The new company’s assets are located primarily in the Marcellus shale gas play in Pennsylvania and New York. According to the company’s Form S-1, Inergy Midstream owns 41 billion cubic feet of working gas storage in four locations and 355 million cubic feet/day of intra- and inter-state gas transmission pipelines. The company expects to complete its new MARC I pipeline in July 2012, which will add 550 million cubic feet/day of capacity.

Under the terms of the offering, Inergy L.P. will own 78.5% of the new company’s common units and through a string of subsidiaries 100% of the incentive distribution rights. The initial quarterly distribution payment will be $0.37/common unit.

Common unit holders receive 100% of quarterly distributions up to $0.37, and 50% of the amount above that figure. The incentive distribution rights holder gets the other 50% of the excess above $0.37.

The general partner of Midstream is called NRGM, GP LLC, and it has no economic interest in the new company. The incentive distribution rights are paid to Inergy Midstream Holdings, L.P., which owns NRGM GP. Inergy, L.P. owns Inergy Midstream Holdings and receives its incentive distribution payments through that company.

The IPO will generate about $320 million at the middle of the pricing range, and Midstream will use the proceeds to pay off a $300 million debt owed to JPMorgan Chase & Co. (NYSE: JPM). Because the net proceeds from the offering are expectyed to total $297.2 million, Midstream will also borrow $2.8 million to meet the payment. The company also plans to open a $500 million revolving credit facility and to borrow $80 million from that facility to pay the first distribution to unitholders. Nearly 80% of the distribution will be paid to Inergy L.P.

The Form S-1 is available here.

Paul Ausick

Without trying to draw too much in cause and effect, this could have an impact on most of the mortgage REITs if this develops as it is being accepted today.  Specifically, this may bring a similar interest in shares of Annaly Capital Management, Inc. (NYSE: NLY), American Capital Agency Corp. (NASDAQ: AGNC), and Hatteras Financial Corp (NYSE: HTS). We would also look for the sector to impact the Market Vectors Mortgage REIT Income ETF (NYSE: MORT).

It was on November 10 that Chimera disclosed that the review by its outside independent accounting firm was with an analysis of the treatment under GAAP of “other-than-temporary impairments” related to investments in securities rated less than AA, non-rated non-Agency securities and other subordinate securities.

Chimera noted that it has not completed its analysis, but it did specify that it expects only immaterial adjustments to its historical financial statements in prior comparable periods.  Also noted was that the effect will be a non-cash change in the GAAP accounting results and this change will not affect previously stated GAAP or “economic book values, actual cash flows, dividends and taxable income for any period.”

Another note was that the second quarter GAAP book value of $3.35 per share and economic book value of $3.08 per share will not change due to this action.  As of September 30, Chimera’s GAAP book value was $3.27 per share and the economic book value was $3.01 per share.  Its taxable income for the third quarter was $0.13 per share and the analysis is said to not have an impact on prior or future dividend distributions.

Chimera shares are up 7.8% at $2.76 and the last $0.13 dividend would generate a yield of nearly 19%, but mortgage REIT yields can fluctuate wildly as taxable income and distributions come and go. The fairly new Market Vectors Mortgage REIT Income ETF (NYSE: MORT) is trading up only 0.3% at $22.72 on very thin volume.  Chimera is the third largest weighting of that ETF at 6.91%, but that falls a distant third with American Capital Agency Corp. (NASDAQ: AGNC) at 13.17% and with Annaly Capital Management Inc. (NYSE: NLY) having nearly a 19.7% weighting of the entire ETF.

Annaly Capital Management, Inc. (NYSE: NLY) is often tied to Chimera because of its past and because of management teams and its shares are actually down 0.5% at $16.23. American Capital Agency Corp. (NASDAQ: AGNC) is also down 0.5% at $27.85 and Hatteras Financial Corp (NYSE: HTS) is down 1% at $25.61.  All sport double-digit implied dividend yields if the payouts remain static.

This review brought on a rating update on Chimera by Credit Suisse with a reiterated “Outperform” rating and a $3.50 price target objective.  Credit Suisse went on to note that Chimera trades at a 15% discount to book value and that its yield before the pop was 20.4%. The end result is that this would begin to ease investor concerns as shares had fallen from $2.80 down to almost $2.50 in recent days before the recovery.

