PrefBlog

The Toronto Star has some details regarding the Equitable Trust fraud:

More than 1,000 condo owners across Toronto fear they are on the hook for millions of dollars as victims of an alleged property fraud.

Lawyers estimate the total misappropriation may exceed $20 million.

Manzoor Moorshed Khan, president of Channel Property Management, borrowed millions against at least five buildings without their knowledge, according to documents obtained by the Star.
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“It seems to be a case where a fairly sophisticated criminal fraud has been perpetrated,” Andrew Moor, president of The Equitable Trust Company, said in an interview. He said the suspected scheme “managed to penetrate a longstanding process that has kept us safe.”
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The Star has learned that at least four condominium corporations managed by Khan’s company were victims in the alleged fraud. Of these, one has filed a lawsuit for $3.1 million against Khan, his company and several financial firms, including Equitable Trust.

The suit, filed by owners at 25 Grenville St., a luxury condo with around 200 units in downtown Toronto, alleges Khan registered a fake bylaw without the board’s knowledge that authorized him to borrow more than $3 million against the property, according to court document.

The fraud against Equitable, proud issuer of ETC.PR.A, was reported on August 23; the depature of its CFO on September 12.

UBS announced unauthorized losses:

UBS AG (UBSN), Switzerland’s biggest bank, said it may be unprofitable in the third quarter after a $2 billion loss from unauthorized trading at its investment bank.

London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the situation who requested anonymity. City of London police and UBS declined to identify the man.

UBS management aims to “get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened,” the bank’s group executive board, led by Chief Executive Officer Oswald Gruebel, said in a memo to staff today.
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A 31-year-old man was arrested at business premises in central London at 3:30 a.m. on “suspicion of fraud by abuse of position,” City of London Police Commander Ian Dyson said in a statement today. The man remains in custody while the police investigate, the police said.

Adoboli’s LinkedIn page lists him as a director in ETF and Delta1 Trading at UBS investment bank in London. He previously held the position of trade support analyst at the investment bank, according to the LinkedIn profile. A University of Nottingham spokeswoman confirmed that Adoboli graduated from the school in July 2003, earning a degree in Computer Science.

Details are slowly trickling out:

As Switzerland’s central bank imposed a limit on the franc’s appreciation against the euro on Sept. 6, UBS AG (UBSN) trader Kweku Adoboli’s Facebook profile had a plea for his friends: “Need a miracle.”

Just over a week later, at 3:30 a.m. yesterday, police in London arrested the 31-year-old Adoboli on suspicion of fraud by abuse of position. UBS told investors less than five hours later that “unauthorized trading by a trader” it didn’t identify caused a $2 billion loss.
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Moody’s Investors Service put credit ratings for UBS under review for possible downgrade. The examination will focus on “weaknesses in the group’s risk management and controls that have become evident again,” Moody’s said in a statement. The loss itself “would be manageable for the group given its sound liquidity and capital position.”

UBS asked British police at 1 a.m. yesterday to arrest Adoboli, before alerting the U.K. financial regulator or prosecutors, according to two people familiar with the matter. The Financial Services Authority was notified shortly after the police, and prosecutors at the Serious Fraud Office weren’t contacted at all, according to the two people, who asked not to be identified because the investigations are private.

UBS declined yesterday to say how the trading allegedly lost the bank $2 billion. Gruebel called the loss “unauthorized” and “distressing” in an e-mail to employees, without giving details. No client positions were affected, the Zurich-based company said in the statement, issued on the third anniversary of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse.

Securities regulators are publicizing a request for comments:

The CSA, and the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) (together referred to as the self-regulatory organizations or SROs), are working to develop requirements in a number of areas related to a client’s relationship with a registrant. This initiative is referred to as the CRM Project. As part of this work, the CSA has already developed requirements relating to:

• relationship disclosure information delivered to clients at account opening

• comprehensive conflicts of interest requirements

These requirements were included in the Rule when it came into force.

The amendments outlined in this Notice relate to the remaining elements of CRM, specifically:

• disclosure of charges related to a client’s account and securities transactions

• account performance reporting

The performance reporting is a welcome feature, but there are no provisions requiring advisors to publicize their composites. They’re allowing dollar-weighted calculations as well, which is craziness, and they are making a big fuss about original cost reporting, which is crazier.

