Snubbing Stub Quotes

10 11 2010

This is a stub blog post.

The SEC has approved new rules that would prohibit Stub Quotes.

What’s  a stub quote? It is a bid on a stock that is intentionally low, when the quote for the stock is high.  It is used solely as a placeholder on a bid for the stock.  It is not to be taken as a serious offer.

Why ban it? It is thought that the presence of stub quotes in the buying algorithm of electronically traded stocks caused the May 6, stock market flash, when the algorithms mistook them for serious bids.  This combined with the ban on “Naked Access” is intended to prevent further flashes.


Sweepting Changes for the SEC and CFTC

17 06 2009

The White House today released a “white paper” outlining their plans for reform for the regulation of financial markets.  Two major changes will greatly affect the world of Securities Markets.  The first deals with Hedge Fund filings with the SEC.  From the Wall Street Journal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

It seems that the main target of this regulation is not the hedge funds themselves, but Ponzi schemes.  The registration and reserve requirements will have the affect of allowing the SEC to monitor investments closely.  Ponzi schemes by their nature lack reserves because they are structured based on continuing investment and payouts to where their capitol is always less than what was invested.  This will raise large red flags for the SEC which has been criticized for their inability to spot Ponzi schemes.

The second major change involves an increase of police powers by both the SEC and the CFTCWall Street Journal:

The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal….

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan….

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In their conception, the SEC and the SFTC were not designed as policing bodies, but as regulatory institutions.  It will be interesting to see how they make the shift.   It would involve a major shift in the role played by both bodies.  There may even be some constitutional questions regarding federal policing powers.  Congress, and more importantly, the public ought to take a hard look at the Obama plan and scrutinize the proposed changes.

The white paper has been made available by the Wall Street Journal.  You can access it here.

SEC worst favored Government Agency

8 06 2009

People are frustrated with the government.   Bailout money, increased national debt, tax hikes, wire-tapping, torture, all give people a reason to be upset at the government.  Of all the government agencies, which should be the worst rated, FBI? CIA, IRS?  No, among all the agencies in the alphabet soup of government agencies, the letters  SEC draw the most ire.  An interesting article on Investment News‘s website:

Among six large government agencies, the Securities and Exchange Commission ranked dead last on the likeability scale with the public, with even the Internal Revenue Service coming in ahead….

Fifty-five percent of the respondents in the telephone survey had an unfavorable view of the SEC, compared to 43% for the IRS, according to the survey, which was conducted in April for Persuasion Strategies, a service of Denver law firm Holland & Hart LLP.

Why the SEC?  Well they are damned if they do, and they are damned if they don’t.  Lack of government oversight has been largely blamed for the nation’s current economic crisis.  This is no more true than in the regulation of financial markets.  On the other hand, others are lead to believe that government interference in markets only have the affect of prolonging economic problems.   To top it all off, the SEC has received a lot of bad press lately, summed up in one word, Madoff.  Of course Madoff is not the only source of SEC problems.  The silver lining in the status of the SEC is that, as the article points out, at least the people under investigation by the SEC are less popular than the SEC itself.

Lawmakers eyes “Naked” Short Selling

4 06 2009

No, naked short selling has nothing to do with the flashy jackets traders wear on trading room floors.  Short selling is basically selling shares that you do not own, for the purpose of buying them back at a lower price.  The difference between the selling price and the buy back price is the trader’s gain.  Short selling comes in two flavors, regular and “naked”.   In a normal short sale, the seller borrows the shares from the owner.  In a “Naked” short sale, the seller doesn’t even borrow the share.  The main problem with short selling is that it artificially drives down the price of shares by increasing the supply of available shares.  Under normal suppy-demand economics, this drives down the price.  With the naked variety, there is the problem with “failure to deliver”, which occures when the stock isn’t delivered to the owner, particularly because the seller never owned it in the first place.  Aggressive short selling was largely blamed for the failure of Lehman Brothers and Bears Sterns.

Over the summer,  the SEC created rules requiring pre-borrowing before a trader can sell shares from certain financial firms.  The Wall Street Journal has an article on recommendations for further regulation.

One idea is to require that traders borrow shares before they try to sell a stock short, known as a preborrow. Last summer, the SEC issued an emergency rule requiring preborrowing for certain financial firms’ shares, but the industry said it was too expensive, and the requirement was abandoned….

The statement came after the Government Accountability Office found that SEC regulations issued earlier this decade only temporarily slowed cases of “failure to deliver,” which occurs when the seller of a security doesn’t deliver the security to the buyer during a required period. These cases can occur for a variety of reasons, including naked short selling.

An SEC spokesman said the SEC appreciates the GAO’s recommendations and is focused on short selling, including examining a preborrow requirement.

SEC and CFTC Merger?

2 06 2009

The New York Times published an article this morning which had a large part devoted to a possible merger of two agencies charged with monitoring securities, the Securities Exchange Commission, and the Commodity Futures Trade Commission.  Both bodies have faced accusations of weak oversite over their prospective areas.   Many reform minded people feel that this would be a good way of changing business in Washington, by consolidating two government agencies which do similar jobs.  The article does touch on amajor roadblock, turf.  One source of this is in congress itself. With oversight commities looking over both agencies, members of congress would be hard pressed to give up their territory.  Another turf battle would be largely territorial.  With most of the Securities Trading occuring in New York, and the Commodities Trading taking place in Chicago, some would fear that the smaller commodities trading institutions will be swallowed by the larger securities institutions (I am a bit partial to this concern as a native Chicagoan).  With that there is a fear that regarding oversite, the commodities division would be largely ignored.  Here is the article from the New York Times:

A merger of two other federal agencies — the S.E.C. and the Commodity Futures Trading Commission — would face fierce political resistance. In recent years, both agencies have been accused of weak oversight. But the industries regulated by the agencies have traditionally opposed a merger, and the Congressional committees with jurisdiction over each agency historically have been reluctant to cede any authority….

