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Wall Street’s 10 Most Notorious Stock Traders
The country’s financial hub has a long history of lying, cheating, and stealing
Spring 2009 | Volume 59, Issue 1
The 1960s saw the development of what can only be called a corporate fashion: the conglomerate. These were companies assembled out of formerly independent parts that had nothing in common other than their ownership. Previously, acquisitions had usually been either vertical (companies gaining control of their suppliers and customers) or horizontal (companies buying their competitors). Antitrust laws had made both of these means of corporate growth difficult if not impossible.
The origin of the conglomerate craze involved two factors. One was the growth of institutional investing. Individuals can afford to wait for their investment in a stock to pay off. But mutual funds, in competition with each other, must show results every quarter or risk losing their investors. Pension funds likewise need to show results quickly, or the financial companies managing them might find their funds moving elsewhere. Buying quickly growing companies was one way to achieve positive short-term results.
The second factor was that accounting rules then in place made it easy for conglomerates to make it look like their profits were rising quickly, even when their growth was often more illusory than real.
Cortes Randell founded the National Student Marketing Corporation (NSMC) in 1964 to tap into the exploding U.S. youth market, especially college students. He sold such youth-oriented items as college coffee mugs, a guide to summer employment opportunities, a computer dating service, and discount airline tickets. In the bull market of 1968, he took NSMC public at an initial price of $6 a share.
Randell was a born promoter, and such savvy institutions as Morgan Guaranty Bank and the Harvard and Cornell university endowment funds bought his stock. Gerald Tsai’s Manhattan Fund, then the hottest mutual fund on the Street, purchased 122,000 shares at an average of $41 a share in 1969.
Over the next two years, Randell arranged a dazzling series of 27 mergers with companies such as a student insurance company and the publishers of Europe on $5 a Day . By acquiring so many companies, some of which were profitable, he gave the impression that NSMC and its profits were growing quickly. But most of these mergers were achieved through stock swaps, poolings of interest, and other no-cash arrangements. When it needed cash, NSMC sold lettered stock (unregistered stock, which is legally difficult to resell) at a bargain price to an institution.
The acquisitions made the quarterly reports look great, and NSMC’s stock rose to $122. Randell promised to triple its earnings every year. Then Alan Abelson, the gimlet-eyed editor of Barron’s , wrote a column in December 1969 pointing out that only the previously earned profits of the acquired companies, which rules allowed to be shown as profits of the acquiring company, gave NSMC any profit, and that the company itself was losing money. The stock fell 20 points the next day.
Some firms that had invested in NSMC—including Bear Stearns—protested Abelson’s column, but insiders—including Randell—began selling. Randell boldly predicted that sales would double in 1970 and that profits would grow from 11 cents a share to $2. In the next quarter, however, the company lost $859,889. NSMC claimed that a “mechanical error” had resulted in $4 million in accounts receivable going unbilled.
The stock crashed, never to recover, and Randell’s reputation crashed with it. He was forced to resign in February 1970. A Securities and Exchange Commission (SEC) investigation showed the books to be a farrago of creative accounting, and Randell was charged with stock fraud. He pleaded guilty and was sentenced to 18 months in jail. In 1979 he was convicted of both mail and stock fraud in connection with another company and spent another five years in jail. His business ventures since have frequently attracted the attention of both state and federal regulators.
The takers of all that lettered stock, meanwhile, ended up with nothing. The rules of accounting in mergers and acquisitions were reformed, and conglomerates soon went out of corporate fashion.
Ivan Boesky was born in Detroit in 1937 and attended law school there. By the 1980s he had become an arbitrager. Arbitrage in the classical sense meant taking advantage of different prices in different markets. If a commodity sold for more in one market and less in another, an arbitrager bought in the latter market and simultaneously sold in the former, pocketing the difference. With the advent of instant global communications beginning in the mid-19th century, opportunities for such deals began to dwindle. Today arbitrage is often highly technical, involving complex strategies with different securities.
In the mid-1980s Boesky sought a way to exploit the roaring bull market that followed the recession of 1980–81. Because money is easy to find in a bull market, a wave of mergers and acquisitions began sweeping the American economy, and Boesky took advantage of it by specializing in what economists call “merger arbitrage.” When a company tenders an offer to buy the stock of another company, it usually offers to buy the stock at a higher price than the market price. Once the offer becomes public, the stock of the company to be acquired rises to near the level of the offer, while the stock of the acquiring company typically falls a few points. If one bets right, buys stock in the company to be acquired, and sells stock in the acquiring company, one can make big money in a short period, especially if borrowed money is used to finance the speculation.
The trick, of course, is to guess right as to who is going to buy whom, ahead of the public announcement. Boesky had enormous success in this risky business. By 1986 he was worth $200 million and was well up on the Forbes 400 list. His method was simple: he used inside information.