Earlier in the week, Kenneth Langone, whose been charged by New York Attorney General Eliot Spitzer for misleading his fellow board members on a portion of Dick Grasso's pay package, said he was willing to settle the case if Spitzer made a public apology to him on national television.

            Spitzer isn't rushing out with a mea culpa, but he will have to bend on something that could be just as significant.

            The judge in the case, Charles Ramos, handed what could be a big victory to Langone, granting a motion from his attorneys that forces Spitzer to provide specifics as to exactly how Langone deceived the NYSE Board when he was chairman of the NYSE Compensation Committee that push through many of Grasso's biggest paydays.

            The significance of  this motion is that two fold. Langone's case is the weakest; he's accused of deceiving on only an $18 million portion of the pay package-which means that the rest was granted in a proper fashion-and his best evidence is a document where some of the language may have been fuzzy.

            More problematic for Spitzer, there appears to be no witnesses to this deception. I have read many of the depositions, particularly of the compensation committee members, and most say that they believe that Langone disclosed all the relevant information and that he deceived no one. One big problem for Spitzer is that when he first brought charges against Langone and Grasso, he billed the testimony of former NYSE Human Resources Chief Frank Ashen as key to his case against both men. But I have read Ashen's testimony, and I couldn't find a single instance where he said Langone deceived the board.

            Spitzer has 14 days to comply with the order, and depending on he answers the questions, there is a chance the case could be thrown out against Langone.

Spitzer's office had no comment on the matter, but it doesn't appear that the Attorney General is backing down from his claim in any way at least not yet. On Monday and again yesterday, he grilled Langone in a depositions, focusing again on what he believed were documents that were alerted in a way to deceive the board on a portion of Grasso's $140 million pay package.

 

                        Charles Gasparino - CNBC

One of the most overlooked aspects of Liberty Media’s pending break up into two companies with two separate tracking stocks is its impact on the battle between the New York Stock Exchange and the Nasdaq stock market over listings.

          As we’ve reported, stock listings are the lifeblood of any stock exchange. They bring in listing fees as well as revenues to the markets whenever stocks change hands. For the NYSE and the Nasdaq, listings are more important than ever because both markets have been locked in a bitter competitive battle that has heated up even more since the NYSE, like the Nasdaq, has become a public company.

          So far, Nasdaq appears to have the edge, particularly in convincing companies that trade on the NYSE to switch their listings to the Nasdaq. Some of the most recent switches include Cadence Design, United Airlines and Charles Schwab.

          You can add Liberty Media to that list. Yesterday I spoke with Greg Maffei the CEO of Liberty who said two tracking stocks will replace both the Class A shares and Class B shares that currently trade on the NYSE. The new tracking stocks will begin trading on the Nasdaq on May 10, he said after the company’s board approves the deal, as expected.

          The New York Stock Exchange had no comment on the matter. Several NYSE officials I spoke said losing Liberty Media won’t be the end of the world. The company’s stock is trading at around $8 a share and stock has traded consistently below $15 a share over the past four years.

          But this isn’t good news for the NYSE, and its stock that has been under pressure of late. While losing Liberty Media isn’t like loosing Exxon Mobil or GE, it does have a sizable market cap, close to $23 billion. I can’t think of a new listing that has come to the stock exchange in recent months that comes close to that size. Meanwhile, a lot of investors believe that at $70 a share the new publicly traded NYSE is way over priced.

If it continues to lose listings of the size of Liberty that sentiment will only grow. Keep in mind that as a public company, the NYSE needs to generate fees and revenues and despite Liberty’s depressed share price, the stock is very actively traded, meaning that trading fees get kicked up to the stock exchange, as well as it yearly listing fee.

          So why did Liberty make the move? Maffei says that at least in part, it’s related to his Nasdaq roots. He was the CFO of Microsoft, one of the Nasdaq’s biggest companies that for years has resisted attempts by the NYSE to switch camps (Former NYSE chairman Richard Grasso even reserved the letter “M” if and when Microsoft jumped ship) But there’s more to the story.

Let’s face it: The NYSE’s marketing effort isn’t what it used to be. For all the controversy over his pay package, Grasso was a tireless marketer; he was in Microsoft’s face just about every other week when he was running the show and his record in winning new listings (and keeping others from jumping to the Nasdaq) was, and is, unmatched, which I’m sure you’ll be hearing more about if the NYSE keeps losing listings.

