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 »

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?

Anyway the screen came up aces with Yorkville Advisors:2

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 »

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 »

If I want to buy a million shares of Facebook, I could call my broker and tell him “go buy me a million shares of Facebook.” What I would like him to then do is:

  • 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 »

  • 27 Jun 2012 at 12:31 PM

Libor Was Whatever Barclays Wanted It To Be

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 »

I’ve had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it’s nice to see others joining in the pastime, even if this sounds a little far-fetched:

The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.

That piece of rank conjecture is from the Second Circuit’s opinion on an appeal* of Judge Rakoff’s rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here’s DealBook: Read more »