Saturday, May 3, 2008
The SEC as Crazy Eddie
"The [SEC] accused a former trader of spreading false rumors about a Blackstone Group takeover bid and then profiting from the ruse, a case that will inflame critics of short-selling and bolster concerns about rumormongering on Wall Street. In a complaint filed in U.S. District Court in New York, the SEC alleges that Paul Berliner, a trader for New York trading firm Schottenfeld Group, used instant messaging to circulate the notion that private-equity group Blackstone was considering lowering its price for Alliance Data Systems, a processor of credit-card transactions it had agreed to acquire for $6.4 billion six months earlier. ... Over the next seven minutes, Mr. Berliner began selling short 10,000 shares of ADS stock, a bet it would fall in price, the SEC said. Almost immediately, as the stock fell, Mr. Berliner began buying it back at the lower price, turning a $25,000 profit on the trades within 10 minutes. ... Many company executives, especially some Wall Street CEOs, have been complaining bitterly that short sellers are profiting from spreading false rumors about major firms, essentially manipulating the market. ... Thursday, on CNBC, SEC Chairman Christopher Cox, who has been under fire for lax enforcement, said the case was evidence that the SEC can move quickly and that the 'cop is on the beat.' In a written statement, he called such market manipulation a 'witch's brew' that the agency will prosecute vigorously. ... Berliner agreed to settle the charges, without admitting or denying wrongdoing, and to pay $26,129 in profits and interest and a penalty of $130,000. he is also barred from working at a brokerage firm. ... According to the SEC, Paul Curnin, an outside lawyer for Blackstone, was inundated that day with phone calls from investors asking whether the rumors were true. He placed a call to Walter Riccardi, deputy director of enforcement at the SEC, who assigned the matter to Scott Friedstad, an associate director. Mr. Friestad set up a team to track down the instant messages and emails. ... The SEC was already investigating the origin of the instant message, the SEC officials say. The large number of specifics was one reason the rumor moved the stock price and was also a key element of the SEC's case. ... The deal between Blackstone and ADS eventually fell apart for unrelated reasons", my emphasis, WSJ, 25 April 2008.
"Walter Riccardi, [SEC] deputy director of enforcement, is looking to leave the agency for the private sector and has recused himself from cases. ... His departure comes amid a shake-up in the agency's ranks. ... The SEC's enforcement program has been criticiized by some members of Congress as needing to more aggressively investigate issues arising from the credit crunch", WSJ, 25 April 2008.
Congratulations, Cox, Riccardi & Co., (CRC) the all-star comedy team shortly appearing in Las Vegas. Your victory over miscreant Berliner is your greatest "triumph" since that over the "PWC Two". See my 19 January 2008 post. Berliner's gain was .0038 of my "Blankfein Test". CRC should have declined to investigate. Has CRC anything important to do? Are we impressed! Did Paul Curnin, a Simpson Thatcher partner, use CRC as its "schtarke"? Schtarke? Schtarke was a title sometimes applied to Murder Incorported's "enforcers". How much time elapsed between the SEC's agreeing to investigate this insignificant case and Curnin's phone call? Tell us Riccardi, when Curnin called, did you respond with, "Yes boss, how may I help you"?
Riccardi, don't worry. Given CRC's "judicious" case selection, I'm sure you'll find something attractive in the not too distant future. Why did I use Crazy Eddie in this piece's title? Because his prices were "insane"? Similarly, the SEC's enforcement case selection.