 

Charles Gasparino - CNBC

 

            Now that the recommendations of the SEC advisory committee on Sarbanes-Oxley have been officially leaked, the big question is whether Chairman Chris Cox will begin implementing the proposals,  the most controversial of which exempts many smaller companies from doing full-blown audits of their books and records.

            Just to recap, the panel is planning to make two broad recommendations. First, companies with a market value of less than $128 million will be completely free of the law’s auditing requirements (currently the cut off is $75 million) In addition, the panel will propose that companies with a market cap of $128 million and $787 million be freed from some, but not all, of these mandates.

            According to my sources in Washington, in his heart of hearts, Cox would loved to adopt wholesale the committee’s proposals. Small companies happen to be the engine of the country’s economic growth.  They’re getting killed by a law that doesn’t differentiate between a Fortune 500 company and one with a market value of $500 million. As a result, “This law has become a free lunch for the auditors,” says one SEC insider.

But Cox won’t be going out on the limb to support the proposal, my sources are telling me, primarily because he knows that to do so, would be political suicide. He has already felt heat from the Sarbanes-Oxley supporters, namely Democrats and unions, who are throwing around a misleading number that the plan would exempt four out of five companies, or 80% of all publicly traded companies, from audits. (What they fail to say is that 80% of the publicly traded companies covers only 5% of the market capitalization of all stocks)

So what will Cox do? People close to the commission tell me he’s considering to two proposals that give him political cover but also start the process of rolling back the most onerous provisions of Sarbox on small companies. One is a proposal by his predecessor Harvey Pitt is to phase in the auditing requirements for smaller companies. As Pitt stated recently on Squawk Box: “Instead of requiring them to have a full blown audit - have their auditors review their internal controls - much like the do when auditors review quarterly reports..."

     Another plan is to give small companies more guidance as to how much of an audit they need to comply with Sarbox. This would have the affect of clarifying what auditors should do so they aren’t just running wild and running up auditing costs at the same time.

            As this debate heats up, and it most certainly will even if the Cox, as expected, proposes modest changes to the law, it would be wise for those who want to resist change to remember that Sarbox was created to make businesses more accountable, not put businesses out of business.

New York AG Eliot Spitzer says he had no choice but to file civil charges against former NYSE Chairman Dick Grasso over his enormous pay package for two reasons. First, a New York State law stipulates that the pay of officials who run non-profits like the NYSE must be “reasonable,” and he’s in charge of enforcing the law. In addition, Spitzer says he was pressured to file the case by John Reed, the former Citigroup chief who replaced Grasso in 2003.

Spitzer says Reed called on him to file charges against Grasso, by handing him a report on the pay controversy prepared by NYSE attorney Dan Webb that took issue with Grasso’s $140 million pay package. At least that’s what he told Jim Cramer on his show Mad Money:

“I had a duty to bring it when John Reed, who was then the CEO/Chairman of the board of the NYSE...walked into my office and gave me the Webb report and said Eliot our board doesn’t want to handle this, you have to. And I read the report and we did our investigation and we determined as a matter of the law we could not walk away from this. We tried to settle, I can’t talk more about it.”           

But Reed is talking more about it, and in a video-taped deposition obtained by CNBC that aired this morning, Reed appears to deny Spitzer’s account:

“It’s not a good description of what happened”          

 

             Reed goes on to say that the he presented the Webb Report both to the SEC and Spitzer and it was Spitzer’s decision to act on it:

“I had gotten a call from Mr. Spitzer saying the he and Mr. Donaldson (William) had agreed the he was going to take the lead in this”

 

             In another part of the deposition, Reed said he would have been just as happy if Spitzer did nothing:

“The Attorney General could have received the Report and thrown it in the wastebasket”

 

            Why is any of this important? Grasso’s attorneys are planning to use Reed’s words to attack’s Spitzer’s rationale for bringing the case, and show that he wasn’t acting in the best interest of the taxpayers of New York State or because Reed and the stock exchange said they needed him to file a case, but because he thought it would advance his political career.

            Spitzer’s office didn’t return telephone calls last night for comment.

