Reporters, CEOs, DJs and Prosecutors
Bankruptcy news is news.
New York State has a "shield law" that allows journalists to keep their sources confidential. Reorg Research, Inc., a news service that covers bankruptcy and distressed debt, published an article about Murray Energy Corporation. Murray Energy thought that the information in the article probably came from some of its investors, in breach of their confidentiality agreements, and demanded that Reorg disclose the names of its sources so it could sue them. Reorg refused, Murray went to court, the court ordered Reorg to give up its sources, Reorg appealed, and yesterday Reorg won: "We find that respondent is exempt from having to disclose the names of its confidential sources by New York's Shield Law," ruled the appeals court, "because it is a 'professional medium or agency which has as one of its main functions the dissemination of news to the public.'" This is true even though Reorg has just 375 subscriber firms who each pay tens of thousands of dollars for its research:
However, respondent's expert affidavits establish that these features are not uncommon among, and in fact are essential to the economic viability of, specialty or niche publications that target relatively narrow audiences by focusing on a topic not ordinarily covered by the general news media - such as the debt-distressed market. This expert opinion is corroborated by amici, which include several prominent news organizations that "either originally entered the media landscape focused on a particular subset of readers, and/or publish at least one subscription-only publication or premium-content service on a specialized topic."
Moreover, respondent and amici argue persuasively that the public benefits secondarily from the information that respondent provides to its limited audience, because that audience is comprised of the people who are most interested in this information and most able to use and benefit from it. More importantly, given the substantial investment required to unearth this information and the limited number of interested readers, the alternative is not broader coverage but no coverage at all.
Obviously this is right and good! (Disclosure: Bloomberg LP was one of the amici curiae supporting Reorg Research's position.)
One fun thing to think about, though, is insider trading. We have talked before about "political intelligence" cases, in which specialist D.C. firms produce reports about newsworthy events and sell them to small groups of hedge-fund subscribers who then trade on those reports. (Disclosure: My wife's law firm now represents one of the defendants in the Blaszczak case.) The political intelligence firms try to ferret out government secrets, and then publish those secrets in their reports, at which point their subscribers know about the secrets (and can trade on them). One advantage to this structure is that the subscribers may not know exactly how the political intelligence firms got the secrets, and have plausible deniability that they knew the secrets came from insiders.
But another possible advantage is that the political intelligence firms look like journalists. Someone who calls up people in the government, asks them for off-the-record information about secret government decisions, writes down that information and then publishes it in articles that she sends to subscribers -- that's a "reporter." That's constitutionally protected freedom of the press. But what if she has very few subscribers, and they each pay tens of thousands of dollars to read her articles, and they then trade on those articles? Well, then it's interesting. If you read a story in a newspaper, and then trade based on that story, that's not insider trading -- that is the most classic sort of outsider trading. But what if the newspaper only has 10 subscribers, all of whom are hedge funds? Does that exclusivity make them insiders?
By the way, this happens to be the structure of the "political intelligence" industry, but you could also structure regular old corporate intelligence that way. Reorg, after all, does: Its reporters call up people involved in bankruptcy situations, ask them for information, write down that information and publish it in articles that they send to subscribers, who pay tens of thousands of dollars. You could imagine even smaller, more specialized, more expensive services, whose business is to call up corporate insiders, get material inside information, and publish it by email to a small handful of hedge funds paying for very expensive subscriptions. At what point would that tip over from "news reporting" to "insider trading"?
Fun for Goldman executives.
Here is a profile of Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein, back and better than ever after a battle with cancer:
Sitting with his feet propped on a coffee table, looking thin in jeans and an open-collar shirt, Blankfein sounded like a man who had suddenly come to terms with his own mortality. And what he realized, he said, was that work was a lovely distraction.
In the 18 months since then, Blankfein, 62, has stitched together a patchwork of new initiatives: a consumer bank, a heightened focus on lending and more resources for asset management, including a suite of exchange-traded funds. Mostly he has doubled down on an old idea — a commitment to trading and risk-taking out of favor across much of Wall Street. He has kept the 148-year-old firm tied to trading, investment banking and principal investing.
