The SEC announced today (highlighting mine):

The Securities and Exchange Commission today charged a Walt Disney Company employee and her boyfriend in a scheme to sell confidential information about Disney’s quarterly earnings to hedge funds.

The SEC alleges Bonnie Jean Hoxie — an administrative assistant to a high-level Disney executive — and her boyfriend Yonni Sebbag sent anonymous letters in March 2010 to more than 20 hedge funds in the U.S. and Europe, offering to provide pre-release results of Disney’s second quarter 2010 earnings in exchange for a fee. Some hedge funds alerted the SEC, which immediately worked with the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation (FBI) to investigate. The FBI set up an undercover operation and made several contacts with Sebbag who offered to sell the information, in one instance for $15,000 and in another for half the expected trading profits.

In early May, Hoxie obtained confidential information concerning Disney’s quarterly earnings and provided it to Sebbag, who in turn sold it to an FBI agent posing as an investment manager.

If this were Hollywood, you could write the script: the hedge-fund guys would be in dark suits or khakis and loafers, rubbing their hands together with glee at getting such an offer. They would be picking upt the phone to call a trading desk, not the SEC.

But that’s not what happened. Props to the hedge funds (they’re not identified by the SEC) that did the right thing and called the authorities.

From the SEC complaint:

Plaintiff Securities and Exchange Commission (the “Commission”) alleges the following against Defendants Yonni Sebbag (“Sebbag”) and Bonnie Jean Hoxie (“Hoxie”):

SUMMARY
1. This case involves a brazen scheme to sell material non-public information to various hedge funds with the expectation that the funds would trade based on the information provided. The defendants are Hoxie, an administrative assistant to a high-level executive at The Walt Disney Company (“Disney”), and her boyfriend, Sebbag. Beginning in March 2010, the defendants sent numerous hedge funds anonymous letters offering to provide the funds with inside information about Disney’s quarterly earnings in exchange for a fee. In early May, Hoxie obtained pre-release results for Disney’s second quarter 2010 (“2Q-2010”) and provided it to Sebbag. Sebbag then sold the confidential information to an undercover agent from the Federal
Bureau of Investigation (“FBI”), who was posing as an investment manager. Sebbag offered to provide the undercover agent additional inside information about Disney on a regular basis in exchange for a share of the profits that the investment manager obtained from trading on the information. …

… FACTS
The Plan
9. Beginning in early March 2010, various hedge funds, including several in New York, received letters from an anonymous sender claiming to be able to obtain pre-release access to Disney’s 2Q-2010 quarterly earnings report and offering to share such information prior to its public release for a fee. The letters, post-marked from Los Angeles, California, stated:
Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is eilatcap@gmail.com. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.

10. At least twenty hedge funds, including funds based in several U.S. states and European countries, received the same or substantially the same letter.

11. FBI agents set up an undercover operation and contacted the sender of the anonymous letter to express interest in such an arrangement. The FBI agents identified themselves as traders who had received the anonymous letters and were interested in receiving the Disney information in return for compensation (the “Putative Traders”).

12. Sebbag, using the alias “Jonathan Cyrus,” responded to the Putative Traders and commenced negotiations that ultimately resulted in the sale of Disney’s confidential information to those traders. …

I note that the pickup of this story on FT Alphaville drew this comment:

I think its funny how they [must have] thought that all 20 hedge funds wouldn’t alert the authorities - as in they thought all hedge funds are crooks.

Good point: it’s one thing to be so foolish as to think you’re going to get away with insider trading; it’s even dumber to think that there are many others as foolish as you.

On a day when the market stands at rest to honor the birthday of Dr. Martin Luther King, Jr., here is a fine appreciation of Dr. King written by Dr. Robert Bruner, dean of the Darden School of Business at the University of Virginia.

Dr. Bruner writes persuasively about the enduring lessons of a speech Dr. King delievered in December 1956, “Facing the Challenge of a New Age.” An excerpt from the blog post:

King’s speech implies that he foresaw that racial integration was just a piece of the larger integration that would take place in the world. Technological innovation permits conversations and the exchange of ideas outside of the former mainstream media—as Iran and China discover today. A rising standard of living induces democratization—people want a say in governing their own institutions—and engages minorities into the governance processes. Economic integration globally, regionally, and locally hastens the exchange of ideas and best practices, and disrupts old economic conditions. …

King said, “In the new age we will be forced to compete with people of all races and nationalities.” No country can build a wall high enough to keep out the impact of these changes in the world. We must get out and compete in this world, not hide from it.

In the face of these changes, King would say that it matters less how big and powerful you are. It matters how good you are. What is the quality of your work? How effective are you? What is your reputation?

King would also ask, “Are you doing your best wherever you are?”

All good questions that each of us should ask ourselves today, and every day.

