Today’s alert is even titled “Don’t Trade on Pump-And-Dump Stock E-mails” and it suggests that the latest McAfee Threats Report confirms a steep rise in spam e-mail traffic that is linked to bogus “pump-and-dump” stocks. It warns that these schemes are designed to trick unsuspecting investors.

To add yet another “pump and dump” fear out there, the SEC/FINRA alert also says that false claims could also be made on bulletin boards, chat rooms, Facebook, Twitter and elsewhere. The SEC suggests simply hitting the delete button for these unsolicited emails. A combined statement from SEC/FINRA officials said,

“Investors should always be wary of unsolicited investment offers in the form of an e-mail from a stranger. The best response to investment spam is to hit delete… Spam e-mail is the bait used to lure people into making bad investment decisions. No one should ever make an investment based on the advice of an unsolicited email.”

Another warning is that these promoters often claim inside information about an impending development. Others tout trading systems using a combination of economic and stock market data to pick stocks. Today’s alert equates these to boiler room sales operations and the word “fraud” appears multiple times.

You get the idea, hopefully.

FULL SEC/FINRA WARNING

That’s interesting, but not unexpected. What is unexpected is that in the statement, Southeastern reveals that it “sent Mr. [Michael] Dell a spreadsheet assuming for discussion purposes that the price in [a going-private] transaction would be approximately $17.00 per share, and illustrating [Southeastern’s] capacity comfortably to finance such a transaction.” The communications began in June 2012.

Southeastern, which is Dell’s largest non-insider shareholder with about 8.2% of the company’s stock, says it sought confidentiality agreements with Dell in order that Southeastern might gain access to information on any material transaction involving Dell, but the requests were denied. Southeastern also says it indicated that it would oppose any offer for deal in the range of $14 to $15 a share that did not include a provision for existing stockholders to roll over all or a portion of their holdings.

Dell Inc. has accepted the $13.65 all cash offer from Michael Dell and Silver Lake Partners, an offer that Southeastern quickly told Dell that it would oppose. The counter-offer from Icahn and Southeastern has been rejected by Dell’s board of directors, who believe the company’s financing for the deal is undercapitalized by $3.9 billion.

The committee essentially rejected a proposed offer from activist investor Carl Icahn because the offer may be insufficiently capitalized. A souring market for personal computers coupled with the risks associated with Dell’s transition to an enterprise solutions business led the committee to conclude that the Dell/Silver Lake offer was superior.

Michael Dell and Silver Lake have offered $13.65 a share in cash in a deal valued at $24.4 billion. Icahn’s offer included a $12 per share special dividend, boosting the potential per share offer by about $10 a share.

The board’s committee noted a “significant liquidity gap in the recapitalization proposed by Icahn/Southeastern that could reduce the promised $12.00 per share special dividend to $9.35 per share — and to $8.50 per share if Icahn/Southeastern are the only shareholders electing the equity stub instead of cash.”

In a presentation filed with the Securities and Exchange Commission, the board’s committee noted that Icahn and Southeastern Asset Management did not provide details of their offer and projected a $3.9 billion funding shortfall.

Dell’s shares are trading fractionally higher in the first half hour this morning, at $13.43 in a 52-week range of $8.69 to $14.64.

The Securities and Exchange Commission has now charged NASDAQ with securities laws violations over its poor systems and decision-making during the initial public offering and secondary market trading of Facebook shares. The SEC release shows that NASDAQ has agreed to settle the SEC’s charges by paying a $10 million penalty and the SEC boasts that this is the largest settlement ever against an exchange.

So what if it is the largest fine or settlement ever? A fine of $10 million is a joke, particularly if you look at the numbers and circumstances below. NASDAQ has a market value for its public stock of over $5.2 billion, but the company’s latest March 30 balance sheet had $674 million in cash and over $1.8 billion in direct long-term debt. Facebook’s market value is $57 billion even with shares down at $23.65. Investors who tried to buy at the IPO price or in the after-market lost literally billions of dollars on an aggregate basis.

The SEC said that NASDAQ’s trading problem caused more than 30,000 Facebook share orders to remain stuck in the trading system for more than two hours when they should have been promptly executed or cancelled. We have heard multiple reports that many of those investors were told the following Monday that they saw shares appear in their account. It was a disaster and a disgrace, and this is one just one more of those things that acts to destroy the public’s already-waning trust against the stock market even more.

The SEC statement noted, “According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.”