"Nobody on their deathbed has ever said 'I wish I had spent more time at the office,'" but what if that is wrong, what if the people who say that have just never found the right office? (Disclosure: I used to work at Goldman Sachs, and on my deathbed I am unlikely to wish I had spent more time there.) Anyway right Goldman: still pretty much Goldman, despite the changes that have swept the rest of the industry. If your thesis is that, a decade after the financial crisis, with Donald Trump as president, banking is going to look more like it did in 2006 and less like it did in 2016, then I guess Goldman is a good vehicle for that thesis.
Elsewhere: David Solomon, Goldman's co-president, "has performed regularly as a D.J., according to associates, mixing and tweaking electronic dance music for a live audience." He goes by D.J. D-Sol, which is not that creative a D.J. name? I feel like an investment-banker D.J. should do something acronym-y. Vacation-Amplifying Music Player Inspires Revelers Ecstatically, Supporting Questionable Union In Debauchery? DJ VAMPIRE SQUID?
Deferred prosecution agreements.
Here is a federal appellate decision about the somewhat dull question of whether a district court should have released a monitor's report about HSBC Holdings Plc's money-laundering compliance. But it addresses a broader and more interesting issue, which is: When a bank does bad stuff, and it reaches an agreement with the Justice Department in which the bank pays a big fine but does not have to plead guilty to a crime or go to bank jail, does a judge get to meddle in that agreement? Lots of people, including many judges, think that the answer is clearly yes: There is a public interest in making sure that banks are punished for doing bad things, and in keeping the public informed about exactly what the bad things are, and judges are in a better position to protect that public interest than prosecutors are. But, says the Second Circuit, the answer is no:
By sua sponte invoking its supervisory power at the outset of this case to oversee the government’s entry into and implementation of the DPA, the district court impermissibly encroached on the Executive’s constitutional mandate to “take Care that the Laws be faithfully executed.” U.S. Const. art. II, § 3. In the absence of evidence to the contrary, the Department of Justice is entitled to a presumption of regularity—that is, a presumption that it is lawfully discharging its duties. Though that presumption can of course be rebutted in such a way that warrants judicial intervention, it cannot be preemptively discarded based on the mere theoretical possibility of misconduct. Absent unusual circumstances not present here, a district court’s role vis‐à‐vis a DPA is limited to arraigning the defendant, granting a speedy trial waiver if the DPA does not represent an improper attempt to circumvent the speedy trial clock, and adjudicating motions or disputes as they arise.
If you are worried that prosecutors are not zealous enough in punishing banks and bankers, then you will perhaps find this decision disappointing. Even if they want to, judges can't make the prosecutors act any more zealously.
We talked yesterday about the UK Financial Conduct Authority's proposal to create a "new premium listing category for sovereign-controlled entities," so that Saudi Arabian Oil Co. can get a premium listing if it chooses to list in the UK. "These are just words," I said: "Nothing in the real world changes if it lists in the UK as 'not premium,' or as 'premium,' or as 'premium with an asterisk.'" I meant that! And still do. But one real-world-adjacent thing changes, which is that premium-listed companies are eligible for the FTSE UK Index Series: If Saudi Aramco gets a premium listing, then it will be a big part of UK indexes, and will benefit from billions of dollars of passive and active-but-benchmarked-to-the-index demand. If it gets a non-premium listing, it won't. If it gets a premium-with-an-asterisk listing, then I suppose the debate will shift over to the index providers.
But these are still just words! Magic words, words with the power to move billions of pounds of investor money, but still words. If Saudi Aramco lists in the UK, it will be a public company listed in the UK. If you want to passively buy all the public companies listed in the UK, you should buy it. If you want to limit yourself to companies with good governance, and you think Saudi Aramco has bad governance, you should not buy it. You -- as an investor, or even a fund manager really -- really do have a choice: You can have a say over what makes a good company, or you can passively buy all the companies. If you are going to be a passive investor, then your basic premise is that you have no special ability to pick which companies are good. So why fight over whether Saudi Aramco is good? If it is a public company, you buy it, and don't worry about its goodness.
If you are going to be an active investor, then your basic premise is that you do have an ability to pick which companies are good, and if you think Saudi Aramco is bad, you should not buy it, even if it is in the index. "Oh but then I risk missing out on its performance and underperforming my benchmark," you complain, but you just said you think it is bad! If you think it will outperform the rest of your stocks, you should buy it and stop complaining!
