SEC

  • 14 Aug 2012 at 5:02 PM

Wells Fargo Is A Little Sorry That It Sold Securities It Knew Nothing About

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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 »

  • 09 Aug 2012 at 6:16 PM

Money Market Funds Can Lose Money, Just Not Your Money

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Money market mutual funds are among other things “mutual funds,” meaning that they’re piles of stuff owned by people called “shareholders.” The shareholders ultimately own the stuff, so if you put $100 into a money market fund and it invests it in stuff and the stuff loses half its value then you should only get back $50. This is what it means to be a shareholder: you have a stake in a business, here the business of sitting around looking fondly at a pile of AAA-rated short-term debt instruments, and when that business does well you share in the rewards and when it does poorly you bear the losses.

But nobody goes around thinking of themselves as “shareholders” in the venture of money-market-fundery; rather, they think of their money market funds as basically being “cash” and when they put in $100 they expect to get back $100 and also, in some historical periods rather far removed from ours, a thing that they would call “interest,” though of course “shareholders” don’t get “interest.”*

One tip that no one thinks of MMMF shareholders as shareholders is this post from John Carney about a “secretive government program to bail out money-market mutual funds,” specifically treasury’s guarantee of money market fund asset values announced in 2008, which I suppose was secretive in the narrow sense that only now and via FOIA are we learning which money market funds took advantage of it.** In the broader sense, it was not particularly secretive, as Treasury actually announced the shit out of it for the fairly obvious reason that a government guarantee cannot restore confidence in a beleaguered asset class if you do not tell anyone about it.***

Secretive or otherwise, though, it was a weird program: while you might think that the government was too solicitous or not solicitous enough of various creditors of various things during the financial crisis, this is the only place I’m aware of where shareholders in a thing were guaranteed not to lose money on their shares in that thing. But, y’know, “shareholders.” Read more »

  • 06 Aug 2012 at 12:22 PM

SEC Lawyers Annoy Their Way Into The Hearts Of Private-Sector Employers

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So let’s say you’re a bank and, redundantly, you are in trouble with the SEC. And you want to hire a new lawyer to get you out of that trouble, because your old lawyers got you into it. You decide, sensibly, to hire a lawyer directly from the SEC, both because those lawyers have valuable experience and contacts and because they lawyers are paid so much less than your other lawyers that they’re a bargain. Who would you rather hire:
(1) An SEC lawyer who has always been nice to you, settled cases easily, not pushed too hard on investigations, and waived collateral consequences of your repeated securities fraud, or
(2) A lawyer who has always been a huge dick to you, litigated everything to the death, made your life difficult, and taken unreasonable positions?

If you chose option (1), you probably don’t work at a bank.

This study of the SEC revolving door is actually pretty neat, though suspect for reasons Yves Smith points out.* The most important conclusion is that the prospect of leaving the SEC to go represent companies doesn’t make SEC lawyers nicer to the companies: in fact, SEC lawyers who later leave to represent clients before the SEC seem to litigate more aggressively than those who don’t. But that’s actually pretty obvious, isn’t it?

For one thing, aggressiveness correlates with ability and intelligence and hard work and the general facepunching ethos required to succeed in private industry. The SEC lawyer who goes home at five o’clock after a relaxing day of ignoring financial fraud probably won’t fit in at a bank with a fast-paced culture of committing financial fraud. Read more »

  • 12 Jul 2012 at 5:30 PM

Mitt Romney, Bill Ackman Undone By Forms

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Let’s talk about two tenuously related stories about government filings, why not. I don’t have much to say about this Mitt Romney Bain thing today but go read it, it is fascinating. Basically Mitt Romney certified under penalty of perjury in some federal electoral forms* that he was not involved with Bain Capital after 1999, and he also certified under penalty of perjury in some SEC forms that he was CEO of Bain Capital from 1999 to 2002, so by the fallacy of the excluded middle (?) he is definitely guilty of a federal felony,** which sounds terrible until you realize that so is everyone else, really, because breathing air is a federal felony, but this is a different obsession of mine.

