Book Review: ‘Flash Boys’

flash-boysMuch is bandied about in financial media on high-frequency trading (HFT) and the implications for institutional and individual investors. The overarching thought is that the capital markets are gamed by high-frequency traders, known as flash boys, and there isn’t anything we can do about it, unless, of course, you’re a portfolio manager who decides to trade on an exchange that is devoted to evening out the playing field. That is what IEX is attempting to do, as the first equity-trading venue dedicated to eliminating the predatory practices of HFT. A new book by Michael Lewis entitled “Flash Boys” provides readers with a glimpse of this esoteric world, and PondelWilkinson’s Evan Pondel reviewed the book for IRupdate in this month’s issue.

PW Participates in IR Certification Exam

First it was the CPA certification for accountants, instituted in 1917.

 

Then in 1963 came the CFA credential, administered by the CFA Institute, for finance and investment professionals, particularly in the fields of investment management and financial analysis of stocks, bonds and their derivative assets.

 

One year later, in 1964, the Public Relations Society of America, www.prsa.org, launched the APR designation as a way to recognize PR practitioners who have mastered the knowledge, skills and abilities needed to develop and deliver strategic communications.

 

Soon, investor relations professionals, courtesy of the National Investor Relations Institute (NIRI), www.niri.org, will have a test of their own. The designation has yet to be named, but development of the Body of Knowledge (BOK) is now underway, and the inaugural exam is scheduled for mid-2015.

 

The BOK is the basis for most certification exams, including the CFA. It forms the base of teachings, skills, and research in a given function, along with details on the essential competencies required of a practitioner based on a set number of years of experience.

 

It is with great honor that I am serving as an advisor to the NIRI committee preparing the first BOK for the investor relations profession.  I will be working directly with editor Ted Allen and a distinguished group of 25 investor relations professionals from throughout the nation who will write the definitive book—one that will represent every element of the requisite knowledge that will be tested in the IR certification exam.

 

It’s a big project and a tall order, especially for a profession whose practitioners require a wide range of knowledge, spanning disciplines that include finance, accounting, capital markets, news media, disclosure regulations, public relations practices and virtually all aspects of communications.

 

Canada and the UK currently have IR certification programs, and two U.S. universities—Fordham and the University of San Francisco—offer graduate degrees in investor relations.

 

While validation of competency through an exam or graduate degree may not guarantee practical success, we at PondelWilkinson are proud to have been asked to participate in this milestone endeavor for our industry.  I’ll keep you posted as the program develops, but please do not ask me for any answers to the exam—none of the BOK committee members will have access to it!

 

Roger Pondel, rpondel@pondel.com

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Does it Pay to Go Public?

IPORecently, a client pointed me in the direction of a very interesting Inc. article about the case for staying private. The author is the CEO of a privately held, family-controlled tech business, one that has name cache. He notes that being a public company is expensive and time consuming. He also believes that “the most critical benefit of staying private is the facilitation of a true focus on long-term goals.”

It’s not hard to argue that Wall Street is increasingly focused on short-term results, but does that mean that management teams need to adopt the same mindset? Maybe it’s a naïve belief, but some would say that if the stock market is working as it should, a company’s share price will reflect the company’s true value over the long-term.

The New York Stock Exchange predicts a busy year for IPOs in 2014, with about 150 to 200 new issues expected. Reuters points to first quarter IPO activity of $47.2 billion, a nearly doubling from this time last year and “the strongest annual start for global IPOs since 2010.”

Clearly, there are CEOs who still believe in taking their companies public, many in the technology sector. Perhaps they are in it for a large personal pay day, but perhaps they realize that it could be easier and less expensive to raise capital to realize their growth plans. Or perhaps, their Fortune 500 client base requires audited financials as a condition for doing business together.

The decision to go public is not an easy one, and it’s a decision that every company must weigh very carefully. If you’re contemplating an IPO to become like Hooli, the fictional tech company featured in the new HBO series “Silicon Valley,” it may not be the right move. But if you’re doing it to build something that can have a lasting impact, it might just be. Just make sure you surround yourself with good advisors to ensure a smooth process.

— Laurie Berman, lberman@pondel.com

Beware ‘The Wolf of Wall Street’

Focusing on con artists and greedy hucksters selling dreams that rarely come true, “The Wolf of Wall Street” is an entertaining, well-acted, comedic, and sadly, reasonably accurate film.
 
