Page 115 - Bus101FlipBook

CH 6] Business 101 6-33

companies, with no operations, inventory or revenue. The end result is that the investor
has contributed their hard-earned dollars into worthless holdings. Are those people
offering those stocks being socially responsible or ethical?
When mismanagement causes investors to lose large sums of money, the results
can be disastrous, especially for the small investor who has placed his life savings on
the advice of a trusted financial adviser.

Insider Trading
Financial managers have the ability to investigate their investments thoroughly and
to present all facts and potential risks to investors. They have a responsibility to make
financial information available to all so that everyone is operating with the same
information. Insider trading occurs when individuals buy and sell stock on the basis of
their position in a firm or agency, which gives them access to information that is not
available to the general public. Such information, known only to the few, the insiders,
gives them an unfair advantage over typical investors.
“Isn't everybody doing it?” was the question from Wall Street as reported in one
newsmagazine after Dennis Levine's debacle led to the Ivan Boesky case and a rash of
SEC subpoenas. In one sense, everybody on Wall Street does trade on inside
information as few people outside the brokerage community are aware of the rumors
and other information traders regularly rely on to make decisions. However, most of
this is accessible to those who want to find it; the inside trades that Levine, Boesky,
and others made were based on information not generally available even on the
“Street” (business jargon for the securities industries).
Laws exist that prohibit insider trading, and the SEC prosecutes individuals found
violating them. Some go to jail, pay heavy fines, and all have their lives ruined.
Boesky accumulated a fortune of $250 million, and was fined $100 million and
sentenced to three years in prison. Ken Lay, Jeffrey Skillng, Andrew Fastow knew that
Enron’s growth was based on false reporting and in the beginning of the investigations
sold off their stocks to profit from their misdeeds, each received prison terms and one
died prior to sentencing.
Whether these punishments will prevent future insider excesses depends less on the
threat of the SEC than on how badly members of certain financial communities want
money, as millions of dollars—and hundreds of millions of dollars—can be made in 6
today's active stock market.
Of course, a most notable incident revolves around Martha Stewart. Many think
and parrot that Martha Stewart was convicted on insider trading, and was sentenced to
federal prison on this charge. However, that is false, as Martha was convicted on lying
to a federal investigator and NOT insider trading. Which is worse? The penalty was the
same and very expensive!

Greenmail refers to a situation in which wealthy investors buy a significant
portion of a cash-rich but minimally profitable (or unprofitable) firm. They then hint to
the firm's board of directors that they are going to attempt a takeover and oust current
management. In many instances, the board offers to buy the greenmailer’s stock at a
price significantly above its current market value to preserve their personal power,
positions, and income.
Saul R. Steinberg began accumulating Disney stock through various avenues and
after he accumulated 11 percent began threatening a hostile takeover of Walt Disney
Productions. Disney’s theme parks and film productions were not as profitable as they
had been in the past, and investors were disgruntled with their returns, causing them to
look disfavorably at the board of directors.
Disney's board took a number of steps to ward off Steinberg's attack. It issued a
new stock offering worth more than $537 million and purchased another company,
Arvida, a resort and home community developer. These moves were intended to dilute
the relative value of Steinberg's holdings. However, these defensive moves produced a
weakened financial position for Disney that penalized all its stockholders. Company
debt more than doubled. The market value of Disney stock dropped by 22 percent in
two days. Stock value declined more than $500 million during the takeover attempt.

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