Agency Subpoenas Focus on 4 Rumors That Hit Lehman
The Wall Street Journal, July 28, 2008
The Securities and Exchange Commission is focusing on four rumors that recently circulated about Wall Street firm Lehman Brothers Holdings Inc., as the commission’s investigation into potential market manipulation heats up. In subpoenas recently sent to dozens of hedge funds and others, the SEC asks investment funds for transcripts of phone calls, messages and payroll documents that mention or include the Federal Reserve’s lending to various investment banks.
The rumors suggested that Lehman’s financial health was deteriorating and that it was losing big customers. Lehman executives believe traders who profit when a stock falls, known as short sellers, have been spreading allegedly false rumors about their stock in an attempt to drive down the price. The article mentioned three of the rumors that attracted the SEC’s attention beginning in early June.
- On June 3, Lehman stock fell as much as 14% amid rumors that the firm had borrowed money from the Federal Reserve, a signal it needed to go to the lender of last resort to raise money and shore up its financials. Lehman publicly denied the rumor.
- On June 30, Lehman’s stock fell more than 10% on a rumor that Barclays was making a bid for the investment bank for about $15 a share, below its trading price at the time. The rumor didn’t pan out.
- On July 10, market rumors were that Pimco, a fixed income asset management company and SAC Capital, a large hedge fund, were pulling their accounts from Lehman. Lehman’s stock dropped as much as 21% during the day before rebounding after both Pimco and SAC said they continued to trade with Lehman as usual.
Comment: Market manipulation cases are difficult to prove. Traders constantly talk to one another and share investment information. It is illegal, however, to knowingly spread a false rumor. Authorities must prove that traders knew the information was false and spread it with the intention of profiting from its dissemination.
Indictment Claims Alaska Senator Got Deals From Oil Executive
The Seattle Times, July 30, 2008
Alaska Senator Ted Stevens repeatedly turned to an oil industry executive for free labor on a home remodel, free constructions materials, and even a cut-rate deal on a new Land Rover, according to a federal indictment filed against Stevens. The seven-count felony indictment accuses Stevens of benefiting from more than $250,000 in largesse from Bill Allen, a friend and former chairman of VECO, an oil field services company, and intentionally failing to report the gifts on Senate financial disclosure documents.
The federal Ethics in Government Act requires senators to file financial disclosure statements detailing their transactions during the previous year, including the disclosure of gifts above a specified value. The case against Stevens became public last July when federal agents launched an unusual raid on his Alaska home, searching for evidence about a 2000 remodeling project by VECO and subcontractors.
The indictment offers a more detailed look at a much longer seven-year period in which Stevens is alleged to have taken free labor and other services from VECO without disclosing the gifts. The indictment says that during this period, Allen sought Steven’s help in getting VECO funding for international projects, partnerships with Russia and Pakistan, federal grants and support for a new pipeline to tap into Alaska’s North Slope natural gas. The indictment alleges that Allen turned his oil field service workers into remodelers of Steven’s home. VECO employees helped design and complete a project that jacked up the house, creating a new first floor and greatly expanding its size.
Prosecutors accuse Stevens of filing false statements, rather than bribery, because there is no proof of a “quid pro quo” trading the VECO services for Senate actions, says the criminal division chief. Senator Stevens said, “I never knowingly submitted a false disclosure form required by law as a U.S. Senator.” He also stated that, “I am innocent of these charges and intend to prove that.” Allen, VECO’s then CEO, pleaded guilty to bribery and conspiracy and pledged to cooperate with the Justice Department.
Comment: The investigation became public in 2006 as FBI agents searched the offices of some Alaska state legislators, including Senator Stevens, looking for evidence of the relationship between lawmakers and VECO. The investigation will go on for some time and some of the allegations may be dismissed or modified, but to say the least, it is a mess and an embarrassment for our elected officials. They should be positive role models.
By Roger Eigsti
Institute for Business, Technology, and Ethics