The perils of instant messaging.
ADS getting pounded – hearing the board is now meeting on a revised proposal from Blackstone to acquire the company at $7O/share, down from $81.50. Blackstone is negotiating a lower price due to weakness in World Financial Network -part of ADS7 Credit Services Unit, as evidence [sic] by ah1 master trust data this month from the World Financial Network Holdings off-balance sheet credit vehicle.
This the nimble-fingered Paul Berliner, 32-year-old prop trader, apparently circulated to 31 other traders and securities professionals in the space of five minutes. At the time, Alliance Data Systems had agreed to be bought by Blackstone at $81.75 a share.
The SEC takes up the story in their complaint:
Within minutes, the false rumor spread rapidly across Wall Street. The media and certain subscriber-based news services quickly picked up the “story” and further disseminated it throughout the marketplace.
Authorities on both sides of the Atlantic have come under pressure to investigate “stories” and their possible fabrication, after allegations that false rumours contributed to the collapse of Bear Stearns and HBOS shares plummeted on market tales about funding problems.
The SEC is cock-a-hoop at their triumph. But what does the Berliner case, where the trader has neither admitted or denied the charges, tell us?
Instant messaging seems to have lived up to its billing. Berliner sent his first missive at 1.11pm, when shares in Alliance Data Systems were trading at $77 a share. Trading picked up within minutes, and within half an hour the price has fallen by 17 per cent.
Impressively speedy. Less impressive given the dramatic response to his tale was Berliner’s profit: a paltry $26,129, and a rather poor share of the $1bn knocked off the ADS market cap. He will now have to pay a fine of $130,000. The SEC doesn’t appear to have bagged itself a large scale bandit here.
Plus it had some key advantages in its favour. Deal Journal notes that the agency, chronically underfunded, boasted about its use of sophisticated technical and electronic methods. But the one-off nature of the crime, and the six-month resolution time, suggests that the SEC just followed an audit trail created by modern working methods, a trail that Berliner apparently made no efforts to disguise.
It was tracing a US-generated rumour about a US company which simplified the investigation process. And the false rumour was contained to one deal and had the advantage of being easily deniable, which ADS later did: no new approach from Blackstone, no board meeting.
Try dissecting the many and various rumours – some of which originated in Asia – that surrounded the UK and European banks and the Bank of England in March, which resulted in the plunge in Hbos shares in similar fashion. The complexities of the false rumours was probably one reason the central bank itself had to step in to deny the tales.
Like it or not, rumours are part of how a market functions. The SEC found itself an undeniably false one, and nailed it. Of couse, six months on the Blackstone/ADS deal has collapsed, and the debate about UK banks’ funding rages on. Hey ho.
Related links
The SEC press release
The SEC complaint
Short-seller accused of spreading false rumours about Blackstone – FT.com
Market rumours – Lex