Regulatory Oversight

If the SEC chairwoman-candidate
Has both tried the Street and defended it,
One may sensibly ask
If she'll make of her task
To have reined in the Street or befriended it.

According to the New York Times' Dealbook, there's a "signal to Wall Street in Obama's pick for regulators."  So, one may ask, what is the signal?  In announcing his nomination of Mary Jo White to run the Securities & Exchange Commission, President Obama said: "It’s not enough to change the law; we also need cops on the beat to enforce the law," adding: "You don’t want to mess with Mary Jo." Indeed, Ms. White made a name for herself as the United States Attorney in Manhattan in the '90s, prosecuting the 1993 World Trade Center bombers and John Gotti, among others. The current US Attorney in Manhattan, Preet Bharara, who put inside trader Raj Rajaratnam in jail, is among the generation of prosecutors trained by Ms. White.

This is all well and good, but her appointment sends other signals as well.  As a recent, must-watch PBS Frontline documentary points out, no Wall Street or financial industry figures have been prosecuted for the frauds that contributed to the financial crisis.  As chair of the litigation department at Debevoise & Plimpton for the last ten years, Ms. White made it her business to keep the industry's leaders "untouchable".  The "revolving door" between Wall Street and Washington has long served to take the teeth out of regulation; it remains to be seen which way the door is turning in the case of Mary Jo White.

MF Global Trustee's Report

When financial wrongdoing's unveiled,
Of a scope that can scarcely be scaled,
One is sadly resigned
That justice will find
There are none to be judged and/or jailed.

The trustee in the MF Global bankruptcy has issued his report, but it will disappoint those looking for a swift path to justice against those responsible for the misuse of $1.6 billion of customer funds. James Giddens, who is unwinding MF Global US brokerage unit, offered little insight beyond the well-known facts: "My investigation has concluded that management's actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business." Although he may pursue legal action against former CEO Jon Corzine and others for taking excessive risks and failing to safeguard customer funds, Mr. Giddens drew "no conclusions" about criminal wrongdoing or regulatory violations, citing his lack of authority in those matters. Well, no worries - that should leave the field open to the unrelenting avengers of the SEC and the Justice Department... right?

Lulled by Fuld?

Said the Lehman bankruptcy inspector
Of the repo transactions that wrecked 'er:
"The Feds, who were looking
At books that were cooking,
Had fraud, but could never detect 'er."

In a rare attempt to explain the financial crisis to the average American, CBS's 60 Minutes brought "The Case Against Lehman Brothers" on Sunday evening. Steve Kroft interviewed Anton Valukas, the Chicago attorney appointed by the federal bankruptcy court to determine what led to Lehman Brothers' collapse. Mr. Valukas found that "there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors."

One of the most damning pieces of evidence was the letter written by Matthew Lee, the firm's top internal accountant, to senior management. Mr. Lee refused to sign off on Lehman's 2007 fiscal year end balance sheet, citing "possibly unethical and unlawful" conduct in their preparation. The so-called "repo 105" transactions were employed to make Lehman's balance sheet appear $50 billion lighter on reporting dates, and thus mask the extent of its over-leveraging. Mr. Lee was let go for his trouble, and the SEC, which was on the premises while repo 105 trades were occurring, has never brought charges against CEO Richard Fuld or others. Why didn't they catch the fraud? Says attorney Valukas: "They were getting the material. Whether they understood it is another question."

The entire interview is embedded below for your viewing pleasure, outrage and incredulity.

Groupon's Risky Business

Said a source who implored not to quote 'im:
"Selling coupons? There's risk to promote 'em.
If one's merchants one pre-funds,
But buyers want refunds,
Well then, they've got one by the scrotum."

Groupon (NASDAQ: GRPN), the discount coupon provider that went public in a social media frenzy last November, recently shocked investors with the disclosure that its fourth-quarter results had to be restated downward. Reuters financial commentator/blogger Felix Salmon explains: "In the US, Groupon sells a bunch of deals for a given merchant, gets lots of revenue as a result, keeps roughly half that revenue for itself, and then passes on the other half to the merchant in question." This policy engenders significant risk because of the company's unconditional refund policy. Says Salmon: "That policy is good business for Groupon: it gives people a lot of confidence to buy a Groupon for merchants who might otherwise seem a bit sketchy. But it also creates dangers, because if Groupon does a deal with a sketchy merchant, then Groupon can be on the hook for a lot of refunds." It turns out also that Groupon's customers tend to demand refunds on big-ticket items more frequently, and the company did not plan for this when it began selling pricier products and services.

