On the Money: News and Articles
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A writ of assistance is a powerful tool for collecting money
On the Money From the September 7, 2007 print edition Cornelius Vanderbilt, when speaking to a competitor who owed him money, said, “You have undertaken to cheat me. I won’t sue you, for the law is too slow. I will ruin you.” Many would agree with the 19th-century shipping and railroad tycoon. The legal process takes time — and in the case of civil actions to collect money, two kinds of time. First, there is the time between initiating a lawsuit and obtaining a judgment. A judgment is simply the court saying that yes, the debtor owes you the money — hence the terms “judgment creditor” and “judgment debtor.” It’s not uncommon for several years to elapse before a creditor obtains this court-ordained document that theoretically forces the debtor to pay up. However, courts aren’t collection agencies. It’s the responsibility of the judgment creditor to collect on the judgment. A second clock starts ticking the moment judgment is entered — the post-judgment collection period. That’s the parade of post-judgment attempts by the judgment creditor to get their money. This also can take years. Meanwhile, the debtor continues to hoard (maybe even hide) money that’s rightfully yours. Fortunately for creditors (and unfortunately for scofflaw debtors), there is a powerful but little-known legal instrument available: the “writ of assistance.” Writs of assistance began being widely used in the 1700s in support of customs and excise inspections, particularly in New England. Today, a writ of assistance is issued by the clerk of a U.S. District or Bankruptcy Court, at the discretion of a judge, after judgment is rendered. The judgment creditor typically files an ex-parte motion to obtain a writ of assistance. “Ex-parte” means without the other party’s knowledge or participation. The writ is served and executed (obviously unannounced) by a law enforcement officer, usually a U.S. marshal or county sheriff. A writ of assistance is so powerful that it’s often served simultaneously with a team of sheriffs, locksmiths, moving personnel, trucks, packing boxes, videographers, private security guards and computer technicians. There’s no notice required before serving the writ and no delay in its execution. The sheriff appears unannounced and informs the debtor that he’s there to “assist” the debtor in paying his debt by taking his stuff. The squad then removes the debtor’s possessions. To provide a full flavor of the power and scope of a writ of assistance, consider the following, taken from an actual case in Colorado. “To the Sheriffs of any and all counties: You are hereby ordered and directed to assist in this case by seizing and taking into custody and control any and all papers, documents, negotiable instruments, business records, computer records, computers, bank records, originals or copies of deeds, division orders, leases on oil and gas properties, stock certificates, stock purchase and sale orders, cash, checks, stocks, bonds, personal property, […] Specifically including, but not limited to, those items contained within the trunk of any automobile […] or within any briefcase or office in the possession or control of any of the Judgment Debtors. “You are further directed, in the event any of the foregoing are found by you at any home or office, to search that home or office for any of the foregoing materials and to seize same and to take them into your custody...
read moreTime to measure nation’s vital economic signs
On the Money From the August 3, 2007 print edition A healthy human body has certain vital signs that are essential for life. Heart rate, blood pressure, respiration and temperature are the critical indicators of survival, the vital signs. Economics and finance have vital signs of their own, called “indicators.” While almost any activity or relationship — such as the presidential approval rating versus stock prices — can be used as an indicator, the core information is collected and dispassionately provided by the U.S. Census Bureau. Although indicators often are used to build forecasts, the Census Bureau’s job is to simply collect, report and compare. Here are the 10 core indicators with their latest results: Housing starts/building permits — They provide statistics on the construction of new, privately owned residential structures in the United States. The statistics are for new housing units intended for occupancy and maintained by the occupants. The measure doesn’t include hotels, motels and group residential structures such as nursing homes and college dormitories.Housing starts in June were at a seasonally adjusted annual rate of 1,467,000, which was 2.3 percent above May. New home sales — Information includes the number of: (1) new single-family houses sold; (2) new single-family houses for sale; and (3) the median and average sales prices of new homes sold. Excluded are “HUD-code” manufactured (mobile) home units.In May, the seasonally adjusted annual rate was 915,000, which was 1.6 percent below the revised April figure of 930,000. Homeownership — This data comes from the monthly samples of the Housing Vacancy Survey, which is a supplement to the Current Population Survey. For example, the homeownership rate in the first quarter of 2007 was 68.4 percent, close to the 68.5 percent of the first quarter of 2006. Construction spending — A sophisticated set of calculations, the report uses construction costs of new single-family houses started each month from the U.S. Census Bureau’s Survey of Construction, then distributed into monthly values by applying patterns of monthly construction progress.The data is subsequently weighted and adjusted for multifamily houses, improvements, private nonresidential construction, and special architectural and engineering costs.Total construction activity for May was annualized at $1.17 trillion, 0.9 percent above the revised April annualized activity of $1.16 trillion. Manufacturing and trade inventories and sales — Provides data on the dollar value of retail sales, value of end-of-month inventories, and the dollar values of merchant wholesaler’s sales and end-of-month inventories.U.S. total business sales for May were an annualized $1.1 trillion, up 1.3 percent from April. Month-end inventories were an annualized $1.4 trillion, up 0.5 percent from the previous month. U.S. international trade in goods and services — This is an estimate of goods and services entering the United States from foreign countries. Valuable competitive details are included in this report.The nation’s international deficit in goods and services increased to $60 billion in May from $58.7 billion in April. In other words, imports increased more than exports. Quarterly financial report, retail trade — Corporations provide standard income statement and balance sheet data consolidated for all majority-owned domestic enterprises, except banking, insurance and finance.After-tax profits for retail corporations with assets greater than $50 million averaged 3.2 cents per dollar of sales for the first quarter of 2007, down 0.7 cent from the average of 3.9 cents in the preceding quarter. Manufacturers’ shipments,...