While some of those orders may have been spread over multiple firms from multiple clients, this still obviously represents thousands and thousands of investors who got screwed here at the IPO. We have been around the game long enough to know that there is no free lunch in the financial markets. Still, this was a screw-job and we are even cleaning that terminology up so that we do not have offensive content.

The SEC also went on to show that several members of NASDAQ’s senior leadership team convened a “Code Blue” conference call and decided not to delay the start of secondary market trading in Facebook. There was an expectation that they had fixed the system limitation by removing a few lines of computer code, but the SEC said that they did not understand the root cause of the problem and this caused violations of several rules. One of those violations was the NASDAQ’s fundamental rule governing the price/time priority for executing trade orders.

The systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by NASDAQ. Another point to back this up is that the SEC showed that this time discrepancy caused more than 38,000 marketable Facebook orders to not be included in the cross. It said, “Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were ‘stuck’ orders.”

Here is the real insult. Today’s SEC report said, “NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ’s rules do not permit it to use an error account for any purpose. NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules. NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga Inc. (NASDAQ: ZNGA) trading.”

The SEC’s order also charged NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) for failing to maintain sufficient net capital reserves on the day of the Facebook IPO. In what are called “separate incidents unrelated to the Facebook IPO” the SEC additionally charged NASDAQ with violations of Regulation NMS and Regulation SHO based on its failure to appropriately monitor and enforce compliance with price-test restrictions in October 2011 and August 2012.

So NASDAQ ended up with a magical $10.8 million gain. Shareholders collectively lost billions of dollars here. Imagine how eager the users of the next great social media or Internet craze are going to feel about getting to participate in an overly-hyped up IPO. If you want to know what destroys trust and what causes the feeling that the market is rigged against the retail investor, this joke of a $10 million settlement pretty much sums it up.

What is so frustrating about this news is that it fails to take into account the fallout and the collateral damage which took place as a result. Any time you have confusion of this magnitude in a hot IPO suddenly worth billions of dollars, you end up having an army of other shareholders that are basically forced to hit the panic button and sell because they do not know how bad it will get. This collateral damage drove down the price of the post-IPO trading and contributed to billions upon billions of shareholder losses.

Facebook’s IPO was first signaled at $28 to $35 per share. Then the underwriters raised the price range to a better $34 to $38 range. Then the company decided to sell 25% more shares and many Facebook insiders and employees got to cash out early. After pricing at $38.00 for May 18, 2012 trading, the stock went briefly to $45 after opening around $42 or so and closed out at $38.23 on the first day. By June 1, 2012 Facebook was trading at $27 and Facebook spent much of 2012 trading even under $20 per share. Now the stock is close to $24.

You might just assume that with the name 24/7 Wall St. we are mere champions of the cult of finance regardless of what happens. That is far from the case. The public should be outraged about this small settlement. Investors got screwed here, and $10 million just feels like one more insult on top of injury.

South Miami has agreed to settle the charges. The city will retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

South Miami had originally sought financing to develop a public parking garage. Where thing went awry was that the project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Annual certifications made by South Miami to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements.

The city ended up settling with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Due to the payment and settlement, bondholders were not financially harmed and they’re not required to include any interest from the bonds in their gross incomes.

The SEC said,

An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami’s participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

FULL SEC CHARGE

A non-prosecution agreement means that there will be no criminal charges filed against the company. The SEC even said here that it has decided not to charge the company under the Foreign Corrupt Practices Act because of its prompt reporting of the violations on its own initiative. Other reasons cited were the completeness of the information provided and the real-time cooperation with the SEC’s investigation, which saved the agency substantial time and resources.

The SEC went on to say that this NPA is the first that the SEC has entered involving Foreign Corrupt Practices Act misconduct. In parallel criminal proceedings, the Justice Department entered into an NPA with Ralph Lauren in which the company will pay an $882,000 penalty.

The bribe payments and gifts to Argentine officials were shown by the SEC to come to a total of $593,000 during a four-year period. Ralph Lauren agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest. It is almost surprising that shares are down even 1.7% at $166.25 on the day.

FULL SEC NOTE

TheStreet.com and three former executives settled a Securities and Exchange Commission probe into accounting fraud at the company yesterday.

The SEC said the fraud occurred from 2008 to 2009 while slapstick CNBC stock picker Jim Cramer served as chairman of the financial website.

The SEC’s lawsuit claims the accounting fraud was aimed at making Cramer’s online darling at the time appear more successful.

In settling the troublesome probe, TheStreet.com didn’t admit or deny any guilt.

