The NEXT big scandal on Wall Street!

Business Week says this is an open secret on Wall Street: Prime brokers with access to information on big trades are tipping off their other traders and their hedge fund clients, allowing them to do a bit of front-running. Does this really go on? Well, it's going to be hard to prove. I am sure it goes on to an extent, especially if the prime brokerage operation and a hedge fund are owned by the same company. The people who are really suspicious are mutual funds. They stand to lose a lot as the bid and ask moves against them subtly but enough to really affect their P&L over the long-term. You have got to think that buyside players with real clout have made this an issue. If it goes on. Do prime brokers really have advance word on mutual fund orders?

Our take on this news: Duh!! Who didn't know this? The financial media does a terrible job reporting and looking into the specifics of the financial industry. CNBC is the worst!!!

Bear Stearns Blogs about hedge fund crisis

Richard Marin, the head of the Bear Stearns unit that ran its hedge funds, is a man in the spotlight. How does he deal with it? In part by writing a blog (invite only now), which the New York Times noticed and wrote about. Some choice entries: On June 23, he wrote he was "trying to defend Sparta against the Persian hordes of Wall Street." And "nothing like a good dog fight 24X7 for a few weeks to remind you why you chose the life you chose." And "the good news is that after two embattled weeks both I and my loyal staff are still standing to fight another day." His work also included some brief movie reviews. The Times chides him for taking in Mr. Brooks during the crisis over its two ailing hedge funds. Not sure how this went over with his boss. The blog was restricted to invited guests soon after it hit the press.

Our take on this news: Do we need to be blogged by an insider whose only interest in to manipulate the inquirers. We wouldn't believe a word his says!!

GLG Settles WITH SEC on Short Sales

GLG Partners Agrees to $3.2 Million Fine to Settle SEC Charges of Illegal Short Selling

London-based hedge fund GLG Partners LP will pay more than $3.2 million to settle charges that it made illegal stock trades in connection with 14 public offerings, the Securities and Exchange Commission said Tuesday.

The SEC said the company made more than $2.2 million in profits over a two-year period -- from July 2003 to May 2005 -- in illegal short sales.

Short selling involves borrowing stock from a broker and selling it immediately, with the hope of buying it back for a lower price and returning it to the broker. The profit is the difference between the price at which the stock was sold and the cost to buy it back, less any commissions and expenses.

The agency said GLG's actions violated the Securities and Exchange Act, which prohibits covering certain short sales with securities obtained from a public offering. Specifically, the law says companies may not sell such securities five business days prior to the pricing of a public offering because it could "artificially distort" the security's market value.

Although GLG did not admit or deny SEC's findings, the hedge fund agreed to a cease-and-desist order and to pay back more than $3.2 million, including profits gained, interest and civil penalties.

The company will also adopt and implement policies and procedures to comply with SEC rules, provide training to employees and designate a senior-level employee to oversee compliance.
"Foreign-based hedge funds that trade on the U.S. markets cannot turn a blind eye to compliance with the U.S. federal securities laws," Antonia Chion, associate director of SEC's enforcement division, said in a statement.

The agency's announcement comes a day after GLG said it will sell itself in a $3.4 billion reverse takeover with Freedom Acquisition Holdings Inc., a blank check company that is established to enter into a merger or acquisition.

The combined company will be called GLG partners and will trade on the New York Stock Exchange.

The deal, which is subject to Freedom shareholder and regulatory approval, is expected to close early in the fourth quarter.

Our take on this news: GLG got off quite easy. How about penalize them from doing business in the U.S. marketplace for awhile?

A second Bear Stearns fund to be bailed out?

Bear Stearns' deal to bail out its High-Grade Structured Credit Fund with a $3.2 billion infusion led to concerns that the second troubled fund was due for a similar parental bailout. While the Bear fund is negotiating with lenders to avoid a collapse of the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, at least one big-name analyst--Guy Moszkowski of Merrill Lynch--has told his clients that he does not expect another big infusion. That would be good news. Moszkowski reiterated his buy recommendation, noting that it is really cheap compared to peers. The bet now would be that the hedge fund ills are contained. There is another view that holds that Bear Stearns might make a good acquisition target right now.

Our take on this news: Tick... tock... tick... tock... tick... tock... waiting for this and other funds to collapse.

SEC Website shows Companies on Terror List

SEC Web Site Shows Companies With Activities in Countries on State Dept. Terrorism List

The government has launched a Web site that allows investors to track whether companies have business interests in countries the U.S. designates as "state sponsors of terrorism."