Although intensely exaggerated, the highly successful Hollywood extravaganza epitomizes the classic bucket shop investment bank, selling mostly worthless penny stocks via high pressure telephone solicitations, principally to unsuspecting individual investors, and tantalizing entrepreneurs who want to take their very small companies public.
 
From Charles Ponzi to Bernie Madoff, there is a long history of questionable behavior on Wall Street. The wolf, or rather wolves, never really left. In fact, the sordid creatures may be creeping back into the hood with the stock market’s stellar performance. According to one law firm, DLA Piper, even though 2013 saw the lowest number of SEC enforcement actions (68) in the past decade, word has it that this year and beyond, the SEC plans to bring record numbers of sanctions using new tools and resources.
 
In a bulletin to its clients and prospects, the law firm noted that whistleblower bounties and tips are on the rise and that the Dodd-Frank whistleblower bounty program is gaining steam, with informants potentially receiving as much as 30 percent of any monetary recoveries. On October 1 last year, the SEC awarded its largest bounty to date, $14 million, which itself may drive the number of tips higher in 2014.
 
Mid last year, the SEC’s enforcement unit announced it had formed the Financial Reporting and Audit Task Force, comprised of lawyers and accountants throughout the United States tasked with identifying issuer violations. This august group has a tool in its arsenal, affectionately known as RoboCop, which allows it to determine whether an issuer’s financial statements stick out from the pack. Other tools are supposedly in the works that will analyze text portions of annual reports for potentially misleading disclosures.
 
According to the bulletin, with the amount of new resources and tools the SEC is devoting to detecting financial reporting violations, an expectation is growing that the agency will bring a greater number of enforcement actions in the future. In June of last year, SEC Chair Mary Jo White said that in certain cases, the SEC will not settle unless the defendants admitted wrongdoing, so more companies, officers and directors may be testing the SEC’s allegations and legal positions by litigating and going to trial.
 
The largest number of enforcement actions in any one year during the past decade was 219 in 2007. We’ll see what happens in 2014. But wolves everywhere, beware.
 
— Roger Pondel, rpondel@pondel.com

Conversation: Potential Perils of Crowdfunding

Mary Jo WhiteThe Securities and Exchange Commission, through December 23, 2013, is seeking public comments on a proposal under Title III of the JOBS Act that would permit crowdfunding in connection with the purchase of securities. Nothing is perfect, and if adopted, investors and issuers alike will need to exercise caution.
 
Following is a tongue-in-cheek dialog between SEC Chair Mary Jo White, with comments taken verbatim from a press release issued by the SEC October 23, and a completely fictitious investor, expressing concerns:
 
Mary Jo:  I’m pleased that we’re in a position to seek public comment on a proposal to permit crowdfunding.
 
Investor:  What is crowdfunding?
 
Mary Jo:  Crowdfunding describes an evolving method of raising capital that has been used outside the securities arena to raise funds through the Internet for a variety of projects ranging from innovative product ideas to artistic endeavors.
 
Investor: Umm…I’m not sure I understand.  What does that have to do with securities?
 
Mary Jo:  Title III of the JOBS Act created an exemption under securities laws so that this type of funding method can be easily used to offer and sell securities as well. Securities purchased in a crowdfunding transaction could not be resold for a period of one year.
 
Investor:  Oh, I get it now.   You mean I soon will be able to take my hard-earned money and buy stocks in small, risky companies I never heard of?  Companies that may be run by rip-off artists.  Companies that have not been vetted by an investment bank. Stocks that will not necessarily trade in the public markets—not even on the OTC Bulletin Board?  And stocks that I may not even be able to easily sell?
 
Mary Jo: The Securities and Exchange Commission voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.
 
Investor: Huh?  Maybe I don’t get it after all. What are the commissioners thinking?
 
Mary Jo:  The intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.
 
Investor: Opportunities you say?  Aren’t there enough investment opportunities out there already? Do we really need more?  I’m scared. I want my mommy.
 
Mary Jo: We want this market to thrive in a safe manner for investors.
 
Investor:  O.K. I understand that’s what you want.  But President Obama wanted the Affordable Care Act website to work.  Besides, wasn’t the SEC supposed to be watching folks like that Madoff fellow?  He should have been easy to monitor, compared with the thousands of small entrepreneurs who will want to sell securities to unsuspecting investors?
 
Mary Jo:  There is a great deal of excitement in the marketplace about the crowdfunding exemption.
 
