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Smart and tough, seasoned and scrappy, prosecutor Robert Khuzami came charging into his new job has head of SEC Enforcement to great fanfare.  Journalists who dog the Law Beat hailed this as the SEC’s Gangbusters moment.  The Untouchables were invoked, and high hopes were held out for a new regime that would kick serious butt, take names, and make Wall Street safe for the average investor.

We expressed our initial disappointment when, in his introductory press conference, Mr. Khuzami announced that his department would set a precedent of winner bigger settlements than ever before.  He has been true to his word – the Goldman settlement is considered a milestone in this regard.  But, with nary a jail sentence in sight, all Mr. Khuzami has done is to boost the price of crime.  The fundamental game is unchanged.

Improper securities deals aside, the number of high profile banks involved in money laundering, and the dollar magnitude of the alleged activities, is staggering.  In cases of money laundering by European banks on behalf of Iran, for example, the amounts disclosed run well into the billions.  We can only imagine the ratio of discovered to undiscovered dealings.  And yet, even in this high-stakes game, no one is going to prison.  Banks are not being shuttered.  A few hundred million in fines is paid, a couple of bank executives are relieved of their duties.  It seems the real crime lies not in perpetrating a fraud on the public trust, but in being caught.  Is it time to beatify Richard Nixon?

Mr. Khuzami has an opportunity to put the lumbering craft of regulation into high gear.  The Wall Street Journal has performed a significant service to the public – not, we think, always its primary reportorial objective – reporting on Congressional staffers who trade in stocks of companies directly affected by legislation overseen by their own bosses (11 October, “Congress Staffers Gain From Trading In Stocks”).  “At least 72 aides on both sides of the aisle traded shares of companies that their bosses help oversee,” reports the Journal.  Shades of Ivan Boesky!  The juiciest part of the article is the observation that “insider-trading laws don’t apply to Congress.”

The Journal also reports (12 October, “Lawmaker Aims To Outlaw Insider Trading On The Hill”) that a bill to outlaw insider trading in the House has languished for five years and currently enjoys the support of just nine Representatives.  No parallel bill has been proposed in the Senate.

One would imagine that, in the wake of this year’s revelation of insider trading by SEC staffers, Congress would rush to clean house.  Not only have they not done so – they don’t think there is anything wrong.  Congress has more important concerns than ensuring that its members meet the Caesar’s Wife standard.

In his former incarnation as federal prosecutor, Mr. Khuzami was cited for personal bravery, including an award for risking his life to bring drug dealers to justice.  It is one helluva come-down for him to be marking time in the wake of Chairman Schapiro’s ongoing political tightrope act.  We think the time has come for Mr. Khuzami to bang some heads together.  Where better to start than with the miscreants on the Hill?  Settlements be damned!  Please, Mr. Khuzami – please, please, oooh pretty please! – throw somebody in jail.

It can not be an excessive stretch for a tough and nimble legal mind such as Khuzami’s to find a theory on which to try Congressional staffers who participate in discussions about government intervention, then trade the stocks of the very companies that will be affected by these pending – and unannounced – actions.

On the face of it, this is an ongoing pattern of trading on the basis of material, non-public information.  This is the stuff your compliance officer spoke to you about when you joined the firm, and reminds you about regularly.  This is the stuff people get sent to prison for.  But if those who make the laws, can break the laws, it is time for the SEC to go gangbusters on this one.  Even though the likeliest outcome is not jail time, nor even fines or disgorgement, we would dearly love to see our lawmakers sweat.

Chairman Schapiro must go on the offensive with Congress.  If she does not, she is less politically canny than we credit her.  Even if she fails to convince the SEC Commissioners of the necessity to change the law, her labor-union constituency and their pension managers will have plenty to say on the subject.  This is a topic on which she can score a clear moral victory.  We envision the odd coalition of Wall Street bankers and labor leaders descending on Washington to demand that Congress forbid itself to break the law.

The likeliest outcome is a change in procedures.  Currently, staffers report their transactions once a year, and it is not clear that there is anything resembling compliance oversight of what employees of Congress do with their money.  Thanks to the light and heat generated by the Journal’s articles, that should change.

Congress doesn’t wish the law of the land to apply to its own members?  Tea, anyone?

Moshe Silver
Chief Compliance Officer

HEDGEYE RISK MANAGEMENT