It’s heavily influenced by a report Report: Performance Reporting
And Cost Disclosure:

Only two common investment terms are understood well by more than 2/3 of investors, namely, ‘rate of return’ and ‘Term deposit/GIC interest’. Understanding drops off quickly to the 4 out of 10 level when we talk about synthetic measures like market indices or ‘benchmark funds’. Terms like ‘Management Expense Ratio’ are understood by less than 1/3 of investors.
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When we look at how investors assess the performance of their portfolio, we find that most people simply assess the amount of money they gained or lost since their last account statement. The use of market indices and benchmark performance is most common among those with the most money invested.

YLO had a filing on SEDI today, but there was nothing of particular interest – just two more days of buying of YLO.PR.B, YLO.PR.C and YLO.PR.D in the familiar daily quantities, followed by a cancellation of all shares held by the firm on September 14.

It was a mixed day for the Canadian preferred share market with PerpetualDiscounts up 7bp, FixedResets down 9bp and DeemedRetractibles winning 12bp. Volatility was at its normal low levels. Volume was low.

Well, here’s a blunt proposal:

Hong Kong would “absolutely” welcome London-based banks HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN) if they decided to move headquarters to the former British territory, according to Chief Executive Donald Tsang.

“If HSBC or Standard Chartered were to change headquarters it would not undermine their business at all,” Tsang said in an interview yesterday. Tsang added he didn’t “want to encourage a move that would impair relations” with trading partners including London and New York.
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HSBC and Standard Chartered, the two U.K. lenders dependent on Asia for a majority of their profit, faced calls from investors to consider moving after the U.K. government imposed a bank levy last year to raise 2.5 billion pounds from lenders. Shifting to Hong Kong would also allow the banks to sidestep any financial transaction tax imposed by the European Union.
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With a top tax rate of 50 percent, London-based bankers making more than 1 million pounds will pay about three times more in tax and social security than colleagues in Hong Kong, accounting firm KPMG estimated last year.

“If you ask businesses why they choose Hong Kong over other places, our surveys show that almost all of them place taxes at the top of the list – or perhaps I should say a lack of taxes,” Tsang said in a speech at the Think Asia Think Hong Kong conference in London.

More bad news for the Europeans:

The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets.

The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.

The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 99.1 basis points below the euro interbank offered rate, or Euribor, at 12:24 p.m. in Frankfurt, indicating a premium to buy the greenback. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.

U.S. money-market funds “have stopped rolling over dollar loans of European banks,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “I wouldn’t be surprised if demand increased in the next weeks.”

As anticipated, Moody’s downgraded Credit Agricole and SocGen:

Credit Agricole was lowered to Aa2, Moody’s third-highest rating, and remains under review. Paris-based Societe Generale (GLE) was reduced to Aa3, with a negative outlook, as Moody’s re- evaluated its level of state support. BNP Paribas, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.
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Credit Agricole’s new ratings “are more consistent with the bank’s sizeable exposures to the Greek economy,” Moody’s said in the statement.

The western world is getting a long-overdue lesson on the relationship between pipers, payments and tunes:

And, reminding his audience of his nation’s economic power, he said China is ready to invest more in Europe, but called on Europe to take “bold steps” toward recognizing China as a full market economy.

The World Trade Organization set a 2016 deadline for its member nations to recognize China’s market economy on the country’s admission to the organization in 2001. But, to China’s frustration, neither EU countries nor the United States have done so, amid continuing disputes over dumping of cheaply made Chinese consumer goods and anti-dumping tariffs in the receiving countries.

“We have been concerned about the difficulties faced by the European economy for a long time, and we have repeated our willingness to extend a helping hand and increase our investment,” Mr. Wen said. “To show one’s sincerity on this issue [of the market economy] a few years ahead of that time is the way a friend treats another friend.”

And by the way, shut up about that stupid human rights thing, OK? And spies? Shut up about them too, got it?

