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Monday, March 18, 2013

| 03.18.13 | SAC Capital settles insider trading charges

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March 18, 2013
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Today's Top Stories
1. Say-on-pay lawyer charged in harassment suit
2. Ina Drew blames underlings for JPMorgan fiasco
3. Senate report accuses JPMorgan execs of deception
4. Goldman Sachs, JPMorgan to resubmit capital plans
5. Goldman Sachs to hold annual meeting in Utah

Editor's Corner: SAC Capital settles insider trading charges

Also Noted: IBM
Spotlight On... Did JPMorgan CEO hold back data from OCC?
Fidelity's ETF fee sparks controversy; Cheat sheet on Whale Trade and much more...

News From the Fierce Network:
1. Start-up raises funds for new trading service
2. Credit unions ponder the rise of mobile banking
3. Case study: JPMorgan embraces big data


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Editor's Corner

SAC Capital settles insider trading charges

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn


In stunning news, SAC Capital has been charged with insider trading and has settled for a record fine.

The controversial hedge fund, headed by the brash Steve Cohen, has been in the crosshairs for years. So many of its ex-employees and employees became ensnared in insider trading cases. The smoke led many to believe that there was a big bon fire of burning illegal activity at the secretive hedge fund.

While most speculated that the SEC would hit the firm, if not Cohen himself, with civil charges related to negligence or failure to supervise, most assumed insider trading charges were not likely barring the emergence of a big-time witness willing to testify against Cohen and the firm. When former SAC portfolio manager Matthew Martoma decided to take his chances at trial, refusing to turn on his former boss, most people though the insider trading charges were on hold.

That proved to be very wrong.

While Cohen has not been charged, the company has been. It has agreed to pay $614 million to settle charges that it traded illegally on insider information. That's more than anyone has ever paid to settle charges--more than Ivan Boesky, Michael Milken and Goldman Sachs. The bulk of the payment will settle charges that it that it sold nearly $1 billion in shares of two durg companies after Martoma, then employed by SAC Capital, received and shared secret information about problems with a new drug for Alzheimer's disease.

The big question here is whether criminal charges are likely.

That remains an open question. The SEC charges opens up new possible targets. Bloomberg reports that the complaint cites the role of Jon Horvath, a former analyst at SAC Capital Advisors, who has already pleaded guilty to passing illegal tips to one manager at the hedge fund, and his attempts to provide information to another supervisor. That may certainly help criminal prosecutors.

But as for Cohen himself, it's still unclear. You get the sense that the prosecutors have some big momentum now. -Jim

Read more about: insider trading, SAC Capital
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Today's Top News

1. Say-on-pay lawyer charged in harassment suit

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

Dodd-Frank has proved to be an unexpected boon for plaintiff's lawyers.

The law's say-on-pay provisions required that corporate boards allow shareholders to vote on advisory, non-binding resolutions about executive compensation plans. As it turned out, that new requirement also gave plaintiff's attorneys a new money making lawsuit.

They started to sue boards for not providing enough information for investors to make informed decisions on compensation policies. Rather than risk a hit to their images, many boards decided to settle for lucrative sums.

But now comes news that Faruqi & Faruqi, the law firm that perhaps did the most to popularize these suits, has taken a big hit to its image in the form of a sexual harassment lawsuit.

Forbes notes that "there's not much solidarity among class-action attorneys, and some have had the long knives out for Faruqi for a while."

It was certainly a bombshell that former associate Alexandra Marchuk formally accused partner Juan Monteverde, a pioneer at the firm on say-on-pay suits, of "repeatedly harassing" during her four-month stint at Faruqi & Faruqi. The most shocking allegation is that forced "drunken sex upon her in December, 2011." She soon quit the firm and hired a lawyer.

These accusations spell trouble for the controversial firm.

"With very specific allegations of drunkenness and harassment, often witnessed by fellow employees who presumably could be put under oath, the lawsuit looks like trouble for Monteverde and the firm. And that trouble just adds to a reputation for haste and questionable behavior that has dogged Faruqi & Faruqi and led to an increasingly contentious relationship with the Delaware judges who must decide whether the firm's lawyers can pursue shareholder suits there," Forbes notes.

