Eideard

May 6, 2010
Daylife/Reuters Pictures used by permission

Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making market swings worse…

Regulators are playing catch-up. In the United States and Europe, they have recently fined traders for using computers to gain advantage over slower investors by illegally manipulating prices, and they suspect other market abuse could be going on. Regulators are also weighing new rules for high-speed trading, with an international regulatory body to make recommendations in coming weeks.

In addition, officials in Europe, Canada and the United States are considering imposing fees aimed at limiting trading volume or paying for the cost of greater oversight.

Perhaps regulators’ biggest worry is over the unknown dynamics of the computerized stock market world that the firms are part of — and the risk that at any moment it could spin out of control. Some regulators fear that the sudden market dive on May 6, 2010, when prices dropped by 700 points in minutes and recovered just as abruptly, was a warning of the potential problems to come. Just last week, the broader market fell throughout Tuesday’s session before shooting up 4 percent in the last hour, raising questions on what was really behind it…

High-frequency trading…done by independent firms or on special desks inside big Wall Street banks, now accounts for two of every three stock market trades in America…

Even the traders’ authorized activities are coming under fire, especially their tendency to shoot off thousands of orders a second and suddenly cancel many. Long-term investors like pension funds complain that the practice makes their trading harder…

In the United States, the Securities and Exchange Commission has been looking into the new market structure for almost two years…Looking and looking and looking. Though it gets in the way of lunch – sometimes.

And the S.E.C. last year proposed what would be an even more high-powered monitoring system called a consolidated audit trail that would gather data on trades in real time from all United States exchanges, and be a powerful tool in helping regulators piece together events in case of another flash crash…

That’s called building a better barn door after the stables are empty. But, the SEC will have sufficient information on how to construct a great looking screenplay about one more failure to act on behalf of investors.

Scumbag-in-chief Thomas says corporations have a right to political secrets

A U.S. Supreme Court ruling last year opened the floodgates to corporate political donations, much of it secret, but a process begun in another government agency may force those donations into the light of day…

The Supreme Court’s narrow decision in Citizens United vs. the Federal Election Commission…said the political speech of corporations was protected by the First Amendment. That applied even if the funds corporations were spending in political races belonged to stockholders…

Justice Kennedy said limiting corporate political contributions was an exercise in thought control…Not that Justice Kennedy has anything against thought control on behalf of corporations.

Since then, Americans were faced with the prospect of increasingly expensive elections funded by increasingly covert political donations from corporations, not from individuals, with both major parties, Democratic and Republican, scrambling for their share of unlimited money.

Riding to the rescue were 10 corporate law professors who call themselves the “Committee on Disclosure of Corporate Political Spending.” In August, the group submitted a “petition for rulemaking” to the Securities and Exchange Commission with a simple message: “We ask that the commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities.”

In other words, if executives want to participate in high-stakes politics using corporate funds, they should have to publicly tell stockholders what they’re doing. After all, those corporate funds belong to the stockholders, not corporate management with their own political agendas…

“Disclosure of corporate political spending is necessary not only because shareholders are interested in receiving such information, but also because such information is necessary for corporate accountability and oversight mechanisms to work,” the petition argued. “The Supreme Court has often recognized, and indeed relied upon, these accountability mechanisms, particularly when corporations use shareholder resources for political purposes…

The petition was filed using Rule 192. Under the rule, if the SEC decides to act on the petition it must file notice in the Federal Register of the time and place of the rulemaking procedure.

But the SEC is under no compunction to act on the petition at all. Meanwhile, the money is flowing and the clock is ticking toward the 2012 election.

The odds are split on whether or not the SEC actually gets off their rusty-dusty and does anything about this petition for a decision.

On the other hand, the SEC is still a bit gunshy about appearing to be complete phonies under the corporate thumb – even though it’s true – because of all the bad press they’ve gotten for ignoring the buildup of corruption that dropped everything from the Madoff Ponzi fraud to the subprime massacre and the resulting Great Recession – into their responsible laps. They may do something about the petition just to cover their buns.

I’ve seen panic. I traded through panic in the late 90′s, as well as the late and early aughts. Panic isn’t a friend of mine but we sometimes see one another at the same parties. This sell-off is not panic. Not yet anyway, but we’re getting close.

