Friday, September 24, 2010

Please Don't Eat The Daisies

Like Doris Day, Carlson Capital's name is sprinkled with alliteration. And like her role referenced above, and the bucolic burbs of its setting, so Carlson Capital was caught and censured for disturbing otherwise calm waters, by violating Rule-105 - a polite reference to the rule prohibiting the practice of pounding secondaries before, and or into pricing, and covering (typically) via the offer . It goes without saying that (as was the case the GLG) it is obviously not permitted to pound the shares of an issuer (of equity, or equity-linked debt) PRIOR to the public announcement of the issue. Some would argue the former is OK because the practice is not without risk: shares hammered beyond management's pain threshold can always be pulled by the issuer leading to mother-of-a-squeeze, or or the perp of the low-risk arb could be denied stock by the syndicate forcing it to cover higher.

And politely, the SEC and its enforcers found Carlson culpable despite their protestations that the offending transactions (and presumably their covering counterpart) were initiated by separate portfolio managers, running independent portfolios. Admittedly, the WFC transgression (which was involved in a deal)  could have been bad luck. But just typing this justification made me smile. And then laugh. And thinking about it causes me to chuckle further. As an excuse, this falls into to pathetic "My Dog Ate My Homework", or "I Was Kidnapped and Violated By Aliens" categories of plausibility. Is there not another category of censure (and fine?) that says: "You broke the rules, and you were caught, but your attempt at a defense and subsequent justification is sooooo lame (and ridiculuous) that we will automatically multiply it by 10". If there isn't, there should be. Legally, this may not be defensible, or consistent, but the threat of such not-so-arbitrary enlargement might help put an end to Americans predilection for attempting to evade culpability for anything and everything - even when caught red-handed.

Indeed, their defense would have us believe that on the cited occasions one desk decides to drop big chunks of stock of the soon-to-be-issuing company, and then, completely independently there is another guy, whose strategy arrives at the decision to place orders from the secondary's underwriters for similar amounts of stock.  And this is in a reasonably small shop, with a central trading manager who is in the loop and presumably with advanced trading, middle-office and risk-management systems, Sure.

But it begs the question - is this an isolated incident (at CC and hedge funds generally), or is it exemplary of pervasive financial don't-ask--don't-tell, and that no omlette was ever made without breaking eggs? And if so, should we care? Actually, the question was rhetorical, and have no doubts that I think we should as these activities are zero sum, reflective of a real larceny probably from YOUR pension fund, and the reason it continues is because the spoils are concentrated, and losses widely diffused. So, 10x (or more), admission of guilt, even industry banishment might be a real and useful deterrent to such stealing.


Common Schlemiel said...


From the lack of comments, I can see that you have caused serious injury to your readers from uncontrollable gales of laughter.

Wonderful concept, but after the US threw trillions on the similar sins of this recession, why on earth would they bother with such petty ante prosecutions?

"Cassandra" said...

I take your point, yet I remain a believer that systemic stability was/is essential and in the interests of the collective good, and the cost of this is that inevitably, greedy selfish dickfucks may (and will) game the system. I wish it were better designed, and I wish gamers and their facilitators with bad intent might encounter a garotte, but the price remains cheap alongside systemic collapse - understanding I am not an apologist for what has one wrong.

That said, fairness is at the heart of systemic stability and integrity, and the cheaters must be punished - great and small alike. But ciminally and putatively punish they must...