Mirror Trades and Lying Traders

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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Suspicious trades.

My favorite fact about the ongoing investigations of Deutsche Bank's possible "mirror trades" and other suspicious transactions relating to its Russian operations, which apparently come to as much as $10 billion in total, is that Deutsche Bank has already been investigated and fined for those trades by the Russian central bank. The fine was "the equivalent of about $5,000, largely for procedural shortcomings," and isn't that just wonderful trolling? The gist of the investigations -- outside of Russia anyway -- seems to be that Deutsche Bank might have moved money in violation of U.S. and E.U. sanctions and money-laundering laws. Obviously Russia doesn't care about enforcing U.S. and E.U. sanctions against itself, but instead of just ignoring these trades, Russia looked into them and deemed them worthy of just about the smallest imaginable fine. Deutsche Bank "told investors that it had increased its litigation reserves by 1.2 billion euros ($1.3 billion), mainly to cover possible liabilities related to its Russia operation," and it would be funny if it ended up paying $1,299,995,000 to U.S. authorities and $5,000 to Russia.

Elsewhere in suspicious trades, JPMorgan settled a shareholder lawsuit over the London Whale trades for $150 million. Poor JPMorgan shareholders. First JPMorgan lost $6.2 billion on dumb London Whale trades. Then it was fined $920 million by U.S. and U.K. regulators for losing that money. And now it has to pay $150 million to a shareholder class (and that class's lawyers) for losing the money. All of that -- the losses, the fines, the settlement -- ultimately comes out of shareholders' pockets, of course. It is hard to imagine that the repeated penalties and lawsuits serve as a bigger deterrent to losing money than losing the money did; nor is it likely that JPMorgan shareholders appreciate the efforts of regulators and plaintiffs' lawyers to protect them against bad trading decisions by constantly taking their money. But the law is ironclad: If you are a public company, and you mess up, you have to pay some plaintiffs' lawyers.

Oh and "FINRA Sanctions Cantor Fitzgerald & Co. $7.3 Million for Selling Billions of Unregistered Microcap Shares, and for Related Supervisory and AML Violations."

Lying bond salesmen.

This month's appeals court decision reversing the conviction of former Jefferies trader Jesse Litvak for lying to customers about bond prices doesn't seem to have slowed down efforts to prosecute other traders for lying to customers about bond prices. Here's the latest:

A former top trader at the Royal Bank of Scotland pleaded guilty in federal court in Connecticut on Monday to one count of conspiracy to commit securities fraud as part of the government’s investigation into Wall Street bond sales practices.

Adam Siegel, the former co-head of securitized bond trading at R.B.S., waived his right to indictment and agreed to cooperate. He admitted to conspiring to increase the bank’s profits by lying to customers about the prices of securities they were buying or selling. Mr. Siegel worked in R.B.S.’s office in Stamford, Conn.

The Litvak appellate decision sent the case back for a new trial in which Litvak will be able to present evidence that bond traders lie to customers all the time, that customers don't take those lies seriously, and therefore that the lies can't be material enough to make them criminal fraud. That might be true? But I would not be thrilled about having to convince a jury of it. It seems like Siegel wasn't either.

Elsewhere in lying traders, poor Tom Hayes had his prison sentence cut from 14 years to 11, which is still a pretty long time to go to prison for lying about Libor. And: "Bankers’ misdeeds would be cataloged, by name, on a private registry for hiring managers under a proposal that’s gaining traction as Wall Street firms struggle to restore reputations damaged by the financial crisis and the Libor and foreign-exchange scandals."

SEC v. Cohen.

The theory of the Securities and Exchange Commission case against Steve Cohen is fairly straightforward: There was a lot of insider trading at his old hedge fund, SAC Capital, as measured by the number of people convicted of insider trading. (That number is at least "eight current or former employees," including two named Richard Lee.) Cohen ran SAC Capital. Therefore he probably deserves some blame for "failure to supervise" all those insider traders. 

But that theory has been complicated by the Second Circuit's Newman decision limiting the reach of insider trading law. One very direct complication is that, despite all the insider trading at SAC Capital, the SEC only actually charged Cohen with failing to supervise two insider traders, Mathew Martoma and Michael Steinberg. And Steinberg's conviction was thrown out, and the charges dismissed, after Newman. So the SEC is amending its case against Cohen to include only the failure to supervise Martoma.

More broadly, though, the case against Cohen was brought at a time when prosecutors and the SEC thought insider trading law was much broader than it turned out to be. Any sort of "edge," of informational advantage, seemed suspicious to prosecutors, and they had had a good run of convincing juries that hedge-funders who knew stuff about companies that the general public didn't know were probably criminals. The Newman case killed that theory: Just talking to a company and trying to find out about its business is okay again; it's only illegal to receive tips in exchange for a "personal benefit" to the tipper. It is still pretty easy to charge run-of-the-mill insider traders -- executives who tip their golf buddies off about mergers in exchange for a cut of the profits -- but it is now much harder to charge professional investors who talk to companies as part of their business duties. There was a time when prosecutors and the SEC were pretty confident that lots of hedge-funders, and especially lots of hedge-funders at SAC Capital, were guilty of illegal insider trading. That moment has passed, and the case against Cohen -- that he should have stopped all that insider trading -- is not as compelling as it used to be. But on it goes, with a trial set for April 2016, though there have been settlement talks. 

