Month: July 2013

Nasdaq Among The Targets of Hacking Spree, According to Indictment

Three of the five alleged hackers are at large as the DOJ issues indictments in what I referred to the “largest such scheme ever prosecuted in the United States.”  The hackers, five Russian and a Ukrainian, stole more than 160 million credit card numbers from a number of payment processors, retailers and financial institutions.

Nasdaq was a target, but its trading platforms were not compromised.

Among the U.S. Attorneys mentioned in the article is Preet Bharara, who is having a big week.  He is also involved in the SAC Capital insider trading case.

SEC Pounces on Bitcoin Ponzi Scheme – In Securities Fraud, Everything Old Is New Again

Movie critics would call the scheme cliched and hackneyed.
Link:  SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

This week, the SEC charged McKinney, Texas-based Trendon T. Shavers with defrauding investors in a Ponzi scheme involving Bitcoin.  He may have raised more than $4.5 million in the scheme, but due to the Bitcoin-denominated transactions and vague SEC release, it is hard to tell.  The SEC also says that in more recent dollars, the 700,000 Bitcoin raised exceeds $60 million, which screams “We Want Headlines!!!!” to me.

Shavers’ vehicle was called Bitcoin Savings and Trust and he used the names “Pirate” and “pirateat40” to sell his dirty wares.  Despite the scary name, Shavers is probably just a Jimmy Buffet fan.

Jimmy Buffet, A Pirate Looks At Forty

The SEC claims Shavers claimed that investors would have no risk and huge profits over the Internet.  It appears that Shavers took in Bitcoin investments and then sent them out in withdrawals and interest payments while losing money in his investments and siphoning off funds for himself.  This is classic Ponzi scheme.  Nothing new or notable other than the Bitcoin angle, which isn’t that interesting considering other schemes that are far more imaginative.

 

Insider Trading – How Much Of A Factor Must The Material Non-Public Information Play In The Investment Decision?

Spoiler alert: Not much.

Link: United States v. Raj Rajaratnam

Raj Rajaratnam, former billionaire hedge fund manager, appealed his notorious insider trading conviction.  If you recall, he was the founder of the Galleon Group hedge funds who received insider information from contacts at McKinsey, Intel, Goldman Sachs and other hedge funds.

Among the issues raised at trial was whether the fraud counts should be vacated because the court told the jury that it could convict Rajaratnam if the “material non-public information given to the defendant was a factor, however, small, in the defendant’s decision to purchase or sell stock.  He claimed that this allowed to jury to convict without a causal connection between the inside information and the trade.

The court noted that under the misappropriation theory of insider trading, a person commits fraud “in connection with” a securities transaction in violation of Rule 10b-5 when he misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information.  The Supreme Court in the O’Hagan case enshrined/created this theory to “protect the integrity of the securities markets against abuses by ‘outsiders’ to a corporation” who have access to confidential information that will affect the corporation’s security price but otherwise owe no duty to the corporation’s shareholders.

The court in this case endorsed the “knowing possession” standard* that is consistent with the cardinal rule of insider trading:

If you have a fiduciary or other duty to the company and hold material non-public information, disclose or abstain.

On this basis, the appeals court said that the district court’s instruction was more favorable to Rajaratnam than the legal standard.  Rather than merely be in possession of the information, the jury had to find that he used it in some manner to find him guilty of insider trading.  As a result, the jury instruction satisfied the “knowing possession” standard.

*The knowing possession standard became the law in the 2nd Circuit in United States v. Teicher and United States v. Royer.

My Favorite Apps For Work – url2pdf

Have you ever found yourself reading a webpage on a mobile device and thought, “I wish I had a .pdf of this so I could mark this up and save it”?

Since I read a lot of cases and article on my tablet that I share with you good folks (you’re welcome), I was tormented by this thought.  Or concerned.  Or mildly annoyed.

url2pdf does just what its name suggests.  It takes a URL and converts the page into a .pdf file suitable for framing.  I use it for highlighting or marking up documents as I would a paper file.

The interface is sparse, to be charitable.  However, it is easy to use and doesn’t require much in the way of instruction.

It is amazing how such a small, free, simple app can make portable devices so convenient.  It is another tool that turns that turns my tablet from a glorified reader to a mobile workstation.

 

SEC Announces New Enforcement Initiatives For High Risk Market Areas

SEC to focus on financial reporting, microcap companies and new analytical tools to detect fraud.

The SEC recently announced new initiatives that will “build on the Division’s unmatched record of achievement and signal our increasingly proactive approach to identifying fraud.”(1)

First up is the Financial Reporting and Audit Task Force, which will concentrate on efforts to identify securities-law violations relating to financial statements, which we thought was a large part of what the SEC did before this release.

Next up is the Microcap Fraud Task Force, which will “investigate fraud in the issuance, marketing, and trading of microcap securities.”  Considering the types of operators who often work in this area, this is probably a good use of SEC resources as long as they recognize that people can operate in this space with integrity.  Being small is not an indication of being dishonest.  However, the hallmarks of microcap fraud should give a good indication of which players to target.

Finally, we have the Center for Risk and Quantitative Analytics.  The CRQA, as the SEC calls it, “will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing.”

Much like the Dodd-Frank provisions for identifying systemic risk, there is little to suggest that the government has the capabilities to address these issues in this manner.  If the SEC could not recognize the wisdom for investigating Bernie Madoff after being handed the quantitative analysis demonstrating that Madoff’s claims were impossible, what is there to suggest they can do it on a market-wide scale?

Expect fishing expeditions on innocent firms and excuses relating to “concealment” and “lack of cooperation” for guilty ones.  However, we applaud the SEC for focusing on areas where attention is needed.

