If you've been hoping that somebody would find a novel way to nail the rating agencies for their complicity in the mortgage meltdown, keep on hoping. At least one strategy came up against a brick wall this week, according to news reports:
The 2nd Circuit axed three class action securities fraud complaints against the rating agencies Moody's Investors Service, Standard & Poor's and Fitch Ratings, finding that the AAA ratings the agencies assigned to risky mortgage-backed securities just before the financial crisis were merely expert opinions, rather than acts of underwriting.
In a unanimous decision, the three-judge panel upheld the dismissal of class action complaints filed by a group of unions, the Wyoming Retirement System and a holding company, Vaszurele Limited, agreeing with District Judge Lewis Kaplan that the rating agencies were not underwriters and had no actual control over the ultimate ratings banks assigned to securities.
It was not all that surprising to watch the 60 Minutes expose of Greg Mortenson and his memoir, Three Cups of Tea. This has become an old story: Again and again, vivid memoirs bursting with detailed and arresting anecdotes have turned out to rely on fabricated or at least exaggerated recollections.
Why does this keep happening? One obvious reason -- which doesn't get much attention -- is that vivid memoirs sell better than ones filled with the kind of vague recollections that most of us actually have about the past. While people like James Frey and Augusten Burroughs have draw intense criticism, the truth is that most memoirists probably have made up something. In particular, any memoir author that recreates detailed conversations is probably stretching things.
Try this experiment: pick up the phone, call your spouse or a friend and talk to them for five minutes. Then, sit down a half hour later at your computer and try to reconstruct any part of the conversation with any accuracy. Good luck with that. Even if you take notes, you'll find yourself struggling to be remotely accurate in recalling the dialogue.
Or another experiment: Try to remember what a close colleague wore to the office yesterday. Heck, try to remember what you did last weekend.
Memoir after memoir features verbatim conversations from years or even decades earlier. Such dialogue is appealing to readers, since it makes the book read more like a novel. Ditto on all the vivid details.
And here is my point: a big reason that memoir sells is because it can be as captivating as fiction, but it's a true story. Take away the dialogue and the details, and you'd have a bunch of clunkers.
I'm not saying that great memoirs can't be written that are 100 percent truthful. Only that this is very tough, and most writers don't even try.
The Feds sure know how to take their time when it comes to rounding up the hedgies engaged in insider trading. It's been months since Joseph "Chip" Skowron's name first surfaced as a hedge fund star who obtained information from a French doctor that he used to help his fund avoid $30 million in losses. Since then, the healtchare fund he ran at FrontPoint collapsed as investors bolted for the doors.
But it wasn't until today that Joseph Skowron was actually charged by federal authorities.
Skowron has attracted attention for his medical background, his Harvard credentials, his luxurious lifestyle, and the fact that he was among the first hedge fund people to be named in the latest round of investigations. In short, Skowron was a notable case of greed gone wrong.
Still, there has been a fair degree of murkiness about the details of Joseph Skowron's alleged crime. Earlier reports made it sound like Skowron had gotten a tip and acted on it improperly. But when the SEC released its detailed criminal complaint against Skowron today, it instantly became clear this was a far more deliberate act of insider trading -- involving envelopes of cash, no less.
You can read the full indicment of Skowron document below. But here are excerpts from the SEC's summary:
The Securities and Exchange Commission today charged a former hedge fund portfolio manager with insider trading in a bio-pharmaceutical company based on confidential information about negative results of the company’s clinical drug trial.
The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least $30 million in losses. . . .
The SEC previously charged the medical researcher – Dr. Yves M. Benhamou – who illegally tipped Skowron with the non-public information and received envelopes of cash in return according to the SEC’s amended complaint filed today in federal court in Manhattan to additionally charge Skowron. The hedge funds, which have been charged as relief defendants in the SEC’s amended complaint, have agreed to pay $33 million to settle the charges. . . .
According to the SEC’s amended complaint, Benhamou served on the Steering Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C. While serving on the Steering Committee, Benhamou provided consulting services to Skowron through an expert networking firm. But over time, he and Skowron developed a friendship. By April 2007, many of their communications were independent of the expert networking firm. Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred during Phase 3 of the trial.
The SEC alleges that Skowron acted on confidential information he received from Benhamou prior to the public announcement and ordered the sale of the entire position in HGSI stock – approximately six million shares held by the six health-care related funds that Skowron co-managed. These sales occurred during the six-week period prior to HGSI’s public announcement. Skowron caused the hedge funds to sell two million shares in a block trade just before the markets closed Jan. 22, 2008. Changes to the trial resulting from the negative developments were announced publicly on January 23. When HGSI’s share price dropped 44 percent by the end of that day, the hedge funds avoided losses of at least $30 million.
According to the SEC’s amended complaint, Skowron gave Benhamou an envelope of containing 5,000 Euros while they were attending a medical conference in Barcelona, Spain in April 2007. The cash was in appreciation for Benhamou’s work as a consultant. In February 2008, after the illegal HGSI trades were completed, Skowron asked Benhamou to lie about his communications with Skowron, which he did. In late February 2008, Skowron met Benhamou in Boston and attempted to hand him a bag containing cash in appreciation for his tips on the Albuferon trial and his continued silence. Benhamou refused the cash. However, while attending a medical conference in Milan, Italy in April 2008, Skowron gave Benhamou another envelope containing at least $10,000 in cash that Benhamou accepted.
The SEC is seeking permanent injunctions, disgorgement of any ill-gotten gains with prejudgment interest, and financial penalties against Skowron and Benhamou. Simultaneous with the filing of the SEC’s amended complaint, the six hedge funds named as relief defendants agreed to settle with the Commission and pay disgorgement of $29,017,156.00 plus prejudgment interest of $4,003,669.00 without admitting or denying the allegations. The proposed settlement is subject to court approval.
Earlier this month, the SEC extracted a $10 million settlement from IBM for engaging in bribery to win business abroad. According to the Wall Street Journal:
The commission had accused the company of a decade-long campaign of bribery in Asia, saying employees handed over shopping bags stuffed with cash in South Korea and arranged junkets for government officials in China in exchange for millions of dollars in contracts. . . .
The SEC alleged “widespread” payment of bribes by more than 100 employees of IBM subsidiaries and a joint venture from 1998 to 2009. In exchange for the payments, the Securities and Exchange Commission said, IBM received contracts for computer gear. . . .
The complaint details bribes totaling hundreds of thousands of dollars in cash, laptop computers, cameras, travel and entertainment expenses that were routinely gifted to government officials by IBM employees over the course of a decade in exchange for millions of dollars of government business.
That sure sounds like a pretty brazen violation of federal law that prevents bribery abroad. But in its settlement with the SEC, IBM wasn't even compelled to acknowledge that it did anything wrong. It neither admitted or denied wrongdoing.
So here again -- as in so many cases involving corporations violating the law -- neither the company nor any individual is taking moral responsibility for anything. None of the employees who paid the bribers are being prosecuted or even, for all we know, disciplined by IBM.
Meanwhile, the $10 million penalty isn't a very substantial deterrent to wrondgoing by other companies -- not when the profits from winning foreign contracts can be very lucrative and establish long-term relationship that keep yielding more profits.
Given this kind of slap on the wrist, one wonders why the Chamber of Commerce is so anxious to water down the law banning foreign bribery. After all, it's clearly not very effective.