Meanwhile, the SEC takes a long time to hear appeals of its administrative judges' decisions.

Justness.

It is hard to express how wonderful Just Capital is, but this is a good start:

The project began, improbably enough, in 2011 in the chic Manhattan design store ABC Carpet and Home when Mr. Chopra was whisked away from his salon in a friend’s chauffeured car to an Occupy Wall Street rally.

Just Capital, remember, is a nonprofit organization created by Paul Tudor Jones II and Deepak Chopra to "rank corporations on how well, or 'justly,' they treat employees, society and the environment." Other wonders include its use of the word "justness" (to mean "justice"? possibly?), the nationwide survey that it conducted to figure out what its mission should be, and the oddity of a nonprofit set up by a hedge fund billionaire to combat the depredations of hedge funds and "shareholder hegemony." Also:

This year Mr. Jones said in a TED talk that traditionally there are three ways to change income inequality: “By revolution, higher taxes or wars.” His alternative is Just Capital.

If only the Bourbons and Romanovs had had TED talks, a lot of bloodshed could have been averted.

Backdated Panda.

Here's a panda:

Source: U.S. Department of Justice (really)

It was drawn by a man named Jayme Gordon, who yesterday was "Charged with Defrauding Dreamworks by Falsely Claiming He Created Kung Fu Panda." This panda was attached to the indictment announcement by the Justice Department, and is part of group of drawings that Gordon allegedly copied from a "Lion King" coloring book sometime after 1996 and then backdated to 1993 and 1994. I don't have much else on this, it is just a nice reminder that fraud can take the form of cross-border mirror trades, or lying about bond prices, or concealing risky trades, or bribing corporate insiders for information, or sometimes backdating a panda. 

People are worried about unicorns.

"Theranos' wounded credibility hobbles all unicorns" is the headline here, and is that true? The theory is that unicorns don't have particularly complete or transparent disclosure, and therefore are more vulnerable than public companies to problems like those at Theranos. (Those problems being: News reports have repeatedly raised suspicions that its product is mostly fake.) I prefer to think, not that private-company disclosure is bad, but that it is negotiable. If you want to fling money at a Blood Unicorn without asking if its product works, go right ahead. If you want to do due diligence and meet with management and see financial statements, you can ask for that instead. (Of course, the company can always say no, if it has enough other enthusiastic and less-demanding investors; there is a collective-action problem.) In fact, free from the shackles of Regulation FD and insider-trading law, private companies can be more open with their investors than public companies can be. Or less, if they'd rather. The level of transparency is left to private ordering, not Securities and Exchange Commission regulation.

Elsewhere, Lyft is looking to raise up to $1 billion at perhaps as much as a $4.5 billion valuation, while "Uber is raising $2.1bn at a valuation of $62.5bn." Presumably investors are satisfied that their products work. And: SpaceX's product works. And in post-unicorns: "How Jack Dorsey Runs Both Twitter, Square."

People are worried about stock buybacks.

My fear that the 2016 U.S. presidential election would be fought mostly over Rule 10b-18 seems not to have come true, though now I wish it had, but in any case there seems to be a bit less buyback worrying these days. The buybacks themselves go on, though

Total shareholder return, dividends plus buybacks, for 12 months through September totaled $934.8 billion, and that’s a record. That’s not exactly news, though. Total returns have now set a new record high for eight straight quarters.

(That's for S&P 500 companies.) It's worth noting that car-hailing app companies have raised a lot of money this year, though not quite $934.8 billion.

People are worried about bond market liquidity.

Here is Nick Dunbar on the high-yield market, self-recommending in full, and there is a very cool chart. On liquidity:

There are hundreds of funds and ETFs that invest in high-yield corporate bonds. When I did a search on Bloomberg just over a year ago I found 460 such funds (excluding ETFs) with assets above $250 million. Collectively, these funds owned junk bonds worth $750 billion. Now fast forward to today. The largest 30 of these funds have seen their assets under management decline by $59 billion in the past 12 months. When you factor out negative investment returns, that implies net outflows of $45 billion. To get a feel for the size of this number, it’s equivalent to the four biggest US insurance companies liquidating their entire junk bond portfolios. In other words, the contagion effect is real.

Also: "ETFs are a contrarian indicator," as they have 12-month inflows of $7 billion, versus the much larger outflows in mutual funds.

Things happen.

Credit Suisse Claims UBS Raided Staff. City bankers ready to walk if bonus disappoints, survey finds. Guns, Jail and Coffins Are Big Stocks for This Virginia Investor. Trinity Church Campaigns Against Some Gun Sales at Cabela’s. How Brazil’s Top Investment Banker Built, and Lost, an Empire. The Bloomberg Markets Most Influential. The OCC's Quarterly Report on Bank Trading and Derivatives Activities is out. In Net-a-Porter and Yoox Merger, a Fight Behind the Scenes. Martin Shkreli Is Removed as C.E.O. From Another Company, KaloBios. Martin Shkreli did something not-terrible on his way to infamy. Conoco exits Russia after 25 years. Bebchuk and Jackson on corporate political spending. Tyler Cowen on "The Big Short." The Effect of Fed Funds Rate Hikes on Consumer Borrowing Costs. The Bank of England's Christmas QuizGuffipediaCropped. Cartoon captions. CBGB Is Reopening At Newark Airport, As A Restaurant.

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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