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Today's Top News1. SAC Capital remains elusive target for Feds
It will not be for lack of effort if prosecutors fail to bring insider trading charges against SAC Capital founder Steven Cohen. Investigators have tapped his home phones. They have flipped at least three. They have heard a lot of incriminating evidence from former SAC Capital employees, prompting one agent to write in his notes that employees at SAC Capital "understood that providing Cohen with your best trading ideas involved providing Cohen with inside information," as noted by the New York Times. But in the end, it remains to be seen if enough has been done. The Times notes that when Mathew Martoma was initially confronted by an FBI agent, he fainted. When he came to his senses, he did not agree to turn on his former boss. I continue to think that Martoma is the key to whether or not criminal charges will be filed against Cohen and SAC Capital. There could be other traders that federal investigators are working with, but with Martoma's cooperation, the case involving Elan and Wyeth seems simple enough, ideal for a jury. Without Martoma's cooperation, there may not be a case at all. In any event, it's interesting to step back and take a look at the government's on-going efforts to bring charges against SAC Capital. At this point, prosecutors are baying for an indictment. In the end, however, it's not what they know, but what they can prove that matters. At this point, the best that prosecutors may be able to do is to bring civil charges related to lack of supervision and controls. For more: Related articles: Read more about: insider trading, SAC Capital
2. Bank conundrum over small accounts
The consumer banking industry is only too happy to let Bank of America be the fall guy when it comes to consumer fees. Recall the uproar last fall when the bank tried to institute a $5 retail customer fee for debit cards. That led to a truly stupendous customer and political uproar that painted the bank in an extremely unfavorable light. The road to brand recovery has been hard. Other large banks were even farther along in terms of charging such fees. Several banks had pilot programs underway in which such fees were already being levied. Once Bank of America emerged as the poster child for unethical banking, they quickly backed down, suffering relatively little brand damage. Bank of America has once again backed down on consumer fees, as reported by the WSJ and others. This time the back backed off of fees on small checking accounts on which the bank loses money. They would like to incent these customers to push these accounts into the revenue-generating column by at least signing up for direct deposit, for which employers pay small fees. The bank may have avoided another PR crisis, but the issue of small accounts remains. Banks are not in the business of losing money, so they need to crack this nut. But how? In the end, given the difficulty in raising fees, banks may have no choice but to turn away from this negative-margin business, unless they can come up with some services that people are willing to pay for. That process may already be underway. For more: Related articles: Read more about: Bank of America, fees 3. Whistleblowers alleges massive fraud at Deutsche Bank
A trio of whistleblowers have come forward to allege that Deutsche Bank perpetrated a $12 billion fraud to hide the true extent of credit derivatives losses. Eric Ben-Artzi, a former quantitative risk analyst, is among the group. He says he discovered and internally reported securities violations stemming from Deutsche Bank's valuations of its credit derivatives portfolio. His lawyers say that between mid-2007 and 2010, the bank failed to properly value the gap option component in its portfolio of Leveraged Super Senior tranches of credit derivatives. The gap option is the difference between the collateral paid by the LSS note buyer and the mark-to-market expected loss that the LSS note seller agreed to cover. With a $120-$130 billion portfolio in notional value, Deutsche Bank was the largest holder of LSS trades in the marketplace. "By not accurately valuing it, the bank was able to maintain its carefully crafted public image that it was weathering the financial crisis better than its peers – many of which required financial assistance from the government and experienced significant deterioration in their stock prices. Even using conservative assumptions, if the LSS portfolio had been properly valued, the bank would have substantially missed its earnings estimates. Due to these material misrepresentations, countless investors may have been harmed," Ben-Artzi's lawyers contend. Ben Artzi tried to work through internal channels to raise the issue, but encountered hostility and was soon stripped of responsibilities. Eventually, he was abruptly fired, three days after making a complaint to the SEC. The bank says the allegations were thoroughly investigated at the time and were found to be invalid. What's interesting is that all three whistleblowers made their claim independently. The bank will likely settle this as soon as is reasonable. It has nothing to gain from going to court. For more: Related articles: Read more about: Credit Derivatives, Whistleblower 4. Goldman Sachs a socially conscious investment idea
Goldman Sachs has been called a lot of things, both good and bad. The negative characterizations tend to be the ones that stick. Who can forget the Great Vampire Squid description. To balance that out, I refer to the Motley Fool, which raises the idea of investing in Goldman Sachs because it is such a good corporate citizen. You read it right. Because it is a solid citizen. The case in the essay itself is somewhat thin, as the author bases the bank's CSR "cred" on one program, its initiative to help small businesses. The bank's 10,000 Small Businesses is a $500 million effort to help small businesses create jobs and economic opportunity. "Goldman doesn't have to be doing what it's doing with its 10,000 Small Businesses program, and even if it's just doing it for good PR, who cares? What matters is, Goldman is doing it. And while the Wall Street perennial may not be perfect when it comes to social responsibility, what company is? To paraphrase Voltaire, it's important to never let the quest for the perfect drive out the good." Of course, one small business initiative itself doesn't make the bank a good corporate citizen. But company does a lot more than finance small business programs. For a more detailed description of what it does in the realm of environmental, social and governance contributions, check out its 2011 ESG report highlights. Despite the negative press over the past few years, socially conscious ETFs and mutual funds have been known to own the stock. For more: Read more about: Socially Conscious Investing 5. A new phase of insider prosecutions begins
The government's slam-dunk success in prosecuting insider trading cases over the past several years has been impressive, to say the least. Phreet Bharara, the U.S. Attorney in Manhattan, has yet to lose a case. The success has been driven in part by the strong evidence that the SEC was able to muster, chiefly amazing wiretap evidence, which has proven devastating as a courtroom tool. Throw into the mix the use of insider witnesses who turned on the defendants and you have a formula for great success. But now the government is entering a new era, in which it charges people even though it lacks wiretap evidence, notes DealBook. These more circumstantial cases would appear to be harder to win, but all we need to do is look at the Rajat Gupta guilty verdict for an indication of just how powerful circumstantial evidence can be. He was found guilty of fraud in July and was sentenced later to two years in jail. In that case, the evidence was still strong. It remains to be seen how the government will fare with other cases. Certainly, if there are cooperating witnesses, prosecutors' will have an easier time. Apart from wiretap evidence or a strong witness, you have to wonder if there is case at all. For more: Related articles: Read more about: insider trading Also Noted
SPOTLIGHT ON... Another insider trading ring busted It's astounding that more professionals seem to think that insider trading is hard to detect. The reality is that the monitoring software used by Finra is pretty advanced, so much as that casually sharing insider trading tips with friends could be easily detected, especially when the tip tree expands an near-exponential rates. When the top of the tip tree is an investment banking at Wells Fargo, you have to shake your head and wonder if they really thought they could get away with this. Article Company News:
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Friday, December 7, 2012
| 12.07.12 | SAC Capital remains elusive target for Feds
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