SquawkBlog: Blog

Did Someone Know Something About BMY?

Wed, 09 Aug 2006 12:50:00 GMT

Shares of Bristol-Myers Squib have tanked in recent days thanks to a barrage of bad news including a federal probe into the recent settlement of a patent dispute and increased competition from a generic version of its popular Plavix blood thinner.

But now regulators are examining whether some investors may have improperly benefited from the company's recent misfortunes, CNBC has learned.

At issue: A huge run up in "short interest" in the company's stock just prior to all the negative publicity that caused shares of Bristol-Myers to slide more than 19% in recent weeks.

Short interest is the amount of stock that is sold short, which allows investors to make money when stock craters. Following a complaint by the company, officials at the NYSE are now examining whether some investors may have had advanced warning of the company's problems when they made their bet, according to people with knowledge of the NYSE's activities.

One thing is certain: The run-up in short interest in the stock is significant. Company officials confirm that short interest equaled 27 million shares on June 15, the last reporting date. By July 15, short interest more than doubled at 47 million shares. The next reporting date is Aug. 15 so the number might be larger, at the moment though, short interest amounts to a whopping 10% of the 2 billion shares outstanding in the company's stock.

More interesting is the timing of the ramp up. Bristol-Meyers recent misfortunes began circulating in the media in late July when the FBI raided its offices in a Justice Department probe of its patent deal with a generic drug maker over Plavix. That began a barrage of negative news for the company including announcements of declining profits, and most recently, an announcement by Apotex that it will indeed release a generic drug to compete with Plavix.

In recent months, regulators have increased oversight of the once lightly regulated market for short selling. The NYSE, for instance, has launched a probe of Vonage's IPO, which sank from $17 a share to around $7 and whether short sellers improperly benefited. Allegedly improper short selling has attracted congressional scrutiny and the SEC has recently tightened rules on so call naked short selling.

It's unclear whether the NYSE interest in the Bristol-Myers issue will lead to charges but one thing is certain, company officials believe someone had advanced knowledge of the problems based on the huge increase in short selling they've discovered just prior to the recent announcements.

Will the Mack-Pequot case be dismissed free of charges?

Wed, 02 Aug 2006 13:46:50 GMT

When the Securities and Exchange Commission closes a case without bringing charges, targets usually get a private, form letter from the agency alerting them that they've been cleared and the case is closed. But that all might change for two high-profile targets of the commission, Pequot Capital and Morgan Stanley CEO John Mack.

CNBC has learned that the commission is considering the unusual, and some would say, unprecedented move of not just officially alerting Pequot and Mack that they are cleared of possible insider trading charges, but also releasing all the evidence in the probe.

The move comes after a former SEC attorney Gary Aguirre went public with charges that he was fired from the SEC when he sought Mack's testimony in an insider trading case against Pequot. Aguirre said he had reason to believe that Mack gave Pequot an insider tip on a pending merger that allowed Pequot, a massive hedge fund run by Mack's good friend Arthur Samberg, make millions of dollars in profits. Both Mack and Pequot have denied the charges.

But people close to the case say the commission's investigation into Pequot and Mack is reaching its final stages. CNBC was first to report this morning that Mack gave his deposition in the case on Tuesday, and the entire matter could be concluded in the coming weeks. Though the investigation is still open, these people say the evidence that Mack offered an insider tip to Pequot is sketchy at best, leading some people at the commission to believe there is not enough evidence to bring charges against the Morgan Stanley CEO.

Of course anything is possible. It's unclear what Mack said during his deposition yesterday before the SEC. It is of course completely possible that Mack provided new details that may cause the SEC's enforcement staff to believe that Mack may have provided a tip to Samberg, which could result in the investigation continuing or at some point, formal charges being filed against Mack, Pequot or both.

But if that is not the case, the SEC enforcement staff is planning to ask the full commission to give the green light to release all the evidence in the case, which includes emails and other documents developed by Aguirre. There are two reasons why the SEC enforcement staff is pushing for a complete disclosure of the evidence. First, the enforcement staff wants to clear its own name from charges that it pulled punches to protect a high-ranking CEO with close political ties to the Bush administration, these people say (Mack, notably, had contributed to the president’s campaign). But also, some people in the commission believe that if there isn't enough evidence to charge Mack, he deserves to have his name cleared. These people say he was unfairly attacked when Aguirre went public before the Senate Judiciary Committee saying he had evidence that Mack gave an insider tip to Pequot but never once showed his cards. Aguirre has said that the SEC warned him not to disclose information from his work at the commission.

Charles Gasparino - CNBC

Grasso loses Brendan Sullivan

Mon, 31 Jul 2006 15:18:46 GMT

For almost three years, Wall Street has been anticipating a major courtroom showdown that would pit "The Enforcer," New York Attorney General Eliot Spitzer, against famed defense attorney Brendan Sullivan in the Dick Grasso over-compensation case. But CNBC has learned that one of the consequences of a recent ruling is that Grasso will lose Sullivan as his attorney once the trial begins sometime next month.

The move comes after State Supreme Court Judge Charles Ramos moved up the trial date of the case to September 5 from October 30, putting what will likely be a six-week courtroom battle in the middle of another case Sullivan is already committed to: The third retrial of former Cendant chairman Walter Forbes by the US Attorney's office in New Jersey.

Grasso is being charged by Spitzer of violating the state not-for-profit law after being awarded a $140 million pay package that led to his resignation as Chairman and CEO of the New York Stock Exchange back in 2003. The law states that the compensation of officials who work at not-for-profits must be reasonable and commensurate with duties performed. Spitzer wants Grasso to return as much as $100 million to the stock exchange, which was a not-for-profit entity before it became a public company earlier this year. The Attorney General also charged former NYSE compensation committee chairman Ken Langone with deceiving the NYSE board on a chunk of Grasso's pay package.

