Insider Trading Case: AKO Capital

A London, England court has sentenced a former trader at a hedge fund there, AKO Capital LLP, who has pleaded guilty on insider trading charges. The trade, Anjam Ahmad, must pay about 287,000 pounds ($421,000) in fines and restitution.

There are as many as twenty two different companies involved in the trades that are the subject of the prosecution.

Judge Geoffrey Rivlin suspended his sentence, so and Ahmad, who is 39 years old, will serve no jail time.

Judge Rivlin at the sentencing June 22 said: "You cooperated immediately with the authorities and were very frank about the part you played in all this.”

The Financial Servcies Authority (FSA) has gotten a good deal more aggressive in such matters recently. Regular readers of this blog will probably understand that I believe that is unfortunate not only for Ahmad but for the economy and general public of the British isles.

Regulators and prosecutors are interested in trophies they can put on their walls. They aren't interest in what is best for the people paying their salaries. It isn't in their job description to be interested in what is best.

Bibliographic Note

I've recently received via snail mail a catalog from Edward Elgar Publishing, giving titles that deal with a wide variety of legal/regulatory matters. One of their recent publications that might be of special interest to readers of this blog is: CORPORATE GOVERNANCE AND DEVELOPMENT, an anthology edited by Thankom Gopinath Arun, of the University of Central Lancashire and the University of Manchester, and John Turner, Queen's University Management School, Belfast.

The catalog descriubes the book as analyzing "the complex relationship between corporate governance and economic develpment by focusing on the reform of corporate governance, the role of the lagl system, and the interconnections with the financial system."

I'd also like to give a shout-out to two forthcoming books from EE.

CORPORATE GOVERNANCE IN MODERN FINANCIAL CAPITALISM, by three authors affiliated with the Stockholm School of Economics, Sweden: Markus Kallifatides, Sophie Nachemsson-Ewall, and Sven-Erik Sjostrand. Available in June 2010.

The authors focus on Old Mutual's takeover of Skandia as a test case of corporate governance.

CONTRACTUAL NETWORKS, INTER-FIRM COOPERATION AND ECONOMIC GROWTH, anothger anthology, edited by Fabrizio Cafaggi, of European University Institute, Italy. Available in September 2010.

Its authors postulate that "collaboration among firms of different sizes constitutes a potential response to numerous weaknesses of modern western industrial systems."

Beer Company Intrigue

All sorts of good stuff in this story., or rather this meta-story.

Way back in November 2001, several European-centered news organizations, including Reuters, The Financial Times, and the Guardian, received under unclear circumstances what appeared to be a presentation originally prepared in connection with a planned corporate acquisition. The leak, if trustworthy, was important: Interbrew, a large Belgian-based beer company, (best known for Stella Artois and Beck's) was about to launch a bid to buy SAB, the South Africa based rival best known for Carling Black Label. And it was prepared to pay up to 650p per share for SAB, but it was going to try a low-ball bid of 500p first.

Some of the news organizations ran the story. They didn't say the bid would happen, but they did say they had received documents claiming, etc. On Nov. 29, 2001, for example, the Guardian published a story saying that it had a “secret document” which it said had been couriered to a “large chunk” of the business press. The price of SAB rose, of course, and my guess is that the leaker then sold his shares of it for a nice quick profit.

The truth behind these documents seems to be that they were real, but that the price and had been tampered with. (The actual price range contemplated in the real documents had been 400-550, not 500 - 650. The leaker presumably changed the numbers to create a higher price bounce.) Interbrew decided it would not go forward with the proposed bid. And it was furious at the unknown leaker, so it sued the media outlets and demanded to know where they had gotten this material.

Don't cry for Interbrew. They later became Inbev, and still later took over Anheuser-Busch. Anyway, back to 2001...the outlets resisted, Interbrew filed a lawsuit in the UK, and over the course of the following years, the case wound its way up to the European Court of Human Rights.

Possibly important point: NONE OF THE MEDIA OUTLETS INVOLVED had ever promised confidentiality to the leaker. Yet they resisted giving up information about their receipt of the tampered-with documents because they believed doing so would hurt their ability to make such promises when it was warranted.

December 15, 2009: ECHR has ruled in favor of the news outlets. "Interbrew's interests in eliminating, by proceedings against X, the threat of damage through future dissemination of confidential information and in obtaining damages for past breaches of confidence were, even if considered cumulatively, insufficient to outweigh the public interest in the protection of journalists' sources."

Comments, anyone? (And yes, Mr. Rather, you may go to the airline ticket counter immediately if you like.)

UK's trade minister

The United Kingdom's trade minister, Lord Davies, has flown to Saudi Arabia with the intent of persuading two defaulting Saudi conglomerates, the Saad Group and Ahmad Hamad Algosaibi & Bros (AHAB) to stop giving preference to local banks over British banks in terms of the restructuring of their loans.

Earlier this year, as it happens, Lord Davies faced a good deal of pressure to resign his office over a now-forgotten scandal that involved his supposed excessive coziness with the Mugabe regime in Zimbabwe. That appears to be all settled, or perhaps just forgotten, now.

Here's a link from that forgotten era of February 2009.

