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Archive for the ‘News Corp.’ Category

A year ago we posted a number of predictions for 2013 and many proved accurate. One area in particular may be taking a significant turn for the better.

Our predictions for 2013 were:

Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

What Did We See In 2013?

Ms. Brooks is on trial, JPMorgan did have greater Whale damage (along with several other huge financial settlements related to its business practices and flawed oversight), and several people are going to jail or being strongly pursued over insider trading. I won’t comment on the moral state of GS. The global economy has survived and is improving. Slowly. And without doing the research I am quite certain that at least one US bank somewhere was taken over by the FDIC.

I missed on Walmart’s non-US operations and a big sex scandal.

Yet the most significant change by far in terms of the financial industry is that the SEC, under new leadership, appears to have become more dedicated to putting some people in jail.

At the end of November 2012, SEC chairwoman Mary Schapiro left that office and was replaced in mid December 2012 by Elisse Walter, an SEC commissioner. Walter was an appointment by the president, who then nominated Mary Jo White as the chair. White was confirmed by the Senate and was sworn in on April 10, 2013.

Chairwoman White lost no time in tackling the challenge of prosecuting people in the financial industry. On April 22nd she named George Canellos and Andrew Ceresney Co-Directors of the agency’s Division of Enforcement. Canellos had been Deputy Director and then Acting Director of the division. Per the agency’s press release, Ceresney “served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Mr. Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.”

In particular White appears not interested in settlements that involve a fine with no admission of wrong doing. On her way in the door she got the board of the SEC to overturn a settlement with a hedge fund manager that included a no admission of wrong doing. Soon after, the individual involved signed a new settlement in which he admitted to most of the agency’s charges.  Later in the year, JPMorgan Chase reached its first settlement under the new leadership and it too included an admission of violating certain securities laws.

An article by Sheelah Kolhatkar in Bloomberg’s Business Week in mid October recaps this sea change and quotes Mr. Dennis Kelleher, president of Better Markets. “Mary Jo White has clearly changed the tone, and what she’s had to say is encouraging to anybody who wants the SEC to not only be successful, but be restored to its storied place as a protector of investors and markets.”

That’s the real story for investors coming out of 2013 and we look forward to more significantly stronger settlements in the year ahead.

Why this is important

Readers of this blog know that when it comes to ethical business behavior there is one key element that so often is overlooked to our detriment: the impact of corporate and industry culture on individual behavior. In the investment banking industry we have seen a cross company, industry level trading culture that has not only violated any sense of fair play and decency but has had tremendous real dollar impact on the global economy and investors’ trust. Alleged collusion on Libor rates was topped by collusion on foreign currency exchanges. Highly risky collateralized debt obligations were packaged and sold while the bankers made mockery of their  clients and customers. Massive bets were placed on global interest rates in a game of “top gun” between traders in different organizations.

This environment at an industry level makes it difficult for a CEO such as Jamie Dimon to totally manage his organization’s (and shareholders’ and customers’) risk. Mr. Dimon is doing all the right things in coming to relatively quick settlements and pledging to install new processes and oversight within his bank. I respect what he is doing. Yet until the industry as a whole changes its macho/top gun culture we global citizens are  not safe.

If there is one way to change that macho/top gun culture it is to prosecute, convict and sentence to jail a sufficient number of egregious individuals that the investment banking and trading community sobers up.

 

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The Wrapper On 2012

What a year it was. I started this blog and its associated Twitter account, @ethicsbite, in March and since that time have covered and commented on an amazing number of stories. When I scroll down the list of tweets I realize first hand the extent of ethically questionable (and many times illegal) corporate behavior in our country. Ponzi schemes, insider trading, money laundering and (in the UK) phone hacking are among the illegal. Providing financial advice to clients while your own firm profits by the reverse position is unprofessional. Manipulating the rate determination for an international banking benchmark is likely a violation of regulations. I’ll stop there as the full list would no doubt cause my readers to move on. So we’ll switch to sex.

The Petraeus sex scandal seemed to dominate the corporate ethics news at the end of the year. The New York Times story regarding Walmart’s Mexico operations was more significant in scale.  But all of that was eclipsed by juicy, titillating tales from Washington, Tampa and Afghanistan.

2012 Awards

In addition to being amazed at the plethora of unethical activity, I have marveled at the crassness of the people involved. One has to wonder how they would explain their actions to Mom.

In terms of sheer and utter crassness, the 2012 award truly has to go to the News of the World, whose employees allegedly hacked into the cell phone of a young British girl who had disappeared, then proceeded to delete some of the messages on her cell phone so they could capture potential new incoming messages. Her parents detected that something was going on and informed the police. That case led to the demise of one Rebekah Brooks, a Rupert Murdoch “protégé” and the editor of News of the World. Ms. Brooks and her husband’s relationship with David Cameron, the British Prime Minister, tainted 10 Downing Street and created a political situation that could not be ignored. As the investigation continued, Rupert found himself testifying at Parliament and Ms. Brooks was formally charged in May, together with her husband and four others, with conspiring to interfere with the investigation. She allegedly attempted to carry off the evidence in boxes she took out of News of the World’s offices. Moreover it has turned out that phone hacking may have been a relatively common tool at News of the World as close to 200 individuals, many of them celebrities and political figures, have filed suit over the hacking of their personal cell phones. News of the World was shut down by Mr. Murdoch and he subsequently re-organized the News Corp. entity.

