If I were an ambitious securities regulator or prosecutor, I would spend a few minutes each morning reading blog posts with titles like “Why I Quit my Investment Banking Job to Start a Tech Company.” There seem to be new ones every day, and you never know what you might find in them. For instance, if the author discusses his time as a trader at an investment bank and says that he was “uncomfortable with some of the things I witnessed/experienced,” an alert regulator might call him up and ask: Well, what, specifically? Was it mortgage fraud? Insider trading? Spoofing?
I don’t know how the Feds got David Liew but I sure hope it was from his blog post:
Liew resigned from Deutsche Bank in 2012 and in July of that year wrote a blog post called, “Why I Quit my Investment Banking Job to Start a Tech Company,” according to the FBI affidavit. In the post, he discussed his three years of trading, saying he was “uncomfortable with some of the things I witnessed/experienced.”
Liew, who traded precious metals for Deutsche Bank AG in Singapore, pleaded guilty last week to spoofing charges. (He also settled with the Commodity Futures Trading Commission for spoofing and triggering stop orders.) He has agreed to cooperate with prosecutors to go after some of the other things he witnessed/experienced:
In his court plea, Liew described working with others at his own bank and at two other operations. He refers to “The Legend,” without naming him, at another unidentified global bank.
A tip for traders: It might be fun to call yourself “The Legend” for your spoofing prowess, but resist that temptation. “The Legend,” “The London Whale,” “Lord Libor”: All of these are bad nicknames. If you are ever prosecuted for your misdeeds, you want your nickname to be, like, “the Staten Island Minnow,” or “Go-With-the-Flow Pete,” or “Ol’ Whatsisname.”
Anyway, as you might expect, an ex-trader who was disgruntled and indiscreet enough to blog about his discomfort also wrote some dumb stuff in electronic chats. Spoofing is hard to prove without evidence of intent, but it is very easy to prove if you have lots of electronically preserved chats with other traders explaining how you are spoofing:
After trading silver futures on March 29, 2011, Liew wrote to the trader he called The Legend. “Look at silver … all algo play … basically I sold out … by just having fake bids,” according to chats transcribed in the FBI affidavit.
By June 2011, Liew had begun teaching others the mechanics of spoofing, according to the FBI affidavit. In a chat with a trader from an unidentified trading firm, Liew explained how he used high-speed traders to move the market to his advantage. “I just spam … then cancel a lot … its actually stupid … cause im risking … but it gets the job done.”
Sadly his blog post has been deleted, so you and I may never know why Liew quit his trading job to start a tech company, but the important thing is that the FBI does.
Last week, Goldman Sachs Group Inc. got in some public-relations trouble when it came out that Goldman Sachs Asset Management had bought some Venezuelan bonds from the government, arguably helping to prop up President Nicolás Maduro’s … the standard word is “embattled” … government. (One economist worries that the government “might use the money on tear gas against protesters.”) One weird thing about the transaction is that Goldman bought the bonds for 31 cents on the dollar. That’s not that weird; Venezuela is in bad shape, and its bonds are trading well below par.
But it is a little weird to buy government bonds directly from the government at a big discount to par. That’s not precisely what happened — the bonds were issued in 2014 by Petroleos de Venezuela SA, the state oil company, in a private placement to Venezuela’s central bank, which then sold them to Goldman through an intermediary this year — but, economically, it kind of looks like that. The bonds were never sold to an unaffiliated third party for cash until they went to Goldman. When we first talked about the trade, I asked:
What if Goldman had bought brand-new Venezuelan government bonds directly from the government at 31 cents on the dollar? Would those bonds have par claims in any future restructurings?
The traditional answer would be no: If a government sells a new bond for 31 cents on the dollar, then it is an original-issue-discount bond and its claim in a restructuring would be 31 cents (accreting up to par over time). If the government did a restructuring, then someone with a 31-cent original-issue-discount claim could expect to get back only about one-third as much as someone with a par claim, even if that par claim was also trading for 31 cents on the dollar in the secondary market. I am not sure that that traditional answer applies here, since Goldman’s bonds are not new (issued in 2014) and not government bonds (issued by PdVSA), but I am not sure it doesn’t, either.
It’s not just a question for Goldman, though, since Venezuela’s main financing source these days seems to be finding old bonds that it issued to itself and reselling them at a discount:
Venezuela is attempting to resell at a deep discount $5 billion of bonds it originally issued in December through a Chinese brokerage as it struggles to squeeze through a tightening cash crunch, according to investors who were offered the bonds.
The bonds were originally issued “by Venezuela’s government in a private placement to state-run Banco de Venezuela,” so they too have remained within the government; now they’re being shopped at a discount. Which worries investors:
Potential buyers fear that if Venezuela defaults, owners of the 2036 bonds wouldn’t have the same claim as other bondholders because their bonds were issued at discount prices via an intermediary,
The best reason for a company to pay investment bankers tens of millions of dollars to help negotiate a mergers or acquisition is that, if the bankers are good at their job, they can add (or subtract) hundreds of millions of dollars to the sale price. But this is hard to signal in advance. You can’t just walk in to a pitch and say “oh I am really good at negotiating higher prices.” I mean, you can, but anyone can say that; how do you prove it? You can point to data — maybe your deal premiums are higher than other banks’ premiums, for instance — but this data is famously manipulable, and every deal is different, and getting a small premium on a hard deal may be more impressive than getting a big premium on an easy one. You can lay out some of your strategy in the pitch — have a page saying “we plan to contact large sovereign wealth funds and ask them to pay a lot of money” — but that doesn’t really give the client a sense of your ability to think on your feet in negotiations.
More satisfyingly, you can try to build a relationship with the company. This is partly general salesmanship — the more you hang out with the chief executive officer, the more she will feel like she owes you the M&A mandate — but if you actually have negotiating skill, then the CEO might notice it during your relationship. You’ll give the CEO some free advice on negotiating to hire a new employee, or on dealing with an internal business issue, and maybe she’ll think “oh hey this guy is pretty good at giving negotiating advice” and be more inclined to hire you for the big M&A assignment. Or, of course, there is word of mouth: CEOs who are happy with their investment bankers will tell their CEO friends, who will also go hire those bankers.
Best of all, the CEOs who are happy with their investment bankers can tell a newspaper, preferably in colorful language:
Still, one executive whose company used both Goldman and a large universal bank to handle its sale experienced the Goldman modus operandi at close quarters.
“The banker at the large firm had done a ton of free work for us for years so we threw him a few million dollars as bone. But he could not have gotten us the 40 per cent above our all-time high that we got,” he said. “Goldman had the poker tactics, down to telling our management not to even talk to the buyers in the bathroom during due diligence. We went to them when we needed the A team. Other bankers didn’t have their nuts of steel.”
I hope they gave him a discount in exchange for that five-star review! (Disclosure: I used to work at Goldman, and I am therefore biased to favor this sort of shameless glorification of the firm.) Imagine going into an M&A pitch with a pitchbook page saying “we will tell you not to talk to the buyers in the bathroom during due diligence.” That is not a good slide! (Imagine the clip art!) And yet it’s the thing that stuck out to this former client, and that convinced him that Goldman’s skill is what got him a 40 percent premium.