Book reviews – Page 5 – Compliance Building

Weekend Reading: Flash Boys

I admit to being a Michael Lewis fanboy. I consider him one of the best business writers. He has a knack for using characters as a lens to explain an issue.

The issue in Flash Boys is high frequency trading. Or high speed trading. Or electronic trading. It’s a bit of a confusing mix. Uncharacteristically, Lewis seems to stumble a bit around what the problem is. I think that is in part because the problem is complicated in a technical, legal and financial directions. Many of the people involved don’t fully understand it. Those that do fully understand it don’t want to explain it. They are too busy making money exploiting the issue.

Based on the speed you receive information, you can trade on that information and make money if you find out faster and trade faster than others. That has been true since markets existed.

For stock exchanges, the days of floor pits and individuals yelling buy and sell orders are long gone. It all happens in server stacked on top of each other with an algorithm matching buy orders and sell orders. There are multiple exchanges where trades can take place. That’s good for competition and innovation.

But those exchanges are located in different places. Not necessarily far apart, but milliseconds or microseconds apart. Just far enough that watching trades happen in one exchange can give a strong indication about what will happen in another exchange a bit further away. High speed traders exploit that information and make money. Lots of money if they are fast enough.

Lewis explores the issue in great detail and provides a good understanding. He uses Brad Katsuyama, a trader at the Royal Bank of Canada, as the focal point of his story.

The most disappointing part of the book is that it ends without resolution. The problems with high speed trading are still in the system and its hurting investors not involved in high speed trading.

Weekend Reading: Busted

What do you do when the whistleblower sitting in front of you is an unreliable drug addict? Maybe you see some nugget of truth in the story. Maybe you see some way to find reliable evidence that proves that nugget of truth.

Wendy Ruderman and Barbara Laker, reporters at Philadelphia’s Daily News were confronted with this situation when Benny Martinez walked into the newsroom with a tale of police misconduct. He claimed that narcotics-unit officer Jeffrey Cujdik fabricated evidence in at least two dozen cases. But Benny was not a reliable witness. He was a drug addict and criminal.

One nugget was that officer Cujdik was renting an apartment to Benny. That’s an indication that something was wrong. Benny was being evicted so there was a court hearing coming up that could prove at least one aspect of his story. After attending the hearing, Ruderman and Laker started digging through warrants and found problems.

Those bad arrests lead to more problems with the Philadelphia police department. There were rumors about another police officer sexually assaulting women during police raids. Another group of police officers were raiding corner stores, stealing from them and destroying the video camera coverage. A lawyer for one of the police officers couldn’t understand why they would write a story based on a drug dealer turned informant.

“What do you guys think you are going to do? Win a Pulitzer Prize?” he sneered.

Ruderman and Laker won the Pulitzer Prize for the “Tainted Justice” investigative reporting they did for the police corruption. Busted: A Tale of Corruption and Betrayal in the City of Brotherly Love tells the story of how they discovered, investigated and wrote the story. It documents their shoe leather journalism.

Unfortunately, at the time the book was punished all of the police officers still had their jobs. Some were relegated to desk duty. However in May, Police Commissioner Charles Ramsey fired Jeffrey Cujdik, just weeks after officials announced no charges would be brought in the Tainted Justice case.

Besides the true crime aspect of the book, it’s also an elegy for newspapers. Ruderman ended up at the Daily News after a devastating round of staffing cuts at the sister publication, the Inquirer, threatened her job. Brian Tierney paid $515 million for the newspapers in 2006. They sold for $139 million in bankruptcy in 2010 and then for $55 million in 2012. At times during the story it seemed like the newspaper would close before they finished writing their stories.

The book highlights the importance of the news media and whistleblowers in uncovering corruption.

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Jack Ryan: Shadow Recruit

Movies about compliance officers are few and far between. It may surprise you to find Chris Pine playing that role in Jack Ryan: Shadow Recruit.

Jack Ryan is the protagonist in Tom Clancy’s cold war thrillers. I read most of his books back in the 1980s. They were so cold war based I wondered how the story telling would work in the current era where national security is focused more on anti-terrorism. I wonder no more.