A close second place in crassness would be Chesapeake Energy’s founder, Aubrey McClendon. Mr. McClendon showed little bounds in his use of the company’s money and making a name for himself with it. From such relatively small amounts as corporate payment of his personal staff (to be reimbursed at year end without interest on the amounts advanced) to the millions of dollars he authorized be invested in a local NBA team and the construction of a shopping mall that just happened to have eateries owned by Mr. McClendon, the CEO continually used corporate funds to “match” expenditures from his personal wealth to foster his interests. Chesapeake by this time was a publicly held company traded on the NASDAQ and the CEO’s use of money in this manner should have been overseen by the Board. But as is often the case, the Board was beholding to the CEO.  Chesapeake’s stock fell on bad times (from around $34 on 8/1/2011 to around $17 on 12/14/2012), four new independent board members were elected and McClendon was stripped of his Chairman title. But those who paid the cost were the shareholders, of course.

What Will We See In 2013?

Here are our predictions: Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

As the French say, “the more things change, the more they stay the same.”

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Libor

JPMorgan Chase may be facing inquiries from up to eleven different government agencies regarding its role in the Libor rate setting scandal.

The managing director of the U.K.’s Financial Services Authority stated last week that the Libor “is no longer fit for purpose.” He is pushing for it to be replaced with alternative indices. The Reuters article implies that other indices used in commodities and stocks may also be “under scrutiny.” This will surely be grist for the mill in the courthouse where lawsuits are already being filed from plaintiffs who believe their Libor based interest rates were calculated incorrectly. It also raises the question of legitimacy on any existing contract that is Libor based. This one is going to go on for a long time with many interesting and significant repercussions.

Standard Chartered

Standard Chartered is a great name for a UK bank, isn’t it? The name just feels old, stable, conservative…. all the things you would want in a bank. Now the New York State Department of Financial Services has a hotshot young regulator who is threatening to revoke Standard Chartered’s “charter” to operate in New York on the basis that the bank allegedly laundered $250 BILLION-with-a-B for Iran through its New York branch.

Goldman

Goldman Sachs has escaped prosecution by the Justice Department for its actions related to packaging mortgages and reselling them as collateralized debt. The feds felt they didn’t have enough evidence to win the case. Sigh.

NewsCorp

News Corporation announced a $1.6 Billion-with-a-B LOSS for the most recent fiscal quarter, primarily a result of write-downs related to the restructuring of its businesses around the world. That restructuring was announced following the phone hacking scandal at News of the World in London which has resulted in Murdoch’s protege Rebekah Brooks being formally charged in criminal court. However there have also been significant charges related to restructuring initiatives underway in the company’s Australian businesses.

Chesapeake Energy

Chesapeake, the scandal that keeps on giving future case studies, was in the news first for being served subpoenas in a US anti-trust probe and then for facing financial challenges in selling its Michigan properties, which are the subject of said investigation.

Facebook

The Facebook saga continues as a lower price for its stock is causing the company to face significant challenges. Key personnel have been leaving for new opportunities, a possible sign of loss of faith in the company’s further upside potential. The company faces a $3 BILLION tax bill springing from its extensive employee stock plan. At the same time, shares that had been acquired on the private market pre-IPO will soon be able to be traded on the public market. Welcome to the real world. They obviously didn’t learn any lessons from GE which makes billions in profit without paying a dime in federal taxes. Facebook got it backwards – are they making any profits at all and yet have a billion dollar tax bill? No wonder I need a CPA to put my return together.

Knight Trading

Knight Capital Group Inc. announced that its after-tax losses on its trading glitch could amount to $270 million. Good Night.

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Libor

The Libor scandal has continued to evolve, with US Federal subpoenas now issued to Bank of America while Deutsche Bank admitted that some of its personnel were involved. Citibank continues to be rumored as a target of investigation. Lloyds of London received legal inquiries from the UK government.

Lawsuits are starting to be filed, as Libor was a benchmark rate for numerous types of financial instruments. Among possible plaintiffs are city, state and county governments, mortgage holders, pension funds and brokerage services. In almost all cases, plaintiffs will allege they lost money by paying higher rates than they should have. Yet in spite of the wide-ranging impact of this scandal, its potential to further tarnish the investment banking industry and its direct and indirect impact on everyday citizens, the amount of coverage by the major media networks‘ nightly news hours has evidently been dismal.

Meanwhile, Barclays apologized for its role in the Libor scandal while simultaneously announcing a $6.6 Billion profit. No mention of refunds to those injured by the rigging of this “free market” rate.

UBS

A former UBS mortgage securities strategist has claimed that he was pressured into filing “misleading reports.” In another case, a trio of ex-UBS personnel have been accused of rigging the bid process for certain municipal bonds. And in yet one more UBS item, the bank reported losing $350 million largely due to the results of Nasdaq’s glitch in the Facebook IPO. Nasdaq is offering up only $62 million so watch for a lawsuit there.

