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.”
You could have lots of complaints about the SEC but a fun niche one is that they trample on our fundamental American liberties like the freedom of speech. So, for instance, if you’re an investment manager you can’t really go around telling people how awesome you are at investment managing, even if you are in fact awesome at investment managing. The JOBS Act is changing that, at the margins, and I suggest that you show your support for freedom and American values by advertising on Dealbreaker.
But not by giving money to Mitt Romney! Because of this story in the Journal about how it’s hard for people employed on Wall Street to give money to him, at least in large quantities. The problem is that if you want to give him lots of money you run afoul of contribution limits so you have to instead give money to state Republican committees which, in a clever move, are in uncompetitive states so they can just shuffle money around to his national campaign, and his people will even handle the paperwork for you: Read more »
But Mr. Falcone and the SEC appear divided on two crucial questions, according to people familiar with the matter. The first point yet to be agreed on is the amount of possible financial sanctions, they said. The two sides also must resolve whether as part of the settlement Mr. Falcone would face a temporary ban from working in the securities industry or acting as a director of a public company. The hedge-fund billionaire’s refusal to accept an industry ban, fearing it would essentially end his career, led to the breakdown of settlement talks last year…Harbinger and Mr. Falcone are being probed by the SEC on three fronts. About a year ago, Harbinger disclosed that it was under investigation by the SEC for possible market manipulation. It wasn’t previously reported that the allegation involves a company called MAAX Holdings Inc., now called MAAX Corp., a Canadian maker of bathroom fixtures, according to people familiar with the matter. The SEC also has been looking at whether Harbinger misled investors by failing to disclose in a timely fashion a $113 million loan to Mr. Falcone from the fund’s investors in 2009. Mr. Falcone has now repaid the loan money, which he used to help pay his personal taxes. The third issue the SEC is investigating is whether Harbinger agreed to allow some investors, including Goldman Sachs Group Inc., GS +3.71% to cash out of their holdings while barring other clients from withdrawing their money, or favored Goldman or other investors with information other clients didn’t get during a 2009 restructuring of the firm. [WSJ, earlier]
There’s this thing called the JOBS Act that would basically make it easier for small or smallish companies to raise money by giving investors unaudited financials or not having internal controls or just lying to them on the Internet, which is my racket. I’ve enjoyed reading people really ripping into it*, like Simon Johnson, whose take seems to be canonical, or Yves Smith, whose take is good too but I prefer “Just Open Bucket Shops Act**” to her “Jumpstart Obama’s Bucket Shops Act” if we need a sarcastic acronym and, yeah, I suppose we do.
I mostly agree with the ripping, because, like I’ve said before, either the SEC registration process is necessary to protect investors, in which case it’s especially necessary for smaller newer companies, or it’s not, in which case it’s no more necessary for large companies than for small ones. So fine. But the JOBS Act crowdbuzzwording mania is definitely timely, what with Kickstarter being a thing and the Facebook IPO being the hugest thing in the history of things and also something where people apparently talked about offering shares of Facebook on Facebook because synergies. Anyway it seems likely to me that the widespread desire to loosen securities laws is not driven solely by the desire of businesses to raise capital – since, among other things, as Yves Smith says, crowdmuppeting is a super dumb way to raise capital, and actually come to think of it so are IPOs, kind of – but also by the desire of people who are not quite private equity magnates to get their hot little hands on some shares in their favorite social doodad.
As it stands now, not only can the non-rich not buy shares in Facebook unless they (a) are “accredited investors” ($1mm assets or $200k in income) and willing to get sort of ripped off or (b) just, like, wait a few weeks, but non-accredited investors are also not allowed to even hear about exciting investing opportunities from private companies looking to sell securities. Because it’s illegal to sell unregistered securities***, even if you only sell them to rich people, if you’ve made a “general solicitation” – that is, basically, if you’ve talked about them in pleasing ways to non-rich people. This is why Bridgewater doesn’t advertise on TV, and why no matter how much you want them you can’t get Whitney Tilson’s market insights unless you are an accredited investor on his mailing list, or a Dealbreaker reader, or a human. Read more »
One aspect of good salesmanship is that you have to offer an attractive proposition not merely to the abstract entity that is your nominal client – El Paso, Italy, Greece – but also to the specific human being who is your contact at that client. Telling a corporate treasurer who is five years from retirement that a trade will have a significantly positive NPV due to huge cash flows in years 11-15 is not always as effective a sales technique as buying him a nice steak and an evening of unclothed entertainment. I suspect, though, that the latter strategy is more highly correlated with whatever you’re selling ending up on the front page/op-ed page/sec.gov.
