%1

The U.S. securities regulator is considering measures to require big investors to disclose more about short positions, or bets that stocks will fall, use of derivatives to bet on other stock moves and to protect small investors from trading apps that use features common to video games in order to boost risky trading activity, Reuters reported. The review of rules by the Securities and Exchange Commission (SEC) was prompted by January's GameStop saga and the meltdown of Archegos Capital, its new chair plans to tell lawmakers. Gary Gensler, sworn in last month as chair of the top markets watchdog, will testify before the House of Representatives Financial Services Committee today. Democrats are pressuring him to take a tough stance on Wall Street after Gamestop's fierce rally in January, fed by bullish posts on Reddit, and the March implosion of New York investment fund Archegos. "Whenever there are major market events, it's a good idea to consider what risks they might have placed on the entire financial system," Gensler will tell lawmakers, according to prepared testimony published by the committee yesterday. SEC staff are working on potential measures, Gensler will say, including greater disclosure of "short-selling," a strategy hedge funds and other big investors use to bet a stock will fall; increasing transparency around securities lending, which underpins short-selling; and new reporting rules for the "total return" equity swaps that felled Archegos, a family office.

Defaults in the U.S. private credit market slid in the first quarter as the nation’s abating pandemic triggered a surge in economic growth, and investors hunting for yield grew more willing to finance struggling companies, Bloomberg News reported. The proportion of loans that defaulted or remained in default fell to 2.4%, according to a private credit market index from law firm Proskauer. That’s down from 3.6% in the fourth quarter and a peak of 8.1% in last year’s second quarter. The index tracks the performance of over 700 active senior secured and unitranche loans representing $131.1 billion in original principal. “The drop in the default rate this quarter from last quarter is consistent in what we’re seeing in our day-to-day,” Peter Antoszyk, co-head of Proskauer’s private credit restructuring group, said in an interview. “Deal activity is off the charts, and workout and restructuring activity has fallen off.” As millions of Americans get vaccinated daily, consumer spending is picking up, bringing a jump in sales to companies. Investors are pouring money into private equity and private credit funds, which is helping to sustain borrowers, Antoszyk said. Firms are also seeing a positive impact on businesses that were struggling “due to the efforts that were made by management, sponsors and the private credit community to support them,” he said.

It is a lucrative time to be leaving GameStop Corp.’s C-suite as the run-up in the videogame retailer’s share price has enabled four executives to depart with vested stock now valued at roughly $290 million, The Wall Street Journal reported. Separation agreements between GameStop and the four executives, including Chief Executive Officer George Sherman, have provisions that let stock awarded during their tenure to vest when they leave. While such a handling of leadership transitions isn’t atypical, it does potentially allow the executives to sell their shares near GameStop’s historically high levels. GameStop’s shares closed Friday at $151.18. They hit an intraday peak of $483 in late January after ending 2020 at just below $19. The fortunes that the executives stand to gain, based on an analysis of recent GameStop securities filings, reflect the rapid and unusual rise in the company’s market value as it became a darling of individual investors and the focus of a turnaround steered by activist investor and Chewy Inc. co-founder Ryan Cohen. Three of the four executives joined the company in 2019. GameStop has said that Mr. Sherman will step down by July 31 and that it is searching for his replacement. His exit agreement calls for the accelerated vesting of more than 1.1 million GameStop shares, according to filings, valued at roughly $169 million as of Friday’s close.

Hedge fund Alden Global Capital likely violated federal pension protections by putting $294 million of its newspaper employees’ pension savings into its own funds, according to a Labor Department investigation, the Washington Post reported. Alden is presently the leading bidder for Tribune Publishing’s titles, including the Chicago Tribune and Baltimore Sun. It has already purchased at least 200 newspapers, often aggressively cutting staff and selling off the papers’ assets to boost profits. Alden also took advantage of their newspaper employees’ pension savings, according to a 2019 decision by the Labor Department. Among the agency’s findings was that the three administrators governing pensions for current and former employees of the Denver Post and other Alden-controlled newspapers were affiliated with Alden or its media company, MediaNews Group. Acting as fiduciaries of the pensions, the three administrators moved hundreds of millions of dollars of the employees’ savings into two Alden-controlled funds between 2013 and 2015, according to the decision. Federal law protecting pension holders, the Employee Retirement Income Security Act (ERISA), requires that pensions be invested solely on behalf of retirees and not in a way that could benefit the pension managers themselves.

The judge overseeing the bankrupt Zohar investment funds refused their request to block their founder, turnaround manager Lynn Tilton, from buying one of their portfolio companies in a sale that leaves them with a roughly $150 million loss on loans to the business, WSJ Pro Bankruptcy reported. Judge Karen Owens of the U.S. Bankruptcy Court in Wilmington, Del., approved the sale of Global Automotive Systems LLC for $32 million to an affiliate of Ms. Tilton, giving her control of the auto supplier but leaving little for the Zohar funds that own the company. The judge’s decision overruled the Zohars, which objected to the sale terms. In court papers, the Zohars alleged that Ms. Tilton used her position as a lender to GAS to skew the sale process in her favor, manipulating the company’s finances to make herself the only viable bidder. She denied that, saying her bid was the best available and blamed the Zohars’ “own poor decision-making” in rejecting earlier bids she made. GAS is among the many businesses financed by the Zohars, vehicles Ms. Tilton created to channel investor capital into loans to troubled companies she hoped to improve. Value unlocked from her turnaround efforts were supposed to repay the Zohars and their investors. Many of the businesses in her portfolio have shut down, with or without the benefit of bankruptcy, leaving the Zohars with mounting losses. She placed the Zohars under chapter 11 protection in 2018.

Archegos Capital Management, the $10 billion firm that collapsed spectacularly last month, never publicly disclosed any stock investments, the New York Times reported. Even for a firm whose structure and strategy came with fewer regulatory requirements, that was a remarkable achievement. Money managers with $100 million or more in stocks are generally required to declare what securities they are invested in every quarter. But Archegos, a so-called family office that managed the fortune of the former hedge fund manager Bill Hwang, did not publicly file such a document — called a 13F — in its eight-year history. The lack of a paper trail is uncommon for a firm with so much money, according to securities experts. Thomas Handler, a lawyer in Chicago whose firm does work for more than 300 family offices, said it was highly unusual for such a large firm to have never filed a 13F. Much smaller family offices routinely make such reports, he said. Archegos stayed largely under the radar until it fell apart last month. As a family office — a firm generally created to handle the investments of a single wealthy person and a small circle around them — it did not have to register as an investment adviser with the S.E.C., because it did not manage money for outsiders. Also, the firm frequently employed a kind of derivative — called a swap — that allowed it to invest heavily in the stocks of certain companies, including ViacomCBS, without owning the shares itself. But Archegos invested substantial sums in plain vanilla stocks, according to a person briefed on Mr. Hwang’s portfolio and tax filings made by the Grace and Mercy Foundation, the charity Mr. Hwang founded and supported with some of his vast wealth. When it came apart last month, Archegos had more than $100 million in stock holdings, said the person, who spoke on the condition of anonymity because they were not authorized to speak publicly.