Monday, December 31, 2012

Court Permits Tweeting in the Courtroom

Ontario Superior Court in Thunder Bay, Ontario
This is an interesting advancement in the use of real time communications - a new policy allowing tweeting in Ontario courtrooms is set to go into effect on February 1, 2013.

It appears that Ontario will be the source of information and statistics on the use of social media in courtrooms. Some are obviously concerned about the potential distractions, others look forward to the increased communications regarding court proceedings.

The policy, established by the Ontario Superior Court, paves the way for journalists and lawyers to use electronic devices, but bans members of the public from doing so, the Toronto Star reports.

For more details, see which has a story on the policy, and additional links.

Enhanced by Zemanta

Sunday, December 30, 2012

The Times on Taxes

The New York Times' Sunday lead editorial (12/30) is simply breathtaking. The title is "Why the economy needs tax reform." It starts well,
Over the next four years, tax reform, done right, could be a cure for much of what ails the economy...
OK, say I, the sun is out, the birds are chirping, my coffee is hot, and for once I'm going to read a sensible editorial from the Times, pointing out what we all agree on, that our tax system is horrendously chaotic, corrupt, and badly in need of reform. Let's go -- lower marginal rates, broaden the base, simplify the code.

That mood lasts all of one sentence.
Higher taxes,...
Words matter. "Reform" twice, followed by paragraphs of "higher taxes," with no actual "reform" in sight. The Times is embarking on an Orwellian mission to appropriate the word "reform" to mean "higher taxes" not "fix the system."

Let's be specific. What is the Times' idea of tax "reform?"

tax capital gains at the same rates as ordinary income.... a restoration of the estate tax, higher tax rates or surcharges on multimillion-dollar incomes, and higher corporate taxes..
That's just to get started. Since, as the Times refreshingly admits,
..the new revenue would only slow the growth of the debt in the near term..
before the health care entitlement deluge hits,
... Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax,... and a financial transactions tax...
That's "reform?"

What will all those taxes do? The Times has a little bit of deficit reduction on its mind,
 More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path.
But with "reduce," "help," and "stable path," you can tell that eliminating deficits and paying off the debt are not a real high priority here. The Times has bigger fish to fry, starting with a red herring and ending with a red whale.
Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research...
We've been spending more and more on education for years. While performance steadily declines. The trouble with schools is not lack of money.

Yes, infrastructure is crumbling, as a few New Yorkers may have figured out when their power went off, while their politicians -- and the Times -- instead of talking about burying electric lines and putting in a modern grid, wished instead to stem the rise of oceans and sugar in their soft drinks. But infrastructure spending is a tiny component of the Federal budget; we could support anyone's wish list without a Federal income tax.  Basic research spending could be doubled on about 10 minutes worth of Federal spending. Red herring.

The whale comes last:
Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge. 
The Times is arguing forthrightly for confiscatory taxation of income and wealth, in order simply to  reduce post-tax incomes. This isn't "redistribution," it's "off with their heads!"

Inequality of opportunity? No, President Obama's kids should not go to Sidwell Friends, they should go to DC public schools like everyone else?  Mayor Rahm Emanuel's kids shouldn't go to the University of Chicago Lab school (mine go there too, but I don't preach this stuff), they should have to go to Chicago public schools like everyone else? These are "economic and social advantages" arising from unequal income. Big ones, that motivate a lot of parents to work hard so they can afford the tuition.  French President Francois Hollande has a better idea: ban homework, so kids with smart parents can't get an advantage because they get help on homework. Too bad you can't ban homework in China and India. No concierge medicine either. Stand in line for medicaid like the rest of us.

And to accomplish this leveling, we'll just take money from "the rich" until all are equally impoverished.

Am I being alarmist? No. Read the sentence again, carefully. Words matter. What else can it possibly mean?

It's just astounding. When has a society ever grown, become prosperous, and raised opportunities for its citizens--of any background--by confiscatory taxation, transferring wealth to the State, with the deliberate aim of reducing the opportunities of a segment of its population? The examples I can think of -- French and Russian revolutions, the whole communist world -- ended rather badly.  Even more modest attempts, say postwar Britain, do not augur well. The evidence of Europe's current high-tax "austerity" (another word Orwellianly appropriated to mean "high taxes") and the weight of academic research (most recently from the IMF and Alberto Alesina) stand before us: Fiscal retrenchment led by higher marginal tax rates simply does not work.

Moving from outcome to opportunity, as the Times does, when has a society ever accomplished equal and plentiful opportunities by confiscatory taxation and heavy regulation? I can think of lots of societies that by these means became much less equal, with opportunity dependent on political and family connections, and thus out of reach of even the most talented and industrious people without connections. 

What of us naysayers? On taxing "capital gains at the same rate as ordinary income,"  
That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.
Three more fish and a whopper.