The TRE puts situation is causing headaches:

After a hearing on Wednesday morning, the Ontario Securities Commission announced that it needed an extra day before ruling whether or not Sino-Forest Corp.’s (TRE-T4.81—-%) put options that are affected by its cease-trade order will be allowed to be exercised.
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CDCC’s main argument is that these puts are insurance contracts that were signed before the halt was put into effect, and that letting the holders exercise them does not constitute a new investment decision. (The new investment decision is a key part of the argument because the cease prevents new decisions from being made.)
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Sino-Forest options in question are American style, which means that they can be exercised at any time up to and on the exercise date. (Whereas European options can only be exercised on the exercise date.) Those who argue against CDCC claim that the right to have exercised before the puts makes these options equivalent to stocks. In other words, they say, holding a put is no different than being short the stock, and like the short sellers who are now stuck, the put holders should have exercised earlier.

I certainly hope that the argument regarding equivalency to stocks has been very badly reported, because it’s nonsensical as stated. They aren’t stocks. They’re put options. Losses for both parties are limited (which is not the case for call options).

Saying they’re insurance contracts can lead to murky consequences as well. We’ve already had to listen to shrill screams that buying a credit default swap on a security you don’t own is like buying fire insurance on a house you don’t own. It’s a slippery slope.

Unfortunately, the Financial Post has a direct quote:

“The holder was buying insurance against the situation that has arisen,” said lawyer James Tory of Torys LLP, who is representing the CDCC.

Those words may yet come back to haunt us.

I continue to be amazed that this issue was not dealt with long in advance; and continue to believe that in future the CDCC should simply adjust the expiration dates by a term equal to the term of the cease-trading order. Wasn’t there something a long time ago, with options having strike prices that were unaffected in Canada by a major special dividend, when every other options exchange in the world made an adjustment? It was a $5 dividend if I remember correctly, which is by no means a sure bet.

The Financial Post claims that a National Bank – HSBC retail brokerage deal is all over but the shouting.

The Canadian preferred share market fared poorly today, with PerpetualDiscounts down 8bp, FixedResets losing 12bp and DeemedRetractibles off 3bp. Volatility was OK, with BAM issues well represented – to some extent reversing their sparkling performance yesterday. Volume was on the high side of average.

Assiduous Readers will be aware of my admiration for American institutions. The politics may be crazy – and I feel that the SEC has been compromised by politicization – but there’s no doubt but that the finest quality ingredients go into the sausage-making process, regardless of what one might think of the final product. The latest example of this is living-will regulations:

U.S. regulators approved two sets of guidelines that banks including Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) will have to follow in drafting plans to protect the broader economy in the event of their own collapse.

The Federal Deposit Insurance Corp. board voted unanimously today to release a joint final rule laying out what the largest and most complex financial firms must include in so-called living wills they’re required to file. The panel also approved contingency planning guidelines for insured banks.
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Regulators are requiring financial firms to file plans that are developed under the context of the bankruptcy code, with each designed to give a blueprint for how a firm could be taken apart. Subsidiaries with critical operations or core functions would also have to be addressed in resolution plans, a senior FDIC official said before today’s meeting.

Can you imagine? Requiring the plans to be compatible with the bankruptcy code that has been developed globally over three hundred years, adjusted, tweaked and refined in response to every conceivable contingency? It’s unheard of! It’s brilliant! I think the FDIC board members should all get Nobel Prizes, and that’s just for starters.

The Italian 5-year auction didn’t go too well:

Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.

The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14.

Greece is finally getting some good advice:

Greece should default on its bonds to stop a deterioration of the economy, said Mario Blejer, a former Bank of England adviser who took the reins of Argentina’s central bank after its 2001 default on $95 billion.

“Greece should default, and default big,” Blejer, who was an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “You can’t jump over a chasm in two steps.”

Rescue programs backed by the International Monetary Fund and European Central Bank are “recession creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.

IIROC has published a rather cutesy Guide to Trading on Equity Markets. The interactive graphics are in desperate need of proof-reading … for example, item #5, purportedly indicating the “last trade” on the explanation of buy and sell orders is misplaced; while the explanation of limit orders illustrates the instruction “Sell 500 @ 20.00” with an explanation of the consequences if the order had in fact been “Sell 500 @ 20.40”. Good old IIROC, always good for a laugh.

