Heavy Ion Fusion and Insider Trading

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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Neuromama.

People often talk about "pump and dump" schemes, but I feel like there's an appeal to the pump even without the dump. Like, here's a thing I could do:

  1. Incorporate a company.
  2. Issue 1 billion shares to myself.
  3. Sell one share to you for a penny.
  4. Buy it back for $50.

Now, for the quite reasonable price of $49.99, I am the founder and chief executive officer of a $50 billion company, which I presume will get me invited to the sorts of parties I don't currently get invited to. "What do you do," people at these parties will ask me, and I will bashfully reply: "Oh, me? I run a $50 billion company." "What does your company do," they will follow up. "It trades over-the-counter," I'll say.

Of course, after I buy a share for $50, I could try to sell more of my shares for $50 to unsuspecting third parties and then run away with the money, but that seems mean. 

Anyway, here is the story of Neuromama Ltd.:

On Monday, the Securities and Exchange Commission halted its shares, which trade on over-the-counter markets in the U.S., over “potentially manipulative transactions” and concerns about the “identity of the persons in control.”

There were red flags over the years. But Neuromama, which has ambitions to license “heavy ion fusion technology patents” among its many projects, began to draw more scrutiny this year after its paper value more than quadrupled to $35 billion on scant volume. Before its suspension, the market cap of Neuromama, which was based in southwest Siberia before moving to a beach community near Tijuana, Mexico, was greater than even Tesla Motors Inc.

Neuromama trades over-the-counter, under the delightful ticker "NERO"; it has 630.1 million shares outstanding, and over the last six months it has traded an average of 447 shares per day, hitting a high price of $56.50 last month. So we are talking about $25,000 of daily transactions creating a $35 billion company. Here are Neuromama's SEC filings; its last financial statements were filed in 2014. Here is David Merkel with more on its history and prospects. Here is Steven Zubkis, also known as Steven Schwartzbard, Neuromama's chief marketer, with an analogy:

“We’re suffering from a negative side effect caused by our success,” Zubkis said in an e-mail Monday. “Up to this moment there has been less liquidity than any of us would like. But that’s not a bad thing, … it’s like a negative side effect from a prescription drug. So the drug saves your life and in the process gives you a dry mouth or a headache. A good trade-off, your life for a dry mouth.”

My mouth is certainly agape, anyway. Zubkis/Schwartzbard "was sentenced in 2007 to five years in prison for defrauding investors in a $1.8 million scheme through misrepresentations tied to the renovation of a Las Vegas casino," and "was sued by the SEC in the 1990s for orchestrating a $12 million penny stock scam." Here's a video of him complaining about Google search results while smoking. (In addition to the heavy ion fusion, and "plans to license Cirque-du-Soleil-style performances in Tijuana," Neuromama seems to have a search engine?) Here's a Neuromama web page, which is a good web page, and which features this graphic representing, I'm going to say, Albert Einstein playing in the Super Bowl for Neuromama against Google, Alibaba and Facebook on a soccer field covered with money?

We have talked a few times around here about Sarah Meyohas, the artist who manipulated stock prices for art, to "delineate intention" rather than to deceive anyone or make money. (I mean, from the trading. She painted the stock charts, and made money selling the paintings.) Sometimes I hope there are more artists like her out there, founding and marketing and inflating multibillion-dollar companies not because it is profitable to do that, but because it is beautiful. Or at least funny.

When is insider trading a crime?

It's actually a hard question. Insider trading is always bad and you shouldn't do it -- that concludes the advice portion of this section -- but sometimes people do it anyway. And sometimes nothing happens, and other times they get sued by the Securities and Exchange Commission and have to give the money back, and other times they get charged with a crime and have to go to prison. How do you know which is which? Peter Henning writes that "what makes one case more susceptible to a prosecution than another remains something of a mystery," and ticks through a list of comparable-seeming cases, some of which resulted in criminal charges and prison time, and others of which resulted only in civil cases. He asks:

What makes a particular instance of insider trading so wrongful that the government’s most powerful law enforcement weapon — a criminal conviction — is used on defendants who pose little threat to society beyond their own avarice?

But come closer and I will whisper the answer in your ear, after you sign a waiver stipulating that it's not legal advice. The answer is: It's a crime if prosecutors want it to be a crime. And if not, not. You may, with careful study, be able to discern some patterns in which cases are charged and which aren't, but for the most part those are just empirical patterns, not binding rules. If you insider trade, it might be a crime, or it might not be, and the prosecutors get to decide.

This is not limited to insider trading. "Everything is wire fraud," I sometimes say, and I say it nervously, because almost any form of lying on the internet, if money is somehow involved, could be charged as wire fraud, and here I am on the internet. We are all of us guilty, all tainted by the modern world's original sin -- lying on the internet -- and if we are not all in prison, it is only by the freely granted grace of our federal prosecutors. Be nice to prosecutors, is I guess the point here.

