Sen. Jon Corzine, whose Wall Street expertise plays a key role in Democrats' strategy on corporate responsibility, led an investment banking firm that is being accused of inflating stock prices in the 1990s and contributing to the market crash.
Senate Majority Leader Tom Daschle lately has kept Mr. Corzine at his side frequently as Democrats call on President Bush to get tougher with corporate executives who fraudulently inflate company earnings to boost stock prices.
How about the at least $250,000+ that Bawney Fwank took from a fat little New York bitch using monies (allegedly my ass) stolen from a major stockholder of of a very well known AeroSpace company?
Wouldn't it be fun to hear something like this?... " Hey, Bawney, have you and your little allegedly homosexual friends been seeing things lately?
Hey Bawney, you thinking about the deal put to you to pay that money back, with all the interests?
Hey Bawney, you listenin"
Wouldn't that be funny?
Imagine the hue and cry if this were Bush or Cheney.
Monday May 13, 2002
ORIGINAL SIN
How prices of initial public offerings were manipulated by Goldman Sachs through the illegal practice of "Laddering"
By Nicholas W Maier
Special to Dotcom Scoop
For five years I worked on the front lines of Wall Street for one of the most well known professional money managers in the business, James Cramer. During my time at his firm, I witnessed more than a few manipulative tactics that served to perpetuate and ultimately destroy the bubble of the nineties. One in particular, known to insiders as "laddering," was especially potent and egregious, serving to ravage the small, uninformed investor.
Fresh out of college, I earned my way up at Cramer & Company from office gopher to trader, analyst, and from January 1996 through 1998, to "syndicate manager." A syndicate, or a group of underwriting investment banks, brings a private company into the publicly traded world through the process of an initial public offering. As syndicate manager, I was responsible for overseeing all of our firms activity into IPOs.
Cramer himself explained to me the day I was given the position that the task of syndicate manger was deathly important. During the mid-nineties, the investment banks were essentially printing money by bringing any company with a pulse public. We obtained shares of an IPO for a bargain price, and by the time that stock started to trade and the small investor joined the party the stock would have spiked a few hundred percent. I calculated the contributions and we made millions of dollars a year being given these stocks.
The specifics of my job were relatively simple - determine which upcoming deals would be hottest, or open at the most inflated premium to the issue price, and do whatever it took to secure an allocation. The most important measure the investment banks used in determining allocations was commissions, which is why institutional money managers such as Cramer & Company are the only people who ever get in on these deals. Based on our active trading style and high commission bracket, I could expect at least some participation just by asking, while the little guy at home could expect only to get hooked.
What helped me most was that my firm had an especially lucrative relationship with the premier investment bank, Goldman Sachs. Besides them being our prime broker, or the clearinghouse that handled all of our trades with any other Wall Street broker (and thus they received added fees), there were three Goldman alumni, including Cramer himself, at our shop. Needless to say, our Goldman salesman liked us, and took me into his confidence. This individual guided me through the specifics of the other factors involved in winning points with the investment bankers that were responsible for handing out the free money.
Our broker did not mince words. To increase my allocation, I should always agree to buy more stock after the IPO opened for trading. The proposal was that Goldman would give me extra shares at the initial, low price, if I bought in the "aftermarket," that is once mom and pop were allowed on board, usually at a significantly higher price. The math was not tricky and the rewards far outweighed the risks: any money lost from my aftermarket buy would be more than compensated for by receiving extra shares at the initial, low price.
The way our broker put it, this was not an idle suggestion on his part. There would be a direct correlation both on an existing deal and all future deals. The more I promised to buy in the aftermarket, the more shares I could expect to get at the initial, low price. Most importantly, he asserted that scores were kept. If I reneged on my aftermarket order, I could expect to feel the consequences, or to be docked on future allocations. All of this was kept track of in an investment banking "book," as he often called it.
The "book," as he put it, was the insiders look into an IPO. From one peek within it, he could tell me exactly how high the deal would go and where to place my aftermarket order. If he told me to place my order at fifty, I would place it at fifty. If he told me to place it at a hundred, I would place it at a hundred, knowing it to be worth my while in that the deal would trade at least that high. This "book," as I was told, also made its way with an investment banker to the brokerage houses trading desk on the day the IPO opened. It was, above all else, a written record to hold me to my word.
This simple "tie-in" agreement, or the forcing of a client to buy more stock of an IPO with the understanding that they would receive a larger allocation on current and future IPOs, eventually had a profound impact upon the marketplace.
This game was a perpetual cycle for the duration of my time at Cramer & Company. I would get my five thousand shares of an IPO at twenty, agree to buy more at a hundred, and over the next day or two sell it all with another broker. Remember, none of these aftermarket orders had anything to do with what I honestly valued a company to be worth. I only bought more because of the direct kickback, or increased allocation. Honestly, we at Cramer & Company all knew these IPOs were trading at, to say the least, ridiculously inflated prices. Still, the deals kept coming, and many of them even continued to go up.