Both Grasso and Langone have mounted a vigorous defense in the case, claiming they've done nothing wrong and that Grasso's pay was fully disclosed to the NYSE board. In fact, Grasso told CNBC that he will be well-represented in the case by one of Sullivan's partners at his firm Williams & Connolly, Gerson Zweifach, who has been handling much of the nitty-gritty of the case including taking depositions and appearing at pre-trial hearings.

In fact, one of the ironies of the ruling last week is that while Langone and Grasso said they have no problem with the new court date, the attorney general's office said the new date may pose problems. Spitzer's lead attorney in the case, Avi Schick, told Judge Ramos that the new date doesn't give the attorney general's office enough time to prepare for what's going to be one of the most closely watched cases on Wall Street in years. Nearly every major Wall Street CEO has served on the board of the stock exchange, and many are expected to be called as witnesses, including former Goldman Sachs CEO and current Treasury Secretary Hank Paulson.

But there may be another reason why Spitzer wants a delay in the trial date; the September 5^th court date comes just days before the Democratic campaign for governor. The expected six-week trial will take place during the height of the New York State gubernatorial race to be decided on election day, November 7. At least for now, Spitzer is considered the front-runner, so the last thing he needs is a high profile defeat in the middle of the campaign.

Spitzer's political priorities could be one reason why Grasso says he isn’t concerned about losing Sullivan and having Zweifach as his lead attorney. "They wont face Cy Young," Grasso told CNBC, "but they will face Warren Spahn, who by the way had a better winning percentage".

Charles Gasparino - CNBC

SEC Chairman Cox and Specter to discuss hedge funds

Thu, 27 Jul 2006 13:03:13 GMT

Senate Judiciary Committee Chairman Arlen Specter is ramping up
his investigation of hedge funds by calling on SEC Chairman Christopher Cox for a private meeting to discuss what he believes is the agency's poor record in cracking down on fraud and abuse in the business, CNBC has learned.

The meeting, which could take place as early as next week, comes after a former SEC investigator, Gary Aguirre, said he was fired from the commission when he tried to take testimony from Morgan Stanley CEO John Mack in an investigation of possible insider tradingby the large hedge fund Pequot Capital. Aguirre has said that Mack was the possible leaker of insider information to Pequot, a charge that Mack denies, and one that at least initially the commission didn't take seriously.

But the SEC recently did an about-face, and has now called Mack to give a deposition in the Pequot case. CNBC has learned that Mack will give his testimony next week, and according to people close to the case, the SEC is concluding its investigation into Pequot. Mack's testimony will be one of the final official acts before the commission decides whether to drop the case or file charges, these sources add.

Specter is expected to question Cox on a number of issues involving Aguirre's investigation, but also the broader issue of how well the commission investigates hedge funds, according to people close to the matter. These people say that while Aguirre doesn't appear to have a smoking gun that points to Mack violating insider trading laws, Specter believes that the agency erred in not taking Mack's testimony earlier, and will likely point that out during the meeting.

One interesting point: Specter's foray into hedge fund regulation could set up a nasty political battle between the Senate Judiciary Committee and the Senate Banking Committee, which has direct oversight of the SEC.

Charles Gasparino - CNBC

Langone to attack Spitzer in court

Mon, 24 Jul 2006 13:23:37 GMT

Ken Langone has been keeping a lower profile in his bid to convince a New York State court to throw out a civil action by the state's attorney general Eliot Spitzer, who says he misled the New York Stock Exchange board over Dick Grasso's $140 million pay package. But all that is about to change as lawyers for Langone unleash a blistering attack on the attorney general and his case in court papers obtained by CNBC.

These arguments will be presented on Wednesday to New York State Supreme Court Judge Charles Ramos, who is weighing Langone motion to have the case dismissed. A decision could come in the coming days or weeks.

At issue for Langone is a civil charge by Spitzer who says the New York financier misled the board of the NYSE when he was the chairman of its compensation committee that granted some of the biggest paydays to Grasso. Spitzer is also suing Grasso, who resigned as NYSE chief in 2003, to have him return as much as $100 million of that deal. But Langone says that Spitzer's case is woefully inadequate, and in his court filing, he issues what may be his strongest rebuttal yet to the AG's charges, accusing Spitzer of everything from mischaracterizing evidence to spreading false innuendo about his relationship with Grasso.

Langone’s best point relates to Spitzer's witness list, or in his opinion, lack of a witness list. Langone says emphatically that Spitzer doesn't have a single NYSE board member on the record saying that Langone had misled him or her. Langone also draws attention to the fact that former NYSE Human Resources chief Frank Ashen, who was initially billed by the AG's office as a key witness in his case against Langone and Grasso, is largely absent from the vast majority of the AG's evidence as presented in court filings. The reason, according to Langone: In his deposition, Ashen is essentially siding with Langone and Grasso, and will do so in court.

Charles Gasparino - CNBC

Mack to testify to the SEC

Fri, 21 Jul 2006 14:38:28 GMT

The Securities and Exchange Commission has notified Morgan Stanley CEO John Mack that the agency plans to take his deposition in the insider trading claim involving Pequot Capital, CNBC has learned. The move is a major about-face for the SEC.

The investigation of Pequot has been a matter of controversy for several weeks after a former SEC investigator, Gary Aguirre, went public with claims that top officials at the SEC quashed his probe after he sought to take Mack's testimony. Aguirre has said that he has evidence that Mack was the likely source of possible insider information given to Pequot that allowed the massive hedge fund to profit off the acquisition of Heller Financial by GE Capital. Aguirre has made these claims in writing to the Senate Banking Committee and appeared at a recent Senate Judiciary Committee hearing on 'hedge funds and independent analysts'.

