a fallen world where brokers sometimes fail to find every last seller for big orders and thus miss out on getting potentially better prices for their clients, and sometimes disclose big orders to others on the same side who end up front-running them, and mostly manage to do both. This problem is unavoidable – unless he knows everything about the portfolios and desires and honesty of everyone else in the world, even the most honest broker can’t get the order exposure decision perfectly right – though its impact can be reduced by using brokers who are smart and honest rather than the reverse.
In this fallen world, though, it’s hard to know whether your broker is honest, because you can’t always tell what he’s up to when he discloses an order. If I tell him I want a million shares of Facebook and he calls up Fidelity and says “I need a million shares of Facebook, you selling?” and Fidelity then buys Facebook in front of my order, I’ll usually never know if he called Fidelity because he genuinely though wrongly thought Fidelity would sell me some shares, or because he’s friends with Fidelity and wanted to help them front-run me.
But sometimes you can tell! When a bunch of brokers “placed phone receivers up to their respective squawk boxes and transmitted squawks [about pending client orders for specific blocks of securities] over open phone lines directly to [day trading firm A.B.] Watley, where traders then placed trades in the squawked securities before the brokerage firms executed the squawked customer orders,” and when “in exchange for providing access to the direct feeds of squawks, Watley placed ‘wash trades’ with the [brokers] in which Watley traders simultaneously bought and sold the same security at the same price through different accounts,” you can be pretty pretty sure that they were up to no good.
Apparently not sure beyond a reasonable doubt though. Read more »
Good lord are these Barclays settlements juicy. Basically every day for two years one Barclays trader or another would send an email to their Libor submitter saying “hey let’s commit crimes, tons of crimes, hahahaha” and then they did. In pathetically colorful language:
Trader C requested low one month and three month US dollar LIBOR submissions … “If it’s not too late low 1m and 3m would be nice, but please feel free to say “no” … Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. A Submitter responded “Done … for you big boy”.
on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody [...] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.
Or tons more, but I found this one particularly poignant:
Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday [...]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[...] [X or Y] will be here if you have any requests for the fixings”.
Like … Trader B was kidding right? I mean, in this one single case? He was making a joke about how he was constantly asking for low fixings and the submitter took him seriously? When you joke around about committing fraud and people take you seriously, that’s maybe a sign you should stop committing so much fraud. Read more »