 

Charles Gasparino - CNBC

Milberg Weiss Bershad & Schulman, the big class-action law firm, is weighing a lawsuit against the major brokerage firms over the controversial practice of “naked shorting,” CNBC has learned.

          A short sale involves borrowing shares selling them immediately, and the replacing the borrowed shares at some later date, hopefully when the stock drops in value and you can make a profit. Naked shorting involves a short sale where some or all of the shares aren’t borrowed—it’s been a controversial issue thanks to CEOs of small companies who blame their falling stock price on naked shorts. People Patrick Byrne of Overstock.com, say hedge funds have crushed their share price by engaging in naked shorting of their stock.

          But apparently the Patrick Byrne’s of the world aren’t the only ones complaining about the naked shorts. Ironically, the hedge funds are complaining as well. The suit, if filed, would state that the big brokerage firms are charging hedge funds huge fees to develop a full short positions when, in fact, the brokerage firms can’t find enough stock in the market to complete the short position. Instead, the funds are saying that the brokerage firms are creating a false short position by borrowing some of the stock and engaging in a naked short for the rest. The real damages come apparently when the short sale needs to be unwound, meaning that the target stock has dropped in value and the fund needs to pay back the borrowed shares that don’t exist or can’t be found quickly.

    Let me be clear that there are a lot of unknowns here. First Milberg Weiss isn’t sure it wants to file the suit, and I have no idea how much damages will be sought, though a person with knowledge of the matter say it will be significant. Also, I don’t know who the plaintiffs are, though from what I hear it wont be SAC Capital, Stephen Cohen’s firm that is a target of a lawsuit for shorting shares of Biovail Corp.

 

Charles Gasparino - CNBC

Earlier in the week, Citigroup was freed from a one-year ban imposed by the Federal Reserve that prevented the world’s largest financial institution to do what it seems to do best: buy other companies. Citi, keep in mind, came to being through a series of mergers engineered by its former CEO Sandy Weill. The biggest being the deal that brought together Travelers Group (run by Weill) with Citicorp several years ago. Since then, however, Citi was placed in the penalty box because of a string of scandals, one in which involved Weill just before he stepped down as CEO.

Now that his replacement, CEO Chuck Prince, seems to have gotten the company’s regulatory house in order, the big questions people on Wall Street are asking are when will Prince start buying new companies again, and which ones will he target?

            First, let’s start with the when. Recently I interviewed two people who say they have met with Prince on both of these subjects. He recognizes that while the company may be out of the regulatory dog house, it hasn’t quite recovered from the scandals that forced Citi to cough up billions of dollars in fines and other penalties and continues to weigh down on its stock price, which for the past four years has been stuck in a trading range of between $40 and $50 a share, after years of outperforming nearly every major financial company out there.

            There’s no doubt that Citigroup could do a major deal. The company is sitting on over $20 billion in cash and generated $25 billion in earnings last year. Even so, Prince knows that he still doesn’t have “the currency” to make such a move. Translation: the stock has been so wounded that investors will begin unloading shares if he spends big bucks to acquire a big bank. His goal, they say, is it to wait for the stock to improve, preferably to close to $60 a share, before making a major move.

            If and when Prince is able to improve the stock price that’s when you can see him looking to buy a major U.S. bank, these people say, and the name that they and others are predicting is Washington Mutual out of Seattle. The bank has $343 billion in assets, 2,600 retail banking, mortgage lending and other services mostly on the west coast, a key to Prince’s strategy of building branches outside of the NY area according to analysts.

Sources say Prince indicated that Washington Mutual is on his list of possibilities when the time is right. Meanwhile, Prince says he’s likely to look at smaller bank, which was described to me as a “string of pearls” approach that will allow Citigroup to build up retail banking assets, which it desperately needs, by gobbling up smaller banks that won’t scare the market.

One of the oddest things about Citigroup is that it’s undeniably a great company—a cash cow, and yet, it’s stock price acts as if something could go wrong at any minute. Some of that is the fault of the guy Prince replaced, who did a lousy job making sure the place stayed out of trouble. But some of the blame falls on Prince, who unlike other Wall Street CEOs is a lawyer by training, not a businessman.

As a result, Prince will have to show the market that he’s at least as good a salesman as he is a lawyer if Citi can return to former glory.

 

Charles Gasparino - CNBC            

 

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