120 “Ex-Kidder Workers Get Severance Pay—With a Catch—They Must Agree to Be Silent on Tenure at Company,” Bloomberg News, January 13, 1995, p. 1.
121 Weiss, p. 90.
122 “Disgraced Trader Vows to Return,” Daily Telegraph, July 6, 1996, p. 1.
123 Jerry W. Markham, “Guarding the Kraal—On the Trail of the Rogue Trader,” Journal of Corporation Law, Fall 1995, pp. 144-145.
124 John Gapper, “Banks Warned on Linking Bonuses to Profit,” Financial Times, July 27, 1994.
125 “Explaining It to the Board,” Derivatives Strategy, April 4, 1994, p. 3.
126 Terence P. Pare, “Learning to Live with Derivatives,” Fortune, July 25, 1994, p. 106.
127 Hal Lux, “Levitt’s Last Testimony,” Institutional Investor, January 2001, p. 74.
128 Lux, “Levitt’s Last Testimony,” p. 74.
129 Ford S. Worthy, “What We Learned from the ’87 Crash,” Fortune, October 5, 1992, p. 98.
Chapter 7: Messages Received
1 “Fallen Idols,” The Economist, May 4, 2002, p. 11.
2 Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford University Press 2000).
3 In the Matter of Cendant Corporation, Securities Exchange Act of 1934 Release No. 42933, June 14, 2000, p. 7.
4 In the Matter of Cendant Corporation, p. 15, note 10.
5 Susan Jackson, “Point, Click—and Spend,” BusinessWeek, September 15, 1997, p. 74.
6 Mary J. Cronin, “Business Secrets of the Billion-Dollar Website,” Fortune, February 2, 1998, p. 142.
7 “Cendant Announces Public Offering of $1 Billion of FELINE PRIDES,” Business Wire, February 12, 1998.
8 In the Matter of Cendant Corporation, p. 10.
9 In the Matter of Cendant Corporation, p. 13.
10 Tom Lowry, “Just Going about His Business,” BusinessWeek, February 28, 2000, p. 138.
11 Amy Barrett, “Who’s to Blame,” BusinessWeek, August 17, 1998, p. 70.
12 Cendant Corp. v. Forbes, 99 Civ. 4869 (S.D.N.Y. 1999).
13 David E. Rovella, “SEC ‘Goes Criminal’ on Fraud,” National Law Journal, May 7, 2001, p. A1.
14 Rovella, p. A1.
15 Subrata N. Chakravarty, “Dean Buntrock’s Green Machine,” Forbes, August 2, 1993, p. 96.
16 Chakravarty, p. 96.
17 Ralph Blumenthal, “Waste Hauler’s Business Acts Faulted,” New York Times, March 24, 1983, p. B12.
18 Chakravarty, p. 96.
19 Gene G. Marcial, “Big Names at Boca Resorts,” BusinessWeek, July 2, 2001, p. 110.
20 David Young, “Waste Firm Still Hauling Image Woes,” Chicago Tribune, October 6, 1991, p. C3.
21 Young, p. C3.
22 In the Matter of Arthur Andersen LLP, Exchange Act Release No. 44444, Administrative Proceeding File No. 10513, June 19, 2001, p. 5.
23 Michael Schroeder, “Suit Says Policing Audits Is Conflict for SEC,” Wall Street Journal, February 22, 2002, p. C1.
24 In the Matter of Arthur Andersen LLP.
25 Kristina Torres, “Generosity Can Come with Strings Attached,” Saint Paul Pioneer Press, April 6, 2002.
26 In the Matter of Waste Management, Inc., SEC Administrative Proceeding File No. 3-10238, June 21, 2000.
27 David Grainger, “You Just Hired Him; Should You Have Known Better?” Fortune, October 29, 2001, p. 205.
28 “Al Dunlap’s Disgrace,” Australian Financial Review, July 21, 2001, p. 21.
29 “Al Dunlap’s Disgrace,” p. 21.
30 In the Matter of Sunbeam Corporation, Administrative Proceeding File No. 3-10481, Release No. 33-7976, 34-44305, May 15, 2001.
