OVER 20% Of Hedge Funds Misrepresent Something To Clients

More than one in five hedge fund managers are lying to their investors, according to a new report.

The study, conducted by a quartet of academics, founded that 21% of hedge funds misrepresent past legal or regulatory problems, while nearly three in 10 offer incorrect or unverifiable information about other topics, including assets under management and performance, the study shows.

The study looked at 444 due-diligence reports on 403 different hedge fund managers commissioned by investors between 2003 and 2008, and found that 42% contained “verification problems.”

Of that 42%, half are cases where “the manager verbally stated incorrect information.” This was reported by FINalternatives.

Wall St. on Trial: E-mail-Heavy Case Could Benefit The Defense

Several former prosecutors say that the coming criminal trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, brought up on fraud charges in connection with the implosion of two funds, is far from a slam dunk. And they say that any attempt by the government to build a case based on anti-Wall Street sentiment could backfire.

For the blood-thirsty, there’s the specter of retribution for an act that some believe tipped the first domino in the global financial crisis. For those who think bailout-happy Washington has taken it too easy on the financial sector, the prosecution of two hedge fund managers, ­ the era’s shadowy and iconic Wall Street players, ­ represents the first instance of government pushing back. And then there’s the legal community, eager to see whether an indictment so rich in seemingly damning e-mail messages will in fact yield guilty verdicts. NYT has a former litigator's analysis of the coming trial.

Next-Gen NYSE Trading Floor: Hybrid of Live and Electronic

NYSE redesign, already under way at the Big Board's main trading room, is part of a broader strategic shift at the exchange. The exchange wants to lure more electronic traders directly to the floor, creating a hybrid world where they can take in the person-to-person "buzz" of live traders while still executing trades by computer.

The changes could bring about another big cultural change: traders will be able to sit at stations similar to desks used throughout Wall Street, instead of standing or perching on stools, as is Big Board custom. WSJ has more and provides rendering from Perkins Eastman Architects. The Architects, who also designed newly renovated Times Square half-price Broadway ticket booth, said the plan could "bring back some of the excitement" to the room. "We're taking out the blocky booths and replacing them with something nice," said Lou Pastina, EVP of NYSE operations.

Third of Wall St Expects Bigger 2009 Bonus

Bloomberg reports on survey from a leading Career website: “This finding may rile regulators who have concluded that compensation arrangements often created incentives for risk- taking with insufficient regard to longer-term risks.” Of the quarter of respondents who anticipate a smaller bonus, 54% attribute it to their firm’s performance and 20% to a change in pay structure. Citi, Morgan Stanley and UBS increased salaries for some while adjusting bonus policies.

How Private Equity Can Win While Their Companies Lose

Private equity firms, former executives and Investment Banks profited as the Simmons Bedding Company fell into bankruptcy, devastating its bondholders and employees.

Presidents have slumbered on its mattresses aboard Air Force One. Dignitaries have slept on them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and H. G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest mattress, and the brand was immortalized on Broadway in Cole Porter’s song “Anything Goes.”

Its recent history has been notable, too, but for a different reason.

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

Thomas H. Lee Partners of Boston has not only escaped unscathed, it made a profit. THL bought Simmons in 2003, pocketed around $77 million in profit, collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Prior to this, investment banks also cashed in. A succession of private equity buyers came and went. Merrill Lynch Capital Partners bought Simmons in 1991 for $32 million for a 60 percent stake in the company and the assumption of its debt. Merrill sold it to Investcorp, an investment group based in Bahrain, for $265 million in 1996. Two years later, Investcorp sold the company to Fenway Partners for $513 million. Go to Full NYT article.


MORE to SEEA Video look at how private equity dealmakers can win while their companies, like Simmons Bedding, lose.

Calls for "One Uber-Regulator"

Last week, the Group of 20 announced that they had agreed to a far-reaching effort to revamp the economic system, which, if carried out by governments, would lead to much tighter regulation over financial institutions, complex financial instruments and executive pay. They could also lead to big changes and more outside scrutiny over the economic strategies of individual countries including the US.

Meanwhile, the U.S. House and the Senate now reviewing the Obama administration plan to overhaul financial regulations in hopes of preventing another crisis. Morgan Stanley CEO John Mack, who's stepping down at the end of the year, is calling for a single regulator to oversee financial institutions worldwide. “A better system would be one uber-regulator,” Mack told Bloomberg in an interview. “We do need an overall systemic-risk management that everyone buys into. It’s not a U.S. systemic boundary — it’s a global systemic risk manager.”

