First let me say that this has nothing to do with me, but given my interest in all things financial and the government during this financial crisis, I read with interest the Office of Inspector General’s Report to Congress regarding the SEC. The SEC deserves credit for casting such a critical eye at itself. It should happen more often in government.

First the humorous side of the report, the SEC apparently has issues with Porn usage among employees.

Now the Serious.

It never crossed my mind that it would be legal for employees of the SEC to trade stocks. Not that they shouldn’t have rights to own whatever they want in a trust. They should. Trading individual stocks and bonds. Wow.

There is a SEC policy in place regarding trading and what employees can and can’t do according to this report, but if you know about actions of one company, even if you don’t trade that company, doesn’t that provide you insight into an entire industry ?

But wait there is more. According to this report,

” we have determined that the Commission’s current system in place to report the ownership and
trading of securities is insufficient to prevent and detect insider trading on the part of
Commission employees or violations of the Commission’s rules.

The OIG investigation has found that the reports that employees are required to file when they buy, sell or own securities are not meaningfully reviewed or sufficiently checked for conflicts of interest.  Moreover, there is currently no system in place for the Commission to detect if an employee who has traded or owns a security failed to properly report such transaction.  “

Double wow.

And then there is this:
Allegation of Retaliatory Investigation
The OIG is investigating an allegation that Commission staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.  During this reporting period, the OIG took extensive sworn, on-the-record testimony of the complainant and reviewed certain relevant documents.  The OIG plans to interview additional witnesses identified by the complainant and to take the sworn, on-the- record testimony of the Commission attorneys who worked on the matter.

If you want more information about Naked Shorting, this is one of my posts on the subject

The OIG report makes for interesting reading with ALLEGATIONS of intimidation, perjury, falsifying data to a court to get a judgment, and lots of abusive behavior within the employee ranks.  Then there is the irony of their lack of a definitive policy on the distribution of material non public information.

Finally, there is this nugget from the study:

Referrals to Department of Justice for Prosecution 6. Thats 6 SEC employees being referred to the Department of Justice for consideration of criminal prosecution. For the 6 months between April 1 and Sep 30 of this year. Out of only 3500 employees.

No wonder they released it on the Friday after Thanksgiving without any press release to let people know its available…

Here is a link. Check it out for yourself

http://www.sec.gov/about/oig/audit/2008/seminov08.pdf

and

Help ensure the integrity of SEC operations by reporting to the OIG suspected fraud,  waste or abuse in SEC programs or operations, and SEC staff or contractor misconduct by contacting the OIG.
Call:
Hotline# # (877) 442-0854
Main Office# (202) 551-6061
Web-Based Hotline Complaint Form:
www.reportlineweb.com/sec_oig
Fax:# # (202) 772-9265
Write:
Office of Inspector General
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-2736
Email:
oig@sec.gov
Information received is held in confidence upon request.
While the OIG encourages complainants to provide information on how they may be
contacted for additional information, anonymous complaints are also accepted.

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In the big picture this is not a major suggestion. Think of it as something that can be done with no downside and long term benefit.

I personally don’t think a stimulus package of checks or rebates to the consumer will work. I believe consumers are so beaten up and fearful of the future that they will put it in the bank.  Of course 20 years ago that would have been a good thing, These days banks don’t appear to be lending those deposits. So there is no primary or secondary stimulus impact.

Instead, having the government spend money on public works, which in turn creates jobs, will have a quick and positive economic impact. As much as it pains me to write those words, a drowning economy can’t worry about its form as it tries to get back to the surface. Sometimes you have to win ugly.

Private money is going to stay on the sidelines because we all know that there are unbelievable bargains available out there. Our money is waiting  to go to equity and debt where we think we will get outsized returns. If and when those returns happen, money will come back in as new capital investment. Until then, the only liquid investor willing to put non current assets on their balance sheet is the government.

My little idea on where the government should spend money in public works projects ?

Parks and Schools.

Maybe this is obvious to those in the coming administration, but I think we should be buying up foreclosed homes in areas that have been overwhelmed with them . Tearing them down, and replacing them with parks and schools.