On the other hand, as my Bloomberg View colleague Noah Feldman points out, lying is constitutionally protected. We've talked about that before: Lying about politics is allowed, encouraged even, but lying about business is fraud. Maybe! If prosecutors want it to be.

Money markets.

Investors who normally like to invest in safe boring bonds are having a rough time these days. They face the sad choice between guaranteeing that they'll lose money by buying bonds with negative yields, or risking that they'll lose money by taking on more duration risk or credit risk than they're used to. They complain constantly: The search for yield is difficult and dangerous and makes them grouchy. But it does seem a little like they are so overtaxed by the search for yield that they don't look for it right in front of their eyes. Like in six-month bank certificates of deposit. These people know what I'm talking about:

Rising rates paid by banks and other companies that issue commercial paper are luring new investors to the market, just as more-traditional buyers are scaling back in response to looming regulations.

The newcomers include investors like Renuka Kumar, a senior portfolio manager who manages corporate cash at SVB Asset Management in San Francisco, an affiliate of Silicon Valley Bank. She bought six-month commercial paper issued by a major bank at a rate of 1.05% last week. To get a similar yield on a high-quality industrial corporate bond, she said she would have to commit money for 18 to 24 months.

We live in a really weird time for interest rates. Long-term rates are low, but in the under-a-year market for bank funding, new money-market fund regulations have increased and steepened rates. (The fact that I like to cite is that one-year Libor, at about 1.53 percent, is higher than the 10-year Libor swap rate, at about 1.39 percent.) The money market (under a year) and bond market (over a year) are so separate from each other that their relative prices barely make sense, and bond managers are delighted at the bargains they can find in the money markets.

Elsewhere, Goldman Sachs's consumer bank -- which, coincidentally, also pays 1.05 percent for a savings account (and where I'm a customer) -- is one year old now. And European banks are trying to figure out how to hoard cash -- literal paper cash -- to deal with negative interest rates:

Munich Re has experimented successfully with storing a double-digit million sum of euros in cash at what the insurer describes as a manageable cost. A few other German banks, including Commerzbank, the country’s second-biggest lender, have also considered taking the step. But when a Swiss pension fund attempted to withdraw a large sum of money from its bank in order to store it in a vault, the bank refused to provide the cash, according to local media reports.

Happy 13F day.

Yesterday was the 13F filing deadline, so there were some 13Fs. ValueAct bought about 2 percent of Morgan Stanley. Berkshire Hathaway bought more Apple shares. George Soros bought more S&P 500 puts. Carl Icahn bought some AIG and Xerox stock.

Regulation can be dumb.

Ahahaha the members of the Commodity Futures Trading Commission can't talk to each other:

The uncomfortable silences coming from the CFTC’s offices are a result of the Government in the Sunshine Act, passed in the wake of Watergate, which was designed to prevent regulators from making deals on policy in proverbial backrooms. It effectively says a majority of a commission can’t deliberate outside an open public meeting.

With two of five CFTC seats vacant, however, any two commissioners in one place constitutes a majority—which blurs the line between merely discussing policy and actually deciding it.

“It’s messed up,” said Bart Chilton, a former Democratic commissioner on the CFTC, which briefly dropped to three members while he was serving from 2007 to 2014. “You’ve got to be careful about even getting in an elevator without an attorney, for fear of violating the law, even if you’re just going to lunch or something.”

Really all regulators should sometimes have to deal with the unintended consequences of an inflexible regulation that hampers their ability to make good decisions. It's a good learning experience!

What is your boss up to these days?

Oh hey super: "The environment has led executives to take up triathlons as 'the new golf,' said Rob Urbach, chief executive of USA Triathlon." ("The environment" there refers to how stressful it is to be a banker these days, not, like, concerns about how much water golf courses waste.) Here's a story about William Demchak, the chief executive officer of PNC Financial Services Group, who likes triathlons:

Mr. Demchak personally searches for promising athletes among the ranks of PNC employees. Staffer Lauren Woodring, for instance, was in the middle of reviewing auto-loan documentation last year when she got a call from Mr. Demchak. Seven layers of management below the CEO at the time, Ms. Woodring let it ring, assuming he dialed her by accident.

When he called back again a half-hour later, she says she nervously picked up. “I want to see if you’d be interested in being the runner on the relay team,” the chief executive said, referring to a race bankers were competing in as a team. He learned that she was very fast from the owner of a bike shop they both frequent.

So, one, not picking up the phone when the CEO calls: great move. But, two, imagine picking up the phone the second time and finding that, no, the CEO didn't dial you by mistake, and he's not giving you a raise, and he's not firing you: He wants you to go running with him. And swimming. And biking. I suppose the point of the story is that some people like this sort of thing.

