SEC Waivers and Suspicious Laughter

Also speculative models for activist defense and traders whispering to their mistresses.


As you may have heard, this week UBS, Barclays, Citigroup, JPMorgan and Royal Bank of Scotland entered guilty pleas for crimes relating to foreign-exchange manipulation. As you may also have heard, the banks previously spent some time going around to regulators to make sure that the supposedly automatic regulatory consequences of a criminal conviction would not apply to them. One of those regulators was the Securities and Exchange Commission, which granted an assortment of waivers, including letting some or all of the banks remain "well-known seasoned issuers," retain a safe harbor for forward-looking statements, and avoid disqualification under Rule 506 for doing private placements. Commissioner Kara Stein is a regular dissenter from these waivers, and here is her dissent yesterday. She points out:

Further, through this latest round of Orders, the Commission has granted:

  • Barclays its third WKSI waiver since 2007;
  • UBS its seventh WKSI waiver since 2008; 
  • JPMC its sixth WKSI waiver since 2008; and 
  • RBSG its third WKSI waiver since 2013.

The Commission has thus granted at least 23 WKSI waivers to these five institutions in the past nine years. The number climbs higher if you include Bad Actor and other waivers.

Hahaha but also what does this tell you? Certainly it tells you that the automatic loss of WKSI status is not a great deterrent for bank misconduct, since it's never enforced, fine. But doesn't it also tell you that it's not a sensible consequence for bank misconduct? Or at least, not for all bank misconduct? Banks do bad things all the time -- that is a fact of banks, and of life -- and the SEC decides, over and over again, that slowing down their debt offerings would not improve capital markets or investor safety, and so skips its own supposedly automatic punishments.

Here, banks conspired to manipulate FX rates, and also did some miscellaneous unpleasantness in their FX business. The consequence for that is that they paid massive fines and fired at least some of the people who did the manipulating. Why should another consequence be that they have to jump over a bunch of hurdles to do their debt offerings? What do the debt offerings have to do with the FX business? The banks don't even have to stop doing the things they admitted to in their guilty pleas. Why should they have to stop underwriting private placements?

Some metrics.

Meanwhile here's a story about Behavox, a startup that wants to analyze data about traders' phone calls and electronic communications -- including tone of voice, frequency of laughter and swearing, etc. -- to figure out if they're up to no good. Or whatever sort of no good their employers are concerned about:

"Why is this trader suddenly whispering to this individual that is not even on his approved contact list? Oh, the trader is married and this is his new mistress. That doesn’t matter," Adylov says. "But why is he no longer speaking to this contact that used to be so important to him? Human relationships don’t usually change nature very quickly. Or why has that mate whom he used to communicate with only infrequently suddenly become the most important contact whose messages get returned instantly? Are they friends who are suddenly passing inside information? Is there a new pattern to the trader’s use of his security pass? Is he going outside the building to take calls from this person on his own mobile?" 

Incidentally I would like to propose to you that married traders' chats with their mistresses are an important element of financial regulation. The model here is as follows:

  1. Much of the work of bank regulation consists of compliance officers and law-firm associates going through traders' communications to respond to regulatory requests, conduct internal investigations, and generally try to find and eliminate bad behavior. (Fraud bad behavior, I mean, not marital bad behavior.)
  2. That work is boring.
  3. But at least every so often you come across ridiculous sex chats and get to giggle about them with your coworkers.
  4. The sex chats, although rarely directly relevant to the fraud, are what incentivize the lawyers and compliance officers to keep going: Each new document will probably be boring and irrelevant, but it might be some filth from a married managing director, so you keep hunting. And maybe you find the fraud!

Anyway I don't know what this means for Behavox. I've said before that efforts to measure bank culture will inevitably lead to efforts to game those measurements, and I suppose that could happen here, but at first glance this thing seems like it would be hard to game. Or at least annoying to game. I would hate to work on a trading floor where everyone was shouting in the phone all day to avoid getting flagged to compliance. 

Goldman activist defense. 

I didn't know this:

For months, Goldman Sachs Group Inc.’s activism-defense business has been the butt of competitors’ jokes.

“If you want to lose, hire Goldman Sachs,” quipped Rob Kindler, the head of mergers and acquisitions at the firm’s arch rival Morgan Stanley, at a conference in March.

