“That it?” she asked, not bothering with a verb or hiding the disapproval in her voice. She sounded Southern.
“Yes,” I replied flatly. Ordinarily, I would have asked about her accent, Southern but not from Charleston.
“Two pounds of garlic mashed and gravy. That’s disgusting.”
“I had a bad day.”
“If you eat that,” she observed, “it’s gonna get a lot worse, honey.” She punched the keys of her cash register.
“I’m coming back for a pint of Belgian chocolate ice cream. If that’s okay with you, honey.” I immediately regretted punctuating the sentence with “honey.” It sounded assoholic.
“Real bad day,” she observed, shaking her head from left to right.
Twenty minutes later, true to my word, I returned to the checkout line with ice cream. But when I dug into the Belgian chocolate back in my condominium, the cashier’s warning proved right. The “garlic mashed and gravy” promised there would be hell to pay if I continued on the present course.
I traded the ice cream for ice water and began an evening with Charlie’s file and Internet Web sites that offered financial information. Access to Bloomberg, the mother of all subscription databases, would have been much better. I considered taking a cab to LaGuardia. The airport offered free access to Bloomberg terminals.
Are they inside or outside security?
I could not remember, so I stayed home. Eventually, a number other than Charlie’s scribbles flagged my attention. The printout showed that Alex Romanov owned 9.5 million shares of Rugged Computers. It was a big position. The absolute number, even for a fund the size of MRI Capital, shocked me. How had I missed 9.5 million shares before? That number could make MRI Capital an “affiliate.”
In the vernacular of securities regulation—legislative tyranny to some—an affiliate is a director, corporate officer, or anyone who owns more than 10 percent of a company’s outstanding stock. I am no lawyer. But I consider affiliates to be people with access to material, nonpublic information. I use the word interchangeably with “insiders,” which sometimes draws fire from those who argue semantics for a living. Who cares? I know enough to keep my guys out of trouble.
The SEC regulates affiliates. It forbids them from profiting on inside information, which is like buying lottery tickets and knowing the winning numbers in advance. The penalties are stiff. Cross the line. Go to jail. Serve hard time as the prison’s bend-over bitch in residence. This deterrent is simple and effective most of the time.
The SEC also requires affiliates to disclose their trades publicly. The CEO of Company X, for example, must report his personal buys and sells in Company X stock. All investors, from investment club grandmothers to Wall Street wizards, can see insider trades by visiting Yahoo! Finance or other Web sites with financial data. The decisions of senior management, 10 percent shareholders, and other affiliates hang like damp laundry in the gale of public scrutiny. Who sold? When did they sell? How many shares? At what price?
At issue is whether insiders possessed material, nonpublic information prior to their sales. If an insider sells shares one day and the stock tanks the next, there are questions you have to ask: What did they know? When did they know it? Did they profit illegally?
Sitting at my desk, I doubted Romanov would ever allow himself to become an affiliate. Why take the risk? Most hedge funds disdained publicity. They invested stealthily, away from those who would otherwise regulate their activities or copy their market moves.
There were exceptions. Some hedgies, like the shareholder activists, hogged the limelight. They made sport of managerial ineptitude and skewered underperforming managers on the pages of
The Wall Street Journal.
Not the Mad Russian. He preferred to operate in the shadows. He kept his mouth shut about triple-digit returns until his gains were secure.
There was good reason. Romanov bought volatile stocks. They traded “by appointment” in Wall Street vernacular, only a few thousand shares per day. News could send prices flying or wipe out paper profits in short, cruel flurries. All it took was one large order, buy or sell, just one person to copy an investment decision and blow the economics.
According to the industry rule of thumb, Romanov could trade 20 percent of a stock’s daily flow without moving the share price. He could sell fifteen thousand shares, for example, of a stock with an average daily volume of
seventy-five thousand. Any more would crush the price. It would take sixty-seven days to “lose” a block of 1 million shares.
Translation: “Lose” is special jargon from hard-boiled traders. It’s how the film-noir wannabes of Wall Street say “Sell.”
Losing a block of a million shares over sixty-seven days brought risk. Word might get out. For Romanov, a heralded money manager, the last thing he needed was to tip off other investors. They would follow the lead of the next Warren Buffett, overwhelm demand with sloppy sell orders, and erase MRI’s gains amid the torrent of falling prices. In these cases “lose” reverted to its more traditional meaning.
It made no sense for Romanov to become an affiliate. His disclosures, mandated by the SEC, would take just three days to “hit the tape” and become public knowledge. Other investors, assuming insiders had better information, would sell: “What do they know we don’t?” Nobody wanted to hold falling shares or hot potatoes.
So much for sixty-seven days and MRI’s triple-digit returns. Based on my assumptions, Romanov could only sell forty-five thousand shares of a million-share block before other investors noticed his actions. Just three days of trading. Given the 20 percent profit participations, the swings in Romanov’s personal fortunes could be huge.
He can’t be an affiliate. But 9.5 million shares is too big a number.
Romanov had once said, “I concentrate my bets. I never own more than fifteen stocks at a time. That’s how I generate my kind of returns.” His words reeked of arrogance then. My gut said something was wrong now.
It took only a few clicks to find Rugged Computers in Yahoo!’s finance section. The “key statistics” page did not show total outstanding shares. The “profile” page, however, contained a link to Rugged’s Web site. The company had issued a total of 44 million shares.
“What are you doing?” I asked aloud. With 9.5 million shares, MRI owned 22 percent of the company. Romanov, in control of more than 10 percent, was clearly an affiliate.
I clicked back to Yahoo! The Web site often showed insider transactions. Bad news: Yahoo! provided no information about Rugged’s insiders. It was disappointing but hardly a surprise. Access to micro-cap information was often sketchy among free Internet services.
