Insider Trading, Bitcoin and Libor
Yesterday I wrote about Mathew Martoma and the "personal benefit" test in insider trading law. One thing that I say all the time is that insider trading is not about fairness, it's about theft: The goal of (U.S.) insider trading law is not to prevent people from trading on material nonpublic information, but to prevent corporate insiders from enriching themselves using the material nonpublic information they get through their jobs. This explains the "personal benefit" test. If an investor learns something about a company that no one else knows, using legitimate research and moxie and gumption and shoe leather and elbow grease, and trades on that information, that's good! We want investors to try to find out information and then use it to make prices more accurate. That is the point of markets! If, on the other hand, the investor learns something about a company that no one else knows by bribing an executive for a tip, and trades on that information, that's bad! We don't want executives to betray their companies for their own enrichment.
I think this is the correct interpretation of the Supreme Court's insider-trading precedents, but nobody much likes it, including, I suspect, the majority of the Second Circuit panel that decided Martoma's appeal. So the "personal benefit" test has been weakened a lot in the past before being revived by the Second Circuit's 2014 Newman decision, and it was weakened again in the Martoma decision this week, which found that if a corporate insider intends to give a "gift" of information to someone she expects to trade on it, then she and the trader can both be guilty of insider trading.
By the way, one reason that insider trading law really should be about theft, not fairness, is that the U.S. has another law designed to create fairness. That law is Regulation FD -- for "Fair Disclosure" -- and it prohibits companies from selectively disclosing material information to some investors but not others. Regulation FD punishes companies for disclosing the information, though, not recipients for trading on it, and its penalties are civil rather than criminal. Also Regulation FD enforcement actions are ... very rare. (I like to point out that in the Newman case, two hedge fund managers were convicted of insider trading and sentenced to prison because they traded on material nonpublic information about Dell Inc. and NVIDIA Corp. Their convictions were reversed in part because an appeals court found that "NVIDIA and Dell’s investor relations personnel routinely 'leaked' earnings data in advance of quarterly earnings." But no Regulation FD case was ever brought against those companies.)
A system in which corporate insiders and their accomplices were punished criminally for misappropriating corporate information for their own benefit, companies were punished civilly for revealing information selectively, and investors were generally free to search out and trade on information would actually be a pretty sensible system. It's ... almost the system we have? But no one wants it.
Elsewhere, Sheelah Kolhatkar writes about Preet Bharara's legacy as a federal prosecutor: "While the hedge-fund and insider-trading crackdowns continued energetically, the anticipated flood of financial-crisis cases never materialized."
Grand Pacaraima Gold Corp. was a Canadian penny-stock gold mining company that, like many penny-stock gold miners, hadn't found any gold. This was not great for its stock price. Eventually it had a better idea: "On February 27, 2014 the Company changed its name to First Bitcoin Capital Corp.," and became a Canadian penny-stock cryptocurrency company that trades under the ticker BITCF. I don't think it found any bitcoins either -- at least, the most recent financial statements on its website listed assets of only $102 in cash and $360,000 in "mineral properties," but those most recent financial statements are as of September 30, 2016 (oops), so perhaps it has found some in the interim. "We also have a small amount of Bitcoin (COIN:BTC) we have earned in cryptocurrency exchanges," said BITCF in a shareholder letter yesterday.
But here in 2017, not finding bitcoins is a vastly more lucrative business than not finding gold, and First Bitcoin's stock has soared, trading up from $0.029 per share at the end of 2016 to a high of $2.70 last week. It closed on Wednesday at $1.79 per share, representing a $540 million market capitalization and about 6,000 percent growth year-to-date. But yesterday the Securities and Exchange Commission "temporarily suspended trading in the securities of BITCF because of concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of BITCF’s assets and its capital structure." "The good news is that while our shares have been suspended for 10 business days, our internal growth will continue unabated," responded BITCF in its shareholder letter, which is a fun read:
We have been very busy generating more than 100 unique cryptocurrencies ranging from disrupting the air-miles-loyalty industry to providing solutions to the cannabis industry. One of the beautiful aspect to our business model is the transparency that blockchain provides.
That transparency is I suppose different from the transparency that quarterly financial statements provide, but what are you gonna do. In any case I encourage you to read the financial statements and press releases that BITCF does provide, because they are a trip; highlights include:
- BITCF has done both a stock buyback and a dividend in cryptocurrency, using "Internet of Money" XOM tokens to buy back shares in July and dividending "TeslaCoilCoin" TESLA tokens to shareholders in August. (Do not ask me what those tokens are or what they are worth, that is obviously not the point here.)
- BITCF "allows its shares to be mined on its own blockchain and rewards miners with those shares mined based on Proof of Work," although it also "pre-mined nearly all total mineable shares" so don't get your hopes up too much.
