Sergeant Spoof's Time Has Passed

Also insider trading, securities fraud, merger appraisal, crypto and Dimon 2024.


Spoofing means putting in big buy (sell) orders that you don't intend to execute, with the intent to push the market price up (down), so that the smaller sell (buy) order that you do intend to execute can execute at a higher (lower) price than it otherwise would. It is bad and illegal and you shouldn't do it, and it has gotten increasing regulatory attention in recent years, and it is my sincere hope that at big banks these days the training program includes a module, or at least a sentence, on how you shouldn't spoof. But spoofing once got rather less regulatory attention, and in the not-too-distant past a lot of banks seem to have had training programs that instead covered how to spoof and how much fun it is. 

And now their past spoofing is getting dredged up. Here is a Commodity Futures Trading Commission action against Deutsche Bank AG for spoofing and stop-loss manipulation, and while the funny quotes are several years old, they remain funny:

On February 11, 2011, another trader, Trader E, wrote to Trader C: “shall we spoof.” (Emphasis added.) Trader C responded: “sure.”

Sure! Honestly if you instant-messaged me "shall we spoof," I'd have a hard time not responding "sure." It just calls for a "sure," you know? Or:

On December 16, 2008, one of the Traders, Trader A, was discussing trading activity in gold futures with another Trader, Trader B. Trader B indicated: “i am bidding futur[e]s at 854 in size.” Trader A asked: “For anyone. Or a spoof?” Trader B responded: “spoof.” In response, Trader A stated: “Don’t leave i[t] out too long ... U don’t want people leaning on it.” (Emphases added.)

Even the most minimalist 2018-era bank compliance program would at least teach traders not to use the word "spoof" in a recorded electronic chat, but a decade ago our primitive forebears did not quite understand the problem.

Anyway Deutsche paid $30 million for its sins, mitigated by its own efforts to report and remediate those sins. On the same day, the CFTC also fined UBS AG $15 million and fined HSBC $1.6 million for similar spoofing charges, in both cases praising their cooperation with the investigation. The more advanced 2018-era bank compliance programs actively go out and search trader chats for bad words, and when they find the bad words they turn the traders in. A $30 million fine for turning your traders in may not sound that appealing, but the probably correct calculation is that it's a lot better than the fine you'd pay if you didn't turn them in and the CFTC later found the chats on its own.

UBS's chats are even dumber, by the way. Here's one:

On May 13, 2008, another UBS trader, Trader C, discussed trading activity with a trader employed by Financial Institution 1, Trader D. Trader D wrote: "TKU [thank you] SERG[E]ANT SPOOF ... [YO]UR NEW NAME [Trader C.]" Trader C responded: "HAHA NEVER SPOFF [sic] ... SPOOF UNLESS I[']M F ... " Trader D responded: "HAHAHAH YEA ... THEN I[']M F ..... " (Emphases added.) 

And here's one lamenting that the spoofing didn't work because the spoof orders kept executing:

In another example, on August 2, 2010, Trader F was discussed trading activity with another UBS trader. Trader F wrote: "u know when u were gone i did the regular bid/offer thing to spoof ... i got lifted twice haha ... think that trick is slowly starting to catch up." Trader F wrote further: "sometimes ... but when i see stuff like that in the futures i been smacking it ... last time me and [Financial Institution 1] were doing that, worked in our favor." (Emphases added.)

You would hope that even in the olden days, when spoofing was part of the curriculum, they'd at least teach you how to spoof successfully.

Suspicious call options.

If you bought short-dated out-of-the-money call options on Bioverativ, Inc. stock, just before its January 22 announcement that it will be acquired for $105 per share (a 63.8 percent premium) by Sanofi, then you did pretty well. According to the Securities and Exchange Commission, someone did:

Defendants' trading in Bioverativ calls is highly suspicious. Between Friday, January 12, 2018 and Friday, January 19, 2018, immediately preceding the Announcement, Defendants purchased 1,610 out-of-the-money Bioverativ calls with strike prices between $65 and $75 and an expiration date of February 16, 2018, despite the fact that Bioverativ shares had never closed above $64.11 per share. On January 22, 2018, after the Announcement made that same day, Defendants sold 732 of those contracts for a profit of approximately $2,518,622.70. Defendants sold an additional 75 contracts on January 23, 2018, netting an additional $207,825 in profits. Based on the last reported sale prices on January 24, 2018, Defendants' remaining options contracts were valued at approximately $2.2 million.

"The identities of the Defendants are not yet known because the options purchase orders originated through a foreign brokerage firm located in Zurich, Switzerland," and the SEC's insider trading complaint seeks to freeze their assets and reveal their identities.

We talk a lot around here about the nuances of insider trading law: how it's not really about fairness but about theft; how simply trading on information that no one else has is not a crime; how the government needs to prove that you got that information corruptly, from someone with a duty to keep it secret, in order to prove insider trading. Trading on information that no one else has -- even really good information -- even "inside" information -- is not necessarily illegal.