Anyway Dan Primack is defending Romney and basically saying “being the CEO of some old fund for SEC filing purposes is not the same thing as actually running a private equity firm, and you can tell from the fund marketing documents that he wasn’t actually running it,” which I suspect is roughly correct as a matter of his working life, and as a matter of acquitting him of felonies, though also not entirely politically palatable – “when I said I wasn’t involved with Bain Capital after 1999, I meant except for being CEO,” etc. etc.

Moving on quickly to the other piece of federal filing arcana: Bill Ackman is buying some P&G stock so he can sell shampoo at Burger King or something. Buy! Or sell! Or something. But the weird thing to me was: how often do you see a story that is like “activist investor is granted early termination on HSR filing”? Is “never” the right answer? Maybe? Read more »

Phil Falcone Is Preparing For Trial On SEC Fraud Charges By Alienating All Of His Witnesses

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Even if Wilbur doesn’t testify I’m pretty sure that a trial of the SEC/Falcone case will be something to behold – if it happens, which the public posturing suggests it will. The Journal previews his defense today and it sounds like courtroom tensions will run high:

Mr. Falcone plans to try deflecting blame to a former Harbinger operating chief and two lawyers who advised him to borrow $113.2 million in 2009 from a Harbinger fund to pay his personal taxes even though other investors were blocked from withdrawing money, according to people familiar with his defense. … Mr. Falcone is expected to contend that borrowing the money was the best option for his investors, since most of his assets were illiquid and because of what he believed to be a lack of financing alternatives. The loan also prevented a possible tax lien on his Harbinger assets, which could have hurt the fund, according to the people familiar with his defense.

There is some question as to who will testify to that effect, though, since all the people he’s blaming don’t seem to be playing along: Read more »

  • 27 Jun 2012 at 4:30 PM

Phil Falcone’s Alleged Piggish Behavior Made Him Some Enemies

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If you knew nothing about Phil Falcone but what you read in the SEC’s assortment of complaints against him today, you would probably conclude that he’s kind of a dick. The loan thing, of course – Falcone borrowed $113mm from Harbinger at the same time he was preventing investors from withdrawing their money – but also a whole range of new and exciting charges announced today. Like that time he got mad at his prime broker and so bought 113% of the issue of a bond that the prime broker was short, and then called in the prime broker’s borrow to screw them (and gloated to them about it). Or the time – sorry, three times – that he shorted stock of companies that were doing equity offerings and then illegally covered his short with his allocation in those offerings.

Robert Khuzami is right about the marvelous variety and inventiveness of Harbinger’s scammy ways, but lots of people do lots of bad things on Wall Street. It’s just that usually their victims are either diffuse markets (insider trading) or widows and orphans (Ponzi schemes etc.) – it’s rare to spend so much time screwing so many big institutions. And it’s maybe even rarer for the SEC to stick up for those institutions.

Start with the thing that’s gotten the most attention so far: the loan that allowed Falcone to take $113mm out of his fund when investors were not allowed to redeem. How did no one tell him that that was a bad idea? Well: Read more »

  • 01 Jun 2012 at 1:55 PM

Market Volatility Soon To Be Just A Distant Memory

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So, um, news today, not great, huh? So no surprise that stocks are down. It’s okay though, since the SEC has cooked up a cure:

The Securities and Exchange Commission has approved two proposals submitted by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) that are designed to address extraordinary volatility in individual securities and the broader U.S. stock market.

No, kidding, not a cure for bad jobs reports, but this is a weird phrasing isn’t it? The approved proposals are just better-thought-out circuit-breakers for single stocks and the broader market. Since getting pummeled for being an idiot about market structure, I am attempting to be less of an idiot about market structure (until now!), and one thing that seems to be settled wisdom is that trading halts have a function in reducing volatility associated with order imbalance caused by ignorance, panic, or fat-fingering, but don’t do much to cure volatility associated with, y’know, economic volatility. Not that the SEC is claiming that they do, exactly, but “easing volatility” doesn’t seem like exactly the result here.