We might start with the interesting assertion that any tax rate is a "giveaway." Who gives what to whom, dear Times?

"Research shows" is another fascinating choice of words.  "Research shows" means "all research shows," or "the consensus of research shows," without actually saying it. The facts are "some research shows," or in this case, really, "two unpublished papers we found on the web claim."

The links point to a report by the Congressional Research service and a one-page screed from the Urban Institute.  Both pieces of "research" simply plot the usual pointless correlations ignoring the hundreds of other causes, effects, and things not held constant. Aspirin causes colds you know: Look, there is a strong correlation between asprin-taking and colds. Neither one is even submitted let alone published in a refereed journal, which is no guarantee of anything but at least it's the minimum standard for "research." If this were indeed what constitutes "research,"  and "science,"  vast new funding for fundamental research in economics might well be warranted.

Fortunately, that is not the case.  What real research concludes, as much as anything in economics concludes, is that capital gains taxes are about the easiest to avoid (see Buffett, Warren).  Real research shows that when capital gains rates were reduced in the 1980s, revenue increased. Real public finance, the rest of the world's tax systems, and the broad conclusion of just about everybody until the world lost its head in 2008, was that capital gains taxation is a bad idea.

And the whale: "Receive" capital gains? Dear Times, capital gains are not a check sent by great-grandma's trust fund. Let me educate you on where capital gains come from: People work, and earn money, and pay taxes on that money.  Rather than blow it all stimulating consumption demand, they save some of it, invest in stocks, or start businesses. When those investments pay off, they sell, and receive capital gains. A vast swath of retirees lives off capital gains, especially from their houses.Small business owners are "high income" in the one year they sell their businesses.

Words matter, again. "Receive" paints capital gains as passive receipts form a mysterious ill-gotten mountain of gold, ripe for plucking with neither tax avoidance, behavioral change, or economic consequence. That's just not how our world works, but very revealing of the Times' zero-sum, class-warfare worldview.

What about 
...higher corporate taxes..
Once again, one of the few things real "research shows," and  economists agree on pretty heartily, is that corporate taxation -- already higher in the US than the rest of the world -- is a silly idea. All corporate taxes are passed on to people, through higher prices, lower wages, or lower returns to investors, primarily the former two. Tax people when they get the money. And corporations are much better at evasion, lobbying, moving abroad, and structuring operation in silly ways to avoid taxes.

The value added tax -- the economist's favorite, if coupled with elimination of other taxes -- is famously "regressive," the modern term (here are those important little words again) for "everybody pays the same rate."  Value added is, in Europe (along with 30-40% payroll taxes) the middle class tax that pays for middle class benefits. What about that, dear Times?
a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving;
This is just incoherent. If you're "protected from higher prices," you're not paying the tax. If we couple the VAT with a vast new income transfer program, adieu revenues.

At least we close with some humor. The VAT is there to encourage saving, while heavy taxation of interest, dividends, capital gains and estates, says just the opposite.

What about spending?
The big obstacle to comprehensive tax reform is the persistent Republican myth that spending cuts alone can achieve economic and budget goals. That notion was sounded rejected by voters during the election. Yet it still has adherents among many Republicans, which will make it that much harder for Congress to grapple with the bigger and more complex issue at the heart of tax reform: how to pay for government in the 21st century.

....All that [long list of taxes] would only be a start, because the new revenue would only slow the growth of the debt in the near term. After 10 years, the pressures of an aging population and health care costs would cause the debt to accelerate again.
Oh those evil Republicans, standing against "reform," and reusing to grapple with "how to pay for government." The size and scope of which is not under discussion. No, dear Times, it's not "the pressures of  an aging population and health care costs." It is the Federal Government's promises to pay for it all. Which are, apparently, fixed stars.

Technical regress in any area is sad. Once upon a time, when we talked about taxes, there was a modicum of economics involved. When we thought about raising or lowering a rate, we thought seriously about the inevitable avoidance and distortions.  The first question was, "if we pass this law, will x actually pay more money, or will he simply change behavior to avoid the tax?" The second question was, "will his change in behavior hurt the economy?" Before we talk about what's "fair" we talked about "what works."

And we knew the sign of the answer: distorting taxation raises less revenue than you think, and reduces economic prosperity. The only question is how much. We did not indulge in magical thinking that appropriating anyone's income would actually improve the economy, all on its own. We understood the damage, and tried to carefully balance the benefits of spending against that damage. This is how we got, for a while, to low marginal rates with a broad base (the latter since loopholed away), low capital gains, estate, and corporate taxes, and were headed messily towards a system that taxed consumption more than rates of return. 

As one glorious counterexample of all the Times' monstrous confusions:
a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share
A transactions tax is the easiest thing in the world to avoid with financial engineering.  How do you begin to figure out the "fair share" that financial vs nonfinancial corporations should pay? How about mutual funds whose beneficiaries are impoverished union schoolteachers? 

