September 27, 2006 –
The September 9th “Economist” magazine discussed the trials and tribulations of Jamie Olis, a former senior level tax planner at Dynergy, who was sentenced to 24 years in prison for, according to a Houston judge, contributing to the destruction of $100 million of Dynergy market capitalization. Olis caused this destruction, the judge stated, by releasing fraudulent information through Project Alpha, a gas trading and finance scheme that falsely pumped up Dynergy’s cash flow by USD $300 million. Furthermore, in rendering his decision, the judge relied on the testimony of a government witness, a statistics expert that claimed because markets are 100% efficient, Dynergy shares’ rise and downfall were directly attributable to Project Alpha’s lies and the deception of Jamie Olis. The only problem with this argument is that markets are nowhere near 100% efficient.
Certainly, Olis deserves stiff sentencing as the U.S. legal system has a history of punishing white-collar fraud and embezzlement that destroys millions and sometimes billions of dollars of capital (remember the 1994 collapse of $1.6 billion of Orange County, California municipal bonds?) with a slap on the wrist while imprisoning someone that steals several thousand dollars from a bank using a fake gun to five years or more of hard time. But also to claim that 100% efficient markets that incorporated this fraudulent data directly created $100 million of market cap loss is just not realistic.
So many factors influence a stock’s share price besides cash flow, profits, P/E ratios and so forth, such as the general stupidity and greed of people. Furthermore, how many times have you read unexpected (meaning the market wasn’t anticipating and therefore couldn’t have already incorporated this news in the share price), tremendous news about a company’s outperformance but witnessed the share price of that company trade sideways or even drop for weeks because the news release happened to be during a market that was trending downwards?
Markets act irrationally in the short-term because people act irrationally. People make decisions based upon terrible sensationalistic financial headlines that goad them into bad investment choices. Furthermore, institutional purchases of some of the largest global investment houses such as Merrill Lynch and Goldman Sachs are sometimes so large that they have been proven to be able to significantly push a share’s price higher and vice versa. Undoubtedly the largest of these global investment firms take advantage of their ability to move markets to make millions of dollars. Should the individuals at these firms be imprisoned too for adversely affecting individual investors at times? Furthermore, fraud is often defined in legal terms as an “intentional” act. Having worked at some of the largest global investment firms for many years, I know that there is 0% chance that the firms don’t intentionally sell deceptive investment strategies such as the Modern Portfolio Theory of diversification to customers in order to gather their assets. So should the executives at these firms be imprisoned as well?
Sadly, fraud is just part of Capitalism. Where there is a Pound, Dollar, Yen, Ruble, or Euro, or Real to be made, many companies will collude to defraud the customer. You may say this is a cynical point of view, but this is merely reality today.
Deception is also a key strategy to success in martial arts. Drawing your opponent’s attention away in an intentional manner often opens up his guard to allow a successful offensive maneuver. This brings me to a random but related musing. Today as I watched a Brinks armored car drive down the street, I thought to myself, “Does anyone else besides me think that that Brinks needs to re-think their strategy of overtly labeling their vehicles?
When the President of the U.S. rides in a convoy of eight vehicles, his vehicle is not labeled “PRESIDENT” to make it easy to identify the vehicle in which he is riding. So why does Brinks label all of their trucks with huge “BRINKS” logos to allow every potential thief that the vehicle contains valuables? Why not just use plain, unmarked vehicles with the same amount of security measures? Doesn’t this make more sense? Sure you give up the free advertising, but you probably improve the security of your vehicles. In most cases, deception undertaken by corporations is unethical and immoral. But in this case, this is one company where more deception makes sense.