Thievery Corporations

The paper today is full of debauchery covering the cat-and-mouse chases of regulators vs. the regulated.

1:       <Fund Managers Lift Results With Timely Trading Sprees >
   Hedge funds, who make their money from fees tied to performance, exploit the illiquidity of micro-caps to 'window-dress' quarterly performance reports.

     What's this mean?
*We will use a fictional hedge fund (Hedge Hog Hedging, Inc.==> HHH, Inc.) and use quarter end results of a real company suspected to have been manipulated by shareholders for the purpose of propping-up performance over the period; Iridex Corporation {IRIX: NASDAQ}. The reason for using a fictional hedge fund is because regulators are unable to pinpoint who made the trades which lead to inflated market prices.


OK,
     HHH, Inc. owns 29% of Iridex's nearly 9 million shares outstanding, about 2.6 million shares. It is the last day before the end of the quarter, so HHH, Inc. Fund Manager, utilizing high speed trading technology, puts in buy orders for Iridex shares at a price higher than current market price, effectively (and artificially) inflating the share price of Iridex.
                 What happened in real life is Iridex's market cap went up nearly 20% in the last 5 minutes of the last trading day before the end of the quarter, adding $7 million to their market cap. A hedge fund, BlueLine, at the time owned 29% of Iridex shares. There is no evidence that BlueLine is responsible, but there is no question that they gained from the inflation.

                                        BlueLine owns 29% of Iridex shares
                                        Market cap increases by $7million
                                        -------------------------------------------------
                                        BlueLine sees $2.03 million added to market value of their shares

Investors in the fund on the quarterly report see a value of their position in Iridex seriously inflated from its true value. These investors likely are not tracking the performance of Iridex on a daily basis, hence them paying somebody else to do it for them, therefore they do know that value the assets is inflated by $2million dollars (not to mention possible inflation in any other holdings besides Iridex). Then the next day the propped-up shares lose value, usually falling below pre-manipulated prices.

2:         <Global Cartels Fixed Display Prices for a Decade, EU Finds >
   In matured 'cash cow' markets, companies meet in secrecy to fix prices. A good example of a "matured 'cash cow' market" would be TV's. Sales are relatively stagnant, market shares change little between competitors, margins are thin, and competition is strong (but consolidated to a strong few).

   With basically no room for innovation coupled by a lack of funds, do to parent companies allocating most research and marketing money to 'the next big thing', players in these markets often are tempted to form allegiances. The theory is, if you can't increase your market share in the industry, increase the value of the market.

The TV display industry was run as a cartel with very familiar names involved.

-LG Electronics
-Panasonic
-Samsung
-Toshiba
-Phillips
-Technicolor
                    *If you asked me to name tv companies from the 90's-early 00's I don't think I could think of one that is not on this list.

These companies were meeting and playing golf together while setting up price floors they vowed not to breach in order to prop-up earnings, what a bunch of jerks. The difference between this case and the first one is that these guys were caught and fined.
                                        ***Oh sorry, no 'guys' were fined, only companies....which leads me to my next topic.

The make believe world where private citizen justice mirrors corporate justice.
   I cannot stop thinking of how it would be if  criminal justice for citizens was the same as it is for corporations.
example:  
               Corporate Scenario: Real people meet, representing their companies, and agree to fix prices; effectively swindling millions of dollars from consumers over a period in excess of 10 years.     Consequence: The company is fined a couple million dollars.
             
               Private Citizen Scenario: A real person is driving their car. They are going 100mph in a school zone at 7:30 am when the area is swarming with innocent little children. The car is pulled over by the local respectable policeman.
                Consequence: The officer writes a ticket for the car. Pleasantly surprised the driver asks what this means for your car to have a ticket. It turns out the ticket is for $1,000 off the resale value of the car. Sweet, no direct punitive action on the individual for carelessly endangering the lives of schoolchildren. (I know this is an extreme analogy, but if you have any respect for money and the real hard work needed to create real equity in this world then deceiving people in an attempt extract extra cash from them should be viewed as an almost equally heinous act, deserving of harsher penalties than most commonly given today.


*I would love to hear opinions, arguments, and especially opposing views
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<Iridex Financials>
<Global Cartels Fixed Display Prices for a Decade, EU Finds >
 <Fund Managers Lift Results With Timely Trading Sprees >