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.

Advertisements




SEC Whistleblower Incentives, Good for enforcement? Bad for Business?

9 11 2010

The SEC is currently debating whistleblower incentives.  Under the program, an employee who contacts the SEC concerning possible violations may receive from between 10 and 30 percent of the judgments against their corporation.  The business community has raised concerns about the incentives stating that such incentives are bad for the business environment.  First it creates a defacto company versus employee atmosphere to a scale not seen before.  Previous whistle blower provisions mostly centered on the employee’s job security, in that they were essentially termination proof for one year after reporting potential violations.  By giving employees a monetary incentive to report against their employer, the SEC will have created a hostile work environment where there would be a constant friction between the two, especially if the employee starts to look for violations where there are likely none.   Secondly, in response to firms roles in the recent economic recession, most financial institutions have enacted internal policies and channels for employees to report possible violations.  The new incentives would encourage employees to by-pass the existing channels in favor of reporting directly to the SEC.

SEC Chair Mary Shapiro addressed these issues.  From the Wall Street Journal Online:

After describing the specifics of the program, including how individuals would report fraud and how the SEC would evaluate the merit of such claims, she assured the group that the SEC was keen to “reduce the chance that employees unnecessarily bypass internal compliance programs that their own companies may have established” and the “goal is not to, in any way, reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes.”

However, the end result could be that the SEC may be inundated with complaints from disgruntled employees looking to profit against their employers.   In this environment of fear and hostility towards business, small and large firms may have to end up spending much of capitol, time and opportunity, fighting these allegations, which overall, is a huge negative for a business environment fighting to emerge from recession.  The SEC has posted a full copy of the proposed rules for implemeting the whistleblower provisions.





SEC complaint process coming out of the Stone Age

26 10 2010

The opening scene of the original 1987 film Wall Street, shows an investment brokerage firm using old IBM computers flashing green dot matrix data on a black screen.  It looks like the SEC if finally getting rid of those old machines and is “streamlining the complaint process”… From the Wall Street Journal:

“We will have all of it in one place, searchable, which will do a lot for us in the long run,” he said.

The system will be installed in two phases. The first will improve the agency’s ability to track and search the information it receives, Mr. Khuzami said. In a second phase, which the agency hopes to complete in 2011, more tools for analyzing the data will be put in place.

The system makes it easier to file complaints online, using a tool that prompts the person making the complaint to answer certain questions, depending on the allegation. Staff who receive telephone complaints will use a similar program that will prompt them to ask callers the same questions. SEC employees will key in handwritten complaints using the same format. This will standardize the information available to staff everywhere.

It has taken this long for the SEC to standardize the complaint process?  It is no wonder everyone and their mother seems to be able to get away with securities fraud these days.  When I need to file a trademark application, I go online, I go online, I fill it out, and I am able to search for similar marks to make sure mine is unique.  The Federal Court system is going totally electronic.  Heck, we have had EDGAR for over a decade?  Why is it that the compliance portion of the SEC innovative, while the complaint process is as antiquated as the Securities Exchange Act itself?





Madoff gets 150 years

29 06 2009

Bernard Madoff has been sentanced to 150 year for perpetuating a Ponzi Scheme which may have cost contributors a total of $65 Billion.  In his sentencing, Judge Denny Chin noted that no other fraud scheme in history had cost so much, and that there was  an important “symbolism” in the 150-year sentence. From Bloomberg:

Over three decades, he built a reputation as a brilliant stock picker who delivered steady returns through both bull and bear markets. He attracted an international client roster that included celebrities including filmmaker Steven Spielberg, fund managers such as J. Ezra Merkin, charities, universities, friends and even European royalty.

Big Lie

His facade shattered on Dec. 11, as Madoff confessed to authorities that his firm, Bernard L. Madoff Investment Securities LLC, was “one big lie.” Under immense pressure from a rush of investor redemptions, he admitted he used money from new investors to pay old ones. Regulators later said that his investment advisory business hadn’t made a trade in at least 13 years….

Madoff received the maximum sentence on the 11 fraud charges to which he pleaded guilty. Before his sentencing, he consulted with Herbert Hoelter of the National Center on Institutions and Alternatives, a prisoner advocacy group, according to court records.

Madoff gets what he deserves.  There is no other way to describe his crime other than, grand-grand-grand-grand-grand-grand larceny.  What will be interesting to watch is the progression of the civil case against Madoff.   Civil litigation arising out of this Ponzi scheme will last at least a decade as all of the assets of Bernard L. Maddoff Securities Investments LLC are already in a constructive trust with Securities Investment Protection Corporation (SIPC) as trustee.   It is very likely that many of Madoff’s personal assets will also be placed in trust.  For more information on the SIPC, see this article.

The case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).





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.





Chicago White Sox and a Ponzi Scheme

16 06 2009

The Securities and Exchange Commission today obtained a court order ending a $11 millions ponzi scheme operated by David Hernandez, a local felon turned Chicago sports internet entrepreneur.   Looks like his entrepreneurial efforts were focused on something other than Chicago sports.  From the SEC:

The SEC alleges that David J. Hernandez, who was convicted in 1998 for wire fraud arising from his previous employment at a bank, sold “guaranteed investment contracts” through his company that, unbeknownst to investors, was actually out of business. Hernandez promised returns of 10 percent to 16 percent per month and made false and misleading statements about his background, the use of investor proceeds, and the safety of the investment. Among Hernandez’s illicit uses of investor funds was to start up a Chicago sports-talk Web site called “Chicago Sports Webio” featuring Chicago-area sports figures and reporters.

Now look how Hernandez grossly misrepresents his credentials:

The SEC alleges that Hernandez, who lives in Downers Grove, Ill., misrepresented that Next Step Financial was a successful company that invested in payday advance stores when, in fact, it was out of business. He trumpeted a strong educational and banking background, claiming to hold a J.D. and M.B.A. and have more than 20 years of experience in banking. According to the SEC’s complaint, Hernandez never received the claimed degrees, and his banking career ended with the conviction for wire fraud. He never invested in payday advance stores as he claimed, nor did he purchase the insurance policies that purportedly covered investor funds.

“Chicago Sports Webio” is a venture between Hernandez and Chicago sports radio personality, Mike North, who was recently fired from sports radio The Score 670. For those northsiders who know that the good guys wear blue pinstripes and hats, not black, should not be surprised that the site is sponsored by none other than the “Chicago White Sox“.  The site features a rather attractive model/”sports personality”, April Rose.   I am assuming that she is nothing more than a pretty face, who looks good in a White Sox jersey, and really does not care at all about sports.

On a side note, if you would like read a blog by a stunningly attractive woman, it had better be someone who knows sports inside and out and is passionate about the subject.  I am talking about none other than Sarah Spain, who posts on mouthpiecesports.com. Best of all, she is a Cubs fan!

If you want to read the complaint, it is available in pdf. form from the SEC’s website.





Yet Another Ponzi Scheme

10 06 2009

This time two it involves California men allegedly involved in a $80million Ponzi scheme.  The SEC is now suing them for fraud.  From Bloomberg:

An important thing to note about Ponzi schemes, especially in trying to avoid them, is that they largely target specific ethnic groups, and are committed by members of that ethnic group.  The imfamous Madoff Ponzi scheme targeted wealthy Jews and their families.  No, Kevin Bacon isn’t Jewish, but his wife Kira Sedgwick is Jewish.  This ponzi scheme was instigated by two Korean-Americans, and targeted the local Korean community.