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.

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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.





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.





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.





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.