Think of a “banana republic” and you’re likely to envision a distant land ruled by corrupt dictators who manipulate the economy and persecute their political opponents. Surprisingly, such places still exist in the United States, where power-hungry individuals control the narrative. Take, for example, the absurd campaign-finance fraud case presented by partisan Democrat Manhattan DA Alvin Bragg against former President Donald Trump. Bragg distorted logic and law to indict Trump simply because he belonged to the Republican party, even if the alleged offense involved paying hush money to an alleged paramour.
The fact that Trump, as a presidential candidate, could face jail time for a $130,000 payment to Stormy Daniels is reminiscent of a banana republic. Even more troubling is Bragg’s overall policy of indicting political opponents while allowing violent criminals to roam free, making him one of the most “progressive” prosecutors in the nation.
Securities and Exchange Commission (SEC) Chairman Gary Gensler also deserves recognition in our country’s Banana Republic Hall of Fame. Gensler has been flirting with banana republic status for some time now. He regulates cryptocurrencies through enforcement and seeks to change well-established securities laws by compelling major companies to disclose their efforts in addressing climate change and other progressive policy objectives.
The SEC chief is supposed to be Wall Street’s top watchdog, but much like Bragg, Gensler chooses to turn a blind eye to real misconduct. Rather than addressing blatant market manipulation in certain “meme stocks,” which has caused significant losses for retail investors, he focuses on prosecuting mundane violations, such as a trading firm named Virtu’s minor bookkeeping misstep. Securities lawyers I spoke to consider it to be nothing more than a books and records violation. Nevertheless, Gensler’s SEC attempted to turn Virtu’s error into the crime of the century.
Why? Perhaps it stems from the fact that Virtu is led by a man named Doug Cifu, who has criticized Gensler’s questionable tenure as SEC chief.
This case epitomizes the characteristics of a banana republic.
Cifu is a rare CEO who runs a profitable business and isn’t afraid to speak his mind. Virtu is a market maker, a trading firm that facilitates transactions between buyers and sellers. It also trades stocks using its own capital. Virtu is one of the primary players in computerized high-speed trading, a practice that has faced criticism, though those familiar with how markets operate see its value.
The majority of small investors are unaware that Virtu enables them to trade freely on platforms like Robinhood or at a low cost through brokers like Charles Schwab and E*TRADE. Virtu’s computer programming enhances market efficiency for small investors while generating substantial profits.
Cifu, a lawyer by profession, possesses an in-depth understanding of the markets and their structure, making him highly knowledgeable compared to many individuals on Wall Street. Moreover, he isn’t afraid to express his opinions, even when they diverge from the popular narrative. This sets him apart from the majority of Wall Street executives who fear upsetting anyone, particularly the SEC regulators. Consequently, they often come across as simple-minded or robotic in their public statements.
Cifu, however, openly criticizes Gensler, his primary regulator. Gensler has ambitious plans to reshape the stock market to appease left-leaning politicians like Senator Elizabeth Warren, who despises Wall Street.
Collateral Damage to Investors
Cifu believes Gensler is fixated on solving a problem that doesn’t exist, as stock trading operates smoothly and inexpensively. If Gensler succeeds in “fixing” the markets according to his vision, investors may suffer the consequences. Apparently, Cifu hasn’t been shy in expressing this to Gensler directly.
That must have stung.
Hence, the recent SEC enforcement action against Virtu bears an uncanny resemblance to a banana republic. The charges leveled against Virtu are remarkably weak. The SEC takes issue with Virtu’s actions during a 15-month period when the company was integrating an acquisition and experienced a flaw in its control system. The SEC claims Virtu’s traders were able to monitor the company’s market-making activities and profit from that information, all while deceiving customers. These actions are serious violations of securities laws, according to the agency.
However, the complaint conveniently avoids any mention of insider trading, the one crime that is notably absent. Virtu contends that insider trading did not occur, with the SEC lacking evidence of traders spying on market-making activities. Virtu also asserts that there were additional safeguards in place to prevent such behavior. The company acknowledges the system glitch and self-reported it to the SEC. Regarding their alleged misstatements, Virtu maintains that they weren’t lies but rather an assertion that customer data was secure.
Typically, cases like this are settled. Virtu would likely have settled as well if it weren’t for Gensler’s determination to extract serious charges for a victimless crime.
Consequently, the case will likely go to court, where a judge will decide whether the transformation of markets into a banana republic is permissible.
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