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Posted by on Dec 3, 2010 in RISKS WITH MONEY | 0 comments

Another insider-trading case hits financial world

On the Money From the  December 3, 2011 print edition The FBI raided three large hedge funds in New York, Connecticut and Massachusetts on Nov. 22 as part of a three-year insider-trading investigation. Already, 14 defendants have pleaded guilty. “There’s a lot more patterns and serial insider trading than we previously thought had occurred,” said Scott Friestad, associate director in the Securities and Exchange Commission’s division of enforcement. Authorities say the criminal and civil investigations could surpass the impact on the financial industry of any previous such probes. There may be more arrests, as investigators examine the role of consultants and analysts who provide hedge funds and mutual funds with detailed information about the businesses and industries in which they specialize. To better understand what all this is about, let’s examine what federal law has to say about insider trading. Financial gain often is dependent upon the ability to predict the future. (The back-dating options scandal showed that in the absence of predicting the future, some people will re-invent the...

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Posted by on Oct 1, 2010 in RISKS WITH MONEY | 0 comments

Multilayered leverage amplifies money’s rises, falls

On the Money From the  October 1, 2011 print edition The ancient Greek Archimedes said, “Give me a lever that is long enough, give me a fulcrum that is strong enough and give me a place to stand and single-handed, I’ll move the world.” He was describing the physics of “leverage.” Recently, The Wall Street Journal reported that “leveraged debt, part of the credit bubble” was making a comeback. In finance, leverage is borrowed money. To the extent assets are controlled by borrowed money, that’s financial leverage. But furthermore, when the money that’s lent to a consumer also is borrowed, that creates debt upon debt – or leveraged debt. The credit bubble is made up of the multiple lenders that sit between the ultimate lender and ultimate borrower. The term “leveraged buyout” (LBO) frequently is used in connection with acquisitions. Companies buy control of another company (hopefully an asset) using borrowed funds. If the increase in value of the asset is greater than the cost of the borrowed funds, the leverage...

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Posted by on Apr 3, 2009 in RISKS WITH MONEY | 0 comments

SEC takes dim view of abusive naked short selling

On the Money From the  April 3, 2009 print edition As the world economy collapsed last fall, (and some would say it’s premature to use the past-tense of that verb), regulators took aim at activities that have a depressing effect on the financial markets. One of the activities that drew the SEC’s ire was the practice of “abusive naked short selling.” As opposed to “long trading,” which is purchasing a stock for cash and selling it later after the price has increased, “short trading” is the reverse. That is, the short-seller borrows a stock and sells it, and at a later time buys the stock in the market, hopefully at a lower price, and returns the shares that were borrowed. Notice that the first part of a short sale is borrowing the stock, not selling it. That might seem obvious. After all, how can anyone sell something they don’t own? Enter the abusive naked short-seller. In an abusive naked short transaction, the seller doesn’t actually borrow the stock, and fails to...

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Posted by on Apr 6, 2007 in RISKS WITH MONEY | 0 comments

Here’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...

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Posted by on Feb 9, 2007 in RISKS WITH MONEY | 0 comments

Many 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....

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Posted by on Dec 8, 2006 in RISKS WITH MONEY | 0 comments

Options 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...

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