(1)Umm, none of Enron, Worldcom, Madoff, Fannie/Freddie or the rest of the mortgage-related misconduct were in the plus column of “the Division’s unmatched record of achievement.” But, we digress . . .

Startup Tips and Lessons from Zynga: Knowing When To Step Aside

Sometimes the skills needed to start a company are different from the skills needed to run a company.

Cross-posted at My Gamasutra Blog.

Earlier this week, Zynga made an announcement that was not too surprising to folks following the company.  Mark Pincus was out as CEO.

Zynga was a high-flying casual game developer sailing on the winds of its relationship with Facebook.  Zynga described itself as “the world’s leading social game developer.”  It went public in December 2011 at $10.00/share, and its stock price had traded as high as $14.69/share in early 2012.

Since that time, Zynga’s fortunes have fallen.  Its stock has traded below $4.00/share since Summer 2012 as its daily and monthly active users declined and it continued to lose a lot of money.

What was surprising was the Pincus was staying on as Chief Product Officer and Chairman of the Board.

In addition, reports state that Don Mattrick, the new CEO, was chosen by Pincus as his successor.  Pincus was quoted as saying:

“that if I could find someone who could do a better job as our CEO I’d do all I could to recruit and bring that person in. I’m confident that Don is that leader.”

So, what are the lessons here for startups, particularly tech startups?

I’ve previously written about how startups need people different skillsets at different points in their maturity.*  What is remarkable in the Zynga story is that Pincus seemed to understand that Zynga had grown past his skillset as a CEO, and a different kind of leader at this point in its development.

Most founders, even those that do not name the company after a beloved pet, consider that company to be “their baby,” even after taking VC money and public investor money.  They have nurtured the company from idea-to-business, and they believe that they should maintain control of it, even in the face of mounting evidence to the contrary, like, say, gigantic losses of money and declining user numbers, prying a founder out of a controlling role can be difficult and painful.  This can be particularly painful for the founder, who may be faced with a loss of confidence and sense of shame despite the company he or she may have built.

Pincus will continue to have a powerful role at Zynga, particularly as one of the two members of the Executive Committee of the Board of Directors.  However, if the reports of how this transfer of power took place are accurate, Pincus should be commended for his maturity and foresight in recognizing the changing needs of Zynga.

Or maybe he should be admired for his strategic foresight in maintaining a powerful role before being dispatched entirely by the Board of Directors and angry shareholders.  Maybe Mafia Wars does prepare you for real life after all.

*For Gamasutra readers, see here for a discussion of how companies begin to need salespeople as they mature, a position that founders may not be suitable.

SEC To Vote On Rules For General Solicitation In Some Private Offerings

It has been quite a while since the SEC proposed rules relaxing the prohibition of general solicitation in Rule 506 and Rule 144A offerings.  The criticism to the proposed rules flowed from issuer and investor advocate groups for a variety of reasons.  These rules are required by Section 201(a) of the JOBS Act.

According to WSJ MarketWatch, the SEC will vote on the proposal on July 10.

At this point, it may be worth going back through the proposal to be ready for the new rules.  Issuers will be anxious to begin advertising.  However, the proposal includes onerous requirements for verifying investor eligibility.  We look forward to seeing what changes, if any, the SEC plans to make to the proposed rules.

 

My Favorite Apps For Work – LectureNotes

I never used a tablet at The Big Firm.  I had the firm-issued Blackberry and my own iPhone, but I was not a fan of integrating my personal electronics with the firm’s system.

I was also not an early adopter for tablets.  However, since I went solo, I started using a tablet frequently.  I tend to use it for reading articles and as a replacement for printouts.  This leads me to LectureNotes.

LectureNotes is an Android app for taking notes on the screen.  Simple enough, as there are many apps that do this, including the native apps that were pre-installed on the tablet.

LectureNotes is great for the note-taking function, but what really sets it apart is when it is paired with PDFView.  PDFView renders .pdf documents for viewing and marking on LectureNotes.  You can import .pdf’s to have them available to mark them up as if they were paper documents.  You can customize the size and color of the “pen” you use and note deletions, insertions and notes.  It also allows you to organize your documents in a customizable way.

You may say that Adobe Reader does the same thing, and it does.  However, I found that there is far less latency in LectureNotes when I am marking up a document than when I use Adobe Reader.  The fraction of a second latency in Adobe Reader is enough to catch my attention and break my concentration as I stop to make sure the program recognized that I was writing.

LectureNotes is priced at less than $5.00 at this writing and worth it.  PDFView is free.  Paired together, they are responsible for a great deal of changing how I interact with documents.

 

Winklevoss Twins (Of Facebook Fame) To Create A Bitcoin ETF

The Winklevoss Twins, best known for their supporting role in the early Facebook saga, have filed a fascinating registration statement. The Winklevoss Bitcoin Trust has made a filing with the SEC to register around $20 million of Winklevoss Bitcoin Shares.

The point of this investment will be to reflect the performance of the “Blended Bitcoin Price” of Bitcoins. This price is the weighted average market price of Bitcoins on Bitcoin exchanges chosen by the Winklevosses.

The Winklevosses intend for the Trust to hold Bitcoins “using the Trust’s proprietary Security System,” whatever that means for a digital asset.

While this is sort of novel and interesting in its own way, what I found most fascinating is the fact that the financial statements filed with the Form S-1 were blank. Completely blank.

While initial registration statement filings often contain blanks, I’ve never seen “Form of Financial Statements” before. Financial statements may change over the course of a filing history, such as in response to SEC comments. However, it will be interesting to see if the SEC sends the Winklevosses a bedbug letter for this filing.

Best line from The Social Network.