Screening Walls Will Be The Next Embarrassment For The SEC
Say you are a hedge fund and you have been unlucky enough to have bought GGP bonds or other GUCs in the biggest clusterfuck of a CRE bankruptcy in history: how will you know what the hell is going on in the deal that has more moving parts it would make Level 99 of The Incredible Machine look tame in contrast? The easiest way is by getting access to disseminated inside information. But how will you "ascertain" that your traders will not take advantage of this material, insider information, a process that would immediately hold them liable for civil and criminal charges? By erecting internal "screening walls" of course, that are so completely impenetrable, that you traders will never be able to have drinks with you and where, just after your 8th Jager bomb, you will never disclose just which maturity it is that traders needs to nudge or which GUC they need to "start opportunistically unwinding if you know what i mean, wink, wink."
At least that is the plan proposed by Judge Groper in the General Growth Properties bankruptcy, as reported in the Daily Herald:
The creditors said they will establish "screening walls" to isolate trading activities from their activities as members of the official committee. The request was approved today by U.S. Bankruptcy Judge Allan Gropper in New York.
And just who are these highly ethical unsecured creditors who really promose never to abuse information leakge:
The screening wall includes using different personnel, offices, file space and phone lines for trading versus committee business, according to court papers. The request was made by creditors American High-Income Trust, Fidelity Fixed Income Trust, Capital Ventures International, Eurohypo AG, Calyon New York Branch and General Electric Capital Corp.
GECC - what a shocker: unlike the other participants who likely bought GUCs at pennies on the dollar, it would be amusing to find out how much over par GECC paid for the bankrupt company's bonds.
While the practice is not unique, with internal Chinese walls set up on many occasions in history to avoid conflicts of interest, only to be flagrantly abused during cigarette breaks and jaunts to the local massage parlor, it will be interesting to see how Judge Groper intends to enforce and supervise that material information leakage is not actually occurring.
And more to the point, how is it that the SEC and Finra actually make sure that firms actually have any semblance of internal control over information dissemination? Do they have some compliance monkey eating bananas and checking that person X never talks to person Y? No, of course not, that would be stupid. Just as it is stupid to assume that "material, inside information" will not spread from within its destined confines.
Zero Hedge will be happy to follow this situation: we realize that the SEC needs all the help it can get in policing and enforcing its terminally flawed regulatory framework. This being just one minor example.
h/t Boy X-mas