The admission of wrongdoing by Philip Falcone, pictured left, and his hedge fund Harbinger Capital Partners, along with a five-year ban from the securities industry, is a step in the right direction for the Securities and Exchange Commission.
The deal with Mr Falcone (documented here) is the first evidence of a tougher policy on serious regulatory breaches by the SEC under Mary Jo White, its new chairman. This actually requires the offenders to admit to something when they settle and pay a fine.
The previous deal that Mr Falcone and his lawyers had struck with SEC staff – to pay a fine and accept a two-year ban while neither admitting nor denying a breach (the usual SEC formula) was thrown out by the commissioners earlier this year.
I’m intrigued by the possibility that the civil trial of Fabrice Tourre, the former Goldman Sachs banker, may hinge on whether an email to his girlfriend was a love letter or an injudicious admission that he was misleading investors about the complex mortgage-related securities he was selling.
The lead attorney for the Securities and Exchange Commission said at the opening of the civil hearing on Monday that it was the latter. Mr Tourre’s lawyer asked the jury to put the language of the communication down to “youthful arrogance” and said it was “an old-fashioned love letter” to his girlfriend, who was a Goldman co-worker.
“Secretive hedge fund manager” is one of those adjectival pairings to rank with “flamboyant impresario” and “introverted computer programmer” as a journalistic cliché. So when I read the headline “Hedge funds lobby SEC over secrecy rule” in Monday’s FT, I naturally assumed the hedgies wanted the US regulator to erect even higher walls around them. Not so.
Colleague Sam Jones points out that at least part of the myth of secretive hedge funds is constructed on the regulatory legacy of rule 502(c) of Regulation D. This “arcane piece of Depression-era legislation… defines how the modern hedge fund industry operates”, outlawing general advertising and solicitation by funds but also making them paranoid about talking to any “unqualified outsiders”. The Managed Funds Association, the funds’ US lobby group, has written to the Securities and Exchange Commission seeking its elimination.
I have a soft spot for US judge Jed Rakoff, who has just thrown a large legal wrench into the decades-old mechanism of redress between Wall Street banks, investors and the Securities and Exchange Commission.
I first came across him nearly 10 years ago when he presided over the extraordinarily complex litigation between JP Morgan and a bunch of insurers about offshore financing the bank had arranged for Enron. Witty, sharp, quoteworthy and unmistakeable – with his white beard, he looks like one of those wise judges who administer 23rd century justice in sci-fi movies – he is a journalist’s dream.
Goldman Sachs‘ attempt to settle with the Securities and Exchange Commission in the Abacus case on a lesser charge than fraud, which I and Francesco Guerrera wrote about today, is a reminder of the peculiar way in which US civil securities cases are often resolved.
The standard settlement involves a defendant being fined by the SEC, and disciplined in individual cases, but “neither admitting nor denying” the allegations. The SEC thus gets a scalp and avoids a court case, while the defendant avoids a conviction.