Usually investors tend to run for cover when they see accounting changes.  So far, that is not the case with Chimera as investors are taking the company at face value.  If everything represented is as-is, then Chimera is trading under its implied book values and that may be cushion enough for investors.  Stay tuned.

JON C. OGG

The thresholds will lower the broad market decline percentage triggers, shorten the duration of the trading halts, and also change the reference index.  The existing market-wide circuit breakers were originally adopted in October 1988 and have only been triggered on one day in 1997.

The basic proposals are as follows:

• Lower the market decline percentage thresholds from 10%, 20%, and 30% down to new levels of 7%, 13%, and 20% from the prior day’s closing price.
• The duration of the trading halts that do not close the market for the day would go from 30 minutes, 60 minutes, or 120 minutes down to 15 minutes.
• Rather than six time periods, the only two relevant trigger time periods would be before 3:25 P.P. and on or after 3:25 P.M. 
• The new proposal would strip the Dow Jones Industrial Average as the reference index and would change to the S&P 500 Index as the pricing reference.

Normally, we might not support changes of this magnitude.  Our concern is that the Flash Crash of 2010 was damaging enough that some measures needed to be reviewed.  More importantly than that, some estimate that trading machines, the computer to computer trading, now accounts for up to 75% of the trading in the liquid stocks out there.  That figure varies wildly depending upon the day, but all you have to do is read what we wrote about the dangers of  nanonsecond trading.  

Imagine if the machines actually dumped 1 billion trades upon the market in one second.  A stretch, yes.  Theoretically possible, yes.  If you do not trust our notion on this matter, remember this: a survey on Wall Street noted that high-frequency trading (HFT) is mostly bad for everyone except the HFTs themselves.

A public comment period will take place but here are the full proposals from the SEC site.

JON C. OGG

Before thinking this encompasses all assets for all customers, that might not be the case.  The SEC went on to note, “on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.”  This covers Stanford Group Company that was owned by Allen Stanford “to perpetrate a massive Ponzi scheme.”

Today’s news out of the SEC noted that these investors were sold certificates of deposit, or CDs, which were issued by Stanford International Bank Ltd. through the Stanford Group Company, and Stanford Group Company is a SIPC Member.

The SEC determined that customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.  A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC.  Unfortunately for investors, it appears to be up to the trustee to decide whether investors have customer claims protected by a statute.  Those who disagree with the trustee’s determination could seek a court review.

Lastly, the SEC noted, “The Commission has authorized its staff to file an action in federal district court under SIPA to compel SIPC to initiate a liquidation proceeding in the event SIPC does not do so.”

The SEC also provided a massive support document titled ANALYSIS OF SECURITIES INVESTOR PROTECTION ACT COVERAGE FOR STANFORD GROUP COMPANY.

What this translates to certainly does not sound immediately like a full restitution.  The analysis in the formal letter from the SEC to SIPC noted that the SEC “is making a formal request to the SIPC Board of Directors to take the necessary steps to institute a SIPA liquidation proceeding of SGC.  Should the Board refuse to take such action, the Commission has authorized its Division of Enforcement to bring an action in district court against SIPC to compel the institution of a proceeding to liquidate SGC under SIPA.”

A separate release from SIPC noted, “The Securities Investor Protection Corporation (“SIPC”), which maintains a special reserve fund mandated by Congress to protect the customers of insolvent brokerage firms, said that it will analyze the referral provided today by the U.S. Securities and Exchange Commission (“SEC”) with respect to the Stanford Group Company, operated by Robert Allen Stanford.”

Unfortunately, this is one of those situations that caught many investors off balance and has killed more than a few fortunes.  Any and all Stanford investors will want to look far deeper than the amount of coverage we can give to this tragic topic.

JON C. OGG

What is odd is how small the disclosure was.  American Tower stated:

• On June 2, 2011, American Tower Corporation received a subpoena from the United States Securities and Exchange Commission requesting certain documents from 2007 through the present, including in particular documents related to the Company’s tax accounting and reporting. The Company intends to cooperate fully with the SEC with respect to its request.

