The ‘Pastorini' gold sting - lessons to be learnt
How can investors and regulators recognise and combat evil plots to manipulate markets?
Author: Barry Sergeant
Posted: Thursday , 12 Apr 2007
JOHANNESBURG -
This year's top market fiasco to date, a purported "bid" for Gold Fields by one Edward Pastorini, who may not even exist, has once again raised questions over the status of traded markets.
The damage in the Pastorini story occurred on Wednesday this week, when Bloomberg, a news wire service, categorically stated during early trade in Johannesburg and London that Pastorini and unidentified partners would make a bid for Gold Fields. This would cost at least $15bn (including control premiums) in cash.
With a starting market value of around $10bn on Wednesday, investors pushed Gold Fields up by as much as 10%, adding $1bn to its value. As news spread that the Pastorini story might be a hoax, the stock retraced by the equivalent of $800m. If this was a pre-meditated scam, the culprits would have been long of Gold Fields stock ahead of Wednesday morning, and would have sold into a rising market, harvesting hundreds of millions of dollars.
Overnight Wednesday and into Thursday Bloomberg published a new line of articles. This time around, it stated that "a plan to take over Gold Fields Ltd., the world's fourth-largest gold producer, by a man who says he's a financier can't be verified". An official at the Financial Services Board in Pretoria said the Pastorini story would be investigated for possible contravention of the Securities Services Act, prohibiting publication of false and misleading information.
Pastorini was last quoted as speaking from some unidentified location in South America, no doubt sipping champagne with his meat packing glitterati partners. Wise cracks aside, the underlying question goes to how "Pastorini" could have created a $800m hoax in markets which are supposedly well regulated. Capital markets - comprising principally stock and bond exchanges - have long been touted as an essential cornerstone in the ever-elusive bid to ensure the most efficient allocation of capital.
The big problem is that markets have always been driven by fear and greed - something that's never going to change. The iconic billionaire investor Warren Buffett once observed how it is that Wall Street (the iconic home of financial exchanges) "likes to characterize the proliferation of frenzied financial games as a sophisticated, pro-social activity, facilitating the fine-tuning of a complex economy".
But the truth, Buffett quickly added, is otherwise: "Short-term transactions frequently act as an invisible foot, kicking society in the shins". Damage occasioned by the Pastorini affair is going to foul the air for quite some time. Pity the hapless regulators who have to try and shovel to the bottom of a cesspool, and pity the foreign reputation of South Africa's markets.
"Pastorini", whether one or more persons, leveraged a plot off buoyant stock market conditions, and frenzied global merger & acquisition (M&A) activity. The day before the Pastorini event, global stock markets touched all time highs, as did emerging markets. Investors are sitting ducks for M&A action.
One plumb example occurred on February 17 2006, when the stock price of platinum digger Lonmin shot up nearly 30% in literally minutes, shortly after one o'clock London time, to 2860 pence a share, on the company's own announcement that it may be a takeover target. Lonmin rose a similar amount in Johannesburg; in its wake, Impala Platinum shot up nearly 15%, Anglo Platinum rose just over 9%, Northam Platinum was up nearly 9%, and Aquarius Platinum swelled by nearly 8%.
The next day - a Saturday - certain London media stated as fact that Gold Fields was the Lonmin predator. The fact is that no bid ever materialized, nor the name of the party that may have been in discussions with Lonmin. But no matter; at this juncture, investors are about to enter the fifth consecutive year of a monster global equities bull market. Frothy M&A stories will continue to surface.
One of the great ironies of the Pastorini affair is that the event occurred - seemingly effortlessly - in the stock market, the oldest of exchange types, and in theory at least, the best regulated. New markets are vastly more complex. In the past few decades, financial "whiz kids" have seen fit to invent derivatives markets and hedge funds, two kinds of largely unregulated activity.
Buffett has usefully defined derivatives as contracts that essentially call for money to change hands at some future date. The amount of money that changes hands depends on pre-selected reference items such as interest rates, stock prices or currency values. "The range of derivatives contracts", Buffett stated, "is limited only by the imagination of man (or sometimes, so it seems, madmen)."
Options - such as the old fashioned "first-option" - are an essential part of the derivatives world. To understand this wild financial frontier, try an inimitable story from Buffett, where it's always been a "fantasy" of his that a boatload of 25 brokers are shipwrecked, and struggle to an island from which there is no rescue.
"Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to trading options endlessly on the future output on the 20?" One of these traders, real or imagined, may recall that "Edward Pastorini" is an anagram for "Top Insider Award".
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