Morgan Stanley officials were notified by the SEC yesterday in a phone call that the commission is seeking Mack's testimony; Mack is expected to appear before the commission in the coming weeks.

It's unclear what new information, if any, the SEC has uncovered. According to representatives at Morgan Stanley, the company plans to answer all the questions fully in an effort to clear Mack's name in the charges Aguirre has made.

Charles Gasparino - CNBC

Greg Reyes Indictment Today

Thu, 20 Jul 2006 17:18:40 GMT

CNBC has learned that Greg Reyes, former Chairman and CEO of Brocade Communications, is expected to be indicted by the US Attorney's Office in Northern California and is expected to be charged for civil securities fraud by the SEC at a joint press conference this afternoon at 2pm Pacific Coast Time.

Charles Gasparino - CNBC

Greg Reyes is not going down without a fight

Wed, 19 Jul 2006 16:15:25 GMT

Lawyers for former Brocade Communications CEO Greg Reyes are working overtime to prevent their client from being the first casualty of the burgeoning federal investigation into backdating stock options. CNBC has learned that just last Thursday they made a detailed power-point presentation to the US Attorney’s Office in the Northern District of California which laid out key points in their defense, including their contention that Reyes didn't personally benefit from the backdating and their opinion that Reyes is "a good guy."

As CNBC was first to report, Reyes is likely to face civil charges by the Securities and Exchange Commission in its investigation of stock-options back dating. The SEC's enforcement division has issued a Wells Notice to Reyes informing him that the staff has recommended to the full commission that he should be charged in the matter. While the full commission may decide not to bring charges, such moves are rare, and even attorneys for Reyes concede that the SEC will likely file a civil case in days or weeks.

The big question is whether Reyes, who resigned from Brocade more than a year ago, will be charged criminally by the US Attorney's office. Lawyers and representatives for Reyes say that last week they made a last-ditch attempt to get prosecutors to back off during a lengthy power-point presentation made to the US Attorney in San Francisco. According to people with direct knowledge of the presentation, Reyes' lawyers argued that he had little accounting knowledge - he was predominantly a salesman, and even though he had control over the granting of options, Reyes wasn’t conscious of the fact that he was doing something potentially illegal. Further, his attorneys claimed that Reyes relied on the accounting expertise of the company’s CFO and audit committee to serve as a check in his options granting practices.

Reyes’s attorneys pointed to the Board of Directors at Brocade - which was notably advised by legendary Silicon Valley attorney Larry Sonsini - which gave their client wide authority to grant options and provided no guidelines as to how to grant the options. Mr. Sonsini was not available for comment. Though the company was forced to restate its earnings due to faulty accounting of options, his attorneys claimed that “backdating” was only a marginal portion of the restatement.

Meanwhile, attorneys for Reyes called their client "a good guy," as well as a "well liked, respected young CEO" who would make a "sympathetic defendant”. They cited his many charitable donations, which included what they described as an anonymous donation of $1 million to a Brocade fund for victims of September 11.

In an interview with CNBC, representatives of Reyes said that since the enactment of the Federal Securities Act of 1933, there has never been a prosecution, let alone a conviction of a defendant who did not profit from wrongdoing; financial gain is always the motive in securities fraud cases. Reyes’s attorneys claim that there is no allegation of self-enrichment or self-dealing.

Attorneys for Reyes are cautiously optimistic about their chances to stave off an indictment. The US Attorney's office won't comment on the matter, but one thing is certain: CNBC has confirmed that federal officials will bring their first backdating case within a month, and the Reyes case is at the top of their list.

Charles Gasparino - CNBC

Options backdating...let the cases begin!

Mon, 17 Jul 2006 15:29:05 GMT

The Securities and Exchange Commission is ready to pull the trigger on its first stock-option backdating case, CNBC has learned.

People at the SEC as well as several defense attorneys representing targets of the wide-ranging probe say that the commission will file its first case within a month. Although there are around 400 cases of backdated stock options that have caught the SEC’s attention, and about 60 under more intense scrutiny, these same people say one case is at the top of the SEC’s list. That case involves Greg Reyes the former high-flying CEO of technology company Brocade Communications.

Reyes resigned from Brocade more than a year ago, after the company announced an earnings restatement stemming from how it accounted for stock options. Since then he has received what’s known as a “Wells Notice” from the SEC, meaning that the commission’s staff is recommending that the agency file civil fraud charges against him over backdating of options. The full-commission must approve the staff’s recommendation before charges are filed, but attorneys working for Reyes believe that a civil case against Reyes is extremely likely given the tenor of some recent meetings with the SEC.

A bigger question is whether Reyes will face a criminal indictment as well. The US Attorney’s office has joined the SEC in a joint investigation of Reyes’ actions, and Reyes’ attorney, according to people with knowledge of the matter, recently met with prosecutors from the US Attorney’s office from the Northern District of California to stave off an indictment of their client.

How did they do? People close to the Reyes defense team say they are cautiously optimistic that the US Attorneys office may back off from brining a criminal case even if the SEC files a civil case against Reyes, as is expected in the coming weeks.

The controversy surrounding backdating of stock options has been at the top of the SEC’s enforcement agenda for more than six months. Stock options are designed to align the compensation of employees with their company’s performance. They give the holder the ability to purchase stock at a strike price at some future date. A lower strike price allows the employee to make more money if and when shares of the company’s stock rise. The strike price is usually set at the date the stock option is granted.

But if an executive can change the date of the strike price - move it back to a day when the shares are actually lower -- the benefits could be tremendous. The SEC and the Justice Department are investigating whether companies and their top executives committed civil and possibly criminal securities fraud by manipulating these dates.