Shares of American Tower are down 6.2% at $51.02 on more than 1 million shares in less than the first five minutes of trading.  The 52-week trading range is $41.26 to $56.84 and the consensus Thomson Reuters price target is just above $60.00.  Analysts are likely to be out with downgrades or with “temporary exceptions” in the research coverage.  Unfortunately, the time frame is wide enough and the disclosure is vague enough that no one outside of the company will yet be able to make determinations or opinions.

Shares of rival Crown Castle are down a bit in sympathy with a drop of just over 1.5% at $40.95. The smaller player is SBA Communications Corp. (NASDAQ: SBAC) and its shares are down 1.5% at $38.19.  American Tower is now worth about $20 billion after the haircut in its market cap, while Crown Castle’s market cap is almost $12 billion.  SBA Communications has a market cap of only about $4 billion.

There is an old rule of thumb that many investors heed.  When accounting irregularities or large accounting questions arise, look for opportunity elsewhere.  American Tower shares were down over 8% pre-market… Even after about 20 years of reading news releases and financial statements, it is amazing how so few words can have such a big impact.

JON C. OGG

It will be interesting to see what regulations are and are not applied at NYSE Euronext, Inc. (NYSE: NYX), NASDAQ OMX Group Inc. (NASDAQ: NDAQ), IntercontinentalExchange, Inc. (NYSE: ICE), CME Group Inc. (NYSE: CME), and CBOE Holdings, Inc. (CBOE).  Perhaps the only police there will be themselves and each other.

FINRA has not issued any public announcement on its regulatory operations, however FINRA is not a federally funded government agency and would therefore not be under the same shutdown rules.  I placed a call into the media relations and the official answer is that FINRA is not funded by the government so it would not be closed down.  FINRA regulates the brokerage firms, regional offices, and registered representatives who sell and trade in securities. 

As a reminder, government workers are supposed to be forbidden to show up for work and are supposedly forbidden from work operations in remote offices and even from home.  How many government workers will honor that is something which we won’t address.  The markets could find themselves without the market police monitoring the situation.  The financial markets have historically wanted to be SROs, or self-regulating organizations, but even most market participants will probably agree that self-regulation without oversight would have allowed the financial meltdown to get even worse.

So, the SEC has outlined its “SEC Functions During the Federal Government Shutdown” if this comes to pass.  The full details are here.  It has outlined the following:

• The SEC will have only an extremely limited number of staff members available to respond to emergency situations involving the safety of human life or the protection of property, including law enforcement. Certain Commission systems will be operating under modified conditions.
• EDGAR will remain fully functional, but the Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal Division and Office activities.
• The IARD system will remain fully functional and will continue to accept filings but the Compliance Inspections and Examinations department will not be available.
• The CRD system will remain fully functional and continue to accept filings and the Transfer Agent Registration System will also continue to accept filings; but the Division of Trading and Markets and the Office of Compliance Inspections and Examinations will not be able available.
• The EFFS system for SRO proposed rule changes will remain functional but a day that the SEC is not open for regular business is not a “business day.”
• The Division of Enforcement will have only a limited number of staff on duty to perform critical functions even if staff will attempt to respond to allegations of ongoing fraud and misconduct.
• Investor Complaints via the Office of Investor Education and Advocacy will have a limited number of staff on duty to review investor complaints but will be unable to respond to complaints, questions, or requests for information.
• Comment Letters and Public Input can be submitted but there will only be “an extremely limited number of staff members on duty.”
• The Public Reference Room would be closed.
• Mail Delivery will have a limited number of staff on duty to process incoming mail from 8 a.m. to 5:30 p.m. Monday through Friday to take in mail and accept packages from couriers, but processing delays are expected. 
• In emergency situations, you will be able to reach an extremely limited number of SEC staff to respond to emergency situations.

The SEC’s full plan and contact data is here. 

We apologize if this is a bit dry, but if we are going to cover the financial markets at a time when the markets’ policemen are not watching we want you to know what the rules of the game will be.

JON C. OGG

If a company has more than 500 shareholders whether a stock is publicly traded or not, it  has to provide public financial data.  That would imply that Facebook would have most of the same burdens of a public company without the benefits of the ease of access to capital in the financial markets.

