Securities Industry Commentator by Bill Singer Esq

May 22, 2020


Natixis' Equity Derivatives Losses Soar to 250 Million Euros (Bloomberg by Donal Griffin)








https://www.cnbc.com/2020/05/21/zuckerberg-50percent-of-facebook-employees-could-be-working-remotely.html
There are times when the more you consider something, the less sense it makes except it does make more sense but the more you think about it it doesn't -- you know what I mean? Really?? In any event, among the imponderable ponderables is this development involving Facebook as reported by CNBC's Rodriguez:

The company will begin allowing certain employees to work remotely full time, he said. Those employees will have to notify the company if they move to a different location by Jan. 1, 2021. As a result, those employees may have their compensations adjusted based on their new locations, Zuckerberg said. 

"We'll adjust salary to your location at that point," said Zuckerberg, citing that this is necessary for taxes and accounting. "There'll be severe ramifications for people who are not honest about this."

Bill Singer's Comment: Ummm . . . what? I'm going to work remote via telecommuting, so, in essence, I'm working via the Cloud, which, last I understood is everywhere while actually being nowhere. As one of the world's leading online social media companies, Facebook is all about the Internet, which, you know is another one of those things that's everywhere but nowhere. Moving along here, Facebook is proposing to allow its employees to work remotely full-time but compensation will be "adjusted" based upon where they're physically working from even though, if you give it any thought, why the hell does it matter where the remote worksite is if everything is being handled via the Cloud? Not that Zuckerberg hasn't thought this through but why would Facebook give a crap about where a remote worker is working? Oh yeah, sure, I read where he says that he's adjusting salary to take into account "taxes and accounting," but why is Facebook even bothering to "adjust?" After all, if you want to telecommute, why should the employer pay you based upon the cost-of-living from where you're telecommuting? Isn't that sort of an onus on the employee? An employer is offering a base salary of $X per year and allowing you to telecommute. Why should you get paid more or less than $X per year based upon where you choose to telecommute from? And if Zuckerberg is so concerned about being victimized by employees "spoofing" their honest-to-goodness remote location in favor of a higher-taxed more accounting-intense locality, then maybe he should just offer a decent, one-size-fits-all-telecommuters-salary and worry about something like state-sponsored disinformation on his platform or pernicious personal attacks. Or, you know, putting a daily limit on the number of cat pictures you can post or the number of saccharine inspirational messages?

https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html
As CNBC's Fitzgerald reported in part:

The coronavirus rout brought a copious amount of new accounts to online brokers in the first quarter, especially younger investors. Exact reasons for that surge in interest is unclear. Most analysts chalk it up to the attractiveness of the market comeback, but it appears the stimulus money at least played a part.

New accounts at most major online brokers - Charles Schwab, TD Ameritrade, Etrade, Interactive Brokers and Robinhood -  were also likely bolstered by a recent move to zero commissions and fractional trading. 

Schwab saw "monumental volumes" with a record 609,000 new accounts in Q1 and millennial favored stock trading app Robinhood saw daily trades up 300% in March year-over-year. Robinhood also told CNBC "over half" of its customers are first time investors. 

Bill Singer's Comment:  It's an ill wind that blows no good for lawyers. My guess is that all these young investors will learn what all young investors have often learned: 
  • You're more apt to lose your "play" money via day-trading because you think it's a game but it's not; 
  • bulls and bears make money but pigs are led to slaughter, 
  • you're need to perform due diligence before investing; 
  • there's no shame in taking profits;
  • sometimes your investment idea is just wrong and you're a dumbass; and
  • there is a difference among "trading," "investing," and "gambling." 
For all those kids and bored adults trading their stimulus money at discount shops offering zero commissions, good luck recovering your lost money when you argue that you were the victim of "unsuitability"  -- keep in mind that all of your trades were self-directed. 
If you don't think "first time investors" should be trading "stimulus money," then you could pass a law requiring full disclosure by such investors that they are NOT using "stimulus money" to invest. After you do that, make sure to pass the same law prohibiting the sale of lottery tickets to folks receiving food stamps or subsidized housing. Legislating against stupidity is a fool's errand. Ultimately, sometimes folks only learn after pain and suffering. 
Think about it. You're out of work. You're self distancing at home. Your employer may never re-open. You just got a bail-out check from the government. You have rent due. You have utility bills due. And despite all of that, you really, really think it makes sense to open an online account, trade stocks despite never having traded stocks for a living before, and you're going to use the stimulus money to cover your bets? You know the old joke: A mother sees her child playing in a tree. She tells him to come down. He ignores her. She tells him again. He still ignores her. Then she yells at him: "If you fall out of that tree and break your leg, don't come running to me for help!"