I’ll be out of the office until 20 April, so posting here will be a little lighter than usual.

In the meantime, when did they start putting glitter in the egg-coloring kits? That’s kinda neat. Move over a little, let Dad take a look. C’mon, take it easy, you’re not using this egg right now, are you? Hey, I wanted to use the purple! Then a little dip in the yellow; wow, look at that color! Whaddaya mean, aren’t I too old for this? Where is that written? I’m just supposed to put together the cardboard egg-drying stand? Do you think that’s fair? Hey, is my egg coming out great, or what? No, that’s a baby-chick face I drew with the crayon; it does NOT look like Darth Vader! Hey, when do we put the glitter on? Wow, isn’t this fun? Wait, what are you doing…there’s no need to yell for your mother. What, honey? No, we’re having fun, everything is fine. Really! Right, kids? I said, right? Well, yes, OK dear, it’s their stuff.

OK then. Guess I’d better wash up. Glad I could help. You kids finish up the rest, OK?

I said, OK?

Hey, don’t everybody look at me like that.

Maybe there’s a ballgame on.

Seriously, happy holidays to everyone celebrating one these days.

Today in NYSE History (NYSE.com)
08 April 1890 — Junius S. Morgan, patriarch of the Morgan banking family, died, leaving his financial empire under the leadership of his son, J. Pierpont Morgan.

By “begins,” I mean the day that J. Pierpont took over the bank. This is a timely anniversary, because the man has been mentioned a lot lately, as some people today (understandably) wish aloud for some larger-than-life figure to step in, deus ex machina, and resolve the financial crisis, as Morgan most famously did with the Crisis of 1907.

Most recently, Jean Strouse, author of the excellent “Morgan: American Financier,” wrote an op-ed in the New York Times that recalled Morgan’s actions in 1907 and drew parallels and contrasts with the work of today’s government and private-sector financial leaders. The most notable contrast, of course, was the episode when J. Pierpont locked 50 bankers in his study and wouldn’t let them out until they agreed to a finance a loan to get the nation through the 1907 crisis. Unfortunately, solutions aren’t that simple today, as Ms. Strouse noted.

My friend Bart Ward alerted me that Ms. Strouse will be at the Museum of American Finance on 14 April to talk about, “What Would Morgan Do? Financial Crises Past and Present.” I’d love to hear that and would bring my book to get autographed, but I’m on vacation next week.

The other Morgan item that caught my eye recently was also in the Times: Alan Feuer’s “Rooms” column about J. Pierpont’s study and the accompanying interactive feature that gives you a must-see, panaromic view of the room. Incredible place for an incredible event. And if you’re going to be locked up somewhere for the night, having to figure out how to rescue the world, not a bad place for that to happen.

Larry Tabb, founder and CEO of the eponymous financial-market research and advisory firm, has a provocative and strongly worded article in the new Advanced Trading magazine. Excerpts:

… Starting with Reg FD, through decimalization, Reg NMS, the Analyst Research Settlements and Sarbanes-Oxley, regulators and legislators have made it virtually impossible to raise equity capital, invest in publicly owned small and midsize companies, and provide investor liquidity. While these rules were intended to promote free and fair markets, they all have had unintended consequences: They have broken the intermediary (broker-dealer/market maker) business model.

Who cares about the intermediaries? Aren’t they just speculators? Yes, but they are regulated speculators chartered to bridge demand and dampen volatility. In a world long ago (pre-2000), intermediaries developed research, underwrote new issues, supported securities in the secondary market, and provided insight to investors and corporations. All of these services have been undermined. …

Read the full article for Mr. Tabb’s discussion of the difficulties of research and capital raising; for this space I’ll focus my excerpting on his commentary about trading:

… On the trading side, U.S. equity markets have seen spreads collapse, liquidity fragment and commissions decline. Isn’t this a good thing? Yes, but the regulation, technology and competition that lowered trading barriers also have made it virtually impossible for market makers to display large blocks of liquidity. Without the ability to show size, liquidity has disappeared into dark pools, and the transparent market has become supported by less capitalized and less regulated shadow market makers (i.e., hedge funds and proprietary trading shops) that have no mandatory vested interest in the marketplace.

So what happens when the large dealers cede market making to smaller, more-automated and less regulated firms? First, these shadow market makers have less capital; less capital means less size, and less size means more volatility. Second, as opportunities vanish, dealers shift their focus elsewhere. As banks lost their ability to profit in the equity markets in the roles of market makers and agency brokers, they have shifted their resources to proprietary trading and other less transparent trading strategies.