Orwellian language, blatant mistruths, and magical thinking aside, however, I want to applaud this editorial. No, I'm not kidding.

The Times is saying, out loud, that if we are to have the regulatory and welfare state we have enacted, it must be paid for with huge middle class taxes, as well as confiscatory taxes on anyone who dares to save, invest, or start a business. This is refreshing honesty. Up until about November 3, all we heard from them is that reversing the Bush tax cuts on the rich would pay for it all. At least a few of its readers may wake up and say, "wait, we voted for this?"

Really, my main complaint is that they left out the "if," and its logical consequence, and any doubts that raising tax rates so massively might not produce the needed long-run revenue growth they hope for.

It is a mistake to dismiss this clear editorial. This isn't the Village voice, or the Berkeley Free Press. This is the New York Times. This is how a wide swath of our fellow citizens, and majority of our fellow voters, see the world.   This is the agenda. They could not have been clearer if they had said "first we annex Austria and move against Czechoslovakia. Then we invade Poland and swing North and West." Heed them.

Saturday, December 29, 2012

SEC Charges Advisory Firms and Portfolio Managers for Roles in Collapse of Midwest-Based Closed-End Mutual Fund

United States Securities and Exchange Commission

The SEC charged two investment advisory firms and two portfolio managers responsible for managing a Midwest-based closed-end mutual fund for their roles in the failure to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.

An SEC investigation found that the Fiduciary/Claymore Dynamic Equity Fund (HCE) attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed HCE to additional undisclosed risks and caused the fund to lose more than $45 million in September and October 2008, which was approximately 45 percent of its net assets. The fund liquidated in 2009.

Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing HCE’s portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading. FAMCO agreed to pay an additional $2 million in disgorgement and penalties. The SEC’s case continues against former FAMCO co-portfolio managers who allegedly made misleading statements in HCE’s periodic reports about the two strategies’ contribution to HCE’s performance and about HCE’s exposure to downside risk.

“When discussing fund performance and risks, fund advisers must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark,” said Robert J. Burson, Senior Associate Regional Director of the SEC’s Chicago office.

Enhanced by Zemanta

Thursday, December 27, 2012

Benefits trap art

Two charts from the UK, admittedly sprayed with too much chartjunk, but illustrating the poverty trap in Britain. (A previous post  on high marginal tax rates for low income people has more charts like this.)

Most of UK benefits are not time-limited, so people get stuck for life, and then for generations.

The original article, by Fraser Nelson, "Why the Poles keep coming" in the Spectator, is worth reading.  The article starts with the puzzling fact that
Britain’s employment figures are strong but most of the rise in employment so far under this government is accounted for by foreign-born workers (as was 99pc of the rise in employment under Labour). 
The author had the same epiphany that led me to economics all those years ago. No, it's not culture, or "laziness." Treat poor people as intelligent, responding to incentives, just like you and me, but with a lot bleaker choices. Try to look at the world through their eyes if you want to understand their behavior:
 if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t.
...Until our policymakers start to see things through the eyes of those ensnared in welfare traps, nothing will change. 
More great quotes:
If you had designed a system to keep the poor down, in would not look much different to the above.

...the cash-strapped British government is still creating still the most expensive poverty in the world.
Hat tip: Dan Mitchell writing at Cato@Liberty. His post is worth reading, as are the links. (Alas, the Spectator only cites the source of the graphs as " an internal government presentation," so I don't know who to properly credit.)

Monday, December 24, 2012

Fiscal cliff or fiscal molehill?

Four thoughts, reflecting my frustrations with the "fiscal cliff" debate. 

1. Recession

How terrible will it be if we go over the cliff?

Bad, but for all the wrong reasons. If you, like me, didn't think that "stimulus" from government spending raised GDP in the recession, you can't complain that less government spending will cause a new recession now. The CBO's projections of recession are entirely Keynesian. Pay them heed if you still think the key to prosperity is for the government to borrow money and blow it.

There are no "cuts" in sight anyway. "Cut" in Washington means "increase spending less than we previously said we would." At worst a few programs will have to spend the same amount this year as last before spending increases resume.

It's not even obvious that the "cuts" will happen. Will Congress really try to pay doctors 1/3 less? (Will doctors take any medicare patients if they do?) Or will they pass an "emergency" bill, exempting doctors just like Social Security? Sequestration has never actually been used.

To an economist, the main worry is that higher marginal tax rates mean more distortions, which are a drag on the economy.  But distortions take a while to kick in. It takes a while for people to change to easier jobs, not start businesses, move businesses offshore, not go to school, choose easier but less rewarding majors, find more tax shelters, and so on. So the danger is not so much a recession, which comes, and then ends, and we go back to growth. The danger is settling in to a decade of (even more) high-distortion, sclerotic growth.