Of course municipalities will have to get involved with eminent domain, but a guess is that if we buy occupied homes in communities with a large base of foreclosures, we would be rescuing many homeowners from huge declines in the market values of their homes. Something many will not be upset with.

The upside of this program of course is that not only will you be improving areas that have come across tough times with parks and schools that will act as attractions to potential new residents, but the inventory of homes will be reduced as well.

Two years ago creating parks and building schools was a local endeavor that few municipalities could afford. Today they are an investment that can bring suffering communities emotional and financial relief

On to the subject of the Inauguration. Four years ago I suggested that the Bush administration cancel the inauguration parties and instead ask corporations to donate that money to the victims of the Tsunami.

Its fair to ask where I stand on the coming inauguration and whether parties should be canceled and money sent to the victims of the tragedy in India.

When the tsunami hit, it was a devastaion of epic proportions. Raising money for the survivors and rebuilding was a responsibility we as a nation accepted. We had telethons, events and fund raisers to try to help. The unfortunate situation in India, at least as it stands today, is not one that can be helped by contributions to the survivors. Thoughts and prayers, yes. Potentially  support for anti terrorism programs, yes. But re-routing funds from anything to India, as least as far as I am aware, won’t help survivors or hostages at this time.

In addition, the 2005 inauguration was President Bush’s 2nd term. That it and of itself makes it a completely different set of circumstances.

That said, the coming inauguration is not off the hook. Some of the costs for housing, events and tickets I have seen and been offered are absurd. President Elect Obama should recognize and address the fact that in these economic times, corporations that are laying off people or getting bailout money should not be spending money sponsoring inaugural events.

Is there any doubt that the next “bailout scandal” will be banks and other bailout recipients sponsoring Inauguration events or spending boatloads of money to attend ?

Note to PE Obama, have your staff scrub the sponsors list and look for the words “bank”, GM, Ford and Chrysler and then google all sponsors for the word “layoff”

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Just a brief update to try to explain what some commenters dont seem to understand.

1. the only thing that cable companies, and satellite for that matter have to sell is bandwidth and the applications they can run on that bandwith. More bandwidth means more digital everything.

2. For Basic Cable subscribers that get say, 40 analog channels, they are consuming 40 x 38.6mbs or 1.54 Gbs. Let that sink in. 1.54 Gbs of bandwidth. Compare that to how fast your internet access is. That more bandwidth than your entire neighborhood consumes online , by a lot.

Thats also the equivalent of 500 standard def digital channels.  If you convert that to revenue per bit for cable companies, or cost per bit for basic cable consumers,  the basic cable customers are getting the best deal in town. By a long shot.

Digital cable customers, not so much. Digital customers are paying multiples of analog customers for bandwidth.

In reality, analog customers are getting an amazing deal, and the cable companies have been hesitant to convert them only because of the potential FCC backlash.

I’m as cynical as the next guy when it comes to cable rates and motivations, but the reality is that the longer analog remains, the fewer opportunities to leverage the freed up bandwidth to create next generation bandwidth hog applications.

Will the cable companies charge us an a lot for that bandwidth, probably. But when we start to see applications built on top of 250mbs per second and more, it will have far more value to society than watching USA Network on your old analog TV

And Net Neutrality ? Well if everyone had that 1.54gbs available to them, net neutrality would be a non issue. We wouldnt be arguing about access or pre emption, we would be arguing about quality of service

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You may not know it, but the cable industry is fighting a battle for the future of the internet. In the grand scheme of things, I think both the FCC and the Cable and Satellite industries want to see the internet thrive. In this case I believe the FCC is making a mistake.

Every now and then, things get a little confused and in this case the confusion is going to cause the internet to take a hit. It could be a potentially big hit, and the only group fighting it is the cable industry, and yours truly.

The Cable industry has been doing exactly what every internet user in search of more bandwidth wants them to do, converting analog versions of channels to digital.  Each analog channel takes up 38mbs of bandwidth. Thats right.  CSPAN takes up more bandwidth than you have available to you for internet services. Crazy isnt it ?

The standard def digital version of the same channel takes up less than 3mbs. The typical HD version takes up about 8mbs or less. So, every time a channel is converted from analog to digital a MINIMUM of 28mbs is freed up.

