Category: Publish to KM Space

Blogoversary

Compliance Building went public on February 12, 2009. Since then, I have managed to publish a blog post almost every business day. Sometimes, more than one. I hope at least some of those 1500 posts were useful to you, whether you are a subscriber or one of the other 325,000 or so visitors to Compliance Building over the past three years.

Thanks for reading.

If you haven’t done so already, you can subscribe and have my posts sent to you. It’s free, except on the Kindle. (I can’t convince Amazon to change the price.)

I started my first blog, KM Space, on this day in 2007. I set up Real Estate Space a few months later. Now I’m moving into my sixth year blogging. As I do every year, I take some time to think about why I publish a blog, whether I want to continue, and what I can do better.

Why do I do this?

Mostly, I publish because the information is useful to me. This blog is a personal knowledge management tool. It’s all about trying to capture information that interest me and has relevance to my day-to-day work. I find that writing my thoughts adds some clarity to my thinking. By putting all of that information into the blog, it’s in a place where it is easy to find.

Will I continue?

The real estate private equity industry is at a turning point. There is split between companies that are filing their Form ADVs, jumping into the world of SEC regulation and those, with good reason, are not registering. Regardless, it’s good for the industry to be focused on compliance and ethics. If it’s good for the industry then it’s good for my company and good for me personally. If a fellow private equity real estate company gets into compliance or ethical trouble that will reflect poorly on the industry as a whole. Inevitably, that will make my job harder. It will likely make it harder to raise capital and to get deals done. That’s bad. So I try to share information that will benefit the industry because that benefits me.

What Can I Do Better?

It’s hard to take a strong position on many issues. I certainly don’t want to be overly critical of the SEC and have them target my company. I realize that what I say here could be attributed back to my company. They don’t want splash back from me taking a strong position. Especially, if I turn out to be wrong.

I admit this blogging experiment is self-centered, but I’m happy to have you along for the ride.  If you want more detail on this you can read my Why I Blog page.

For those of you who know me from KM Space, I will continue to publish a subset of my Compliance Building posts to the KMspace feed. No need to say goodbye. Unless I’m boring you.

Image is from Cake Wrecks: Are Anivery.

Margin Call

With the announcement of the Oscar nominees, try watching Margin Call to combine movie watching and compliance. Margin Call received an Oscar nomination for best original screenplay.

The movie sets Kevin Spacey, Demi Moore, Jeremy Irons, Stanley Tucci, and Simon Baker as the key players at an investment firm during the earliest hours of the 2008 financial crisis.

Tucci is the head of risk management for the mortgage trading desk, but gets laid-off in the first few minutes of the film. On his way out, he hands an unfinished project to a low-level risk analyst to find the problem. He finds it and it’s big. The holdings on the mortgage desk could lead to the downfall of the firm. that leaves it up to the firm’s employees on whether to save the firm at the risk of fleecing millions of investors.

Unlike Inside Job, Margin Call does not paint the characters as evil, mustache-twirling, robber barons. They’re humans staring at the face of a monumental choice. One choice is to hold and likely bankrupt the company. The other is to sell the garbage and likely being painted as a bad guy. They’re up all night thinking about the problem and trying to find a way out. Dawn comes and they all need to make choices.

Defending Jacob

Being a lawyer, I like a good legal thriller. If you’re looking for a legal thriller to keep you up at night, try William Landay’s latest novel: Defending Jacob. Jacob is a fourteen year old boy whose classmate is found murdered. Jacob’s father is an assistant district attorney. You can guess from the title that Jacob gets accused of the crime.

Before I go on, I should point out a few of my biases. I’m friends with the author. Our sons went to daycare and preschool together for many years. So I see bits and pieces of him and his family in the story. (But not that I think Bill’s son will grow up to be accused of murder.) I think I see flashes of Bill, his family, and the community in the book. Maybe that distracted me from the characters or maybe it made me like them more. I’m not sure.

