I enjoyed Bloomberg’s story about how the SEC was pestering JPMorgan to better disclose its proprietary trading activities well in advance of the London Whale fiasco. If you just read the headline you’d be all “oh look how prescient the SEC was,” but if you read the actual letters, not so much. Here is my favorite exchange:
SEC: Identify the trading desks and other related business units that participate in activities you believe meet the definition of proprietary trading. Identify where these activities are located in terms of your segment breakdowns. Quantify the gross revenues and operating margin from each of these units. We note your disclosure on page 59 of your Form 10-K for the year ended December 31, 2010 that you have liquidated your positions within Principal Strategies in your former Equities operating segment. It is not clear if this was the extent of your proprietary trading business. Please clarify if there are other proprietary trading businesses. If there are, please clearly identify the extent to which such activities or business units have been terminated or disposed of as well as the steps you plan to take to terminate or dispose of the rest of these components.
JPMorgan:1 … The Firm believes that the Staff’s comment regarding the disclosure on page 59 relates to the Form 10-K filed by a registrant other than JPMorgan Chase.
Hahahahaha true, it’s Goldman Sachs. Read more »
It’s easy to make fun of the SEC for wanting to sue Netflix over a Facebook post. Netflix, Facebook, and the SEC are all a little funny, and bring them all together and you get a delightful orgy of hip-five-years-ago clumsiness. Also, like, olds, get over yourselves, everyone is on Facebook, why should I call Grandma on her birthday, or 8-K my operational stats? Social! 2.0!
And yet I’m a little sympathetic to the SEC here, mostly because I am old and afraid of Facebook. The agency notified Netflix yesterday that it’s planning to bring a civil action claiming that Netflix violated Reg FD by posting operational numbers – that Netflix viewing had exceeded 1 billion hours of Netflix June – on CEO Reed Hasting’s Facebook wall without press releasing or 8-King those numbers. Reg FD prohibits an issuer from “disclos[ing] any material nonpublic information regarding that issuer or its securities” to any investor or analyst without simultaneously disclosing that information through a “method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”
So if you’re Netflix you have two ways to win this: either the information was not material, or it was disclosed publicly in compliance with Reg FD. Perhaps strangely, Netflix is taking both angles. From its response yesterday: Read more »
Dealbook reports that Mary Schapiro has given official notice and come December 14th, she’s out of there. Names being floated as possible successors are said to include Sallie Krawcheck and the SEC’s director of enforcement, Robert Khuzami, but on the off-chance they’re not interested, want to throw yours or a loved one’s C.V. in the mix? Update: Apparently Obama plans to nominate Elisse Walter, an SEC commissioner and former FINRA VP, to take over. So you’ve probably got less of a shot at this point but anything can happen!
This House Financial Services investigations subcommittee hatchet job on MF Global is, I don’t know, pretty reasonable and not-that-hatchety? It’s 100 pages and not exactly full of new news, but it’s a good read, stuff happens, there’s a clear story arc, heros and villains (kidding, just villains), you’re in suspense until the end. There’s some law of narrative that demands that every financial disaster be a parable for something, and the Fall of the House of Corzine obliges nicely. It reads like the sort of fairy tale where three whatevers come to the guy and tell him “repent repent a thing will happen” and each time he’s like “naaaah” but the third time the thing happens and he’s all “huh, wish I’d repented.”
The thing that was going to happen – which has the benefit of being inevitable in this report though I guess maybe not in real time – was that MF Global’s inventory of fairly short-dated peripheral Eurozone sovereign bonds, which it had bought and then financed via repo-to-maturity transactions, were going to be the death of it. And people kept telling Corzine that and he was all “I SAID NAAAAAH.” And then they were the death of it.
The first people who told him were his auditors at PwC in late 2010, who were troubled by how MF Global was accounting for the repos-to-maturity.1 The RTMs were accounted for as a sale plus a derivative purchase liability; the forward was required to be marked to market but MF Global used its own models to determine that the mark-to-market was so small as to be immaterial because Corzine was pretty sure the chances of default were low. PwC were unamused and advocated a mark-to-market that marked more to the actual market.
Corzine’s response was the best:2 Read more »
The Securities and Exchange Commission said Thursday it received more than 3,000 tips in the past fiscal year. The SEC said the tips — 3,001 in all — came from all 50 states, Washington, D.C., Puerto Rico and from 49 countries. It announced the findings in a report required by the Dodd-Frank Act on the activity of the SEC’s whistleblower office, which opened its doors in August last year…Under the program created by the Dodd-Frank Act, whistleblowers can receive a 10% to 30% reward if they provide original information that leads to a successful enforcement case netting a penalty of $1 million or more. The SEC issued its first reward under the program on Aug. 21 to an informant who didn’t want to be identified. The whistleblower received $50,000, or 30% of the $150,000 thus far reclaimed out of the multimillion-dollar fraud the person prevented, the SEC said at the time. [WSJ]
One problem that a lot of people have noticed is that Americans do not spend enough time talking about politics. Yes, you can devote several hours a day to watching political news and forwarding political emails and signing secession petitions, but certain areas of life are not utterly infused with political rancor. Buying stocks is … somewhere on the spectrum, less politicized than buying beer but more politicized than buying toothpaste.
Lucian Bebchuk wants to change that. He has a post on DealBook, based on this paper he wrote with Rob Jackson, urging the SEC to make companies disclose their political contributions, so that you can get all mad and sell your stock in companies that make contributions to your less preferred candidate and buy stock in companies that make contributions to your more preferred candidate. I mean, I can just tell you: buy oil stocks if you’re a Republican and tech stocks if you’re a Democrat and the financial industry is kind of a mixed bag but, lately, Republican.
