One, was incompetency.
Two, was highly illegal.
I stared at the screen for a moment, then a thought hit me. I picked up my phone and found the contact information for Ruth Bennett, my personal financial advisor. I didn’t have much money for Ruth to manage yet, but she knew I would someday, with any luck. It was the Sunday afternoon, so I called Ruth’s home number.
“Well hi, Candice,” Ruth said happily. When you manage other people’s money, you’re always happy for some reason. Even when they call you on a Sunday. “What can I do for you?”
“Hey Ruth, I just had a quick question about the stock of a company I’m consulting with. I apologize for calling you on the weekend, but I just needed to pick your brain if you have a moment.”
“Sure,” Ruth said. “What’s the company?”
“There are actually two companies,” I said. “Wright Enterprises and Anderson Telecommunications.”
Ruth put me on speakerphone. I could hear her typing. “Okay, Wright stock closed at $97 per share on Friday. The stock is trending up on the news that Wright is acquiring, ah, Anderson Telecommunications.”
“And what about Anderson’s stock?” I asked. “I assume its ticking up in anticipation of the takeover.”
She tapped on the computer keys. “It was up 2% of Friday at $29 per share. It looks like Wright is offering $31 a share, so the Anderson stock holders must be thrilled.”
“I’m sure they are,” I said, resting my chin on my hand as I stared at the numbers on my screen. “Ruth, what would happen if Wright acquired Anderson, then some issue came to light that showed Anderson’s stock was not worth what Tanner, I mean, Wright, paid for it?”
Ruth took me off speaker phone. Her voice was clear when she asked, “Why would you ask that question, Candice? Is Goldman consulting with Wright on the acquisition?”
“I really can’t say anything more,” I said. “Just tell me, what would be the repercussions if something like that happened?”
She sighed in my ear. “Well, if it comes to light that Wright overpaid for Anderson, both company stocks will plummet. The SEC and the state attorney general would launch an investigation and if anyone is found guilty of cooking the books or doing anything to falsely inflate the stock price, well, people could go to jail. At the very least, the fines could run into the hundreds of millions of dollars.”
I felt the breath catch in my throat.
“Candice? Are you there?”
“Yes, sorry. Um, one last question. And this is completely hypothetical. Why would someone do that? Cook the books to inflate a stock price before an acquisition?”
“There are a variety of reasons why someone might do that,” she said with an edge to her voice. “All highly illegal.”
“Like trying to make the deal look better than it really is. Or trying to make the company appear more sound than it really is. The best reason I can think of is if they were propping the company up so they could later knock it down. They would short both company stocks and when the stocks collapsed, they would make a fortune in the bargain.”
I chewed at my bottom lip. “Forgive my ignorance, Ruth, but can you explain to me what you mean by ‘short both company stocks’?”
“Basically, shorting a stock means that you are betting against the stock price going higher. You’re betting that it’s going to go lower in the future. You buy options called ‘puts’ that give you the right to purchase shares of stock at one price and sell it when the stock reaches a strike point. If you are shorting a stock, you option the stock when it’s at the higher price, and when the stock drops, you sell back the option and your profit is the difference.”
“So, if someone shorted Wright’s stock at $97 per share, with a strike price of say $57…”
“They would see a profit of $40 per share.” Ruth was quiet for a moment. “Candice, is there something going on that you’re not telling me?”
“No, Ruth, of course not,” I said, hoping I sounded convincing. “I’m just on the team doing due diligence for the acquisition and I have to look at every angle. That’s all. Just running hypotheticals through my head.”
“Well, that’s good to hear, dear,” she said with a sigh. I could tell by her tone that she was concerned that I was into something I shouldn’t be. She drove the point home by adding, “Because anyone involved in that kind of collusion and stock manipulation could go to jail.”
“Thanks, Ruth,” I said. “That’s good to know.”