Click for Big

Click forBig

The situation with TRE options is a disgrace:

Shareholders of Sino-Forest Corp. (TRE-T4.81—-%) aren’t the only ones with headaches after the Ontario Securities Commission halted trading in the company’s shares.

Investors who thought they were buying insurance using “put” options against a decline in the forestry company’s shares are facing the prospect that their protection could be worthless.
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Last week, the OSC extended the cease-trade order to Jan. 25, 2012. During the four-month break, about 9,000 put options are scheduled to expire. Each put allows the holder to sell 100 shares at a predetermined price.
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The issue first flared up on Aug. 26 when the Canadian Derivatives and Clearing Corp., which oversees options trading in Canada, announced that Sino-Forest options could not be exercised while trading in the stock was halted. That rattled investors who held put contracts that were now frozen.

After discussions with the investors, the CDCC filed a request with the OSC asking for permission to allow some investors to exercise the options.

It is requesting special treatment for contracts that were purchased as protection against a long position in the shares. That means anyone who bought puts purely for speculative purposes will still be out of luck if the OSC approves the request.

I’m surprised at two things – mainly that such a situation isn’t common enough that it was foreseen and provided for in the contract specifications. It seems to me – at first blush – that the most logical way to address the problem is to extend the expiration date of the options by a term equal to the term of the cease trading order.

CDCC’s press release states:

In accordance with CDCC prior practice, CDCC made application to the OSC on September 7, 2011 for an order varying the Cease Trade Order to permit the outstanding put contracts to be exercised.

OSC staff are considering CDCC’s application and have advised CDCC that, if OSC staff determine it is appropriate to recommend that the requested variation order be granted, OSC staff may recommend that a condition be included in the variation order that limits the relief to holders of outstanding put contracts who are not current or former members of management or other insiders of Sino-Forest Corporation.

However, the application for the variance states:

CDCC members will be informed that if they (or their clients or other beneficiaries) wish to exercise a Put Contract, they must currently own the shares to make good delivery.

Even this wouldn’t be so bad, if you could at least sell your puts to somebody who did own shares (or who was short the puts already) – but the Montreal Exchange reports no trading in TRE options since the cease-trading order became effective. And I don’t know whether it would be legal to borrow the shares required to make good delivery.

If you were given the task of thinking up a response to such a situation most harmful to market integrity, you would suggest treating puts differently according to the moral virtue of the holder (speculators, of course, being EVIL! EVIL! EVIL!).

I don’t know much about the intricacies of the option market, but would dearly love to be guided to some authoritative discussion of the topic by somebody who does.

IAG issued equity:

DBRS regards favourably the decision by Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company; Subordinated Debentures rated “A”, Claims Paying Ability rated IC-2, and Non-Cumulative Preferred Shares rated Pfd-2 (high)) to privately place six million common shares worth close to $200 million with the Caisse de dépôt et placement du Québec. Pro forma the new issue, the new shares will represent 6.7% of the Company’s 90 million in outstanding common shares. The Company’s solvency ratio will increase by 14 percentage points as of June 30, 2011, to 208%. Ostensibly, the raising of capital at this time was a reaction to the recent weakness in the global economy as suggested by soft equity markets and continued downward pressure on interest rates. Both market developments could result in a required increase in actuarial reserves, which could erode earnings in the short run. To issue new capital in the current uncertain economic and market environment is therefore regarded as prudent.

IAG has been increasing its exposure to equity markets by virtue of segregated fund guarantees, increased equity assets held opposite long-tailed liabilities, and through the impact on management fee income in both the segregated fund operations and in the IA Clarington mutual fund operation. The Company is also exposed to falling interest rates. While IAG, like most life insurance companies, is dynamically hedging some of these market exposures, it is increasingly exposed to financial market volatility, which justifies the decision to increase its regulatory capital relative to the peer group.

IAG has stated:

The Company considers that its solvency ratio will remain above 175% as long as the S&P/TSX remains above 9,600 points (compared to 10,600 points without this issue) and will remain above 150% as long as the S&P/TSX remains above 8,100 points (compared to 8,800 points without this issue).