read moreAfraid of foreclosure? Here’s what really happens
On the Money From the July 6, 2007 print edition Rating company Standard & Poor’s recently pointed to a sharp rise in late payments and defaults on “Alt-A” home-mortgage loans, a category between prime and sub-prime. S&P found that 4.21 percent of Alt-A loans bundled into mortgage-backed securities last year were 90 or more days overdue after 14 months. That was up sharply from 1.59 percent for loans from 2005 and 0.91 percent for loans from 2004. More borrowers are distressed, facing foreclosure, and could possibly lose their homes. Many may be wondering what that means, how long they have and what they can do. In other words, “How long before we have to get a U-Haul?” Here’s a closer look at the foreclosure process in Colorado, including the timing of major events. Delinquency and default — Technically, a loan is delinquent one day after a payment is due. When no payment has been received for more than 30 days, the loan is in default. However, foreclosure can’t be initiated against FHA loans until at least three payments are due and unpaid. Conventional (non-government insured) loans can be put in foreclosure immediately upon default. However, most lenders will choose not to begin foreclosure until three payments are due and unpaid. For the borrower that stopped making payments Jan. 1, it will be April 1 before the lender decides to initiate foreclosure proceedings. 1. – Initiating foreclosure — In Colorado, the governor appoints a public trustee for each county in the state. The trustee must act as an impartial party when handling a foreclosure. The lender (usually through an attorney), files a Notice of Election and Demand for Sale with the public trustee of the appropriate county. Other supporting documents are required. Complete details regarding the documents and procedures may be found in the Colorado Revised Statutes, Title 38-38-101. 2. – Sale process — After receiving the documents from the lender, the public trustee then notifies the county clerk and recorder. The foreclosure sale must take place between 45 and 60 days after the recording of the Notice of Election and Demand for Sale. If the 60 days is used to set the sale date, the hypothetical borrower now has until June 1 to attempt a remedy. In other words, five months from the time the borrower stopped making payments. 3. – Publication and notification — Once recorded, the notice must be published in a newspaper of general circulation within the county where the property is located for a period of five consecutive weeks. The public trustee also must mail other notices, which are more fully described in the statutes. 4. – Stopping the sale — The property owner may stop the foreclosure proceedings by filing an Intent to Cure with the public trustee’s office at least 15 days prior to the foreclosure sale date, then paying the necessary amount to bring the loan current by noon the day before the foreclosure sale is scheduled. 5. – Another chance to stop the sale — The lender’s attorneys must schedule a Rule 120 Hearing to take place before the sale date. The purpose of the hearing is to legally establish whether the lender has the right to foreclose on the property and have it sold at the public auction. This might be an...