While Reyes’ actions have clearly caught the eye of civil and criminal authorities, his actions also show that many of these cases are far from cut-and-dry. In a recent meeting with officials from the US Attorney’s office, his lawyers made several compelling points. First, that whatever actions Reyes took, he did not do so for self-enrichment, as has been alleged in other cases. They told prosecutors that Reyes’ action benefited company employees, “including low-employees, staff and secretaries,” according to one person with direct knowledge of the meeting. Because of this, they argued, there is scant evidence that Reyes’s actions showed criminal “intent,” a necessary element of any prosecution.

Reyes, they argued had wide discretion to set the date of the option to any point he wanted.

Charles Gasparino - CNBC

Vonage: Sign Up...Pay Up?

Thu, 13 Jul 2006 16:49:23 GMT

Two of the big questions surrounding the disappointing Vonage IPO, other than why its keeps going lower, is just how many of the company's own customers bought the stock at the hefty IPO price of $17 a share, and have actually paid full cost for the shares.

Ever since its May 24 IPO, Vonage has been keeping mum about its direct to share program, which gave its customers - people who purchase the Vonage internet phone service- access to its IPO. Vonage thought it was doing its customers a huge favor and generating some good publicity. It wasn't so long ago that giving small investors access to an IPO was like giving away free money; shares usually spiked as soon as they were open for trading, and investors made a bundle.

The problem for Vonage and its customers was that just the opposite happened; the stock has been in free-fall since the offering, losing 13% on its initial trading day. It is currently trading under $7 a share, and many customers have balked at paying $17 for a stock that is now worth less than half that amount a mere 6 weeks later.

Publicly, Vonage has been tight lipped about how many people are refusing to pay up. But that may be changing; one person close to Vonage told CNBC that the refusals haven't been as drastic as first thought. This person says that between 60% and 70% of the DSP customers have paid their full amount. The person also says that the exact number will be released in the coming weeks when Vonage announces second-quarter earnings.

Most analysts, however, are unimpressed. What is unclear is exactly how much money these customers have actually paid. Remember, the company set aside 13.5% of its IPO for its own customers. It's unclear if the 60% to 70% represents all the customers who bought the shares -around 10,000-or the total amount of stock set aside in the DSP program. A company spokeswoman declined to provide more details until the release of second-quarter earnings, but its conceivable that most of the DSP remains uncollected even if most of the 10,000 participants paid up.

One thing is certain: Vonage's problems go beyond its problems convincing customers to pay $17 a share for a stock now trading under $7. Competition is growing while the company loses money and patent disputes are eating into the company's bottom line. Meanwhile, the company faces a number of class action lawsuits over its disastrous IPO. One lawsuit, filed by Motley Rice alleges, "both the Company [Vonage] and Company insiders...embarked on an illegal course of conduct to sell shares of the Company in a public market."

Charles Gasparino - CNBC

The Pequot Proof

Mon, 03 Jul 2006 13:35:29 GMT

For my money, the biggest problem with last week’s Senate Judiciary Committee hearing on hedge funds wasn’t what was said, but what wasn’t, namely, the evidence former SEC attorney Gary Aguirre says he has uncovered to justify his allegation that Morgan Stanley CEO John Mack was likely involved in an insider-trading scheme with hedge fund Pequot Capital.

The hearings lasted more than a hour without a single committee member demanding that Aguirre explain how he has reached his conclusion about Mack, that has been the talk of Wall Street ever since the New York Times’ first broke his story. But that doesn’t mean that the evidence, whatever it is, won’t see the light of day. CNBC has learned that not only has the committee requested documents that Aguirre says proves his case, but will also conduct a full review of the information. People close to the committee say its chairman Arlen Spector will also likely issue some kind of statement on the merits of the case he developed.

The move comes after the hearings received a fair amount of criticism for allowing Aguirre to state his case against Mack – namely that he was the likely tipper of inside information that led Pequot to profit off of a merger several years ago – without demanding that he also provide some proof. Both Morgan Stanley and Pequot have denied the charges, and in their denials, pointed out the Aguirre’s lack of supporting evidence. Aguirre, for his part, suggested that he couldn’t provide more details because the SEC had recently warned him about releasing confidential information from investigations.

CNBC has learned that the judiciary committee has requested the documents from the senate banking committee, where Aguirre first brought his case, and will immediately begin its own examination of the evidence once it receives those documents. What that evidence is has been a subject of much debate around Wall Street in recent days. So far, Aguirre’s description has been vague; he has referred to “spread sheets” and emails that he says points to Mack as a key suspect in the allegedly suspicious trades. But it’s unclear exactly what those documents say. Officials at Pequot and Morgan deny the charges.

One things is certain: Most lawyers I speak to and even people at the SEC don’t give much credence to Aguirre’s statement that the SEC’s notice would have prevented him from discussing the evidence. They say it’s virtually impossible to prosecute a whistleblower, particularly one involved in such a high profile case. That’s why I have launched my own examination. CNBC is in the process of contacting the various Senate committees to determine if Aguirre’s documents can be made public. We will also try and make contact with Aguirre to see if he can turn them over to us. Stay tuned.

Charles Gasparino - CNBC

From Whistleblower To Witness

Mon, 26 Jun 2006 12:02:37 GMT

The SEC lawyer who is at the center of an investigation into possible insider trading at the prominent hedge fund Pequot Capital has agreed to appear as at witness during Senate Judiciary Committee hearings that are focusing on the secretive hedge-fund business, CNBC has learned.

Former SEC attorney Gary J. Aguirre, (pronounced a-GEER-ray) headed SEC's investigation and then criticized the agency's handling of the case after the commission fired him. Aguirre has agreed to testify in the hearings, scheduled to take place Wednesday in Washington, according to a preliminary witness list obtained by CNBC and a person with knowledge of the committee's activities. Other witnesses include a representative of the Department of Justice as well as Connecticut Attorney General Richard Blumenthal, the chief law enforcement official of the state where most hedge funds reside. Committee Chairman Arlen Specter may also ask a representative of the SEC to appear at the hearings.

