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News of the World Still Making News

Rupert Murdoch may have shut down his phone hacking London tabloid, but that hasn’t stopped it from generating news. This month’s stories include:

  • Parent company News Corp. named a new person to its Board of Directors – Mr. Alvaro Uribe, a former president of Columbia. Appropriately enough Mr. Uribe’s former chief of staff was arrested last year in connection with a case involving illegal wiretapping.
  • A number of prominent individuals have recently filed their own lawsuits seeking damages for the alleged hacking of their own phones. Among the names are Neil Kinnock, former head of Britain’s Labour Party, Stephen Byers, a former cabinet minister, and an assortment of actors and other celebrities.  A total of 53 new claims were submitted earlier this month bringing the total to 174.

News in the World of Banking

  • JPMorgan Chase may have been recently added to the list of banks included in the Iran money laundering investigation.
  • JPMorgan is also facing growing pressure in the US Senate regarding the losses in its risk management operation.
  • Freddie Mac stands to recover several $ Billion-with-a-B from various banks which had entered into mortgage repurchase agreements with Freddie Mac.
  • And then there was/is Lehman Brothers. Remember those guys? Well what’s left of their company has just sued JPMorgan Chase for over $ 2 Billion related to derivatives obligations. Lehman is also fighting JPMChase over the $ 6 Billion the big bank claims they are owed by Lehman.
  • And last but not least in the world of banking, a report just out from Better Markets claims that Americans have lost a total of $12.8 TRILLION since the collapse of Lehman Brothers.
  • In the meantime, asset manager Blackrock was fined $ 15 million by a UK regulatory agency for not following certain rules aimed at protecting investors’ money in the event that Blackrock went under.

Observation: Every piece of harm the banking industry has done ends up being an aggregate multi-billion loss for investors and consumers. Every successful prosecution ends up with a multi-million dollar fine and no one going to jail. What’s wrong with this picture?

Justice in the News

  • Stanford Financial’s former chief investment officer, Laura Pendergest Holt, was sentenced to three years in prison for her involvement in the Houston company’s multi-year ponzi operation.
  • A whistle-blower who testified against UBS was awarded $104 million by a federal court. The case was a significant test of the government’s ability to successfully award individual whistle-blowers. The particular case involved UBS’ alleged attempts to entice US citizens to evade taxes. UBS had settled with the US by paying $780 million to avoid being prosecuted.

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Money Laundering for Iran

It’s late August. Even the financial news takes a vacation. So of course it was a quiet couple of weeks with little news on Libor, the JPMorgan Chase hedge unit, News of the World or even Chesapeake. Government investigations likely continue their steady grind behind the curtain. Meanwhile both Tampa and New Orleans braced themselves for Isaac.

But wait, there was one new story of note: Laundries. Our own family has two laundries. One isn’t that great but it does a decent job with the standard business shirt for a reasonable price. The other is where we take our nicer outfits to be dry cleaned. It appears that Iran might have copied that model as several banks stand accused of laundering Iranian money on its way to and from the U.S. That would be illegal, due to the current international sanctions against Iran.

Standard Chartered

The story was just breaking in our last post when UK’s Standard Chartered was accused by the New York State Department of Financial Services with allegedly laundering $250 BILLION for Iran through its New York branch. The next week, Standard Chartered was reported working on a $340 Million deal with New York State allowing it to continue to operate in New York. The deal was completed, but only after their CEO left his vacation early (bummer!) to head directly to the US to negotiate.  Standard Chartered still has to face several US Federal agencies.

Standard Chartered was also sued by the estates of military personnel killed in Lebanon in 1983 on the basis that the bank had concealed its Iranian money at the time the plaintiffs won a suit against Iran in connection with the tragedy.

Deutsche Bank and RBS

Several days later, Deutsche Bank was named as an additional target of Iran money laundering investigators.

Not to be outdone by the Germans, the Royal Bank of Scotland was also cited as a target in the investigation.

Facebook

While apparently innocent in terms of Iran, Facebook’s iPO debacle continued to spew out more stories. One of its prominent directors dumped a reported $$ Billion-With-a-B in stock as soon as his restrictions in selling had lapsed. And the COO reportedly let out to an investor that the $38/share IPO value had been determined in part based on what it would take to deter Wall Street traders from simply flipping the stock. You mean it had nothing to do with the company’s actual value?? Unbelievable.

