Insider Trading, Code Theft and Carp

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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TPG doesn't need this carp.

We talked a while back about TPG's lawsuit against its former spokesman Adam Levine (no relation) for not returning his BlackBerry or something. Last week Levine filed his own lawsuit against TPG and it is a John Grisham novel; the plot is that Levine was working at a powerful shadowy financial firm and one day read a Securities and Exchange Commission document and "realized that many of the practices it characterized as 'questionable,' 'problematic,' 'egregious,' or even 'violations of law,' were commonplace at TPG." After swallowing that particular red pill, Levine made himself unbearable to his co-workers, telling them "we're not allowed to do it like that," and "the SEC said we can't do it that way." Now he's suing as a mistreated whistleblower.

What makes this fight so wonderful is how TPG and Levine flesh out the characters in their competing stories. In TPG's complaint, Levine comes off as a Bush administration blowhard reliving his glory days of warmongering, calling himself a "weapon of mass destruction" and threatening to "'take down' TPG the same way that he took down Scooter Libby." Meanwhile in Levine's complaint, TPG comes off as a collection of white-collar-mobster stereotypes, offering to throw money at Levine so he doesn't mess up their scam, and then threatening colorful physical harm -- notably gutting him "like a carp" -- when he stands on principle and says no. Each side plays so perfectly on the stereotypes of the other side and I hope it's all true. Here is Levine's lawyer because really why not:

"TPG apparently decided to adopt what can best be described as a kamikaze legal strategy,” Thomas told The Huffington Post. “Kamikazes were effective in war in causing damage, but they also died. Historically, these strategies do not work out well.”

Financial crime.

On Friday, the Second Circuit denied prosecutors' request for en banc review of the Newman decision narrowing the law of insider trading. (Previously.) "Today’s decision, without dissent from any member of the Second Circuit, emphatically reaffirms that Todd Newman committed no crime," said Newman's lawyers, and the emphatic unanimity of the court is sort of a sharp contrast with the views of, like, everyone who is not an appellate judge. There's really no question at all what the law is, and the law is that you can only be guilty of insider trading if the person who tipped you received a personal benefit for tipping you, and you knew about it. But the popular view of insider trading is much broader than that, which is why we keep discussing proposed bills in Congress to expand the law. 

Elsewhere in overreaching financial-crime prosecutions, the latest trial of Sergey Aleynikov starts today, and does anyone think he should be in jail? The Second Circuit threw out his federal criminal conviction for stealing code from Goldman (where I used to work), the state judge threw out a lot of the evidence against him in his state prosecution for the same thing, Michael Lewis wrote a Vanity Fair article and a chunk of "Flash Boys" about his innocence, Goldman seems a bit embarrassed that he's still on trial, and also he is pretty clearly not guilty? And yet the state prosecution is continuing. 

Meanwhile perhaps the most puzzling area of financial crime is the thing where bond traders who are sneaky about their markups may be either (1) doing what all bond traders always do or (2) committing crimes. Last month's guilty plea and cooperation agreement from Matthew Katke presumably makes a lot of traders nervous, and in that vein here is a story about sneaky markups by art dealers that I also find puzzling. My takeaway is that, much like bond traders, art dealers (1) sneakily mark up paintings a lot and (2) can go to prison if they get caught. (My other takeaway is that Russian potash baron Dmitry Rybolovlev owns Leonardo's "Salvator Mundi" and AS Monaco, which seems unfair.) And here is Craig Pirrong on the Kraft/Mondelēz wheat manipulation case.

Some market structure.

Here is Jeff Sommer on the latest S&P Dow Jones Indices Persistence Scorecard and other measures of whether active managers outperform indices. They don't, is the short version. Here is Jason Zweig asking: "Have index funds become so popular that they are ruining the financial markets for everyone else?" 

If investors keep turning their money over to machines that have no opinion about which stocks or bonds are better than others, why would anyone want to become a security analyst or portfolio manager? Who will set the prices of investments? What will stop all stocks and bonds from going up and down together? Who will have the judgment and courage to step in and buy during a crash or to sell during a mania?