On the other hand, if you buy so many out-of-the-money call options right before a merger announcement, you know, come on. Everyone is just going to assume you insider traded. Perhaps you can prove them wrong. If you made all this money trading Bioverativ options in a Swiss account, and the SEC freezes your account, you can always show up in New York and argue that it is all a misunderstanding and nobody misappropriated any information from anyone and you should get your money back. Frankly though everyone will be surprised to see you. 

Elsewhere in insider trading, here's some unintuitive legal insider trading: At 3:47 p.m. one day, the U.S. Department of Education publicly announced two winning bidders for a lucrative debt-collection mandate, one of which was a public company. But at 1:30 p.m. it had emailed all the losing bidders to tell them who had won. And the winner's stock jumped, on relatively heavy volume, between 1:30 and 3:47. It is not clear why, but by that point a lot of people knew who the winners were -- and had no duty to keep quiet about it:

In its email to the losing bidders, the department identified the two winning firms but didn’t mandate that the information remain confidential. “If you have information that you know is nonpublic and material, but you have no duty to keep quiet, it’s in the category of information you overhear in a taxi,” says Stephen Crimmins, a former SEC enforcement lawyer who now works for Murphy & McGonigle. “You can trade on it.”

For all I know, when Sanofi decided to pursue Bioverativ, it sent emails to 40 other biotechnology companies saying "hey no deal right now, we're too busy buying Bioverativ." (I mean, it seems unlikely, but you never know.) If it did that, would any of those biotech companies have any duty to keep Sanofi's random blurting of nonpublic information secret? Could they trade on that information? Could their executives buy call options with it?

A final hypothetical that I am just going to leave here as an exercise for the reader. "News Tuesday that Bezos’s Inc., Buffett’s Berkshire Hathaway Inc. and JPMorgan Chase & Co., led by Dimon, plan to join forces to change how health care is provided to their combined 1 million U.S. employees sent shock waves through the health-care industry." CVS Health Corp. closed down 4.1 percent yesterday, Anthem Inc. down 5.3 percent, Cigna Corp. down 7.2 percent, etc. Those drops were pretty predictable, if you knew that Amazon and Berkshire and JPMorgan were teaming up to disrupt health care, which I did not. But someone did! If JPMorgan had shorted health-care stocks on Monday afternoon: Insider trading? Or what? (Probably a Volcker Rule violation but never mind that.) Or, if a Berkshire Hathaway executive knew about the plans and shorted health-care stocks for his personal account on Monday afternoon: Insider trading? Or what?

Everything is securities fraud.

I mean:

The U.S. Department of Justice and the Securities and Exchange Commission are investigating whether Apple Inc. violated securities laws concerning its disclosures about a software update that slowed older iPhone models, according to people familiar with the matter.

The government has requested information from the company, according to the people, who asked not to be named because the probe is private. The inquiry is in early stages, they cautioned, and it’s too soon to conclude any enforcement will follow. Investigators are looking into public statements made by Apple on the situation, they added.

While the slowdown has frustrated consumers, U.S. investigators are concerned that the company may have misled investors about the performance of older phones.

It is fun to imagine more extreme hypotheticals. What if Apple sold phones that it knew would explode after one year, and they all exploded and killed millions of people? And the Justice Department looked into it, examined the facts and the law, and said: "You know, this looks like securities fraud. The real victims here are Apple's shareholders, who had no warning that the phones would explode and kill their users, and who have now lost money when the stock dropped." If you were an alien trying to understand the U.S. legal system from cases like this one (also opioid cases, climate-change lawsuits, gun control, etc.), you might conclude that its purpose is to protect shareholders from losing money when the companies they own harm consumers. 


Remember Dell? Dell Inc. went private way back in 2013, and some shareholders sued because they thought the deal price was too low. So they sought an appraisal in a Delaware court, and for a while they won: The court awarded them a fair price of $17.62, instead of the deal price of $13.75. But not all of them. Some of the shareholders who sued were denied appraisal rights on technicalities. T. Rowe Price Group managed to get some of its funds denied appraisal on two entirely different technicalities.

One technicality is that, to get appraisal, you need to own your shares continuously from the time you demand appraisal until the time the deal closes. Some of T. Rowe's funds did, but not quite: They owned the shares the whole time, but some back-office procedures changed the nominee record-holder of the shares, and so they foot-faulted out of appraisal. Another technicality is that, to get appraisal, you need to vote against the merger. Other T. Rowe funds tried to do that, but the outside automated system used to record their votes accidentally forgot their instructions and they forgot to double-check. And so those funds missed out on the $4ish extra dollars per share that were awarded in the appraisal action.

T. Rowe quite understandably felt bad about this: It had meant to vote against the deal and seek appraisal for its funds, and if it had done so it would have gotten some extra money for them, but it messed up so they missed out. You shouldn't be too hard on T. Rowe: Plenty of other mutual funds thought the $13.75 price was just fine, voted for the deal, and never even sought appraisal. Their investors missed out just as much as T. Rowe's did, and in a sense their error was worse: They were substantively wrong about seeking appraisal; T. Rowe was wrong only on a technicality. Still T. Rowe's error was more embarrassing. It was also potentially more legal-liability-inducing: All those other funds could claim that their managers were reasonable in accepting the deal price, but it's harder to argue that you were reasonable in voting Yes when you explicitly meant No. So T. Rowe decided to pay out $194 million of its own money to the funds who missed out on appraisal. 