The headline rate people are fighting about -- 35% vs. 39.5 % federal income tax rate -- is basically irrelevant to the larger issues. If we had a clear, functional, stable tax system, with a total (all taxes) 39.5% top marginal rate, the economy would heave a big sigh of relief and take off like a rocket.

We have instead a horrendously complex, nay corrupt, tax system. It's chaotic, with teams of lobbyists descending now to carve out everyone's exemption, deduction and subsidy. Tax reform is, in my judgment, more important than the headline marginal rate. More generally, I think the lessons of growth economics are pretty clear that over-regulation and the consequent politicization of economic decisions is a larger danger to growth than any stable clear and uniformly administered taxes with faintly reasonable marginal rates. If you can start a business and know for sure you'll keep half the profits, that's more enticing than never knowing what new holdup you will be subject to from 100 overlapping regulatory agencies.

Furthermore, economics cares about the total marginal tax rate -- everything between the extra dollar you earn and the additional goods you receive -- including Federal, state and local income taxes, deduction phaseouts, payroll taxes, taxes on rate of return between earning and spending, sales taxes, estate taxes if you leave it to your kids, property taxes if you buy property, excise taxes, and on and on. Some parts of Washington seems to finally have figured out that reducing deductions raises taxes with less distortionary effects on marginal tax rates.  They have not so successfully figured out that every phaseout or income test adds to marginal tax rates. In any case, it makes no sense at all to talk about the Federal income tax rate in isolation.  

Economics cares equally about taxes and benefits. Whether you send the government a check or they send you a check doesn't matter, what matters is how that check changes based on your behavior. Marginal tax rates are high for lower income people too (earlier post on the subject). Asset tests are just as bad as income tests: If you save, and then an asset test takes away a benefit such as college aid, you might as well not bother saving. It makes no sense to talk about taxes and not benefits at the same time.

Economics cares about the overall impact of the Government on decisions, not just on-budget taxing and spending. If the government says "employers shall provide $15,000 worth of health insurance to every employee," that does not show up on the budget -- but it has exactly the same effect on the economy as a tax and benefit. If the government says "all gasoline shall contain 10% ethanol," that has the same effect on the economy as a tax and subsidy.

2. Distribution

The same points apply even more to distributional questions -- are the "rich" paying "their fair share," should they "pay more," and so on.  The headline Federal income tax rate is the tip of the iceberg. Economics tells us to consider the overall effect of the government at all levels on the distribution of individual consumption. (Not household, not income, not wealth.)

Obviously, we have to talk about taxes and benefits in the same breath here. We also need to talk about who benefits from government spending and intervention. There's a lot of corporate welfare, which ends up in the pockets of some very rich people. If we remove a few hundred billion in green energy subsidies, and the Al Gores of the world can't make another $100 million bucks on it, that ought to count as reducing the transfers to the rich just as much as raising their taxes.

Economics cares about the burden of taxation, not who pays taxes. This is clearest for gas taxes. It's clear to everyone that the government is not socking it to those fat-cat gas station owners with gas taxes, they are simply passed on to you and me.

3. Politics (admittedly dangerous speculation for an economist)

What in the heck is going on? Why is our national discussion paralyzed over the tip of an iceberg?

Only one story makes sense to me. President Obama has been saying for four and a half years that he wants to raise taxes on "the rich," and he means to do it. He wants to raise tax rates on the rich, for symbolic, social, political reasons as much as for anything in an economics textbook. Nothing else explains the Administration's monomania on this point, especially given that it won't make a dent in the deficit, the fact that it makes zero economic sense as a central policy to address our economic problems, and given the Administration's refusal to talk about reform -- which would raise tax revenue and help economic growth -- instead.

"The rich," need to get with the program, like Warren Buffet. It remains open season for deductions, exclusions, special deals and loopholes. Notice Buffet never asks for removal of all the clever dodges he uses to pay less taxes, and nobody has mentioned that he might do so. Tax on unrealized capital gains anyone? Limit the exclusion of charitable donations, even to family foundations that employ family members to run them, from estate taxes? Boy, that would raise a lot of revenue from some truly "rich" people.

Quid pro quo here, though, rich people and the CEOs who recently visited the White House had better line up and support the Administration if they want their special deal, deduction, credit, Obamacare waiver, and no visits from the NLRB, EEOC, EPA, consumer financial protection bureau, and so on.

High statutory rates, a Swiss cheese of loopholes renegotiated in every annual crisis, and an army of regulators on the prowl, are a recipe for permanent Democratic government. The cliff is beautifully structured to make Republicans look bad. Things happen when they make sense. This path makes enormous political sense.