White House abandons and House Divided on Financial Reform

Obama administration on Wednesday abandoned a significant provision in the face of widespread political and industry opposition. It dropped a requirement for financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards. NYT discusses political cave-in. and that unity from the darkest days of the crisis have dissolved. The acrimony could further delay or dilute the administration plans to rewrite rules for the financial system.

Front-Running Hedge Fund Disclosure - Something about Mary

Chairwoman Mary Schapiro said on Friday that the S.E.C. will probably require “some level of public reporting,” as it currently does for mutual funds. She said the agency was “very aware of the tension” involved in requiring more disclosure because hedge funds don't want competitors to “front-run.”

New Kids on the Prime-Brokerage Block

Bulge Bracket trading and other services to hedge funds scaled back last year as their clients posted losses or closed. Prime-brokerage businesses, including some just launched in 2009, competing fiercely to attract hedge funds as clients. Some of the newer and lesser-known players: Cantor, FBR Capital Markets, Jefferies, Merlin, Conifer Securities. Merlin plans to announce a partnership with Northern Trust, to allow Merlin clients seamlessly to "custody" (hold in safekeeping) assets at NT. 9/15 WSJ for more.

Inspection of Wall Street’s New Pecking Order

Economists debate cause and effect of Lehman Brothers' collapse a year ago and politicians and the public seem to blame the financial crisis on the banking sector. Furor has died down, some banks proving to be surprisingly resilient, yet Wall Street still faces increased regulation and political pressure. Update from Economist.com: "Wall Street's new shape" leads off: AT THE press of a button, double doors sweep open: Welcome to the office of Lloyd Blankfein, chief executive of Goldman Sachs.

Credit Suisse, Goldman Want to Buy Life Insurance from Sick and Old for Cash, Package as Bonds to Trade

Credit Rating agency DBRS is reviewing nine proposals for life-insurance securitizations including from Credit Suisse. Goldman Sachs has developed a trading index of life settlements, so traders/investors can bet whether people will live longer than expected or die sooner than planned. The index is similar to stock indices that allow investors to bet on the direction of the market without buying individual stocks. Moody's has been approached about securitizing life settlements, but has yet to see a portfolio that meets its standards.

Andrew Terrell thinks securitized life policies have big potential, explaining that investors want to spread their risks and constantly looking for new investments that do not move in tandem with their other investments. Terrell was co-head of Bear Stearns's longevity and mortality desk - which traded unrated portfolios of life settlements - and later worked at Goldman on a trading platform for life settlements. "It's an interesting asset class because it's less correlated to the rest of the market than other asset classes".

Not quite a done deal: The insurance industry is girding for a fight: Just as all mortgage providers were tarred by subprime mortgages, so too is the concern for life insurance companies that they would be tarred with the brush of subprime life insurance settlements. Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings for securitized subprime mortgages and later were burned, are approaching life settlements with greater caution.

“The securitization of life settlements adds another element of possible risk to an industry that is already in need of enhanced regulations, more transparency and consumer safeguards,” said Senator Herb Kohl, who is chairman of the Special Committee on Aging. More from NYT.

Accumulators? Dangerous Derivatives Return

Derivatives nicknamed “I kill you later” - Accumulators - making a comeback, Wall Street Journal reported today. Accumulators generated controversy after wiping out enormous sums among high net-worth individuals in Asia.

Senator Wants Broad SEC Market Review

There are now potential conflicts of interest on trading desks serving both retail and high-frequency trading clients: Delaware senator Ted Kaufman is asking the SEC to review stock market structures, part of a debate over the impact of computer-based trading. WSJ.

These days, about half of all the equity stocks traded in the US are handled by nimble computers. NJ.com has a feature on Jersey City-based Direct Edge and notes how the NYSE plans to consolidate existing Secaucus and Brooklyn data centers in a huge Mahwah site. NJ.com has photo of a Trader on the support desk at Direct Edge with a Glossary of terms such as • High frequency trading • Flash orders • Liquidity • Dark pools • Best bid and offer.

Guaranteed Bonuses Back and Face Scrutiny

WSJ 8/13 $100 Million for Mr. Hall?
As trading has been the main source of recent Bank profits, the biggest bonus commitments are being made to Bond Salesman, Currency and Derivatives Traders, and computer programmers and others who support those operations. “Is Wall Street again going to overpromise, and then when the market turns down, we’ll have another set of pay problems?” asked pay consultant Alan Johnson?

