“SEC Charges Institutional Shareholder Services …” is the sort of start to a headline that might make you think, ha ha ha SEC, always going after the bit players who keep big companies honest rather than the dishonest companies themselves. How’s Egan-Jones doing? But that wouldn’t be fair, for one thing because ISS – which tells lazy shareholders how to vote on proxy proposals and mergers and stuff – is kind of a Goliath itself these days, though not as much as it was last week. And also because this is really quite intensely bad:
From approximately 2007 through early 2012, an ISS employee (“the ISS Employee”) provided information to a proxy solicitor concerning how more than 100 of ISS’ institutional shareholder advisory clients (i.e., institutional investment managers) were voting their proxy ballots. In exchange for vote information, the proxy solicitor gave the ISS Employee meals, expensive tickets to concerts and sporting events, and an airline ticket. The ISS Employee, who had access to all of ISS’ clients’ proxy voting information, gathered the information by logging into ISS’ voting website from home or work and used his personal email account to communicate voting information to the proxy solicitor.
I mean! It’s not that bad for, like, the world, in the sense that institutional shareholders’ voting plans aren’t really nuclear launch codes or anything. I guess you could get up to some nefarious things with them – insider trading on close votes, etc. – but it sounds like they were mostly used for typical proxy-solicitor purposes.1 Which are mostly (1) calling up the shareholders and being all “hey why don’t you vote for us rather than for the other side?” and (2) impressing their clients with the extent of their knowledge about who’s voting how. I mean, why hire proxy solicitors if not for their knowledge of how investors are voting? You could call the shareholders yourself. One hopes. Read more »
Richard Bruce Moore managed to get hit by two different theories of insider-trading in two countries—without ever actually getting a hot tip. Read more »
Unfortunately, the book says that it cannot be thrown at the SEC when the SEC is operating—or not operating, for that matter—in an investigative capacity. Read more »
Once upon a time there was a settlement between the SEC and Citigroup over some bad stuff that Citi did, or maybe did, since the settlement did not require Citi to admit any guilt. But then the judge overseeing the case, Jed Rakoff of the Southern District of New York, bravely stood up and said: No, this settlement is Not Right, in small part because of that not-admitting-guilt thing.1 And lo he was a hero throughout the land, except in the Court of Appeals for the Second Circuit, which will likely reverse him.
I’m sure Judge Rakoff’s colleague Victor Marrero didn’t hold up SAC Capital’s proposed settlement with the SEC last week with the express goal of getting financial bloggers to say on Twitter that “Victor Marrero is the new Jed Rakoff,” but … kind of, right?
Here you can read the New Yorker‘s John Cassidy getting all exercised about the settlement, saying that “To his credit, Judge Marrero has, at least for now, refused to go along with this travesty.” I guess a lot of people don’t like this not admitting or denying thing that’s all the rage in SEC settlements these days (and, to be fair, always). But there’s an important difference between the two cases; Judge Rakoff had a reason for rejecting the Citi settlement, and Judge Marrero doesn’t particularly seem to have a reason for rejecting the SAC one.2 Read more »
Here’s a good Sonic Charmer post about how JPMorgan could have prevented the London Whale loss by imposing a liquidity provision on the Whale’s desk:
Liquidity provision means: ‘the more illiquid the stuff you’re trading, the more rainy-day buffer we’re going to withhold from your P&L’. And since one way a thing becomes illiquid is ‘you’re dominating the market already’, you inevitably make it nonlinear, like a progressive income tax: No (extra) liquidity provision on the first (say) 100mm you own, half a point on the next (say) 400mm, a point on the next 500mm, 2 points on the next 1000mm, etc etc. (specific #s depend on the product). Problem solved. In fact, it’s genuinely weird and dumb if they didn’t have such a thing.
The London Whale’s problem (one of them) was that he traded so much of a particular thing that he basically became the market in it. That means among other things that even if on paper “The Price” of what he owned was X there would have been no way for him to sell the position for X. A liquidity provision is a rough and dirty way of acknowledging this fact.
This suggestion isn’t a matter of GAAP accounting: JPMorgan wouldn’t report its asset values, or its revenues, net of this liquidity provision. It’s just an internal bookkeeping mechanism: his bosses informing the Whale that, for purposes of calculating his P&L and, thus, his comp, they would take the GAAP value of the things he had and subtract a semi-arbitrary number for their own protection.
It is weird and dumb that they didn’t do this although you can sort of guess why: the Whale portfolio started very small, and by the time it got big the Whale was both profitable and a (mostly imaginary) tail risk hedge, so it would have been hard for a risk manager to take a semi-punitive step to rein in his risk-taking. “Just tell the Whale to take less risk” does in hindsight seem like a sensible suggestion, but I suppose if he’d made $6 billion it wouldn’t.
Something else though. Here you can read about an exchange between the SEC and JPMorgan about the Whale newly released yesterday. Read more »
So Mathew Martoma: pretty bad investment for SAC, no? He “was unable to generate … winning trades or outsized returns in 2009 and 2010, and did not receive a bonus in either of those years. In a 2010 email suggesting that Martoma’s employment be terminated, an [SAC] officer stated that Martoma had been a ‘one trick pony with Elan.’” Now we know what the trick was – it was insider trading! – and it looked like a good one in 2008 anyway, making SAC some money on the way up, saving it $276 million by selling out just before Elan announced negative drug trial results, and earning Martoma $9.3 million in what turned out to be his last bonus at SAC.
The trick looks less good today: Read more »
1Q2013 must be I Love The ’80s Quarter at the SEC. Two weeks ago we learned that they were pestering ’80s icon and junk-bond inventor Michael Milken for maybe providing investment advice for money after agreeing not to do that, and today they announced a settlement with “New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker” for letting that unregistered broker solicit investors for Ranieri’s new Selene funds. Ranieri Partners is of course Lew Ranieri, the Liar’s Poker hero, mortgage-backed-security inventor, and general man-about-the-1980s.
The situation, according to the SEC’s orders, is pretty straightforward: former Ranieri senior MD Donald Phillips enlisted his buddy, William Stephens, to fly around the country pitching potential investors on Ranieri’s Selene funds, which were busy buying up non-performing mortgages. Stephens seems to have done a good job, signing up corporate pensions, university endowments, and state retirement systems. He brought in a total of $569 million in capital commitments, for which he was paid fees of $2.4 million.
The problem was that the Selene funds were a massive Ponzi scheme. No, I’m kidding, that’s not the problem at all! Ranieri and Selene were and are on the up-and-up, Selene is still buying non-performing mortgages, and as far as I can tell doing so in 2008-2010 was a good trade and made those investors happy. The problem was actually that Stephens ran into some trouble with the SEC a decade ago over some unrelated kickback allegations, and ended up losing his license to be an investment advisor. And since then “Stephens has not been registered with the Commission in any capacity, including as a broker or dealer.”
But he went and brokered and/or dealt anyway. Read more »
This much she promises you. Read more »
The people who run stock exchanges say they’ve become too hard to run, and routinely blame the many, many errors made on too many regulations.
The regulators have a solution: more regulation. And, their earlier gripes notwithstanding, the exchanges agree. Read more »