And then last month the Delaware Supreme Court reversed the appraisal verdict and ruled that the $13.75 deal price was the fair price. So never mind! And now T. Rowe has to awkwardly go back to its investors and say: "Remember when we messed up voting your shares and gave you some extra money to make up for it? Well it turns out our mistake didn't matter so we'd like the extra money back." Fortunately it had this possibility in mind when it handed out the extra money in the first place; from T. Rowe's 10-Q:

In accordance with the compensation payment, the Clients agreed that in the event the findings made by the Court regarding the fair value of Dell or the amount of interest to be applied were modified by the Supreme Court of Delaware on appeal, T. Rowe Price and the Clients would make an appropriate adjustment between themselves, calculated in a manner that is consistent with the methodology used to compensate Clients.

With some luck, Dell's buyout will finally be resolved shortly before it goes public again.

Isn't the world interesting? You might think that someone would offer to acquire a company and the shareholders would vote and the deal would close and that would be the end of it. But no, there are epicycles upon epicycles, odd and slightly archaic solutions to various problems, and then even odder solutions to the problems created by the first set of solutions, and so on forever. Sometimes when you look at the convoluted result it is tempting to say, this is ridiculous, surely it should all be much simpler, let's get a blockchain up in here. But it is worth staying open to the possibility that the processes are complicated because the world is complicated, that the fallible and idiosyncratic human methods of dealing with merger disputes come from the fact that merger disputes are human disputes, and that more reliable automated methods would smooth over some essential nuances.

The crypto.

Another great day in crypto land, let's see:

  • "The U.S. Commodity Futures Trading Commission sent subpoenas on Dec. 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar." You might remember Tether for people's skepticism that it has dollar reserves backing its peg, and for its announcement over the weekend that it has "dissolved" its relationship with the auditor who was supposed to dispel that skepticism. 
  • "The Securities and Exchange Commission obtained a court order halting an allegedly fraudulent initial coin offering (ICO) that targeted retail investors to fund what it claimed to be the world’s first 'decentralized bank.'" It is called AriseBank and it allegedly has the grab bag of problems that you'd expect: an unregistered sale of securities, false claims about offering FDIC-insured deposits and Visa-branded credit cards, executives with undisclosed criminal records, and a thick layer of general crypto-blather. More surprising is that the SEC says it has used these "tactics to raise what it claims to be $600 million of its $1 billion goal in just two months." Though that is AriseBank's claim, not the SEC's. "In reality, it may not have raised much more than $1 million," reports the Wall Street Journal.
  • "Signaling Crackdown, SEC Boss Emerges as Crypto Skeptic-in-Chief" is the headline here, but I would make a distinction between being a "crypto skeptic" and bringing a lot of enforcement actions against cryptocurrency frauds. Being a "crypto skeptic," to me, means thinking that the core claims of cryptocurrencies -- that they can provide a viable non-governmental store of value and medium of exchange, that they can allow for the creation of new decentralized protocols for the infrastructure of the internet, that their underlying blockchain technology can revolutionize finance -- are wrong or inflated. But even if you think all of those claims are true, you might nonetheless also think that there are a whole lot of totally fraudulent schemes that are drafting off the real enthusiasm for cryptocurrencies to separate rubes from their money. You don't have to be a "stocks skeptic" to crack down on penny-stock pump-and-dump schemes. I don't know if SEC Chairman Jay Clayton is a crypto skeptic in the broader sense -- he might well be -- but there are definitely a lot of frauds to crack down on, and they are definitely securities frauds, so it's not surprising that he "has elevated digital currencies to the forefront of his agenda."
  • "Bitcoin Is Having Its Worst Month in Three Years."

Jamie 2024?

JPMorgan Chase Chief Executive Officer Jamie Dimon "committed himself to the top job for another five years or so," but then what?

Don’t rule out Dimon 2024 — and some think he might run on a populist platform.

“This idea that the five-year commitment takes him out of running for president is obviously rubbish,” says someone who knows him well. The scruffy look in Davos “showed me he wants to disassociate himself with everything that place represents”.

Sure. If you are the billionaire CEO of a Wall Street bank, how better to demonstrate your populism than by wearing jeans to Davos?

Things happen.

Decade of Easy Cash Turns Bond Market Upside Down. Bezos, Buffett and Dimon's Health Push Years in the Making. Blackstone’s $17 Billion Thomson Reuters Bet May Supersize Deals. Embattled Steinhoff reports former CEO to police. Och-Ziff Names New CEO to Replace Daniel Och. Ireland enjoys tax boom but fears a reckoning. Rival Employers Dread Possible Arrival of Amazon HQ2 in Their Town. Extreme balloon twisting. Chameleons, Already Dealt Unfair Share of Cool Traits, Also Have Fluorescent Heads. United Airlines Forced Emotional Support Peacock to Give Up Its Seat. Woman who did yoga on plane says she’ll do it again.

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