https://www.bloomberg.com/news/articles/2020-05-21/new-york-s-luxury-real-estate-winners-and-losers-after-covid-19?srnd=premium
Bloomberg's Tarmy does a nice job of "reporting" rather than merely pandering to those talkin' their books in the real estate industry. 
We are told by some realtors that the pandemic offers an historic, once-in-a-lifetime buying opportunity -- in the city (if that's where they have clients looking to sell condos and co-ops; or, in the alternative, in the suburbs (if that's where they have clients looking to rent/sell homes). If, in fact, there is a generational evacuation of our cities afoot as those running from the COVID crisis panic to the surrounding suburbs and rural areas, then we are potentially looking at the real-estate equivalent of a Diaspora. On the other hand, if the relocation is only temporary, then those who left the cities will return (or largely so). 
Frankly, it can't be both scenaria. Many of those who fled the cities left behind condos and co-ops -- are they now expected to carry two mortgages for a full-time city dwelling and a full-time country place? Will a bank extend such double-duty mortgages to those who may have left behind a failing law firm or brokerage firm or tech business? Assuming that those who now dwell in the 'Burbs opt to stay there, who will be bidding on the city residences that will inevitably be put up for sale? If those in the 'Burbs return to the cities, what happens to the price of the emptied country homes? Ultimately, the safer play is likely the waiting game. 
It's likely going to be a zero-sum game in which either folks who left the cities will remain in place or, in the alternative, the rubber-band will reach its point of extension and snap back most of those who left. If the cities experience a return of population, suburban home prices may fall; if the suburbs retain their newfound populations, city residential prices may fall. Much may depend on the so-called Second Wave of COVID-19. Much may depend upon what "quality of life" returns to the city. Much may depend upon whether the beloved summer home is less so as a four-season abode.

April home sales drop nearly 18%, while decline in inventory pushes prices to a record high (CNBC by Diana Olick)
https://www.cnbc.com/2020/05/21/april-home-sales-drop-18percent-as-inventory-decline-pushes-prices-to-record-high.html
As CNBC's Olick reports:

The supply of homes for sale fell 19.7% annually to 1.47 million units for sale at the end of April. That is the lowest April inventory figure ever. Not only did potential sellers decide not to list their homes, as job losses mounted and the economy shut down, but some sellers already on the market pulled their listings. 

That drop in inventory pushed prices to a new record high. The median price of an existing home sold in April rose 7.4% annually to $286,800. That record does not account for inflation, but is a nominal record-high.

Bill Singer's Comment: The bit of "misdirection" inherent in that data is the question of whether banks will be ready to commit to funding new mortgages -- particularly if a buyer is already burdened by another mortgage for a city home that has been left behind. Similarly, many wannabe buyers may soon learn that their salaries or income is dramatically reduced (if not vanished) as business need to confront the economics or how to reopen profitably and what staff to retain and at what cost. Lost in the panic to flee the cities is that many of those who fled did so while tethered to a long line, which remained attached to the jobs or businesses that operated in the city. If that anchor is cut from the line, those who fled will become untethered and may find themselves without a job, without a business, and without income -- not a compelling balance sheet upon which a bank will lend money for a home purchase. As Olick correctly reports, home supply has dropped because sellers have had to re-think the economics of flight and the logistics of who do we move into a new home if the Second Wave hits during the week we were planning to move? Although there is some suggestion that the remaining inventory is now priced at a "a new record high," I would note my personal ambivalence as to that purported development. Those who could get out, likely have. They are renting or owning that second home outside the city. If they don't return as domiciliaries in the city, I doubt that the "record high" prices will remain so; if they do return, then the supply of homes in the areas that they are returning from will likely increase and with that added supply will come reduced price. All of which suggests, again, an either/or by which housing prices in the 'Burbs will benefit from a diminished return to domiciles in the City; and prices in the City will benefit from a not-coming-back era in the 'Burbs. 

