Unstructured Finance

Essential reading: Derivatives tax plan concerns industry, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

*Derivatives-tax plan concerns industry. John D. McKinnon and Siobhan Hughes – The Wall Street Journal. The Obama administration’s proposal this week to change the way some derivatives are taxed signals common ground with Republicans on a potentially difficult and divisive tax issue that could have far-reaching implications for investors. Link

* Ex-KPMG auditor freed on $150,000 bond in tips-for-cash scheme. Emily Flitter – Reuters. U.S. authorities filed criminal and civil charges on Thursday against Scott London, who is accused of passing non-public information about five of KPMG’s clients to a friend. Link

* KPMG says it plans legal action. Michael Rapoport – The Wall Street Journal. KPMG LLP plans to take legal action against Scott London, its ex-partner accused of insider trading, said John Veihmeyer, the Big Four accounting firm’s chairman and chief executive. Link

* Insider trading probe impact on KPMG expected to be short-lived. Nanette Byrnes – Reuters. KPMG will suffer some financial and reputational damage from insider trading charges filed against a former senior audit partner, but significant legal liability for the firm was unlikely, said audit industry experts on Thursday. Link

* A plot twist at Herbalife draws in the auditors. Floyd Norris – The New York Times. With KPMG gone, it will be interesting to see which firm signs on as Herbalife’s auditor. Link

Insider trading—it’s not just hedge funds

Sometimes it seems that insider trading cases are all about hedge funds. After all, the overwhelming majority of the federal government’s multi-year crackdown on insider trading has netted dozens of traders and analysts working in the $2.25 trillion hedge fund industry.

But this week’s escapades involving a former top audit partner at KPMG and his golfing buddy are reminder that the temptation to profit from inside information exists in many industries and professions.

Still, senior hedge fund reporter Svea Herbst-Bayliss reminds us in the following post,  a recent survey found a good portion of people who labor for hedge funds harbor private doubts about the integrity of their colleagues. If the numbers expressed in this survey are anything close to accurate, law enforcement should be busy for quite a while longer.

Essential reading: Middle class tax hikes loom in Obama proposal despite pledge, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * Middle class tax hikes loom in Obama proposal despite pledge to avoid them. The Washington Post. President Barack Obama proposed a 2014 budget that, if adopted, would break his promise to avoid any tax increases for middle- and low-income people. Link

 * Fund managers warn on taxes in Obama budget. Stephen Foley and Dan McCrum – The Financial Times. President Barack Obama surprised Wall Street by backing a plan that would force investors to pay tax on unrealized derivatives gains, opening up a new front in his attempt to raise revenues through a reform of the tax code. Link

* Hollande creates a prosecutor for fraud and vows to end tax havens. Steven Erlanger and David Jolly – The New York Times. French President François Hollande on Wednesday announced the creation of a position of special prosecutor to pursue cases of corruption and tax fraud, and vowed to eradicate tax havens “in Europe and the world.” Link 

Essential reading: Luxembourg backs info exchange in fight against tax evasion, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Luxembourg agrees to automatic information exchange to help fight tax evasion. The Washington Post. The initiative, which is to start in 2015, follows international pressure on Luxembourg to end its policy of banking secrecy that critics say has helped people hide money from tax authorities. Link

* FBI probes trading as KPMG quits Herbalife, Skechers audits. Martinne Geller and Emily Fitter – Reuters. In a blow to one of the world’s largest accounting firms, KPMG said it resigned as auditor of two U.S. corporations amid an FBI investigation into insider trading allegations involving leaked information and a former senior partner. Link

* Golf pal chats led to probes. Hannah Karp and Jean Eaglesham – The Wall Street Journal. Scott London’s path from KPMG LLP partner to subject of insider-trading investigations began with a casual conversation in 2010 with “someone I’d known from the golf club, ” he said in an interview. Then the FBI called. Link

Essential reading: Senator Baucus takes on tax code, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * Sen. Max Baucus moves to reshape tax code. Lori Montgomery – The Washington Post. Last month, Senator Max Baucus summoned members of the Senate Finance Committee to a closed-door meeting to discuss the first full-scale rewrite of the 5,600-page U.S. tax code in more than 25 years. After two years of watching President Obama and congressional leaders take on tax policy and other areas of the committee’s vast jurisdiction, the panel’s chairman is reclaiming his turf. Link 

* KPMG fires L.A. partner over alleged insider-trading tips. Michael Rapoport – The Wall Street Journal. KPMG LLP has fired a senior partner in its Los Angeles office, saying the unidentified partner had provided inside information about its clients to someone who had used that information in stock trading. The firm has also resigned as the outside auditor of two of its clients because of the actions of the partner, who it described as the partner in charge of its audit practice in its Los Angeles business unit. Link

* Louisiana Governor Bobby Jindal delays controversial tax plan. Reuters. Jindal said he would park his plan to get rid of the state income and corporate taxes and replace the lost revenue with higher and broader sales taxes, deferring to the Legislature on the issue. Link 

Essential reading: Small businesses shrug off Obamacare delays, and more

Welcome to the top tax and accounting headlines from Reuters and other sources.