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets up 10bp and DeemedRetractibles losing 3bp. There was good volatility, all positive and dominated by BAM – perhaps the market forgot that all those issues went ex-Dividend today. Volume was low.

The weird index movement is growing:

More large US fund companies are taking a do-it-yourself approach to indexing.
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In the latest evidence of that trend, both iShares and John Hancock last month filed applications with the Securities and Exchange Commission seeking permission to launch exchange traded funds based on indices constructed by their respective parent companies, BlackRock and Manulife.
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Today, commoditisation of broad-based index products and the concentration of assets into a handful of funds create pressure on sponsors to either cut fees or find another way to differentiate their products and attract assets, analysts say. Most ETFs do not break out licensing fees, but the S&P 500 SPDR pays 3 basis points, or a third of its 9-basis point expense ratio, to the index provider.

The other advantage, of course, it that it makes product comparison more difficult.

Those nasty speculators are betting against the political line again:

The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 15 basis points to 351 at 3:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 17 basis points to 317 and the subordinated index jumped 25 to 560, according to JPMorgan Chase & Co.

But those pesky speculators keep betting against Greece:

Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis.

It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9, according to CMA.

Comrade Peace-Prize’s stimulus plan involves closing the carried interest loophole:

President Barack Obama’s $447 billion legislative proposal to boost hiring includes measures that would more than offset the cost of cutting payroll taxes and spending on infrastructure and state aid, his budget chief said.

The plan includes proposals to change tax rules on carried interest to treat it as ordinary income and removing tax breaks for the oil and gas industry, Jack Lew, director of the White House Office of Management and Budget, said at a briefing.

Glad to hear it! Carried Interest interest is the process by which hedge fund managers pay themselves in units of the fund and then declare the this income as capital gains. Whatever one might think of Capital Gains Tax, it’s clear that its purpose is to encourage people to put skin in the game – but the managers aren’t investing anything other than their time. It’s one of the more ridiculous provisions of the US tax code.

SocGen is doing some trimming:

Societe Generale (GLE) SA, France’s third-largest bank by assets, plans to free up 4 billion euros ($5.4 billion) in capital through disposals by 2013 to reassure investors about its finances.

The lender’s exposure to Greek bonds is about 900 million euros and it has “no significant” holdings of Irish or Portuguese debt, the Paris-based bank said today in a statement. Societe Generale aims to cut the cost base of its investment bank by 5 percent and have a core Tier 1 capital ratio “well above” 9 percent by 2013 with no capital increase. The company is also shedding jobs at retail networks in Russia, Romania, the Czech Republic and Egypt, it said.

So is BofA:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, will eliminate 30,000 jobs in the next few years as part of Chief Executive Officer Brian T. Moynihan’s plan to bolster profit and the company’s stock.

The reductions, equal to about 10 percent of the staff, are part of an overhaul that aims to remove about $5 billion in annual costs by the end of 2013.
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People affected by the cuts may include those working in data centers and deposit systems, said Moynihan, 51. The company had 63 data centers inherited through its acquisitions, and “we’ll take that down,” he said. Also targeted are three deposit systems, one scheduled to be “merged out” later this year and another in 2012, plus “tens of millions of square feet” in idle real estate.

Those are part of Project New BAC’s first phase, which focuses on consumer banking, credit cards, home loans and technology, Moynihan said. The second phase will begin in October and continue until April, covering institutional services such as global markets, commercial banking and corporate banking, according to the investor presentation.

How about them three year note yields, eh?:

The U.S. government sold $32 billion of three-year securities at a record low yield in the first of three note and bond offerings this week totaling $66 billion.
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Yields on 10-year notes gained three basis points, or 0.03 percentage point, to 1.95 percent at 4:36 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 9/32, or $2.81 per $1,000 face amount, to 101 17/32. The yields earlier touched 1.8770 percent, the lowest level on record in Federal Reserve data beginning in 1953.

The current three-year note yields increased five basis points to 0.34 percent. The yields on 30-year bonds were little changed at 3.25 percent.

The three-year note auction yield of 0.334 percent was lower than the London interbank offered rate, or Libor, for three-month loans in dollars, at 0.343 percent.

