Kangaroo Courts and Fake Press Releases

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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Rules vs. enforcement.

This American Banker story on "The Inside Story of the CFPB's Battle Over Auto Lending" is a fascinating microcosm of financial regulation. The Consumer Financial Protection Bureau worried about discrimination in auto lending, specifically that dealers took larger discretionary markups on loans made to minority borrowers. It contemplated writing a rule limiting dealer discretion over markups.

But officials also worried they did not have the legal justification to write a rule and would face a backlash from the politically powerful auto dealers.

"First, the legal authority for all of the potential rulemakings is unclear given our lack of authority over dealers," the memo said. "Second, the bureau would face considerable pressure from external groups if it sought to regulate or ban the practice of markup itself — pressure that should not be underestimated. The rule could be perceived as an attempt to circumvent our lack of regulatory authority over auto dealers, and that presents both legal and political risks that our rule could be overturned by a court or by Congress."

So instead it decided to use enforcement actions (against, e.g., Honda) in the hopes of changing industry norms, but without the public comment and checks on its legal authority that a rulemaking would create. A former CFPB lawyer says that "a rulemaking would be more evenhanded and fair across the marketplace. It would necessitate that the CFPB disclose its proxy methodology — in its entirety — to the public for comment, criticism and debate, which would bring transparency to the CFPB's indirect auto initiative." I once said that "it is just a feature of American financial regulation -- of American law, really -- that the rules are often decided in hindsight, one controversy at a time, by punishing the last guy who did something controversial rather than by announcing that the next guy to do it will be punished." But you rarely see the decision laid out so clearly.

Meanwhile in mortgage redlining, "Hudson City Settles Discriminatory-Lending Allegations for About $33 Million."

SEC in-house courts.

The Securities and Exchange Commission has in recent years taken a lot of enforcement actions by way of administrative proceedings in front of in-house SEC administrative law judges, rather than by taking defendants to actual court. This has led to a lot of complaining by defendants that the in-house courts are unfair to them; it has also led more than one federal judge to declare those courts unconstitutional. Yesterday the SEC proposed new rules apparently intended to make the administrative proceedings more fair and attractive to defendants: Now you get a bit longer to try a case, you can depose witnesses, and you get "enhanced transparency into the timing of the Commission's decision" if you appeal the administrative law judge's initial decision. "Daniel Walfish, a former SEC attorney who is now at law firm Milbank, Tweed, Hadley & McCloy LLP, said the agency is 'almost certainly trying to telegraph that it is taking the criticism seriously and that the administrative forum is not a kangaroo court.'"

The weird thing is that this doesn't address the constitutional problem, which has to do with how the administrative law judges are appointed, and which actually seems pretty easy to fix? Like the problem is that the ALJs have to be appointed by the commissioners, instead of by lower-level staff, and you'd think the SEC could just do that.

Fake press releases.

Here is an SEC settlement with Michael Glickstein and his firm G Asset Management over this:

Glickstein and G Asset Management LLC issued a press release on Feb. 21, 2014 announcing that G Asset had offered to purchase a majority interest in Barnes & Noble for $22 per share.  In a matter of seconds after the announcement, Barnes & Noble’s stock price rose from $17.05 per share to $18.99 per share, causing the New York Stock Exchange to temporarily halt trading in the stock.

G had "less than $3 million in total assets under management" and no realistic prospects of buying Barnes & Noble; it did, however, own a bunch of short-dated (many expiring the next day!) call options on Barnes & Noble, many of which it had bought just before issuing the press release and sold just after, for a $168,000 profit. Glickstein and his firm agreed to pay back a total of $275,000 and be barred from the industry for at least five years, without admitting or denying anything.

This all seems like a pretty straightforward fake-merger-announcement scam (see Avon, etc.) until you get to Section F of the SEC order, where things take a strange turn. The section title is "Respondents' Previous Overtures to Barnes & Noble," and there are a bunch of them over the course of almost four years. Some were -- not especially firmly financed -- offers to buy the company, but others were activist proposals to split it up. Glickstein/G at one point filed a Schedule 13D claiming to beneficially own 5 percent of the stock and submitted a not obviously joking letter asking Barnes & Noble to split into three different businesses.  That 5 percent stake was a bit of a stretch-- almost all of it was in the form of shares subject to out-of-the-money options, Glickstein/G had paid a combined total of just $1.6 million for their stake (at a time when an actual 5 percent stake would be worth about $40 million), and days later they filed another 13D saying that they were back below 5 percent -- but still this no longer sounds quite like a scammer making a quick buck with a fake press release. You almost start to think that Glickstein might have believed in what he was doing, even if he didn't have the money to actually do it.

Elsewhere in fake announcements:

Two more companies were targets of apparently fake securities filings, this time Kraft Heinz Co. and Phillips 66. 

Two separate filings that said they were submitted by Loreto M. Zamora on behalf of LMZ & Berkshire Hathaway Co. to the Securities and Exchange Commission on Thursday morning claimed to hold at least 10% stakes in both Kraft Heinz and Phillips 66.

Here are the filings, which don't really seem likely to inspire a buying frenzy? I just see Form 3s saying "No securities are beneficially owned." 