The amount of magical thinking on the economic left doesn't help.  They used to claim that that economies like the US in the 1950s can still grow (for a while) despite high marginal tax rates (which nobody paid because of huge deductions). They used to claim that high tax rates wanted for other reasons don't hurt too much. Now they've talked themselves into arguing that high marginal tax rates are actually good for growth.  Why not just say the obvious, this is a policy desired for political reasons, and the political outcome is more important than the economic damage?

4. The future (admittedly dangerous prognostication for one who says things are hard to predict)

The discussion around the cliff  sounds like we are finally settling some large issue. We are not. This is the fiscal molehill, not the fiscal cliff. This is Harpers Ferry, not Gettysburg. It's the Anschluss, not D-day. It's... Ok, I'm overdoing the military analogies, you get the point. This is the prelude to what looks to me like 10 years of constant crisis.

Here is the big issue. The US has already enacted European welfare and regulatory state with American characterstics -- the bloated inefficiency, legalism, and red tape that is our specialty. We have not enacted the taxes to pay for it. We will either dramatically cut back the former, or rather dramatically raise the latter. On the table now is at most $100 billion out of a $1 trillion deficit, and likely much less. The fiscal molehill.

US Federal, State and Local spending is 40% of GDP. Pay attention to state and local, that's a lot more than the 24% Federal we talk about a lot. Europe is more like 50% of GDP, so it sounds like we're behind. But our government is bigger than it looks.

We have about a trillion dollars of "tax expenditures," including the deduction for employer-provided health insurance, deduction for mortgage interest, and (small but annoying) credits for all sorts of things like checks to silicon valley CEOs too subsidize the electric cars they drive down t their private jets. These are no different than a trillion dollars of tax and another trillion dollars of spending, or another 6% of GDP. We're at 46% right here.

Our government likes mandates and rules, which affect behavior and soak up the economy's taxing capacity just as much as on-budget taxing and spending, but hide the fact. Europeans tax gas and energy, and people choose small cars and turn down the heat. We have mileage standards, energy efficiency standards, carpool lanes, electric-car sales mandates, and so on. Same real size of government. And so on.

Before the ACA, our government was paying for health care for about half the country, in our inimitably inefficient style, including medicare, medicaid, schip, and current and retired government employees. Under the ACA, we're basically all in a European style system, funded by explicit or implicit (mandates) taxes. With those uniquely American characteristics.

The fact that government overall is about half of GDP matters to our tax debate. Properly measured, the average American must then pay about half his or her income in taxes. For every dollar taxed at a lower rate, another dollar has to be taxed at a higher rate. When we tax the average dollar at 50%, any progressivity  has to shift a lot of marginal rates well into the territory that destroys incentives and reduces revenue.

Europe pays for this stuff, and its middle class pays for this stuff. 30- 40% payroll taxes, 20% value added tax, $9 a gallon gas, 50% income taxes extending down to what we would call lower-middle-incomes, property taxes, estate taxes, wealth taxes. Sorry, Europe can't quite pay for this stuff, even with those taxes.

But this is our choice. European taxes to pay for the regulatory and welfare state we've already enacted. With the European growth and eventually southern European corruption they entail. Or a sharp cutback in that state. We can decide before or after we experience the European debt crisis.

So, the fiscal cliff is just the beginning. This will be a long hard road, and my guess is that we will lurch from crisis to crisis, with patchwork last minute deals, for another decade. It doesn't have to be so -- the economic choices are clear. But given the size of the question at hand and how little anyone is talking about the real issues, it's hard to see another way.

I think the deck is stacked towards the large-state camp.  There were two theories: "Starve the beast" said, cut taxes and eventually the size of the state will have to shrink. "Vote the benefits" said, increase spending and regulation, and eventually taxes will have to be raised to try to pay for it all. The latter seems to be winning.

I guess it's appropriate that the Grumpy economist is playing the Grinch for Christmas!

SEC Charges Eli Lilly and Company with FCPA Violations

English: The logo of Eli Lilly and Company.
The SEC charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China, and Poland.

The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore “marketing agreements” to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with offshore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.

The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third-party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.

“When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated,” said Antonia Chion, Associate Director in the SEC Enforcement Division. “We strongly caution company officials from averting their eyes from what they do not wish to see.”

Enhanced by Zemanta

Thursday, December 20, 2012

ICE to Acquire NYSE


Intercontinental Exchange said it plans to acquire NYSE Euronext in a stock and cash deal worth $8.2 billion. Both companies’ boards approved the plan to merge early Thursday.

Intercontinental Exchange, typically called ICE, operates regulated markets that trade in agricultural and energy commodities, credit derivatives, equities and equity derivatives, foreign exchange and interest rates. The firm also operates a wide range of clearing houses and has launched houses in the United States and Europe that clear credit-default swap transactions.

