“One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” George S. Canellos, the agency’s acting enforcement chief, said Tuesday in a statement. “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”

Also, when you're not in the business of convincing people to fund you, you're in the business of convincing people to buy what you're selling and sell what you're buying, which further constrains you from saying "what we're selling is dogshit."¹

Anyway I found a certain poignancy in Citi's correspondence with the SEC over Morgan Stanley Smith Barney, which was released on Friday. Citi and Morgan Stanley had a joint venture in MSSB, and MS valued it at around $9bn, and Citi valued it at around $22bn, and at most one of them was right and, while the answer turned out to be "neither," it was much closer to MS than C. Citi was quite wrong, and since this was eventually resolved by a willing seller (Citi) selling to a willing buyer (MS) at a valuation of $13.5bn, Citi had to admit its wrongness in the form of a $4.7 billion write-down, and the stock did this:

Which is the market's way of saying: no biggie Vikram, we already knew you'd be taking the writedown, honestly we thought it'd be worse than that, we just didn't say anything because we didn't want you to feel bad, but we're glad that's cleared up now.

But the SEC doesn't get to do that, because – and this is sort of endearing – the SEC has to pretend that a company's financial statements convey meaningful information about the actual world, and so last year they sent Citi a bunch of letters to the effect of "um, really, with that MSSB valuation?" To be fair even Citi was admitting, back in its 10-K a year ago, that MSSB wasn't worth what its balance sheet said it was worth – but it said that this was a temporary impairment and so didn't need to be reflected on Citi's financials since MSSB would recover soon and anyway it's not as if Citi was looking to sell at a depressed price. Here is how the SEC responded in April:

We note your disclosure related to the temporary impairment of your equity method investment in the Morgan Stanley Smith Barney (MSSB) joint venture. Please address the following:

• You assert that, as of December 31, 2011, you do not plan to sell your investment in this joint venture prior to recovery of the value. Please tell us how you were able to reach this conclusion given the fact that you are currently in negotiations with Morgan Stanley to sell at least part of your equity interest in this joint venture pursuant to options held by Morgan Stanley.
• We note that you have based the fair value of this equity investment on “the midpoint of the current range of estimated values.” However, you do not disclose this range, nor do you disclose how the range was estimated.

Citi's response is absolutely gorgeous; it says:

• We are not in fact negotiating with Morgan Stanley about selling the rest of MSSB, and
• We can't disclose our internal estimate of MSSB's value, because that would hurt us in our negotiations with Morgan Stanley about selling the rest of MSSB.

See what they did there?² The SEC did, a few months later anyway, when the negotiations got so advanced that the SEC pushed Citi for more information about its internal valuation of the MSSB joint venture. Citi obligingly provided that valuation to the SEC, confidentially, ten days after it disclosed the write-down.

Also during these negotiations Citi's investment banking division provided a valuation of MSSB "that slightly exceeded Citi's carrying value of approximately $11 billion for that 49% interest as of June 30, 2012." So:

• Citi provided a valuation of an asset to its counterparty as a negotiation tool,³
• which was higher than the valuation it reflected in its publicly filed financial statements,
• which was higher than its internal estimate of the correct valuation,
• which was closest to the market's estimate of the correct valuation, and the ultimate valuation at which Citi sold the asset.

So Citi "knew" that its financials, and the valuation it gave in negotiations with MS, were "wrong." Making this all a little sketchy, but also a lot no-harm-no-foul. Citi was locked into putting a brave face on its MSSB valuation, because admitting that there was a problem would have actually cost shareholders money, in the form of a worse negotiating position with MS. And so Citi provided two separate estimates of MSSB's value, to MS and to Citi's own shareholders, that did not accurately reflect what it thought it would ultimately get for MSSB. And then it didn't. And since everyone pretty much knew that that was going on, no one has much cause to complain. The typical fraud lawsuit starts with "you lied about X, and when you came clean, the stock dropped by $Y, so give us $Y"; here the lawyers' damages would be negative. Citi came clean, as it were, about MSSB, and the market breathed a sigh of relief.

So, I imagine, did Vikram Pandit, though in his case the relief didn't last long. Citi did what probably really was the right thing for shareholders: it maintained with a straight face that MSSB would be cheap at $22 billion. That was wrong, of course, but since no one believed it, it all worked out okay.

