White Lies and Guilty Pleas

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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What is fraud anyway?

Today is the oral argument in Jesse Litvak's appeal of his fraud conviction for lying about how much he paid for some mortgage bonds, which a lot of people are watching with great interest:

Long-acceptable trading tactics—pretending to have paid more for a bond than one had, for example, or embellishing how many potential buyers may be interested in a particular security—have become potential criminal offenses.

“The fact that he [was convicted] for doing what appears to have been fairly widespread really shook the industry,” said Lee Richards, a partner at white-collar defense law firm Richards, Kibbe & Orbe LLP and a former federal prosecutor. He added that some traders “had come to believe that everyone in the business told white lies.”

If his conviction is overturned -- and he has reason for optimism -- then there will be broader consequences:

Matthew Katke, a former Royal Bank of Scotland trader, pleaded guilty to committing securities fraud last month. But in an unusual agreement, Mr. Katke can withdraw his plea if Mr. Litvak’s appeal finds that he didn’t commit securities fraud.

Katke is cooperating with prosecutors in a continuing investigation, so if Litvak's conviction is reversed, then Katke's plea goes away, and so presumably does that investigation. So a lot of people have a stake in Litvak's outcome. Meanwhile banks are assuming that his conviction is for real and trying to keep themselves out of trouble. For instance:

Goldman is developing new policies on traders’ communications, including limits on what they can say about their past trades, according to a person familiar with the matter.

“The best practice would be to be truthful, or not to say anything at all, especially in writing these conversations in instant messages,” said Elizabeth Baird, a partner at Morgan, Lewis & Bockius LLP and a one-time bond trader. 

The idea here seems to be that Litvak would tell a customer that he'd bought a bond at 102 and sell it at 102.25, when really he'd bought it at 100. The response from other banks is not to tell the customer the truth about what they paid for the bonds -- which would limit their ability to charge more -- but rather to try not to tell the customer anything at all about it. It can't be fraud if you don't say anything. Or at least if you don't write it down.

Elsewhere, here is Andrew Ceresney, the Securities and Exchange Commission's director of enforcement, on the SEC's litigation successes and challenges. And here's an SEC fraud case against ITT Educational Services, for concealing "the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed."

Happy FX guilty plea day.

Speaking of fraud, today is the day that all the big banks are expected to admit that they conspired to manipulate foreign-exchange fixing, a semiannual tradition that last took place in November. In a bizarre throwback to an earlier tradition, UBS's admission to FX manipulation will consist of a guilty plea to Libor manipulation: UBS had a non-prosecution agreement with the Justice Department over Libor, which required it to keep its nose clean, and now that its nose was found in some FX-rigging chat rooms, all bets are off. Except that it may not actually be pleading guilty to the FX thing?

“This is basically a trade off,” said Andreas Venditti, an analyst at Vontobel Holding AG in Zurich. “They get leniency on foreign exchange and a lower fine and instead the Justice Department comes back with Libor.”

UBS’s cooperation in the currency probe may help shield it from antitrust charges in that matter.

So the punishment for being a repeat offender is that you get punished for your old offense but get leniency on your new one? I mean, okay, fine. All of this seems like accounting, not substance. The substance is: You manipulated some whatever, and now you write the government a big check. The meaningless accounting is whether the check is stapled to a non-prosecution agreement or a civil settlement or an FX-rigging guilty plea or a Libor-rigging guilty plea. A lot of people seem to put a lot of energy into debating those nuances but I just cannot see how they matter.

Verizon Online.

"You can easily save information from America Online on your hard disk, and there are more than 50,000 computer programs you can download -- that is, transfer from America Online's computers to your own -- at no extra charge," wrote Walt Mossberg in 1992, and for all I know that is still true? I suspect that there's an element of nostalgia to yesterday's voluminous coverage of Verizon's agreement to purchase a mid-size ad-tech company. Or more than suspect; here is a Vox article titled "In memoriam: AOL CDs, history's greatest junk mail." You always have a soft spot in your heart for your first Internet service provider.

Is it a good deal? Tara Lachapelle points out that, at a 24 percent premium to AOL's 20-day average trading price and at an enterprise value of just 11 times Ebitda, the deal looks cheap. AOL's stock is trading above the offer price, suggesting that shareholders are hoping for more. She doesn't think they'll get it, though, since no one else seems particularly interested in buying AOL. Maureen Farrell agrees that "the roster of suitors who would view AOL as a must-have asset isn’t long." And Stephen Gandel argues that Verizon "is actually paying through the nose for AOL," since a lot of AOL's earnings come from dial-up subscribers, which can't be viable forever.

Besides dial-up, Verizon is getting The Huffington Post, but people seem to think that that's going on the block. The real draw is ad tech. As AdAge explains it:

The digital advertising industry (and some might say, the entire advertising industry) is on the fast path to automation. Scores of companies have emerged to help automate different parts of the ad buy -- the buying, the selling, the targeting, the attribution, etc. -- and AOL owns a piece of tech for just about every step of the way. For a while, everything seemed peachy in the desktop-focused ad-tech world, but then media consumption moved quickly to mobile, where targeting cookies don't work effectively, and the system essentially broke.