 * No big deal? Small business groups shrug off delays to Obamacare’s health care exchanges. J.D. Harrison – The Washington Post. The Obama administration has delayed part of the health care law designed to give small business owners and employees more flexibility when purchasing insurance, which could temporarily undermine lawmakers’ intent to drive down the cost of health coverage. Link  

* Why we support a revenue-neutral carbon tax. George Shultz and Gary Becker – The Wall Street Journal. Coupled with the elimination of costly energy subsidies, it would encourage competition. Link 

* Tax lobby builds ties to chairman of U.S. Senate Finance Committee. Eric Lipton – The New York Times. Restaurant chains like McDonald’s want to keep their lucrative tax credit for hiring veterans. Altria, the tobacco giant, wants to cut the corporate tax rate. And Sapphire Energy, a small alternative energy company, is determined to protect a tax incentive it believes could turn algae into a popular motor fuel. To make their case as Congress prepares to debate a rewrite of the nation’s tax code, these businesses have at least one strategy in common: they have retained firms that employ lobbyists who are former aides to Max Baucus, the chairman of the Senate Finance Committee. Link

Pacino, Papandreou, Panetta, Paulson: Welcome to SALT 2013

The SkyBridge Alternatives Conference – the annual hedge fund blowout better known as SALT, is a month away. And the official agenda for the three-day bacchanal, which sees thousands of hedge fund investors, allocators and hedge fund hangers-on descend on Las Vegas in the second week of May, has been released.

Many regular SALT-goers will tell you, of course, that as the event has grown in popularity its official agenda has become but one part of the conference. A sideshow to goings-on inside the Bellagio are the unofficial meetings going on outside, in the hotel’s poolside cabanas.

But SALT gate-crashers – a growing group of people who don’t pay for tickets to the conference but rock up to the Bellagio to network poolside with SALT’s paying guests – will be disappointed to know that the cabanas are a costly and official part of the event this year. The bungalows were all scooped up by SALT organizers, according two people familiar with the plans, and offered to guests for $20,000 for duration of the conference, as part of a sponsorship package that includes branding and passes to attend the event.

“I’m from the Treasury, and I’m here to help”

Ronald Reagan famously said that the “nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” But according to a report from SNL, the government may actually help banks when it forces them to add directors to their boards. Every bank CEO’s worst nightmare is having the government name directors to his or her board. Usually, banks pack their boards with clients or prominent people that offer prestige and potential business leads, but little substantive oversight. At the smaller banks that SNL is focusing on, that often amounts to people like the owner of the local car dealership, or the owner of the local golf equipment seller. (For a stereotypical example of a community bank’s directors, consider the board of Smithtown Bancorp, which was sagging under the weight of failed loans before being taken over by People’s United Bank in 2010.)
The Treasury, on the other hand, tends to appoint people with actual banking experience, who can do what board members are supposed to do: keep an eye on management for the benefit of shareholders. The government only does so for banks that have lost their way: the Treasury has the right to name directors to boards of banks that received bailout money under the Troubled Asset Relief Program, and that missed six quarters of dividend payments. Typically, these appointees are bankers with more than 20 years of experience.
By SNL’s reckoning, the banks with Treasury-appointed directors have racked up median stock gains of 50.38 percent since taking on the new board members, compared with a median gain of 28.22 percent in an index of bank stocks.
Of course there may be other reasons for this outperformance – for example, it may be that small bank stocks in general have outperformed larger bank stocks over the relevant time frame, or that relatively weak banks have been in greater demand from value investors betting on an improving economy. But it may also be that the government has found a fix for the principal-agent problem at banks that have stumbled into trouble.

The burden of being SAC Capital’s “Portfolio Manager B”

Michael Steinberg, the SAC Capital Advisers portfolio manager who was arrested at the crack of dawn last Friday morning probably envies former Goldman Sachs trader Matthew Taylor’s rush-hour surrender to the Federal Bureau of Investigation on Wednesday.

While Steinberg was led away in handcuffs as a Wall Street Journal reporter took shaky video footage of the scene outside his door at 6am, Taylor sauntered into FBI headquarters in New York on his own, at 8:30am, having had plenty of time to collect his wits with a cup of hot coffee.

The difference between Steinberg’s dramatic arrest and Taylor’s quiet surrender highlights a theatrical strategy the FBI and prosecutors use for big cases. It does not bode well for the other potential targets in the high-profile insider trading investigation into Steven A. Cohen’s $15 billion hedge fund, which increasingly seems to be the primary focus of the government’s attempt to go after wrongful trading in the hedge fund industry.

Steinberg indictment sheds some light on SAC’s computer program that once annoyed some top traders

By Matthew Goldstein

SAC Select may not have been one of SAC Capital Advisors’ best-known portfolios during its brief trading history. But the computer-driven trading program may have been one of the more controversial at Steven A. Cohen’s hedge fund.

Setup by a number of SAC Capital’s algo- savvy traders, including Neil Chriss, who left SAC in 2007 to found Hutchin Hill Capital, SAC Select was designed to piggyback on the trades on some of the hedge fund’s top portfolio managers. SAC Select, which at its peak in 2008 managed about $4.2 billion in hedge fund assets, was discontinued sometime in 2009 or early 2010. The strategy was intended as an added investment benefit for long-time SAC Capital clients.

But SAC Select was always controversial within Cohen’s empire because portfolio managers essentially viewed it as a platform simply copying some of their best ideas, say several people familiar with the strategy. Two people familiar with it said it “pissed off” the human traders at SAC.  Cohen is said to have countered that the computer program was not much different then PMs at SAC being regularly required to share their best “high conviction” trading ideas with Cohen each week.