If you consider a “banana republic,” you think that of corrupt dictators someplace distant, where the people in power control the economy and jail their political opponents. Places like this still exist on the earth — and imagine it or not, right here in the nice ’ol US of A.
Don’t imagine me? Consider the absurd campaign-finance fraud case that partisan Democrat Manhattan DA Alvin Bragg brought against Donald Trump. Bragg twisted logic and law to indict the previous president because he was a Republican, even when the stated premise was that Trump paid hush money to an alleged paramour.
That Trump, as he campaigns for the White House, could go to jail due to a $130,000 payment to Stormy Daniels, is real banana republic stuff. Much more banana republic is Bragg’s broader policy to indict political opponents while he lets violent criminals roam free as probably the most “progressive” prosecutors within the country.
Securities and Exchange Commission Chairman Gary Gensler deserves a spot in our country’s Banana Republic Hall of Fame as well. Gensler has, after all, been flirting with banana republic status for a while. He’s regulating crypto through enforcement. He is also trying to change a long time of securities laws by forcing major corporations to expand their disclosures beyond financial information to incorporate how they’re addressing climate change and other progressive policy goals.
The SEC chief is speculated to be Wall Street’s top cop but, like Bragg, Gensler has chosen to disregard real malfeasance comparable to the plain pumping and dumping we’ve seen in some “meme stocks,” costing generational wealth for small investors who believed the pumpers.
Yet what puts Gensler firmly within the banana republic camp is his latest prosecution of something that’s pretty prosaic: The functional equivalent of a books and records violation committed by a trading firm named Virtu, based on securities lawyers I spoke to. Last week, Gensler’s SEC tried to make Virtu’s faux pas into the crime of the century.
Why? Well, possibly it begins with the undeniable fact that Virtu is run by a man named Doug Cifu, who has been critical of Gensler’s bizarre reign as SEC chief.
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Yes, real banana republic stuff on this one.
Cifu is a rare CEO in that he runs a profitable business and he speaks his mind. Virtu is a market maker — a trading firm that matches buyers and sellers of stock. It also employs people to trade stocks using the corporate’s capital. It’s certainly one of the highest firms involved in computerized high-speed trading, which is controversial to some but to not individuals who understand how markets work.
Most small investors don’t know Virtu is the rationale you may trade in your Robinhood app at no cost, and at low price via brokerages like Charles Schwab, E*TRADE, etc. It utilizes computer programming to make markets more efficient for small investors and still makes a ton of cash.
Cifu, a lawyer by training, understands the markets and their structure higher than almost anyone I do know on Wall Street — and he’s not bashful about telling you as much. Again, that puts him at odds with some folks even when it’s so refreshing since most Wall Street C-suite types are scared of offending anyone, especially their regulators on the SEC. That’s why they often sound like simpletons, automatons, or each.
Not Cifu. One among the people Cifu has spoken out against, forcefully and at times eloquently, is Gensler, his primary regulator, no less. Gensler has grand plans to remake the stock market to attain brownie points with lefties just like the powerful Wall Street-hating senator from Massachusetts, Elizabeth Warren.
Investor roadkill
But Cifu says Gensler is trying to fix something that isn’t broken since stock trading runs pretty seamlessly, and is inexpensive. When Gensler gets through with “fixing” the markets, investors might find yourself as roadkill. And from what I understand, Cifu has said that to Gensler’s face.
Ouch.
That’s one reason why the Gensler-SEC enforcement motion against Virtu last week appears so banana republic-like. One other is that the costs are incredibly weak. The SEC is taking issue with Virtu’s activities during a 15-month period in 2018 and 2019 when it was digesting an acquisition and there was a flaw in its control system. The SEC said Virtu’s traders could spy on what the corporate was doing on the market-making side and profitably trade off that information, after which essentially lied about it to customers. Those are serious violations of securities laws, the agency says.
OK, insider trading is against the law. However it’s nowhere to be present in the grievance. That’s because, Virtu says, it didn’t occur. Even the SEC concedes that by failing to point out a single instance of traders spying on what was happening in market-making. Virtu tells me the SEC can be ignoring that there were other controls in place to forestall it. The glitch, the corporate said, was caught by Virtu and self-reported to the SEC. Its misstatements — failure to reveal the alleged glitch — weren’t lies but the corporate’s contention that customer data were secured.
Most cases like this get settled; Virtu probably would have, were it not for Gensler’s desire to have the corporate conform to serious charges for a victimless crime.
So now the case will likely go to court, where a judge will determine whether to permit markets to morph into banana republic status.