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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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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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A bank, an IPO and an Oil & Gas Driller all potentially have that one key characteristic of the astronomical black hole – a massive implosion sucking everything close enough to them into the abyss.

First the bank — JPMorgan Chase

This week’s news included the analysis that the hedging unit which lost $ 2 BILLION-with-a-B dollars of asset value faces a loss that is growing and likely to continue to grow. Most recent estimates are around $5 BILLION. Recall that when this story first broke, there was a total bet… uh, I mean trade, on the table of around $100 Billion in the “risky” category. Now that the whole world knows the situation, you can bet…. uh, I mean trade, on the prospect that there will be no takers on the other side should the bank try to unwind its position. Do you see the black hole now?  So if a 2 to 5 percent loss in this position wipes out about $20 Billion of shareholder value in JPMorgan Chase then what would a 50% loss do? Poof. No more bank. And who could possibly come to the rescue in order to prevent the next world wide financial meltdown? Hmmm.

And by the way, remember how banks can regulate themselves? It turns out that the 3 JPMorgan Chase directors who had responsibility for risk evaluation and the oversight thereof don’t really have the experience to do that. One is the head of a museum.

Ethical Analysis: As commented on in earlier posts, fiduciary responsibility to one’s shareholders – F; professional codes of ethics for financial advisors – F; adherence to the ethical expectations of the investing public and general citizenry – F.

Next the IPO – Facebook, Morgan Stanley, the NASDAQ

Before its IPO, Facebook was heralded as the largest IPO ever. Now it may be a major IPO bust, with stock hitting its peak on the day of the IPO and down since. The NASDAQ apparently could not keep track of all the individual investor trades, with news in the past two days that some of those investors had money removed from their account to support the purchase but found no shares of FB appearing in their account to reflect that purchase. Morgan Stanley is planning to dole out millions of its underwriting fees to those investors. How long do you think it will be before Morgan sues the exchange? In the meantime, Facebook is considering a move off the NASDAQ to a competing exchange and everyone seems to be questioning the company’s valuation. Then there is the allegation that the underwriters went forward with the IPO even though new financial data was bringing the IPO price into question. Not to mention that only some (I believe they were at first called “preferred”) potential investors were informed of this news. How do you spell SEC?

Morgan Stanley and the NASDAQ have big black eyes over this one, but with a likely SEC investigation, shareholder lawsuits already launched and the prospect of continued sell-off in the shares, this mess can only get bigger, nastier and more expensive.

Ethical Analysis: My jury is still out on Facebook, although their leadership clearly consented to go forward with the IPO in spite of changing financial data. NASDAQ appears thus far to be an operational blunder. Morgan Stanley and the underwriting team may have broken securities laws, certainly didn’t maintain a level playing field for the retail investors and should have delayed the IPO for few days. I would give them an F in meeting the ethical expectations of investors and in conducting a professional financial underwriting operation.

Finally the Oil and Gas Driller – Chesapeake Energy

The major news this week was that Carl Icahn is/has accumulated over 4% of the shares of Chesapeake. Also, two of the nine board members are up for re-election at the annual shareholders meeting in early June.

So why do I consider this one a potential black hole?

Where is the money? All that money that founder and CEO Aubrey McClendon borrowed from various entities using his personal interest in company wells totals to somewhere well north of $ 1 Billion-with-a-B dollars. At one point (2008) he even got the company to buy his map collection for $12 million in addition to paying him an annual bonus of $75 million. Where is all this cash going? The guy seems to have an amazing appetite for cash. That tells me that something is going on behind the curtain. His investment (and the company’s too, of course) in the Oklahoma City Thunder pro basketball team isn’t nearly enough to account for all these loans.Maybe it’s his hedge fund that he’s been running out of his CEO offices at Chesapeake. Maybe he has personal margin calls on his stock in the company. I don’t know and nothing has been coming out in the press.  What I do know is that there is another big piece of this story that is yet to come out and that Chesapeake’s investments and Mr. McClendon’s appear very much intertwined.

