Insider Is Fleet, but the SEC Is Fleeter

A big options purchase was the tipoff to alleged insider trading. Also: Reed closing in on proposals for the Big Board; at Fannie Mae, did ''manual systems'' cause a $1.2 billion slip of the pen?; and more.


On Monday, FleetBoston’s stock surged a portfolio-popping 26 percent after announcing that it had agreed to a merger with Bank of America. Perhaps, one might have hoped, corporate executives had gotten the message from two years of indictments, plea bargains, jail sentences, and trials: If you break securities laws, you’re in for a world of trouble.

But alas, at least one person with inside information just couldn’t resist cashing in on this knowledge after all.

On Tuesday, the Securities and Exchange Commission brought emergency enforcement action in Boston federal court against a former Argentina-based FleetBoston employee and two of his relatives. The SEC accuses them of using insider information in a bid to illegally profit from the second-largest bank merger in the United States.

The regulatory agency obtained a temporary restraining order and asset freeze against Guillermo Garcia Simon, his wife, and his brother. The trio bought FleetBoston securities late on Friday, October 24, and without the freeze would have realized profits of at least $500,000, and potentially more than $1 million, alleges the commission.

Specifically, the SEC alleges that the three Simons purchased 1,100 Fleet call options during the last hours of trading on October 24, at a cost of about $11,000. The options purchase represented over 50 percent of the total trading volume in that series of call options on Friday, according to the SEC complaint. Juan Marcel Marcelino, district administrator of the SEC’s Boston office, told Reuters that the SEC was tipped off after the American Stock Exchange noticed the unusual trading volumes.

The call options entitled the trio to buy Fleet stock for $35 per share; at the time of the options purchase on Friday, it was trading at about $31. The acquisition price of $45 per share was announced before the market opened on Monday. During that day, Fleet’s stock price rose as high as $39.66. The call options increased in value by more than $500,000, and the value of the underlying stock increased by more than $864,000.

The SEC’s nearly instantaneous reaction took many legal experts by surprise, because the regulatory agency usually takes weeks, months, or even years before it brings insider trading cases. Since the commission obtained the emergency order before the option transaction was concluded, it was able to freeze the assets before any profits could be removed.

Reed Closing in on Proposals for the Big Board

Interim New York Stock Exchange chairman John Reed next week plans to unveil sweeping changes intended to improve the exchange’s corporate governance practices.

The cornerstone of his proposal: Splitting the board of directors and giving outside directors much more power, according to published reports.

Exchange members will have a chance to review the proposal on November 3, and suggest changes, according to The New York Times.. Then Reed plans to submit his proposal to the exchange’s members for a vote on November 18.

According to The Washington Post, Reed is mulling the split of what is now one job — NYSE chairman and chief executive — into two. Under this plan, reported the paper, the chairman would run the new independent board and oversee exchange operations, and the chief executive would not have a hand in regulatory matters.

“I think this structure makes a whole lot of sense,” Robert H. McCooey Jr., chief executive of Griswold, a member firm, told the Times.“We get input from customers and member firms on the one hand, and on the issues that have caused us grief over the past year or so, we have a truly independent board that can deal with governance and compensation. I think John has done a tremendous job, doing it as quickly as he has.”

Reed’s plan would eliminate the NYSE’s current 27-member board and replace it with a much smaller body, ranging between 6 and 12 members, all of whom would come from outside the securities industry, according to the Post. He will also recommend the creation of a larger advisory board, made up of industry insiders, who would help the exchange with business strategy, the paper noted.

The independent directors on the new, smaller board would include retired officials with no active ties to the securities industry, such as Madeleine K. Albright, the former secretary of state, who joined the board earlier this year. These directors would assume responsibility for touchy topics like compensation and regulation, according to the Times.

The larger advisory board would represent the interests of the industry and would include Wall Street executives, exchange members like specialist firms and floor brokers, institutional investors, and executives of companies with shares listed on the exchange, reported the Times.