More information is available at Financial ICE to Acquire NYSE for $8.2B

Wednesday, December 19, 2012

SEC Charges Connecticut-Based Adviser for “Skin in the Game” Misstatements About CDOs

The SEC charged a Connecticut-based investment adviser with falsely stating to clients that it was co-investing alongside them in two collateralized debt obligations (CDO).

The SEC’s investigation found that Aladdin Capital Management’s co-investment representation was a key feature and selling point for its Multiple Asset Securitized Tranche (MAST) advisory program involving CDOs and collateralized loan obligations (CLOs). For example, Aladdin Capital Management asked in one marketing piece, “Why is an investor better off just investing in Aladdin sponsored CLOs and CDOs?” It then emphasized that the “most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors.” Aladdin Capital Management in fact made no such investments in either CDO, and its affiliated broker-dealer Aladdin Capital collected placement fees from the CDO underwriters.

Aladdin Capital Management and Aladdin Capital agreed to pay more than $1.6 million combined to settle the SEC’s charges. One of the firms’ former executives Joseph Schlim agreed to pay a $50,000 penalty to settle charges against him for his role in the misrepresentations.

“If you sell an investment with the pitch that you are co-investing and have ‘skin in the game,’ then you better actually have ‘skin in the game,’” said Robert Khuzami, Director of the SEC’s Enforcement Division. “Such a representation by an investment adviser or broker-dealer is an important consideration to investors in complex products.”

Enhanced by Zemanta

Fidelity Cuts Investment Minimums

Fidelity Investments
Fidelity Investments is lowering investment minimums on 22 equity, fixed income and enhanced index funds, and slashing total net expenses on eight of its Spartan Index funds.
The eight funds with reduced expenses are: Spartan 500 Index Fund, Spartan Total Market Index Fund, Spartan Emerging Markets Index Fund, Spartan Global ex U.S. Index Fund, Spartan Mid Cap Index Fund, Spartan Real Estate Index Fund, Spartan Small Cap Index Fund, and Spartan U.S. Bond Index Fund.

The full story is at On Wall StreetFidelity Cuts Investment Minimums

UBS Pleads Guilty, Fined $1.5 BILLION

Three keys logo by Warja Honegger-Lavater.
When does this end? Another major fine - in fact, a historic fine - against UBS as it pleads guilty to allegations that it engaged in a multiyear scheme to manipulate interest rates.
According to the New York Times, the cash penalties represented the largest fines to date related to the rate-rigging inquiry. The fine is also one of the biggest sanctions that American and British authorities have ever levied against a financial institution, falling just short of the $1.9 billion payout that HSBC made last week over money laundering accusations.
The UBS case reflects a pattern of abuse that authorities have uncovered as part of a multi-year investigation into rate-rigging. The inquiry, which has ensnared more than a dozen big banks, is focused on key benchmarks like the London interbank offered rate or Libor. Such rates are used to help determine the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.
According to the NYT story, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns. During the 2008 financial crisis, UBS managers also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of +UBS’s creditworthiness,” according to authorities.
UBS Pleads Guilty, UBS Pays $1.5 Billion Over Rate Rigging -

Related articles, courtesy of Zemanta:
Enhanced by Zemanta

Tuesday, December 18, 2012

SEC Charges Germany-Based Allianz SE with FCPA Violations

The SEC charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

“Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

SEC Charges For False Financials

WallStreetCheatSheet is reporting that the Securities and Exchange Commission charged TheStreet, which operates the website (NASDAQ:TST), with filing false financial reports reports throughout the year 2008 by posting revenue from fraudulent transactions at a subsidiary it had bought the previous year. Gregg Alwine and David Barnett, co-presidents of the subsidiary, are alleged to have entered into sham transactions with friendly counterparties that had little or no economic substance.

Friday, December 14, 2012

The Fed's great experiment

So now you have it. QE4. The Fed will buy $85 billion of long term government bonds and mortgage backed securities, printing $85 billion per month of new money (reserves, really) to do it. That's $1 trillion a year, about the same size as the entire Federal deficit. It's substantially more each year than the much maligned $800 billion "stimulus." Graph to the left purloined from John Taylor to dramatize the situation.

In addition, the Fed's open market committee promises to
"..keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." [Whatever "anchored" means.] 

This is a grand experiment indeed. We will test a few theories.

First, just how much of the labor market's troubles are the result of an ill-advisedly long maturity structure of government debt? How much is the result of 2% long term rates (negative in real terms) being too high and strangling credit? (If, in fact the Fed's purchases have any sustained effect at all on long rates, which I doubt.) At zero interest rates does the split between reserves (which are, in the end, nothing more than floating-rate, overnight, electronic-entry US government debt) and other forms of government debt mean anything at all? In short, is monetary policy of the buy-bonds, print-money sort completely ineffective at zero rates, yes or no? At a trillion bucks a year we will soon find out. I bet no. (The WSJ calls this the "more cowbell" approach to policy.) But nobody can say it wasn't big enough to test the theory.