The Securities and Exchange Commission on Monday introduced the site, which links to information from the companies' most recent annual reports that reference any of the five listed countries.

Iran has the most companies listed at 43, followed by Sudan at 32, Cuba with 22, 19 in Syria, and five in North Korea.

Only two companies -- U.K.-based HSBC Holdings PLC, Europe's largest bank, and Credit Suisse Group, Switzerland's second-largest bank -- had business activities in all five countries. But numerous firms, including Nokia Corp., Siemens AG and Total SA, disclosed activities in multiple countries.

"No investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state," SEC Chairman Christopher Cox said in a release.

Federal law already requires companies to report on any material activities in a country on the Secretary of State's terrorism list and the SEC is now making that information "readily accessible to the investing public," Cox said.

But the existence of a disclosure does not mean that the company directly or indirectly supports terrorism or is otherwise engaged in any improper activity, the SEC said.

The site can be accessed on the "Investor Information" section of the SEC's home page at http://www.sec.gov.

Our take on this news: We believe longtime Wall Street bulldog and wealthy Minneapolis financier Richard Christenson had been advocating to do just this for years! What took so long to do this?

Can an equity firm run a mutual fund?

The news that Nuveen was purchased by private equity firm Madison Dearborn Partners is yet another example of how private equity funds are increasingly going after financial services funds. Nuveen, a highly recognizable brand, says this will allow them to attract and retain talent and accelerate their product and service development plans. It will also make some people very wealthy. But you have to wonder if there's a lot of synergy between a private equity firm and mutual fund company. Madison Dearborn was willing to pay a big 20 percent premium. So it sees something. But what? The company will be loaded up with additional debt, and you have to wonder if the target will really have the wherewithal to finance the major expansion people are hoping for. It may be that mutual fund returns won't be good enough for a private equity company. But we'll see.

Our take on this news: This will be one of Madison Dearborns few mistakes. Excellent equity firm with excellent returns but this will turn out to be a blunder for them and its investors.

SEC probes into Bear Stearns hedge fund.

This is not surprising: The SEC is looking into the well-covered woes of Bear Stearn's troubled credit-oriented hedge funds. Business Week Online reports that regulators are wondering why and how the firm was able to restate the losses of one fund in April. At first, the firm said the losses were in the 6.5 percent range. Three weeks later, according to the magazine, the losses were restated to 19 percent. This is a huge problem. And many think that the reputation of CEO Jimmy Cayne is on the line. It's no surprise that Bear Stearns has had problems both in its proprietary funds and in its prime brokerage operations. This will only compound the issues. There are likely other funds in similar straights. It's fair to say that more fund blow-ups will bring more regulatory interest. You can sense the angst on the part of regulators. Their reputations are also on the line, in a way.

Our take on this news: Where was the SEC to begin with to oversee their behavior in the beginning?

What to make of the Bear Stearns meltdown.

This is not another Long-term Capital Management is it? On the surface, it sure doesn't seem that way. As far as we know, there was no involvement by the Federal Reserve Board or any public officials behind the $3.2 billion cash infusion that Bear Stearns will provide its two troubled hedge funds. So in a sense, the woes of Bear's High-Grade Structured Credit Strategies fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund (the one in really bad shape) actually signifies some progress. But there are worries that perhaps this is the tip of something larger. There are some dependencies and exposures, perceived or real. Note the cancellation of Bear's Everquest IPO, which bought some subprime exposure from the two funds. You have to wonder what will happen to the entire CDO market. It may well be that others are in the exact same position.

Our take on this news: Who cares about Bear Stearns? If you believe in the free-markertplace, let the market take care of itself. Let Bear Stearns go under entirely!

How the rich feel about mutual and hedge funds.

If you're rich, the financial services would like to know how you feel about mutual funds and a host of alternative investments. There have been several attempts to figure it out. A study by Prince and Associates, for example, suggests that the uber-rich scorn mutual funds and even exchange traded funds. In fact, they found that the richest do not invest in mutual funds at all, preferring hedge funds and direct investments in startups. dailyii.com, however, notes that the finding is at odds with a survey by the Spectrum Group that found even the wealthy don't truly "get" hedge funds, and that less than 10 percent owned one. These are not necessarily inconsistent. The top 10 percent could easily account for the bulk of individual money invested with hedge funds. But to complicate matters, Advisor Perspectives has found that, according to their database anyway, the very wealthy continue to hold mutual funds. It all comes down to how you slice the data. Interesting.

Our take on this news: Survey after survey shows what they want. There is NO pattern in the way individuals invest their funds.

