Posts Tagged ‘Securities Regulation’

As an Adviser to El Paso, Goldman Guaranteed Its Payday –

March 6, 2012

As an Adviser to El Paso, Goldman Guaranteed Its Payday –

Ethics of Insider Trading « The Business Ethics Blog

February 28, 2012

The fiduciary responsibility argument against insider trading is quite strong.

Pro-arguments focus on the increased information efficiency that should arise. Intuitively, information efficiency will increase, but Pareto efficiency will decrease depending upon how quickly the information is incorporated for everyone to act upon. Do most proponents for legal insider trading assume the informational efficiency is the better good because the process is  instantaneous enough to get us closest to the desired Pareto efficiency? What about Insider Trading that seeks to disguise what is happening and preventing the inside information from being incorporated into price?

If legal insider trading produces greater informational efficiency without moving too far away from a Pareto-optimal allocation, then it is maybe justifiable. However, I am skeptical. Human nature is a major hurdle. Between the potential abuse and behavioral biases, the informational efficiency will not be achieved fast enough. Who has the burden of proof for this view, the pro or con camp?

on the ethics of insider trading is by Jennifer Moore, and is called “What Is Really Unethical About Insider Trading?”* Moore looks at a number of arguments against insider trading — arguments rooted in fairness, in property rights, and in the risk of harm to investors — and finds most of them lacking. Moore ends up arguing — plausibly, in my view — that the real reason insider trading is unethical is that it jeopardizes the fiduciary relationships that are central to business. If insider trading were permitted, that would put corporate insiders in a conflict of interest. Basically, the interests of corporate insiders would stop being well-aligned with the interests of the shareholders they are supposed to serve. And if the interests of corporate insiders aren’t aligned with the interests of shareholders, then people are much less likely to be willing to buy shares (i.e., to invest) in companies. And that wouldn’t be good for the firm, for its shareholders, or for society in general.

via Ethics of Insider Trading « The Business Ethics Blog.

Impact of insider crackdown spreads –

February 20, 2012

Wow! Look what happens when an asset manager is no longer privy to inside information; he is just as inept as everyone else at investing.

As regulators crack down on inside information, particularly in the US, asset managers say increased scrutiny and prosecutions have made it more difficult to talk to companies and affected equity returns.

A more stringent regulatory approach has succeeded in breaking up inside information rings, such as the one run by Raj Rajaratnam at Galleon hedge funds, last year. But this tougher definition of the practice can have the more far-reaching effect of preventing conversations between asset managers and investee companies.

“The return streams from long/short [equity hedge funds] dropped off after fair disclosure [a regulation introduced by the Securities and Exchange Commission in 2000], which finetuned how management can talk to analysts,” says Ray Nolte, managing partner at Skybridge Capital, a fund of hedge funds manager.

via Impact of insider crackdown spreads –

Side Note — is an informational edge, which is often a thin line between legal and illegal, mistaken for skill? Like the rest of the hedge fund industry, short bias has suffered over the last 10 years. When it should be flourishing with all of the volatility, short bias does a poor job of diversifying a portfolio. Was short bias not a “skill” but the loss of an informational edge with the advent of Regulation SD? Will investors look back in another 20 years and decide that much of the outsized returns pre-2000 the result of various forms of privileged information?

Additional Side Note — Florian Homm, the manager of the Absolute Return Fund. He was shot in the streets of Caracas, Venezuela, ostensibly because he refused to hand over his Rolex. Several months after the gunshot wound, Homm resigned from Absolute Return which was soon discoverd to be a pump and dump scam in conjunction with Hunter World Markets, a broker with which he was affiliated. So, was it a botched robbery or a botched assassination attempt by some pissed off investors? New rule — if a fund manager is shot, redeem immediately.

Hedge Fund Law Blog» Blog Archive » Requirements for Hedge Fund Performance Reporting

February 14, 2012

Main conclusions from the SEC Clover Capital no-action letter.

With regard to model and actual results, the staff believes that a hedge fund manager is prohibited from publishing an advertisement that:

1. Fails to disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in the value 25% without disclosing that the market generally appreciated 40% during the same period);

2. Includes model or actual results that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid;

3. Fails to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;

4. Suggests or makes claims about the potential for profit without also disclosing the possibility of loss;

5. Compares model or actual results to an index without disclosing all material facts relevant to the comparison (e.g. an advertisement that compares model results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio);

6. Fails to disclose any material conditions, objectives, or investment strategies used to obtain the results portrayed (e.g., the model portfolio contains equity stocks that are managed with a view towards capital appreciation);

7. Fails to disclose prominently the limitations inherent in model results, particularly the fact that such results do not represent actual trading and that they may not reflect the impact that material economic and market factors might have had on the adviser’s decision-making if the adviser were actually managing clients’ money;

8. Fails to disclose, if applicable, that the conditions, objectives, or investment strategies of the model portfolio changed materially during the time period portrayed in the advertisement and, if so, the effect of any such change on the results portrayed;

9. Fails to disclose, if applicable, that any of the securities contained in, or the investment strategies followed with respect to, the model portfolio do not relate, or only partially relate, to the type of advisory services currently offered by the adviser (e.g., the model includes some types of securities that the adviser no longer recommends for its clients);

10.Fails to disclose, if applicable, that the adviser’s clients had investment results materially different from the results portrayed in the model;

via Hedge Fund Law Blog» Blog Archive » Requirements for Hedge Fund Performance Reporting.