Golfers, Hackers and Traders
Golf insider trading.
The Securities and Exchange Commission and federal prosecutors put a lot of resources over the last several years into investigating and prosecuting insider trading at a bunch of hedge funds, some of them loosely linked to Steve Cohen's SAC Capital. I have been skeptical about the resources poured into insider trading, and the government's seeming obsession with Cohen. But, whatever, he ran a big important hedge fund, it's worth making sure he plays by the rules.
But here is the story of a protean, years-long investigation into possible insider trading by Phil Mickelson, who does not run a big important hedge fund, but who instead plays golf well. Last year investigators got it into their heads that Carl Icahn might have given an illicit stock tip to a gambler, Billy Walters, who might have passed it to Mickelson. That seems not to have worked out for the investigators. This year they seem to think that Dean Foods chairman Thomas Davis might have given an illicit stock tip to Walters, who might have then passed it on to Mickelson. Davis resigned from Dean last week, though everyone named in the story denies doing anything wrong.
How good a use of securities enforcement resources is it for FBI agents to keep accosting Phil Mickelson at airports? On the one hand, this seems like pretty small potatoes. And even if prosecutors can prove that Davis and Walters, who "were acquaintances," shared information, and that Walters, who "had a social relationship with Mr. Mickelson," passed it on, that might not be enough for an insider trading conviction. Just sharing nonpublic information with an acquaintance, even on a golf course, is not, under Newman, illegal. The tipper needs to have gotten a personal benefit for the tip, and the final tippee -- the trader -- needs to have known about it.
On the other hand! Insider trading may not be the worst of financial crimes. But I suppose it is a respectable position to think that it is bad, and that its existence undermines confidence in American financial markets. And if you think that, you should focus on the most systemic insider trading. As far as I can tell, the most damaging and systemic hotbeds of insider trading are:
- Shadowy hacker conspiracies that steal all the news releases and always know the news ahead of time.
- Networks of powerful hedge funds that get corporate insiders to tip them and then share the news.
- America's golf courses.
Going after a famous and powerful hedge fund manager for insider trading might deter hedge fund managers from insider trading. But going after a famous and popular golfer for insider trading might deter insider trading at its source.
Elsewhere in insider trading:
The use of hacking may ultimately cause a reevaluation of how much of a lasting effect there will be from the Galleon case, which cost millions of dollars to prosecute and was a top priority for Preet Bharara, the Manhattan U.S. attorney.
Rather than significantly deterring insider trading, that case may simply have accelerated the move to cyberspace, where the personal relationships that tripped up defendants in the physical world no longer exist, specialists say.
And did you know that bank call reports can contain material information that the banks have not yet reported elsewhere?
Here is an argument that, rather than Warren Buffett, Google/Alphabet's founders should model themselves after John Malone of Liberty Media. Now, like all former equity derivatives structurers, I have a framed picture of John Malone hanging over my bed. John Malone is one of the greatest financial engineers who has ever lived. I am ... somewhat skeptical that Google's founders, who relinquished some control of day-to-day operations of the search business to focus on longer-term projects to change the world, should spend their time on financial engineering? Don't get me wrong, I bet Alphabet could get up to some awesome financial engineering, if they put their minds to it. I would love to write about Alphabet tracking stocks and tax-advantaged spinoffs. I'd rather they found a cure for death though.
Elsewhere in financial engineering, this is so great:
The spinoff, announced in January, was designed to avoid taxes on the disposal of the 384 million shares of Alibaba it still owns. But the Chinese e-commerce giant’s latest slide saw its stock hit a depressing milestone for Yahoo. If Yahoo had been able to sell the shares at Alibaba’s peak of $120 a share on Nov. 10, they would have been worth $46.1 billion. Taxing that at 38% would have yielded theoretical proceeds of about $28.5 billion. By comparison, the shares today are worth about $27.9 billion at Wednesday’s price of $72 and change–before any taxes.
Oh well! And elsewhere in tech, Twitter is still doing things.
The SEC's in-house courts are probably unconstitutional.
Or so another judge found, but the judges who have ruled against the SEC here have done so on fairly boring grounds:
The two federal judges said the SEC judges were “officials” and should have been appointed by the commissioners who run the SEC, rather than by less senior people within the agency.
That does not seem like an insurmountable obstacle: Just have the commissioners appoint the SEC judges. Though that is not a very substantive fix. I've previously mentioned my law school classmate Dan Walfish's argument that the big problem with SEC in-house courts is that the commissioners both authorize the initial charges (a prosecutorial role) and review the judge's decision (a judicial role); giving them more power over the judges may not help.
Kleos aphthiton and the staggered board.
Your mileage may vary quite a bit on this one but for your consideration:
In Corporate Legacy, I look to a surprising place, the ancient Greek epic poem, the Iliad, for a solution to this important puzzle, and claim that pre-IPO shareholders adopt strong takeover defenses, at least in part, so that the company can remain independent indefinitely and thus create a corporate legacy that may last for generations.
The human condition is that we are mortal beings, and nobody can live forever. In the face of this challenge, ambitious people have always sought a way to live forever, from medieval knights who searched for the Holy Grail to Silicon Valley billionaires who hope to perpetuate their lives through the melding of man and machine known as “the Singularity.” These valiant attempts notwithstanding, immortality has always proved impossible. Hence, a deep question for poets and philosophers throughout the ages has been how to live a meaningful life despite the certainty of death.
Also a deep question for capital markets lawyers, who include poison pills and staggered boards in new public companies as part of their own efforts to live a meaningful life despite the certainty of death.
Lehman and legitimacy.
I am currently reading and enjoying Philip Wallach's book about the legitimacy of the U.S. financial crisis responses. If you think you might also enjoy that sort of thing, Wallach is guest-blogging at the Conglomerate; check it out. Here's a post "about the Fed’s controversial claim that it faced insuperable legal obstacles to rescuing Lehman Brothers back in September 2008."
People are worried about bond market liquidity.
One popular solution to the bond market liquidity problem is for companies to issue fewer, bigger bonds: If each company has one big bond, it's easier to match up buyers and sellers than if each company has 200 little bonds. (BlackRock, for instance, often pushes this idea.) But here is an article concluding "that wholesale creation of benchmark issues appears to be a dream":
Frequent issuers may present some opportunity for larger issues, if investors offer them sufficient incentives and don’t simply expect them “to do the right thing” as “custodians of the market” or jump for the promise of “cheaper borrowing rates tomorrow.” Moreover, current IRS rules effectively thwart the promising option of re-opening an original issue.
The tax stuff is a big deal, and it might help bond market liquidity if the Treasury found a way to make re-openings fungible with old bonds. But the incentives part is an even bigger deal: Investors say that they want better liquidity, and ask issuers to issue fewer bigger bonds to support liquidity. But the many smaller bonds are easier for issuers, who have no reason to change unless they can get a lower interest rate on the fewer bigger bonds. It's not clear that they can. Everyone wants liquidity, but no one wants to pay for it.
Elsewhere, more bond trading criminal charges may be coming.
I wrote about ITG, which got in a bit of trouble for running a secret proprietary trading desk using customer order information. Probably don't do that.
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