Aguirre's testimony would mark his first public comments since

news of a letter he sent members of Congress leaked last week that

rocked the massive and growing hedge-fund business. In an 18 page

letter, Aguirre alleges that he was fired from the SEC as he was

investigating possible insider trading violations at Pequot and

preparing to depose Morgan Stanley CEO John Mack as a witness. Before taking the Morgan Stanley post, Mack was the vice chairman of the hedge fund, but more importantly for the investigation, he was the CEO of Credit Suisse when the firm was serving as a banker in a deal that has come under scrutiny during Aguirre's insider trading probe. Both Pequot and officials at Morgan Stanley say they've done nothing wrong.

According to people with knowledge of the committee's activities, Specter believes Aguirre could provide what has since been missing from the witness list as he gears up for the hearings: A genuine, inside look into the secretive world of hedge funds and some indication if the business needs closer scrutiny from regulators at the SEC and the Department of Justice.

People with knowledge of Specter's activities say the Senator may also use the hearings as a springboard to introduce legislation that would increase hedge fund regulation. Just last week a federal appeals court says the SEC doesn't have the authority to enhance its regulation of the hedge fund business.

All the congressional activity won't be good news for the hedge

fund business, which for years operated on the periphery of Wall Street, catering to the super rich. More recently, hedge funds

have grown in popularity with more mainstream investors, and as a

result, they've caught the eye of regulators.

CNBC has learned that the committee's interest in the hedge fund business stemmed in large part from the complaints of Overstock.com's CEO Patrick Byrne, who convinced Utah senator Orin Hatch, a ranking member of the judiciary committee, to take a

close look at hedge funds, short selling and the use of research to drive down stock prices. Overstock is located in Utah, and Byrne has waged a public campaign attacking short sellers for using potentially illegal tactics to drive the stock.

But Specter, the committee chairman, chose not to focus on

Overstock and include Byrne as a witness because he feared the

hearings would turn into a spectacle given some of Byrne's recent

comments, and instead began to focus on larger issues involving hedge funds, namely whether the Justice Department and other regulators like the SEC has done enough to crack down on hedge-fund fraud.

People with knowledge of the committee's activities say he

believes Aguirre would make a perfect witness given his inside

knowledge of both hedge funds and regulatory attempts top crack downon the business. These people also say that Specter and the committee will examine why Aguirre was fired.

Charles Gasparino - CNBC

Short-Selling Inquiry

Thu, 22 Jun 2006 13:37:31 GMT

The regulatory pressure on short sellers is mounting as the Senate Judiciary Committee has launched its own inquiry into whether improper short selling helped sink shares of
Vonage after its disastrous IPO.

The committee which is planning hold hearings on hedge funds, independent research and short selling on Wednesday of next week, has contacted Vonage about the possibility of testifying as well as the New York Stock Exchange, which has already launched its own investigation on the matter.

Shares of Vonage have declined sharply since its IPO in May. The stock was priced at $17 a share, but quickly sank to under $9 a share. A spokeswoman for Vonage says the company is not planning to testify, though that may change if it is subpoenaed. A spokesman for the NYSE had no comment.

The Judiciary Committee's interest shouldn't be taken lightly. While the committee doesn't have oversight of stock regulators like the SEC, it has direct oversight of the U.S. Justice Department, which has stepped up its scrutiny of Wall Street and white-collar offenses. People on the committee tell me that representative of the Justice Department will be present at the hearing.

One person who wont be at the hearings is Patrick Byrne the head of Overstock.com, who is probably the person most responsible for the growing interest of stock regulators and now Congress into the issues surrounding short selling and a practice known as "naked short selling" where short positions are created without taking physical delivery of the stock. Keep in mind that ranking Judiciary Committee member Orin Hatch represents Utah, the home of Overstock.The committee, from what I understand, also plans to call representatives from the hedge fund business, academics, and I may be asked to entertain questions because of my book, "Blood on the Street," which investigated research practices on Wall Street.

Charles Gasparino - CNBC

Morgan's M&A Update

Wed, 21 Jun 2006 14:43:33 GMT

Morgan Stanley's M&A meltdown is officially over. The big securities firm, which finished a dismal ninth during the first quarter in terms of winning lucrative M&A business in the US, has recorded a second-place finish in the second quarter, according to Thomson Financial.

This is a big victory for Morgan CEO John Mack, and his M&A head Paul Taubman. Both are relatively new to their jobs, taking their respective positions over the past year, and both have taken heat on Wall Street for slow starts. Recall that Morgan has suffered serious defections, particularly in its once premier investment banking ranks, including a slew of top earners who left to join the start-up investment bank of former Morgan banking chief Joe Perella.

I think M&A success is a good indication of the firm's overall success. Not only is it a lucrative business, but it also underscores just how aggressive the firm is in winning business, and based on Morgan's blow out earnings released today, Morgan is on a roll. Morgan received a huge psychological lift when it brought back one of those defectors to Perella's firm, Jon Anda, and Taubman told me yesterday that he is in a hiring mode. I also asked him if he sees any more people jumping ship, particularly to Perella's firm, and he said that Perella "has made a very aggressive run at a lot our bankers who haven't gone yet and I don't imagine they're going now."

Morgan improved from seventh place in the first quarter to second place in terms of global M&A, also behind Goldman Sachs. The firm's slow start, however, has kept it low in the year to date rankings-Morgan is in sixth place in the US (fourth-place globally), behind a slew of firms, including first place Goldman.

Charles Gasparino - CNBC

Paulson Subpoena

Mon, 19 Jun 2006 21:43:31 GMT

Hank Paulson may be leaving Goldman Sachs for the U.S. Treasury Department, but that doesn't mean he can escape testifying in the Dick Grasso pay package trail scheduled for October 30th of this year.