Such things forgotten, Davies is now expected to head off unsatisfactory results in the Gulf. Results so unsatisfactory, in fact, that the Times of London says this morning that the two defaulting Saudi firms could "do as much damage to the Gulf's bruised financial reputation as the Dubai shock of ten days ago."

The two conglomerates involved are not in a position to present a united front, so if Davies is clever he may be able to make use of the tensions between them. Specifically, AHAB has accused the chairman of Saad of a fraud that could amount to $10 billion.

Kraft and Cadbury, continued

I'll just do some quick link farming today, to catch us up on Kraft/Cadbury matters.

An analyst's note from Merrill Lynch says: "The third quarter offers Kraft a chance to demonstrate that 'old Kraft' is continuing to turn the corner before potentially pairing up with Cadbury.

But there is no luxury of time. Under the Takeover Panel's deadline, Kraft must make an offer by the end of the business day on November 9 or walk away for six months.

Kraft will report those third-quarter reports later today. Here is a preview.

Kraft's transaction info is here.

And Cadbury's response? voila!.

UK Rules for Disclosure of Derivatives

The Financial Services Authority in the United Kingdom has adopted final rules requiring disclosure of options and other equity derivatives.

This has long been a hot issue both in the US and the UK. In both countries, regulators have rules that are supposed to prevent takeover by stealth. When one company or investor or fund owns a sizeable share in another -- ignore the specific threshold amounts just now -- it is supposed to disclose the fact.

But lately the growth of equity derivatives of a sort that (a) may allow for the indirect exercise of power over an issuer yet (b) don't count against the threshold, has raised the specter again of the sort of takeovers by stealth the regulators had belived themselves to have exorcised decades before.

In the US, the question of how to treat such equity derivatives has been addressed only in a very piecemeal fashion. The recent CSX decision spoke to it, and the appeals process might have yielded something more authoritative, but the parties have settled their dispute.

In the UK, though, the FSA has taken the question on more directly. Here's the link.

Don't be confused by the rather modest title of the paper. The new rules cover not just "contracts for difference," but other derivatives with similar effects.

Insider Trading and mergers

About a year and a half ago, Gretchen Morgenson of the NY Times wrote a story with the lead, "The boom in U.S. corporate mergers is creating concern that illicit trading before deal announcements is becoming a systemic problem."

It wasn't merely US mergers she was concerned about, though, despite the wording of that lead. She cited a study by the UK's answer to the SEC, their Financial Services Authority: that showed that in 2004, 29% of companies involved in mergers experienced abnormal trading before public announcements. The FSA also said that in 2001, the comparable figure had been 21%.

What accounts for the increase? Perhaps it simply became more difficult to keep a secret between 2001 and 2004.

Ms Morgenson also quoted a money manager named Herbert Denton: "Martha Stewart got hurt very badly for something that happens every single day on Wall Street. It's a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the SEC should get very, very serious and prosecute a lot of people or forget about it."

I'd raise my hand for the second option there. "Systemic problem" solved.

UK Regulators Propose a Rule

The UK's Financial Services Authority published a "consultation paper" yesterday -- that is, a request for public comment on a proposed new regulation.

The subject of the proposal is an instrument known as a "contract for difference." This is a contract in which a party is paid when an underlying asset increases in value or perhaps pays out money when the asset falls in value (takes the long side), or vice versa (for the opposite party of course takes the short side). The significance of the CFD is that the speculator -- typically a hedge fund -- never acquires title of the underlying asset, so the transaction unbundles title from economic risk.

The FSA is concerned that undisclosed CFDs can mess up the system of corporate governance. Consider, for an easy case, a corporation's stockholder who has sold CFDs to a hedge fund. The hedge fund has the "long" position -- it has an interest in an increase in the value of that stock. The stockholder now has a "short" position -- it will receive money if the stock price falls. The stockholder still has title to the stock, though, and accordingly still has a vote in proxy contests.

Will the stockholder exercise that vote in such a way as to sabotage efforts of corporate management, or to help install an incompetent board, so as to benefit from the difference, the price fall, that will result?

That's an easy problem to imagine, but not the FSA's central concern. After all, look at the matter from the point of view of the hedge fund that bought the long position. It wouldn't be likely to do so if it thought the stockholder was about to sabotage the company so blatantly. Or, at least, it wouldn't make the same mistake twice. Can't the contracts between the long and short parties be trusted to ensure that the economic interest and the voting interest remain in some alliance?

Now we get to the real regulatory concern. The contracts can do that job all too well. The FSA is worried that hedge funds and others with CFD, but without titles to the stock, are exercising informal control over how the stock is voted, and that this makes the corporate governance system too opaque -- management and the other shareholders don't know who is pulling what strings.

Accordingly, the FSA's proposal focuses on disclosure. In essence, they want managements to be able to flush out all CFD holders with an economic interest of 5% of more of their equity.

There is a tax angle to this, too. CFDs are a flourishing part of the UK equity market, accounting for 30% of all trades, because in Britain there's a 0.5% stamp duty levied by the government on the sale of the actual shares, the underlying asset. CFDs are a way of playing the market without paying the tax, and the "unbundling" of votes from economic interest is more of a side effect than a positive benefit of these instruments.

The bottom line though is that if you want to comment on the FSA proposal, you've got three months. The clock is ticking.