The potential black hole has similarities with the one that took down Skilling, Fastow and all of the Enron shareholders and employees. It is related to the value of the company’s shares which have fallen with the abundance of natural gas. In Enron’s case, there were off balance sheet liabilities that were tied up in deals with Fastow’s friends. Those deals started to unravel when the stock dropped below a certain value. I’m not saying that’s the mechanism involved here, but I am saying that McClendon’s personal need for cash accelerated as Chesapeake’s share value went down, a sign that he is over leveraged somewhere in his financial picture. The company may be as well, since almost everything that the CEO is involved in personally has company involvement as well. That may be why McClendon, who has known Icahn for many years, is now eager to have a financial white knight come to the table.  Stay tuned.

Ethical Assessment: Conflicts of Interest abound like a mound of fire ants. F-.

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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.

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With the nation’s first potential $100 billion IPO just around the corner and with that IPO based upon the premier and best social networking site, one has to recognize that this event is symbolic of a very new age in human interaction. At the same time, it should also remind us of a key challenge of the digital age: maintaining respect for the privacy of the individual.

Lest you think that I am about to attack Facebook, I have previously commended Mark Zuckerberg for defending that privacy. I am referring to the unbelievable requests made by potential employers for job candidates to provide their Facebook user ID and password to the interviewer. Zuckerberg rapidly responded to that news and stood up for his users’ privacy. Bravo!

Unfortunately our digital privacy dilemma does not hinge on Facebook’s founder alone. Information technology combined with mathematics and statistics has opened the door for corporations, governments and other individuals to find more information about you than you can imagine. Tracking your searches, learning your buying preferences, determining your likelihood of having particular medical problems, even observing you eating a hamburger in your backyard patio are all things we can now do.

The time for a national discussion of our right to privacy and what that really means is long overdue. I will try to contribute to that discussion in a series of posts on digital privacy. Particular points I will discuss include the following:

  • That the right to privacy has already been established as a constitutional right;
  • That technology assisted statistics has already made protecting and hiding your personal identity and personal identification information impossible;
  • That the data that is collected on you in database warehouses around the globe is and ought to be yours and yours alone to surrender, no matter how it was collected;
  • That the economic size and scale of companies such as Google renders “opting out” impractical and our laws ought to recognize that reality;
  • That therefore the burden of maintaining privacy and security of identification should be on the organizations and corporations that provide services, not the individual; and
  • That these principles must be established not just on the federal level but on the international level.

One of my first posts (My Big Data Footprint) opened the discussion of privacy in the digital world. Following the Seven Layers of Integrity® framework, we should start with the law. Let’s first briefly review the historical basis for the constitutional right to privacy.

The concept of a right to privacy is commonplace in our thinking, but unlike many of our other rights (freedom of speech, right to peaceably assemble, right to bear arms), privacy is not actually enumerated in our constitution. However, the Ninth Amendment, part of the Bill of Rights, provides recognition of other individual rights without specific identification in the constitution itself: “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”  Privacy as a matter of physical space (versus digital) can also be read into the 4th Amendment: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated….”

The right to privacy as a legal issue remained largely dormant until the Civil War, when the 14th Amendment provided an opening to the legal evolution of this right with these words “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.” (Fourteenth Amendment, Section 1)

The first Supreme Court case involving the right to privacy was Griswold v. Connecticut, which centered on a Connecticut law forbidding the sale of contraceptives. In this 1965 case, Estelle Griswold, the executive director of the Planned Parenthood League of Connecticut, and another individual had been fined for violating the state law against sale of contraceptives. After taking the case to the state’s supreme court without success, Griswold filed at the Supreme Court, arguing that the Connecticut law was unconstitutional under the 14th Amendment. As part of the court’s favorable ruling, it established that the Connecticut law had violated a “right to privacy.”

The second major case that cited a right to privacy was the very case that established a woman’s right to an abortion: Roe v Wade (1973). In that landmark decision, the court ruled that that the right to privacy was protected under the “due process” clause in the 14th Amendment, and that this right to privacy included a woman’s right to an abortion.

The Constitution’s Bill of Rights, the Fourteenth Amendment and two pivotal Supreme Court cases in relatively recent decades have established a right to privacy. As with freedom of speech and freedom of the press, our starting point should always be to place a burden of compliance with that right not on the individual but on those who would restrict the individual’s rights. To do otherwise in the case of privacy would be unacceptable.

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