You could ask yourself a question like “why should a company do what its shareholders want?” and then you could answer “because the shareholders own the company,” but that is not an entirely compelling answer. They don’t really; they are residual claimants on the company’s income, or whatever; nobody owns the company, the company is people my friend; the company is a bundle of sticks, and there you are with your stick, waving it around while you beg the question. The company perhaps – perhaps! – owes shareholders an honest day’s effort to maximize the value of that residual income; it does not owe them doing the things that they want it to do.
But also, how do you know what the shareholders want? Or, what is a shareholder? I like thinking of most efforts at shareholder empowerment as kind of “let’s get rid of the agency costs of letting corporate executives use investor money for their personal silly goals and let investment managers use investor money for their personal silly goals.” Read more »
One day somebody will write the history of arguments of the form “we should be allowed to trick people, it’s for their own good.” It sounds like a terrible argument doesn’t it? And yet. There are real points to be made against mark-to-market accounting at banks. And this Investment Company Institute paper from July arguing against floating share prices for money market funds is also sort of persuasive.1 Oh sure, telling investors that every dollar they invested in a money market fund is worth $1.00, even if it’s actually worth $0.997 or whatever, is not true. And sure letting them redeem $0.997 worth of stuff for $1.00 creates all sorts of run-on-the-bank stability problems. But it lets investors treat money market funds as cash! And think of the tax consequences and administrative headaches of a floating share price!
But those arguments are mostly losing. Re: money market funds, a while back Mary Schapiro at the SEC tried to impose rules roughly in the form of “either tell people what their shares are worth or have a capital buffer to make sure they’re worth $1.0000”; she failed to get enough votes, and now the super-SEC that is the Financial Stability Oversight Council have said “you should try that again”2:
The Financial Stability Oversight Council, a board of top U.S. regulators established by the Dodd-Frank financial overhaul, approved several recommendations to overhaul money-market funds in an open meeting Tuesday. The aim of the council’s push is to prevent runs on money-market funds during a financial crisis, as happened in 2008 when Lehman Brothers Holdings Inc. filed for bankruptcy protection.
Treasury Secretary Timothy Geithner, who is chairman of the FSOC, said at Tuesday’s meeting that he hopes the proposal will generate public comment and ultimately put pressure on the SEC to “take this back and propose on its own a set of options” for money-market overhauls.
Here are the FSOC proposals, and I guess they are bad news for money market funds because in a certain light money market funds look suspiciously like “all trick.” Read more »
If you had asked us two years or two months or two days ago if we thought that there would be a time in the near future when Securities and Exchange employees would not be regularly reprimanded for watching porn on their work-issued computers for 98 percent of the workday, we would have said absolutely not. No judgment, but in our professional opinion, people do not go from, among other things:
* Receiving “over 16,000 access denials for Internet websites classified by the Commission’s Internet filter as either “Sex” or “Pornography” in a one-month period”
* Accessing “Internet pornography and downloading pornographic images to his SEC computer during work hours so frequently that, on some days, he spent eight hours accessing Internet pornography…downloading so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office.”
* www.ladyboyx.com, www.ladyboyjuice.com, www.trannytit.com, and www.anal-sins.com
…to living a porn-free existence at l’office. Did we think they’d take baby steps toward that goal? Sure. But when you’ve tried to log on to your websites of choice, on average, 533 times a day, assuming weekends were worked, baby steps means getting yourself to a place where you can do a solid two hours of work each week without hitting up anal-sins.com. So you can imagine (and probably share in) our surprise to hear that, according to a probe by Interim Inspector General Jon Rymer re: “misuses of government resources,” the worst offenses one office was charged with claiming they needed iPads to do their jobs when really they just wanted to watch movies on them at home and going to hacker conferences without encrypting the data on their computers. Read more »
Mortgage-backed securities are sort of conceptually simple – put mortgages in a pot, stir, sell layers of resulting goop – but complex in execution; they have not only economic but also legal and accounting and bankruptcy purposes and so their offering documents are long and boring and filled with dotted and dashed lines and arrows and boxes and originators selling to sponsors selling to depositors selling to trustees selling to underwriters selling to investors. All those arrows serve as a finely calibrated series of one-way gates; each link in that chain is meant to shield the person before the link from something, some real or imaginary claim from the people coming after the link, allowing originators/sponsors/etc. to tell themselves “I never need to worry about those mortgages again!”
Hahahaha no they totally do. Today the Journal and the FT have stories about a possible JPMorgan SEC settlement on some Bear Stearns mortgage practices, specifically (per JPM’s filings) “potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations”. If you’re keeping score these are:
- not the thing where Bear maybe did a shoddy job underwriting mortgages, and
- not the New York state lawsuit involving, besides the shoddy underwriting, Bear Stearns’ settlements of claims against originators, but rather
- the SEC’s investigation of what seem to be those same settlements of claims against originators.1
This is how the FT describes it: Read more »
The Securities and Exchange Commission has launched a probe into the messy departure of Vikram Pandit as chief executive of Citigroup and whether the board of directors of the big bank properly disclosed his ouster, the FOX Business Network has learned. One person familiar with the matter says the SEC’s inquiry is informal and has not reached the level of a full-blown investigation. But it is a sign the SEC is clearly interested in the circumstances surrounding Pandit’s official “resignation” from the big bank. Those details have been in dispute since the October 16 announcement. Both Pandit and Citigroup chairman Michael O’Neill have said in interviews and during conference calls with analysts that the decision was Pandit’s to leave the firm. [FBN, earlier]
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 »