- "In order to purchase and support WEED anyone that sends 1 President Johnson coin ($GARY) to the Company’s Omni Layer Bitcoin Wallet will receive 1 WEED coin into their Omni Wallet," is just a fine sentence right there.
Honestly if you are not running a cryptocurrency startup what are you even doing with your life, is a question I ask myself a lot.
There were two main kinds of Libor manipulation. One was when swaps traders asked their banks' Libor submitters to manipulate Libor up or down to benefit their own swaps positions. The other was when bank executives asked their Libor submitters to manipulate Libor down -- always down -- to make it look like their banks were in better shape than they actually were, to retain market confidence in the early post-crisis period. The first kind of Libor manipulation was morally bad -- Libor manipulation for profit -- but possibly not that harmful, since it had no systematic bias. (In fact there were probably instances where one bank was manipulating Libor up and another was manipulating it down, canceling each other out.) The second kind of Libor manipulation was perhaps more systematically harmful -- it kind of ruined Libor's usefulness as a measure of borrowing costs -- but more morally defensible. The goal was not to defraud counterparties, but to prevent a banking panic. There are longstanding rumors that central bankers told banks to do it.
The story of greedy traders manipulating Libor to increase their bonuses is much more suited to criminal trials, anyway, and the big criminal Libor cases so far have been about that. But here is a new U.S. indictment against two Société Générale SA treasury managers -- not rates traders -- charging them with what seems to be the second category of Libor manipulation:
As alleged in the indictment, between approximately May 2010 and approximately October 2011, Sindzingre and Bescond knowingly instructed their subordinate employees at Société Générale’s Paris treasury desk to submit inaccurately low LIBOR contributions in an effort to make it appear that Société Générale was able to borrow money at more favorable rates than it actually was.
Elsewhere in Libor, the Federal Reserve is coming closer to designating its replacement for Libor. That replacement will be called the Secured Overnight Funding Rate, "a broad measure of overnight Treasury financing transactions" that "was selected by the Alternative Reference Rates Committee as its recommended alternative to U.S. dollar LIBOR." So get used to saying "SOFR" instead of "Libor."
J.P. Morgan is the backer of the most widely followed emerging-market bond index, the J.P. Morgan Emerging Market Bond Index. Depending on their form, sanctions could in some cases require the bank to remove Venezuelan debt from the index.
That, in turn, could roil the emerging-markets bond world. Pension and investment funds globally could try to dump the debt for fear of falling out of step with the benchmark index’s performance.
It seems like JPMorgan Chase & Co. is going to be a follower rather than a leader on this, kicking Venezuela's bonds out of its index if required by the government and not otherwise. But there's nothing inevitable about that order: If JPMorgan had wanted to sanction Venezuela itself -- or if its customers had demanded it -- then it could have kicked Venezuela out of the index and had much the same effect on Venezuela's bond prices, and its ability to raise money by selling new bonds. (In fact there were calls for JPMorgan to do just that.) In a world where investors slavishly adhere to indexes, you don't need sanctions to prevent investors from buying a country's bonds; you just need to take those bonds out of the index. Index providers, as we sometimes discuss around here, are the unacknowledged legislators of the world.
"Do Lawyers Make Better CEOs Than MBAs?"
That is the title of this Harvard Business Review article:
After all, there’s a subtle difference in how these two disciplines train people to understand and manage risks: Legal training focuses on the downside of particular actions, while business training may emphasize the upsides for shareholder value from risk taking.
The finding is basically that lawyers do make better chief executive officers than MBAs for companies that were going to get sued a lot anyway. Regular companies are better off with the MBAs:
We found that CEOs with legal training were associated with higher firm value, but only in a subset of firms, specifically, in high-growth firms and firms with large amounts of litigation. Outside of this setting, however, the effect of CEOs with legal training on firm value was negative. So companies in, say, the pharmaceuticals and airlines industries performed better when run by lawyer CEOs, all else being equal, while companies in, say, printing and publishing performed worse. This is perhaps because in low-litigation industries the benefits of less litigation are offset by lawyer CEOs’ overly cautious firm policies, which can negatively affect cash flows and growth.
Yesterday I wrote: "One thing I sometimes wonder is why Alphabet Inc., which owns Google and is steadily amassing all of the world's information, doesn't start a hedge fund with all that information." A reader pointed out that Eric Schmidt, then the chief executive officer of Google, answered that in 2010:
“One day we had a conversation where we figured we could just try to predict the stock market,” he said. “And then we decided it was illegal. So we stopped doing that.”
