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Last week, the CFTC withdrew two no-action letters which gave DB Commodity Services LLC (CFTC Ltr. No. 06-09, 2006 WL 1419398) and something known only as "Client X" (CFTC Ltr. No. 06-19, 2006 WL 2682362), exemptions from the position limits in Regulation 150.2 (17 C.F.R §150.2). These entities sought exemptions because they were buying small numbers of futures to create a virtual commodity index. The commodity index was a tool used to price their real product: commodity-linked notes.
The withdrawl of no-action protection from this apparently inocuous activity appears to be part of a general CFTC blitz on speculation. The CFTC limits the size of transactions which are not bona fide hedging (see this CFTC Backgrounder for more). The CFTC news release finds that transactions undertaken by DB Commodity Services and X do "not qualify for a bona fide hedge exemption under the Commission’s regulations," and given CFTC Chair Gary Gensler's belief that "position limits should be consistently applied and vigorously enforced," this seems like something of which we'll be seeing more.
Only two more days until the SEC and the CFTC begin their "harmonization" meetings. Okay, again from the top - and Mary, in E this time.
Today brings a wealth of interesting items (and lots of video) from around the interweb. To wit:
From Advertising Age: Pfizer's PR chief wishes that government regulators would come up with some kind of Twitter policy, already.
From The Compliance Exchange: Ron Paul says that Barney Frank is going to allow a vote on a bill that would let the GAO audit the Fed's monetary policy! Also, YouTube video of Mary Schapiro talking about restoring the SEC's reputation.
From Compliance Week: a podcast (subscription required) about the SEC's proposal, in release 33-9052, to change the proxy rules with an eye to getting better disclosure about the "relationship of a company's overall compensation policies to risk." The proposal would seek to illuminate compensation policies that "can create inadvertent incentives for management ... to make decisions that significantly, and inappropriately, increase the company's risk."
Finally, from the Corporate Counsel Blog: a roundup of all the commentary on the Rakoff / Merrill / B of A proceedings.
In May, the SEC proposed an amendment to the process that gives shareholders the right to insert proposals, and alternative director slates, onto corporate proxies (more here). Last weekend John Coates hepped me to the onslaught of comment letters that followed. He told me he'd signed a letter suggesting a slightly higher threshold than the 1% proposed by the SEC (Jay W. Lorsch et al, 8/13/09). He also told me that there was another letter from another group of law professors saying they thought 1% was just fine (Lucien Bebchuk et al, 8/17/09).
My first thought was that this sounded like a lot of fighting over pretty small numbers. The difference between the current 10% fee and 1% probably adds up, but the difference between 1% and 3%, or 5%? So, I went to Google Finance to see how much money 1% really is. I picked a couple of very large companies to start: Google, IBM, and AT&T, and I did the math. IBM has a market cap of $157 billion so 1% of that is $157 million. That's the minimum price to get one's proposal before the eyes of IBM shareholders. To me, that sounds like a shitload of money - maybe even a couple of shitloads - more than your average crazy has laying around his bunker. The numbers for Google and AT&T are similarly large - they won't have to worry about a flood of alternative director slates.
Smaller companies, however, probably will - a company with a market cap of $250 million would have an entry fee of $250,000. Not exactly spare change to the American Nazi Party, or the Black Bloc, but certainly low enough so that every hedge fund in town could float its own slate. So this is maybe a receipe for chaos, but what the hey ... how else do we find out what happens?
On the 11th, the administration sent to Congress its Solomonic resolution for the lingering over-the-counter derivatives problem (does no one remember that the point in the story of Solomon's proposed baby-hacking is that when you cut a baby in half, it dies?)
The 115-page proposal creates a very broad definition of "swaps" and then carves out a subset of "security-based swaps." Regular swaps are to be regulated by the CFTC and security-based swaps by the SEC. Both agencies are instructed to play nice and write joint rules and joint interpretations or the big, bad Treasury will do it for them.
Standard swaps will be cleared by central clearing agencies and traded on exchanges. Non-standard swaps must be reported. In a nice piece of circular reasoning, the proposal creates an assumption that swaps traded on an exchange are standardized.
For a detailed discussion of the proposal see Sullivan & Cromwell's section-by-section analysis on their Financial Markets Resource Center (a great resource in any event).
On August 5th, Robert Khuzami, the new Director of the SEC's Division of Enforcement, gave a wide ranging speech about the "top-to-bottom scrub" that the Division has gone through post-Madoff. For a scrub overview see this memo from Edwards Angell Palmer & Dodge.
One of the things Khuzami promised is a faster investigative process. He has removed at least one procedural roadblock by convincing the Commission to delegate to him the power to issue Formal Orders of Investigation. He plans to delegate this power to "senior officers" of the Division. To encourage SEC investigators to move with a will, he is taking away thier tolling agreements. Tolling agreements, he said, would become the "exception, not the rule. (I, for one, had no idea that tolling agreements were the rule!)"
A tolling agreement is a contract between litigants where both parties agree not to use the statute of limitations as a defense. Section 3.1.2 of the SEC Enforcement Manual says that "[s]uch requests are often made in the course of settlement negotiations to allow time for sharing of information in furtherance of reaching a settlement." Khuzami appears to believe they were also used to maintain a leisurely investigative pace.
