Feeds:
Posts
Comments

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.

 

Read Full Post »

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.”

Read Full Post »

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.

Read Full Post »

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.”
.
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.

Read Full Post »

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.

Read Full Post »

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?

Read Full Post »

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.

Read Full Post »

Another exciting week for corporate ethics watchers!

JPMorgan Chase competes with Facebook for the top financial news story of the week as the major bank’s exposure to losses from its London hedging unit has a strong probability of growing. While the news for Facebook is almost totally upbeat, the combination of troubles in Europe and losses at one of the most reputable of the biggest banks has been bad news for the stock market all week.

Here are the highlights on JPMorgan Chase:

  • Last weekend saw speculation that the entire London hedging unit would be closed down, and that the Chief Investment Officer, Ina Drew, would be asked to resign. There were also calls for Dimon to resign his position at the New York Fed.
  • On Monday, Ina Drew announced that she would retire from the bank.
  • On Tuesday, Jamie Dimon was facing his shareholders at their annual meeting in Tampa. Shareholders there defeated a proposal to separate the roles of Chairman and CEO, a proposal that would have meant the loss of one of those positions for Mr. Dimon.
  • On Wednesday, several shareholder lawsuits against the bank were announced. The suits were focused on the bank’s alleged failure to appraise shareholders of the level of risks being taken.
  • But the real news, reported early this morning in the Financial Times, is that JPMorgan Chase’s hedging unit may be sitting on a total exposure of $100 BILLION in risky trades, trades that it will be challenged to unwind. That provides the possibility of total losses multiple times larger than the $2 Billion that came to the CEO’s attention over a week ago.

Ethical assessment: As noted in prior posts the real issue here is fiduciary responsibility to shareholders and, due to the bank’s scale and role in the global economy, the investing public and the general public. The bank may not have broken any laws but the behavior of this particular part of the organization appears to not meet the professional ethical standards of any financial analyst, banker or licensed stockbroker. It does not meet the ethical standards of the communities (investing public, general public) that it serves.

In Brief

Chesapeake Energy – Corporate “raider” Carl Icahn was reported to be positioning himself for a move on the company. This may provide some temporary relief to Chesapeake’s employees’ retirement savings at the company which are estimated to be 38% invested in shares of the company. When are we going to stop using company shares as the basis for employee retirement programs? Isn’t it a principal of sound financial management to not put all of the eggs in the same basket?

News of the World – Rebekah Brooks, her husband and four others were charged in the UK phone hacking scandal. It also came out that, guess what, Ms. Brooks managed to cart off seven boxes of papers relevant to the case from her News of the World offices as the investigation was beginning last July. Hmmm. Hasn’t this been tried before?

Delete, shred, carry away. Rarely works in these high profile cases. Besides, if a physical document exits, there are multiple electronic versions out there all over the place. Yep, those electrons may be hard to see but they are also hard to destroy.

Read Full Post »

JPMorgan Chase

The world of banking gave us more drama this week in the form of Jamie Dimon’s usually well-managed JPMorgan Chase. While it is not certain that wrong doing occurred, even Dimon admits the $ 2 BILLION trading loss in their London hedge fund unit was “eggregious,” “a mistake” and “almost inexecusable.”  Perhaps the “almost” applies to himself, Jamie Dimon, as reports this morning are that the entire unit may be out the door along with the unit’s leader. Political as well as financial fallout is already running high with the SEC announcing an investigation, voices of regulation speaking out on a return to the Glass Steagall days and Elizabeth Warren, consumer advocate and candidate for the US Senate, demanding that Dimon resign from his position on the New York Fed.

Ethical Assessment: It is not clear that the law was broken. On the other hand, this was not the bank’s money the bank was gambling with, as discussed in a prior post. And the size and scale of the bank involved (“too big to fail”) has implications beyond shareholders and depositors. Standards of financial and fiduciary responsibility have, in my opinion, been compromised.

In addition, the fact that Dimon sits on the New York Fed is reminiscent of Goldman Sach’s influence just prior to our last meltdown. For me there is a potential conflict of interest in having the CEO of a “too big to fail” international bank so closely involved with the Fed.

On the positive side I give Jamie Dimon credit for releasing this news as soon as he knew of it, admitting that a huge mistake had been made and taking swift action in holding his personnel accountable. All too often these things are left to drag out, no one loses their job immediately or ever and PR machines are cranked up to spin the story. Not so with Mr. Dimon.