Anyway, I definitely admire these guys for this particular con*:
The SEC alleges that Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it.
Got it? Argyll gave corporate executives margin loans at 50-70% loan-to-value based on the market price of their stock (based on the volume weighted average price over five days leading up to the closing of the loan). They took the stock as “collateral.” They then trousered the stock and sold it for, y’know, 100% of the market value, with 50-70% of that funding the loan and the remaining 30-50% funding miscellaneous expenses that presumably included unclothed entertainment for themselves. The loans had three-year terms and were not prepayable for 12-18 months, so the expected life of the scam was at least 12 months (but see below). 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 »
Here’s a sort of touching monologue from David Einhorn’s call with Punch:
If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done — signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the — you know what’s going on here. And — and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you.
You could sort of see why the FSA read that to mean that he was insider trading. Like …
(1) You have told me something with signalling value. Sorry – “a lot of signalling value.”
(2) I will now act on that signal.
(3) Don’t be mad.
“Signalling value” sure sounds like it means “material nonpublic information,” doesn’t it? Read more »
If The SEC Really Wanted To Get Tough On Securities Fraud It Would Have Added Some Minor Inconveniences To Its Multi-Hundred-Million-Dollar FinesBy Matt Levine
It’s clear that I am a terrible person because I continue to be unable to get all that excited about banks that commit fraud. And the big thing today is that the SEC doesn’t put banks out of business just for committing fraud, which I think is rather sporting of them but lots of people disagree.
Here’s the issue:
By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong.
An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.
JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.”
Ha ha ha strong record of compliance with a fraud case every two years or so! What a sham! Except that JPMorgan actually does have a strong record of compliance, and is generally viewed as being pretty conservative and law-abiding.
This stuff stirs emotions because it’s hard to think about who is being punished here. Corporations are people, my friend (still), but in the way Mitt Romney meant it, not in the way everyone pretended to take it. Like: JPMorgan employs a lot of people, and some of them are maniacs and crooks and liars and most of them aren’t and that’s true of … the SEC, for instance, and The New York Times,* and anyone else who wants to give them shit for their fraudulosity. But JPMorgan isn’t an individual human, not any more anyway. So saying “JPMorgan is crooks” is sort of nonsensical. Read more »
Mr. Mason, who sometimes posts online videos of himself in his underwear doing yoga or dancing, sat down for a recent interview in his Chicago office to discuss challenges facing the company and his ability to handle them. WSJ: The SEC also took issue with a memo you wrote to employees during the quiet period that was leaked to the press. Mr. Mason: I wrote the memo because 23-year-olds were coming into my office and asking how they should respond to their parents when they ask if Groupon is about to go bankrupt. The risks of not communicating to my employees were greater than the risks of doing otherwise. If I knew it was going to leak, I would have been less bizarre, and I wouldn’t have made a joke about my now-wife. She was upset. (He joked that his then-girlfriend asked him why he never said anything nice about her.) [WSJ]
You can’t argue too much with the SEC’s gentle suggestion that maybe banks should tell people, in a consistent format, what’s up with their European debt exposure. It seems to be a thing that is on investors’ minds, so why not have the SEC try to put their minds at ease:
“Our staff has been working with banks to improve their disclosure about sovereign-debt exposure for several months,” SEC Chairman Mary Schapiro said in a written statement released Monday. “Even so, I understand this is an area of focus and uncertainty that could really benefit from further transparency and consistency, particularly as we head into annual reporting season. I think the staff’s guidance should help achieve that goal.”
Yep. The release is here and contains a good list of things you might want to know, including things like “The effects of credit default protection purchased separately by counterparty and country,” “The fair value and notional value of the purchased credit protection,” and “The types of counterparties that the credit protection was purchased from and an indication of the counterparty’s credit quality.” It’s not exactly a standardized form for disclosure that will allow everyone to do detailed comparison among the banks and/or sleep well at night, but it should at least shame people into giving reasonably detailed substantive information so that when your bank blows up you at least won’t be surprised at which European country did it. That seems good. It even seems like what the SEC is supposed to do.
The Journal, ever fair, finds a token objector, sort of: Read more »