All this has led to the downward revision of 4th quarter net income by $22.6 million. Groupon had to make an embarrassing SEC filing, and the shares were down 17% on Friday. Says accounting expert Francine McKenna: "They just need to get their act together."

Facebook IPO - The Inside Story

Mark Zuckerberg, known to be skeptical
Of the IPO stock market spectacle,
Expressed his unease
That I-banking fees
Could ever yield anything practical.

Countered one of the Facebook wise men of it:
"The S.E.C. tells us the 'when' of it;
As our ownership grows,
We'll have to disclose
Our finances, so let's reap the benefit."

The Wall Street Journal reports that Facebook is moving toward a possible $10 billion IPO, which would value the social networking company at $100 billion. CEO & founder Mark Zuckerberg has previously questioned both the value of an IPO and the role of investment banks in such a transaction. However, the SEC may force his hand; come April, the number of Facebook shareholders will have passed 500, the level at which US law requires companies to publish their financial results. At that point, Facebook would have all of the liability of a public company, so the board is evidently warming to the idea of its having the cash proceeds, as well.

Overheard in the MF Global Accounting Dept.

"In the annals of shame and ignominy
Of the modern financial economy,
A transgression may start
With a loss on the part
Of a sure-fire thing, not uncommonly."

The New York Times reports that the notorious $600 million of MF Global customers' funds "may no longer be simply missing. It may be gone." Regulators and FBI agents who have worked around the clock to recover the funds now believe that they were used not to margin customers' trades, but to pay off the firm's trading losses. Futures brokers routinely use customers' cash to earn income for themselves, but always back such operations with collateral such as Treasury notes. MF Global now appears to have used up this buffer and simply taken the cash to plug the gaps in its can't-miss $6.3 billion European bond position. This is a shock to the futures trading community, which up to now has believed that its deposits were safely segregated.

It's Buffett's Move

Berkshire Hathaway drove the price higher
When its IBM deal hit the wire,
So the charge could be made
Of an insider trade,
Since Buffett knew he was the buyer.

In a case of self-fulfilling prophecy, Berkshire Hathaway's purchase of 5.4% of IBM for $10.7 billion prompted a 12% surge in the technology services company's share price once it became public. Although large purchases of public shares must normally be disclosed in 13F filings, the SEC grants about 60 confidentiality waivers every quarter, allowing investors to accumulate shares without driving their prices up. For his part, Mr. Buffett has overcome his fear of tech companies by recognizing in IBM an entrenched service provider with a protective "moat" against would-be competitors. Notwithstanding new highs in the share price, Mr. Buffett believes that, for IBM, the best is yet to come.
Hat tip to... somebody on Twitter for the insider trading joke, and apologies for forgetting who it was.

MF = Money is Fungible

Said the Feds, in a stern admonition,
At a broker's insolvent petition:
"We place our reliance
That money of clients
Is far from your trading position."

Commodity broker MF Global filed for Chapter 11 bankruptcy on Monday, after weekend in talks with potential acquirers fell through. Due diligence inquiries revealed a $900 million discrepancy in the amount of customer funds on hand, inviting due diligence of a different sort from the FBI. The case of MF Global, in which leveraged bets on European sovereign bonds did not turn out as hoped, highlights once again the necessity of the industry's avowedly strict segregation of customer funds. Clients may be wiped out, but only because of their own bad bets. Against those of the firm, they are federally insured.

The Goldman-Paulson Case: Pro & Con

Institutional buyers of debt
Are big boys and deserve what they get,
But if some of those boys
Knew who cobbled their toys,
They may not have invested, peut-être?

Couldn't Put 2 + 2 Together

"The SEC's catching Madoff was hopeless,"
Says his nemesis, Harry Markopolos.
'mongst the agency's ills?
"Computational skills
Below those of the general populace."

An Alleged Violation of the Securities Act of 1934

"Find an edge!" bellowed Raj Rajaratnam,
To the geeks at his hedge fund in Gotham.
But a Galleon tipper
Informed on her skipper;
Crowed the SEC: "Ha! Now we've gotten 'im!"