Levine on Wall Street: Harbingers and Currencies

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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Phil Falcone is leaving Harbinger to spend more time with his other Harbinger.

Phil Falcone used to run a hedge fund called Harbinger Capital, and he was arguably too good at it, borrowing from the fund while locking up investors and doing some lovely creative short squeezes. After flying too close to the sun for a bit, his punishment was that he's not allowed to run a hedge fund any more. But he's allowed to run public companies, because I guess public company shareholders need fewer protections than hedge fund shareholders? Until yesterday he ran two public companies, Harbinger Group and HC2 Holdings (which everyone assumes stands for "Harbinger Capital 2"), each of which had a distinct hedge-fund flavor:

Harbinger Group is a onetime oil driller that Falcone's hedge funds took over in 2009 and invests in companies from life insurance to pet supplies. HC2, based in Herndon, Virginia, owns a steel company, an underseas cable firm and a biotechnology firm.

But now he's leaving Harbinger Group to run HC2 full time, apparently because Harbinger's other shareholders think that he's a drag on the stock, which seems to be trading below net asset value. Fun fact: His Harbinger Group severance is $20.5 million, plus $19.8 million in earned bonuses, for a total of $40.3 million. Since he took over Harbinger Group in late 2009, it has had a cumulative net loss of $47 million, so he lost more for shareholders over the last five years than he made for himself yesterday. I mean, that's just an accounting convention, he's added billions in market capitalization over that time, but it's still sort of a fun fact.

Insider trading in the currency markets.

No come on that doesn't even make any sense, this is what I guess you'd call front-running. HSBC was advising on a big cross-border acquisition for Prudential PLC, and "was working on a related multibillion-dollar currency transaction" to hedge Prudential's currency risk, and its "trader allegedly sold large quantities of pounds ahead of Prudential's order," and also "allegedly alerted a trader at hedge fund Moore Capital Management" about the trades. Is this bad? Who knows. The Justice Department is investigating, but each of those actions is either illegal and shameful front-running or perfectly normal risk management. So the HSBC trader: Had he guaranteed Prudential a price that he was hedging, or was he just working an order for them and front-running it for his own account? Or the Moore Capital thing: Was the HSBC trader calling them as a possible counterparty to get Prudential's deal done without market impact, or was he calling them to tip off his buddy to a front-running opportunity? There is a difference, but knowing which this is requires more details, and a certain sensitivity to nuance and market realities.

Elsewhere in HSBC news, it agreed to pay $12.5 million to settle Securities and Exchange Commission charges that its Swiss private banking arm provided illegal investment advisory services to U.S. clients. And, along with Goldman Sachs, it was sued by a jewelry company for allegedly manipulating the prices of platinum and palladium, and I guess if everything is manipulated then why not platinum and palladium? On the other hand, if your model of financial markets is that every stock, bond, currency, commodity, or other financial quantity is illegally manipulated all the time, then it's at least possible that what you think of as "manipulation" is just "trading."

Some M&A law.

It's a busy week for mergers and acquisitions decisions. There's Tibco, the company that is selling itself to Vista Equity Partners after Goldman Sachs miscounted its shares and got the price of the deal wrong. A Delaware chancellor let the deal go to a vote even though, you know, Goldman miscounted the shares and got the price wrong. I think I'm fine with that, since Tibco seems to have wanted a specific per-share price (which it got), and Vista, which probably cared more about the total enterprise value, does not seem to have relied on Goldman's erroneous advice. So the error was not particularly material to the actual negotiations, just embarrassing.

On the other hand, a different Delaware chancellor has temporarily blocked Nabors Industries' acquisition of a majority of C&J Energy Services, a sort of weirdly structured inversion deal in which Nabors would contribute its completion and production businesses in exchange for 53 percent of the combined company and $940 million in cash. The C&J shareholders argued that this was a scheme for Nabors to acquire control of C&J without paying a premium, while C&J's board members and managers get to keep their jobs, and that C&J should run a real process to try to sell itself for a premium. The judge seems to have agreed and told C&J "to solicit any competing proposals from potential buyers for 30 days." It's hard to be all that confident that a court-ordered go-shop will get many buyers, but you never know.

Elsewhere, here's a paper on the law and finance of anti-takeover statutes. And "how chief executives respond" to activist pressure "has become a new measure of their mettle."

This is awkward.

Martin Shkreli, the chief executive officer of Retrophin, a small-cap biotech company, was fired two months ago because "the board concluded that Shkreli had committed stock-trading irregularities and other violations of securities rules." In the days before his firing, Shkreli was buying Retrophin stock and tweeting things like "Not selling $RTRX. The stock is very very cheap." But! Awkwardly, at the same time, Shkreli "received almost $3 million in proceeds by selling Retrophin shares with delayed public disclosure," entering into prepaid forward contracts that were only disclosed this month. As a former marketer of prepaid forwards, I have some sympathy with him: He kept the shares and the voting rights, and the prepaid forwards seem to have been hedging or financing transactions -- he apparently bought some out-of-the-money puts and sold some out-of-the-money calls that were documented as a prepaid variable forward -- rather than outright sales. Still, it's not great to go around saying that you're buying stock, even if you are, when you're also selling stock, even if it's in a prepaid forward.

Tokyo stock traders don't want to work longer hours.

Why would they? "Tokyo's exchange is open five hours a day," which seems like the right number of hours to work, and it scrapped plans to extend trading hours after firms and workers protested. One thing that you'll hear from advocates of high-frequency trading is that the world, and information, move in continuous time, so things like batch auctions or exchange-imposed messaging delays are bad for market efficiency. On the other hand basically all stock markets are closed most of the time, which is a bit weird for market efficiency.

Steve Cohen's ex-wife has some outside investors.

Which is more than he can say, zing!

Things happen.

Investor-to-investor bond trading. Uber is raising money at a $35 to $40 billion valuation. Bitcoin binary options. Tour the U.S. Treasury with Your Smart Phone. Deutsche Bank research has a fancy new magazine called Konzept, which will help "find sustainable solutions for our stakeholders and evolve our thinking about the future." Sausage-Maker Wants to Set Record Straight on How Sausage Is Made.

(Corrects Uber valuation in 11th paragraph. )

  1. Just adding up net income lines in the financials for the year ended September 30, 2014. There's also a one-month $70.8 million net loss for September 2009.

  2. I have some biases, not only because I used to work at Goldman, but also because I have messed up share counts in spreadsheets. Happens to all of us.

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:
Matthew S Levine at mlevine51@bloomberg.net

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