Jack Ryan has been through many good actors: Alec Baldwin, Harrison Ford and Ben Affleck. This time its Chris Pine rebooting the character. Ryan joins the Marine Corps after 9/11 interrupts his college career. He’s recruited by Kevin Costner to work on terrorist financing. He goes back to school to finish his PhD in economics and goes to work undercover on Wall Street.

He ends up as a compliance officer at a big Wall Street firm. Of course his role is to look for suspicious activity.

“I’m a compliance officer, I do everything by myself.”

He spots some suspicious activity with a Russian business partner. That moves him from analyst to operative. A compliance officer with a gun. Shoot outs and car chases ensue.

The movie is mediocre. It’s not horrible, just bland. But make your spouse sit through it and maybe, just maybe, he or she will raise an eyebrow, wondering if you are actually an undercover operative.

Weekend Reading: A Time to Attack

What should we do about the nuclear weapon program in Iran? The country is not complying with the Treaty on the Non-Proliferation of Nuclear Weapons. Iran has four main sites being used to create weapons-grade uranium. The country has stopped short of further purifying the uranium to the concentration needed for a bomb. But once it decides to, Iran can produce the uranium needed for a bomb in two to six months.

Besides the uranium, Iran needs to develop the weapon and means of delivery. The weapon is still a year away and the delivery method could be longer than that.

But once Iran gets the uranium it’s game over. Once the uranium in produced we lose the way to track it.

I didn’t know any this last week until I picked it up from Matthew Kroenig’s A Time to Attack: The Looming Iranian Nuclear Threat. The book’s publisher sent me copy to review and I was looking to learn more about the Iran nuclear issue.

Iran is spinning centrifuges to enrich uranium. There is no civilian purpose for this uranium. The only purpose is to create a nuclear weapon. Iran is working on ICBMs. No country has placed conventional weapons on an ICBM. The only use has been to mount a nuclear device to launch across vast distances.

We know where the four key sites are located. The toughest is Qom which is built into the side of a mountain and protected by almost 300 feet of rock. No really, google the Qom Uranium enrichment facility. It’s right on Google maps.

Matthew Kroenig offers a few possible courses of action. There is only one that he thinks will work: Attack once Iran passes the point of no return. It’s not a good approach and does not have a good outcome. But the other outcomes are worse.

Would any other country believe that the US would go to war with a nuclear-armed Iran, if the US was not willing to go to war with a nonnuclear Iran. Once Iran has a nuclear weapon, the rest of region will start their own programs out of fear of Iran and the lack of faith in the US.

Yes, it has to be the US. Israel does not have a bunker-busting bomb powerful enough to destroy the Qom facility or even the lesser protected facility at Natanz. Even for the US, the B-2 bomber is the only aricraft capable of delivering the Massive Ordnance Penetrator bomb.

Kroenig puts together well reasoned arguments in an easy to read book. It leaves even a liberal dove like me agreeing with his position.

Weekend Reading: Fierce Patriot

General Sherman is known for burning Atlanta. That is as much I knew about him. Having been raised in Boston, my schooling in American History emphasized the Revolutionary War. But my friend and author Megan Kate Nelson has piqued my interest in the Civil War.

Why did I read about Sherman? The publisher offered me a copy of the book. Even better than a free book, is a good free book. And Fierce Patriot is very good book.

Robert O’Connell does not plug through Sherman’s life in a purely chronological way. He breaks the biography into three parts. The first is Sherman’s career. Starting with his West Point education, then moving from soldier into banker, then back to soldier. The second part covers his influence on military strategy and the role of changing technology on the battlefield. The last part focuses on his personal life. My gripe with the book is that the second and third parts are less successfully executed than the first part.

The author’s main thesis is that Sherman was a nationalist. He believed in the UNITED States and would not put up with the South’s secession. Even though he burned a path across the South in his march to the sea, he made his army recognize that the enemy was fellow countrymen. There was plenty of pillaging to feed his army. The march was designed to be painful and to deliver psychological blows to the South. But there was not supposed be raping and murdering of southern citizens. The goal was to once again make them citizens of the United States.