Natixis' Equity Derivatives Losses Soar to 250 Million Euros (Bloomberg by Donal Griffin)
https://www.bloomberg.com/news/articles/2020-05-21/natixis-losses-on-equity-derivatives-soar-to-250-million-euros?srnd=premium
Frankly, it hasn't been a good run for French banks. As Bloomberg's Griffin reports in part about Natixis:

The bank's overall equities division reported a 126% plunge in revenues for the first quarter. The result included a 130 million-euro loss linked to companies cutting their dividends, according to a presentation.

Natixis and its crosstown rivals BNP Paribas SA and Societe Generale SA fared far worse than their U.S. counterparts in the tumultuous first quarter, thanks to their use of equity derivatives known as structured products, multilayered securities that get increasingly difficult to manage as markets fluctuate.

Specter of Negative Rates Is Putting Wall Street Bankers on Edge (Bloomberg by Yalman Onaran and Liz McCormick)
https://www.bloomberg.com/news/articles/2020-05-21/specter-of-negative-rates-is-putting-wall-street-bankers-on-edge?srnd=premium

Bloomberg's Onaran and McCormick report about the growing concern among US banks that negative rates may be the oncoming tsunami from which you can't run away from fast enough or get high enough to survive:

Bank executives constantly decry negative rates, arguing that the benefits to the economy are elusive while the harm to the banking system is significant. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has talked about "huge adverse consequences" of negative rates. European banks, which have suffered on their home turf with below-zero rates since 2014, have warned U.S. policy makers not to follow suit.

SEC Adopts Amendments to Improve Financial Disclosures about Acquisitions and Dispositions of Businesses (SEC Release)
https://www.sec.gov/news/press-release/2020-118
The SEC Adopted a FINAL Rule https://www.sec.gov/rules/final/2020/33-10786.pdf  adopting amendments intended to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.As set forth in part in the SEC Release:

The Securities and Exchange Commission today announced that it has adopted amendments to the financial disclosure requirements in Regulation S-X for acquisitions and dispositions of businesses, including real estate operations, in Rules 3-05, 3-14, 8-04, 8-05, 8-06, and Article 11, as well as in other related rules and forms.  In conjunction with these changes, the Commission also amended the significance tests in the "significant subsidiary" definition in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2 to improve their application and to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant.  In addition, to address the unique attributes of investment companies and business development companies, the Commission adopted new requirements regarding fund acquisitions specific to registered investment companies and business development companies.

https://www.sec.gov/news/public-statement/lee-statement-financial-disclosures-about-acquired-disposed-businesses
In part, SEC Commissioner Lee notes her objections to the amendments [Ed; footnotes omitted]:

Today the Commission amends its rules governing disclosures public companies must provide when they buy and sell businesses. Unfortunately, today's rulemaking does not adequately address the risks of reduced transparency for investors with respect to this activity, nor does it properly examine the potential effects on competition, particularly in the present economic climate where the risks that arise from overly concentrated markets are heightened.

I want to thank the staff for their hard work on this release. I know it is the product of careful analysis, as well as the incorporation of the policy views of a majority of the Commission. While I may not agree with the final rules on balance,I am, as always, appreciative of the diligence and expertise of the staff. I also note that I do not object to the Commission going forward with this rulemaking in the midst of the ongoing economic and social disruption caused by COVID-19. There has been a lengthy opportunity for public comment, at least nine months of which occurred before the COVID-19 crisis began, and any new obligations imposed by the rules will be delayed by several months.