CNBC has learned that last week, Grasso, the former Chairman and CEO of the New York Stock Exchange, sent out 20 so-called "trial subpoenas" to various Wall Street executives who also served on the NYSE board involved in the dispute over his $140 million pay package, which is the subject of a civil suit by N.Y. Attorney General Eliot Spitzer.

Among those receiving the subpoenas was former Merrill CEO Dave Komansky, and a host of other CEOs even though his trial isn’t scheduled to begin for months. But Grasso's real target, according to people close to the case, is Paulson, who once confirmed, will be the new Treasury Secretary replacing John Snow.

Grasso's legal team, headed by prominent attorney Brendan Sullivan, is afraid that Paulson will claim some kind of privilege if they subpoena him after he's confirmed as Treasury Secretary. By subpoenaing him now, they believe it makes it virtually impossible for him to skip the trial.

Paulson figures to will be a key witness for Grasso. Spitzer is seeking the return of around $100 million of the $140 million Grasso received before he was ousted as stock exchange chairman in Sept., 2003. Spitzer says the pay package violated a New York State law that says the compensation of officials at non-profits (at the time the NYSE was a non-profit corporation) must be reasonable.

Even though Paulson led the charge to get rid of Grasso back in the summer of 2003 when the pay package first became news, in his depositions he has said good things about the former NYSE chief. He called him an A-plus CEO, and has said separately that the main reason why wanted Grasso out was because of all the bad publicity, not because Grasso was doing a bad job.

A spokesman for Paulson had no comment on the matter, other than to say that his boss has bigger things on his plate these days, like his upcoming confirmation hearings.

Charles Gasparino - CNBC

Perella's Firm: An Update

Wed, 14 Jun 2006 13:22:09 GMT

With the markets in turmoil, now might not be the best time to start a new investment banking boutique, but don't tell that to Joe Perella. Barring some last minute snafu, Perella plans to open his new boutique for business this week, possibly as early as Thursday, CNBC has learned.

Perella's new venture is one of the most closely watched issues on Wall Street in recent months. He left Morgan Stanley last year, protesting the leadership of then CEO Phil Purcell. When Purcell was replaced by John Mack, many people at the firm thought Perella would return. After all, he and Mack were friends and colleagues for years, and Mack was willing to give Perella a major role in the new management team.

Perella decided to go out on his own and create his own investment banking boutique with a substantial private equity arm. He came out the gates strong, raising $1.1 billion and stealing many top bankers from Morgan and elsewhere, including Morgan Stanley capital markets star Jon Anda. Perella's aggressive tactics also caused somewhat of a rift with his old friend Mack, who was forced to stem the exodus of bankers.

But Perella's new venture hit a snag last week when Anda did an about face, returning to Morgan. My sources at Morgan say he balked at signing a long-term non compete contract of five years given the fact that market conditions have soured. These same sources said that Perella was having difficulty getting many of the other top bankers he poached from other firms to sign the contracts as well.

Perella, according to people with knowledge of the matter, was to officially open his firm for business by doing a high profile deal.

People at Perella's firm say they won't announce the new business through a deal--just a simple press release. They say, however, that all the firm's partners have signed long-term agreements, though not the five-year deals initially offered. As for business, the firm is working on about a half dozen undisclosed deals that should hit the market in the not too distant future.

Perella, it must be said, is not someone to be taken lightly. He may be the best investment banker on Wall Street with ability to call many of the top CEOs in the country. Meanwhile his partner, Terry Meguid, is about as good of a No. 2 as you can get. But some of the firm's recent problems shouldn't be taken lightly either. My opinion is that the reason why Perella won't be making a bigger splash when opens is because business conditions, in a word, stink.

One thing that won't stink about the new firm will be the name. From what I hear it will have the word "Perella" in it.

Charles Gasparino -CNBC

Replacing Blankfein

Mon, 12 Jun 2006 16:59:12 GMT

Now that Lloyd Blankfein has been selected to replace Hank Paulson as CEO of Goldman Sachs, the big question on Wall Street is who will take Blankfein’s job and become president of the big investment bank.

CNBC has learned that Blankfein will name Gary Cohn, a close friend and head of the firm’s sales and trading operations to be his No. 2, taking over as president, the same job he held before the recent management upheaval. It’s easy to see why Cohn is Blankfein’s choice: Both are from the trading side of Goldman, which has been driving the firm’s profitability in recent years.

But according to senior people at Goldman, Cohn won’t have the No. 2 job to himself. Blankfein wants to appoint a co-president with Cohn, someone who could represent the firm’s powerful investment banking division. The race for this slot, people at Goldman say, is between Jon Winkelried, co head of investment banking, and Michael Evans, head of Goldman's Asia division.

Of course, none of this is official; it needs to be approved by the Goldman board, which will meet later in the next two weeks, these people say, and given the fluid politics at the big investment bank, anything could happen.

That said Blankfein wants Cohn to serve as his No. 2, people at Goldman say, and given Cohn’s enormous clout at the firm—he runs Goldman’s most profitable division—he looks like a shoo in. The question becomes how does the new management team appease its prominent investment banking division, which lost its top advocate when Paulson announced his decision to take the Treasury Department post.

It’s interesting to note that while Paulson has distanced himself from all business related activities as he awaits official confirmation, he is heavily involved in the succession process, and has been a main proponent of having a co president to serve with Cohn from the investment-banking division.

--Charlie Gasparino

Hanging Up On Vonage?

Tue, 30 May 2006 15:25:39 GMT

Vonage is still feeling the pain from its ugly IPO last week, in which shares of the broadband telephone services provider fell more than 25% from its Wednesday offering, putting the company in hot water with customers who bought the stock at its inflated offering price.