I ... wait ... well ... Eric, call me, let's talk about how insider trading law works. (I mean, not legal advice, actually call your lawyer instead.) Actually it's an interesting question. Google, let's assume, gets relatively little of its information from corporations with which has explicit confidentiality agreements, and probably almost none from corporate insiders in exchange for personal benefits. On the other hand it gets a ton of its information -- searches, emails, etc. -- from users who have at least some dim expectation of privacy. Could Google aggregate search data to see what products people are looking at, and then trade stocks based on that? Seems fine, no? Could Google scan Gmail for mentions of the word "merger," try to figure out which Gmail users are working on public-company mergers, and then buy short-dated call options on the targets? Seems ... less fine.
Elsewhere: "The Hot New Hedge Fund Flavor Is 'Quantamental.'"
Blockchain blockchain blockchain.
"Burger King Is Allegedly Launching Its Own Cryptocurrency," it says here, though the Whoppercoin sounds like a pretty straightforward loyalty-rewards program ("customers will receive one Whoppercoin for each Whopper they purchase") rather than a cryptographic innovation that redefines the concept of money and the very fabric of society itself. But maybe, you never know. And here is Paragon, a "decentralized legalize autonomous org." that plans a "professional coworking space for cannabis" and is of course launching an initial coin offering; it is not to be confused with the WEED token, or I guess with the GARY token. And: "I receive linkedin messages daily from newly minted fund managers on the crypto haj through Asia."
People are worried that people aren't worried enough.
The CBOE Volatility Index continues its drift back down to "complacent" levels, but here is a story about how "the CBOE SKEW index, which is meant to reflect concern about 'tail risk', or events roiling the markets, rose to 148.62 last week, its third highest reading and just shy of a record high of 154.34 touched in March 2017." So people are worried, just somewhat esoterically worried.
People are worried about unicorns.
Hahaha some people may be worried about unicorns, but you know who isn't? SoftBank:
SoftBank Group Corp. has finalized a $4.4 billion investment in office-sharing company WeWork Cos., a massive deal that demonstrates the outsize ambition of the Japanese conglomerate to wield influence in startups around the world.
"I wonder whether 'sell into a SoftBank Series H' is now a legit VC exit strategy," tweeted Felix Salmon. Why bother with the public markets at all, when SoftBank and its $93 billion Vision Fund are just lurking around looking desperately for places to put money to work?
One thing that we have talked about recently is whether the era of "founder-friendly" investing is over. I have argued that SoftBank's vast pools of money have to be good for founders: The more money that is chasing venture capital deals, the less leverage providers of that money will have to ask for better governance terms. But there is an argument the other way, that more public-markets-oriented investors from outside of the venture capital bubble will provide more capital but will demand less founder-friendly governance terms in exchange. For what it's worth, "SoftBank also took two board seats at the seven-year-old company, suggesting an unusually large level of control for a late-stage investor."
Elsewhere in venture capital, male VCs are calling female startup founders to ask if they are sexist:
“I call them the ‘we cool?’ conversations,” says Ms. Fredrickson, co-founder and chief executive of New York-based cosmetics startup Stowaway.
"Any male VC that isn’t reexamining their behavior towards women in light of recent press, regardless of whether or not they have been accused, just simply isn’t doing their job as an investor or as a person of privilege and influence," says one venture capitalist.
People who lose their vision gain greater sense of hearing and smell. The lack of data in VC does the same thing to an investor’s sense of the human and behavioral side of investing. It forces your attention to things like the personality characteristics of a company’s management team, customers’ emotional response to products, and whether you, the investment team, can truly work together as partners vs. the detached guidance of a strategy backtest.
Amazon Clobbers Grocers’ Stocks With Price Cuts at Whole Foods. ("Exactly the pricing behavior you'd expect when the largest controlling shareholder doesn't also own the competitors," tweeted Martin Schmalz.) Chinese Dealmaker Raises Billions From Shadow Banks. Uber investor Pishevar takes another shot — this time legal — at Benchmark. It’s Listed and It’s Surging: Switzerland’s Central Bank. Dallas Fed chief rejects looser curbs on big banks. Draghi Has Reason to Temper the Drama in Jackson Hole Sequel. Why Policy Easing—Not Tightening—Tops Agenda for Some Central Banks. Samsung Heir Gets 5 Years for Scandal That Toppled a President. Executives Warn MiFID Has Firms Caught Like ‘Deer in Headlights.’ Spotify closer to IPO after Warner Music deal. "We find a decrease in both the likelihood and the frequency of management earnings forecasts conveying bad news and an increase in the level of real earnings management following interventions by hedge fund activists." Markets Eye Debt Ceiling With Unease. Trump to push for tax reform passage by year’s end, says Cohn. Of course Trump won't have a tax plan. The Oral History of This Oral History.
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