Here is Paul Murphy, complaining about the debasement of London Stock Exchange listing standards:
Along the way, the LSE somehow stopped being a venue for capital formation and instead became (largely) a pricing service for Russian and other oligarchs who wanted to monetize their paper wealth while retaining absolute corporate control. (Alternatively, private equity firms found they could use the LSE simply for profit crystalisation purposes.)
The LSE was not, and is not, alone here. The world’s major equity exchanges, in their competitive zeal, are on a mission to roll back rules and conventions on selling stock to the public that have been developed over many decades.
This is true, but it is also backwards. Higher listing standards makes it harder for public markets to be a tool for capital formation, as Jay Clayton hinted on Wednesday. It turns out that, in 2017, in an era of abundant liquidity and stagnant innovation, there is a certain quantity of information and control that investors demand in order to contribute to capital formation, and that amount is much lower than what was required by traditional listing standards. (Have you heard of ICOs!?) If regulators just dig in their heels, maintain the traditional standards, and refuse to list giant companies, then those companies will cheerfully go off and raise giant amounts of capital in private markets. (Or, in Aramco's case, find another regulator.) And public markets will become even more the preserve of mature slow-growth companies that only want to return capital to shareholders, as the people who actually want capital get it elsewhere.
Here is the bizarre story of how DryShips Inc. has sold a bunch of death-spiral-ish convertibles to an investment firm, which then dumped the underlying shares into the market, driving down the stock price but making some money for itself and providing financing to DryShips. It seems problematic?
Legal experts said the quick sales raise questions for regulators. “If [Kalani is] buying it with the intent to resell, then they’re acting as an underwriter and this is a public offering,” said Jill Fisch, a University of Pennsylvania law professor who specializes in securities regulation. In an underwriting, a licensed entity, normally a bank, sells shares to the public and gives the proceeds to the company.
Yes, right, that. Companies are allowed to raise money by selling stock to third parties who then dump it into the market, yes, but that is normally called a public offering, and tends to require quite a bit of disclosure. This ... may not have had that.
But every story about arcane financial maneuvers needs to be humanized by finding an individual victim, and this is I think the strangest individual victim I've ever seen mentioned in an article like this:
Ingmar Bueb, a 48-year-old opera singer, invested $220,000 in DryShips over the years, the bulk of his nest egg. The High Bridge, N.J., resident had hoped to use the profits from this long-term holding to build a small opera house, he said.
What? Who invests "the bulk of his nest egg" in a microcap shipping company? "An opera singer," is the answer, "who hoped to use his profits to build a small opera house." Ah. Right. Okay.
Should index funds be illegal?
I should re-title this semi-recurring section something like "people are worried that common ownership of multiple stocks in the same industry by asset managers might have negative effects on competition," which is more accurate but does not roll off the tongue as easily as "should index funds be illegal?" Anyway, these Bank of England staff members are not that worried about common ownership of the UK banking industry. This is mostly because there's not that much common ownership of UK banks, but also, common ownership of banks might be good for stability:
Besides the contentious argument that weaker competition is good for financial stability, as higher profit margins make banks more conservative, common ownership also entails common exposure to contagion effects. Therefore, these large institutional shareholders could have strong incentives to reduce moral hazard faced by managers and also facilitate commonly owned banks to raise new equity during time of financial distress. In principle, this should be good for financial stability.
People are worried about unicorns.
People are worried about stock buybacks.
Here's a good and level-headed series of tweets from Michael Madowitz on the problem of "short-termism." "The key tension," he notes, is that "managers' investment opportunities are a subset of shareholders', so shareholders ALWAYS have (weakly) better choice set." But in real life, "managers have MUCH more information about internal investment opportunities than investors," and "if you believe in learning by doing, firms that consistently focus on internal investments & build off success should be more productive." That I think captures the tension nicely: In general, shareholders should be better at finding investment opportunities than managers are, because (1) their job is to find investment opportunities and (2) their set of opportunities is much bigger than what the managers have. So there is a bias toward returning money to shareholders and letting them decide what to invest in. But in specific cases, companies that are good at doing some things might be able to profitably hang on to the money and invest it in doing other things well. And if the bias toward returning money to shareholders becomes too pervasive, it might be too difficult for the managers to invest in doing things that they really should do.
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