Guilty Banks and Complaining Spoofers

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.
Read More.
a | A

Never mind that FX guilty plea stuff.

Yesterday's expected big guilty pleas by five banks to foreign exchange rigging charges seem to have been pushed back for another week. "Part of the reason for the delay is that banks are still trying to lock down waivers" for the collateral consequences of their guilty pleas, because you get those waivers by going to a bunch of regulators and begging for them, and that is a fairly arbitrary process:

“Now that bank guilty pleas are becoming more common there is a real need for much clearer rules on the regulatory consequences of bank convictions,” said Brandon Garrett, a law professor at the University of Virginia who studies corporate prosecutions.

On Monday I was pretty blasé about those consequences: You can't just shut down all the big banks at once, and if they all plead guilty at once, then those guilty pleas can't come with the sort of disastrous consequences that people once feared. "A guilty plea is just the particular sort of document that you sign before handing over a big check to the Department of Justice," I said, "the way a deferred prosecution agreement used to be." But now I'm not so sure. I mean, here's this guy:

“For any company there’s a huge reputational difference between a deferred-prosecution agreement and a guilty plea,” said David A. O’Neil, a partner at Debevoise & Plimpton and former senior Justice Department official who helped secure a guilty plea to a financial crime last year from the French bank BNP Paribas. “But the government needs to be careful that it doesn’t turn a guilty plea into a D.P.A. with just another name.”

The way it seems to be doing that is by being cagey about the regulatory consequences of a guilty plea: It's not that a guilty plea will mean the end of a bank (like it used to), or that it will mean business as usual for the bank (like a DPA), but that it will leave the bank at the whim of regulators and prosecutors, creating massive uncertainty that can only be resolved by a lengthy process of groveling. 

There's a case that this is the right outcome: Harmless guilty pleas cheapen the justice system, disastrous guilty pleas destroy the banking system, and the middle road of whimsical groveling at least gives regulators the ability to influence change at the banks. But it does feel like sort of a worrying way to run a banking system. Prosecutors can be arbitrary, and can get things wrong, and it might be nice to have our banks regulated by rules rather than by negotiations.

The SEC is looking at market structure.

Yesterday the Securities and Exchange Commission held the first meeting of its Market Structure Advisory Committee, a group of market-structure experts (including a Bloomberg Tradebook executive) who will advise the SEC on how to fix market structure. First up was Rule 611, the order-protection rule, which many have identified as a major culprit in modern market fragmentation. But SEC chair Mary Jo White's opening remarks are more generally interesting, particularly her list of questions about current market-structure oddities, e.g.:

  • "Why are there 11 exchanges that trade listed equities, and why are ten of these exchanges controlled by three exchange groups?"
  • "Why are 94% of displayed orders in corporate stocks cancelled without an execution? Do at least some portion of them detract from fair and orderly markets?"
  • "Why, in a single week, were nearly 2.9 billion orders routed to dark pool ATSs, yet only 1% of these orders received an execution?"
  • "Recognizing that high frequency trading is not a monolithic phenomenon and that different HFT firms can employ varying strategies, why were only 49% of trades from a sample of HFT firms generated by resting orders that offer liquidity to others?"
  • "Why do retail brokers route nearly all of their non-marketable customer orders to exchanges that pay the highest rebates for those orders? Is there any data indicating that customers receive best execution of their orders at those exchanges?"

There are other good ones. "Rule 611" is probably a partial answer to some of them, but only some of them.

Elsewhere in market structure, here is the story of how the Commodity Futures Trading Commission got the power to go after spoofing. And here is the somewhat crazy story of how Nav Sarao, the accused flash crash spoofer, complained incessantly to the Chicago Mercantile Exchange that high-frequency traders were manipulating the market against him.

Mr. Sarao appears to have filed an unusually large volume of complaints. “That would be considered a high number,” said Ray Cahnman, a longtime futures trader and chairman of the proprietary trading firm Transmarket Group LLC. “Most people would break down before they get to 100 because they realize the complaints aren’t going anywhere,” he said.