I am, however, concerned that we would push ahead with a rulemaking that will likely facilitate mergers and acquisitions, or M&A activity,without assessing the costs and risks of such activity in two significant regards: the risk to investors of less transparency regarding the economics of an acquisition, and the risk of increasing economic concentration, which is heightened at present where large companies that are better positioned to weather the current economic conditions may pursue predatory takeovers of smaller, struggling businesses.

https://www.justice.gov/usao-sdny/pr/chinese-national-arrested-20-million-scheme-fraudulently-obtain-loans-intended-help
Muge Ma a/k/a "Hummer Mars" as charged in a Complaint filed in the United States District Court for the Southern District of New York
https://www.justice.gov/usao-sdny/press-release/file/1278151/download
with one count each of bank fraud, wire fraud, making false statements to a bank, major fraud against the United States, making false statements, and making false statements to the SBA. In addition to the facts set forth in the DOJ Release's headline above, the Release alleges in part that [Ed:New York International Capital LLC ("NYIC"); Hurley Human Resources LLC ("Hurley"); Paycheck Protection Program ("PPP"); and Economic Injury Disaster Loan ("EIDL"):

From at least in or about March 2020 through at least on or about May 15, 2020, MA applied to the SBA and at least five banks for a total of over $20 million in Government-guaranteed loans for the his companies NYIC and Hurley (together, the "Ma Companies") through the SBA's PPP and EIDL Program.  In connection with these loan applications, MA represented, among other things, that he was the sole owner and executive director of the Ma Companies, that the Ma Companies were located on the sixth floor of his luxury condominium building in New York, New York, and that NYIC and Hurley together had hundreds of employees and paid millions of dollars in wages to those employees on a monthly basis.  In fact, however, MA appears to have been the only employee of NYIC since at least in or about 2019, and Hurley does not appear to have any employees.  In order to support the false representations made by MA in the loan applications about the number of employees at, and the wages paid by, the Ma Companies, MA submitted fraudulent and doctored bank records, tax records, insurance records, payroll records, and/or audited financial statements to five different banks, and also provided links to the Ma Companies' websites, which describe them as purportedly "global" companies.  In the course of these loan applications, MA also misrepresented that he was a United States citizen, when, in fact, he is a Chinese national with lawful permanent resident status in the United States.

Before the discovery of the fraudulent conduct by MA, the SBA approved a $500,000 EIDL Program loan for NYIC and a $150,000 EIDL Program loan for Hurley, and at least a $10,000 loan advance was provided to NYIC.  In addition, a bank approved and disbursed over approximately $800,000 in PPP loan funds for Hurley, which were frozen in connection with this investigation.  As a result, MA sought to withdraw his loan applications from the banks and return the funds.

MA and individuals purporting to work for NYIC have also fraudulently represented to a COVID-19 test kit manufacturer and a medical equipment supplier that NYIC is representing the New York State Government and the Governor of New York in procuring COVID-19 test kits and personal protective equipment ("PPE") to respond to the COVID-19 pandemic.  Among other incidents, in a recorded call that took place on or about May 18, 2020, MA represented, in substance and in part, that his company NYIC was a registered vendor for New York State, among other state governments, and that NYIC had a big team working on a deal for the State.  NYIC is not, however, an authorized vendor of New York State, nor has NYIC been authorized to represent New York State in connection with the procurement of COVID-19 supplies.

A lovely bit of reporting by NBC's Pu. Really drills down into the costs -- both business and human -- of what many are now seeing as a "predatory" online model. As Pu notes in part:

"Small businesses like us need your support in this time of crisis," Stamos writes in each note. "Online apps such as GRUBHUB ARE CHARGING US 30% of each order and $9 or more on orders made using phone numbers on their app or website . . . please help save the restaurant industry by ordering directly with us."

