Hacking Edgar and Ignoring Mail

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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Avon continuing.

In a former life as an M&A lawyer, I was sometimes present at the birth of entities. We'd fill out a form, send it away to the Delaware Secretary of State, and get back the PDF document that formed the earthly body of Cutesy Codename Merger Sub LLC. Then, as a christening gift, we'd get Cutesy Codename Merger Sub LLC a filing code for the Securities and Exchange Commission's Edgar system, so that it could make securities filings if and when it actually involved itself in the public-company merger that was its destiny.

It was not particularly hard to get an Edgar code, is the thing:

The SEC doesn’t verify whether entities using its filing systems “are real or have money,” said James Maloney, a former SEC official now at law firm Gibson Dunn & Crutcher. Getting access to Edgar “is no more complicated than signing up for an e-mail account,” he said.

And once you have an Edgar code, you can make filings about your own company. And if your own company happens to be launching a tender offer -- or a fake tender offer -- for another company, then your tender offer filings also show up with that other company's Edgar filings: "Third parties such as shareholders and insiders are allowed to file directly to a company’s Edgar feed, a system set up to promote maximum disclosure." 

This fact seems to have been relevant to the incorporators of PTG Capital Partners LTD, whose tender offer for Avon Products is still up on Edgar, and still in Avon's Edgar results, even though it's a hoax. Dan Primack:

That’s right: An obviously-fraudulent document remains posted on the website of America’s top financial regulator, thus giving it a de facto seal of approval.

I am less offended by this than everyone else seems to be? It's a good lesson: Just because something is on Edgar, that doesn't mean that it's true, or that the SEC approves it. It just means that someone pushed a button somewhere. A lot of people pushing buttons are bad people!

Meanwhile, PTG's hoax tender offer for Avon seems to have caused about $91 million worth of stock to trade in 25 minutes, at as much as a 21 percent premium to the pre-announcement price, so it sure looks like the PTG guys made some money on their hoax. That money seems to have come at the expense of high-frequency trading market makers, whose algorithms are perhaps not as equipped as old-timey human specialists were to decide when a stock move is dumb and should be avoided.

Lost in the mail.

Yesterday was really a nutty day all around for securities stories. There was Avon, of course, and those lovely golf-code insider traders, and Wesley Clark's penny stocks. But there was also this case, in which the SEC fined Nationwide Life Insurance Company $8 million for sitting on its mail. Nationwide offers variable annuity and variable life insurance products, which work sort of like mutual funds, and Investment Company Act Rule 22c-1 requires that if Nationwide gets a customer order to buy or sell shares before 4 p.m., it has to complete the transaction at that day's price. But Nationwide got a lot of buy and sell orders by mail, and decided to save itself the trouble of executing at that day's price by holding the mail until 4:01:

An SEC investigation found that when regular postage mail became available for retrieval early each morning from its P.O. boxes, Nationwide arranged for the pickup and delivery of mail directed to other business units but intentionally delayed the retrieval of mail related to its variable contracts business.  Therefore, in spite of receiving customer orders and other variable contract mail in its P.O. boxes at least several hours before the 4 p.m. cut-off time, Nationwide sought to avoid its requirement to process the orders contained in this mail using the current day’s price by ensuring this mail wasn’t delivered to its offices until after 4 p.m.  Meanwhile, Nationwide did arrange for prompt pickup and delivery of U.S. Postal Service Priority Mail or Priority Express Mail that enabled contract owners to track an order’s time of delivery to the P.O. boxes.  Those orders were assigned the current day’s price.

This went on for almost 16 years, from October 1995 through September 2011, during which time this happened:

The SEC’s order further finds that Nationwide employees complained to post office staff when portions of the variable contract mail were inadvertently mixed together with the other mail and therefore delivered to Nationwide’s offices before 4 p.m.  After one such incident, Nationwide requested a meeting with the post office and stressed that it needed “late delivery” of variable contract mail “due to regulations that require Nationwide to process any mail received by 4 p.m. the same day.”

Do you think that's how they got caught? Like, the post office went to the SEC and said "hey we have guys who keep demanding that we delay their mail to avoid your regulations?" No, right? Anyway the lesson here is never trade by mail, come on.

Today in FX settlements.

