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Today's Top News1. The SEC may hit SAC Capital with civil charges
When SAC Capital called a meeting with limited partners for today, most assumed that it would be to quell any fears that have built up over the Mathew Martoma indictment. As it turns out there was a significant enforcement development to report. SAC Capital has received a Wells notice from the SEC, according to media reports. This doesn't mean that an indictment is coming (the company received a Wells notice several years ago, and no charges resulted), but it certainly makes concrete what everyone already knew, which is that the government is pondering charges seriously. SAC also noted that Steven Cohen was deposed on this issue earlier in the year. It should be noted that SEC filed a parallel complaint against Martoma, when the criminal indictment was handed down. But that doesn't really clear up what the SEC is pondering. It might slap the firm with civil insider trading charges, or it might levy failure to supervise charges against the firm, as I suggested previously. It's unclear if Cohen himself would be named as a defendant. As of right now, there's no way to tell if the SEC's activity indicates anything significant about the likelihood of criminal charges against the firm or the founder. More information will hopefully trickle out soon. For more: Related article: Read more about: insider trading, Civil Charges
2. Commodity trader fights back against short-seller
Muddy Waters, the well-known short-selling firm run by Carson Block, generated new headlines recently when it took another shot at commodity trader Olam. The short-seller released a lengthy report that essentially said that the Singaporean company was possibly heading for an Enron-like crash. Muddy Waters earlier cast broad accusations, saying Olam may need to raise or refinance as much as $3.8 billion over the next year just to stay solvent. Not only was it short of cash, but it has been overaggressive in its accounting, especially its use of goodwill, the short seller charged. The trading company has fought back in a detailed defense that rebuts the main points leveled by Muddy Waters, making clear that solvency is not an issue. "We believe that the report's assertions are motivated to distract and create panic amongst our continuing shareholders, bond holders and creditors," Olam said in a statement. The defense notes that the company had "readily marketable inventories" of $3.71 billion on Sept. 30, which will get converted into cash. "Olam cites the opinion of Standard & Poor's on the 'exceptionally liquid' nature of agricultural inventories to bolster its claim," notes Breakingviews, which has a recommendation for the company. It suggest that "it may not hurt the company to liquidate some of this inventory at or near book value, just to show that it could survive an external liquidity freeze." Jefferies was able to do this when it was attacked by credit rater Egan Jones. For more: Related articles: Read more about: short sellers 3. Criticism for big insider trading report
The WSJ generated lots of news with its report on executive insider trading of the legal variety. The high level conclusion is that, from a statistical perspective, these traders fared better than would be expected. "Among 20,237 executives who traded their own company's stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much. Most executives have a mix of trades, some that look good in retrospect and others that do not. The Journal also compared the trading of corporate executives who buy and sell their own companies' stock irregularly, dipping in and out, against executives who follow a consistent yearly pattern in their trading. It found that the former were much likelier to record quick gains. Looking at executives' trading in the week before their companies made news, the Journal found that one of every 33 who dipped in and out posted average returns of more than 20% (or avoided 20% downturns) in the following week. By contrast, only one in 117 executives who traded in an annual pattern did that well." At a minimum, the report suggests, 10b5-1 plans are hard to track. The report did not go over well with all. An esteemed Reuters columnist writes, that, "I'm not particularly impressed: it seems like much more of a fishing expedition than a wide-ranging scandal," adding that, "More generally, the WSJ's methodology seems designed to produce exactly the results that it came up with…Firstly, stocks tend to take the stairs up and the elevator down: if there's a sharp move in a stock, it's much more likely to be a fall than a rise. Secondly, executives trading in their own stock are much more likely to be sellers than buyers. They get awarded stock as part of their compensation package: that's not trading. And once they're awarded it, they have every right to sell it — and selling it makes perfect sense, in terms of portfolio diversification if nothing else." All in all, however, companies need to be more cognizant than ever than insider trades can be problematic. Disclosure is the key. No one is going to deny an executive the right to manage his or her finances, but there are ways to do all this without raising suspicion. This is a tricky issue for boards, but one they ought to confront. For more: Read more about: insider trading, executives 4. Lloyd Blankfein to meet with the President
I think it's fair to assume that Goldman Sachs CEO Lloyd Blankfein is at least pondering his next step. No one knows, except perhaps the board, his confidantes and his family, whether he plans to make a big move soon. But it would be in keeping with other former CEOs of the august bank to move into public service. This has worked out well for some (Henry Paulson, who got more than he bargained for) and not so well for others (Jon Corzine). I mention this now as Blankfein prepares to meet with President Obama, who is seeking the support of top CEOs for "his approach to addressing the fiscal cliff…" notes Bloomberg. For the president, this is a campaign-style effort to sell Corporate America on the idea of extending middle class tax cuts while raising rates at the highest income levels. My guess is that the Blankfein team has extended feelers to the administration about whether there is place for Blankfein at a high level. The administration would be wise to consider the possibilities. There are lots of downsides of course, notably that the "optical" issues would be immense. But if Blankfein can somehow emerge as a force behind the president's plan, that just might seal the deal. He has, of late, taken a conciliatory view on financial regulation that the regulators no doubt appreciate. For more: Related articles: Read more about: Goldman Sachs, CEO 5. Connection between doctors, insider traders
One of the saddest aspects of the ongoing insider trading scandals is the obliteration of promising medical careers by hedge fund excesses. In some cases, hedge fund managers have so seductively lured and then compromised once-proud doctors at the top of their profession, plying them with expensive gifts and good humor, no doubt making them brilliant and wanted. That is clearly seen in the scandal surrounding Mathew Martoma, who had his way with an 80-year-old doctor, Sidney Gilman. The doctor was putty in his hands, somehow induced into offering up secrets, if you believe prosecutors. Gilman will not be charged with a crime and has agreed to be a witness against his seducer. There was a similar dynamic in the FrontPoint scandal, which involved a hedge fund manager wooing a doctor with knowledge of clinical trials. The twist in the FrontPoint scandal was that the hedge fund manager was himself a former doctor who fell hard for all that the hedge fund industry offers, including the temptations to cheat. Bloomberg Businessweek offers a thorough excavation of Chip Skowron III, a once brilliant doctor who turned to insider trading, which landed him in jail to serve a five-year sentence. His fall from grace was nothing short of remarkable. Many things can drive a man to crime, including an incredible need to fill personal voids. Skowron lost his mother, with whom he was close, on the same day he found out he had been admitted to Yale medical school. In the end, all crime sagas are human sagas. The real story often isn't known until well after people check into prison. For more:
Read more about: insider trading Also Noted
SPOTLIGHT ON... Debate over Schapiro's SEC legacy I've suggested before that Linda Schapiro was stuck with a very tough job. "When she assumed the Chairmanship of the SEC in January of 2009, the reputation of America's financial regulatory apparatus was at its nadir." The debate is raging right now as how she fared. My sense is that she did about as well as should could, given the institutional constraints. She has left much for her successor, Elisse Walter, to build on. Article Company News:
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Thursday, November 29, 2012
| 11.29.12 | SEC may hit SAC Capital with civil charges
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