Of course the bandwidth that is freed up can be used for any number of digital offerings, from more internet bandwidth (accomplished via channel bonding and Docsis 3.0), to more HD channels (which obviously is good for our HDNet), more video on demand and more.

Why has the FCC made this an issue ? Because it does reduce the number of channels available to those who connect their cable to older set top boxes or directly to their analog TVs.

So which is more important, protecting analog TV connectivity, or having more bandwidth available ? Obviously I think freeing up bandwidth should be a priority. Otherwise, what is next , stopping Youtube and other video sites from increasing the bit rate of videos because those with dialup will be forced to upgrade ?

Broadband should be a priority in this country. It not only equates to faster internet service, but it will open up many new applications that can significantly impact our society. All of which are far more important than making sure that an old analog TV can receive a few more basic cable tv channels.

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This past Nov 22nd Youtube had its first major live event. A concert featuring HDNet fave Joe Satriani , Katy Perry Will.I.Am and others.   Of course everyone involved in the space is chattering about whether or not the show was a success.

According to Mogulus, the live internet broadcast peaked at about 700k simultaneous users. That’s huge for an internet audience.   I think by any traditional Youtube measure , you have to call it a success, with some major gotchas.

First the reasons why it was a success:

700k would be a great audience for a small cable network. Especially for a 1 off show.

MORE IMPORTANT than the audience size was the amount of money that Youtube had to spend to generate that audience. My guess is that they only promoted it on their site  and via traditional PR.

A traditional small cable network would have had to spend several million dollars in off network promotions (radio, tv , net, mag, newspaper) in order to generate that size audience and then they would crow about how it was one of its biggest audiences ever.If Youtube can prove that it can generate this size audience on a weekly or monthly basis, it has a huge hit machine on its hands.

In particular, the audience was probably right in the 18 to 34 sweet spot that advertisers covet. More good news. They will be able to sell a ton of ads in and around their shows.

Thats on the positive side. What about the negative ?

While the cost to promote was extraordinarily low, the cost to deliver was incredibly high. The marginal cost to deliver one more viewer for even the smallest cable network is the same as the largest. Nothing. Youtube had to use the services of Akamai to deliver the event. Akamai by all accounts did a great job, but as the size of the audience grows, the total cost to deliver future Youtube live shows will increase. Cable networks do not have this problem.

Some estimates had the cost to Youtube at 25k or 10c Gb. 10c a gig works for ad hoc downloading, but when you have to have dedicated servers pushing out unicast streams, those costs go up. But even if its only 50k per hour. Extend that out for an entire day, and you are talking $1.2mm PER DAY to deliver an 800k continuous stream to only 700k average simultaneous users Slice and dice the online delivery costs any way you like. Its still incredibly expensive

Thats not going to cut it for any internet content source, even one owned by Google,  to be able to compete with even the smallest cable network.

The 2nd issue applies to the net as a whole. Akamai could devote its full resources to nicely deliver the show to 700k users. The real question is how many of these types of events could they deliver at once ? What if myspace or MTV came to them and there were 3 or more of these at the same time ? How many simultaneous users across multiple large events could Akamai and its competitors handle ?  I would be shocked if it could handle 3mm simultaneous 800k streams reliably.

There were reports of buffering and drop outs for the Youtube Live event. Thats acceptable today. It wont be acceptable as a TV alternative. It will be less acceptable if these live events are offered as alternatives to traditional TV

So there was good news and bad news. Anytime you attract and deliver 700k simultaneous users, its a success. Whether or not a content provider, even Youtube could ever make a profit doing anything more than 1 off events has yet to be determined

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November 18, 2008

On behalf of

Mark Cuban

RE: SEC Civil Action in the United States District

for the Northern District of Texas, Dallas Division

The SEC knows their case centers on one telephone conversation between two individuals- 4 years ago. The SEC claims there was an agreement between these parties to the conversation to keep certain information confidential. We interviewed Guy Faure, the former CEO of Mamma.com Inc., with whom the SEC claims Mr. Cuban made an agreement. We had a court reporter transcribe the interview. There was no agreement to keep information confidential. Here is a relevant excerpt from the interview with Mr. Faure:

CHRISTOPHER CLARK :

1) Q- We spoke earlier about you were telling Mr. Cuban in words or substance : “I have confidential information for you”.