People are worried about unicorns.

If you're a private company, your shares don't trade on a stock exchange. That's kind of the definition. But if you're a giant private company with lots of employee-shareholders, your shares probably trade somewhere. Apparently that somewhere is WeChat, the Chinese social network:

That message was sent by Cathryn Chen, founder of MarketX Inc., a San Francisco firm specializing in selling shares in private tech firms to Chinese investors. Ms. Chen this month also messaged the group or posted separately on her WeChat Moments—the equivalent of a news feed—details of investment opportunities in Uber, augmented reality startup Magic Leap, and mortgage lending platform LendingHome. Each opportunity was for shares owned by current shareholders, known as a secondary market purchase, MarketX indicated. “One of the well-known funds based in Silicon Valley has offered to sell Uber’s shares at a discounted price. Private message me if you’re interested,” she posted on Aug. 5.

I mean, it makes sense. Stock exchanges tend to be purpose-built entities with fancy computers and matching engines to facilitate trades, but all you really need to trade stocks is a way to send messages. Why not WeChat? You don't see a ton of private stock transactions advertised on Facebook, but that's mostly for legal reasons. ("Marketing and solicitation tactics on WeChat, aimed at smaller investors, could still run afoul of U.S. regulations.")

Elsewhere: "Dropbox Is in Talks With Advisers for Possible 2017 IPO."

People are worried about bond market liquidity.

The central worry of bond market liquidity is that bond dealers -- traders at big banks -- are not willing to buy as many bonds as they used to, for regulatory and risk reasons, and therefore won't cushion market downturns by stepping in to buy bonds when everyone else is selling. I have never found this worry all that compelling, because I don't quite believe that the job of a bond dealer is to buy when everyone else is selling. The job of a bond dealer is to intermediate between buyers and sellers. The dealer provides convenience, immediacy, but not a price guarantee. A dealer will be willing to buy bonds if he thinks that he can sell them, in a reasonable amount of time, to some ultimate buyer. So the deep question of bond market liquidity is: Is the universe of real investors diverse and robust enough that, when some investors want to sell, others will want to buy? If the answer is yes, then they'll find some way to facilitate those trades. If it's no, then dealers can't do all that much to help.

Anyway here is a deep dive from Bloomberg Markets on changes in the bond market and the increasing importance of buy-side investors in trading:

Today, post-crisis regulations intended to make banks safer and discourage risk-taking are eroding their profits and forcing dealers to rethink their business model. Banks are pulling back from market-making and shedding assets, business units, and employees. The dealer has essentially been demoted from maitre d’—deciding where everyone sits and recommending dishes—to a waiter taking orders. These changes have created a vacuum in the bond market and made trading much trickier.

They’ve also paved the way for the buy side—from asset managers to hedge funds—to exert more influence than ever on the market.

One anecdote: A portfolio manager at Diamond Hill Capital Management in Ohio bought a block of Rent-A-Center bonds from a transition manager at about 2 points below their trading level, on an electronic platform, beating out a dealer who offered the market price but only on a portion of the bonds. It used to be that dealers provided immediacy to motivated sellers, by buying below the current market price and working the bonds out to other customers over time. Now the customers are doing it directly.

Elsewhere, here is the Bank of England staff's blog on "Forming strong bonds: dynamics in corporate bond markets." It's about the other big bond market liquidity worry, mutual funds:

In a novel application of agent-based modelling, we examine how investors redeeming the corporate bonds held for them by open-ended mutual funds can cause feedback loops in which bond prices fall further, posing risks to financial stability. In our model, reducing the speed with which investors pull out their investments over time helps to keep prices stable and remaining investors’ savings on an even keel.

Me recently.

I wrote about death, and death puts.

Things happen.

US board composition: male, stale and frail? Elon Musk Sets Ambitious Goals at Tesla—and Often Falls Short. Icahn Says He May Boost Trump with Attack on EPA. Shenzhen-Hong Kong Stock Trading Link Gets Green Light. Investing and Valuation Lessons from the Renaissance. BHP Billiton Reports Worst-Ever Annual Loss. U.S. Said to Uncover Evidence of Criminal Acts in VW Probe. Tesla Tweaks Autopilot’s Chinese Translation After Beijing Crash. Hedge-funder in hot water: Sahm Adrangi arrested on DUI, cocaine charges in Hamptons. Goldman Sachs’s Last Remaining Partner in Brazil Leaves the Firm. Spam Spam Spam Spam. 'Super Mario Bros' Recreated In Excel Is The Best Possible Use For Excel. Usain Bolt Has Never Run A Full Mile.

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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:
James Greiff at jgreiff@bloomberg.net