This week's expected foreign-exchange-rigging settlements have been delayed, apparently because the banks are having trouble getting the waivers they want from the SEC. Meanwhile, the latest is that Barclays' foreign-exchange settlement will include a guilty plea to foreign-exchange rigging, but won't include a guilty plea to Libor-rigging, but will include a fine for Libor-rigging. "The size of the fine isn’t clear but as of a few weeks ago was around $60 million," plus whatever the fine for the FX-rigging plea is (probably more). (Plus of course the original $160 million Libor-rigging fine back when Barclays signed its non-prosecution agreement in 2012. Plus of course the hundreds of millions in other Libor-rigging fines that Barclays paid to other regulators.) "Barclays seems to be getting off more lightly than UBS Group AG," whose FX settlement won't include a guilty plea to FX rigging, but will include a fine for FX-rigging, and will include a guilty plea to Libor-rigging. ("UBS officials are confounded by the outcome.") I'm sure all of this makes perfect sense but it does not exactly impress one with the majesty of the law. 

Brian Moynihan vs. The Thing.

It may not surprise you to learn that being the chief executive officer of Bank of America is a stressful job, but here's a profile of Brian Moynihan:

In an interview Thursday, Mr. Moynihan said Bank of America is “not where we want to go. We have work ahead of us, there’s no question. But [we’re] driving the thing in the right direction.”

Later:

“We’ve been hard at work,” he said in Thursday’s interview. “The thing can keep growing and deliver value.”

I love that he calls his company "the thing." In my mind he capitalizes it. "The Thing keeps growing!" he screams in his nightmares. There is a lot of good stuff here; here's one small detail that I enjoyed:

After the Merrill deal was announced in 2008, Mr. Lewis gave his job as head of corporate and investment banking to Merrill chief John Thain—and tried to move Mr. Moynihan to Delaware to run the bank’s credit-card unit.

When Mr. Moynihan refused, the company drew up a news release announcing his resignation. “I have enjoyed my time at Bank of America, but it is time to pursue new challenges,” the draft quoted Mr. Moynihan as saying.

I mean it is not really a surprise that when an executive says he is leaving voluntarily to pursue new challenges, it means that he was pushed out and the people doing the pushing wrote the press release, but it's still fun to see it confirmed. Moynihan obviously survived that one, but it was a close call. Credit cards in Delaware! 

Elsewhere in bank news, Citigroup shut down its "Alternative Credit Program," and I mean a good general rule is: Never have an "Alternative Credit Program." When things go wrong, "Alternative Credit Program" just sounds too much like "Bad Credit Program." This one "allowed a small group of coveted clients to make high-stakes bets on currency markets without going through the bank’s normal procedures to manage risk"; that coveted group included Tormar Associates, the joint family office that lost a bunch of money on Swiss franc trading and is now suing and being sued by Citi over who's responsible for those losses. Because Citi apparently offered Tormar 300 to 1 leverage on its trades. Because that's how the "Alternative Credit Program" worked. 

Remember Pimco's equity business?

The one from the 1980s, which "failed after its bond traders overwhelmed a handful of equity managers at strategy meetings," I hope physically? Or the one that started in 1999 and "ended in legal trouble after regulators accused it of allowing a hedge fund to engage in market timing"? Or the one that started in 2009 under, for some reason, Neel Kashkari, which now also seems to be ending in tears: Pimco is shutting down three active stock funds to "focus on enhanced indexing strategies," though some active funds will remain. And Virginie Maisonneuve, the current chief investment officer of equities and the only woman on Pimco's Global Executive Leadership team, will be leaving next month with no plans for a replacement. "'Blip' is giving it too much credit for that business," says an analyst. You'd sort of think that getting Bill Gross out of the way might make Pimco a more appealing place for non-Bond-King investment styles? Apparently not.

Elsewhere in asset management news, Blackstone expanded its minority-stakes-in-hedge-funds business by taking a chunk of Magnetar, Calpers is selling some trees, and a lot of university endowments outperform Harvard's.

Things happen.

London is becoming infested with boiler rooms. Where are the Scottish sovereign bonds? BlackRock: With Fed Poised to Act, This Feels Like Pompeii. Italy's Second-Largest Bank Made a Killing by Dumping Italian Bonds. A bubble is "something I get fired for not owning." Uruguyan private equity is rough. Dov Charney keeps suing American Apparel. "He was into science, and I was part of science." Not so excellent. Drinking Secret Service Men Had Poor Judgment, Report Says

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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