Now CNBC has learned that the company is looking to lessen the blow for a group of investors who also happen to be Vonage customers. At issue is a controversial plan in which 13.5% of the deal was reserved for customers of Vonage’s telephone service, something called the “direct to share” program. Under the plan, a Vonage customer could sign up to buy shares of the IPO, and pay for the stock later through one of the three lead underwriters on the deal, Citigroup, Deutsche Bank and UBS.

But what looked like a good way to keep the company’s customers happy by letting them in on a high-flying IPO backfired after the stock price cratered, falling from $17 to around $12 just after shares began trading. It wasn’t long before the firm’s underwriters complained that many of the direct to share customers were balking at paying for their stock, which the company said they were legally obligated to purchase.

Over the Memorial Day weekend, the company found itself in a difficult situation. These were after all Vonage customers who were stuck holding the rapidly deflating stock. At one point, it considered simply letting the underwriters decided what to do, possibly sticking the underwriters with the unwanted stock if people chose not to pay up. It also considered taking possible legal action against those customers who didn’t want to make good on their purchase, people at Vonage said.

Late Sunday, Vonage came up with a solution: Those customers who don’t want to pay won’t have to. Here’s the company’s statement: “While all avenues are available to us we cannot imagine alienating our customers in that way. If certain DSP (Direct To Share) customers don’t pay we expect to repurchase shares from the underwriters if necessary.”

This is clearly a messy situation that will likely get even messier. As my colleague Joe Kernen pointed out on Squawk Box this morning, Vonage has essentially created two classes of shareholders. What type of relief is the company given to a customer of one of Citigroup’s Smith Barney brokerage unit who is stuck holding shares at Vonage now trading well below the offering price?

I’d also like to know what so much of the deal went to retail investors. It’s one thing for a large money manager to be holding onto shares that have fallen that quickly in value, but its another thing for some average investors to loose that much money so quickly.

While many small investors who hold the stock probably wish they never heard of the name Vonage, this story clearly isn’t going away.

Charles Gasparino - CNBC

AIG's Ex-boss Is Growing Impatient

Tue, 23 May 2006 15:11:59 GMT

Maurice “Hank” Greenberg, appointed many of the top execs now running AIG, the nation's largest insurance company, but the animosity between the two sides continues to grow.

Just how much Greenberg despises the company he built into one of the world’s largest and most profitable can be determined through his public comments. Last week, Greenberg said AIG’s earnings were disappointing as he continues to unload shares of the company that ousted him amid an accounting investigation. Greenberg has publicly stated that he’s done nothing wrong and that the company hurt shareholders by caving into pressure from an over zealous regulator, New York Attorney General Eliot Spitzer, when it restated billions of dollars in earnings and forced him out as CEO in 2004.

Now Greenberg is at it once again, complaining through his senior advisors about some highly touted corporate governance improvements recently announced by AIG, which have been met with rave reviews by watchdog groups and were described by one columnist as the “new corporate model.”

The changes include ditching the boards “executive committee,” having no company management present at during the board’s executive session, and making most of the board comprised of independent directors. There’s also a clause that prevents board members from arranging charitable contributions from the company.

Part of Greenberg’s problem obviously stems from who made the proposals, one of his advisors conceded to me in a recent interview. The new corporate governance rules were the created by former SEC chairman Arthur Levitt, a special advisor to the company, and Frank Zarb, the company’s chairman. Greenberg simply despises Zarb, and has nearly the same contempt for Levitt, blaming both men for forcing him to leave the company, and then distorting his record as a CEO.

But Greenberg is also saying he has legitimate gripes with the new initiatives. In a word, he believes they’re hypocritical. Greenberg contends that the company is just as insular as it was when he ran the place, though without the benefits of vaunting profits and a soaring share price. His gripes include a shortened board meeting, which he says is dominated by Zarb and the company’s CEO Martin Sullivan. During his reign, Greenberg says he made sure business-unit chiefs spoke at every board meeting to give shareholders an idea of how the company was run.

He complains that there was no peer review data available at the meeting, meaning you couldn’t really tell how well the company is now doing versus its peers, and that the minutes of the board’s executive session were not immediately available. His people could only get the minutes have filing a written request to AIG. Probably his biggest gripe has to do with the rule involving charitable contributions. It comes, he says, only after Zarb got AIG to contribute millions to the Zarb School of Business at Hofstra University.

AIG had no official comment on Greenberg’s gripes, but people at the company say many of the complaints Greenberg is making are simply absurd. The company, they point out, discloses much more information than it ever had under Greenberg. As far as not handing out the corporate minutes, the AIG folks say they are certain Greenberg received them; all he had to do was ask.

Greenberg, however, isn’t backing down. His next step? A spokesman tells me that Greenberg will continue to unload shares AIG stock, reducing the $23 billion he either owns or controls through his various companies, to what he believes is an appropriate level. What that is, he won’t say. It appears he wants to keep his old firm guessing.

Charles Gasparino - CNBC

Milberg Weiss

Tue, 23 May 2006 15:05:43 GMT

When federal prosecutors indicted Milberg Weiss Bershad & Schulman on Thursday, Wall Street was supposed to be celebrating. After all, no other law firm had been as successful at squeezing billion-dollar settlements out of Corporate America over the past four decades. And no other firm represented the evils of overzealous class-action litigation than Milberg Weiss, with its tough as nails lead partner, Mel Weiss and his battle-hardened second in command, Bill Lerach.

But the cheering of Milberg Weiss’ pending demise was clearly muted, at least according to the CEOs and defense attorneys I spoke with in recent days. The reason? The firm, and its top guns like Weiss and Lerach (who now has started his own company), may be bad guys at least as far as Wall Street is concerned, but the alternative might be worse. In other words, Wall Street is waking up in the aftermath of the indictment with the feeling that it’s better to deal with the devil you know rather than the devil you don’t.