read moreOpting out can help you avoid danger of identity theft
On the Money From the June 1, 2007 print edition Identity theft is a widespread and well-known problem. Eight years ago, Congress enacted the Identity Theft and Assumption Deterrence Act, which created the federal crime of identity theft. The law was targeted toward any “means of identification” of another person, not distinctively identifiable information. When it comes to financial information, there are even more protections available in the form of the Gramm-Leach-Bliley Act. The key to combating identity theft is to protect your privacy. However, some information must be exchanged in order to do business. The Gramm-Leach-Bliley Act applies to many types of financial institutions, banks, savings and loans, credit unions, insurance companies and securities firms. It even includes some retailers and automobile dealers that collect and share personal information about consumers to whom they extend or arrange credit. The act contains three major components. Financial institutions are required to disclose the kind of information they collect and the types of businesses to which they may provide that information. This is contained in their “privacy notice.” Anytime you open a new account with a different financial institution, it must provide a copy of its privacy notice, and do so annually. The company must give you the opportunity to opt out or say “no” to information sharing under certain circumstances. Even consumers who aren’t technically customers of a financial institution — such as former customers or people who unsuccessfully applied for a loan or credit card — have the right to opt out of sharing information with outside companies. Third, the law requires that financial institutions describe how they’ll protect the confidentiality of your information.In other words, here’s a chance to protect yourself by just doing a little reading and, in the words of a related campaign, “just say no.”Unfortunately, privacy notices tend to be in very small print and not very appealing to read. Nevertheless, when reading the privacy notice, look for the following important features: The type of information it shares with other parts of the same company, likely to be described as “members of our corporate family” or “our affiliates.” The information it shares with other companies or organizations that are not part of the same corporate group, perhaps called “nonaffiliated third parties.” What information you can prevent your financial institution from sharing with other companies or organizations. How you go about opting out. While the regulations say a financial institution isn’t required to list every type of information it may gather or share, or tell you the names of specific companies or organizations that may buy or receive your information, the privacy notice must describe the basic categories of information, and give examples. On the other side, however, the Fair Credit Reporting Act limits your ability to stop selected information-sharing with affiliates. For instance: The information is needed to help conduct normal business. The information is needed to protect against fraud or unauthorized transactions, or is provided in response to a court order. The institution reasonably believes the information is “publicly available.” Publicly available information includes your name, address and telephone number as they appear in the telephone book, information about your home mortgage recorded in county records or information that would be found on your driver’s license. (That’s why you shouldn’t put your Social Security number on...
read moreA haircut on your jumbo during cramdown?
On the Money From the May 4, 2007 print edition Two friends were discussing the fate of their financial futures. The first asked, “Did you have to take a haircut on your jumbo during cramdown?” The second answered, “I was eating my own dog food, but I backed up the truck before the cat bounced.” A reasonable conversation, right? Not unless you have an understanding of the sectarian vernacular of the finance industry. Every industry develops colloquialisms, words and phrases that have special meaning within it. Even the serious community of finance and banking has many catchphrases. Slang terminology grows out of behavior. Therefore, some insights into the financial activities may be revealed by the following buzzwords. Haircut — The percentage by which an asset’s market value is reduced for the purpose of calculating value taking into account risk, broker’s commission, fees and other transaction-related costs. Jumbo — A mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO re-sets the conforming loan limit size on an annual basis. Cramdown — A well-known and often-employed (though unscrupulous) bankruptcy technique, forcing creditors to accept discounts on their assets. A settlement is “crammed down their throats.” Eat your own dog food — An idiom referring to companies using their own products for day-to-day operations, rather than sell them for revenue. This phrase became popular during the dot-com craze, when companies didn’t implement their own software and thus couldn’t even “eat their own dog food.” Back up the truck — A situation where a large buyer scoops up huge quantities of a stock. In other words, when someone likes a stock enough to “back up the truck.” Cat bounce (dead) — A temporary recovery by a market after a prolonged decline or bear market. In most cases, the recovery is momentary and the market will continue to fall. Remember the saying: “Even a dead cat will bounce if dropped from high enough.” Trustafarians — People who receive money from their family or an allowance; the word is a play on Rastafarian (a believer in a religion that originated in Jamaica). Get a lift — The concept that by taking some action, you’ll receive slightly more in profit. The term often is applied to small increases resulting from painfully obvious previous lapses in judgment. Teenage scribblers — International currency traders and/or analysts. The term arose in the 1980s and ’90s, primarily in the UK. The conservative government at the time blamed currency trading as a nonproductive self-indulgence, hindering real economic stability. A seat at the table — To have the firm’s stock listed on one of the major stock exchanges, either through a public offering or reverse merger. Crack — A trading strategy used in energy futures to establish a refining margin. It’s accomplished by simultaneously purchasing crude oil futures and selling petroleum product futures. The trader is attempting to establish an artificial position in the refinement of oil, created through a spread. Shadow player — Someone who’s investing a large amount of money while attempting to conceal their identity when buying up shares in a company. Bullet payment — When all interest is deferred until the last day. This often suits people in commercial life, where they don’t have the...