Perhaps Obama should appoint Rick Perry as head of the SEC?

Federal criminal authorities are investigating whether a former U.S. securities regulator inappropriately represented alleged fraudster Allen Stanford after he left the agency in 2005.

Spencer Barasch, former head of enforcement for the U.S. Securities and Exchange Commission in Fort Worth, Texas, is being probed by the U.S. Attorney’s Office and the FBI…

The criminal probe follows SEC internal findings that Barasch made numerous requests after he left the SEC to represent Stanford and was turned down each time.

Barasch persisted in his requests even though he directly dealt with Stanford matters while at the SEC and was partly responsible for ignoring repeated red flags SEC examiners raised about Stanford as early as 1997, Kotz found in a 2010 report. He later eventually did provide some legal counsel to Stanford in 2006, the report found…

The agency finally filed civil charges against Stanford in February 2009. Stanford was arrested in June 2009 and criminally charged with fraud in connection with a $7 billion scheme linked to certificates of deposit issued by his Antigua-based banking company…

The testimony about Barasch came on the same day the Project on Government Oversight, a government watchdog group, issued a report about the “revolving door” at the SEC. It found that 219 former officials at the SEC have left since 2006 to help clients with business before the agency.

Some members of Congress are calling for tighter rules. Not bad idea. But, for decades there was little enforcement of existing rules. Why should we expect that little bit of change to continue – if Congress hasn’t changed essential views about oversight and regulation?

SSA Mark Hitts, SSA Susan Kossler

Bernard Madoff — the architect of history’s biggest Ponzi scheme — and Gary Ridgway – the Green River killer — would seem to have little in common aside from being branded as “monsters” in the tabloids.

But a team of FBI agents, the same ones who specialize in helping local police track down serial killers like Ridgway, are using their expertise in behavioral profiling to target white collar criminals like Madoff.

For about two years now, agents with the Federal Bureau of Investigation’s Behavioral Analysis Unit have been consulting with their colleagues in New York who specialize in securities fraud detective work. The BAU agents are going over the case files put together by the FBI for Madoff and other convicted scammers like Bayou Group’s Samuel Israel, whose $400 million hedge fund turned out to be Ponzi scheme, and former Democratic fundraiser Hassan Nemazee, who stole nearly $300 million from Citigroup and two other big banks.

The hope is the BAU agents, whose work in profiling serial killers has been popularized in books, movies and on TV, can get into the minds’ of fraudsters and see what makes them tick…

The expanded efforts to sniff out white collar crime arise from a deep-seeded belief shared by many in law enforcement – that fraud is rife in some corners of Wall Street and corporate America. Manhattan U.S. Attorney Preet Baharara says his office, which is prosecuting the big insider trading case against Galleon Group co-founder Raj Rajaratnam, has found that trading by hedge funds on confidential information is “pervasive and pernicious.”

Indeed, some of the FBI agents in New York assigned to investigating securities fraud openly describe some of their targets as operating like “professional criminals” – the kind of language you might expect agents to use when discussing the Mob or other organized crime syndicates…

Yet the agents with the FBI’s behavioral group, some of whom also are active in developing profiles of terrorists and criminals who prey on children, believe they can develop profiling strategies that will help undercover agents ferret out corrupt corporate titans, shady hedge fund traders and other Wall Street con artists. At a minimum, the profilers want to determine if major white collar criminals share enough personality traits and behavioral patterns that agents in interrogations and investigations could use the information they glean…

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Two women are fending off a vicious man-handling of investor protection. As Congress pettily wrangles over the debt limit and the next budget, Mary Schapiro and Elizabeth Warren are fighting to protect you against the ravages of Wall Street.

Wall Street and its Republican allies would like to make the Dodd-Frank financial reforms disappear. The money trust has been pouring millions into lobbying to eviscerate the budget of the Securities and Exchange Commission and blocking the formation of the Consumer Financial Protection Bureau…

While the SEC gathers most of its revenue from fees and fines, it can’t seed key investor protections like an office of investor advocate without the additional funds. Its budget was supposed to double under Dodd-Frank over the next five years. The money trust wants to keep the status quo and de-fund the agency…

Elizabeth Warren is fighting a separate battle to save the funding and independence of her consumer bureau, which President Obama asked her to start up. Republicans have proposed that another commission run the agency or answer to other regulators, which is the bureaucratic equivalent of neutering it.