For boards that have felt targeted by these say-on-pay suits, there is no relief here. Some other firms will merely fill the void.

For more:
- here's the article

Related articles:
Kleiner Perkins rocked by sexual harassment charges
Banker boyfriend from hell
 

Read more about: Gender Discrimination, Dodd-Frank
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2. Ina Drew blames underlings for JPMorgan fiasco

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

The hearings before the Senate subcommittee for permanent investigations has made for fascinating theater, as Senators grill JPMorgan executives and lambaste regulators over the London Whale fiasco that has cost the bank so much in earnings and reputation.

Emotions were running high, that's for sure. Hearings of this nature, while common in the financial sector, are quite tricky for those called to testify. You have to walk a fine line. You could plead the fifth amendment, but you will likely come across as guilty whether you are or not. You could also be very forthcoming and open about what happened, but you then risk opening yourself up to legal action and even prosecution.

So the best course is to try to give insightful answers, even as you cover your own reputation. In the end, this is hard to do.

Ina Drew, formerly the head of the CIO unit that got the bank in so much trouble, faced this fine line as she testified.  Her strategy was to lament the losses and the lapses but make sure blame is laid at the feet of others. In her prepared remarks, she did not pull any punches in blaming Achilles Macris, who supervised the investment office's credit portfolio in London, and his employee, Javier Martin-Artajo.

"I did not, and do not, believe I bore personal responsibility for the losses," Drew said in her prepared testimony. An internal report from JPMorgan, however, put the blame onto her and her unit. Some of compensation was subsequently clawed back.

As reported by the Financial Times, her testimony continued: "I have since come to learn...that valuations for many of the book's positions were inflated and not calculated or reported in good faith; that the original version of the second-quarter scenario analyses reflected much higher projected losses and was specifically redone before it was sent to me so as to reflect lower projected losses; and that some members of the London team participated in or condoned such conduct and hid from me important information regarding the true risks in the book."

For more:
- here's the item
- here's a running blog

Related articles:
How Ina Drew's career unraveled
Clawback controversy at JPMorgan
 

 



 

 

 

Read more about: Hearings, Enforcement Action
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3. Senate report accuses JPMorgan execs of deception

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

The hits keep coming for JPMorgan Chase (NYSE:JPM) regarding the infamous London Whale "hedging" fiasco.

A widely awaited Senate report has accused the bank of misleading investors and lying to investigators, raising serious questions about the conduct of CEO Jamie Dimon and then-CFO Douglas Braunstein.

This is certainly not the outcome that the bank was hoping for, especially with another hearing set for Friday. The same Senate subcommittee in 2011 issued a similarly scathing report about Goldman Sachs, which was accompanied by an unusual recommendation that top executives be investigated for perjury. That forced CEO Lloyd Blankfein and others to quickly hire criminal defense attorneys.

As of right now, it's unclear if JPMorgan Chase executives will do the same, but the findings of the subcommittee will be of great interest to the SEC, which is taking a look at disclosure issues.

The gist of the report is that while Dimon maintained that the controversial trading was relatively immaterial--the CEO called it a "tempest in a teapot"--he was in possession of "information about the . . . complex and sizeable portfolio, its sustained losses for three straight months, the exponential increase in those losses during March and the difficulty of exiting the . . . positions," as reported by the Financial Times.  

As for Braunstein, currently a vice-chairman at the bank, he was rapped for deception, including assurances that regulators were given information on the positions in question on a recurring basis. The report called his assurances "inaccurate at best, and deceptive at worst."

John McCain was the Senator leading the charge for the subcommittee. It will be interesting to see if he makes a recommendation regarding prosecution for what he sees as outright lying to investigators.

The very premise of the London Whale controversy seems to be fresh again. While the bank worked hard to position the CIO trading activity as "hedging," the panel seems to think that it was raw speculation all along.

Obviously, if people thought that this sad episode had blown over, they were mistaken. JPMorgan is now in full-on damage control mode. The controversy will linger until we get more clarity about whether anyone will be charged with perjury.

For more:
- here's the article
- here's the report
- here are some excerpts

Related articles:
Former JPMorgan CFO rapped for London Whale controversy
JPMorgan struggles to forget the London Whale
 

Read more about: Enforcement Action, London Whale
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4. Goldman Sachs, JPMorgan to resubmit capital plans

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

It seems like the Fed's stress tests always hold some nasty surprises.