Mr. Tabb’s principles for rethinking market regulation:

We need to develop incentives for capital formation, price discovery, smooth capital transfer and better risk management, and ingrain them into the underlying framework of the markets. And if this means private equity may suffer because there are greater opportunities to raise capital in the stock market, or proprietary trading shops and hedge funds need to be regulated as market makers, or investors need to sacrifice low commissions for less volatility and greater liquidity — so be it. Unless we rethink market regulation from the ground up, we will just be placing Band-Aids on a damaged market and will be doomed to repeat the sins of the recent past.

Do you agree or disagree? As always, your views are welcome in the comment box below.

A Linkstock of items I’ve been meaning to post:

Measuring arbitrage in milliseconds (Dow Jones Newswires) — High-frequency traders (who do the majority of the share volume these days) talk about arbitraging between one exchange and another that is milliseconds faster in trade execution.

How to look at the Dow (Portfolio) — Felix Salmon calls it “silly but ubiquitous.”

Adapt, Change, Survive - The DJIA Needs Adjustment (Ticker Sense) — Laszlo Birinyi a bit earlier on the same topic.

Ian Bremmer on sovereign defaults (Portfolio) — The peerless Felix again, interviewing the head of Eurasia Group, which particularly caught my eye because we recently announced that NYSE Euronext is offering Eurasia’s global political risk assessments to listed companies.

New York museum opens exhibit on credit crisis (Reuters) — Sounds like a good effort by the museum to demystify the crisis.

Tails of Manhattan (New Yorker) — Delicious tale (tail?) of revenge against Bernie Madoff, served up by Woody Allen. And to think that Paul Kedrosky was saying just last week that no one writes anything funny about finance.

And one more to close out your made-it-through Monday:

Today in NYSE History
30 March 1981– President Ronald Reagan was shot in an assassination attempt; as the news reached the trading floor, the market closed at 3:17 p.m.

Nasdaq’s Greifeld said: “If it’s properly conceived and properly executed, (the uptick rule) certainly can provide some psychological benefit for the market.
– Reuters 12 March (sorry, no link available)

Gosh, that sounds familiar. Where have I heard that before? Oh wait it was here:

Duncan Niederauer, CEO of NYSE Euronext, would like to see the Securities and Exchange Commission reinstate the uptick rule for short sales, even if it’s mainly for the sake of bucking up “investor psychology.”
– Traders magazine on 5 March, quoting Duncan speaking on 3 March

Yes, yes, that was it — investor psychology. I thought maybe there was an echo in here.

Apart from that bit of deja vu, I was struck by the following:

Here’s Mr. Greifeld on 2 Oct. 2008, as quoted by Reuters, calling for single-stock “circuit breakers” instead of an uptick rule:

“The uptick rule … would be in the marketplace all day every day having a negative effect on the fairness and efficiency of the marketplace,” Greifeld told issuers and media on the call.

Then here’s SEC Chairman Mary Schapiro yesterday, 11 March, quoted by Associated Press via Yahoo! Finance:

Dramatic changes in the global economy may merit restoring a federal rule aimed at preventing a massive plunge in a stock price caused by a rush of short sellers, the head of the Securities and Exchange Commission said Wednesday.

SEC Chairman Mary Schapiro said “hopefully” by next month the agency will open for public comment a proposal to reinstate the so-called uptick rule.

And finally here’s Mr. Greifeld yesterday, to quote the Reuters article more completely:

Nasdaq’s Greifeld said: “If it’s properly conceived and properly executed, (the uptick rule) certainly can provide some psychological benefit for the market.

“But the uptick rule as it existed in the past does not apply in the post-decimalization world,” he said. Decimalization has made the prices of stocks more specific, complicating any new uptick rule.

Greifeld said he doesn’t expect a reinstatement of the uptick rule to have an impact on trading volumes.

Gotta go now, I haven’t had breakfast. Suddenly I’m thinking of waffles.

Perhaps the biggest irony of the Bernard Madoff case is that Harry Markopolos, the investor-turned-investigator who for years warned other investors and the Securities and Exchange Commission that Mr. Madoff was running a Ponzi scheme, today is haunted by regrets that he was not more effective in getting others to heed his whistle blowing, according to today’s Wall Street Journal.

Mr. Markopolos shouldn’t fault himself; rather, he deserves immense credit and appreciation. He did more than anyone else to sound the alarm. According to the article, he did manage to warn off some prospective Madoff investors. The SEC inspector general is investigating how the agency missed the alleged fraud, but surely Mr. Markopolos bears no blame. He sent the SEC and investors a detailed 19-page analysis, listing 25 red flags about Mr. Madoff’s supposed investment results.

Certainly, any failure to convince others was not due to lack of effort. Perhaps Mr. Markopolos lacked only an effective medium to communicate his warning. Here’s a thought experiment: What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?

We’ll never know the answer, but here’s what I think might have followed:

• The post would have quickly spread far and wide among traders and investors. It’s a small Street, as the saying goes, and an analysis raising questions about the investment results of a prominent name such as Madoff would have sent e-mails flying.

