Category Archives: regulation

Financial Reporting

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A little bit in the weeds, here, but necessary for future understandings by some investors. The proximate matter is FTX’ collapse and bankruptcy (with possibly criminal activities associated).

In a footnote to the financial statements, the company said its “primary shareholder is also the primary shareholder of several related entities which do business with the company.” It didn’t say who the related parties were for any specific transaction it disclosed.
The standard accounting rules for disclosing related-party transactions are vague and have long been considered a weakness in the system. There is no clear-cut rule requiring companies to disclose the players in a related-party transaction. The rules do say, “If necessary to the understanding of the relationship, the name of the related party shall be disclosed.”

Some questions arise. Whose definitions of “necessary” and “understanding?” The way the rule is written, those definitions are left to the company—FTX, here—to determine, and what an investor or customer or client needs or wishes for his own understanding is unimportant.

FTX’s new CEO John Ray exposed part of the much larger problem in his FTX bankruptcy-court filing, in which he acknowledged that FTX’s financial information wasn’t trustworthy and that it was controlled by

 a very small group of inexperienced, unsophisticated, and potentially compromised individuals.

That potentially compromised part is key. Compromised by whom? In what way? That would seem clearly related to who those “related parties” are.

There’s more, related to arm’s length transactions, which are statutorily required in many business arrangements. Here’s a working definition of arm’s length transactions that’s good enough for our purposes:

A transaction in which the buyer and the seller have no significant, prior relationship. In an arm’s length transaction, neither party has an incentive to act against his/her own interest. That is, the seller seeks to make the price as high as he/she can, and likewise the buyer seeks to make it as low as he/she can. The negotiations for an arm’s length transaction result in the arm’s length price, which is almost always close to the market value of the asset being sold.

That drive for each party to work toward his own interest, and especially the resulting essentially market price for the things being transacted, also is key. How can an investor or a customer or a client know that a particular transaction within an FTX is legitimate or problematic under arms’ length requirements if the investor or customer or client can’t know who the related party is that’s do[ing] business with the company? And why is the investor or customer or client being actively denied this information? What’s being hidden?

This is, as RG Associates founder and member of the Financial Accounting Standards Board’s Emerging Issues Task Force, Jack Ciesielski, said,

a hole that needs to be fixed. The auditors would have to know who the related party is. Why not just put that in there? How hard can it be? By keeping it purposely opaque it’s defeating the purposes of the footnote.

And so do investors, customers, and clients need to know—hence the footnote, even if carefully vague in the present case. And hence the need to plug that loophole: require the related parties to be explicitly identified. There’s no free speech question here, no political speech would be chilled by this. Documenting business arrangements in a purely investment environment has nothing to do with our 1st Amendment.

Another Power Grab

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This one by the Securities and Exchange Commission.

A proposal under consideration by the agency would generally require brokers to route small investors’ market orders into auctions, where trading firms would compete to execute them, people familiar with the matter said. …
Brokers would have a way out. Instead of sending the orders to auctions, the brokers could attempt to have them filled at the midpoint price or better, the people said.

And

The proposed midpoint requirement and auctions would apply to market orders. Commonly used by small investors, market orders are instructions entered through a brokerage to buy or sell stocks at whatever their current market price is.

This sounds good, but in reality, it’s a solution for a nonexistent problem.

I’m one of those poor, downtrodden small investors, and my broker already uses a price improvement procedure whereby my market orders are routed to the trading house that offers the best execution price—which is the price shaded above the mid-point toward the buy price if I’m selling and below the mid-point toward the sell price if I’m buying. I’m already getting a better price than the mid-point.

My broker isn’t alone, either; most brokers offer/provide that procedure: it’s a means of competing for the small investors’ business.

But wait—don’t those trading houses pay the brokers for the orders to be routed to them? Why yes, yes they do. And those trading houses compete among themselves for the brokers’ business, which means the brokers get a range of trading houses from which to select the best price improvement for their customers.

The SEC’s…proposal…is just another exercise in power for the sake of power being carried out by SEC Chairman Gary Gensler.

Why We Can’t Trust the CDC

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The Centers for Disease Control and Prevention’s primary advisory panel, the Advisory Committee on Immunization Practices, has voted unanimously to recommend routine Wuhan Virus (my term) vaccinations for children via the Vaccines for Children program, which pays for ACIP-recommended vaccines for children in low-income families. This likely will lead to green-lighting schools—especially teachers union-controlled schools—to require the vaccinations as a condition of enrolling.

