In six days, those who observe the Chinese calendar will usher in the New Year with traditional cuisine, family gatherings, and fireworks displays. 2013 will be the year of the snake, and because of the serpent’s association with delusion and subterfuge, those who subscribe to the mythology behind the calendar anticipate an added helping of deceptive behavior this year. So far, we’re off to a roaring start!
First, on January 16th, Deadspin broke the story that Heisman candidate Manti Te’o’s inspirational girlfriend did not exist. The story had been propagated in the fall that Te’o’s girlfriend, whom he had met online, died tragically at 22 of leukemia just hours before a critical game against Michigan State. Inspired by her life, Te’o would go out to lead Notre Dame to an upset 20-3 victory, accruing twelve tackles over the course of the game. It was, as Deadspin put it, “heartbreaking and inspirational” – except it wasn’t true. Someone had created the false online persona, faking Facebook messages and phone calls, in order to deceive Te’o. And even after he found out last December that his girlfriend was completely fictitious, he continued to speak of her as real in interviews for roughly three weeks, until he told the Notre Dame administration that he had been deceived. The greatest collegiate defensive player in the country had been catfished.
The next day, disgraced cyclist Lance Armstrong appeared on Oprah’s couch for the first of his two-part confessional interview. Armstrong had dominated the cycling world in his heyday, winning seven straight Tour de France competitions between 1999 and 2005, and the story is especially inspired because he had recovered from highly invasive testicular cancer to do so. Armstrong established a foundation, hallmarked by its ubiquitous yellow wristbands, devoted to helping those with cancer defeat the dread disease. For many years, he passed every banned substance test, and those who questioned the validity of his racing results faced his withering on-air rebukes and struggled to work in cycling thereafter. At last, though, the web of deception broke, and the US Anti-Doping Agency unveiled Armstrong’s leading role in “the most sophisticated, professionalized and successful doping program that sport has ever seen.” After taking some time to consider his options, Lance Armstrong called on Oprah to provide his limited confession and seek to begin his image rehabilitation process.
Early the next week, the nation thrilled as Beyoncé captivated the audience with a stirring rendition of “The Star Spangled Banner” during President Obama’s inauguration. Her powerful performance received rave reviews from those in attendance and from the press. However, the next day, a spokesman for the United States Marine Corps Band confirmed that Beyoncé had “decided to use pre-recorded music” (i.e. lip-synched) instead of singing live during the performance. In the hours that followed, there were groans of dismay in social media circles, but a great deal of understanding from the professional music community. 2009 singer Aretha Franklin mentioned she would “probably do the same next time” in such frigid temperatures, and Jennifer Lopez noted that certain venues create terrible reverberation and necessitate pre-recording. In fact, Yo-yo Ma and Itzhak Perlman had pre-recorded their piece four years earlier, after a sound check revealed their instruments would all fall out of tune or be damaged by the freezing temperatures. Yo-yo Ma said that otherwise, “we would have had four and a half minutes of absolute disaster.”
Of course, the finance world has had its own share of surprising revelations, and last week was no different. Last Monday, it was uncovered that FX traders at banks in Singapore were colluding to set specific rates to benefit their non-deliverable forward contract positions. In currencies where it is logistically or legally problematic for non-domestic entities to trade onshore, companies often hedge by means of non-deliverable forward contracts, where the settlement rate fixes based on contributed quotes. Much like the now-infamous LIBOR scandal, FX rate setters abused the quotation process by coordinating via an instant message system when they needed each other to provide low or high rates to benefit trades they had in place. In addition to hurting the counterparties in specific transactions fixing on those days, these traders damaged the credibility of the entire NDF rate-setting system.
The same day, the SEC filed a civil complaint in U.S. District Court against Jesse Litvak, erstwhile senior mortgage-backed securities trader at Jefferies & Company, a broker-dealer. The SEC alleged that over a period of two years, Litvak constantly and deliberately lied to customers about (inter alia) the fair market price of the MBS, the amount his firm would be compensated, or whether or not the securities had been purchased from other customers or came from company inventory. Litvak’s extraordinary trail of self-incriminating notes includes many such gems as “So we bot bonds from [X] at 41-4… she thinks we sold at 41-16… we really sold em at 42-8.” In other cases, he allegedly fabricated transactions in communication with unwitting customers, stating for instance “winner winner chicken dinner…he is gonna sell em to me at 75-28 as I told him to not get cute and just sell the bonds so you can own them at 76” when they actually had been purchased at 70 nine days before and held in inventory. The customers accepted his word about the fair prices and the fabricated transactions, and allegedly paid far too much for the securities in consequence.
Of course, not everything that seems fraudulent really is. We frequently negotiate the fair market prices of derivative transactions on behalf of our clients, spending a lot of time understanding precisely for which currencies, amounts, and tenors a trade will exhibit a wider spread between the bid and ask prices. This generally enables us to differentiate between a counterparty’s legitimate concern (the ability to lay off a large or illiquidly traded instrument in the market) and an illegitimate one (trying to take excess profit without market justification). This kind of experience is exactly why social media and fans could howl at the revelation of Beyoncé’s lip-synching, while professional musicians understood exactly why it had appropriately happened.
Differentiating between a hoax (collusion in NDF rates among traders), a deception (a securities trader lying about fair market prices), and a lip-synch (justifiable argument for wider pricing on a transaction when extenuating circumstances apply) is no easy matter. However, in our estimation, the safest ground is seeking the advice of experienced, independent market participants to divine (where possible) truth from falsehood, and subterfuge from candor. Many clients have trusted us to do this together with them for more than twenty years, not because we can sniff out every deception, but because we will endeavor to ply our full experience and market understanding on their behalf unswervingly.