Goldman wasnt the only investment bank soliciting these after market orders. Most of the major brokerage houses that had investment banking divisions did the exact same thing. Overall, the solicitation of aftermarket orders by investment banks became so commonplace that I never suspected any of it might have actually been blatantly illegal. Then the bubble began to burst. Starting in March of 2000, the stock markets, and especially the heavily IPO laden NASDAQ, began to plunge. Finally, on August 25, 2000, the Securities and Exchange Commission, or the industrys police, issued the following warning:
Summary: This staff legal bulletin sets forth the views of the Division of Market Regulation, reminding underwriters, broker-dealers, and any other person who is participating in a distribution of securities, that they are prohibited from soliciting or requiring their customers to make aftermarket purchases until the distribution is completed.
The rule, as stated, means that investment banks are not, in fact, allowed to make any customer commit to buy additional shares in an IPO until after it has already started trading. This simple "tie-in" agreement, or the forcing of a client to buy more stock of an IPO with the understanding that they would receive a larger allocation on current and future IPOs, eventually had a profound impact upon the marketplace.
Solicitations for aftermarket purchases give (other) purchasers in the offering the impression that there is a scarcity of the offered securities. This can stimulate demand and support the pricing of the offering. Moreover, traders in the aftermarket will not know that the aftermarket demand, which may appear to validate the offering price, has been stimulated by the distribution participants.
Simply put, it is the SECs opinion that through the process now known as "laddering" orders, or the insertion of forced demand by investment bankers for an IPO stock at progressively higher levels, a "hot" offering was almost guaranteed to fly. By specifically requiring a customer to buy more shares of an IPO, Goldman had placed an artificial catalyst into the marketplace. Obviously, as I stated, none of my orders were based on any traditional methods of valuation, but solely to secure more of an initial allocation, or a sizable kickback. Goldman Sachs had essentially, through their complete monopolistic control of an initial public offering, manipulated the share price higher.
It does not take a genius to recognize that the net effect of laddering was immense. There is nothing that validates an exorbitantly priced deal more than when it rises even higher. The uninformed investor, seeing the instant gains, is inevitably sucked into the fervor. Goldman created the convincing appearance of a winner, and the trick worked so well that they seduced further interest from other speculators hoping to participate in the gold rush. The general public had no idea that these stocks were actually brought into the world at unnaturally high levels through illegal manipulation.
This process of "laddering" worked so well for the investment banks that it changed all the traditional rules of the marketplace. Here we have the very genesis of the new economy stocks based on fraud. By making winners out of losers, everyone had to reassess valuation methods. For every IPO that traded at higher levels, fifty existing stocks could be revalued. Enron, with little actual assets, became the fifth largest corporation in the country. The brokerage house analysts, given a benchmark to rationalize ridiculous valuations, rolled out ever-aggressive targets that stopped just short of the moon. Meanwhile, people in the know like Kenneth Lay and Cramer & Company were getting out as fast as they could.
Obviously the SEC is aware of violations, or they never would have issued the afore mentioned warning in the first place. Recently the investment banks are feeling some ramifications. Apparently, towards the very end of the bull market, a few of them elected to simply demand a direct profit sharing agreement with their clients. There have been various cases where the brokers received exorbitant commissions in return for allocations. So far First Boston, without admitting guilt, has agreed to pay a hundred million dollar fine, and both JP Morgan and Robertson Stephens are facing similar charges.
The differences between these cases and those of laddering are many. Higher commissions, although easy to prove with written records and paper trails, are less harmful to the overall integrity of the marketplace. They do not cause a move, but are rather a product of it. In one last desperately greedy attempt to milk the end of the IPO craze for all it was worth, the investment banks simply demanded a huge check from participants.
On the other hand, there has been only limited speculation up to this point regarding any investigations regarding laddering. For my part, after being contacted, I have been voluntarily talking to the SEC regarding a current investigation, as they call it, into "Certain Initial Public Offerings." I have been asked specifically about laddering practices enacted by Morgan Stanley, Smith Barney, and most recently, regarding Goldman Sachs. After I told them what I knew, the staff attorney for the SEC handed me a document and asked me what I thought it appeared to be. It was nothing less than the investment banking "book" that my Goldman Sachs broker had told me so much about.
This specific "book" was for a deal called Marvell Technologies that was brought public by Goldman Sachs in the year 2000. Although the IPO came after I left Cramer & Company, I recognized my former funds name, and in the far right hand margin, directly next to the allocation we received, was a column marked for aftermarket orders. Cramer & Company had agreed to buy in the aftermarket for this deal, and received a sizable allocation. I guess this proves that scores really were kept, after all.
There is a classic fraud that many in the investment world have heard of called a "Ponzi scheme," where initial investors are given outsized returns to entice subsequent investors who are eventually robbed of everything. The parallel to laddering is easy to make. In this case, the perpetrator was the investment banks, the initial investors given outsized returns were institutions like Cramer & Company, and the victims were the small, uninformed investors who didnt have a clue what was really happening. Maybe Goldman and the other investment banks will ultimately pay for their indiscretions. The small investor obviously already has.
Nicholas Maier is the author of a new book about his experience on Wall Street working for James Cramer entitled "Trading with the Enemy." He lives in New York City with his wife and daughter. He can be reached via email at
nwmaier@aol.com.