The SEC Enforcement Manual appears to back Khuzami's interpretation - it notes laconically that investigators should "[t]ry to avoid multiple requests for tolling agreements by asking for a suitable period of time [...] it is ultimately more efficient to overestimate rather than underestimate the time need to complete the investigation."
*yawn*
Last week, Jed Rakoff, a District Court Judge in the Southern District of New York, refused to approve a settlement between the SEC and Bank of America. Rakoff was widely praised for taking a principled stand against shoddy disclosure and the SEC's tacit approval of same.
But that's not what I want to talk about. I want to make the case that Jed Rakoff is the Kevin Bacon of the securities bar. Before Rakoff was a judge he was a federal prosecutor, and eventually, the Chief of Business Fraud for the US Attorney's Office, SDNY. He succeeded John R. Wing who would become Peter Madoff's lawyer (his boss at the SDNY was future Whitewater Indepedent Counsel Robert Fiske). Upon leaving the US Attorney's Office in 1980 he became a partner at Mudge Rose (Richard Nixon's law firm). Among his clients was Kidder Peabody M&A specialist-turned-government-informer Martin Siegel. Siegel testified against Ivan Boesky who was defended by short-lived SEC chair Harvey Pitt. In 1990, Rakoff left Mudge Rose and joined Pitt's firm, Fried Frank. In 1995, when President Clinton appointed him to be a District Court Judge (replacing David Edelstein who heard some of the Kidder Peabody civil suits, 686 F Supp 413, 752 F Supp 624) he completed the triangle - he'd been a prosecutor, a defense attorney, and now a judge.
If you know me, you are only two degrees away from Rakoff - he taught a class on Federal Criminal Law I took in law school (I got a C) and I used to work at Fried Frank, too.
Is it a small world, or is it just me?
Perhaps it has come to your attention that Annie Leibovitz is having financial troubles. I spent a couple hours looking into this expecting to find a story about predatory lending, but instead I discovered that the art market is, well, totally sleazy!
Leibovitz, apparently suffering from an advanced case of the New York City disease (real estate), had embarked on a renovation project so vast even her substantial income could not cover it.
Enter Art Capital Group, an art financing business run by a former gallery dealer named Ian Peck. Art Capital, basically acting as a glorified pawn shop, made Leibovitz an offer: her life's work, all her houses (she has five) and two years of her time in exchange for $15 million. On the face of it, this sounds like a pretty bad deal - but only if you're entering into it in good faith ...
In December, Art Capital started negotiating to sell the Leibovitz pictures to The Getty. After extended negotiations, The Getty offered $15 million which Art Capital found insultingly insufficient. Then the Getty broke off negotiations and announced it had made a deal directly with Leibovitz. Art Capital sued them both (602334/09 & 601136/09 - NY Cty Court). In late July a New York court denied some of the Getty's motion to dismiss (2009 WL 2440303).
Felix Salmon, who has been following this ado pretty closely, notes Goldman Sachs, which underwrote part of the Leibovitz loan, has become uncomfortable with Art Capital's methods, but isn't it kind of hard to find a hero, or a victim in this story?
In 2005, Art Capital was itself victimized by an employee who was alleged to have, among other things, colluded to fix the auctions at Christies (see ART CAPITAL GROUP LLC v. ROSE ANDREW, 601389/2005). That employee, Andrew Rose, denied any wrongdoing and now runs his own art financing business.
About twice a year I have a fit of ambition and sign up for listserves. Then, a few weeks later, I start getting those "your mailbox is over size limit" warnings and I unsubscribe. But I never give up, because I'm convinced listeserves are bursting with useful information that will make my job easier. It's just that when I spend time sorting through all that information I don't have time to do the job with which they ostensibly help.
Through it all, I have kept my subscription to the listserve from the Business & Finance Division of SLA, and last week it paid off again with a very useful discussion about intraday trading data.
A typical stock chart, whether acquired from Google Finance or Bloomberg, records the high, low, and closing price for one day's trading. If you need more detailed information about what went on during the trading day (bid, ask, individual trade size, etc.) you must use a more specialized source.
Intraday, of course, means during the course of one day. Intraday pricing is also known as tick-by-tick pricing. A tick is the minimum amount a stock exchange will let a security's price change. From 1792 until 1997 a tick was 1/8 of a dollar on every US stock exchange. In the 1990's that changed when the AMEX, and then the NYSE and the NASDAQ changed their minimum tick to 1/16 (also known as "a teeny"). This radical change lasted all of four years until the SEC blew it away by making the exchanges "decimalize" their trading - thus changing the minimum tick to one cent.
The collected wisdom of the SLA B&F list recommended the following sources (and I know of no others): NASDAQ Report Source, Francis Emory Fitch (which I always called plain old "Fitch"), and NYXdata. Fitch has the largest and deepest data. NYXdata is owned by the NYSE, but it covers NASDAQ otc, and the regional exchanges, NASDAQ Report Source only covers NASDAQ, but its cheaper than the others and you don't have to subscribe.
