Levine on Wall Street: Schemes From an Italian Restaurant

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Confidential relationships.

Here's an insider trading case in which William Redmond, the chief executive officer of a public company, befriended Stefano Signorastri, the manager of his favorite restaurant, and then, as one does, allegedly made "frequent disclosures of confidential corporate information" to Signorastri. Who then, as one does, allegedly traded on it. (As did a waiter.) My favorite question to ask in cases like this is: Who had a duty not to disclose information? You might think, well, the CEO had a duty to his company not to disclose information about its merger plans to the guy serving him dinner. And you'd be right! According to the Securities and Exchange Commission. In this case. But in other cases, the SEC will take the position that the executive's disclosure was fine, because it was made in a relationship of "trust or confidence," and the friend to whom the executive disclosed was the one with a duty not to trade on it. So sometimes disclosure to golf buddies is privileged, and sometimes it isn't. Disclosure to restaurant managers seems not to be privileged, even though this CEO seems to have been quite close with the manager.

The dividing line is roughly that if the executive knew his friend was up to no good, then he gets in trouble; if he truly had no idea that his friend was going to trade then he doesn't. Here the SEC seems to think that the CEO was up to no good, though how it knows that is not clear. "Either directly or indirectly, Redmond gained, or expected to gain, a personal benefit from conveying to Signorastri and Individual B material nonpublic information regarding the potential sale of GenTek and GenTek’s merger negotiations in the form of a gift to a friend and/or reputational benefit," is how the SEC puts it, which is a pretty weak benefit. I mean, sure, "from time to time, Redmond received complimentary food and drinks" at the restaurant, but on the other hand he "often left a very large tip for the wait staff." Presumably in cash, I mean, not, like, "You want a tip? Here's a tip: My company is being bought." Though also that?

Elsewhere, another bad thing you can do if you're the CEO of a company is issue press releases saying that you've "developed new fiber optic technology that was fully vetted and ready for commercial use" and that you've got $1.9 million of new orders, and then secretly sell a bunch of your stock before the market figures out that those are all lies. The SEC tends to catch stuff like that.

Oh Bank of America.

Huh:

Bank of America angered some shareholders when its board in October decided to give the additional job of chairman to CEO Brian Moynihan. It was an unusual move because shareholders had passed a binding proposal in 2009 requiring the jobs to be held by different people. Influential pension-fund investors and advisers, including the California State Teachers’ Retirement System and the New York City Comptroller’s Office, have painted the board’s decision as a trampling of the shareholders’ will.

So ... it wasn't that binding then? But it was! It's Item 8 on page 51 here, a binding resolution to amend the bylaws, and it passed, and Article VI, Section 7 of BofA's bylaws was amended to require an independent chairman. But then the board wanted to make Brian Moynihan chairman, so it just amended the bylaws back and made him chairman. That's pretty rough! The weird thing about corporate law is that, for the most part, it takes both the board and the shareholders to amend a company's charter, but either the board or the shareholders can amend the bylaws on their own. But the board is a much more nimble organization, so any time the shareholders do something it doesn't like, the board can just change the bylaws back the next day, and it'll take another year for the shareholders to muster a response. The response has been mustered -- the Sisters of Charity of St. Elizabeth have filed another proposal to separate the jobs -- but it's hard to see why it would work any better this time.

The AIG trial is still going on.

Seems hard to believe, but "testimony likely wraps up Monday after eight weeks" in Hank Greenberg's lawsuit against the government over the AIG bailout, and "the key question" seems to be whether the Federal Reserve had statutory authorization to take equity in AIG:

In justifying the AIG equity stake, the government’s legal filings cite phrasing in the act including that the Fed can make loans to nonbanks “subject to such limitations, restrictions and regulations” as it deems necessary, and it puts the equity stake in that bucket.

Hank Greenberg's lawyers disagree; they think the Fed was not authorized to give AIG money in exchange for an equity stake. This has never struck me as that compelling: If a court concludes that the Fed went too far in giving AIG money, then it seems like the remedy would be to take back the money, not to give AIG more money. "Judge Wheeler could rule in favor of Mr. Greenberg on the legal question but conclude shareholders didn’t suffer an economic loss, because their alternative to the bailout was being wiped out in bankruptcy court." (In contrast, my favorite argument of Greenberg's is the one about how the government evaded Delaware shareholder voting requirements, which does seem a bit unfair, but which doesn't seem to have gotten much traction with the court.)

Bovespa is acquisitive.

BM&FBovespa, the Brazilian exchange operator, "hired two banks last month to acquire large enough stakes in the national exchanges of Mexico, Colombia, Chile, Peru and Argentina to ensure a seat on the board of each." The idea is that there will eventually be one sort of consolidating Latin American stock exchange network, and Bovespa would rather it be in Brazil than not. The leading alternative is Mila -- a consortium between Mexico, Colombia, Chile and Peru -- that Bovespa seems to be planning to infiltrate. Latin America apparently has not seen the same wave of exchange consolidation as the U.S. and Europe, in part for reasons like this:

Given that most of the region’s exchanges operate as mutual companies, BM&FBovespa will largely build up its stakes by buying shares directly from brokerages.

I love the aggressiveness of this move. You don't usually see a public company buying up stakes in its competitors so it can take board seats and influence their behavior. But buying up stakes in non-public, mutual competitors is even stranger and more fun.

What sort of company is LendingClub?

Well I mean it's an issuer of on-balance-sheet securitizations of consumer and small business loan, right? Ehmm maybe not:

Instead of comparing LendingClub to banks or credit card companies, its advisers are looking at high-growth Internet companies and marketplaces ...

“The bankers are going to try and push LendingClub to compare themselves to the companies that make it look more attractive,” said Aswath Damodaran, who teaches corporate finance and valuation at New York University’s Stern School of Business. “You as an investor have to guess who they remain comparable to at the end of the game.”

If this company had gone public in, like, 2006, do you think its bankers would have positioned it as a new kind of securitization platform? Every company is a tech company these days (they all have computers, right?), and I suppose there's a case to be made that tech companies are more beloved than financial ones.

Happy ... Merger ... Monday?

I see that "Onex Corp. has agreed to buy Swiss juice-box maker SIG Combibloc Group AG for as much as 3.75 billion euros ($4.7 billion)," but that's about it, so I assume that one minute after this is published Apple will buy Google or something. I guess "early-stage takeover talks" between BT and O2 are something. Another possible conclusion is that it's Thanksgiving on Thursday, and then it's practically Christmas, and mergers are going on vacation and we will not see another $100-billion-in-two-deals Monday in 2014.

Things happen.

Ukraine is having a financial crisis. Loan guarantee chains in China. The "change in the cost in purchasing your future pension is completely absent from the CPI." Booming derivatives costs are welcome news for ETFs. "So he began reading business publications, like McKinsey Quarterly, for style." Law firm bonus season is going well. "What is the average moral quality of assemblers of art?" And Tyler Cowen's best books of 2014. Jon Stewart Regrets Abusing Jim Cramer. Chinese general caught with tonne of cash. New York is still better than London at finance, and Harvard is still better than Yale at football. Why I quit JPMorgan to start a jetpack business.

  1. It seems to have been Il Cortile in Little Italy, which is "said to have inspired a Billy Joel lyric from 'Scenes From an Italian Restaurant,' after a waiter asked the pop star if he wanted a bottle of white or a bottle of red."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net