read moreIRS issues new ‘dirty dozen’ list of attempted tax scams
On the Money From the March 2, 2007 print edition “Taxes are what we pay for civilized society,” said U.S. Supreme Court Justice Oliver Wendell Holmes Jr. But President Calvin Coolidge said, “Collecting more taxes than is absolutely necessary is legalized robbery.” Somewhere between civilization and theft lies our obligation to Washington, D.C. While it’s good business to minimize expenses (including taxes), wandering into illegal areas is never a wise choice. Remember, “Ignorantia juris non excusat.” That’s a fun phrase meaning, “Ignorance of the law is no excuse.” Each February, the Internal Revenue Service publishes its “Dirty Dozen” list. The list contains the most blatant tax-related scams affecting American taxpayers. This year’s collection reveals five new swindles. At the top of the list are fraudulent refunds being claimed in connection with the special Telephone Excise Tax Refund. Other new abuses include cheats relating to Roth IRAs, the American Indian Employment Credit, domestic shell corporations and structured entities. Taxpayers should remember they are ultimately responsible for what is on their tax return even if some unscrupulous preparers have steered them in the wrong direction,” IRS Commissioner Mark Everson says in a news release. Here’s the latest list of common schemes. Telephone excise tax refund abuses: Requesting a refund of the entire amount of their phone bills, rather than just the 3 percent tax on long-distance and bundled service to which they are entitled. Abusive Roth IRAs: Shifting undervalued property to Roth Individual Retirement Arrangements (IRAs), circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed. Phishing: Internet-based criminals pose as representatives of the IRS, and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink to visit an official-looking Web site.The IRS doesn’t use e-mail to initiate contact with taxpayers. Call 1-800-829-1040 to confirm any contact from the IRS. Disguised corporate ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. Zero wages: A Form 4852 (Substitute Form W-2) or a “corrected” Form 1099, showing zero or little income, is submitted with a federal tax return, including a statement rebutting wages and taxes reported by the payer to the IRS. Return preparer fraud: Promises of large refunds by preparers. Any promise beyond an accurate and truthful return is fiction. American Indian employment credit: There is an Indian Employment Credit available for businesses that employ Native Americans. However, there is no provision for its use by employees. This provision of the tax code is also frequently contained in “phishing” swindles. Trust misuse: Not all trusts deliver the promised tax benefits. Currently, more than 150 active abusive trust investigations are in progress, and 49 injunctions have been obtained against promoters since 2001. Structured entity credits: A newly identified scheme is partnerships created to own and sell state “conservation easement credits.” According to the IRS, this isn’t a “viable business purpose,” and the investments aren’t valid. Abuse of charitable organizations and deductions: Moving assets or income into a tax-exempt organization but maintaining control over the assets or income is not acceptable. Furthermore, contributing non-cash assets continues be an...
read moreHere’s what constitutes insider-trading practices
On the Money From the April 6, 2007 print edition [In 1952, CBS Television aired a popular game-show called “I’ve Got a Secret.” The contest was basically a guessing game where the panel tried to determine a contestant’s “secret.” Today, we are witnessing another incarnation of “I’ve Got a Secret” in the form of the insider-trading trial of Joseph Nacchio. Nacchio, the former CEO of Denver-based Qwest Communications, is charged with improperly (as in using secret or insider information), taking for himself $101 million through the sale of Qwest stock. Prosecutors claim Nacchio, sold his stock while knowing the company had severe financial problems. Shares of Qwest plummeted from more than $60 a share in 2000 to just $2 a share in 2002. Its near-collapse left thousands of investors and pensioners in financial ruin. If the DJIA fell that much it would stand at 413.46. Regardless of what intuition may tell you about this series of events, the question before the court is, were these sales against the law?] The current trial of Joe Nacchio, former CEO of Qwest Communications International Inc., puts the spotlight on the practice of insider trading. Nacchio is charged with 42 counts of insider trading for allegedly exercising stock with the knowledge that the Denver-based telecommunications company would not meet its fiscal goals for 2001. He earned $101 million from the stock sales. Were these sales against the law? What do our federal laws have to say about illegal insider trading? Financial gain often depends upon the ability to predict the future. (The options scandal showed that in the absence of predicting the future, some people will reinvent the past.) It follows then that the more knowledge one has about any given scenario, the power to predict will be higher. Knowledge is power. However, sometimes that knowledge is unfair to the public and represents a breach of fiduciary duty owed by the person who has the knowledge. Insider trading wasn’t considered illegal at the beginning of the 20th century; in fact, a Supreme Court ruling once called it a “perk” of being an executive. After the excesses of the 1920s, the practice was banned, with serious penalties being imposed on those who engaged in it. To prevent illegal insider trading, the Securities and Exchange Act of 1934 required that when an “insider” (defined as all officers, directors and 10 percent owners) buys the corporation’s stock and sells it within six months, all of the profits must go back to the company. Insider trading becomes illegal when the purchases or sales violate a fiduciary duty or other relationship of trust and confidence. Other infringement may include tipping such information, securities trading by the person receiving the tip and securities trading by those who steal secret information. In other words, trades by insiders in their own company’s stock, that are based upon “material non-public information,” are fraudulent. The insiders are violating the trust and duty they owe to all shareholders. Corporate insiders have made a contract with all the shareholders to put the shareholders’ interests before their own. When the insider buys or sells based upon special still-secret information, the contract is desecrated. Insider trading also embraces the “misappropriation theory.” It states that anyone who misappropriates (steals) information from their employer and trades because of that information...