Restaurateurs like Stamos are mounting guerrilla campaigns to persuade customers to skip the delivery platforms they say are squeezing their businesses at a particularly difficult time. Some are looking to use social media to get the word out or coming up with special offers. Others are ditching the apps altogether.

FINRA Department of Enforcement, Complainant, v. Shopoff Securities, Inc., William A. Shopoff, and Stephen R. Shopoff, Respondents (Decision, Office of Hearing Officers Extended Hearing Panel Decision, Disciplinary Proceeding No. 2016048393501)
https://www.finra.org/sites/default/files/fda_documents/2016048393501
%20Shopoff%20Securities%2C%20Inc.%20CRD%20142866
%20William%20A.%20Shopoff%20CRD%201273471
%20Stephen%20R.%20Shopoff%20CRD%205276325
%20OHO%20Extended%20Hearing%20Panel%20Decision%20va.pdf
As set forth in the "Introduction" portion of this 58-page FINRA OHO Decision:

The underlying premise of the Complaint in this disciplinary proceeding is that from December 22010 through March 2017, Respondent Shopoff Securities, Inc., through Respondents William and Stephen Shopoff, defrauded investors to obtain desperately needed cash to prop up a failing enterprise. They allegedly did so by selling $12.47 million in promissory notes to fund the real estate investment business belonging to William Shopoff and his wife. Three of the Complaint's four causes of action allege violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010. The remaining cause of action alleges that Respondents' recommendations were unsuitable in violation of NASD Rule 2310(b) and FINRA Rules 2111(a) and 2010. Based on the egregiousness of their alleged wrongdoing, Enforcement seeks to permanently bar William and Stephen Shopoff from associating with any FINRA member firm in any capacity, expel Shopoff Securities, Inc. from the securities industry, and compel Respondents to disgorge $134,070 in commissions gained from sales of securities they offered to investors through other brokerdealers. 

It is undisputed that Respondents limited their solicitations to 29 family members and friends, all affluent customers who knew Respondents and had previously invested with them. None of the customers lost money or complained that Respondents misled them. The non-family members have been repaid in full with interest as promised. At the time of the hearing, of the $12.47 million in notes issued over roughly six years, about $1.1 million in principal and interest remained to be repaid to several family members. 

After carefully reviewing the evidence presented and the testimony given during the hearing, assessing the credibility of the witnesses, and considering the parties' extensive prehearing and post-hearing briefing and the applicable rules and law, the Panel concludes that the evidence is insufficient to establish the elements essential to prove fraud. Critically, there is insufficient evidence to support the allegations that Respondents made material misrepresentations and omissions, acted intentionally or recklessly to defraud the note purchasers, and recommended the notes without a reasonable basis to believe the notes were suitable investments for the purchasers. 

The Complaint is therefore dismissed.

Bill Singer's Comment: Compliments to this OHO Panel for an exhaustive -- and I mean exhaustive -- Decision replete with sufficient content and context so as to render the findings intelligible and the rationale persuasive. In large part, the Panel wrestled with the Supreme Court's Reves v. Ernst & Young test to determine whether the notes at issue were loan or were securities -- the Panel found that the notes were securities. Having deemed the subject notes to be securities, nonethelss, the Panel found in large part that Respondents did not:
  • misrepresent the use of proceeds,
  • fail to disclose material facts
  • make unsuitable recommendations, 
  • did not engage in fraud,
  • and had no intent to deceive (scienter)
Quintessential Shotgun Pleading and Myriad of Motions in FINRA Arbitration Appeal (BrokeAndBroker.com Blog)
http://www.brokeandbroker.com/5232/Shotgun-Myriad-Wells-Fargo/
A public customer filed a FINRA Arbitration Statement of Claim against Wells Fargo Advisors and asked for no less than $100,000 in damages. The arbitrators found in the customer's favor and awarded about $99,000 in damages and fees. For whatever reasons, the customer appealed the FINRA Award to federal court. The Court looked somewhat askance at a quintessential shotgun pleading and a myriad of motions. Not the dried-out prose of the courtroom. Frankly, a tad poetic.