Umm, right? Sarao's 100+ CME complaints are a little reminiscent of all those cancelled stock-market orders, or of spoofing for that matter: When you put in that many orders/complaints, it's hard to know which to take seriously.

Mr. Pirrong said the CME is inundated with messages about manipulative trading in the market. It is unclear if Mr. Sarao’s would have stuck out compared with others. “In one way, this is part of the problem because the signal to noise ratio might be pretty small,” he said.

Merger-Demerger Wednesday.

The stereotype of investment bankers is that they advise companies to make lots of acquisitions, and then the companies get too big and bloated, and then they come back and tell the companies to spin off assets and break themselves up. And of course the bankers get fees both ways. So I was tickled by yesterday's news that Danaher will both buy Pall Corp. and split itself up into a "science and technology growth company" called Danaher (that includes Pall) and a new industrial company to be named later. Announcing the merger and the split at the same time is an advanced move, and suggests a sort of cheerful confidence: Danaher looked at the corporate landscape, decided it would be better off if it added those assets over there and subtracted these assets here, and then went and did it. "Two Danahers? What's not to like about that?" said an analyst.

Drexel: Where Are They Now?

Here is a story about how General Wesley Clark is serving on the boards of a lot of penny-stock companies, many of which don't do so hot. He's also helping Dennis Levine, the former Drexel Burnham Lambert managing director who went to prison in the Drexel insider-trading scandal, raise money to grow hydroponic lettuce:

On its website, Levine’s closely held company, VFT Global, declares that it will solve the planet’s food, water, and energy shortfalls with a network of high-tech greenhouses. “All crops are grown in completely soil-less and controlled environments with all-natural nutrients,” it says. Levine, 62, acknowledges in an interview that the company has never grown anything; since forming in 2009 it’s mostly sought financing for big ideas that haven’t materialized yet, such as a $20 million greenhouse in Arizona to be paid for mostly by the Navajo Nation. “We will blanket the United States,” Levine says. “That’s the game plan over time.”

In more carnivorous Drexel diaspora news, Chris Andersen is raising Mangalitsa pigs in New Jersey:

"I can get guns, I can get drugs, I can get boys, I can get girls—you couldn't get a Spanish ham in New York City," he joked. So he decided to take action. "I said to my chef that I may be a dumb investment banker, but I can raise a pig."

A short interest violation.

Whenever even I find a regulatory action too boring to contemplate, I mention it here, because usually someone will write in and be like "no actually this is really interesting and important!" So here is a $2 million Finra fine against Morgan Stanley for failing to accurately and timely report its short interest because "Morgan Stanley included positions from the accounts of non-broker-dealer affiliates in a number of aggregation units when determining each unit's net position." The consent letter is full of sentences like "The firm over-reported positions by including 381 short interest positions for certain Nasdaq and OTC equity securities totaling 365,469,262 shares, when the firm should have reported 342 short interest positions totaling 365,280,102 shares for these securities." Have at it! Should I care? 

Things happen.

Does the Volcker Rule violate NAFTA? (Probably, right?) "The problem is no one knows the true costs or benefits of the blizzard of laws, rules and penalties imposed since the financial crisis." Everyone did say that yields have nowhere to go but up. Active Funds Winning in 2015 So Far. The U.K.'s new business secretary, Sajid Javid, previously designed a replenishable synthetic balance-sheet CDO for Deutsche Bank. The new issue of Konzept is out. The New World Oil & Gas story is pretty nuts (earlier, also).  A David Boies profile. You've got a silly code name for the Verizon-AOL deal. Shingy's first interview on that deal ("It is amazing that two amazing brands are coming together."). RadioShack's brand name sold for $26.2 million. The prince vs. the badgers. Pet diarrhea biotech Jaguar Animal Health prices downsized IPO at $7, the low end of its original range. Kill the passion for work. Our attention span is now less than that of a goldfish, Microsoft study finds. Beyoncé owns a dragon egg from ‘Game of Thrones.’

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks!

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

To contact the editor on this story:
Zara Kessler at