31 Patricia Sellers, “Exit for Chainsaw? Sunbeam’s Investors Draw Their Knives,” Fortune, June 8, 1998, p. 30.
32 Sellers, p. 30.
33 Jenny Andersen, “Al Gets the Chainsaw,” Institutional Investor, October 1999, p. 224.
34 Barbara Demick and Daniel R. Biddle, “To Some, Rite Aid a Hard Pill to Swallow,” Chicago Tribune, May 15, 1989, p. C3.
35 Rich Exner, “Bribery Charges Dismissed Against Rite Aid,” United Press International, July 16, 1990.
36 “Rite Aid Vindicated, Returns to Business,” Chain Drug Review, April 22, 1991, p. 47.
37 Vindu P. Goel, “Prescription for Growth,” Plain Dealer, December 17, 1995, p. 1J.
38 In the Matter of Rite Aid Corporation, Administrative Proceeding File No. 3-10808, Exchange Act Release No. 46009, June 21, 2002, p. 8.
39 In the Matter of Rite Aid Corporation, p. 8.
40 Frank Ahrens, “History of Conflict for Rite Aid’s Chief; Indictment Paints Picture of Grass as an Arrogant Bully,” Washington Post, June 22, 2002, p. E01.
41 David Voreakos, “Rite Aid’s Secret Fraud Tapes Broke No Rules, U.S. Says,” Bloomberg News, October 16, 2002.
42 Thor Valdmanis, “Accounting Abracadabra: Cooking the Books Proves Common Trick of the Trade,” USA Today, August 11, 1998, p. 1B.
43 Claire Makin, “Short-Changed,” Institutional Investor, January 1993, p. 103.
44 Makin, p. 103.
45 Dirks v. SEC, 463 U.S. 646 (1983).
46 Carol J. Loomis, “Lies, Damned Lies, and Managed Earnings,” Fortune, August 2, 1999, p. 74.
47 Carol J. Loomis, “Hard Time? Hardly,” Fortune, March 18, 2002, p. 78.
48 Alan Murray, “Inflated Profits in Corporate Books Is Half the Story,” Wall Street Journal, July 2, 2002, p. A4.
49 Valdmanis, p. 1B.
50 Kevin J. Murphy, “Executive Compensation,” April 1998, p. 6 (available at www.ssrn.com).
51 Murphy, p. 90, Figure 15.
52 Murphy, p. 85, Figure 10.
53 The SEC confirmed this accounting treatment in 1992. “Executive Compensation Disclosure,” Securities Act Release No. 6962, October 16, 1992.
54 Murphy, p. 6.
55 Jeremy J. Siegel, “Stocks Are Still an Oasis,” Wall Street Journal, July 25, 2002.
56 Brian J. Hall and Kevin J. Murphy, “Stock Options for Undiversified Executives,” National Bureau of Economic Research, Working Paper 8052, December 2000, p. 37, Table 1.
57 “The Art, Not Science, of Risk Management, Controlling Risk,” Risk, June 1995, p. 2.
58 James Lacey, “The Consultants’ Verdict: Still in Trouble,” Derivatives Strategy, March 1996.
59 Linda Keslar, “The View from the Boardroom: Under Control,” Derivatives Strategy, March 1996.
60 Keslar.
61 David Neustadt, “Morgan Stanley Touts Equity-Raising Vehicle,” American Banker, September 15, 1988, p. 2.
62 Tom Pratt, “GM’s PERCS Help It Avoid Dilutive Offer; May Not Be Using Structure As Well As Avon,” Investment Dealers’ Digest, May 20, 1991, p. 14.
63 Larry Light, “‘PERCS’ You May Be Better Off Without,” BusinessWeek, April 20, 1992, p. 107; “Citicorp Raises $1 Billion in Capital but Dilutes Its Stock,” Bloomberg News, October 15, 1992.
64 Tom Pratt, “Salomon Prices Huge Decs Deal for American Express,” Investment Dealers’ Digest, October 11, 1993, p. 16.
65 “Salomon’s Debt Disguised as Equity Doesn’t Impress Big Investors,” Bloomberg News, August 1, 1993.
66 Tom Pratt, “Salomon and Amex Unveil New Exchangeable Debt,” Investment Dealers’ Digest, December 20, 1993, p. 16.
67 “Wall Street Profits May Drop after Record ’93,” Bloomberg News, March 30, 1994.