Not being a trial lawyer, I can’t vouch for authenticity of investigative procedures or the trial. Again, with a title like “Defending Jacob” you would expect there to be a trial. You end up with the expected clash between the clash of guilty and not guilty against the question of whether Jacob actually committed the crime.

That’s what kept me reading chapter after chapter. Who was Jacob? Could he have committed the crime? Did Jacob’s father really know who he was? Facts quickly start being revealed, twisting the story through reveals and lies. It pushes the father, son, and mother to the edge until…

Defending Jacob should be on the bookshelf of your local bookstore on January 31 and is also available through Amazon.

Stop SOPA

Based on the White House statement about Stop Online Piracy Act (SOPA), the PROTECT IP Act and the Online Protection and Digital ENforcement Act (OPEN), those bills may be in serious trouble.

The Stop Online Piracy Act (SOPA), H.R. 3261, as originally proposed bill would allow the U.S. Department of Justice to take action against websites accused of enabling or facilitating copyright infringement. The court order could include barring online advertising networks and payment facilitators from doing business with the allegedly infringing website, barring search engines from linking to such sites, and requiring Internet service providers to block access to such sites. This creates a huge compliance headache for website publishers and the internet infrastructure.

Then there is the further erosion of civil liberties by allowing government intervention based on content. (Granted, the content is supposed to be illegal, but who determines it’s illegal?)

The bill would also make unauthorized streaming of copyrighted content a crime. We don’t need more criminal laws. Unfortunately, I think many members of Congress are taking positive positions on the legislation without understanding the implications.

Here are links about SOPA and the protest against it:

Compliance Building will shut down for most of the day, as will wikipedia, Boing Boing, the Cheezbuger network of sites and many other internet sites.

Manufacturing Jobs, Robots, and the Economy

We still make lots of stuff in the United States. China is our closest competitor. The two countries are very close at the number 1 and number 2 positions of manufacturing output.  In the past decade, manufacturing output in the US has risen by a third. What hasn’t risen is the number of jobs in manufacturing. In the last ten years, those have decreased by a third. About 6 million jobs disappeared.

Adam Davidson of NPR traveled to South Carolina to get a better picture of what has happened. In Greenville, he found shuttered textile plants but found lots of hi-tech factories.

The double shock we’re experiencing now—globalization and computer-aided industrial productivity—happens to have the opposite impact: income inequality is growing, as the rewards for being skilled grow and the opportunities for unskilled Americans diminish.

Its going to get worse for unskilled workers. A factory owner puts it bluntly. He is willing to invest in a machine that will earn back its cost in two years. If a robot can do your job, hope that it costs at least twice your salary.

This all leads back to thinking about the Great Recession that come from the 2008 financial crisis and comparing it to the Great Depression. One theory is that the Great Depression stemmed from the movement from agricultural jobs to manufacturing jobs. It’s starting to look like the Great Recession stemmed from the movement away from manufacturing jobs. We were using residential real estate as a piggy bank to help through the transition, but we eventually broke the piggy bank.

The latest numbers from the end of 2011 show some solid signs of job growth and consumer borrowing is on the rise. it seems clear from Davidson’s story that some of the jobs will never come back. It’s more important than ever to invest in education and training.

Sources:

Image of a closed factory is by Rubbertoe

The Rise and Fall of Jon Corzine

Bryan Burrough, William D. Cohan and Bethany McLean have a piece in this month’s Vanity Fair on Jon Corzine, the man behind the spectacular crash of MF Global. It doesn’t provide much insight into what happened at MF Global or where the missing money went. But is does paint an interesting picture of the captain of the ship.

Unlike a nautical captain who drowns when his ship sinks, Corzine may escape. According the article, he had only a small percentage of his wealth in the firm. His wealth did not vaporize. The lawyers and class action suits against Corzine will likely take a big chunk of his remaining wealth. His career as a trader and money manager are likely over.