Facebook

Speaking of Facebook, their shares dropped another 4% on Thursday (August 2nd) as more of their top executives departed. Recall that there are ethical issues related to their IPO as potentially negative financial information was released to a select group of investors but not the general public just prior to the IPO.

News Corp.
Rebekah Brooks, formerly Editor of News of the World and a Rupert Murdoch protege, was formally charged with “unlawfully intercepting voice-mail messages.”
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But Wait, There Is One Good Guy Left
On the other hand, in Japan the CEO of Nomura, one of that nation’s largest banks, resigned because some of his employees were involved in an insider trading scandal. If only all of the bank executives were Japanese.

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Chesapeake Energy:

Chesapeake’s Board of Directors named Archie Dunham, former CEO of Conoco, as their new Chairman, removing co-founder Aubrey McClendon from that role. Soon after, Dunham made it clear that Chesapeake needs to continue to sell off assets thereby raising cash. In the meantime, news surfaced that CEO McClendon may have violated anti-trust laws by allegedly sending emails related to bid prices on land for future drilling.

JPMorgan Chase:

Remember a previous post titled “Black Holes?” As predicted then, the hedge unit’s loss at JPMorgan continues to grow. Now reportedly at $ 9 BILLION-with-a-B dollars. Slightly more than the original $ 2 Billion.

News Corp:

Rupert Murdoch is apparently considering splitting News Corp. in two. The split would separate the entertainment business from the publishing business thereby cushioning shareholders who are primarily investing in the entertainment businesses from suffering the effects of the scandal going on in the publishing business. That scandal involves cell phone hacking allegations against the News of the World organization in London.  The company’s board quickly approved of Rupert’s wish. Hmmm.

Goldman Sachs:

No action against them, but the SEC is reportedly filing a civil law suit against a hedge fund manager for allegedly giving favorable treatment to some investors. Goldman was one of the names that allegedly received special treatment. The hedge fund is Harbinger Capital Partners LLC of Wall Street.

Facebook’s IPO:

The SEC opened an investigation into the NASDAQ stock exchange which was unable to effectively process the large number of trades on the stock’s opening day.

And Finally…..Madoff:

Remember Bernie? His brother Peter was planning to plead guilty while at the same time insisting that he did not know about his brother’s massive fraud. ….. sure.

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Investigations:

Jamie Dimon, CEO of JPMorgan Chase, appeared before Congress on Wednesday. Admitting that the bank let people down, but not admitting that stronger regulation might have kept them out of trouble, Dimon pinned the bank’s surprise loss on an internal complacency based upon the London hedging unit’s past successes. What is it that mutual fund prospectuses warn about? Oh yeah, past results are no guarantee of future success.

Prosecutions:

News of the World’s Rebekah Brooks made a court appearance and posted bail. She will be back in court next week.

Rajat Gupta, former director of Goldman Sachs, former head of McKinsey & Co., and former member of Proctor & Gamble’s board of directors, is on trial for insider trading. His case was went to the jury yesterday. Gupta allegedly fed inside information to now imprisoned felon Raj Rajaratnam who was then the co-founder of Galleon Group, LLC.

Justice:

R. Allen Stanford was sentenced to 110 years in prison for running a $7 Billion-with-a-B ponzi scheme. Stanford Financial was based in Houston. Some of my Houston friends invested money in Stanford’s “Certificates of Deposit” that were “issued” by his “bank” in the Caribbean. Paid good interest too. How do you spell Madoff?

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A four day week and relatively quiet.

Chesapeake Energy - Where the money has gone:

A comprehensive analysis from Bloomberg claims that the company will run out of cash sometime next year unless it disposes of more assets. The company has been investing for some time in new wells faster than the cash from existing operations was coming in the door. CEO McClendon has a 2.5% interest in these wells and had to put up his share of well development costs in advance of revenues also. Thus it appears that the company and its CEO are financially over leveraged and the driver is not the share price of CHK but the low price of natural gas on the market. Chesapeake may have lead the way to its own demise as it pioneered the use of the controversial fracturing technology for drilling. Others adopted that technology and natural gas is at a low as supplies have risen.

Other news on Chesapeake: Carl Icahn accumulated over 7% of the company and is demanding representation on the board, which he usually does in these situations. A major New York pension fund has declared itself opposed to two current board members that are up for re-election in June.

Facebook has lost over 20% of its share price since going public last Friday.

News of the World – Former editor and recent PM confidant Andy Coulson was arrested on perjury charges in the phone hacking scandal.

Recent Quotes - Last week Goldman Sach’s Director of Asset Management Jim O’Neill said: “Is it really that entirely desirable to have financial stability at the expense of everything else?” This statement demonstrates three things: (1) Mr. O’Neill sees financial stability as a roadblock to “everything else” – a false choice; (2) he sees financial stability as undesirable; and (3) he doesn’t understand how important financial stability is to the other 7 BILLION-with-a-B people on this planet. I suggest he try making it on a minimum wage for a year so he can experience first hand the importance of financial stability.

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