This is part of the same argument that we have used in our predictions for the Top 17 IPOs of 2011.  Mark Zuckerberg has gone on the record saying that he does not want to take the company through an IPO yet.  The consensus is that 2012 will be the year of the IPO.  The Goldman Sachs investment may have taken that decision away from Zuckerberg.

Second Market currently lists that some 25,000 shares of Facebook are for sale under a sealed bid ending on January 24, 2011.  Under the current regulations there is nothing unlawful nor immoral about that.  Still, it is easy to argue that Facebook is actually already almost a public company.  Shares have sold privately on the third market before.

The intent here from Goldman Sachs was to have an investment vehicle for its private wealth clients, thus skirting around the red tape by being only counted as one holder.  The problem is that the SEC has already been requesting information from Facebook before Goldman Sachs even got involved.

The long and short of the lesson is that Facebook is coming public sooner than it wants to.  Companies can try to keep the lid on growth without having to reveal all of their cookies in the cookie jar if they are structured properly.  The problem is that the existing structure does not allow all the flexibility that Zuckerberg needs to keep his company private.

Our guess under today’s circumstances is that Mark Zuckerberg will have to file to bring Facebook public this year rather than next.  Let’s just hope that Zuckerberg doesn’t get to cheeky and try to bring Facebook public via a reverse merger.  That is not expected, but it might make for a very odd end of a very long saga.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Realistically, the reports focusing on hedge funds, investment bankers, officers, and consultants could include anyone and everyone.  Both Goldman Sachs and Morgan Stanley are bank holding companies like the rest of the “Too Big To Fail” institutions, yet for all practical purposes they have no real banks.  That is different from the likes of a Bank of America Corporation (NYSE: BAC) and from a J.P. Morgan Chase & Co. (NYSE: JPM).  Even if they are included, those still have money center banking operations.

The banks are down almost as much as the non-bank banks.  The Goldman Sachs Group, Inc. (NYSE: GS) is down 3.3% at $161.20 and Morgan Stanley (NYSE: MS) is down 3.2% at $24.80.  Bank of America Corporation is down 3% at $11.31 and J.P. Morgan Chase & Co. (NYSE: JPM) is down 2.1% at $38.59.

The Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) is the real tell for how the sector is doing today as the inverse triple-leverage exchange-traded product is up 3.6% at $12.21 while its opposite bullish-call counterpart in the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) is down 3.5% at $22.20.

The most interesting bit here is that we do not know to what extent the ‘largest ever insider trading case’ really is as it is criminal and civil probes.  We read many articles and have listened to many pundits discussing the grey-zones around what is and is not insider trading.  Still, the real ‘largest ever’ is an unknown.  It could be the largest number of firms, it could be on practices, and it could be many networked individuals.

If any firm on Wall Street is ever going to be given a Darth Vader image in any scandals, it seems that speculators and investors point to Goldman Sachs first before they lump others in.  Goldman Sachs has had unusual options trading activity as you might suspect.  Here is a table of the options trading in Goldman Sachs alone:

There is also a Barclays note on top of the recent deal that is soon to be reached from Ireland.  It seems that there is a new wave of fears that major banks will need to raise more than $100 billion in capital.  Over what time period and under what terms remains an issue up for debate.

JON C. OGG

The company disclosed in its “Mortgage-Backed Securities Litigation” the following data:

• The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating to various roles they played in MBS offerings. These cases are generally purported class action suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for more than $375 billion of securities issued by hundreds of securitization trusts contained material misrepresentations and omissions, including statements regarding the underwriting standards pursuant to which the underlying mortgage loans were issued, the ratings given to the tranches by rating agencies, and the appraisal standards that were used in violation of Section 11 and 12 of the Securities Act of 1933 and/or state securities laws. The cases generally allege unspecified compensatory damages and in some instances, seek rescission. The Corporation has previously disclosed some of these matters under other headings, in its 2009 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, including Countrywide Mortgage-Backed Securities Litigation; IndyMac Litigation; Merrill Lynch Subprime-related Matters; and Federal Home Loan Bank of Seattle Litigation.