A- Right.

2) Q- Do you recall anything Mr. Cuban said in response or reply to that statement by you ?

A- No, I do not.

The SEC knows this-they have the transcript, yet they brought the case anyway. Why? Do they have a different statement from Mr. Faure ?

Why did the SEC end their multi-year investigation of Mamma.com Inc. for alleged securities laws violations days before interviewing present and former Mamma.com Inc. executives about this matter? Was the timing a coincidence? We think not.

Any inquiries respecting this release should be directed to Stephen Best at Dewey & LeBoeuf LLP (202) 346-8735.

——————————

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I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.
November 17, 2008
RE: SEC Civil Action in the United States District

for the Northern District of Texas, Dallas Division

Mark Cuban today responded to a civil complaint filed by the United States Securities and Exchange Commission in the United States District for the Northern District of Texas, Dallas Division. In its complaint, the Commission charges that Mr. Cuban engaged in violations of the federal securities laws in connection with transactions in the securities of Mamma.com Inc.

This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission’s claims are infected by the misconduct of the staff of its Enforcement Division.

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”
——————————

——————————

Ralph C. Ferrara, Esq.

Dewey & LeBoeuf LLP

1101 New York Avenue, N.W., Suite 1100

Washington, D.C. 20005

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In reading all the discussion about the possibility of a bailout of GM, Ford and maybe Chrysler, it appears to me that no one has asked and answered the fundamental questions behind the issue.

First let me say that this is not about the quality of cars they build. I just bought a Ford for my dad. Im looking at trading in at least my personal Lexus coupe for another Ford I like. I think Ford makes great cars. There are some great GM cars as well. Unfortunately, while the companies make cars I like, they can’t seem to run their businesses in a way that will allow them to survive.  The issue is not about car quality. Even consumer reports says that the Big 3 now makes reliable cars.  This is about their business model.

The reality of markets is this, If GM, Ford and Chrysler disappeared that doesn’t mean the demand for cars will disappear. We will still buy cars. The question is what brand we will buy, where will those cars be built,  by what company and how many jobs will be created to fulfill the demand ?   According to Cars.com the Toyota Camry is built in Lafeyette Indiana and has more than 75pct American Components. The Honda Civic is built in the US with more than 70pct of US made components. The Big 3 are not the only manufacturers making cars in the US. If they go away, buy American Made could still survive.

It would be nice to have GM, Ford and Chrysler survive in some new profitable form, but we shouldn’t lie to ourselves and make it sound like the demand for GM, Ford and Chrysler cars couldn’t move to other cards made in the USA. Its a lie to suggest that 100pct of the jobs at these companies and their vendors will disappear.  Jobs will be created in the businesses of those car companies that fulfill the demand for cars that the Big 3 leave behind.  That said, it would be nice to find a solution that maintains as much of these institutions as possible and keeps their employees in their jobs if at all possible.

My Solutions ?

Take a page from the FDIC. The government should be in discussions with foreign automakers that have US manufacturing operations to discuss buying/assuming the operations of GM, Ford and/or Chrysler and rolling the acquisitions into Toyota, Honda, whoever with a requirement that the cars continue to be built in the US and any profits remain in the US.

It is unfortunate that there are not any well run or even profitable car manufacturers in the US that could assume the operations, but it is what it is.  It will take the US operations of foreign car companies taking  over manufacturing facitilities, dealership relationships, vendor contracts, the whole works. I realize that this is more difficult than assuming bank branches. That manufacturing facilities are different between operators. I didn’t say this would be easy. It wouldn’t be. But its far better than the alternative. I would rather see money used to retool manufacturing than fund a business operation that just doesn’t work and hasnt worked for years.

Of course every induced merger requires concessions. The concessions being that some negotiated percentage of  GM/Ford/Chrysler employees would roll into the cost, pay and benefits structure of the acquirer. The taxpayers would guarantee the BANK debt acquired by whoever takes over the companies. Bond debt would be paid if after everyone else that is owed money, including the government.

Sure, the CEO and management of GM would be upset.  Just as Im sure the CEO and management of banks that were taken over were. Thats life in the big city.