Cramer was not named in the suit.

The SEC said three former executives — ex-CFO Eric Ashman and former co-presidents Gregg Alwine and David Barnett — concocted fake sales contracts using crude cut-and-paste forged documents that were shuffled back and forth among several unidentified counterparties to give an appearance of growth and profits.

“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew Calamari, director of the SEC’s New York office.

Douglas A. McIntyre

The issue arose from a Facebook posting by Hastings back in July when he announced Netflix users streamed 1 billion hours in June for the first time in history. Netflix stock soared on the news.

The SEC is investigating whether that information was considered material public information that should have been delivered in a public press release.

In a statement released by Hastings, he conterargued that he had 200,000 subscribers, thus making the announcement a public statement.

“We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month,” Hastings said.

“We remain optimistic this can be cleared up quickly through the SEC’s review process,” he continued.

Shares of Netflix closed up 2.26% to $86.17 on Thursday, before falling 1.33% to $85.02 in after-hours trading.

Samuel Weigley

Follow him on Twitter: SWeigley

Not all market participants like decimalization. It has acted as a key income killer for market makers. The flip-side is that Joe Public is no longer 12.5-cents out of the money every time he buys a stock. We would have assumed that this argument about the future of decimalization was dead and buried. Apparently, Tom Clancy’s line of “Assumption is the mother of all F*&^ups” is true in this case.

News came out this week that the Securities and Exchange Commission staff will host a roundtable early in 2013 (Feb. 5) to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.

In the notice the SEC said that various parties have raised concerns that the adoption of decimalization may be detrimental to small and mid-sized companies. The Jumpstart Our Business Startups Act (or JOBS Act) was enacted in April and it directed the SEC to conduct a study of the effects of decimalization on initial public offerings and on small-cap and mid-cap companies.

This does not imply that an end of decimalization is on the horizon. The SEC’s notice says that the roundtable is meant to discuss what changes, or if any changes, should be considered. What this does imply though is that there could be a push for decimalization or fraction pricing changes in new companies or in smaller companies.

The Report to Congress on Decimalization prepared earlier this year noted, “Prior to the IPO Task Force Report, in a paper released in June 2010, Grant Thornton also concluded that decimalization has had a negative effect on the equity markets, and characterized decimalization as a “death star.”12 The paper argues that decimalization almost eliminated the economic incentive to trade in small capitalization stocks, taking “96 percent of the economics from the trading spread of most small cap stocks – from $0.25 per share to $0.01 per share.” The paper also asserts that decimalization, combined with other innovations such as an increase in online brokerage, was significantly more damaging to the IPO market than oft-criticized provisions from the Sarbanes-Oxley Act of 2002.”

Imagine how confusing it would be if the really large companies were quoted in fractions and the rest of the companies were in pennies. Or what if the SEC determined that the smaller companies should be in fraction prices again?

Regulations and changes of this magnitude are difficult to implement and they often take considerable time to get used to. Sometimes changing back to the way things were before is too much trouble.

If you want to consider how hard change is, consider the metric system. Not many Americans can use the metric system and cannot translate pounds from kilos and miles from kilometers. The U.S. has even passed laws to get the country on the metric system yet airlines in America do not have “Frequent Flyer Kilometer” plans. If you go sell scrap gold or silver it is measured in grams, but go ask someone the price of gold and they will tell you that gold is close to $1,700 per ounce.

Decimalization has been around for more than a decade now. Even if a roundtable came out in favor of reverting back to fraction pricing it may be too late to go back.

JON C. OGG

The four firms and fines came to more than $1.8 million and were, without having to admit or deny any of the charges, as follows:

• Ambit Capital Pvt. Ltd. agreed to pay disgorgement and prejudgment interest totaling $30,910.
• Edelweiss Financial Services Limited agreed to pay $568,347.
• JM Financial Institutional Securities Private Limited agreed to pay $443,545.
• Motilal Oswal Securities Limited agreed to pay $821,594.

Allegations and orders against these firms included sponsored conferences in the U.S., having employees travel regularly to meet with U.S. investors, trading securities of India-based issuers, and participating in securities offerings from Indian issuers to U.S. investors.

What makes this SEC action more unusual is that it is charging foreign firms. In the past, investors dealing with foreign firms were effectively out on their own and if problems arose it required involving international authorities.

It would seem likely that since India’s economy has seen its growth rates lower than the past that the losses in the Indian stock market may have had something to do with these charges. Each individual charge can be seen here.

JON C. OGG