read moreMany methods can detect money-laundering activity
On the Money From the February 9, 2007 print edition Have you found a dollar bill left in an old pants pocket? Or received change at the fast-food restaurant that drips with more grease than the sandwich? Simply place the bills and coins in a net zippered bag and soak them in the sink with a little dishwasher soap and bleach. Now you have clean money — freshly laundered. Is that “money laundering?” No. The term “money laundering” refers to activities and financial transactions carried out specifically to hide the illegal source of income, thereby evading income tax as well as discovery of illegal activities. In most cases, the goal is to give money the appearance of coming from a legitimate source. Money laundering is extremely complex, involving convoluted transactions, often with numerous financial transactions and financial outlets, and often utilizing currency. Currency is a “bearer instrument.” That is, whoever has them, owns them. The IRS’s Criminal Investigation (CI) Division has financial investigators and expertise in following the money trail. Tracking dirty money is immeasurably more difficult if it involves currency. CI special agents combine accounting and law enforcement skills. They focus on money laundering, where the underlying conduct is a violation of the income tax laws or of the Bank Secrecy Act. Money laundering is, in effect, tax evasion in progress. The CI Division was established in 1919 and began its first investigation of an opium trafficker in Hawaii in the early 1920s, bringing the only charge available at the time: tax evasion. There was no paper trail at the financial institution other than bank account records — if the money was deposited. There was no requirement for banks to report the large amounts of currency transactions. It wasn’t until 1970 that the Currency Transaction Report (CTR) came into existence with the passage of the Bank Secrecy Act (BSA). The Money Laundering Control Act was enacted in October 1986, followed in 1996 by the Suspicious Activity Report (SAR), with variations for special industries. In order to detect possible money laundering, tax evasion or other illegal activities, the following reports are used. Even if the transaction is legitimate, such as withdrawal of cash for the purchase of a car, it will be reported. Dollar thresholds appear for each report. Suspicious Activity Report (SAR) — Filed for transactions or attempted transactions involving at least $5,000 that the financial institution knows, suspects, or has reason to suspect the money was derived from illegal activities. Suspicious Activity Report Casino — Filed for transactions or attempted transactions if they’re conducted or attempted by, at or through a casino, and involves or aggregates at least $5,000 in funds or other assets, and the casino/card club knows, suspects, or has reason to suspect that the transactions or pattern of transactions involves funds derived from illegal activities. Registration of Money Services Business (RMSB) — Each Money Services Business (MSB), except for agents of another MSB, must register with the IRS. An MSB typically is an issuer of money orders, traveler’s checks, a money transmitter, check casher, or currency dealer. Suspicious Activity Report by MSB (SARM) — Filed for transactions or attempted transactions if conducted, attempted by, at, or through an MSB, involving or aggregating funds or other assets of at least $2,000. The SARM is also filed if...