The SEC approved two rules today. Read more »

  • 26 Apr 2012 at 4:07 PM

Chesapeake’s CEO Inconvenienced By Having To Find New Creative Ways To Exploit Shareholders

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You may remember that Chesapeake Energy got some bad press last week for giving its CEO interests in all of its wells, and that CEO taking hundreds of millions of dollars in loans against those interests, and Chesapeake maybe not telling shareholders about that in the most forthright conceivable way. At the time, Chesapeake’s general counsel Henry J. Hood let everyone know that everything was fine and Chesapeake’s board was on top of the situation. Today, though, we learn that Henry J. Hood’s bosses are not as supportive as, I dunno, Dan Walfish’s*:

Chesapeake also wishes to clarify a statement appearing in its April 18, 2012 press release captioned “Chesapeake Energy Corporation General Counsel Henry J. Hood Issues Statement.” The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.

That statement doesn’t need clarification! That statement is perfectly clear! “The Board is fully aware of the existence of the financing transactions” means “everyone on the board is aware that financing transactions exist.” If Henry J. Hood had meant “The Board is fully aware of the details and amounts of the financing transactions,” he’d have said that. Being aware of the existence of a thing is the lowest level of knowledge that you can have about that thing. I am fully aware of the existence of Pinterest. The full extent of my knowledge about Pinterest is that it exists. See? Shut up everyone who’s all “‘fully aware’ means ‘generally aware’ now HUH LAWYERS?” Read more »

  • 26 Apr 2012 at 1:25 PM

The Securities And Exchange Commission Requests A Little Credit Where Credit Is Due, Please!

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Yesterday, the Wall Street Journal ran a front page story reporting that the Securities and Exchange Commission had “blown” the cover of whistleblower Peter C. Earle. The article claimed that Earle, a former employee of Pipeline Trading Systems turned government informant, had his identity “inadvertently” revealed through a “gaffe” on the part of an SEC lawyer, who showed a Pipeline exec “a notebook from the whistleblower filled with jottings about trades, calls and meetings.” The executive was said to have recognized Earle’s handwriting and told his colleagues, who had previously suspected but did not know for sure that “Pete’s the whistleblower.” The story was easy to believe because if you’ve been keeping up with the SEC over the last number of years, you know that this sounds exactly like something they’d accidentally do. Except that whereas the regulator fully copped to, for example, missing Madoff while trying to access ladyboyjuice.com 385 times/day, it says that this accusation? Is bull shit. It did not “inadvertently” “blow” anyone. Read more »

  • 25 Apr 2012 at 11:55 AM

SEC Burns Whistleblower In The Most SEC Way Possible

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In recent years, the Securities and Exchange Commission has had its share a fuck-ups come to light. The regulator took a pass on heeding the warning signals by Bernie Madoff himself that he was running a Ponzi scheme, it chose to go after David Einhorn rather than Allied Capital when the hedge fund manager suggested all was not right at the company, and yesterday, it was announced that the Commission is suing Egan-Jones for lying about having rated 150 ABS bonds on an SEC application four years ago (in reality it had rated zero), information that could have been fact-checked at the time but was not because there were new clips on www.ladyboyjuice.com, www.anal-sins.com, and www.fuck-my-wife.com to watch. Today the team scored a new victory when it outed an informant (in typical amateur hour fashion, natch). Read more »

  • 24 Apr 2012 at 6:00 PM

Quo usque tandem abutere, Egan-Jones, patientia nostra?

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Lawyers all know the old case in which a guy sued another guy over a dead fox that Guy A chased and Guy B caught. Who owns the dead fox?, the case asks. It’s hard to care. My professor asked the better question, which was: just how much was a dead fox worth? The answer, it turns out, is “significantly less than the amount you’d have to spend on lawyers to become a famous old case.” So why did they spend so much on lawyers? Unclear. But the moral of the story is that if you see a lawsuit over something really trivial, it’s probably about something else. My professor added, “usually a love triangle.”

So who is Sean Egan sleeping with? He is, of course, the president of Egan-Jones Ratings, which the SEC sued today over … well, the SEC complaint is amazing: Read more »