SEC

If you’ve been really closely following the SAC-Diamondback-expert-network-etc.-etc. insider trading investigations you might be able to keep the players straight but it’s beyond me. I have a hard enough time keeping one list of their prison sentences. The SEC’s new case against Whittier Trust and Victor Dosti really ought to come with a flowchart:

During at least 2008, a Dell employee (the “Dell Insider”) passed material nonpublic information regarding Dell to Sandeep Goyal (“Goyal”), an analyst at a New York-based investment adviser who had previously worked at Dell. … Goyal, in turn, passed this material nonpublic information to Jesse Tortora (“Tortora”), who at the time was an analyst at the investment adviser firm Diamondback Capital Management, LLC (“Diamondback”). … Tortora, who was a member of a group of hedge fund analysts who regularly shared material nonpublic information regarding technology companies, passed the material nonpublic information that he received from Goyal to other members of the group, including [Whittier Trust employee Danny] Kuo. … Shortly after receiving the Dell inside information from Tortora, Kuo communicated the information to Dosti.

Oh what the heck here’s a flowchart:

I guess that wasn’t so hard. Read more »

Badin Rungruangnavarat knows what we’re talking about. Read more »

Today in when prediction-markets-are-outlawed-only-outlaws-will-run-prediction-markets news, the SEC and CFTC have sued Banc de Binary, a prediction market that sounds like it’s no Intrade:

Banc de Binary solicited customers in the United States. … It broadly advertised its websites to individuals in the United States through YouTube videos, spam emails, and other internet-based advertising.

Also it’s a “Cypriot and Israeli company … based in the Republic of Cyprus and regulated by the Cyprus Securities and Exchange Commission (‘CySEC’),” so even if they are keeping your money in an escrow account at a bank it’s still not safe, ZING.

I dunno, is Banc de Binary a scam? I like the name: you say “prediction market,” they say “binary option,” someone says “online betting,” but they all mean roughly the same thing. And the website has I think median levels of eye-bleeding scrolling overpromising hyperbolic red-and-green flashing misery for an online trading site. “Spam emails” sounds bad but for the rest BdB advertises 24/7 live customer support and the SEC backs them up, saying as though it’s a bad thing “Banc de Binary also solicited potential investors in the United States by sending them emails, calling them on the telephone, and chatting with them via instant messenger over the Internet.”

Also the SEC’s (and CFTC’s) allegations about the harms of BdB are pretty meh. E.g.: Read more »

Remember when Facebook IPOed last May and it was a mess? Today the SEC released its amusing order fining Nasdaq $10 million for the mess and explaining what happened. Some computers were having a stressful day at work and so they decided to give up and hide out in the nap room, is the gist of it. I feel like I’d get along with those computers.

What started the mess is that Nasdaq opens the trading of a newly IPO’ed stock with an opening cross where it compiles quotes for a while and then crosses them in one big opening cross before continuous trading starts. And it uses the following process to do the opening cross:

  • 1 Get a bunch of orders over a ~20 minute period before trading starts
  • 2 Use a program called the IPO Cross Application to calculate the clearing price and shares crossed based on those orders, which takes a few milliseconds
  • 3 Check if any of the orders were cancelled during those milliseconds
  • 4 If they were, delete those orders and Goto 2

Did you spot the problem?1 Nasdaq’s systems engineers did not, even after the IPO Cross Application had been running on an infinite loop for twenty minutes. The SEC caught it, though, reading their order, I was worried that they’d fallen prey to it as well: Read more »

A criticism of the SEC that you’ll sometimes hear is that it’s mostly a bunch of lawyers, and two things that are broadly true of lawyers as a class is that they are good at close readings of dense texts and terrified of math. This means, some might say, that the agency is ill-equipped to regulate the high-tech quantitative world of modern finance. So it’s obscurely pleasing to read that the SEC’s office of quantitative research is rolling out a new program that applies high-tech quantitative methods to, basically, close reading of dense texts:

An initial step in the SEC’s new effort [to crack down on accounting fraud] is software that analyzes the “management’s discussion and analysis” section of annual reports where executives detail a company’s performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds “look very promising,” said Harvey Westbrook, head of the SEC’s office of quantitative research.

Companies that bend or break accounting rules tend to play a “word shell game,” said Craig Lewis, the SEC’s chief economist and head of the division developing the model. Such companies try to “deflect attention from a core problem by talking a lot more about a benign” issue than their competitors, while “underreporting important risks.”

It’s also pleasing to hear that a CFO’s guilty conscience over his earnings manipulation seeps directly into his prose. Though the article is a little light on the details of the SEC’s earnings-manipulation model, which I guess makes sense, since “companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency’s computers,” which I would really like to see.1 That could be a mixed bag; the Journal hints that it might result in easier-to-read but more grandiose filings:2 Read more »

“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 »

You don’t have to agree with everything the SEC does to respect the way they do it: passive-aggressively. Felix Salmon this morning discussed “the problematic JOBS Act, where the SEC has done a good job of stalling on various silly yet Congressionally-mandated reforms,” and the SEC’s similar strategy of “being sensible and dragging its feet” on Congressional dedecimalization proposals. If you’re a regulatory agency tasked by Congress with implementing a new law, and you don’t feel like it, the best approach is always to commission a study.

Is that what’s going on with ratings agency reform proposals?

The 2010 Dodd-Frank financial-overhaul law requires the SEC to create a board that would assign a rating firm to evaluate structured-finance deals or come up with another option to eliminate the conflicts that could arise when debt issuers pay rating firms to rate their bonds. … Sen. Al Franken (D., Minn.) proposed the legislation, which is known as the Franken Amendment.

… Mr. Franken defended his proposal Tuesday to attendees at the round table, including SEC commissioners and SEC Chairman Mary Jo White. He also called on the agency to make changes to the credit-rating industry.

“My plea today is that you take action,” Mr. Franken said. “Millions of Americans lost their jobs because the credit rating agencies didn’t do their jobs,” he said.1

The agency published a report in December – six months late – that was widely expected to announce regulatory changes. Instead, the report proposed more discussion and the convening of a round table.

So hahahaha SEC you suck but the problem seems genuinely hard doesn’t it? Read more »