That sentiment was front and center as the big firms contemplated their next move in one of the biggest cases still pending with the firm. Milberg Weiss is the lead firm in a massive class action against nearly all the big Wall Street firms over the allocation of initial public offerings during the 1990s stock market bubble. Mel and the boys contend that Wall Street’s methods of distributing IPOs in the market screwed small investors. He’s seeking a whopping $6 billion from all the top Wall Street firms on behalf of plaintiffs. The betting on Wall Street, at least before the indictment, was that he’d get the money, or something close to it. Already JPMorgan has agreed to fork over around $400 million, and the form wasn’t even close to the biggest player in the IPO market. As a result, firms like Goldman and Morgan could be on the hook for even more, possibly several times that amount, at least if Mel has his way.

The problem is that with Milberg Weiss wounded, and Mel himself a target for prosecution, Wall Street is worrying that its $6 billion liability may grow substantially. Weiss is the father of the class action bar, not just because he’s a good lawyer, but also because he’s a reasonable guy. Nearly every big CEO on Wall Street has a relationship with Weiss, who by most accounts knows how to cut a deal that benefits all sides in these negotiations.

Weiss’s replacement, whoever that might be, may not be so reasonable, and that has Wall Street sweating bullets.

Charles Gasparino - CNBC

Milberg Weiss Indictments?

Fri, 05 May 2006 16:15:18 GMT

Federal criminal case against the big class action firm Milberg Weiss Bershad and Schulman is at a crucial stage with officials there bracing for an indictment of top lawyers at the firm and a possible indictment of the outfit itself, according to people with knowledge of the matter.

CNBC has learned that following discussions with federal prosecutors, attorneys for the firm believe that baring some last minute development two partners, Steven Schulman and David Bershad will be indicted in the coming days or weeks, according to people with knowledge of the situation. In addition, CNBC has learned that lawyers at Milberg Weiss believe they will find out sometime within the next week or so if the firm itself will be indicted. According to people close to the matter, the lawyers believe there’s a 50-50 chance that the firm itself will be indicted in the case.

The investigation, by the US Attorney’s office in Los Angeles, involves allegations that the firm paid kickbacks to potential clients in exchange for bringing the firm cases. The firm has said it has done nothing wrong—that the alleged kickbacks were nothing more than finders’ fees, which are perfectly legal. That said, the US Attorney’s office scored a major victory in its case when it received a guilty plea from a retired real estate broker and former client of Milberg Weiss who said he was paid fees for bringing a case to the firm.

Recently, the US attorney’s office has said that the two most famous partners at the firm, Mel Weiss and William Lerach will not be indicted at this time. The reason why the government is focusing on Schulman and Bershad it appears is because the real estate broker who cut the plea deal says he dealt primary with Schulman and Bershad.

Let me make a couple of caveats here: Predicting criminal indictments is a tricky business. Many of these cases are fluid, and federal prosecutors often use the threat of indictment to force targets to give up evidence about others. Indeed, just a couple of months ago it appeared that Weiss and Lerach were in the prosecutor’s cross hairs.

However, if either Schulman, Bershad or the firm is indicted, it would be a major blow to the class action business. These are the top players in that business, and they’ve done a great job for their clients over the years, wringing huge settlements from Corporate America and Wall Street on behalf of investors.

Attorneys for Schulman and Bershad didn’t return telephone calls.

Charles Gasparino - CNBC

Bringing Back The Bull

Wed, 03 May 2006 15:10:55 GMT

Since becoming CEO of Merrill Lynch in 2002, Stan O’Neal has earned the reputation on Wall Street as a cost cutter and with good reason. Under his leadership, Merrill has closed offices across the globe, slashing thousands of people from its workforce which was once the largest on the street.

So far, the results have been good. Earnings have been steadily rising each since he took the top job. But O’Neal has also faced his fair share of criticism, namely that while he knows how to be a cost-cutting bean-counter he has showed less ability in growing the firm’s bottom line.

CNBC has learned that O’Neal is now trying to change that perception. Sources at the big Wall Street firm confirm that Merrill has embarked on an aggressive expansion campaign, as it looks to hire new executives in a number of areas, from bond trading to foreign exchange. The company has also changed it risk profile, I am told, taking bigger gambles on its trading desk in the hopes of boosting trading revenues.

In addition to hiring more people, sources inside Merrill confirm that O’Neal is looking to purchase a mid sized retail bank. In recent months Merrill has had discussions with several players. People with knowledge of Merrill’s activities say the firm walked away from at least one deal because it was too costly, but the company still hopes to complete a purchase before the end of the year.

One thing you have to say about O’Neal is that he’s a cautious CEO, underscored by its recent deal with BlackRock, the money-management firm. Under the terms of the deal, Merrill received a large, minority stake in the company rather than taking control of a business that is not part of its core operations. Still, it wasn’t too long ago that the conventional wisdom on Wall Street was that O’Neal was busy cutting costs and staff to sell Merrill to a much larger banking player, possibly a company like HSBC or even Bank of America. Now that talk seems to have petered out completely both inside Merrill and among securities analysts, as they watch O’Neal continue to grow the firm. For the last two years, he has added about 6,000 employees, and that trend will likely pick up in 2006.

What people inside Merrill tell me is that while O’Neal does not want to do a transformational deal—merge with a big bank—he’s looking to grow Merrill through a combination of increasing its workforce and if the price is right, a purchase of a mid-sized retail bank. Remember, Merrill is the largest brokerage firm with retail offices selling stocks and mutual funds to small investors across the country. That’s why it makes sense to leverage the firm’s expertise with the small investor through a deal with a retail bank.

Charles Gasparino - CNBC

Proving Deception Could Be Difficult

Thu, 27 Apr 2006 13:32:11 GMT

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