Bond auctions have different headlines in Italy:

Italy is auctioning as much as 7 billion euros ($10 billion) of bonds one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets.

The treasury is selling 4 billion euros of a new benchmark five-year bond today, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent yesterday in a one-year bill offering, up from 2.959 percent a month ago.

Rajaratnam seems intent on digging himself in deeper:

Galleon Group LLC co-founder Raj Rajaratnam may face a stiffer sentence for directing the biggest-ever hedge fund insider trading scheme after telling a court official he still wasn’t “clear” that what he did was wrong.

Rajaratnam, 54, convicted in May of trading on illegal stock tips, later told a court official that he wasn’t “clear” on “the line between permissible ‘detective work’ and impermissible insider trading,” prosecutors said.

After his conviction, Rajaratnam was interviewed by a court probation officer who is writing a memorandum proposing a sentence to the judge. Such interviews are standard in criminal cases. In a legal brief on Sept. 9, prosecutors excerpted some of his comments to the probation officer while telling U.S. District Judge Richard Holwell in New York that they show Rajaratnam “remains defiant.”
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“In my own mind, the line between permissible ‘detective work’ and impermissible insider trading was not always clear, especially with regard to companies broadly covered by the news media as to which there was a wealth of publicly available information, including frequent leaks, rumors and speculation about corporate transactions and other important developments,” Rajaratnam told the probation officer, according to prosecutors.

It gets worse later in the story, but this is an important issue – because nobody knows where the line is crossed. That’s determined afterwards, depending on whether the regulators want to hang you or not. The NYT claims that regulators are attempting to broaden the definition of insider trading:

Investors use multiple tidbits of nonpublic information from various sources to build a “mosaic” to try to get an edge on other investors.
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“The S.E.C.’s recent enforcement docket reflects a belief that certain buy-side investors’ investment activities were rife with insider trading violations, and that there are more to be found,” the law firm Fried Frank wrote in a note to its clients last week titled “Avoiding Insider Trading Risks in Fundamental Investment Research.” Indeed, the mosaic theory itself is one of the central defenses in the insider trading investigation of Raj Rajaratnam, founder of the Galleon Group.
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Whatever suits are brought, many of them may be compared to a 1973 insider trading case against Raymond Dirks, a research analyst. According to Fried Frank’s memo, the court in that case determined that insider trading could be established only if prosecutors proved three separate points: that the tipper has breached his fiduciary duty to the shareholders by disclosing the information to the tippee; that the tippee “knows or should know that there has been a breach”; and that the tipper somehow benefited as a result of providing the information.

But there may be an even more important and larger lesson in the Dirks case. All this “research” is actually quite important, even if it gets close to the line. Otherwise, investors would be left making decisions simply based on what they are fed by companies.

The Supreme Court, which ended up ruling against the S.E.C. in the Dirks case, wrote that if he had been found guilty, it “could have an inhibiting influence on the role of market analysts, which the S.E.C. itself recognizes is necessary to the preservation of a healthy market.”

Richard Fisher of FRB-Dallas is talking a tough line:

Federal Reserve Bank of Dallas President Richard Fisher said he probably won’t support further monetary easing by the Fed, arguing that steps that would boost the recovery are the responsibility of fiscal authorities.

“If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” Fisher said today in a speech in Dallas. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”

DBRS confirmed TRI at Pfd-2(low).

Equitable Group, proud issuer of ETC.PR.A, has announced:

Equitable Group Inc. (“Equitable” or the “Company”) today announced that John Ayanoglou, Senior Vice President, Finance and Chief Financial Officer will be leaving EGI effective immediately to pursue other interests.

The Company is confident in the depth of its finance team while it works to fill the position.

Geez, it’s open season on CFOs nowadays, eh? Assiduous Readers will remember that on August 23 I reported on their previous press release:

Equitable Group Inc. (“Equitable” or the “Company”) today announced that it has become aware of a suspected fraud relating to four loans having a total outstanding balance of approximately $14.0 million.

There is no indication that these press releases are related in any way, but the timing is very interesting indeed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 25bp, FixedResets down 3bp and DeemedRetractibles losing 7bp. Volatility was average, as was volume.