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 […]
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 sound 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.
Here’s its strongly worded letter to the Journal saying as much:
The Securities and Exchange Commission in no way exposed Peter Earle as a whistleblower, and our use of his notebooks in an investigative deposition was neither “inadvertent” nor a “breach” or “gaffe” (“Source’s Cover Blown by SEC,” Page One, April 25). It was a deliberate decision, which SEC lawyer Daniel Walfish discussed in advance with his supervisor, who was present for the deposition in which the notebooks were exhibited. Nor did the fully authorized use of the notebooks in any way compromise Mr. Earle or the integrity of the SEC’s investigation of the Pipeline Trading Systems matter.
Although it was widely known among executives of Pipeline and Milstream Strategy Group that Mr. Earle had approached the SEC after he was terminated from Milstream—a fact volunteered by several witnesses and acknowledged by Mr. Earle long before any use of his notebooks—the SEC declined to confirm his identity and still treated his status as a cooperating witness as confidential. The SEC made sure to obtain all of the notes of the approximately six Milstream traders, and in the SEC’s deposition of Gordon Henderson (the supervisor of Mr. Earle and the other traders), the SEC used other traders’ notes along with those of Mr. Earle. The use of these traders’ notes—highly relevant evidence prepared in the ordinary course of their work at Milstream—in no way revealed whether Mr. Earle or any other trader was or was not cooperating with the SEC.
George S. Canellos
New York Regional Office
U.S. Securities and Exchange Commission
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.
Federal securities regulators, in a sensitive breach, inadvertently revealed the identity of a whistleblower during a probe of a firm that ran a stock trading platform. The gaffe by the Securities and Exchange Commission occurred during an investigation of Pipeline Trading Systems LLC when an SEC lawyer showed an executive who was being questioned a notebook from the whistleblower filled with jottings about trades, calls and meetings. The executive says he recognized the handwriting. Pipeline, which didn’t admit or deny the allegations, was the subject of a page-one Wall Street Journal article earlier this month. The article didn’t name the whistleblower, but he has now agreed to be publicly identified. He is Peter C. Earle, 41, a former employee of a Pipeline trading affiliate. Mr. Earle said he was “disappointed” the SEC took steps in its probe that ended up disclosing his identity to Pipeline. The SEC confirmed showing the notebook to an executive of the business it was investigating. SEC officials said there is always a risk a whistleblower’s identity might be disclosed during an investigation, but its practice has been to avoid unnecessarily revealing an informant’s identity.
The person shown the notebook (in a November 2010 SEC interview), Gordon Henderson, was the head of Pipeline’s trading affiliate, Milstream Strategy Group. He said in an interview that he previously suspected Mr. Earle was an SEC informant. Mr. Henderson’s desk was near Mr. Earle’s in Milstream’s New York office, and he said he recognized Mr. Earle’s handwriting in the notebook.
Related: “Mr. Earle said he made other internal complaints about trading, and was fired on April 3, 2009. Mr. Henderson said the reasons for dismissal included poor performance and a belief Mr. Earle was having an affair with the wife of another Milstream trader at the time. Mr. Earle denied both allegations, calling the notion of poor performance ‘ridiculous.'”
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, […]
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 […]
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 […]
Remember how when Groupon was going to go public it had this cute accounting category that it called “adjusted consolidated segment operating income” which is mostly a long way of saying “earnings before everything“? If not, quick recap: (1) that happened, (2) everyone made fun of their initial S-1 filing because of it, (3) the […]
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 […]
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).
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:
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?
Now as we’ve discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn’t be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it’s just not illegal to trade on material nonpublic information. It’s only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn’t sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren’t tipping him for nefarious purposes, but were instead sounding him out on the company’s behalf as a shareholder and potential investor in a new capital raise, they weren’t breaching their duty of confidence. You could quibble with the details of that but it’s basically the law here. In England not so much.
That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information:
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 […]
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 […]
The insurrection worked! Everyone just take the rest of the day off and catch up with your favorite porn sites, okay?
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 […]
I try to be honest when telling you that a court complaint or SEC filing or research paper is a fun read, just in case you might go read it, though of course there’s no accounting for tastes and I may enjoy many things that you don’t.* And that’s okay. In any case I doubt […]
You may remember that a while back the SEC decided to modernize its computer capabilities by deleting all the porn* and replacing it with algorithms that could catch other algorithms, sort of like Tron. Apparently that worked: On Thursday, a new “analytics” division tasked with mining hedge fund data announced actions against six individuals and […]
The SEC tends to come in for a lot of good-natured joshing around here, and elsewhere, for amusing foibles like spending their days surfing porn, ignoring multibillion dollar Ponzi schemes when they’re told about them directly, and complaining bitterly when anyone suggests that their priorities might be misplaced. Also on some people’s complaint list is […]