68 Malcolm Berko, “More than a Five-and-Dime,” Chicago Tribune, July 15, 1994, p. N11.
69 Tom Pratt, “AMBAC ‘Prides’ Deal Sunk by SEC Accounting Ruling; Broad Impact on Exchangeables Is Feared,” Investment Dealers’ Digest, April 1, 1996, p. 10.
70 “MCN Financing Sells $115 Mln Preferred Securities Via Merrill,” Bloomberg News, March 20, 1997.
71 Michael Bender, “The Latest from the Convertibles Desk at Merrill: FELINE PRIDES,” Investment Dealers’ Digest, April 7, 1997, p. 6.
Chapter 8: The Domino Effect
1 Robert J. McCartne
y, “’Skins Up By 10? You Make the Call: Punt or Put?” Washington Post, January 26, 1992, p. H1; “Swap Market: SocGen Mixes Super Bowl Hoopla and Trading Fever,” Bloomberg News, January 28, 1993; Alan Gersten, “Another Superbowl Disaster,” Journal of Commerce, February 2, 1993, p. 8A; Arthur M. Louis, “Derivatives Go to the Super Bowl,” San Francisco Chronicle, January 19, 1995, p. D1.
2 McCartney, p. H1.
3 “Swap Market: SocGen Mixes Super Bowl Hoopla and Trading Fever.”
4 Robert J. Shiller, Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks (Clarendon Press 1994), p. 47.
5 “Of Votes and Volatility,” The Economist, May 14, 1994, p. 86.
6 Norma Cohen and Alison Smith, “Heat Turned on Self-Regulation: Britain’s Complex System of Financial Services Control Is under Attack,” Financial Times, July 28, 1995, p. 17.
7 Hazell v. Hammersmith & Fulham London Borough Council, 2 QB (CA) 697 (1990), p. 801.
8 Morgan Stanley UK Group v. Puglisi, Commercial Court, January 29, 1998 (Longmore, J.); Helen Parry, “How Black Wednesday Broke Morgan Stanley’s String of PERLS,” London Guildhall University Working Paper, May 13, 1998; Helen Parry and Susan Scott Hunt, “Of Bears and Barings: Approaches to Enforcement in the US and UK,” Swaps and Off-Exchange Derivatives Trading Law and Regulation (1996), p. 186.
9 Michael D. Mann and Joseph G. Mari, “Developments in International Securities Law Enforcement and Regulation,” Practising Law Institute Order No. B4-7014, 788 PLI/Corp 7, October 5, 1992, pp. 21-22.
10 “Kidder Reportedly Woos Japanese Insurer with Accounting Arbitrage,” Derivatives Week, Volume 3, October 31, 1994, pp. 1, 12.
11 “Lessons from the Hedging Scandals,” Derivatives Strategy, February 20, 1994, p. 5.
12 Sharmila Rampeearee, “Japan’s Finance Ministry Orders Transparency in Derivatives,” Bloomberg News, November 29, 1994.
13 Chew Farn Chyi, “Derivatives: A Zero-Sum Game with Leverage?” Business Times (Singapore), January 13, 1995, p. 7.
14 Amy Balan, “Berjaya Industrial Denies Liability for Derivatives Loss,” Business Times (Singapore), December 29, 1994, p. 1.
15 “Malaysia Executive to Sue Credit Suisse over Derivative,” Bloomberg News, December 30, 1994, p. 1.
16 Alec D.B. McCabe and Robert B. Cox, “China’s Minmetals Sues Lehman for $128 Mln in Damages,” Bloomberg News, March 9, 1995, p. 1.
17 “Taiwan Punishes Overseas Chinese Bank for Derivatives Losses,” Bloomberg News, January 19, 1995.
18 Laura Jereski and Ellen E. Schultz, “Glaxo Holdings Is Taking a Hit on Derivatives,” Wall Street Journal, July 13, 1994, p. C1.
19 Steven Lipin, “Bankers Trust Woes Spread to Money Unit,” Wall Street Journal, December 8, 1994, p. A3.
20 James G. Neuger, “Currency Trading May Boost Banks’ Balsam Losses,” Bloomberg News, June 10, 1994.
21 Jeffrey Taylor and Kenneth H. Bacon, “How the Nymex Cooled MG’s Oil Crisis,” Wall Street Journal, April 5, 1994, p. A1.
