What Would Alex Bosika Do?

Has the world entered a “Dark Ages of Morality” so to speak?

I am beginning to wonder.  After the world was pushed to the brink (we’re not out of the woods yet!) of global economic collapse thanks to the wonderful work of Wall Street in 2008, we’ve been reeling from scandal after repeated scandal in the global financial community.

In late June 2012, Barclays bank was triple-whammied with a fine totalling more $500M USD by the Commodity Futures Trading Commission, the United States Department of Justice and the Financial Services Authority for attempted manipulation of the Libor and Euribor rates. The manipulation happened because traders wanted to benefit their financial positions and because the bank could appear healthy. Not cool.

THEN THIS.

On July 26, Business Insider article by Henry Blodget documents how Zynga insiders cashed out after a “secondary stock offering” dumping 43 million shares and raking in $516 million in April.  On July 25, four months after that move, Zynga reported a horrible quarter with the stock plunging from $12 to $3. GREAT TIMING. The April stock offering was managed by Morgan Stanley, Goldman Sachs, Bank of America and other leading underwriters.  So all the stock sold in the offering was sold by Zynga insiders and none of the money raised went to the company.  Really?  Luckily, the Goldman Sachs of the world were able to make $15 million in fees for the cash-out.  Did you hear that great sucking sound?

Here’s the paragraph that takes the cake:

I know many of these folks personally, including at the company’s underwriters, and like and respect them.  I think the last thing they would intentionally do is unload stock when they thought it was about to crash—especially when the amount they made in the sale, though huge, is still relative chicken feed for them.

Also, all of these folks only sold a fraction of their holdings, so they’ve been hammered along with the rest of Zynga shareholders by the subsequent collapse.

Sure Henry.  Whatever you say.  You may not have many friends but that’s really a CYA statement that stood out like a huge frigging Barney Rubble thumb in a Moby Dick photo on the Flintstones!  Give us a break.  Just read the reader comments for this article.  People are angry.  (Read Article)

TAXES.  THE RICH. AND CORPORATIONS.

The news has been hot and heavy about taxes, corporations and “well-off” individuals.  In fact, a recent Reuters article reported that the super rich held $32 trillion dollars in offshore havens.  (Read Article)  Even Vanity Fair is pushing hot buttons on Mitt Romney’s dealings in offshore finance. (Read Article)

Apple has parked cash overseas (approximately $74B) which makes their financial earnings results report lower profits to avoid the “phantom tax liability” but the good part is they have marked the cash as eligible for U.S. taxation if it ever becomes much lower than it is today.  In fact, Apple has joined “Working to Invest Now” to lobby changes to the tax law with other multinational corporations to reduce the tax rate for overseas earnings by a significant amount — but let’s be honest, this is simply because the new paradigm dictates that corporations offshore, outsource and lower input costs to release finished goods to the marketplace.  (Read Article)

Interestingly enough, a Chinese research paper entitled, “Does Competition Encourage Corporate Profit Misreporting” outlines evidence of this type of behaviour with Chinese firms.  Their main empirical findings are summarized as follows:

• Firms in more competitive industries tend to “hide more profits”, all else equal

• Firms positioned unfavourably in competitive environments, such as firms facing higher corporate tax rates, firms facing more severe financing constraints, smaller firms, and private/collective firms, display “stronger propensities to hide profits”

APPLE VS. SAMSUNG

This transparency battle is now widening as tech titans in hotly contested markets (mobile, for example!) fight to prevent the “public” from gaining access to secrets that represent a “competitive advantage” for companies like Apple.

Now — Apple, Samsung, Intel, Qualcomm and Microsoft are court pleading to keep certain details from court filing outside the reach of the public.  Details like product diagrams, contract terms and “costly” internal market research.  Understandably, in fast-moving and extremely competitive markets, this could be devastating.  That said, news organizations like Reuters don’t feel the same way and such this should be widely available to the public.   (Read Article)

Personally, I am sitting on the fence with this one but that said, Apple wasn’t entirely open with Steve Jobs’ health condition (a material event!) when he left Apple for repeated medical visits. Therefore, allowing large organizations the opportunity to withhold information in many scenarios could prove to be problematic in an already troubled market environment that strives, very hard, to convince us that “information is perfect” and markets are not imperfect.

Frontline PBS’ powerful, hard-hitting documentary on Wall Street captured these quotes about the derivatives market which pushed the world to the brink (transcript):

DENNIS KELLEHER: The derivatives market went into darkness, almost no transparency and no regulation. And what you see is this explosion in the growth of derivatives in the United States and throughout the world.

DENNIS KELLEHER, Chief Counsel, Sen. Dorgan, 2006-10: Brooksley Born was absolutely right because what she said is if you don’t have transparency and regulation of derivatives, the risk is going to build up and they’re going to lead to a financial crisis that’s going to cause massive taxpayer bailouts.

(FRONTLINE’S PBS documentary is fantastic — :  WATCH ONLINE!)

GROUPON DOWNGRADED AND….

Another article by Henry Blodget at SAI on July 26 documents the fall of Groupon stock value from $11 to $7.  In this latest report, Ken Sena at Evercore downgrades Groupon for ongoing deterioration in its core business and results misrepresentation.  Wow.

We are reducing our rating given our concerns over the transparency and disclosure of the 1P [first-party] Goods business, coupled with signs of deterioration within the core daily deals business.

New information has emerged related to the company’s Goods category that makes us question the composition of the 1Q12 North America revenue beat…

In addition, billings data for North America and International are trending well below consensus, indicating a sequential q/q decline vs. Street expectation for high single digit billings improvement.

 Nearly one month prior to this article,  BI reported that “Groupon Is Setting Off Major Accounting Red Flags” (Read Article) which represents a troubling track record of issues in this wonderful P&D environment.

This quote before Morgan Stanley helped with Groupon’s IPO in November 2011:

“overall, the (Groupon) balance sheet stinks. The income statement reeks. Cash flows are in the toilet. Instead of participating in this IPO, we would rather purchase lottery tickets.”

— Grumpy Old Accountants blog by Anthony Catanach, June 2011

We’re going after the mob’s life savings. Things will get ugly.

—  Lt. James Gordon