Citi: SEC letters and responses [EDGAR]
SEC Pressed Citi for More Details on Brokerage Joint Venture [WSJ]

1. Unless you're Lloyd Blankfein? This is a fine line.

2. No really, it really says this. To be fair the second part is phrased as "such disclosure could place Citi at a competitive disadvantage in the event that negotiations with Morgan Stanley regarding fair value were to take place in connection with the exercise of the above-referenced options."

3. Ooooh is that bad? Is it Fraud to tell someone that an asset you own is worth $100X when you value it internally at $80X? No, right? I mean not if your counterparty is Morgan Stanley. Ponder CDO cases however.

• The Too Big To Fail Subsidy Is Negative Sixteen Billion Dollars, Or Possibly Some Other Number
• Michael Milken Seems To Have Been Overdue For Another SEC Investigation
• Ratings Agency Would Prefer Not to Be Sued, Won’t Cut U.S. Debt Rating

You don't want to live in a town where the police and the mob work together.

In a completely unrelated note, the Second Circuit recently heard arguments from the SEC — the federal agency statutorily charged to enforce the nation’s securities laws — and Citigroup — a company targeted for securities laws violations that it refuses to admit or deny committing — on the SAME SIDE.

This should be a red flag.

They wanted the Second Circuit to spank Judge Jed Rakoff for having the audacity to ask the SEC to kindly do its job. The nerve of some people.

Well, securities law may not be as sexy as drone strikes, but I watched the SEC try to pull off just as naked an executive power grab.

So it was my first return in my new capacity as a journalist to the federal courthouse that I’ve visited time and time before as a lawyer. It’s a different experience walking in without a suit and without drilling yourself to make sure you remembered everything you needed for the hearing. Almost relaxing in a way.

The courtroom was an absolute zoo, built far too small for a hearing that had the attention of the media and every financial institution worried about the future of their relationship with their regulator. Add in the army of clerks dropping in to watch, and the courthouse had to set up an overflow room with folding chairs and a TV simulcasting the event (and even that room was eventually standing room only).

When I first got there, the TV only showed the floating face and torso of Judge Rosemary Pooler, joining the proceedings from the Northern District of New York, in a courtroom that looked eerily like the backdrop to a hostage video with sparse, utilitarian walls, a light switch and a flag. I felt bad watching her sit like an interviewee in a green room with a hundred lawyers and journos watching her every move. It felt like Legal Big Brother.

The background of the case is simple enough. In 2011, the SEC and Citigroup brought a consent decree to Judge Rakoff. The judge felt obliged to ask for some factual backup before rubberstamping a decree that basically let Citigroup off the hook for activity that, at the time, public opinion thought pretty severe. When the SEC and Citigroup failed to meet this basic standard to Judge Rakoff’s liking, he declined to approve their consent decree. Basically, if the SEC really has gathered enough evidence to reach a reasonable settlement with someone, they should be able to provide the judge with some evidence to back up its reasonableness. In math class you have to show your work.

This isn’t the first time Judge Rakoff has issued a controversial ruling challenging accepted government policies. Remember, this is the guy who made the death penalty unconstitutional for a hot minute. Now he’s questioning the SEC’s chummy totally professional and arms-length relationship with Wall Street.

Interestingly, because the subsequent acquittal in the Stoker case brought to light facts that the SEC and Citigroup originally failed to provide Judge Rakoff, he no longer believes that he must deny the consent decree and would almost assuredly approve the agreement on remand. No harm, no foul, right?

But Michael Conley for the SEC and Brad Karp for Citigroup weren’t thrilled with this possible result, asking the Second Circuit instead to reverse the lower court decision.

Why? Well, the money exchange came when Judge Raymond Lohier (the final judge on the panel was Judge Susan Carney) asked about deference and why an Article III judge would question the judgment of an executive agency that presumably reached its decision based on a sound review of the evidence.

The lawyer for Judge Rakoff, Rusty Wing [disclosure: I used to work with Rusty at LSW, though I had no involvement whatsoever with this matter], pointed out that the SEC is entitled to deference — but that doesn’t mean they aren’t wrong, eliciting laughter from the audience and a snarky “No! Really?” from Judge Lohier himself.

It sounded a lot like the SEC was going to the mat on this one because they didn’t want “deference” as much as they wanted “tyranny” — a ruling affirming that any decision they reach is subject to zero judicial review based on their status as part of the executive branch because we should all just trust the executive branch without any transparency. Sounds a lot like drone strikes to me.

Depending on the outcome of the hearing, when Mary Jo White gets there and starts kicking tail, as Elie suggests, she will have a couple drones at her disposal.