His nationalist beliefs stayed with him after the war. He was a key player in the building of the transcontinental railroad, literally binding California to the rest of the country.

Sherman’s personal life was a mess. His father died young, leaving a flock of children and no money for his widow to support them. Sherman was adopted by the wealthy and politically connected Ewing family. Certainly, the Ewing family played key roles is setting him up for future success. Sherman ended up marrying his foster sister.

All of this is mixed together in wonderfully written style by O’Connell.

Sherman’s march to sea happened 150 years ago in 1864. If you’re looking for a way to learn more about the battles and the man that lead the march, Fierce Patriot is a book you should add to your “To Read” shelf.

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Secure Borders

What do compliance and border security have in common? More than you might initially think. Try reading Sylvia Longmire’s Border Insecurity. Some of the issues with border security will resonate with compliance professionals. (Hopefully, you don’t have to deal with illegal immigration, human trafficking, terrorism and drug smuggling as the compliance issues at your company.)

One common problem is how you define success.

If there is a rise in the number of successful drug stops. Two things could be happening. You may have your rate of catching traffickers. Instead of finding 50% of the drug crossings, you are now finding 75%. Or there has been an increase in drug crossings and your success rate has stayed the same. It’s almost impossible to know.

The same is true with compliance. If there is a rise in the number of calls to the hotline, is it because more people are reporting, or because there are more incidents? It’s hard to measure success when the goal is prevention.

If the border were completely secure, there would be no apprehensions beyond the border and there would be 100% success in preventing illegal drugs from crossing border. Of course the border cannot be completely secure. Even if the entire length was securely double fenced, illegal crossing could go under the fences through tunnels, or over the fences with aircraft or catapults. (Yes, they really catapult drug packages over the fence.) Bad guys could move through legal crossings and possibly avoid detection. The World Trade Center terrorists came border checkpoints and not through clandestine crossings

Compliance can’t prevent bad things from happening. It can discourage the activity and it can try to detect the activity. Bad people will do bad things and try to get around the controls that prevent them.

There is ethics sprinkled in the book. Few doubt that the prevention of drug smuggling and criminals from crossing the border are very important elements of border security. Economic immigrants are a more nuanced discussion and Longmire does a great job discussing both sides. There is the humanitarian side and the economic side. Longmire’s approach is that it is a distraction. The limited border defense resources should be focused on the very bad things: drugs, criminals, and terrorists.

I found this book to be much better than Longmire’s first book Cartel. That book read like a collection of blog posts pasted together into a book. I received both books from the publisher with the expectation of a review.

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Private Equity at Work

Eileen Appelbaum and Rosemary Batt tried to take an academic look at private equity firms and published their results in Private Equity at Work: When Wall Street Manages Main Street. The authors paint the world in black and white. They present the book as a question of whether private equity firms are (1) financial innovators that save failing businesses or (2) financial predators that bankrupt otherwise healthy companies and destroy jobs?

You can guess the answer from the first two paragraphs. The authors spend eight lines on the successful Aidells Sausage Company investment and 19 lines on the disastrous Mervyn’s Department Store investment.

The authors largely treat private equity firms as parasites and propose far-reaching and ill-thought out ideas to curb them. They reach their conclusions from a misunderstanding of private equity, poor comparisons, and a lack of data.

The authors chose to use the corporate-raiding barbarians of the 1980s leveraged buyouts as the origin of private equity instead of Bain Capital’s genesis of management consulting.

The authors routinely use public companies as a benchmark. They fail to note that public companies are merely a small fraction of the operating companies in the United States. It’s hard to get data on private companies, of course, because they are private.

In my mind comparing the bankruptcy rate of private equity-owned companies to the rate of public companies is not a true comparison of failure. I accept the premise that public companies typically carry less debt as a percentage of their capital structure. But I don’t accept the premise that the public company standard is true for non-public companies, whether they are operator owned or private equity-owned.