Verizon, acquirer of AOL, owns the key to fixing this problem: concrete mobile data which can be used to tie user identity across devices.

Here is Farhad Manjoo on the combination of AOL's advertising technology and Verizon's mobile customer data, and Awl publisher Michael Macher on programmatic ads and video ads and the Lumascape. Here is "Verizon-AOL: A War of All Against All." And what will happen to Shingy?

Elsewhere in tech nostalgia, "The auction for bankrupt electronic retailer RadioShack’s name and customer data resumed Tuesday with bidding at $15 million."

Door revolves.

I think I've said this before, but the tech industry won't become the financial industry just because some big tech companies hire some bankers to be their chief financial officers. The tech industry will become the financial industry when big tech companies start hiring former senior federal regulators to help entrench their incumbency advantages. Anyway, "Facebook Inc. hired former Federal Communications Commission Chairman Kevin Martin to manage the social network’s mobile and global access policy from Washington."

The Shelby bill.

Speaking of which, I guess, yesterday Senator Richard Shelby introduced a new bill "to ease regulatory restrictions on smaller banks and increase scrutiny of the Federal Reserve." Here's a summary of the regulatory-relief provisions, which include raising the "systemically important" threshold from $50 billion to $500 billion of assets and designating "the Federal Financial Institutions Examination Council as an ombudsman charged with receiving and investigating complaints about bank examiners," I guess from the banks? And here's Jon Hilsenrath on the Fed oversight provisions, which "look mild at first glance": 

There are no “Audit the Fed” provisions opening Fed monetary policy decisions to scrutiny from the Government Accountability Office; no provisions requiring the Fed to adhere to a mathematical rule to guide interest rate decisions, such  as the “Taylor Rule,” which prescribes an interest rate based on the performances of inflation and economic output; no new restrictions on emergency lending powers prescribed in section 13 (3) of the Federal Reserve Act;  no major revamp of the Fed’s 12 regional banks.

Meanwhile, "FDIC Chief Martin Gruenberg: Big Bank Failure Won’t Imperil System," but that's just what you'd expect him to say.

Robin Hood.

Here is an article about last night's Robin Hood gala, "Wall Street’s biggest annual philanthropic gathering," which raised $101 million and featured Paul McCartney and some jokes and some blather ("we’re going to come together, we’re going to achieve the highest, most noble aspirations of humanity") and some "satellite gatherings at Lavo and the Gallery at Dream Downtown" if you couldn't get into the main party at the Javits Center. The article includes a picture of Lloyd Blankfein smiling with Jamie Hector, the actor perhaps best known for playing Marlo Stanfield on "The Wire," which I am going to get blown up and hang in my living room. The game is the game.

Death and the dad-bros.

Linette Lopez went to SALT:

There are ways to cheat death. Blackstone founder Steve Schwarzman has been on a tear putting his name on building after building, making himself immortal. He just donated $150 million to put his name on a building at his alma mater, Yale. There's also Blackstone Tower in Chicago and the Schwarzman Building at the New York Public Library, to name two. Hopefully, Schwarzman now fears death less than someone who has simply donated a park bench to Rutgers.

SALT attendees were reminded of this fear mid-lecture. During the third day's session, a number of star hedge-fund managers were giving out stock picks. Just as billionaire investor Leon Cooperman was clearing his throat and getting ready to dive in, there was a sound. An indescribable sound. The sound of someone stopping in midway through a loud, guttural cry.

And then there was a thud.

"Should I continue," Cooperman asked as the crowd hushed. To SALT's credit, the man was scooped up in no time. Anthony Scaramucci, the conference's chairman and CEO of its host investment firm SkyBridge Capital, came out to calm the crowd and get the session back on track. Time was put back on the clock.

The session continued after 15 minutes of shock. Afterward, we heard that the man who had collapsed had had a seizure; worst yet, we heard he was young. In his 30s. Not even a dad-bro. A dad-bro-to-be.

Things happen.

Steven Davidoff Solomon on pension fund placement agents. You can't just rely on accretion/dilution analysis to approve a merger. The State Department quickly approved Bill Clinton's speeches to foreign banks that were under U.S. investigation. Are mortgage servicing rights, or their hedges, "The Next Asset Likely to Blow Up Big Banks’ Balance Sheets"? Happy DuPont proxy fight day! Financial sector in advanced economies is too big, says IMF. Market Moves That Are Supposed to Happen Every Half-Decade Keep Happening. CFTC Releases Final Interpretation on Forward Contracts with Embedded Volumetric Optionality. "Lawyers in public-service jobs also drank less alcohol than their higher-income peers." What If Lehman Brothers Had Been Lehman Sisters? North Dakota caviar. "Digital Gold reminds us of how rapidly the libertarian Valhalla degenerates into a capitalist Hell." North Adams police: Don’t drunkenly chase bears

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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