Second, just how much is the economy suffering from a lack of promises from appointed officials? "Oh, well, sure, now I'll build that new factory and start hiring people. I just wanted to hear that Bernanke 'anticipates' that he will think low rates are appropriate until until unemployment hits 6.5%, not just into the 6th year of the Biden administration."

Fashionable new-Keynesian models give a big role to such pronouncements. I'm dubious.  Does the average Joe understand the difference between, say, the Administration's promises that sure, next year we'll cut entitlements, and the Fed's promises?

One big hole in the argument:  Charlie Evans (Chicago Fed president) calls this "Odyssean" policy, after Odysseus who had himself tied to the mast so as to hear the sirens. But notice a big difference between Odysseus and Bernanke. Odysseus did not "anticipate that remaining near the mast will remain appropriate so long as the call of the sirens is not too beautiful, the sea not too rough, the sailors manning the rigging doing their jobs, and no other ships we might crash in to."  Odysseus made an irreversible decision. Cortez burned his ships.

If you want people to believe you about the unemployment trigger, you have to remove the discretion to change your mind tomorrow if, say, the dollar crashes, Spain defaults, long term interest rates spike, the Chinese dump their bonds or whatever.  Otherwise, we know it is all hot air. If they can decide in this meeting 6.5% is the right target, they can decide in the next meeting, "whoops, no, we'll print money until China starts buying Chevys." (Sorry, that will be mumbo jumbo about "illiquid conditions in sovereign credit markets and global imbalances..")

I'm not such a fan of new-Keynesian models (here, with hard academic article warning) so this lack of real commitment doesn't trouble me that much. I don't think we would get immediate benefit even from a completely credible tied-to-the-mast commitment to buy trillions of dollars until unemployment hits 6.5%. (I do think rules-based policy in general is a good idea, not this sort of discretionary commitment-making. But  I can think of a lot better rules, like "the price level shall be CPI=130 forever, period.")

But we certainly will test whether this kind of open-mouth operation has any effect. My forecast: continued sclerosis, and, whatever happens, no evidence that these policies had any effect whatsoever.

Which puts me rather less critical of the Fed than many skeptics. I think money and bonds are perfect substitutes at the moment, so "no effect" means no hyperinflation either. The problems are not monetary, so the Fed is just trying to seem important though it's powerless. The major damage that I see in current policy is the implied shortening of the maturity structure of debt: If markets force interest rates to rise to 5%, the deficit doubles due to interest payments, and the US experiences a Greek death spiral. But nobody is even talking about that.

ECB dilemma

It was announced yesterday that  Europe will have a new, central bank supervisor run by the ECB, much as our Fed combines monetary policy and bank supervision. Be careful what you wish for, you just might get it.

One big unified central agency always sounds like a good idea until you think harder about it. This one faces an intractable dilemma.

Here's the problem. Why not just let Greece default?" is usually answered with "because then all the banks fail and Greece goes even further down the toilet." (And Spain, and Italy).

So, what should a European Bank Regulator do? Well, it should protect the banking system from sovereign default. It should declare that  sovereign debt is risky, require marking it to market, require large capital against it, and it should force banks to reduce sovereign exposure  to get rid of this obviously "systemic" "correlated risk" to their balance sheets. (They can just require banks to buy CDS, they don't have to require them to dump bonds on the market. This is just about not wanting to pay insurance premiums.) It should do for the obvious risky elephant in the room exactly what bank regulators failed to do for mortgage backed securities in 2006.

Moreover, it should encourage a truly European market. Greek, Spanish, Italian banks failing is no problem if large international banks can swoop in, pick up the assets, and open the doors the next day. Bankruptcy is recapitalization.  Greece needs a national banking system as much as Chicago (same population) does.

All well and good. And all diametrically opposed to the ECB's "crisis-fighting" agenda. The right arm of the ECB should be protecting the banking system in this way. But the left arm of the ECB is using banks as sponges for sovereign debt.

In trying to manage the sovereign debt crisis, the ECB has bought huge amounts of sovereign debt. It has lent  euros to banks that in turn have bought large amounts of sovereign debt (often, I gather, with not so subtle pressure from their governments).  It has lent more euros to the same banks to replace deposits that are quite wisely fleeing out of those banks.

How can the right arm protect the banking system from sovereign default, while the left arm wants to stuff the banking system with sovereign debt?

Converesely, how can the left arm do anything but print euros like mad, now that the right arm has responsibility for the banking system?  Lending to banks who buy sovereign debt was always excused by the idea that the bank shareholders bear the credit risk and national supervisors take care of that problem. Now it's in the ECB's lap. Politically, can the ECB really shut down national banks, stiff the creditors, and let them be taken over by big pan-european banks?

