Wednesday, 27 May 2015

2015-036: Dividend Taxes and Stock Volatility

Otmane El Rhazi, Erin E. Syron Ferris. How do dividend taxes affect stock volatility? In this paper, I use a decrease in dividend taxes as a natural experiment to identify their impact on firm's price volatility. If a risk-averse executive faces price risk through his incentive contract, changes in stock volatility due to dividend taxes may increase agency costs and therefore decrease overall welfare. Stock volatility decreased after the tax cut for firms where an executive has large holdings of shares and options relative to firms where an executive has small holdings of shares and options. Therefore, with a risk-averse executive and risk-neutral shareholders, dividend taxes may exacerbate agency costs. The increase in agency costs will decrease shareholder welfare, which can be partially offset by the use of options in the employment contract. Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

Tuesday, 26 May 2015

SEC Charges New York Lawyer and Two Promoters With Market Manipulation

Otmane El Rhazi,

The Securities and Exchange Commission today announced fraud charges against a securities lawyer who used his New York law office as the headquarters for planning and implementing market manipulation schemes.  Also charged are two stock promoters from Canada who assisted him.

The SEC alleges that Adam S. Gottbetter orchestrated promotional campaigns that touted the prospects of microcap companies and enticed investors to buy their stock at inflated prices so he and his cohorts could sell shares they controlled and reap massive profits.  Gottbetter enlisted Mitchell G. Adam and K. David Stevenson to help him in the last of three schemes he conducted in a six-year period.  They repeatedly cautioned each other about the dangers of missteps that might draw law enforcement attention to the scheme, such as failing to keep secret the identities of Adam and Stevenson.  The three rehearsed stories they would tell if ever questioned by law enforcement.  During one meeting in New York City, Gottbetter complained about the difficulties of stock manipulation but conceded that robbing a bank was the only other way to make so much money so quickly. 

Gottbetter agreed to pay $4.6 million to settle the SEC’s charges.  Stevenson also agreed to settle the SEC charges against him while a case against Adam will be litigated in federal court in Newark, N.J.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Gottbetter, Adam, and Stevenson.

“As a securities lawyer, Gottbetter should have served as a gatekeeper and protected the capital markets and investors from fraudsters.  Instead, he swung the gates wide open and illicitly profited at investors’ expense,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. 

According to the SEC’s complaint, Gottbetter was involved in the manipulation of the stocks of Kentucky USA Energy Inc. (KYUS) and Dynastar Holdings Inc. (DYNA) before teaming up with Adam and Stevenson in July 2013 to utilize their offshore ties for a new and potentially more lucrative scheme.  Together they schemed to drive up the stock price for purported oil and gas exploration company HBP Energy Corp. (HBPE) through fraudulent trades generated by a trading algorithm.  They then planned to launch an extensive promotional campaign featuring multiple call centers, roadshows, and a listing on the Frankfurt Stock Exchange.  After creating the false appearance of liquidity and investor interest, they planned to dump their shares of the stock on unsuspecting investors around the world.  While Stevenson and Adam managed to do some small coordinated trades, the scheme was thwarted before the planned manipulation and promotion could be launched when Stevenson was arrested by the FBI.

The SEC’s complaint alleges that Gottbetter violated Sections 5(a), 5(c) and Section 17(a) of the Securities Act of 1933, and violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint alleges that Adam and Stevenson violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 

Gottbetter agreed to be barred from the penny stock industry in addition to paying $4.6 million in disgorgement and prejudgment interest from ill-gotten gains in the Kentucky USA Energy manipulation scheme.  He consented to injunctions against future violations.  Stevenson also agreed to be barred from the penny stock industry and consented to an injunction against future violations.  The settlements are subject to court approval.

The SEC’s investigation was conducted by Simona Suh of the Market Abuse Unit and Nancy A. Brown and Elzbieta Wraga of the New York office.  The case was supervised by Amelia A. Cottrell and Michael J. Osnato Jr.  The SEC’s litigation against Adam will be led by Ms. Brown and Ms. Suh.  The SEC appreciates the assistance of the Newark Field Office of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the District of New Jersey, and the Financial Industry Regulatory Authority.

Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis

Otmane El Rhazi,

The Securities and Exchange Commission today charged Deutsche Bank AG with filing misstated financial reports during the height of the financial crisis that failed to take into account a material risk for potential losses estimated to be in the billions of dollars.

Deutsche Bank agreed to pay a $55 million penalty to settle the charges.

An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of “Leveraged Super Senior” (LSS) trades through which the bank purchased protection against credit default losses.  Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction (approximately 9 percent) of the $98 billion total in purchased protection.  This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario.  Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection.  Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions. 

According to the SEC’s order instituting a settled administrative proceeding, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether.  For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its LSS positions as though the market value of its protection was fully collateralized.  According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.

“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”

In addition to the $55 million penalty, the SEC’s order requires Deutsche Bank to cease and desist from committing or causing any violations or future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-16.  Deutsche Bank neither admits nor denies the SEC’s findings in the order.

The SEC’s investigation was conducted by Amy Friedman, Michael Baker, Eli Bass, and Kapil Agrawal.  The case was supervised by Scott Friestad, Laura Josephs, Ms. Friedman, and Dwayne Brown.  The SEC appreciates the assistance of the German Federal Financial Supervisory Authority and the United Kingdom Financial Conduct Authority.

Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

Friday, 22 May 2015

2015-035: Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News

Otmane El Rhazi, Lena Dräger, Michael J. Lamla, and Damjan Pfajfar. In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy . Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.