I've asked those questions before and been reassured that, with index funds at say 35 percent of stock mutual-fund assets, there is no real danger that we'll collectively forget how to price stocks. Really the fewer people who are competing as active managers, the easier it should be for active managers to find underpriced stocks. Unless of course the people bowing out of the competition are mostly retail investors and noise traders anyway, in which case it would be just as hard for active managers to beat their competition but even harder for them to beat their benchmarks. I don't know. There is a tragedy-of-the-commons element to indexing: Someone should pay for the work required to allocate capital efficiently, but why should it be me?

Elsewhere: Initial public offerings have gone out of fashion, there's a "Series A gap," and have you heard that people are worried about bond market liquidity?

Finance and tech.

Here is a story about how high-frequency traders are getting involved in bitcoin and aren't you excited for the conspiracy theories that will engender? Soon the bitcoin market will be rigged, in addition to being a hotbed of larceny and drug dealing. Elsewhere Virtu Financial Inc. is going to try its initial public offering again, which based on previous correlations is a sign that I should rush out my own book on high-frequency trading. And Dan Davies examines seven business models for financial technology companies and rates their viability on a 1 to 5 scale; the most viable include "Giving customers a worse service for a lower price" (a 5), "Getting your act together with respect to an industry standard where the industry has conspicuously failed to do so" (a 5) and "Trying to use someone else’s network and only pay the marginal cost of doing so" (a 4). Less viable (a 2) is "the whole Uber idea of just blatantly breaking the law and then sending out a press release about how uncool and obstructive everyone is being," which is a decent summary of a lot of the bitcoin industry, though I guess high-frequency traders are just the people to tame it. 

To whom do bank directors owe their fiduciary duties?

Here is John Carney on that question, which is a big one. One thing that I mostly think is that you can't imagine a bank as a company owned by and run for its shareholders, because the shareholders are neither the major claimants on the bank's cash flows (since it's funded mostly by debt), nor the residual claimants (those are the employees hahahahahahaha no but seriously). So a bank that is run only for the benefit of its shareholders will impose lots of externalities and quickly land in big trouble. One thing that many regulatory proposals -- significantly raising capital requirements, cutting down on bonus-driven pay -- have in common is that they would make banks look more like normal companies, with shareholders having a large and residual claim on the bank. Then would the banks have to be run more for the benefit of shareholders?

Wall Street pay.

Big bank chief executive officers are getting paid less relative to their employees, though I don't quite know why that's the relevant benchmark. Like I feel like the public perception of Lloyd Blankfein's pay is denominated in, say, dollars, or how many years it would take a Wal-Mart worker to make what he makes in a day, not in how many months it would take a Goldman bond trader to make what he makes in a year? Anyway one consultant says "We're back to pre-pre-recession levels," which is just a terrific line. 

Elsewhere in pay, "An arbitration panel ordered Barclays PLC to pay a former swaps trader about $9 million in back pay that he didn’t receive after quitting during a regulatory investigation." It always seems a bit unseemly to sue your former employer for pay that you missed out on because of a regulatory investigation, but this guy "wasn’t accused of any wrongdoing and fully cooperated with the investigation," and anyway I guess it's worth embarrassing yourself a little for $9 million.

Things happen.

Currency reserves are shrinking. BTG is having a rough time. Might a Glencore/Rio Tinto deal come back? US craft beer thrives despite strong dollar. Bill Stiritz "couldn't be happier" with Herbalife, though "Federal law enforcement agencies recently contacted several Herbalife members for information about their own business practices."  Downside Variance Risk Premium. Here's a story about a former Goldman Sachs partner building an eco-tourism resort with an actor. "'It’s mostly porn,' a former intelligence officer who worked on counterterrorism operations, told The Daily Beast." The TSA made $638,142.64 in 2013 from change left in bins. My Real-Time Response To Learning What The Rock Eats Every Day.

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(Corrects name of Dmitry Rybolovlev in fifth paragraph.)

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