Goldman heading for major crisis?

Liquidity is a huge issue at Goldman Sachs--given its highly leveraged structure. So does it deal with the potentially escalating chances of some sort of market meltdown? Bob Berry, a mathematician from Cambridge University, monitors 18,000 computers that constantly report on various market exposures, setting limits based on prevailing conditions, according to Forbes. Another unit monitors counter-parties for their ability to pay. Another unit assesses the likelihood of disasters along the lines of avian flu or a military attack. And then there is the firm's Fort Knox. Goldman has more than $50 billion in government securities of the U.S. as well as Japan and Germany. That in theory could be converted into cash, enough to keep the firm running for at least three months even if it had no receivables.

Our take on this news: Who didn't know of the crisis? Duh!

More on Bear Stearns fiasco

Is Bear Stearns' 10-month-old High Grade Structured Credit Strategies Enhanced Leverage hedge fund now officially dead? It sure seems that way. The latest is that Merrill Lynch has balked at a plan that would require Bear Stearns to inject up to $1.5 billion into the ailing fund in return for agreements that the likes of JPMorgan, Citigroup and Merrill would not demand further collateral for about a year. Merrill didn't go for it and has put about $800 million in bonds held by the fund at what will likely be firesale prices. So this spells effectively the end of the fund. It does not appear that the Blackstone Group intends to go forward with any plays, if it ever intended to at all. Perhaps we're seeing a shift in power that will play out as other credit-oriented funds hit rocky roads. Lenders will certainly have the upper hand and be in a position to dictate favorable terms going forward. You have to think that big lenders might be considering the collateral positions at other funds with preventative medicine on their minds.

Our take on this news: Let hem go under.

Private equity vs. the shorts

It's odd that short-selling is so popular all of a sudden. Short interest on the NYSE topped 3 percent of shares in May. That's the highest level since 1931. It's gotten so competitive that just finding the shares to borrow is proving very difficult. Some might read this as a classic bull sign. They might be right. Another way to see this is as a sign of a classic bull-bear battle. In this case, according to Business Week Online, the battle pits the many shorts, including individual traders, against many private equity funds out there. My guess is that shorts will end up covering soon enough. Most pure short-sellers have been driven out already. Private equity may push out the fashionable shorts. There will be a market top at some point, which will make some short sellers look good--the ones that survive to that point anyway.

Our take on this news: The shorts deserve to be hit!

More on Goldman's hedge fund.

Goldman Sachs' hedge performance has generated some unusual headlines as of late. Now comes news from Financial News Online that inflows to the gilded firm's alternative investment funds amounted to zero in the second quarter. Alternative investment, of course, has been a super success. In 2006, Goldman reported inflows of $32 billion. That came after a terrific performance year. Is this reason to worry? Well, as for the flagship Global Alpha fund, Goldman's CFO David Viniar said that redemptions have been slight. The word is that the fund was down at least 6 percent through May. Last year was a down year--almost 10 percent. Of course, the fund gained 50 percent in 2005. The firm seems to be planning new products that they hope will generate inflows.

Our take on the news: Continue those redemptions and get out of Goldman's fund and every other one you're in!

Bear Stearns' problem in hint of what to come?

The saga of Bear Stearns' High Grade Structured Credit Strategies Enhanced Leveraged Fund is worth following--and worrying about. Recall that Merrill Lynch has given the fund a lifeline of sorts by agreeing to delay the sale of $400 million in securities held as collateral in the Bear Stearns fund. A sale, of course, would have effectively spelled the demise of the fund, which had sold off $4 billion in securities in low-rated bonds, many tied to subprime mortgages. The sale was apparently made to meet some margin calls related to short bets that did not pan out. So Bear Stearns has bought itself some more time here. You have to wonder if we're in for more of this kind of intra-bulge bracket bargaining. Bear is not the only one that will face a rough time. There are fears that all this will ripple through the industry. Stay tuned.

Our take on this news: The hedge fund industry isn't just in trouble, it is in serious trouble. There will more situations like this in the future and will require new regulations for the industry to follow. If they folow the new regulations, history shows that the industry violates regulations on a regular basis.

Bear Stearn's a takeover target?

Bear Stearns has been beaten up pretty good this year over its exposure to the subprime implosion and most recently its earnings. But its stock has flagged to the point now that it has a market capitalization in the $17 billion range and trades at just 1.5 times its book value. Breakingviews.com suggests that it might receive some attention as a takeover target. Certainly, Bear Stearns is a powerful Wall Street brand, one that has been upfront about its mortgage woes. You would expect the firm to work through these issues over the next year or so, if not sooner. But at this cheap price, you have to think that a deal is a possibility. That said, who would the suitors be and how would they approach it? Sell off the prime brokerage operation? It's all a bit murky, but you have to think that some bankers have at least thought about it.