The bank also disclosed a mortgage related suit where it was named as a defendant in the Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. case and also as a defendant in the The Charles Schwab Corporation v. BNP Paribas Securities Corp. case.

Again, no predictions were made and many suits in general often contain strong dollar sums.  What the bank did note in the “Litigation and Regulatory Matters” section was as follows:

• In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

The FULL 10-Q SEC FILING is here.  There are outside reports also in that the banking giant has rejected mortgage buyback demands.  With just over an hour until the market close, Bank of America stock is now up only about 1.5% at $12.31 on very active trading.  Shares have pulled back throughout the day and shares were as high as $12.71 earlier in the trading day.

JON C. OGG

Green Mountain has completed a sale of 8,566,649 shares to Luigi Lavazza for $250,000,000.  This was based on a deal already disclosed.  The rest of the data has NOT been previously disclosed and the data will likely add pressure.  The company noted that, in connection with its acquisition of Van Houtte, and the marketing of the associated $1.35 billion debt financing, it has an “adjustment correction”:

• management discovered an “immaterial accounting error relating to the margin percentage it had been using” to eliminate the inter-company markup in its K-Cup inventory balance residing at its Keurig business unit.

Management noted that it discovered that the gross margin percentage used to eliminate the inter-company markup resulted in a lower margin for the Keurig ending inventory balance effectively overstating consolidated inventory and understating cost of sales.  The accounting error arose during fiscal 2007 and analyzed the quantitative impact from that point forward to June 26, 2010.  Accounting errors, even small ones, are rarely viewed with a welcome wagon.  The fact that this has happened since 2007 is also going to possibly create some credibility issues and it would not be a shock if at least analysts say that more issues are coming (particularly if see the “next” issue).

As of June 26, 2010, there is a cumulative $7.6 million overstatement of pre-tax income. Net of tax, the cumulative error resulted in a $4.4 million overstatement of net income or a $0.03 cumulative impact on earnings per share.  This alone is not the end of the world, but the notion that it last for so long will be a concern and investors have been pre-conditioned to have trust issues in any company that makes disclosures of this nature.

The company and its audit committee of the board of directors have determined that the correction in the margin calculation represents a correction of an error in accordance with Accounting Standards Codification 250 Accounting Changes and Error Corrections.  The company also determined that the correction “was not material to the fiscal years and the respective quarters ended 2007, 2008 and 2009 and that the Company anticipates that the correction will not be material to fiscal year 2010 and the respective quarters of fiscal 2010.”  Green Mountain anticipates the cumulative amount of the accounting correction will be made this quarter as a result and it does not intend to provide further updates regarding the correction of this error or the Company’s results for fiscal year 2010 until its fiscal 2010 fourth quarter earnings release and conference call.  In short, investors will likely have to wait for information until the company wants to divulge it.

The other issue is an “SEC inquiry” disclosure.  Green Mountain said that the staff of the SEC’s Division of Enforcement informed the company on September 20, 2010 that it was conducting an inquiry and made a request for a voluntary production of documents and information.  The Company said that it believes the focus of the inquiry concerns certain revenue recognition practices and the company’s relationship with one of its fulfillment vendors.  It claims to be cooperating fully with the SEC staff’s inquiry.

Shares closed down 1.4% at $37.01 today after seeing a 52-week high of $37.97 early this morning after the open.  The bad news is that the 52-week high is now much further way and it gets worse in that investors hate anything about any accounting issues and hate to hear “SEC inquiry” news.  After all, it is not exactly like companies disclose that the government is there to offer a helping hand.

Shares are down more than 10% at $33.55 in the after-hours session.  The fact that Green Mountain has a 52-week low of $19.87 and that ‘pre-news Thomson Reuters estimates of $0.71 EPS for 2010′ give a current expected P/E ratio of 52 will only allow traders to keep pounding on this stock if they choose to do so.

The September 15, 2o10 short interest settlement date showed that some 6.288 million shares were listed in the short interest, down from 7.916 million shares at the end of August.  This is a name that short sellers have been in before and they have been run over each time.  It seems a safe assumption that those short sellers may try to renew their attack against the company based upon this news.

Some analysts will say that this event is not material  to the long-term story, while others will likely cut estimates and/or downgrade their targets or their official ratings.

JON C. OGG