The consumer bureau, Warren hopes, would curb anti-consumer credit practices in banking. Her common-sense approach is simple: Boil every credit agreement down to a plain-language form that tells you how much it will cost you, is it affordable and is it the best deal. That’s something that would benefit every American who gets a credit card, mortgage or other financing.

Not only are GOP proposals punitive to Warren’s fledgling agency, they are unfair. No other banking agency would have to answer to a commission or be hostage to Congressional appropriations. The Office of the Comptroller of the Currency, a banking regulator, has a single director and obtains its budgets from bank fees, for example…

There shouldn’t even be a fight over these two agencies. After the money trust nearly deep-sixed the global economy in 2008, triggered a massive recession and unemployment, they should welcome more cops on the beat. They are like three-year-olds with a pile of money and an endless supply of finger paint. They need parental supervision or things will get messy again.

The Republican Party and their fraternal flunkies in the Democrat Party would like nothing better than to leave investment banks and their frontmen in the “analyzing” business free to handicap every Main Street individual who invests on their own. Keeping the markets a closed corporation as far as honesty and opportunity are concerned – remains the operating framework of politicians bought and paid for by Wall street.

A new journal article in the May issue of Accounting Review shows that sell-side financial analysts expend greater effort to generate earnings forecasts of publicly traded firms with less readable 10-K filings. This increased effort by analysts results in earnings reports to investors that contain more information—but less accuracy and greater uncertainty.

Required annually by the SEC, 10-K reports provide a comprehensive overview of a company’s business and financial condition and include audited financial statements.

“Given the difficulty of following firms with less readable disclosures, analysts who choose to follow these firms likely exert greater effort to do so,” said Reuven Lehavy…. “On the one hand, lower readability of firm financial disclosures can increase the cost of processing the information in these disclosures and, therefore, can increase the demand for analyst services.

“On the other hand, less readable disclosure can increase the costs of analyst coverage. That is, analysts bear greater information-processing costs and higher private search costs for this information, which can lead to less accurate forecasts.”

Lehavy and Ross School colleagues Feng Li and Kenneth Merkley measured the readability of more than 33,700 observations of 10-K filings from 1995 to 2006. Using the Fog Index developed by the computational linguistics literature, they were able to determine the written complexity of 10-K reports by counting the number of syllables per word and number of complex words per sentence.

Through statistical analysis, the researchers found that more financial analysts follow firms with less readable 10-K reports (which suggests a greater demand for analyst reports for these firms); these analysts take, on average, two days longer to issue a first forecast revision following a 10-K filing (which suggests more effort put forth by them); and provide earnings forecasts that result in proportionally higher firm returns associated with their reports (which suggests that investors find these analysts’ reports more informative).

However, the study shows that analyst earnings forecasts for companies with less readable 10-K reports have greater dispersion, are less accurate and are associated with greater overall analyst uncertainty.

AFAIC, yet another reason to cast a dim eye on such reports. Poisonally, I’m happy enough with raw data and analyzing it myself – or following the work of someone who did the same. Futzing around with reports generated under the premise of confusing the government, satisfying the minimum intent of reporting regulations – is a waste of time.

Daylife/Getty Images used by permission

If a company’s financial reporting were so bad that its auditor had pointed out significant weaknesses in its accounting for seven years running, the Securities and Exchange Commission would most likely be all over it.

But what if the company were the S.E.C. itself?

Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits…

The auditor did not accuse the S.E.C. of cooking its books, and the mistakes were corrected before its latest financial statements were completed. But the fact that basic accounting continually bedevils the agency responsible for guaranteeing the soundness of American financial markets could prove especially awkward just as the S.E.C. is saying it desperately needs money to increase its regulatory power.

Like the rest of the federal government, the S.E.C. is operating without an increase in its budget, which was $1.1 billion last year. With President Obama talking about extending the freeze and lawmakers continuing their criticism of its embarrassing performance before the financial crisis, the agency’s prospects for more money appear bleak.