22 Their respective articles were published in the Journal of Applied Corporate Finance in 1994. Antonio S. Mello and John E. Parsons, “Maturity Structure of a Hedge Matters: Lessons from the Metallgesellschaft Debacle,” Journal of Applied Corporate Finance, Volume 8, Spring 1995; Christopher L. Culp and Merton H. Miller, “Hedging in the Theory of Corporate Finance: A Reply to Our Critics,” Journal of Applied Corporate Finance, Volume 8, Spring 1995.
23 Anatoli Kuprianov, “Derivatives Debacles: Case Studies of Large Losses in Derivatives Markets,” Federal Reserve Bank of Richmond Economic Quarterly, Volume 81, September 22, 1995, p.1.
24 Jeremy Gray, “Bundesbank Watch: A Dilemma on Whether to Regulate Derivatives,” Bloomberg News, March 9, 1995.
25 Raymond Frenken and Carine Cassuto, “Countries in Criminal Probe of Derivatives Brokers,” Bloomberg News, November 29, 1994.
26 Thomas T. Vogel Jr., “Derivatives Darken Pall Over Mexico,” Wall Street Journal, January 9, 1995, p. C1.
27 Richard Voorhees, “Double Duty,” Latin Finance, June 1994, p. 63; Tom Pratt, “Merrill Brings Long-Rumored TelMex Prides to Private Mart,” Investment Dealers’ Digest, May 16, 1994, p. 13.
28 Frank Partnoy, F.I.A.S.C.O. (Penguin Books 1999), p. 194.
29 Hal Lux, “Levitt’s Last Testimony,” Institutional Investor, January 2001, p. 74.
30 “Mattel Says Mexican Currency Weakness to Hurt Results,” Bloomberg News, January 4, 1995, p. 1.
31 Saul Hansell and Kevin Muehring, “Why Derivatives Rattle the Regulators,” Institutional Investor, September 1992, p. 49.
32 “Message to the Congress on the Financial Crisis in Mexico,” Public Papers of the Presidents, March 9, 1995.
33 David E. Sanger, “D’Amato Seeks to Limit Foreign Bailouts,” New York Times, July 22, 1995, p. A34.
34 Russell Dean Covey, “Adventures in the Zone of Twilight: Separation of Powers and National Economic Security in the Mexican Bailout,” Yale Law Journal, Volume 105 (1996), p. 1,311.
35 The Department of the Treasury, “December Monthly Report to Congress,” Summaries of the Treasury Secretary’s Monthly Reports, July-December 1996, p. 7.
36 David E. Sanger, “Mexico Repays Bailout by U.S. Ahead of Time,” New York Times, January 16, 1997, p. A1.
37 “Frontline interview of Paul Krugman,” The Crash, Spring 1999.
38 Partnoy, pp. 207-212.
39 Dominic Kennedy, “Man Who Broke the Bank in Singapore ‘Is Just a Normal Bloke,’” The Times (London), February 28, 1995.
40 Nick Leeson, Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World (Little Brown 1996).
41 “The Collapse of Barings: A Fallen Star,” The Economist, March 4, 1995, p. 19.
42 Thomas B. Sanders, “Derivative Ruination in the 1990s: Les Apparences Sont Trompeuses,” Thunderbird International Business Review, Volume 43(3), May-June 2001, p. 424.
43 Leeson, pp. 143-144.
44 Richard Morrissey, “Quantum Fund’s Soros Bets Correctly on Japan,” Bloomberg News, March 5, 1995.
45 John Gapper and Nicholas Denton, “Barings Reports Showed ‘Nil’ Risk,” Financial Times, March 17, 1995, p. 19.
46 “Interview with David Frost,” British Broadcasting Corporation, September 11, 1995.
47 “Risk Monitor Wasn’t Chosen,” New York Times, March 3, 1995, p. D15.
48 Catherine O’Mahony and Darrell Delamaide, “Barings Falls: German Police Seize Leeson in Frankfurt,” Bloomberg News, March 2, 1995.
49 “Interview with Charlie Rose,” PBS-TV, February 27, 1995.
50 “U.S. SEC Chief Says Barings a Supervision Problem,” Reuters, March 2, 1995.
