One thing that most people probably agree on is that having their instant messages, e-mails, and phone call transcripts end up court would be cause for at least a little embarrassment. Everyone’s thrown in an emoticon they aren’t proud of, some of us have used company time to chat with significant others about undergarments, and the vast majority of workers have spent a not insignificant amount of the workday talking shit about their superiors. Of course, the humiliation gets ratcheted up a notch in the case of people who ‘haha’ (and in extreme circumstances ‘hahahah’) their own jokes* which, just for example, involve habitual Libor manipulation. Tan Chi Min knows what we’re talking about:

“Nice Libor,” Tan said in an April 2, 2008, instant message with traders including Neil Danziger, who also was fired by RBS, and David Pieri. “Our six-month fixing moved the entire fixing, hahahah.”

And while having such an exchange become public would be tremendously awkward for most, you know what’s really ‘hahaha’ about this whole thing? That 1) Tan was the one who wanted people to read the above, which was submitted as part of a 231-page affidavit earlier this month and 2) He’s trying to use it as evidence that he didn’t deserve to be fired. Read more »

If you’re Blackstone or KKR, are you on balance pleased or not pleased that Bain Capital’s favorite son is running for president? On the one hand, millions more people now think that they know what “private equity” is – and that they don’t like it – than did a year ago, and that loosely coagulated hostility has led to attempts to ban carried interest and dividend recaps and management fee conversions and the Cayman Islands. On the other hand, when a lawsuit accuses the entire private equity industry of antitrust violations and rampant corruption, now you get headlines like “Equity Firms Like Bain Are Depicted as Colluding,” and so I guess KKR employees can tell the folks back home “we are not an equity firm like Bain.” If Bain is a metonymy for Everything Bad in your industry, you can’t help but look good by comparison. Goldman Sachs once played this role for another industry, or still does, but at least Goldman is genuinely evil;1 boring Bostonian Bain is a weird choice to be the poster boy for badness. Did you know that Cerberus – an “equity firm like Bain” – is named after an actual hell hound?2

Anyway! Today’s unflattering depiction of Bain & ilk comes from a long-running class action lawsuit accusing those firms of price-fixing on a series of club LBOs in the go-go five-years-agos; the theory is that every private equity firm was in a conspiracy not to bid up each other’s deals, and to split the profits. The court recently released a heavily redacted complaint in that case that claims to draw on PE firms’ internal emails basically saying “let’s collude to drive down prices on all these deals.”

Presumably the redacted bits all say “let’s do lots of crimes!” but the unredacted bits tell a … pretty unsurprising story. Private equity firms wanted to buy companies cheap. They did so in part by not getting into tooth-and-nail bidding wars over any individual target, either by just not bidding for the target or by trying to club up with other bidders to split the deal. When this worked and PE Firm A got a deal cheap because PE Firm B passed on it, Firm A was like “yaaaay” and Firm B was like “you totally owe us, man,” which I feel like is in exact equipoise between “evidence of criminal antitrust collusion” and “just a bluffy/jokey thing you say when your competitor lands a deal.” Read more »

Citi settled a CDO case for $590 million today, and if you are following along at home you’ll note that that is more than 2x as much as it settled its last CDO case for. There are a number of reasons for that but a big one is: in this case, Citi is in trouble for buying the CDOs, whereas in the last one it was in trouble for selling them. You can’t win, of course, but you can minimize your losses, and the method is clear: next time you find yourself with billions of dollars of assets that you’ve got marked at par but that you’re pretty sure will quickly decay into a pool of oozing crap, you should sell them quickly and deceptively. You’ll get sued less.

Also you won’t lose billions of dollars on the actual CDOs, which is arguably better.

I kid I kid this is different and Citi will probably be whacked repeatedly and in creative ways by shareholders over the fraudulent selling of the CDOs – that $285mm it’s paying to the SEC is really just a down payment – so there really is no way to win (except to accurately mark your assets and disclose your exposure clearly and accurately but who would do that?). Like: CDO investors will sue over the fact that Citi sold them crappy CDOs. Citi shareholders will sue over the fact that Citi was going around selling crappy CDOs without disclosing in its 10Q “we are in the business of selling crappy CDOs.” The advanced move will be when people sue because Citi didn’t tell them that other people were going to sue it, which sounds very silly until you remember that that exact thing is happening to BofA right now. Read more »

If someone builds structured credit securities out of some dodgy stuff, and someone else rates those securities AAA for no particularly good reason, and someone else sells those securities to you without reading the offering memo, and you buy those securities without any due diligence since you figure that the structurer and rater and broker wouldn’t all be messing with you, and it turns out they were, and the stuff blows up, and you end up losing a lot of money on the AAA rated securities, the natural question for you to ask, this being America, is: whose fault was that?