Guarantees are roughly a third smaller than at the 2007 market height, although they are bigger than last year, Johnson said. “The absolute levels are by historical standards moderate, but it is a big change from where we were at the beginning of the year”.
Summary of some well-known Employers:
Citi and B of A have offered guarantees, arguing that they are necessary to attract new employees and keep existinG. Foreign banks like Nomura (Japan), Credit Suisse (Switzerland) and Barclays (Britain) making guarantees in hopes of poaching talent.

Stronger banks that have repaid bailout money and not subject to restrictions — Goldman, JPMorgan Chase and Morgan Stanley — have also begun offering guarantees.

Former Goldman partner in London, signed a multimillion-dollar contract recently with B of A that she told former associates was worth $15 million a year for two years and included a guarantee, according to a person with knowledge of her pay.

In the last few months, Citi has lured several senior derivatives traders — including Dan Petherick, Rachel Lord and Stefanos Bitzakidis — away from MS with multimillion-dollar, multiyear guarantees. Citi spokesman said that attracting and retaining the best talent was “very important” to the success of Citi and all stakeholders, including taxpayers.

Morgan Stanley, after posting dismal second-quarter trading results, has been canvassing Wall Street trading desks. After picking off currency and rate traders at JPMorgan and Deutsche Bank, MS recently used one-year guarantees to hire three Citi traders and approached several more with similar offers.

Obama administration pay czar, Kenneth Feinberg (pictured) is preparing to review how compensation should be structured at seven companies that received two or more federal bailouts. Resurgence of bonus guarantees underscores how difficult it is to control Wall Street pay, despite the public outcry over how taxpayer money is being spent. Feinberg amust decide how much overall compensation is too much, even when the pay is tied to performance, like the $100 million package that Citi promised to trader Andrew Hall. (See WSJ 8/13)

Companies must each submit 2009 compensation plans for their top 25 earners by Thursday, and Feinberg has 60 days to rule on them. He has the authority to single out any of those employees and adjust their pay packages. Some rivals of the bailed-out have already benefited from being out of reach of the government’s pay czar. Jeff Michaels, head of Citi’s US interest rate trading, found Nomura knocking with an offer that would guarantee him as much as $10 million for 2009 and 2010. That’s nearly twice the $6 million bonus he received last year when he joined Citi from Lehman.

Summary courtesy of Dealbook. Click for access to Full NYT article here to see 293 comments as of 8/10 August 10th 3:53 pm

SEC Says No More Messin’ Around

WSJ story: that you ain’t gonna have the SEC to kick around anymore — at least if Mary Schapiro (pictured smiling in a pearl necklace) has her way. Quotes Paul Weiss Attorney: Clearly the message going out is that the SEC is going to be much tougher with regard to settlement postures, in terms of penalties. They want to demonstrate there is a tough, new cop on the beat. Headline courtesy WSJ Law Blog.

Will Stockbrokers Exist After This Generation?

FINRA reports that registered reps have seen their job numbers dwindle. 25,810 reps have lost their jobs. Registered Rep magazine reports Smith Barney--now Morgan Stanley Smith Barney following its sale from Citigroup saw its number of financial advisers fall 17% 1Q 2009.

A broker can be a "mentor" for investors to guide them. Others hold out less hope for brokers. In a Forbes article, Bill Singer foresees stock brokers not existing after this generation and instead the market will have commission-paid phone operators who dole out information. If there are going to be brokers and other investment advisers in the future, Singer advocates each professional to take exams with more emphasis on product knowledge and CE than on one's ability to make cold calls. Since the retail investor doesn't often know the difference between a financial consultant and a financial adviser, Singer wants to eliminate those distinctions. More at Forbes' Intelligent Investing Panel.

Read here to see someone disagree: who writes to announce the death knell of the advice business is as ludicrous as saying there will no longer be a demand for teachers or doctors. Are educational or medical websites robust and helpful enough to do away with those professions? How about self-diagnosing and self-medicating in times of illness?
The Reformed Broker also tackles the claim that most investors will just do it themselves: "We were told that online brokerages would be the death of the full-service broker in 1999. Most of those online brokerages have since disappeared or have been swallowed up and the ones remaining now charge zero dollars or so for trade execution. Nice business model:E*Trade’s stock looks like Mickey Rourke’s face, currently hovering around a buck, with flies buzzing around it’s sunken eye sockets. Read more at The Reformed Broker.