read moreNew Year’s resolution No. 2: Pay off your debts
On the Money From the January 5, 2007 print edition New Year’s resolutions are a tradition dating back to the early Babylonians. The early Babylonians’ most popular resolution was to return borrowed farm equipment. According to the U.S. General Services Administration, the top three New Year’s resolutions are to lose weight, pay off debt and save money. [While there may be a relationship between numbers 1 and 3 as it applies to the weekly grocery bill,] let’s look more closely at number 2– paying off debt. The first step toward taking control of any financial situation is to create an accurate picture of the fiscal landscape. Start by listing income from all sources. Then record fixed expenses, such as mortgage payments or rent, car payments and insurance premiums, followed by expenses that vary, such as entertainment, recreation and clothing. The best course is to contact creditors directly and immediately if expenses exceed income. Explain the cause of the difficulties, and try to work out a modified payment plan that reduces monthly payments to a more manageable level. Don’t wait until the accounts have been turned over to a debt collector. Consider credit counseling. If a workable budget is hard to create and follow, creditors are unwilling to accept repayment plans or bills continue to multiply, consider contacting a credit counseling organization. Many of them are nonprofit, and they’re dedicated to solving financial problems. The best sources for credit counseling services are universities, military bases, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service — not the Internet or a telemarketer. Be wary of credit counseling organizations that: Charge high up-front or monthly fees for enrolling in credit counseling or a debt-management program (DMP). Pressure clients to make “voluntary contributions,” which is another name for fees. Require personal financial information, such as credit card account numbers, and balances, before sending out any information. Demand payments into a DMP before creditors have accepted the program. In a DMP, clients deposit money each month with the credit counseling organization, which uses those deposits to pay unsecured debts, such as credit card bills, student loans and medical bills, according to a payment schedule the counselor develops with the debtor and creditors. Creditors often agree to lower interest rates or waive certain fees. But the debtor should personally check with each creditor, ensuring that they offer the concessions that the credit counseling organization describes. A successful DMP requires regular, timely payments, and could take 48 months or more to complete. There also are debt negotiation programs, which differ greatly from credit counseling and DMPs. They can be very risky and have a long-term negative impact on credit reports and, in turn, the ability to obtain credit in the future. Many states have laws regulating debt negotiation companies and the services they offer. Contact the state attorney general for more information. In Colorado, visit www.ago.state.co.us/index.cfm. Debt negotiation firms often pitch their services as an alternative to bankruptcy. They regularly claim that using their services will have little or no negative impact on the ability to acquire credit in the future, or that any negative information can be removed from credit reports when their debt negotiation program is completed. The firms encourage debtors to stop making payments to creditors, and instead, send payments to the...
read moreOptions are scandal from ghosts of Christmas past, future
On the Money From the December 8, 2006 print edition The holidays have arrived. As the seasonal song says, “He’s making a list, checking it twice. Gonna find out who’s naughty and nice.” Once again, Santa Claus is shaking his head at the financial community. If this keeps up, Santa’s annual trip will be so short, he’ll need only four reindeer. This year, the activities that are increasing the “naughty” list have been dubbed, “The Options Scandal.” According to Forbes, as of October, more than 150 companies have been engulfed in this embarrassment and embezzlement. Let’s examine the nature of “options” and the source of this scandal. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. An option is a binding contract with strictly defined terms and properties. Since option contracts can be for either a sale or a purchase, the idea was originally to protect, or hedge, an investment. Additionally, many companies use employee stock option plans to compensate, retain and attract employees. These plans are contracts that give employees the right to buy the company’s shares at a fixed price within a certain period of time.They hope to profit by exercising their options in the future at a higher price than when they were granted. If you’re a shareholder in a public company, watch for SEC filings of Form S-8 and Form 4. This may tell you the firm is using options as compensation, thereby eroding the value of the stock in general. The two types of options are “calls” and “puts.” A call gives the holder the right to buy an asset at a certain price within a specific period of time. Buyers of calls hope that the stock will increase substantially before the option expires. A put gives the holder the right to sell an asset at a certain price within a specific period of time. Buyers of puts hope that the price of the stock will fall before the option expires. If you already own the asset for which you’re purchasing an option, it’s called a “covered” option. Trading in just the options alone, without owning the underlying security, is known as an uncovered or “naked” option. The current options scandal has to do with time. An option contract is for a specific period of time from the date it was granted. Under fair and legal rules, after making a considered prediction about which way the price will move, people buy options and hope they’ve accurately predicted the future. However, in the current cases, options were executed today for a date in the past at a price that the issuer and buyer already knew was lower than today’s worth. It’s just like betting on a football game where you already know the results. Is this a new high-tech scheme? Hardly. It’s the oldest scheme in the books, made even more famous in the movie “The Sting” where the entire scheme was based on the practice of “past posting.” Past posting is simply making a bet on a known outcome. This is possibly the best-known con trick of all time. A close cousin to the current scandal involving past-posting options is insider trading....
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