(Bloomberg View) — What is fraud anyway?
Today is the oral argument in Jesse Litvak's appeal of his fraud conviction for lying about how much he paid for some mortgage bonds, which a lot of people are watching with great interest:
Long-acceptable trading tactics—pretending to have paid more for a bond than one had, for example, or embellishing how many potential buyers may be interested in a particular security—have become potential criminal offenses.
"The fact that he [was convicted] for doing what appears to have been fairly widespread really shook the industry," said Lee Richards,a partner at white-collar defense law firm Richards, Kibbe & Orbe LLP and a former federal prosecutor. He added that some traders "had come to believe that everyone in the business told white lies."
If his conviction is overturned — and he has reason for optimism– then there will be broader consequences:
Matthew Katke, a former Royal Bank of Scotland trader, pleaded guilty to committing securities fraud last month. But in an unusual agreement, Mr. Katke can withdraw his plea if Mr. Litvak's appeal finds that he didn't commit securities fraud.
Katke is cooperating with prosecutors in a continuing investigation, so if Litvak's conviction is reversed, then Katke's plea goes away, and so presumably does that investigation. So a lot of people have a stake in Litvak's outcome. Meanwhile banks are assuming that his conviction is for real and trying to keep themselves out of trouble. For instance:
Goldman is developing new policies on traders' communications, including limits on what they can say about their past trades, according to a person familiar with the matter.
"The best practice would be to be truthful, or not to say anything at all, especially in writing these conversations in instant messages," said Elizabeth Baird, a partner at Morgan, Lewis & Bockius LLP and a one-time bond trader.
The idea here seems to be that Litvak would tell a customer that he'd bought a bond at 102 and sell it at 102.25, when really he'd bought it at 100. The response from other banks is not to tell the customer the truth about what they paid for the bonds — which would limit their ability to charge more – but rather to try not to tell the customer anything at all about it. It can't be fraud if you don't say anything. Or at least if you don't write it down.
Elsewhere, here is Andrew Ceresney, the Securities and Exchange Commission's director of enforcement, on the SEC's litigation successes and challenges. And here's an SEC fraud case against ITT Educational Services, for concealing "the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed."
Happy FX guilty plea day.
Speaking of fraud, today is the day that all the big banks are expected to admit that they conspired to manipulate foreign- exchange fixing, a semiannual tradition that last took place in November. In a bizarre throwback to an earlier tradition, UBS's admission to FX manipulation will consist of a guilty plea to Libor manipulation: UBS had a non-prosecution agreement with the Justice Department over Libor, which required it to keep its nose clean, and now that its nose was found in some FX-rigging chat rooms, all bets are off. Except that it may not actually be pleading guilty to the FX thing?
"This is basically a trade off," said Andreas Venditti, an analyst at Vontobel Holding AG in Zurich. "They get leniency on foreign exchange and a lower fine and instead the Justice Department comes back with Libor."
UBS's cooperation in the currency probe may help shield it from antitrust charges in that matter.
So the punishment for being a repeat offender is that you get punished for your old offense but get leniency on your new one? I mean, okay, fine. All of this seems like accounting, not substance. The substance is: You manipulated some whatever, and now you write the government a big check. The meaningless accounting is whether the check is stapled to a non-prosecution agreement or a civil settlement or an FX-rigging guilty plea or a Libor-rigging guilty plea. A lot of people seem to put a lot of energy into debating those nuances but I just cannot see how they matter.
Verizon Online.
"You can easily save information from America Online on your hard disk, and there are more than 50,000 computer programs you can download — that is, transfer from America Online's computers to your own — at no extra charge," wrote Walt Mossberg in 1992, and for all I know that is still true? I suspect that there's an element of nostalgia to yesterday's voluminous coverage of Verizon's agreement to purchase a mid- size ad-tech company. Or more than suspect; here is a Vox article titled "In memoriam: AOL CDs, history's greatest junk mail." You always have a soft spot in your heart for your first Internet service provider.
Is it a good deal? Tara Lachapelle points out that, at a 24 percent premium to AOL's 20-day average trading price and at an enterprise value of just 11 times Ebitda, the deal looks cheap. AOL's stock is trading above the offer price, suggesting that shareholders are hoping for more. She doesn't think they'll get it, though, since no one else seems particularly interested in buying AOL. Maureen Farrell agrees that "the roster of suitors who would view AOL as a must-have asset isn't long." And Stephen Gandel argues that Verizon "is actually paying through the nose for AOL," since a lot of AOL's earnings come from dial-up subscribers, which can't be viable forever.
Besides dial-up, Verizon is getting The Huffington Post, but everyone seems to think that that's going on the block. The real draw is ad tech. As AdAge explains it:
