Not Frenemies (No Way!) Favorite Paradigm From False Flag Financial Brou-Ha-Ha (John Cusack's IN and Your Right to Know Is No More If You Don't Act NOW)

The enemy of my enemy is not my frenemy.

He's my enemy.

(No matter how gently he shoves the knife into my back as I walk away having smiled hopefully at him.)

The sound of Marley's ghost dragging his chains across the floor was the start of Ebenezer Scrooge's nightmare. But old people bound in chains and strangling on cat food seems to be fodder for an Obamian wet dream. While Scrooge was scared into developing a conscience, Obama will only evolve the semblance of one if it is politically expedient for him to do so.

The only thing saving us from his grandiose bargain, for the time being anyway, is that John "Plan B" Boehner is still as crazy as he ever was. The frenemy of our imaginary friend is our friend.

And if you've had any difficulty at all in figuring out who benefitted most from the financial non-meltdown ( but surely the final kiss-off/bye-bye from the boys having ripped off the vast majority of the last decade's profits in the US), you won't after absorbing the telling information contained below.

Matt Levine

Peter Eichler and his firm Aletheia Research and Management seem to have had a good run; Aletheia managed $10 billion and per DealBook “Mr. Eichler’s stellar investment performance attracted the likes of Goldman Sachs and Morgan Stanley, which entrusted him with millions of dollars of their clients’ money.” But now that Aletheia is in bankruptcy everyone’s a critic, and the latest SEC’s complaint makes Aletheia out to be a garden-variety bucket shop with no evident investing abilities.

Such harsh words for such sweet-looking guys. Yet, there's much, much more . . .

The SEC’s main complaint here is that Eichler, the sole and unsupervised options trader – and, apparently, everything trader – at the firm, made lots of options trades that he didn’t allocate for an hour or more after making them. Winning trades were allocated to his personal accounts or those of his friends and employees; losing trades were allocated to the accounts of two in-house hedge funds. There were varying degrees of blatancy here, with the worst being 463 trades allocated after the positions were closed, which returned 11% to favored customers, 17% to Aletheia insiders (including 19% to Eichler’s personal account), and negative 1.7% to the in-house hedge funds. The overall result, across all categories of blatancy, was:

Between mid-August 2009 and the end of November 2011, the Favored Aletheia-Related Accounts and Favored Custom Accounts obtained about $4.14 million in profit on option trades allocated more than one hour after execution, or allocated after the position was closed out (including roughly $2 million in trading profits to Eichler himself), while the Disfavored Hedge Funds lost $4.4 million on late-allocated or “perfect information” trades.

So one thing to notice there is that the net profits, firm-wide, on these option trades were negative $260,000-ish, which, I mean, which would anger you more in a manager, (1) allocating you his worst trades or (2) being a money-loser in the aggregate?

What’s going on here? The SEC might be, um, cherry-picking, in talking about a few million dollars worth of net-unprofitable options trades over three years by a $10 billion, 15-year-old, often-high-performing-then-later-not-so-much investment advisor. This theory would be supported by the second part of the complaint – that Aletheia didn’t warn investors explicitly enough about its precarious financial condition – which is vague and sort of churlish; it’s harsh to get mad at people because they didn’t run around boasting about an impending bankruptcy.¹

On the other hand if you don’t trust the SEC you could trust the market:

At the end of 2008, shortly before the start of the fraudulent options trading alleged herein, the Insider I Fund had net assets of $35.9 million and the Insider II Fund had net assets of $75.6 million. By July 1, 2012, due to subsequent investor redemptions and trading losses – including those sustained as a result of the cherry-picking scheme alleged herein – the Insider Fund I had only $1.3 million in net assets and the Insider II Fund had only $1.4 million in assets

Speaking of cherry-picking, doesn’t it seem like the SEC brings a disproportionate number of customer-screwing complaints² against investment managers who are already pretty much kaput? This makes a sort of sense – the kaput managers are the ones who’ve done the most damage – but of course preventing the damage would make even more sense. Here’s the complaint again:

Aletheia had no polices or procedures to ensure that Eichler allocated options trades at or near the time of trade execution, or that Eichler was not disproportionately allocating profitable options trades to favored accounts of clients or himself, while at the same time disproportionately allocating less profitable or unprofitable options trades to disfavored client accounts.

So … that seems like an oversight no? And not just on Aletheia’s part. Aletheia has been around since 1997,³ and the SEC examines investment advisors every 2-4 years; shouldn’t someone have suggested that they put some policies in place?

Actually, the SEC sort of did:

[The SEC] found that Aletheia, in seeking new business, failed to disclose in 10 RFP responses that it had received deficiency letters from the SEC regarding its failure to show it had most employees sign ethics forms. The [SEC] says Aletheia also failed to make or keep the employee ethics statements despite two SEC deficiency letters in 2005 and 2008.

I think that what that says is that the SEC kept telling Aletheia to put some “don’t screw customers” policies in place, and Aletheia pretty much ignored them.

It’s generally easy to sniff at SEC requirements that you sign ethics statements or put policies in place. Ethics can’t be imposed by signature, and if you want to screw customers, you can just violate the policies. (Especially if you’re the mostly unsupervised CEO.) But! Here it might have helped. You get some paperwork, some policies, some signatures on the ethics forms, and maybe some assistant booking Eichler’s trades says on, say, the 400th trade allocated after the position was closed, “um, Pete, shouldn’t we be allocating these trades to accounts when we open them?”

To its credit, the SEC seems to have tried for years to get Aletheia to do things that might have prevented a customer-screwing that seems to have occurred. It’s just harder to get anyone to take you seriously when you’re going after a successful money manager than when you’re going after one who’s already blown up.