Investor:  Did I say I am scared?
 
Roger Pondel, rpondel@pondel.com
 
 

The Empire Strikes Back

As the IPO market heats up with the usual technology, healthcare and consumer company players, an unusual pending deal will impact the New York skyline as well–the Empire State Building.
 
Last week, it was reported that at least 80 percent of the investors of Malkin HoldingsLLC, Peter Malkin’s company that owns the Empire State Building, approved a plan to take the historical New York City skyline tower public.
 
Malkin’s plan involves lumping in the Empire State Building into a newly created real estate investment trust (REIT), the Empire State Realty Trust Inc. The REIT is estimated to be valued at approximately $4.15 billion, more than a billion over the $2.33 billion that the building alone is valued at after debt. Through this plan, investors will be able to cash out, and Malkin will be able to stay in control.

Empire State Building

Empire State Building Photo Credit: wikipedia.com)

 
With its complicated ownership history, the 82-year-old, 102-story Empire State Building certainly will be the centerpiece of the new REIT, which in total will have more than 18 properties.  Should the IPO go through, Malkin’s share is calculated to be worth as much as $714 million. Investors would also see flexibility and have more access to their capital, making this IPO quite attractive.
 
It is very rare that any deal of this magnitude will please all parties. While the advantages of taking the Empire State Building public appear at first glance to outweigh the disadvantages, at least for top investors and the Malkins, it remains to be seen if this deal proves to be more profitable than costly.  How the Malkins approach IR will also be interesting to watch.  Such a high-profile building is likely to attract a significant retail following, and telling the REIT’s story to investors might be the biggest challenge yet for the Malkins, especially when all of Manhattan is already watching your biggest asset.

 

Joanne Sibug, jsibug@pondel.com
 
 
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Help Speed the Information Flow

A lot has changed in the capital markets since the 1970s, particularly relating to the rapid dissemination of information. However, one key piece of information still reaches companies slower than the 405 Freeway on a Friday afternoon–13F reports showing changes in institutional shareholder ownership.
 
Today, 13F reports, the reporting form filed by institutional investment managers, reaches the public 45 days following the end of each quarter, a glacial pace when considering the advances in electronic communications. Now there is an effort underway to encourage the rapid dissemination of such information, changing that filing period to two days following the quarter.
 
NYSE Euronext, along with the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute recently petitioned the SEC to change the 13F reporting period, stating that the delay “hampers public companies’ ability to identify and engage with their shareholders, including their ability to consult with shareholders regarding “say on pay,” proxy access and other key corporate governance issues.”
 
The petition argues the following points: The length of the current 45-day delay period keeps material information from reaching investors and public companies on a timely basis;The objectives underlying section 13(f) support reducing the delay period; The arguments for maintaining a 45-day delay period are unpersuasive;A substantial reduction in the 45-day delay period would align rule 13(f) with public company governance best practices.
 
We certainly agree that this petition makes sense, especially when you consider the timely disclosure requirements under Regulation FD, filing requirements for 8k’s and Form 4’s, combined with management’s need to understand and know its shareholder base. To send a letter to the SEC in support of the petition, please click here.

 

Matt Sheldon – msheldon@pondel.com

The Downside of Social Media

While social media usage continues to grow here in the U.S. and globally, so do opportunities to reach key audiences on the Web, creating an oversaturation of content, we know all too well.

World Wide Web (Photo Credit: wikipedia.com)

 
Countless efficiency studies have been released on managing content, mirrored by just as many reports on tapping key audiences in a cluttered marketplace.  For instance, standing up in a packed movie theater yelling “Fire!” will certainly grab attention, but it’s probably not the kind of exposure that is sustainable over the long term.
 
Facebook and Google’s ad strategy of creating more personalized content based on user preferences may be the future of marketing.  The fact remains, however, that people turn off when the proverbial information flow goes on overload.
 
Walking a delicate balance is the right strategy.  Consider the following five tips when engaging
online audiences:
 

  1. Whether corporate, investor or marketing-related, make your message relevant. Know your audience’s wants and needs and develop messaging that resonates on a deeper level.  For example, time-strapped CEOs may be more inclined to listen to a vendor that understands the pressures of a “bottom line.”
     
  2. Don’t try to speak to the entire world. While having a video or tweet go viral is rare, most times less is more.  Try having more personalized online conversations and work on building deeper relationships with audiences.
     