A central goal of the plan is to more tightly control companies that are now largely unregulated but could pose risks to the financial system if they failed, such as hedge funds. Under the proposal, hedge funds would be required to register with the S.E.C. and provide access to their books. Many hedge funds already do so….

As part of its overhaul, the Obama administration announced three weeks ago that it would seek new authority over the complex financial instruments known as derivatives, which were a major cause of the financial crisis and have gone largely unregulated for decades. While some in Congress are pushing for tougher oversight, the financial industry is lobbying hard against it, arguing that too much regulation would thwart financial innovation. On Thursday, Gary Gensler, the new chairman of the C.F.T.C., is expected to provide more details about that proposal at a Senate Agriculture Committee hearing.

For years, the debate over how to regulate such instruments has been mired in disagreement between the C.F.T.C. and the S.E.C., reflecting the rivalries between markets in Chicago and New York. But officials said this week that Mr. Gensler and Mary L. Schapiro, his counterpart at the S.E.C., had reached an informal understanding that would enable their respective agencies to share authority over the derivatives market.

The understanding, which the regulators hope Congress will ultimately ratify, would essentially give the S.E.C. authority over derivatives that are related to publicly traded securities and other instruments under the S.E.C.’s jurisdiction, such as credit-default swaps, while the C.F.T.C. would oversee commodities-based derivatives, the officials said.

Others Weigh In on Sotomayor

30 05 2009

Other blogs have weighed in on Supreme Court Nominee Sonia Sotomayor, and her impact thus far on securities law.  Some of them are very interesting.  The National Law Journal has some interesting comments on Sonia Sotomayor and litigation on Rule 10b-5.  Rule 10b-5 is the corner stone of almost all securities litigation.  The rule is a prohibition of fraud and deceit by both act or omission, in connection with any purchase or sale of securities, and has been used in many cases involving insider trading.  For any attorney engaged in securities litigation as a part of their practice, a Supreme Court Justice’s opinion on the rule is important in deciding how to proceed with their case.  From National Law Journal:

Under the business umbrella, for example, “there’s not a corporation out there, as well as the plaintiffs’ bar, that doesn’t know how important and critical is the issue of the private right of action under 10b-5 of the securities law,” said corporate law scholar J. Robert Brown of the University of Denver Sturm College of Law. “But I doubt it will come up.”

Rule 10b-5 is the leading statutory basis for private securities fraud claims, he said. The Supreme Court’s most recent decision in this area — Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. — was a 5-3 victory for third-party business defendants by the Court’s conservative wing. The decision evinced hostility toward 10b-5 actions and a desire to contain them, said Brown. Just last week the Court agreed to decide another key 10b-5 challenge involving when the statute of limitations begins to run. Merck & Co. Inc. v. Reynolds , No. 08-905.

Retiring Justice David Souter dissented in Stoneridge . Although Sotomayor authored a relatively pro-investor ruling in Merrill Lynch v. Dabit (vacated and remanded by the Supreme Court in 2006), her opinions reflect no discernible philosophy in this area, said Brown and others.

Courthouse News Service has also weighed in on Merrill Lynch v. Dabit, a case covered in a previous post on Lots Stocks and Gavel.

In an interview after the conference, Resident Fellow Theodore Frank of the conservative think tank American Enterprise Institute said the descriptions of Sotomayor as a firm believer in judicial modesty “contradict behavior exhibited by a number of Sotomayor’s actual opinions.”
Frank gave an example, “She went out of her way to give a crabbed anti-business reading of the Securities Litigation Uniform Standards Act that was reversed 8-0 by the Supreme Court.”
Frank here is referring to the 2005 Dabit v. Merrill Lynch case, where investors holding securities argued that misleading statements prompted them to retain securities they otherwise would have sold.
Here, the question rode on whether lawyers bringing the securities class action were able to bring the case in state court as a way of avoiding federal legislation designed to stop the perceived abuse of federal class action securities fraud litigation.
As a member of the Second Circuit Court of Appeals, Sotomayor allowed the suits, but when the case made its way to the Supreme Court, the justices voted 8-0 to reverse the decision, deciding that the act applies in state court cases, as well.

See Also: Sonia Sotomayor and Securities Litigation

Cuban Turns Tables on SEC

29 05 2009

Both the Dallas Morning News and Bloomberg are reporting that Dallas Mavericks owner, and one time Chicago Cubs ownership contender, Mark Cuban, is suing the Securities and Exchange Commission claiming that the government agency is illegaly witholding information he requested through the Freedom of Information Act. From the Dallas Morning News:

The billionaire owner of the Dallas Mavericks is seeking a court order to make the nation’s securities cop turn over documents related to its insider-trading investigation of him.

Cuban filed a request for the records in December under the Freedom of Information Act.

“The SEC improperly refused to produce any records,” according to Cuban’s lawsuit.

An SEC spokesman was not immediately available for comment.

The Freedom of Information Act (FOIA)  is a law enacted by Congress in 1966 which allows the Federal Government to release information controlled by the government.  The government retains control over the type of information which can be released, and may deny requests based on the sensativity of the information.  The type of information Cuban seeks is very low on the government sensetivity level.  It is doubtful that the investigation of Mark Cuban’s alleged insider trading is a matter of National Security.  Further such documents relating to the investigation should be released through normal disclosure.  Though FOIA applies to the Federal Government, states have their own versions.  Here is an excellent website with more information on FOIA and how to request information.