SEC v. Aletheia Research and Management [SEC complaint]
S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients [DealBook]
1. Honestly it’s pretty lame stuff. E.g.:

Aletheia’s November 9, 2012 Form ADV, Part 2A brochure further stated that Aletheia intended to file for bankruptcy to protect itself from costly litigation, to raise additional capital, and to assist in the resolution of Aletheia’s tax and corporate status issues. But Aletheia’s November 9, 2012 Form ADV did not, however, provide a complete account of Aletheia’s precarious financial condition. For example, the November 9, 2012 Form ADV failed to disclose that Aletheia was behind in its payments to its business creditors.

I mean … telling your investors you are planning to file for bankruptcy is not sufficiently clear disclosure that you are in financial trouble? “Well, I knew they were filing for bankruptcy, but not that they were behind on payments to business creditors.”
2. As opposed to insider trading, which targets the wee and the mighty alike.
3. Ooh incidentally this is gonna bother me all day:

Named after the Greek word for “truth and disclosure,” Aletheia was started in 1997 by Mr. Eichler, a former Bear Stearns executive.

How could that be true? How could a language work that way? “I seek the truth and disclosure,” Socrates says. Ugh. Anyway here is Liddell-Scott-Jones.

Remember how much I think of Glenn Greenwald and John Cusack? They're back. And they need your support! Do a good deed at Christmas (and throughout the year). Join this group and ensure your and your country's future.

The Right to Know

By Daniel Ellsberg, John Perry Barlow

Reader Supported News

17 December 12

cantankerous press, an obstinate press, an ubiquitous press must be suffered by those in authority in order to preserve the even greater values of freedom of expression and the right of the people to know." -- Judge Murray Gurfein, Pentagon Papers case, June 17, 1971

In December 2010, WikiLeaks started publishing a selection of leaked U.S. State Department cables through the New York Times, the Guardian, and other traditional media, opening a deep crack in the thickening wall of secrecy that has been forming worldwide around the internal processes of democracy since 9/11. They helped catalyze the "Arab Spring." They struck a blow for the right of citizens everywhere to know what is being done in our names. And they thoroughly freaked out the U.S. Government, sending it into a security spasm of Cold War proportions.

It reminded us strongly of another era, when one of us, Daniel Ellsberg, was called "the most dangerous man in America" by the White House and prosecuted for revealing to the American people what was really going on in Vietnam. Efforts to stop the publication of the Pentagon Papers ended when the Supreme Court declared that the government cannot censor the media from publishing truthful information in the public interest, even if it's classified.

Thus, had the government tried to stop WikiLeaks in court, they would have failed. But they didn't have to. Instead, two individuals, Sen. Joe Lieberman and Rep. Peter King simply took it upon themselves to defund the truth. They successfully pressured Visa, Mastercard, Bank of America, and PayPal to stop processing donations to WikiLeaks, costing it 95 percent of its funding overnight.

When the private financial embargo was imposed on WikiLeaks, it was an act of censorship on them and on everyone who wanted to support their work. But against this extrajudicial sanction, there was no avenue of appeal. Even though Treasury Secretary Timothy Geithner announced that there were no legal grounds to blacklist WikiLeaks, that didn't matter. Amazon, Visa, Mastercard, Bank of America, and PayPal are private corporations. They can do as they please. The closest thing they have to a Bill of Rights is a terms of service agreement no one reads.

While the Internet has broadly enabled those who would increase institutional transparency and accountability, responsible revelation requires more than the ability to dump documents online. Editorial processes are required to separate signal from noise and to expose the guilty without endangering the innocent. It takes actual journalism and actual journalism takes money.

We believe that not only does WikiLeaks need to survive, it must be joined by an array of others like it, edited transparency media that have so far failed to emerge, self-censoring victims of the chilling effects of the WikiLeaks blockade. Moreover, the watchdogs that do exist struggle for backers as brave as they are. The old media fear the fears of their advertisers. The new ones often depend on a few large foundations or donors, who, being from the elite themselves, may hesitate to part its curtains.

The answer, we believe, is to crowd-fund transparency, making it easy and relatively anonymous for the public to support the best watchdogs in one place, setting up a kind of United Way for the Truth.

To that end, a group of us that also includes Glenn Greenwald, Xeni Jardin, John Cusack, and Laura Poitras are launching The Freedom of the Press Foundation. Our goal is to collect deductible donations for a changing suite of scrappy public-interest organizations -- both new and existing -- focused on exposing mismanagement, cruelty, corruption, repression, and criminality in our increasingly opaque institutions.

Our first bundle of beneficiaries - in addition to the still-beleaguered WikiLeaks - will include MuckRock News, which streamlines Freedom of Information Act requests so that ordinary people can file them easily, The National Security Archive, which has been prying open the black boxes of classified information for years, and The UpTake, a combative Midwestern collective of citizen journalists focused on bringing transparency to state and local governments.

We hope our financial support and technical assistance will inspire a host of other edited and secure conduits for anonymously-provided documents that the citizens whose lives and liberties they impact have a natural right to see.

These channels are needed more than ever. In 2011, the U.S. Government classified over 92 million documents, four times more than were classified under George Bush in 2008. Moreover, President Obama's Justice Department has prosecuted more whistleblowers under the Espionage Act than all the previous administrations combined.

When a government becomes invisible, it becomes unaccountable. To expose its lies, errors, and illegal acts is not treason, it is a moral responsibility. Leaks become the lifeblood of the Republic.

Whatever one's opinion of WikiLeaks, every American should be offended that two elected officials, merely by putting pressure on corporations, could financially strangle necessary expression without ever going to court. What happened to WikiLeaks is completely unacceptable in a democracy that values free speech and due process.

We intend to assure that it can't happen again.