It doesn’t matter that the vaccines aren’t FDA-approved for children under 12.

It doesn’t matter that children well into junior high age aren’t at risk from the virus beyond—perhaps—getting mildly ill and recovering in a day or two.

It doesn’t matter that the risk from the virus is extremely tiny for any healthy person up through adulthood and into old age.

Here are some hard numbers illustrating the degree of “risk” from the virus, based on work by John Ioannidis, who has routinely studied Wuhan Virus infection fatality rates (IFR) since early in the pandemic:

…median IFRs of 0.0003% for 0-19 years, 0.003% for 20-29 and 0.011% for 30-39, according to the preprint, which has not been peer-reviewed.
The IFR jumps substantially between ages 50-59 (0.129%) and 60-69 (0.501%).

Even that “substantial jump” is from a risk of nearly zero to a level still right next door to zero.

But the CDC takes seriously an advisory panel that insists on vaccination because…”we say so.”

The CDC could walk well down the path back toward trustworthiness if it rejects the ACIP’s recommendation and then gets rid of the ACIP altogether.

Indentured Servitude

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The Service Employees International Union-United Healthcare Workers West wants to force unionization on companies and their employees whether those employees want it or not. The SEIU-UHW’s proximate target is California’s dialysis industry. California’s Proposition 29 is the union’s latest (after two prior ballot failures in the two prior election cycles) effort targeting dialysis.

The measure, which would require dialysis clinics to have a physician, nurse practitioner or physician assistant “on-site during all patient treatment hours, would cost dialysis clinics $376,000 to $731,000 per year—per clinic. That would drive many into bankruptcy closure because they can’t afford those costs.

That’s bad enough. Here, though, is the enforcement mechanism the union has included in its ballot measure.

[T]he language of Prop 29 says it would prohibit “clinics from closing or substantially reducing services without state approval.”

That’s naked indentured servitude. That’s what unions want. Recall unions’ prior and long-standing drive to force non-union workers in any company to pay union dues under the guise that the union is working for them as well as their actual members.

Now unions want to reduce businesses and their employees to the status of serfs, permanently tied to the land/permanently tied to operation.

An Energy Crisis

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New England may face one this winter. Too many who should know better are laying this prospect off to Russia’s invasion of Ukraine.

There are more proximate origins of the risk. One is the Biden administration’s naked war on our nation’s overall domestic energy production industry, including canceling pipeline projects in progress and denying permits for other pipelines—including one from Canada down into New England—canceling drilling leases and slow-walking permits (or outright denying them) to drill on other leases, withdrawing Federal lands from any sort of fossil fuel exploration or development, and on and on.

But that is only backdrop, and corrections to those failures would have no immediate effect on New England’s risk.

A more immediate origin is the domestic blockade of energy to New England, which consists of two barriers. One is ex-Governor Andrew Cuomo’s (D) decision to block a natural gas pipeline from Pennsylvania to New England, a pipeline that would have transited New York, coupled with Cuomo’s decision to deny development from within New York of the Marcellus Formation, a shale formation rich in, among other things, natural gas. These decisions have been upheld, and enthusiastically so, by current New York Governor Kathy Hochul (D). New England’s energy needs be damned.

The other barrier from the blockade is the Jones Act, a century-old law that in pertinent part mandates that goods (for instance, oil and natural gas) carried from one American port (vis., a Gulf Coast refinery) to another American port (vis., Portsmouth, NH, or Portland, ME) must be via an American freighter.

These barriers already have combined to force New England to buy its natural gas from…Russia. Which is the only way the barbarian’s invasion of Ukraine enters into the problem at all.

Immediate and mid-term solutions should be obvious: waive the Jones Act restrictions on energy shipments into New England, something well within the authority of President Joe Biden (D). Given the state of American ship building capacity, this cabotage aspect of the Act should be rescinded altogether, but that would require Congress to do.

Another, more mid-term, solution would be for New York to get out of the way of exploitation of Marcellus and to allow pipeline shipments of natural gas into New England from Pennsylvania. That, though, will require replacement of the Progressive-Democratic Party-run State government with a more balanced and Conservative and Republican Party-run government.