Good news: Yahoo! offered historical prices. I clicked once, and Rugged’s
trading activity filled the screen. Prices and volume numbers dated to August 13, 1996. History that far back was more than necessary. I just needed Rugged’s trading statistics around November 30 and December 31 of last year.
Maybe it was broker curiosity. Maybe it was a complete waste of time. Maybe I could still hear Annie’s voice inside my head:
“Fight for your job, Grove.”
Whatever the reason, my instincts suspected the link between Kelemen and Romanov might help. I was searching for a buried fact, any shred of information that would dispel questions about my involvement with the Kelemen Group.
Damn that Charlie.
Rugged Computers had been an excellent investment. On December 29, 64,436 shares traded and closed at $4.50—a gain of 32 cents from the $4.18 close the previous day. On December 30, 67,492 shares traded and closed at $5.10. On December 31, another 75,008 shares traded and closed at $5.50. The stock had gained $1.32 or 31.6 percent in just three days.
The turnover statistics, however, smelled fishy. Rugged’s shares traded less than 7,500 shares on most days—one tenth of my 75,000-share example. Volume had totaled 206,936 shares on the last three days of December, unusually large for the stock but tiny by market standards. Using the highest closing price during those three days, $5.50 per share, the value of 206,936 shares barely exceeded $1.1 million.
Peanuts.
With $800 million under management, Romanov easily possessed the power to buy every single share that traded. The $1.1 million would hardly dent his fund. MRI could run up the price of Rugged Computers simply by purchasing blocks of stock. The SEC had coined a term for manipulation of this sort. They called it “marking the close.”
Did Romanov buy stock on December 29, 30, and 31?
He certainly had the incentive. He received his 20 percent profit participation based on the book value of the portfolio at year-end. No way had MRI purchased all 206,936 shares. But the $1.1 million outlay would have been an awesome trade in theory. MRI’s total block of 9.5 million shares had appreciated more than $12.5 million. Assuming there were no losses elsewhere in the portfolio to offset the gains, Romanov’s 20 percent profit participation totaled about $2.5 million.
Why did Charlie care?
The November 30 date puzzled me even more. Most hedge fund managers waited until December 31 to calculate their profit participations. The reason was more than simple industry convention. Investment agreements required audits in advance of payments to money managers. It would be too expensive and too time-consuming to audit results more than once a year. The only values that counted were the closing prices at four P.M. on the last day of the year. Forget stomach-churning lows or euphoric new highs earlier during the year. The audited numbers determined how much investors kept and how much money managers took home.
It made no sense to manipulate stock prices thirty days in advance of an audit. The gains might not hold. Consequently, I expected little action from Rugged around November 30. I was wrong. The shares had gained nearly 21 percent during the last three trading days of November, again on light but higher-than-normal volume.
Why did Charlie care?
I instinctively fished the subscription agreement out from the red folder. Ordinarily, these documents were death in print. The legalese suffocated business fundamentals. The countless disclaimers contained too many warnings about risk, too many references to forward-looking statements, and too many repeats of Wall Street’s favorite standby: “Past returns do not guarantee future results.”
It would be easier if lawyers printed just one simple statement in bold red letters on all covers:
“You can lose your ass if you invest in this piece of shit.”
Investors would think twice before putting their money to work. That night, the agreement was anything but boring. I scoured the pages.
My curiosity paid immediate dividends, specifically, a clause on page seven. MRI calculated performance fees on a monthly basis. If the fund appreciated $5 million during November, for example, then Romanov would earn $1 million. The document required an annual audit for the year ending December 31. But audits were unnecessary to pay monthly performance fees to the Mad Russian. Share prices on November 30 mattered just as much as share prices on December 31. This payment mechanism struck me as unusual.
Hedgies can negotiate anything
.
Romanov had the incentive to manipulate Rugged’s share price on either
November 30 or December 31. But the link between the Kelemen Group and MRI Capital still eluded me. It was hard to think objectively. My best friend had betrayed me. I feared my imagination had run amuck.
“Romanov marking the close,” I muttered. “No way.”
CHAPTER FIFTY
The best ideas in life are unpredictable. Brilliance arrives without warning. Sometimes, genius accompanies duress. All too often the catalysts behind inspiration are impossible to identify. Careers would be so much better if creativity came with on-off switches. It makes me sad I have no control over my best thinking.
The alarm clock from hell said 10:15 P.M. Monday had sucked, and I was ready to hit the sack. It would be impossible to sleep, though. I was doomed to another night of raise, lower, raise, lower.
What’s Ron Popeil selling?
SKC called my exile “a leave of absence.” In polite moments I called it “termination.” Right now it felt more like a Serbian war crime. Eight years of service made no difference. SKC tossed me out on the street in less than ninety minutes.
I had money to weather the storm. Unlike other advisers, I avoided big mortgages and recurring expenses. Fortunes changed too quickly in my business. Losing a monster client could easily wipe out $200,000 or more in take-home pay.
Am I really safe?
All my money was at SKC. I knew a broker who left PCS for a big
paycheck from another firm. Twelve months later he was squabbling with the brokerage over his signing bonus, and they froze his assets pending arbitration. I made a mental note to wire all cash to my bank account at Chase first thing in the morning.
So what if it sets off more alarm bells.
I had been exiled less than twenty-four hours, and Annie’s words were again reverberating through my head:
Fight for your job, Grove.
She was right. If I was gone too long, if too many questions went unanswered, my clients would leave of their own volition. Today, SKC had run me down, run me over, and wrung me out.
They won’t freeze my assets. They know I’ll sue.