I bet on the outcome: print euros like mad, keep pretending sovereign debt is risk free, and prop up existing banks. Let's hope I'm too cynical. For once.

SEC Charges New Jersey-Based Consultant to Chinese Reverse Merger Companies with Violating Securities Laws

Seal of the United States District Court for t...

The SEC charged a New Jersey-based consultant with violating securities laws and defrauding some investors while helping Chinese companiesgain access to the U.S. capital markets.

The SEC alleges that the consultant and his consulting firm Warner Technology and Investment Corporation located more than 20 private companies in China to bring public in the U.S. through reverse mergers, and then committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.  After earning millions of dollars in consulting fees, the consultant and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations. The SEC has previously charged several individuals and firms with misconduct related to China Yingxia, including the consultant’s son.

The SEC alleges that the consultant engaged in varied misconduct ranging from non-disclosure of certain holdings and transactions to outright fraud.  For instance, he failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange. The consultant also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City. 

“[The consultant] and his firm sought to take advantage of our financial markets by propping up some Chinese issuers with the sole purpose of enriching themselves at the expense of U.S. investors,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Warner Technology and Investment Corporation advertises itself on its website as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger with an OTCBB trading company. The consultant’s misconduct occurred from at least 2007 to 2010. After completing the reverse mergers, he strongly influenced or even directed many of his clients’ newfound U.S. presence and obligations as public companies. He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and receive any proceeds from fundraising done in the U.S. This enabled the consultant to control how and when offering proceeds were wired to China, and gave him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.

The attorneys at Beam & Astarita, LLC have been representing witnesses, subjects, targets in securities law investigations for decades. The attorneys affiliated with our firm include former SEC Staff Attorneys, former criminal prosecutors, and experienced counsel in FINRA and SEC litigation. For more information about how we can help you avoid securities investigations, or to defend yourself in such an investigation, call our securities defense attorneys at our New York number - 212-509-6544. We defend nationwide.

Enhanced by Zemanta

Thursday, December 13, 2012

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation

Seal of the U.S. Securities and Exchange Commi...

The SEC announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.

The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

“Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned assets.”
More details are available at SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation.

SEC Charges New York-Based Fund Manager with Conducting Fraudulent Trading Schemes

The SEC charged a New York-based fund manager with conducting a pair of illegal trading schemes to financially benefit his investment fund Octagon Capital Partners LP.

The SEC alleges that the fund manager made $831,071 during a four-year period through illicit trading while he also worked as a portfolio manager and employee at a New Jersey-based firm that served as an adviser for several affiliated investment funds.  In one scheme, he illegally matched 31 pre-market trades to benefit his own fund at the expense of one of his employer’s funds.  In the other scheme, the fund manager conducted insider trading in the securities of 19 issuers based on nonpublic information he learned in advance of their offering announcements. Furthermore, the fund manager signed two securities purchase agreements in which he falsely represented that he had not traded the issuer's securities prior to the public announcement of the offerings in which he had been confidentially solicited to invest.

The fund manager agreed to pay more than $1.3 million to settle the SEC’s charges.
“By engaging in more than 50 instances of illegal activity in his securities trading, [the fund manager] showed a complete disregard for the securities laws and our markets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “[He] also misused his position of authority as a portfolio manager of his employer’s fund in order to make handsome profits for his own fund.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, the fund manager conducted his schemes from 2007 to 2011.  He caused Octagon to purchase stock in small, thinly traded issuers at the going market price so that he could sell the same stock the following day to his employer’s fund at a price substantially above the prevailing market price.  Each of the sales from Octagon to the employer’s fund occurred in pre-market trading, thus the fund manager was able to ensure that the trades matched.  Later that same day or within a few days of the matched trades, he directed the employer’s fund to sell the recently-acquired stock on the open market at a loss. The fund manager generated ill-gotten gains of $586,338 for Octagon in this scheme.

SEC Charges Prominent Entrepreneur in Miami-Based Scheme

The SEC charged a prominent Miami-based entrepreneur with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. The entrepreneur stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.

The SEC alleges that the entrepreneur, who is a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. He sometimes solicited investors one-on-one at political fundraising events. According to the SEC, to add an air of legitimacy to his company, the entrepreneur assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. He falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.

The SEC also charged InnoVida's chief financial officer, a certified public accountant living in Pembroke Pines, Fla., who helped the entrepreneur create the false financial picture of InnoVida.

The SEC alleges that besides his Miami Beach mansion, the entrepreneur illegally used investor money to pay for his Maserati, a Colorado mountain retreat home, and country club dues. He stole at least $8.1 million in investor funds.
"From his lap of luxury, the entrepreneur concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

Enhanced by Zemanta