Judge Rakoff Rejects SEC’s “Contrivances” In Citigroup Settlement [Forbes]

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• California Law School Claims Free Speech Right To Offer Piss-Poor Education And Be Accredited For It
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SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated “Reg FD”. This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all “material” investor information in my post and that we needed to instead release the June viewing fact “publicly” with an 8-K filing or press release.

“Reg FD was about protecting me from telling Carl Icahn something special, the big investor, that not everyone else got,” Hastings said. “This was me talking to 200,000 Facebook followers; it is letting the small guy in on the information.”

"I don't want to be tagged with an anti-investor legacy," Schapiro wrote in an e-mail to [Corporation Finance Director Meredith] Cross with the subject line "Please don't forward."

"In light of all that's been accomplished, that wouldn't be fair, but it is what will be said ..."

If you had asked us two years or two months or two days ago if we thought that there would be a time in the near future when Securities and Exchange employees would not be regularly reprimanded for watching porn on their work-issued computers for 98 percent of the workday, we would have said absolutely not. No judgment, but in our professional opinion, people do not go from, among other things:

* Receiving “over 16,000 access denials for Internet websites classified by the Commission’s Internet filter as either “Sex” or “Pornography” in a one-month period”

* Accessing “Internet pornography and downloading pornographic images to his SEC computer during work hours so frequently that, on some days, he spent eight hours accessing Internet pornography…downloading so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office.”

…to living a porn-free existence at l’office.

Several Securities and Exchange Commission staffers responsible for monitoring the markets and exchanges broadly misused computer equipment to download music and failed to properly safeguard sensitive information, a report has found.

The report also found that the staffers failed to protect their computers and devices from hackers, even as they were urging exchanges and clearing agencies to do just that.

Although no breaches occurred, the staffers left sensitive stock exchange data exposed to potential cyber attacks because they failed to encrypt the devices or even install basic virus protection programs.

The report says the staff may have brought the unprotected laptops to a Black Hat convention where hacking experts discuss the latest trends. They also used them to tap into public wireless networks and brought the devices along with them during exchange inspections.

[T]he full report... details an even broader array of problems, from misleading the SEC about the office's need to buy Apple Inc products, to cases in which staffers took iPads and laptops home and used them primarily for pursuits such as personal banking, surfing the Web and downloading music and movies.

Rymer found that the office did not have any planning or oversight into its purchases of computer equipment. From 2006 through 2010, the office got permission to spend $1.8 million on technology devices.

"The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion," said Matt Kitzi, NASAA Enforcement Section Chair and Missouri Securities Commissioner. "Just look at web domain names: it has gone from a couple hundred to well over 1,600 in the past year. They are staking up a position to enter crowdfunding market. There will be a lot more to come on this."

In early in August, the Massachusetts Securities Division charged a Lowell, Massachusetts man for a crowdfunding scam, bilking 20 investors who thought they were investing money in a gaming site of $153,396.

Secretary of the Commonwealth William Galvin, who brought the case, wrote to the SEC urging regulators not to let the JOBS Act changes become a tool for financial fraud and abuse. "Longstanding problems in the markets for small and speculative stocks show the pitfalls of relying on the wisdom of crowds."

The Securities and Exchange Commission has sent letters of inquiry to at least five movie studios in the past two months, including News Corp's 20th Century Fox, Disney, and DreamWorks Animation, a person familiar with the matter said.

The letters ask for information about potential inappropriate payments and how the companies dealt with certain government officials in China, said the person, who was not authorized to speak publicly about the letters.

China's booming middle class is increasingly willing to pay tickets prices for a cinema experience, forgoing cheap pirated DVDs and free internet downloads.

Securities regulators took enforcement action against an online trading platform and two private funds offering Facebook shares on Wednesday, the first action in a year-long probe into the lightly regulated world of private company-share trading.

The Securities and Exchange Commission charged SharesPost, which matches buyers and sellers of private shares, and its CEO Greg Brogger with failing to register as a broker-dealer before offering the securities.

The SEC also brought charges against two private funds and their managers for allegedly misleading investors about hidden fees in Facebook stock offerings.

In view of the sustained public debate over the last several years concerning net neutrality and the Internet and the increasing recognition that the issue raises significant policy considerations, we do not believe that AT&T may omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7).

Under existing law, startup companies can raise money easily and quickly from "accredited investors" -- individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be "accredited."