  3. Start off slow. Don’t bombard your audiences with too many messages at once. Keep it simple. Start a conversation and then slowly move into other topic areas with time.
     
  4. Add value. Make sure you provide your audience with something they can’t get elsewhere. This is paramount.
     
  5. Try the post office.  May sound corny, but a nice follow up letter using old fashioned snail mail with an actual signed signature goes a long way in today’s fast-paced, digitized world. Think about how many personalized letters you receive these days.
     
  6. And finally, remember the old adage of selling the sizzle, not the steak. Keep in mind that there are millions of conversation threads each day. Why should anyone join yours?

 

George Medici, gmedici@pondel.com
 
 

Cashtag Blues

Last summer, with relatively little fanfare, Twitter added clickable stock symbols to its tweets.
This is how it works: Add a “$” in front of a ticker symbol in Twitter’s search box and you’ll be able to engage in conversations about a particular company, similar to what would happen with a hashtag “#” followed by the name of your favorite pop star.

twitter
In social media circles, introducing the “cashtag” is yet another way to stimulate chatter among people
who are interested in a particular topic, such as public companies. But like all seemingly helpful social media tools, the cashtag may, in fact, send your stock tumbling down in 140 characters or less.  We recently observed such a scenario.

Shortly after market open on an otherwise average trading day, an anonymous tweet began surfacing about an FBI raid on a certain public company.  Soon the company’s trading volume began rising and its shares began
dropping, so much so that, as IR representatives for the company, Bloomberg called us to find out if the rumors on Twitter were true.  We confirmed that the rumors were false, and soon the stock corrected itself.

We later learned that the SEC opened an investigation on the tweeter for a possible “10b-5” infraction, which is when someone makes fraudulent claims in connection with the purchase or the
sale of a security.

Rumors surrounding public companies have been swirling about the Internet long before the cashtag, but this example serves as an important reminder that new information channels, carrying potentially market moving information, are reaching influential audiences at light speed.  And that means the onus will increasingly fall on investor relations professionals to ensure chirping birds are not making fraudulent claims.

 

Evan Pondel, epondel@pondel.com

The Ski Season and the Fiscal Cliff: Happy Holidays

Skiing and the fiscal cliff have never before been written about in PW Insight and I suppose are rarely uttered in the same breath. But both are topical, actually have lots in common and are certainly part of this year’s holiday rhetoric.

Snow Summit

Snow Summit in Big Bear, California
(Photo Credit: Flickr: Cary N)

I learned to ski relatively late in life — at 40 — when my wife could still say she was 30-something, my daughter just turned 10, and my son was nine.  Some friends took the family to Big Bear, a Southern California resort that is just so-so as far as skiing is concerned, but an easy drive from most parts of Los Angeles.

My pal, Tod Paris, a CFO by day and sadistic amateur ski instructor when on the slopes with adult beginners on the weekend, started me out on what he said was the least daunting hill.  “Pizza, pizza,” Tod screamed.  Skiers know that pizza has nothing to do with food.  I fell, bruised my ribs, hurt my right ankle. I was frightened and swore that I would never ski again.

My family, however, did well.  So my swearing aside, to keep up with them, I eventually engaged several real instructors, each of whom instilled their own styles and methods to keep me standing and allay my fears.

Fast forward 20+ years.  The ski season is about to get under way, and I am excited. When I look back, what seemed like the steepest, scariest slopes then do not look so bad today at all.

Likewise, could it be that all the fears about the looming fiscal cliff — metaphorically a double black diamond that is being talked about non-stop — also will dissipate?  Los Angeles Times journalist Doyle McManus in an editorial last week called the fiscal cliff merely a slope that in reality “may not be as alarming as it sounds.”

With the holidays just around the corner, some progress is being made, although few believe a final resolution will be reached before the end of the year.  Both sides of the political spectrum are offering their ideas, perhaps akin to ski instructors espousing various teaching methods, and both sides are talking about meeting “somewhere in the middle.”  (How ’bout at the Mid-Chalet Café?)

Let’s also not forget that the tax increases set for the first of the year can be delayed by Congress, or as McManus wrote, “… by a stroke of Timothy F. Geithner’s pen.” Federal spending cuts can be slowed down as well.

So while there will likely be some pain ahead, just as there is on those first runs every season even for experienced skiers, let’s keep our wits and our faith that those Washingtonians in charge will lead us down the path in the least hurtful way.

Happy Holidays.

— Roger Pondel, rpondel@pondel.com