Chesapeake Energy

Earlier in the week it was revealed that only days before the announcement that CEO Aubrey McClendon had borrowed about $ 1.1 Billion against his personal interests in Chesapeake well properties, he was busily arranging another $ 450 Million of similar loans. Not only that, but he was arranging these loans from the same investment management firm that was also putting together a $1.25 Billion loan for the company.

At the end of the week, Chesapeake announced that it had arranged a $ 3 Billion loan for the company itself.

While the company’s loan appears to be related to refinancing opportunities we as yet have no explanation as to McClendon’s need for such large loans. The fact that he has a hedge fund makes one curious as to whether there is some big unraveling going on in that operation and he may be borrowing to keep that afloat. Also Chesapeake shares had dropped from around 34 last August to the 25 area before all this news broke. Perhaps he had his company ownership leveraged too high. Either way it looks like a day of reckoning is coming for Mr. McClendon. Stay tuned.

In Brief

Avon, who is considering a possible merger with Coty, Inc., announced they are cooperating with an SEC probe into “suspicious” trading centering around the merger news.

Former News of the World executive and arrestee Rebekah Brooks was testifying again, but downplayed her relationship with David Cameron, the Prime Minister.

And finally, Tyco surfaced one more time as former CFO and still imprisoned felon Mark Swartz is now suing the company, claiming they owe him $60 Million in retirement benefits and something to do with his taxes. Would those be the taxes on all the money he stole?

Read Full Post »

Corporate ethics news the past few weeks has been just like a soap opera.  Here we go.

Walmart:  Two congressmen announced that they will launch an investigation into the bribery allegations reported by The New York Times. The Washington Post reported that the federal Department of Justice has been investigating this case since last December. And a major pension fund has filed a suit against the company, claiming “gross misconduct” by the board of directors and executive officers.

BP’s Deepwater Horizon Gulf of Mexico Oil Spill: A former BP engineer was arrested for obstruction of justice. I believe this is the first BP (ex) employee placed under arrest in connection with the oil spill.

News Corp. Phone Hacking Scandal: Testifying under oath, Rupert Murdoch dismissed phone hacking as a “lazy way of reporters not doing their job properly.” He apparently didn’t comment on whether or not it was illegal too.

Chesapeake Energy: One hardly knows where to start on this matter as it is far more complicated than a simple case of allegedly violating the Foreign Corrupt Practices Act. Chesapeake Energy’s co-founder and CEO, Aubrey McClendon, was found to have taken out loans against his personal interest in the company’s various oil and gas wells, as reported by Reuters. We are not talking about borrowing money to buy a house – this was about $ 1.1 Billion with a B over 3 years. This in itself raises various questions, not the least of which is how much does one have to spend per day to need $1.1 Billion in only three years. But the more important questions are how did the board allow this to go on? Where was the oversight? Chesapeake was no longer a privately held Oklahoma based oil-catter where co-founder loans against interest in well sites are just part of the glamour. It became a Publicly Held company, with stock traded on a major exchange.

But the story gets more juicy by the day. First the company argued that there was no conflict of interest as the company had first lien on the wells and McClendon’s loans were his own problem. Sure. So I am the CEO making decisions every day as to which wells to invest more money in and which to shut down and the fact that I have over a BILLION dollars of personal debt collateralized against my ownership interest in those same properties is not a conflict of interest? Holy Muckraker!

Then it also turned out that

  • McClendon ran a separate business of his own, a $200 million hedge fund that, guess what, traded in the very same commodities that are produced by Chesapeake.
  • McClendon sold $88 million of his interests in company wells to Wachovia for use as investment vehicles only a few weeks after committing (with his CEO hat on) to a similar deal with Wachovia for $600 million of company well interests.

Of course none of these activities were conflicts of interest either.  Now the company has taken some action with respect to its co-founder and CEO. They have removed him from the Chairman of the Board position and they have eliminated the program under which the two co-founders could participate in direct investment in company wells.  In the meantime, the company has announced that the SEC has begun an “informal inquiry” with respect to both McClendon and the company.

Commentary: If I had ever done anything like this at any company I have worked for I would have been out the door that very day. Where is the board? If I had ever spent as much time running an outside business from my employer’s office as McClendon allegedly did with his hedge fund, I would have been dismissed immediately. He even had the hedge fund’s mail coming to his Chesapeake office. Where is the board?  I’ll tell you where they are going to be – spending lots of hours in their attorneys’ offices.   As a dear departed friend of mine used to say, “It’s better than TV.”

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.