Forensic Finance Flashcards
The four issues that have been discussed that are illegal:
1) Late trading of mutual funds
2) Stock option backdating
3) The allocation of underpriced IPOs
4) Changes in records in stock analyst recommendations
Late trading of mutual funds
trading after four clock, some hedge funds buy or sell stocks
Mutual funds, have lots of stocks inside, to some selective investors allows to place orders of stocks. Most cases at the closing price. But something is happen after trading is closed. Fund would put high commission on these trades.
2003 newspaper, found out, published an article and stopped it.
Late trading of mutual funds - why there was price difference
Price difference because of two reasons: illiquidity and time-zones
Stock option backdating - case of Apple
Apple has cheated. In 2000, there was when Apple stock increased 87-106, oj January 19th, a week before Apple has given options to buy worth 10m USD shares. Allowed buying steve jobs stocks that were at 87, but 106. Profit 140m USD.
Reasons for backdating:
i. Managers are receiving some of that these cheap options
ii. Employees except to receive cheap options
iii. When backdated options are excercised, the realized value of the options is deductible from taxable income
Changes in records in stock analyst recommendations
Case of Thomson
Thompson Instituional database, for subsricbers to see rating, that have given to stock 1-5. Then in 99s-2000s some data were lost, researchers found out that some companies historical ratings were downgraded.
Scheme of Mutual fund late trading
Valued once a day, based on the last transaction, most cases sale prices, not super recent. Prices that are old, but with new info can do arbitrage.
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.
Effect of SAX
- The effect lessen the amount of backdating.
- Before positive abnormal return lessen
- Companies still do later reporting had higher abnormal returns for those options
“Market timing”
– taking advantage of difference in the
time that markets close
Reasons for receiving stocks instead of higher wage
– Managers get increased value upon execution
– Employees more willing to accept lower wages
– Tax deductions
Reasons against receiving stocks instead of higher wage
– Less cash in company
– “Securities fraud”
Spinning of IPO’s the scheme
• Bookrunners allocate underpriced IPOs to top
executives of corporations.
• Corporations get opportunity to get cheap
shares, bookrunners collect commission
payments
• Company executives get less money in the
company (as their company is underpriced)