In recent years, the likes of Citigroup and Bank of America were stunned by negative test results that essentially axed their plans for dividends hikes.

The biggest question marks this year loom over JPMorgan Chase and Goldman Sachs. Both banks were given the green light on their submitted capital return plans, but both were also required to resubmit their plans by the end of the third quarter with some tweaks. That prompted JPMorgan to warn that it may have to reduce its distributions after the second quarter, pending the review of the resubmitted plan.

As noted by FOX Business, The Fed said JPMorgan and Goldman Sachs each had "weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests."

Basically, both banks' capital positions and ratios are up to snuff. The issues are more qualitative, and deal with their ability to estimate losses in the midst of a severe contraction.

It could've been worse. Both BB&T and Ally Financial saw their dividend and buyback plans outright rejected.

All in all, most big banks fared well in the 2013 tests. Bank of America won approval for a $5 billion buyback and for a plan to redeem $5.5 billion in preferred shares. It did not seek a dividend increase. Citigroup likewise was able to rebound, winning approval for a $1.2 billion buyback. It did not submit a plan to increase dividends.

All in all 14 banks were given the go-ahead on their plans.

For more:
- here's the article

Related articles:
Big questions remain about revenue drivers
Stress test scores leading to confusion
So far, so good on stress tests
 

 

Read more about: capital ratios, Stress Tests
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5. Goldman Sachs to hold annual meeting in Utah

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

Goldman Sachs (NYSE:GS) has held its annual meeting in interesting locales lately. Last year, for example, it held its meeting in India, where the bank has a large presence. This year the bank will hold the meeting in Salt lake City, Utah according to Reuters.

Shareholders will gather on May 23 at the Goldman's Salt Lake City headquarters to vote on an array of issues, none of which appear now as a looming problem. Unlike last year, shareholders this year will vote on whether to split the CEO and chairman jobs, which are currently held by Lloyd Blankfein. The resolution has only a small chance of passing, but it will be interesting to see how many vote in favor of it. If the percentage is large, it might prompt the board to take some action to enhance of the role of outside directors, perhaps creating a lead outside director-like position.

The event overall will likely prove to be a feel-good occasion, allowing the bank and local leaders to celebrate what has become a mutually beneficial relationship.

Blankfein and Utah Governor Gary Herbert are scheduled to attend a ceremony for small-business owners who completed an education course sponsored by the bank. Goldman Sachs gave $500 million in 2009 to the program, which appears to offer a terrific value, including free tuition, to companies that have survived the start-up phase.

"Last year, Herbert pledged to create 100,000 new jobs in Utah in 1,000 days, and Goldman is one of his key partners in that effort. Utah agreed to give Goldman up to $47.3 million worth of tax rebates over 20 years in exchange for meeting certain job and wage benchmarks," Reuters notes.

And what about next year? I'll venture a guess that the bank might hold the meeting in Dallas, another city in which the bank has built up operations.

For more:
- here's the article

Related articles:
Goldman Sachs to face CEO/chairman split vote
 

Read more about: Goldman Sachs, Annual Meetings
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SPOTLIGHT ON... Did JPMorgan CEO hold back data from OCC?

In his absence at a Senate hearing, JPMorgan CEO Jamie Dimon took plenty of lumps. In particular, his former CFO and current vice chairman Douglas Braunstein testified that the CEO asked that daily reports to the OCC be suspended due to concerns about confidentiality. The reports were later resumed after a two week hiatus. The incident highlighted in the minds of some senators that the controls at the bank were lax. Article

Company news: 
>Fidelity's ETF fee sparks controversy. Article
>JPMorgan ex-CIO on the hot seat. Article
>Ex-CFO blames CEO for suspended reports. Article
>Cheat sheet on Whale Trade. Article
>Ex-Amaranth trader scores a court win. Article
> Wells Fargo broker leaves for Stifel. Article
Industry news:
>Survey finds riskiest financial product. Article
>Do bank stocks have more upside? Article
Regulatory News:
> IMF to EU: Fix the banks. Article
> Treasury probes 10-year note disruption. Article
And Finally…Another look at Google's perks. Article


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