Although the two boards would meet separately, on occasion they might meet together, said the paper, citing an exchange member.

Other Reed proposals, according to The Wall Street Journal:

  • At least one board slot will be set aside for a New York Stock Exchange seat holder, and another for a state finance officer.
  • No former compensation committee member could sit on the board.
  • Compensation for the exchange’s CEO would be set at about $2 million.

The Journal also reported that Reed hired a former prosecutor to investigate whether former chairman and chief executive Richard Grasso or the exchange’s board looted the NYSE regarding the approval of Grasso’s $187.5 million pay and retirement package.

Reed is also pushing for a quick end to the NYSE’s investigation of its specialists, demanding that the specialists review hundreds of thousands of trades and establish whether there was any impropriety.

Reed, who plans to serve until the end of the year, is actively looking for a successor.

At Fannie Mae, Did ”Manual Systems” Cause a $1.2 Billion Slip of the Pen?

Now it’s Fannie Mae’s turn.

The largest mortgage finance company filed a revised third-quarter financial report on Wednesday with the Securities and Exchange Commission to correct “computational errors” to the tune of $1.2 billion.

The company said the errors were discovered in the course of the standard review in preparation of the company’s third quarter 10-Q and were primarily due to the implementation of an accounting standard.

The correction will not affect Fannie Mae’s income statement. However, it resulted in increases to unrealized gains on securities, accumulated other comprehensive income, and total stockholders’ equity as of September 30.

The revised stockholder equity is $17.52 billion, compared with the $16.39 billion reported in its October 16 filing.

In response to Fannie Mae’s announcement, Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, said in a statement that the “OFHEO is evaluating the circumstances surrounding this error, including the company’s reliance on manual accounting systems.”

“This error underscores the need for the special review OFHEO is about to begin of accounting policies, practices, and internal controls at Fannie Mae,” continued the statement. “This development also adds urgency to Congressional approval of the additional 2004 resources requested by the White House for OFHEO to fund this special examination and strengthen our staff and oversight.”

Earlier this month the OFHEO issued a request for proposals from companies wishing to review accounting policies and practices at Fannie Mae “to supplement OFHEO expertise in planning and completing the review.”

And what of Fannie Mae’s sibling? At the beginning of October, SEC chairman William Donaldson said that the regulatory agency is looking into whether fraud was committed at Freddie Mac, which is embroiled in its own accounting troubles. The OFHEO is investigating Freddie Mac, as well.

Short Takes

  • Goldman Sachs is discouraging its managing directors from serving as board members on public companies in an effort to reduce potential of conflicts of interest, according to the Financial Times.
  • Eastman Chemical Co. named Richard A. Lorraine senior vice president and chief financial officer, succeeding James P. Rogers, who will become executive vice president and president of the company’s Eastman Division.

Lorraine was most recently executive vice president and chief financial officer for Occidental Chemical Corp. In addition to all finance responsibilities, he led the purchasing, logistics and E-business functions of the $3 billion chemical company.

  • CVS Corp. raised its quarterly dividend by 15 percent.
  • Nalco Co. raised about $1.6 billion in a multi-currency junk bond sale on Wednesday, the largest in nearly six weeks, according to Reuters, citing strong investor demand for large, easily traded bonds. It was more than eight times oversubscribed. The bond sale will help pay for Nalco’s leveraged buyout from a French utilities group.

Nalco sold $665 million and 200 million euros of senior notes, due 2011, priced at par to yield 7.75 percent. It also sold $465 million of senior subordinated notes, due in 2013, priced at par to yield 8.875 percent, and 200 million euros of senior subordinated notes, due in 2013, priced at par to yield 9 percent.

  • FPL Group Inc. said it closed on $3 billion of new credit facilities; $1 billion is dedicated to Florida Power & Light Co., and the remaining $2 billion to FPL Group Capital Inc.

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