In piecing together earlier episodes in his career, one stuck out at me from a compliance and risk perspective. While a young trader at Goldman Sachs, Corzine was involved in a screwed up trade that was mishandled and exceeded the firm’s risk limits. In the end, the trade ended up making money, but that won no accolades. The trade violated compliance and risk policies and was non grata. We generally only hear about rogue traders when they lose money. At the time, at least according to the article, Goldman took a dim view on rogue traders who made money.

The other item that emerged is the Corzine was self-made. He is certainly part of the 1% now, but didn’t start out that way. One thing that has bothered me about the Occupy Wall Street movement is a somewhat misguided rage against the 1%. When looking at the income discrepancies over the last twenty years, I think people miss the fact that the people in the 1% are not all the same people that were int he 1% twenty years ago.

Unlike aristocracy, you do not need to be born into the 1% to become part of the 1%. (Sure, it usually helps to start off well-to-do.) It seems to me that combining lots of hard work, lots of education, and little bit of good luck can get you an entrance ticket to the 1%.

Sources:

Charges Brought in Social Media Scam

The Securities and Exchange Commission charged an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn. The SEC also issued two alerts to highlight the risks investors and advisory firms face when using social media.

The SEC’s Division of Enforcement alleges that Anthony Fields of Lyons, Illinois offered more than $500 billion in fictitious securities through various social media websites. In the complaint, they cite a LinkedIn posting to promote fictitious “bank guarantees” and “medium-term notes”:

“Bank Guarantees, Cash Backed, Deutsche Bank, Credit Suisse, HSBC, JP Morgan Chase, BNP Paribas, UBS, RBS or Barclays, One (1) year and one (a) day, Fresh Cut USD 500 Billion (USD 500,000,000,000) with Rolls and
Extensions 40% or better plus 1% commission fee to be paid, to buy side and sell side consultants 50/50. First Tranche: 500M USD . . . . If you are interested you can email for particulars . . . .”

The SEC pulled out a laundry list of violations. Fields was not registered as a broker-dealer nor listed as an associated person a registered broker-dealer at the time of the postings. He later set up an unfunded investment adviser and unfunded broker-dealer. Fields provided false and misleading information concerning assets under management, clients, and operational history to the public through its website and in SEC filings. Fields also failed to maintain required books and records, did not implement adequate compliance policies and procedures, and held himself out to be a broker-dealer while he was not registered with the SEC.

The question I have is did someone turn in Fields? Or is the SEC searching social media sites looking for suspicious securities postings?

In the new investor alert, the SEC offers tips to help avoid fraud online. (.pdf)

If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme.

The SEC points out the three big red flags:

  1. It sounds too good to be true
  2. A promise of guaranteed returns
  3. Pressure to buy right now

In addition to the investor-facing alert, the SEC also issued a risk alert aimed at a registered investment adviser’s use of social media. It once again points out that while the social media platforms may be new, the securities laws are not. You can only use the shiny new tools in compliance with the existing regulatory regime.

“While many RIAs are eager to leverage social media to market and communicate with existing clients, and to promote general visibility, RIAs should ensure that they are in compliance with all of the regulatory requirements and be aware of the risks associated with using various forms of social media. The staff hopes that sharing observations from its recent review of RIAs’ use of social media as well as its suggestions regarding factors that firms may wish to consider is helpful to firms in strengthening their compliance and risk management programs.”

Sources:

Happy New Year

Boston Public Garden: New Year's Eve by Michael Krigsman

New Year’s Eve is a time to reflect on the past and look forward to the future. You may also add an excessive amount of alcohol, an expensive dinner in a crowded restaurant, or a long wait for Chinese food delivery.

I’m sure there is a compliance story in there somewhere, but I’m just going to enjoy taking some time off during the long weekend. Enjoy the end of your year and the start of the next.

Happy Holidays

W.A. Rogers Editorial cartoon from 1902 published in Harper’s Weekly

Uncle Sam standing smiling at Christmas tree laden with warships, telephones, an automobile, a fat man labeled “The Trusts,” and skyscrapers; with bags of money at its base.

(The things that make Uncle Sam happy have not changed much over the last 100 years.)