Elsewhere in enforcement actions, here's a case against "six men, including a father and three sons," over an alleged scheme to secretly issue shares of a controlled public company and then manipulate the stock to help sell the secret shares. And "Ex-BankAtlantic CEO Levan Gets Bar Order, Fine in SEC Suit."

And elsewhere in general misbehavior, "Nidera BV, the Dutch grain trader controlled by a Chinese state-owned company, suffered a loss in biofuels because of the actions of what its chief executive officer described as a 'rogue trader.'" If your model of post-crisis finance is that a lot of trading will shift from banks to less-regulated non-banks -- hedge funds, commodity trading houses, etc. -- then one possible result will be an uptick in rogue trading. Though also possibly a reduction in rogue trading fines. I feel like the default result for a bank with a rogue trader is that the bank gets fined for some sort of controls or books-and-records failing. That is less inevitable for a commodity trading firm. 

Art market mark-ups.

I think I have mentioned before how much I enjoy the legal battle between Russian billionaire art collector Dmitry Rybolovlev and art dealer Yves Bouvier. The gist is that Bouvier's markups were too big and undisclosed:

The feud began last year, Mr. Rybolovlev said, when by chance he met an art adviser over lunch during a Caribbean vacation and discovered that — in a purchase arranged by Mr. Bouvier — he had paid $118 million for a Modigliani painting that a hedge fund billionaire, Steven A. Cohen, had sold for only $93.5 million.

And now Rybolovlev has "announced with clinical detachment his hope of focusing attention on the often opaque nature of transactions in the art market, where buyers often do not know the identity of sellers." Meanwhile Bouvier "runs an expanding network of freeports, the largely tax-free storage depots where wealthy collectors now store so many of their treasures," as well as being a dealer, and there are "those who question whether Mr. Bouvier should be both storing and selling art since running a warehouse gives him privileged information about collectors’ art holdings." It is all reminiscent of the bond market, in which traders use their informational advantage about who wants bonds and who has them to try to make some money on markups that are sometimes not too clearly disclosed. Here is Bouvier talking about art, or bonds, whatever:

“That is the way of the art market,” said Mr. Bouvier, a wiry man who wore sneakers to an interview at a Geneva steakhouse. “It’s a hunt for information.” And those who collect it, he said, expect to be paid.

People are worried about bond market liquidity.

Today's installment of the Wall Street Journal bond market series is on corporate treasuries buying other corporations' bonds, as bank deposits and money market funds become less attractive. This has led to changes in the market -- "companies are playing big roles in some large transactions," and bidding up shorter-dated bonds that are more attractive for corporate cash management -- but it also leads to some rather perfunctory liquidity worrying:

Companies are betting highly rated corporate bonds are safe repositories for cash that will pay higher rates than more traditional bank deposits or money-market funds. But they are also increasing the risk to an asset where principal protection is the priority.

If interest rates rise quickly, the value of their lower-yielding existing bonds could plummet. A major market disruption could also make it difficult for companies to sell their holdings if they need the cash. Either could lead to write-downs or actual losses if they sell at lower prices than they paid.

Well yes but I mean look. If ______s own corporate bonds and interest rates go up or there is a market disruption, and ______s need money and have to sell their bonds, then ______s will have losses, for any ______. That is how markets work. The relevant question for bond-market-liquidity worrying, as for everything, is: Compared to what? Are bonds held by ______s who are especially likely to need the cash and have to sell? People are reasonably worried about run risk in bond mutual funds, which offer daily or near-daily liquidity to investors and which own bonds that might not provide daily liquidity. Before that, people were worried about banks, which also suffer from run risk, so the Volcker Rule tried to stop banks from stockpiling lots of bonds that they might need to sell. But "cash-rich companies like Apple Inc., Oracle Corp. and Johnson & Johnson"? In what scenario will Apple be forced to liquidate its bond investments at fire-sale prices? 

Me yesterday.

I wrote about insider trading and Panda Express, as one does. Elsewhere in insider trading: "SEC Has No Right to Smartphone Passcodes of Defendants, Judge Says." And elsewhere in Panda Express: "Ippudo and Panda Express Hatch World Domination Plan."

Things happen.

Janet Yellen Expects Interest Rate Increase This Year. Google Said to Be Under U.S. Antitrust Scrutiny Over Android. "We are more outraged by deliberate attempts to break the law, compared to stochastic sloppiness leading to mistakes and accidents." Bill Proposed to Give Regulatory Protection to Puerto Rico Mutual Fund Investors. "Interest rates are lower today than they were when FDR or Napoleon or Henry VIII or Genghis Khan or Charlemagne or Julius Caesar or Alexander the Great or even Hammurabi were around." Trump and interest rates. Yale "handily eclipsed Harvard" in endowment performance. Why Artisanal Finance Startups Need to Become Supermarkets. You can actually buy shoes for less than $650. Daraprim is super cheap in India. "An auditor better deters fraud by randomizing her choice of methodology over time, thereby frustrating a would-be fraudster’s ability to learn." 10 Fortune 500 Proxy Fights Inspired by Pope Francis. Don't forget to book a helicopter (or a Citibike) to get around Pope traffic today. Mike Tyson’s new bitcoin ATM machines. Sport programming. Tasty crickets. Canned cocktails.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net