51 John Gapper, “NatWest Chiefs ‘Failed to Spot’ Deals Mispricing,” Financial Times, March 8, 1997, p. 1.
52 Catherine O’Mahony, “Deutsche Bank Reveals DM22 Million Derivatives Loss,” Bloomberg News, March 22, 1995, p. 1.
53 “What Really Happened at UBS?” Derivatives Strategy, October 1998, pp. 2-3.
54 “Daiwa’s Iguchi Joins Gallery of Accused Rogue Traders,” Bloomberg News, September 27, 1995.
55 Parry and Hunt, p. 183.
56 Edward J. Kane and Kimberly DeTrask, “Breakdown of Accounting Controls at Barings and Daiwa: Benefits of Using Opportunity-Cost Measures for Trading Activity,” Pacific-Basin Finance Journal, Volume 7 (1999), p. 225.
57 “An Unusual Path to Big-Time Trading,” New York Times, September 27, 1995, p. D6.
58 Abby Schultz, “Top JP Morgan Trader Is Asked to Step Down,” Investment Dealers’ Digest, March 9, 1992, p. 5.
59 Abby Schultz, “J. P. Morgan MBS Trader Turns Up Trading Same Product at Daiwa,” Investment Dealers’ Digest, June 8, 1992, p. 5.
60 Norihiko Shirouzu, “Ex-Daiwa Trader Alleges ‘Double Cross,’” Wall Street Journal, January 8, 1997, p. A18.
61 Frank Partnoy, “Why Markets Crash and What Law Can Do about It,” University of Pittsburgh Law Review,
Volume 61, Spring 2000, pp. 813-815.
62 Kenneth Scott, “Corporate Governance and East Asia: Korea, Indonesia, Malaysia, Thailand,” The First Annual World Bank Group-Brookings Institution Conference: Financial Markets and Development: Preventing Crises in Emerging Markets (1999), p. 12.
63 Raphael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, “Law and Finance,” Journal of Political Economy, Volume 106 (1998), pp. 1,113, 1,149-1,151.
64 Stign Claessens et al., “Ultimate Controlling Owners of East Asian Corporations and Expropriation of Minority Shareholders,” The First Annual World Bank Group-Brookings Institution Conference: Financial Markets and Development: Preventing Crises in Emerging Markets (1999), p. 18.
65 Stign Claessens et al., p. 18.
66 Charles Adams et al., International Capital Markets (International Monetary Fund 1998), p. 41.
67 Campbell R. Harvey and Andrew H. Roper, “The Asian Bet,” The First Annual World Bank Group-Brookings Institution Conference: Financial Markets and Development: Preventing Crises in Emerging Markets (1999), pp. 1, 4, 42.
68 Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises, 3rd ed. (Basic Books 1996), pp. 23-34.
69 Frank Partnoy, “Why Markets Crash and What Law Can Do about It,” pp. 808-809.
70 Charles Adams et al., p. 42.
71 As of late 2002, many of these disputes were still being litigated, and I had been retained as an expert witness in one such case, on behalf of a Korean life-insurance company.
72 Frank Partnoy, “Why Markets Crash and What Law Can Do about It,” pp. 810-811.
73 Harvey D. Shapiro, “Old Dogs, Slightly New Tricks,” Institutional Investor, June 1998, p. 81.
74 “Flaying the Fund,” The Economist, January 23, 1999, p. 64.
75 Many of the details regarding Long-Term Capital Management are from “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management,” Report of The President’s Working Group on Financial Markets, April 1999. Other useful sources include, in chronological order: “Inside Long Term Capital,” Derivatives Strategy, April 4, 1994; Kevin Muehring, “John Meriwether by the Numbers,” Institutional Investor, November 1996, p. 69; Michael Lewis, “How the Eggheads Cracked,” New York Times Magazine, January 24, 1998, p. 24; Michael Siconolfi, Anita Raghavan, and Mitchell Pacelle, “All Bets Are Off: How the Salesmanship and Brainpower Failed at Long-Term Capital,” Wall Street Journal, November 16, 1998, p. A1; Joe Kolman, “LTCM Speaks,” Derivatives Strategy, April 1999, p. 12; Nicholas Dunbar, Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It (John Wiley & Sons 2001); Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (Random House 2001); and Peter H. Huang, Kimberly D. Krawiec, and Frank Partnoy, “Derivatives on TV: A Tale of Two Derivatives Debacles in Prime-Time,” Green Bag 2nd, Volume 4, Spring 2001, p. 257.
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