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.





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.





At the interesection of Business and Politics…

9 11 2010

We see Barney Frank, and a hedge fund which is responsible for section of Massachusetts $46 Billion Employee Pension fund.  From the Boston Herald:

The state’s pension portfolio for thousands of public employees has a $700 million stake in a hedge fund investment firm that is under investigation by the Securities and Exchange Commission for allegations it misled investors by claiming to be a women-owned business.

The firm, Pacific Alternative Asset Management Co. LLC, marketed itself as a firm run and owned by women in a male-dominated industry. Yet it was hedge fund mogul and Barney Frank pal S. Donald Sussman who in 2000 provided a $2 million loan to four entrepreneurs of the fledgling company, giving him a 40 percent stake in the investment manager’s parent company, Paamco Founding Partners Co. LLC.

Investors, including the Bay State’s Pension Reserves Investment Management Board, are concerned about the financial impact of the SEC probe as well as that of a recent lawsuit filed by Sussman against the firm.

The SEC probe concerns information regarding PAAMCO’s loans, alleging that some of the information on the loans was false or misleading.  It is impossible not to wonder about the political implications regarding this fund, since was responsible for a portion of Public Employees pensions, which are most likely union pensions.  To those who study politics, it is common knowledge that the two largest public employee unions, Service Employees International Union (SEIU), and the American Federation of State County and Municipal Employees (AFSCME), have been long-time supporters of the democratic party, and Barney Frank in particular.  It may be worth while diving deeper into the relationship directly between PAAMCO and Rep. Frank.





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?





Maverick’s Mark Cuban off the Hook, SEC Compliant Dismissed

17 07 2009

Wall Street Journal is reporting that a federal judge is dismissing an insider trading complaint by the Securities and Exchange Commission. From the Wall Street Journal’s Law Blog:

Cuban denied the allegations and played hard ball with the agency, both in statements on his blog and in court. Cuban even had support from five big-wig law professors, who filed an amicus brief in the case that argued Cuban did no wrong.

The SEC originally filed a complaint stating Cuban sold his shares of mama.com upon hearing from the CEO that they would be issuing low-priced shares, a move that would have hurt the value of Cuban’s stock.  While this looks like a textbook insider trading case, it didn’t help that Cuban had amicus briefs filed on his behalf by eminent law professors, Allan Bromburg, Allen Ferrill, Jonathan Macey, Todd Henderson and Stephen Bainbridge.  All of them argued for Cuban stating he did nothing wrong.

A Copy of the SEC Complaint





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.





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.