That question is being asked in all the best circles these days, and the answer is probably “everybody’s,” as it usually is. One place it’s being asked and slooooowly answered is in a New York federal court considering the case of the Cheyne Finance SIV, which is special for at least two reasons. First: there is a widespread belief that credit ratings are opinions, and opinions are protected by the First Amendment, and so you can’t restrict the creativity and expression of those free spirits and S&P by suing them when their opinions turn out to be, well, wrong. But for (weird!) reasons we’ve discussed, the judge in this case, Shira Scheindlin, is unimpressed by those arguments, so this is a rare lawsuit against ratings agencies that may actually go to trial.

Second: this SIV may – may – have been the origin of “structured by cows.”* Read more »

Don’t do this:

One particular municipal entity had been a customer of Wells Fargo, or a predecessor, since at least 1988. This customer’s investment objectives were safety of principal and income. … Wells Fargo’s internal records for the customer’s account specifically stated that the account should not invest in MBS. In addition, applicable state law prohibited municipal entities such as this customer from investing in certain “high-risk mortgage-backed securities.”

Respondent McMurtry nevertheless selected and purchased for this municipal customer a SIV-issued asset-backed commercial paper program which was backed by MBS and related high-risk mortgage-backed derivatives. … On April 30, 2007, McMurtry selected and purchased Golden Key on behalf of the customer. McMurtry did not know what a SIV was at that time he selected Golden Key for his customer. Further, he did not read the PPM for Golden Key, nor did he inform the customer of the risks related to the SIV structure or the underlying high-risk mortgage-backed assets held by Golden Key.

Well, I mean, in his defense it seems that McMurtry had a very good excuse for not informing the customer of the risks of Golden Key, specifically that that he didn’t know what those risks were, or what Golden Key was, or presumably where he was or how he got there or how many fingers the customer was holding up.

The world is safe from Shawn McMurtry for the next six months, since he and his employer entered into a settlement with the SEC today suspending him and fining Wells $6.5 million for its unconcern with the fact that its salesmen were not particularly interested in doing their jobs and/or illiterate: Read more »

Back in June, hedge fund manager Daniel Shak sued his ex-wife, Beth, over assets he claimed she’d hid during the couple’s divorce. Said assets were Beth’s shoes, which Daniel alleged were kept in a “secret room” and were worth approximately $1 million, 35 percent of which he wanted. It was a bit unclear as to why he was going after the footwear collection three years after the two split (though using the proceeds to relaunch his fund was a possibility) but the heart wants what the heart wants. Anyway, today brings just a couple follow-ups on the Shaks, both of which are slightly more exciting for Beth than Dan. Read more »

  • 10 Jul 2012 at 3:26 PM

Whistleblower Law Firm Finds Some Prospects

So there’s a law firm called Labaton Sucharow and a big chunk of their business model is:
(1) read newspaper,
(2) see bank did bad thing,
(3) sue bank.

This is a great business model because banks just cannot resist doing bad things and courts just cannot resist taking piles of money from shareholders of those banks and divvying it up among other shareholders of those banks and the lawyers who facilitated the transfer. For those same reasons, though, it’s a highly competitive business model and there’s every reason to branch into other related fields. So they did:

Labaton Sucharow was the first firm in the country to establish a practice exclusively focused on protecting and advocating for SEC Whistleblowers. Led by Jordan A. Thomas, a former Assistant Director and Assistance Chief Litigation Counsel in the Enforcement Division who played a leadership role in the development of the SEC Whistleblower Program, our practice leverages unparalleled securities litigation expertise and significant in-house resources to protect and advocate for courageous individuals who report possible securities violations.

This is clever as that is also a lucrative business model but a safer one: unlike securities class actions, where the decision about which lawyers get paid and how much are left to courts and can seem arbitrary to those lawyers, in whistleblower suits you actually find a client and convince him to pay you your fees out of any money he can get. And that money can also be serious money.

The problem though is that you cannot typically get these cases just by keeping a casual eye on the newspaper: banks cannot resist doing bad things, true, but once those bad things are in the newspaper the expected value of whistleblowing is low. The whole point of a whistleblower is that he voluntarily goes to regulators with information that isn’t yet widely known, so your job, as a whistleblowing broker, is to find people who have not yet come forward with their valuable crime information and make them come forward to you. And that is hard. It’s not like you can just contact a bunch of people in senior roles in the UK and US financial industries and say “hey, would you like to talk to us about possible misconduct in your industry?” Right? Read more »