The article is about how Goldman is pretty pleased with its win in the DuPont proxy fight, but just for fun let's build a toy model for Goldman's previous failures. (Disclosure: I once worked at Goldman, though this is strictly a toy model and not grounded in any knowledge of the activist defense business.) Here:

  1. Activist defense is not especially lucrative.
  2. When activist defense fails, and activists succeed, that has a tendency to generate transactions (spin-offs, mergers, etc.).
  3. Those transactions are lucrative.

The Wall Street Journal says "Banks that help companies defend against activists can win an inside track for the clients’ future deals later, where there is real money to be made," but that's true if you lose too. (I mean, if you negotiate a compromise or whatever; abject incompetence is not a good pitch.) And if you lose, the future deals become more likely. Consider CVR Energy, which hired Goldman to defend against Carl Icahn, ultimately sold itself to Carl Icahn, and paid Goldman a lot more for the merger than it would have for a successful defense. Long-term greedy, is the model.

Tech capital structures.

Etsy has had a rough week, and one possibility is, of course, that that is due to its hand-crafted artisanal etc. etc. initial public offering. For instance, Etsy chose a small batch of banks to do the deal, leading to less informed research coverage than it would otherwise have gotten:

But for Etsy, more estimates came from firms that lacked access to company management before the IPO. Though Etsy topped the forecasts of analysts at its deal banks, they missed estimates by outside firms writing reports.

And placing the stock with relatively few institutional investors means that the stub of stock traded by second-tier investors is smaller and the price is more volatile. One question is: Should Etsy care? If it devalued research "because it felt that serious investors would do their own homework on the stock," and if it placed stock narrowly "to focus Etsy’s efforts on long-term shareholders," then how much should it worry about the mark to market for those shareholders? They want slow-cooked retro returns; they will stick to their knitting and not worry about this noise. I'm sorry for all of this, ugh.

Meanwhile Uber is working on a revolver, because the "more than $5 billion in debt and equity" that it's already raised I guess isn't enough? If I were Uber I'd be arbitraging my fundraising prowess to just raise lots of cash to invest in other startups or, like, Treasuries, but I guess that wouldn't be particularly disruptive. The revolver is viewed as a harbinger of an IPO, because the whole idea of a pre-IPO revolver is that banks give you lots of money at cheap rates to try to win roles on the IPO. But with Uber's quinquagintacorn valuation and ability to raise unlimited money without an IPO, why bother with the IPO?

Elsewhere in unicorn fundraising, nobody believes in Modigliani-Miller. And Goldman Sachs held its annual meeting in San Francisco yesterday, allowing senior executives to meet tech clients and say nice things about them to reporters:

It was, in a sense, the bank’s way of staking a claim in the heart of tech country, as Goldman fights to win its share of business from the boom that has lured billions of investor dollars and produced huge transactions.

“I think it’s ground zero for innovation and entrepreneurialism in the U.S.,” Lloyd C. Blankfein, the firm’s chairman and chief executive, told reporters after the meeting. “It’s a different kind of gold rush.”

CrossFit fraud!

Last month the New York Times ran a profile of Joshua Bryce Newman, who contains multitudes -- Yale graduate, alleged "Internet elder statesman," CrossFit entrepreneur, movie producer ("Keeper of the Pinstripes"), "founding member of a group that called itself 'Porn ‘N Chicken' and claimed to get together on Friday nights to watch pornographic movies and eat fried chicken" -- but who also keeps raising money from investors and not paying it back, in circumstances that those investors find suspicious. That ended about as you'd expect yesterday, which Newman getting arrested on federal fraud charges in New Jersey. 

Elsewhere in fraud, here's a weird little SEC case against Gray Financial Group, which allegedly sold an illegal fund of funds to some Georgia public pension plans. And high-frequency trading firm Quantlab won a jury trial against some former employees it accused of stealing its code.

Things happen.

People are worried about shadow banks making leveraged loans. Gillian Tett on efforts to revive the single-name CDS market. New York prep schools are levering up. Moody's cut Puerto Rico's credit rating again. BofA Tells Bond Buyers: Singer Won’t Block This Argentina Payout. "'I love making change that helps people,' the evil billionaire said." Antitrust concerns in the personal lubricant market. Playboy's 20 questions for Charlie Gasparino. Activism at TheStreet. A Harvard Law School story. "A Morgan Stanley wealth manager who had an affair with a client could cost the bank $400 million," should have used Behavox. 

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    Matt Levine at

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