• Those who had money invested with Mr. Madoff — or who were thinking of investing — would have done the same math that Mr. Markopolos had done, undoubtedly reaching the same conclusion. The resulting rush to pull money out and the avoidance of adding new money would have meant a faster end to the alleged Ponzi scheme.

• If indeed there were some fund managers who had invested with Madoff suspecting that something was amiss but going along for the lucrative ride, as Paul Kedrosky has suggested, they would have been forced to confront the newly unveiled facts.

• Would Mr. Madoff have initiated some sort of “retribution” against Mr. Markopolos, as the Journal says that Mr. Markopolos feared? Even an anonymous blogger can be identified. Again, it’s impossible to know. We do know that Mr. Madoff was chairman of Nasdaq, head of one of its largest market-making firms, and that he and others at his firm had advisory roles with regulators. Could Mr. Markopolos have been blackballed by the Street or subjected to greater regulatory scrutiny because he was taking on an industry leader? Mr. Markopolos also could have been sued for libel, and even if his analysis ultimately would have been proven factual and not libelous, defending a lawsuit is an expensive proposition. But it would seem unlikely that Mr. Madoff would risk exposing his alleged scheme by bringing a lawsuit. All in all, however, it’s easy to see how the possibility of regulatory retribution or a lawsuit would have had a chilling effect on a decision to go public. A whistle blower would need some wherewithal to blog his allegations.

That’s a lot of might haves and would haves, I know, but personally, I believe that blogging’s fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.

What do you think?

You have to watch this video of Neil Young’s new song, “Fork in the Road.” It’s funny and cutting all at the same time. There are barbs aimed at Wall Street and corporations and Apple and the music industry and the government and the war and the economy and the repo guys hauling away his flat-screen TV and Neil himself.

The clip shows Neil via a Web cam, singing over a stomping track and offering his five-minute time capsule of what he sees. (Note, there’s a little off-color language.) Impossible to do it justice here, but let me pull out a couple of lines. One chorus goes like this:

There’s a bailout coming, but it’s not for me.
It’s for all those creeps watching tickers on TV.

I have to think he means stock tickers there, not news tickers, but it’s hard to know for sure. That’s probably a distinction without a difference anyway. I do know he likes to hold up a mirror to the world, and the image, to me, is one of a society obsessed with the micromovements of the market and the minutia of the world.

I know, I’m probably reading too much into it, but hey, I’m blogging, work with me!

Another chorus goes like this:

There’s a bailout coming but it’s not for you.
It’s for all those creeps hiding what they do.

Is he talking about Bernard Madoff there? Over-the-counter derivative markets? Crooks? Again, it doesn’t much matter — consider it a call for transparency. Quit being creeps, quit doing business in the dark, let in some sunlight — pretty simple.

Are we listening?

You can dismiss it as “just a rock song,” but personally I think that’s a mistake. Neil Young is not only a big rock star, but a profoundly patriotic guy who is engaged in the issues of the day. He’s turning his old Lincoln into an electric car and he performs at benefits for farmers and the poor and the other left-behind people he sings about. He’s also been a good barometer of what people are thinking; remember, long before the outcome of last year’s election was obvious to anyone, he sang:

Someone walks among us, and I hope he hears the call.
Maybe it’s a woman, or a black man after all.

No business exists without public permission, and in finance that means the trust and confidence of investors and the public at large. The events of the last year have wiped out any good will that the Street might have had. Neil Young has just delivered a little musical reminder that we have a long road ahead to get it back. And if it’s not too corny for me to say it, the road back is paved with transparency and good practices.

Hat tip to RollingStone.com for posting the video and to my friend Ed for sending me the link.

World’s 10 Most Influential and Innovative Companies (BusinessWeek, via David Hunkar/Seeking Alpha) Five of the 10 are listed on NYSE: JPMorgan Chase, Monsanto, Toyota, Unilever and Wal-Mart.

The Role of Venture Capital: Turning Nothing Into Something (Fred Wilson)

Enough Doom and Gloom: 10 Positive Forecasts for 2009 (The Good News Economist via Seeking Alpha)

SEC Broadens Its Prove Of Failures in Madoff Case(WashingtonPost.com)
Bid to Revoke Madoff’s Bail Cites His Gifts (NYT.com)
Prosecutors Seek to Jail Madoff (WSJ.com)

The New York Times could cut its costs by outsourcing some of its business section content? (24/7 Wall Street, via Talking Biz News) Yes, and cut its throat. The Times’s business section is an integral component of the paper’s identity.

And of course, your daily dose of historical trivia follows. Have a good Tuesday, folks.

Today in NYSE History (NYSE.com)
6 Jan. 1933 — The NYSE began requiring an independent audit of listed companies’ annual financial statements.