That has ominous implications for investors. The S.E.C.’s technology systems, for example, lack the ability to perform sophisticated analysis of large batches of financial material. As a result, a Congressional report says, S.E.C. analysts sometimes resort to printouts, calculators and pencils. While investigating the “flash crash” of May 6, 2010, S.E.C. computers were so strained by the crush of data from just one day of trading that it took three months to figure out what had happened…

Still, by several measures, the S.E.C. is far from starved for money. Its $1.1 billion budget in 2010 was 15 percent higher than the $960 million it received the year before — and nearly triple its $377 million budget in 2000…

Mary Schapiro, Obama’s appointee as chairwoman, receives kudos like. “She’s done an awful lot that people should be proud of and optimistic about,” said Annette L. Nazareth…a former S.E.C. commissioner and division director.

Under George W., the budget tripled while investigators spent time trolling for porn on the Web. Now that the commission looks threatening to Wall Street financiers, actually files suit against illegal profiteers, you know that Congress will try to clamp down.

Earlier this month, Goldman Sachs invested $450m in the social network company at a price that valued Facebook at $50bn. It was then reported that the bank was looking to raise $1.5bn for Facebook through an exclusive share offer, known as a private placement, for the bank’s top clients…

The bank planned to set up a “special purpose vehicle” to allow its clients to invest in Facebook. The plan was widely seen as a way to circumnavigate rules that restrict to below 500 the number of US shareholders a private company can have. It subsequently transpired that Facebook was planning to address the 500 rule itself by going public or publishing full accounts…

American law prohibits “general solicitation and advertising” in private offerings, banning banks from promoting an offer by taking out advertisements or communicating with media outlets. A Goldman representative said that the media coverage could have been interpreted by regulators as marketing and publicity in contravention of private placement rules…

The move is a major embarrassment to Goldman. Its clients were reportedly told they would have to pay a minimum of $2m to invest and would be prohibited from selling their shares until 2013. The restrictions proved no barrier to the appetite of the bank’s US clients. Goldman was flooded with requests for shares.

The move will also be a blow to Facebook. Goldman was reportedly aiming to raise $1.5bn for the company but had received orders for $7bn.

Foreign investors are not covered by the same rules and will still be able to participate in the Facebook offering…

The Securities and Exchange Commission is making noises like standing up on their hind legs is easier than they thought. Facebook, Groupon, the discount deal website, LinkedIn, and Zygna, makers of the Farmville simulation game appear to be on the SEC Watch List.

Overdue.

John Doerr, venture capitalist, and Facebook founder Mark Zuckerberg
Daylife/Reuters Pictures used by permission

A red-hot trading market has developed in the shares of the world’s leading social networking companies: Facebook, Twitter, Zynga and LinkedIn. What is unusual is that none of the companies are listed on a public stock exchange. Each is privately held.

Now, the Securities and Exchange Commission wants to learn more about the business of these stock trades. The agency has sent information requests to several participants in the buying and selling of stock in these four companies, according to two people with direct knowledge of the inquiry who requested anonymity because they were not authorized to speak about it.

It is unclear exactly what has piqued the agency’s interest. An S.E.C. spokesman declined to comment on the matter. But the S.E.C.’s interest comes as a crop of new exchanges is popping up to facilitate these trades.

Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies. Though the volume remains thin, the number of transactions is increasing each month. At the same time, Wall Street brokerage firms have begun forming investment pools to buy these companies’ shares…

Who is selling these shares? Much of the supply comes from former employees at these companies and their early stage venture capital investors looking to exit their stakes.

The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple, Microsoft or Google before the rest of the investing public can…

As the volume has picked up, the worth of these nonpublic companies has ratcheted up as well. The combined value of the top 11 private venture-backed technology businesses has increased by 54 percent since June, according to a recent study by Nyppex, a brokerage firm that facilitates trading in private companies…

It is uncertain what exactly the S.E.C. is looking into, but several securities lawyers say it could relate to understanding the number of shareholders at these companies.

That would be relevant to regulators because Facebook and other start-ups have a reason to keep the number of shareholders to under 499. If they had 500 shareholders, S.E.C. rules would require them to disclose their financial results to the public…

Leave it to geeks to attract another new kind of sleaze. The only surprise – here at Lot 4 – is that the SEC is actually getting off their rusty dusty and doing some investigating. Not that it guarantees any response if they discovered illicit activities.