If I’m providing loan guarantees, or direct government loans to car companies to protect jobs,  I would much rather have Toyota US Operations running GM with a Toyota USA cost and manufacturing model than GM, with a GM cost and manufacturing model running GM.  They can apply business principles that actually do work and save whatever part of the Big 3 can be saved.   IMHO, this will keep the largest chunk possible of the  job base in the US and turn the auto industry into income tax payers rather than a taxpayer money pit. Call me crazy. Its time for the US auto industry to go down in history as an example of how not to run a business.  If we want manufacturing to be a priority in this country, we have to find business models that work. We cant just depend on protectionist policies to keep unproductive, unprofitable businesses alive because we think they are too big to fail.

And if there is no Sheila Blair with a plan for the auto industry.  Let em go bankrupt with the government providing financing to help them come out with a brand new business structure. Of course there should be some caveats:

1.. The bankruptcy court puts the designs of all parts, patents and technology of all big 3 cars into the public domain so no one ever has to worry about getting their car fixed. Someone will always be able to build parts or systems for all makes and models.   In fact, making the designs open source could possibly lead to better parts, car designs and repair solutions.

2.  The bankruptcy court assigns to their boards someone who has a clue about how to cut costs and manufacture in a cut throat environment. Michael Dell and Andy Grove come to mind.

3.  The court creates a warranty fund, much like the FDIC, where every car sold has some dollar amount go into the fund to pay for warranty service for a maximum of up to 3 years. In the event the Big 3 cant survive out of bankruptcy, repairs on the cars for models sold while the companies are in bankruptcy become a tax credit, with the treasury being reimbursed for these repairs from the fund. (btw, I hate to do something using tax credits, so if anyone else has a better suggestion on how to deal with and pay for warranties..)

I’m probably missing something, but if the fear of bankruptcy is buyers will turn away for fear of parts and warranties concerns, problem solved.  In fact, knowing that the government will now help protect warranties could help sales.

Bottom line is this: When doing things the same was as its always been done doesnt work….. stop doing it that way. That applies not only to businesses, but consumers as well.

My last car purchase, for my dad,  was American. The next car I buy will be made in America.   I can think of so many reasons why its the right thing to do.  I’m going to give Detroit another chance and buy American. It wont matter if they are owned by Toyota or Honda, in or out of bankruptcy or as is.  What will matter is whether or not I like the car.  I’m coming back with an open mind. The product better be as good as advertised or you have lost me forever.

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No question the start of the season has been a struggle for the Mavs and all of our fans.  I guess the good news is that hopefully we are getting the bad part of the season out of the way at the beginning rather than during the end of the year, as we have the last several years.

I hate to lose, and we are going to do everything we can to get everyone on the same page so we can finish games the same way we have been starting them.

Thanks to all Mavs fans for hanging in there with us. I hate to lose games as much as you do, but the season is just starting. We have gone through struggles before, and Im sure we will go through them again.  As will every team.

What seperates the Mavs from other teams is that we have great fans who have stuck with us through our entire history.  My committement as always, is that Im going to make sure we do everything we possibly can to set things in the right direction.

MFFL

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As I watch and read about the Hedge Fund testimony currently going on, its obvious that the right question has not been asked.

1. Those who give money to hedge funds rarely if ever have a 1 year investment term. In fact, the contracts for investment do everything possible to lock up your money for as long as possible.

vs

Hedge Fund Managers pay themselves on an annual basis.

That is a huge disconnect and there in lies the rub. While it is true that the managers are paid on a performance basis (plus their 2pct of assets) and some even have clawback provisions, that is not enough. If a fund can get big enough, all they have to do is max out in a single year and the managers are set for life. They put hundreds of millions of dollars EACH in their pocket.

The investors on the other hand, can not max out returns in a single year. They are locked in. So there is a huge disconnect. Managers think short term, investors long term.  Managers should be paid on their performance over a much longer period.

If you made the minimum period for managers 36 months, you would see wholesale changes in how investments are made by Hedge Funds.

So, back to the Testimony today. The questions I would ask ?

How long does the average investor stay in your funds ? Why arent you paid based on the same term rather than annually ?

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