The authors get trapped in the idea that private equity is all about taking public companies private using high levels of debt. The LBO sector is only one part of the private equity world.

I was particularly annoyed at the authors for their failure to correctly describe the regulatory framework and background for private equity firms. Private equity firms were not subjected to SEC regulation by Dodd-Frank. The SEC always had the power to enforce the anti-fraud provisions of the various securities laws. Dodd-Frank removed a commonly-used exemption from registration as investment advisers. That old exemption was based the number of clients (i.e. funds) the firm managed, not size.

When it comes to performance, the authors have some good data, but much of it is admittedly flawed data on performance. Those flaws don’t keep them from reaching their conclusions. They note that a large chunk of private equity firms do not beat the S&P 500 or similar public company benchmark. They state that many investors would have been better off investing in an ETF. They fail to note that the same is true for mutual funds. The majority of which fail to exceed their respective benchmarks.

The authors also label private equity as focused on short-term shareholder value. They seem to forget that public companies are even more focused on short-term issues. A public company’s value is determined with every trade and the value swings up and down with the stock ticker wrapping around the tote board.

Eventually, the authors sprinkle in some positive stories of private equity. But the book is largely a hatchet job on private equity.

Eileen Appelbaum is Senior Economist at the Center for Economic and Policy Research. Rosemary Batt is the Alice Hanson Cook Professor of Women and Work at the ILR School, Cornell University.

A publicist sent me a copy to review. There were many times while reading the book that I wished he had saved the postage.

Weekend Reading: The Sea & Civilization

Lincoln Paine wants to change your view of the world. He wants you to focus on the blue parts of the map that cover over 70% of the world’s surface. In his book, The Sea and Civilization, he makes that case that mankind’s technological and social adaptation to the water has been a driving force in human history, whether it was to wage war, or for migration or commerce.

Perhaps Jared Diamond’s great book Guns, Germs and Steel should have been Guns, Germs, Steel and Boats. Paine makes the case by telling the tales of recorded history through the lens of the seas.

At times he succeeds. At other times, the book comes across as a rote recital of history. There were several places in the book where I wanted more insight. Paine is incredibly thorough, hitting most of the major events affected by sea travel. I wish there was more depth instead of breadth.

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Best Practices Under the FCPA and Bribery Act

Tom Fox is prolific writer on the Foreign Corrupt Practices Act. He publishes the excellent FCPA Compliance and Ethics Blog. One of the downsides to a blog is that it’s a running commentary and not a narrative guide. Blogs are great for sharing ideas among practitioners. But a blog does not come together as a nuts and bolts tool.

Tom took action and organized some of his best posts into Best Practices Under the FCPA and Bribery Act. Now you can pull a comprehensive collection off your shelf to help you create and manage a world class compliance program for bribery and corruption.

The book is a “best of” collection, but organized topically, making it a great resource for the FCPA practitioner.

I was not an unbiased reader of the book. I’ve spoken with Tom many times and spent some time with him at the Compliance Week conference in 2010. Tom kindly mentioned me in the acknowledgements and sent me a copy of the book.

My only demerit on the book is that there is little new material that did not appear on his blog.

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Weekend Reading: Sycamore Row

I went to law school in the early 1990s so I’m supposed to be a John Grisham fan. The lure of doe-eyed law school graduates getting hired by big law firms paying big salaries was shadowed by the sinister practices in The Firm.

I did read Grisham’s first few books and stopped. I enjoyed the writing the plots were less intriguing.

Someone recommended that I read his latest novel, Sycamore Row.

He goes back to the setting and characters from his first book, A Time to Kill. It’s three years after the murder trial and Jake Brigance is still practicing law in Ford County, Mississippi. Jake gets handed a will contest that is tainted with race and just a touch of mystery.

I have to admit that I have a hard time reading the book and not envisioning Matthew McConaughey speaking Jake’s dialogue. That means I kept waiting for “Alright, Alright, Alright.”

Like most sequels, Sycamore Row is not as good as the first novel. But if you like John Grisham, or at least A Time to Kill, you’ll enjoy this one.

It was good bus-ride reading.