DAVID WEIDNER'S WRITING ON THE WALL
Buy, buy and then cry
Commentary: Backlash amid the turmoil shows investors still don't get it
By David Weidner, MarketWatch
One of the great burdens of financial journalism is that family members near and far ask you for advice about the market.
In my family, there is one person who takes every gathering as an opportunity to pan in this gently flowing stream. The conversation almost always ends the same way: "I'm too scared to be in the market."
At first, this response frustrated me. But these days it's not hard to admire the self awareness. Risk, even in small doses, is not for everyone.
So isn't it funny when people who should know better end up whining to the courts that they lost a bundle in the market. No one seems to get upset when they make an unexpected windfall.
Sentinel Management Group Inc. is the target of multiple actions. It's being charged with fraud by the Securities and Exchange Commission and faces civil suits from investors for selling assets at below-market value. The SEC alleges Sentinel didn't tell investors their assets were "highly leveraged," according to the complaint, and investors have sued to block any more trades or deals.
Sentinel is into cash management or money market funds like Lance Armstrong is into bike riding or Steven Schwarzman is into a seafood diet. Suing Sentinel for leverage is like a toaster buyer saying their Proctor Silex dried out their bread.
Sentinel's quagmire is the latest legal territory staked out by Amaranth Advisors, Sowood Capital and Bear Stearns Cos.' (BSC) hedge funds - to name just a few firms that are facing, or have been threatened with, a lawsuit.
Mad money
Hedge-fund managers like to defend the secrecy of the business by saying it's only institutions, high-net-worth individuals and other sophisticated investors who can invest in the funds. How sophisticated do you need to be to understand that hedge funds take risky bets that can blow up?
Another target: mortgage companies. Luminent Mortgage Capital Inc. (LUM) has one foot in the grave, and already investors have piled on with a lawsuit alleging management and directors misrepresented some facts. The plaintiffs cited a lack of financial controls and a lack of discipline and hedging practices when investing.
Talk about mad money. Luminent may also be responsible for the mortgage crisis, the war in Iraq and fruit flies, but investors who gained as much 20% on their investment in 2006 didn't go class action over that.
Government intervention
In Washington, the Bush administration is backing accountants, bankers and lawyers in a U.S. Supreme Court case that may decide if investors can sue third parties when the investments in a company go bad. The decision may go a long way toward deciding if Enron Corp. retirees will be able to win something from Enron's banks or if they've come to the end of the line. See full story.
The industry and parts of the government are aligned against the plaintiffs. It's part of a backlash against the backlash of investors.
Wall Street deserves much of the blame when it comes to fostering ill will among investors. A recent poll found that 58% of 2,500 traders who responded said that they would trade on insider information if they could make a $10 million profit and have no chance of getting caught, according to Trader Monthly.
Bankers who may see not only year-end bonuses but as much as a 20% increase to those bonuses are also fueling the ire of investors who are dreading the next statement from their 401(k) providers.
Crooked traders and big paydays don't inspire trust and confidence. But it's doubtful that legislation or more education is going to be the fix. For years, Wall Street's biggest trade group has spent $5 million annually on investor education.. No amount of schooling makes a bad investment bet go good.
And it's dangerous to put limitations on who can sue and when. Though it's difficult to know how many investor cases are justified in the courts, about 20% of the 5,671 investor complaints filed at the NASD last year resulted in disciplinary action. Though those cases are usually investor against broker, it does suggest that some investors are right when they believe they've been wronged.
As for a journalist's stock-picking prowess? Scarier than the market.
Big coincidence
Apologies to everyone who has written about the brief hiatus of "Big Coincidence," this column's effort to point out suspicious stock trading in advance of big announcements from companies. The recent market volatility has made it difficult to see unusual activity.
But that changed Thursday when Cincinnati's Fifth Third Bancorp (FITB) announced a $1 billion deal for First Charter Corp. (FCTR) , a Charlotte, N.C.-based bank. The deal represented a 53% premium to First Charter's recent stock price and was unusually pricey. Fifth Third will take a 2% per-share earnings hit next year and expects annual cost savings of only $22 million.
As The Wall Street Journal blog Deal Journal pointed out Thursday, First Charter stock was on a big run before the deal was announced. Shares rose 13% after Aug. 3 after falling nearly 30% early in the year. See Deal Journal blog entry.
Maybe First Charter trading will be taken up by a the task force against insider trading formed by the Financial Industry Regulatory Authority, the Options Regulatory Surveillance Authority, NYSE Regulation Inc. and the Securities and Exchange Commission.
The market surveillance arms of those regulators have started meeting to compare notes. Former SEC enforcement chief Stephen Cutler touted the technology at the regulators' disposal, telling Reuters, "There is no such thing as a trade falling under the radar."
In First Charter's case, the trades must have fallen on top of it.
David Weidner covers Wall Street for MarketWatch.
Just my opinion...