Our take on the news: Bear Stearn's is a complete mess, as are numerous other firms. A complete ovehaul and shake-up is needed, as well as company culture.

Tender offer making a comeback?

Tender offers have become rare in recent years. But after some arcane rules were clarified, it seems that such offers are making a comeback of sorts. The AP notes that through May, about 15 percent of friendly deals involved tender offers, up more than three times from a year earlier. Is this a good way of making hedge funds and others shut up about a supposedly "undervalued" price by a bidder? Maybe so. Tender offers usually offer speed. One can buy a firm much more quickly than it could if it went via the shareholder approval route. But the tender also puts pressure on shareholders to tender quickly, to avoid missing out on the offer, and locking in gains. That's preferable to to the long arduous route of holding out. Two recent deals, for Laureate Education and Biomet, seem to indicate that tenders can reduce shareholder opposition to deals.

Our take on this news: Nothing will shut up hedge fund managers.

Goldman works hard to avoid conflict

There has been a lot of hand-wringing over the many conflicts that top investment banks have when acting as advisor and principal. The big guns have worked it all out and are enjoying the fruits of both. But that doesn't mean there will not be speed bumps. Breakingviews.com chronicles how Goldman Sachs had to work hard to deal with some perception issues in the U.K. It took some criticism for its conflicted role, which earned local bankers a "spank form Hank," as in then chairman Hank Paulson. He told them to shape up. Their new proactive approach was evident during the New Look auction. It worked hard to clear up confusion about its role, even going so far as to deny rumors that it was putting up a consortium to make competitive bid. In general, the private equity side seems to be deferring to the advisory side.

Our take on the news: Goldman's is a conflict period!!

Big Bear Stearn's in Big Trouble

Just when it seemed like Wall Street's top firms had weathered the subprime storm comes news that Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leverage Fund sank 23 percent as of the end of April 30. According to BusinessWeek Bear Stearns' asset management group has suspended redemptions which has investors upset (to say the least). One apparently has been trying in vain to get his money back since February. The fund got caught on the losing end of a big bet on subprime mortgages. In a June 7 letter, Bear Stearns explained that redemptions were not possible because the "company will not have sufficient liquid assets to pay investors." Ouch! Some $250 million in assets were attempting to flee. It's Hail Mary time for the fund. It still has about $500 million, so a lucky run might be enough to put all this under the bridge.

Our take on this news: This is the tip of the iceberg for an entire industry. Bears is only one of numerous large institutions that are in trouble with their hedge funds.

Bears misses earnings, Goldman beats revenue

Bear Stearns seemed to confirm that all the worrying was justified. It missed estimates by a decent margin, driven by poor results in fixed income trading and a large writedown. There has been a lot of hand-wringing over whether Bear was having a tougher time weathering the subprime mess, which clearly have hit its bond operations. As for Goldman Sachs, it beat the revenue and earnings estimates yet again, albeit by a smaller margin than we're used to. Investment banking and principal investments remain strong. But the growth has slowed from the near impossible growth rates the firm threw up last year. So the early take may be that the industry remains strong but that there are finally signs that meteoric surge is finally starting to moderate. This has been the conventional wisdom for a while, and now it seems more justified.

Our take on this news: Both firms are in trouble and will plumment in value from a long history of fixing the books.

Is James Cramer slipping?

Boo-yah! What's going on with Jim Cramer's ratings? According to one measure, his ratings fell to an average of 175,000 viewers in May, a nearly 30 percent drop from the 247,000 a year earlier. In March, he fared much better with an average 255,000 viewers. Interestingly, among those aged 25-54, his average viewership has gone from 88,000 in March to 50,000 in May. For the year, he's down 50 percent. I'm not a TV ratings experts, so I am not sure what's at play here. But you have to wonder if his schtick is getting old. His long-ish article in New York Magazine may be interesting for some. Others might just want the tips. I'd like to see some work on whether the "Cramer effect" is as strong as it once was. That might be a more telling indicator of his popularity, if not his relevance.

Our take on this news: Why should anyone be watching someone who was fined heavily for illegal activity, then given a tv show. Plus, he runs off the mouth about manipulating the viewers for his own benefit! Tell us why anyone should watch or care what he says!