Millions of investors have
already been victimized by the scams that were Enron and Worldcom. And it's not over.
Millions more will be victimized by tomorrow's mega-billion financial catastrophes. This
is the first comprehensive, no-sacred cows guide to today's financial scandals, and to
protecting your assets from tomorrow's.
MARTIN HOWELL is
editor-in-charge of Reuters equities coverage in North and South America. He has directed
much of Reuters corporate news coverage in the United States in the past four years,
including coverage of the Enron scandal, the Internet bubble, and Wall Street deception.
For the past 18 years, he has written, reported, and edited business news throughout the
United States, Europe, Asia, and Australasia, and managed news teams on all these
continents.
Table of Contents
Foreword
Introduction
Acknowledgments
1. Sages and Charlatans:
Avoiding the Fads, the Buzz, the Rip-Offs, and the Merely Dumb
If You Can't Understand,
Don't Invest. Friends and Family Don't Like a Company's Products. A Product or Company Is
Hyped by Wall Street, the Media, and Others. On Wall Street, the Game Is Usually Rigged
Against the Small Investor. The Motivation of an Adviser Making a Recommendation Is
Suspect. Price Means Everything: A Great Company's Stock May Be Too Expensive. Don't Get
Caught Out by the Latest Fad; It Probably Won't Last. If You See Major Funds Are Shunning
a Stock, There's Usually Good Reason. Avoid Companies That Are Too Reliant on One or Two
of Anything. Diversify or Bust: Too Much Money in One Stock May Ruin You. Ejecting at the
11th Hour. A Company Files for Chapter 11 Bankruptcy Protection. The SEC Launches a
Full-Scale Probe into Possible Securities Fraud. The CEO or Another Top Company Official
Is Arrested. A Company's Shares Are Delisted by a Stock Market Such As the NYSE. A Company
Does a Reverse Stock Split to Remain Listed. A Company Is Facing a Large Number of
Class-Action Lawsuits. A Prominent Short Seller Has a Company in His or Her Sights.
2. Pipedreams and Big
Lies
When You Find the Big Lie,
Everything Else Crumbles Around It. A Whiz-Bang Device Is Loved by Tech-Geeks, but the
Masses Are Unenthusiastic. The Technology Is Great, but Its Price Is Too High for the
Mainstream. If a Technology Is Said to Transform the World, It Is Being Over-Hyped.
Journalists Are Often Wrong in Predicting the Success of a Deal or Product. When Money Is
Easy to Raise, Be Alert for Companies Doomed to Fail. A Product Is Only Set to Reach a
Niche, but Hopes Are Ramped Higher. First Company to Market May Not Be the One to Succeed
with a Product. Technology Becomes Obsolete and Companies Can Easily Burn Up. Be Wary of
Chasing the Prices of IPOs Soon After They Start Trading.
3. The Superstar CEO:
Celebrities, Showmen, and Destroyers
The Quitter: When a CEO
Leaves without an Explanation. When There Is Family Control, the Rights of Others May Be
Trampled On. Beware the Worst Combo of All: An Aggressive CEO and a Compliant CFO. The CEO
Bullies Everyone. The CEO Hypes a Company's Performance and Prospects. A CEO Is Caught
Making Misleading Statements. When a CEO Is Abusive, It May Be a Sign of Major Problems. A
CEO Is Built Up As the New Star Who Is Going to Fix Everything. When Senior Management
Includes the Company's Former Auditors. When the CEO Is Known Best for Destroying Jobs and
Slashing Costs. A CEO Known Best As a Serial Acquirer Rather Than a Builder. A CEO Who
Blames Others for a Company's Ills. An Executive with a Dubious History: Beware Repeat
Offenders. When Executives Buy Homes in Bankruptcy Havens Such As Florida.
4. Jets, Parachutes, and
Stealth Wealth: Pay for Performance or Pay for Plundering
CEO Compensation Is Not
Linked Closely with Performance. When Stock Options Are Handed to Executives Like There's
No Tomorrow. When Top Executives Own Very Little of Their Company's Stock. If a Company
Rewards Failure by Re-Pricing Stock Options. If a Company Rewards Failure by Lowering
Compensation-Linked Targets. Executives Making Money for Themselves from Company Business.
When a Company Forgives Large Loans Made to Senior Executives. Big Payments Are Made to
Executives for Their Work on a Takeover. When Boards Hand Out Massive Severance Packages
to Failed Executives. Executives Retire with Huge Packages, Including Costly Perks.
Companies with Golden Parachutes for Any Kind of Takeover. If a CEO Is Protected by a
Contract Even if Convicted of a Crime. When a CEO's Perks Are Excessive and Costly. When a
Company Pays for Private Jet Travel, Clubs, and Agents' Fees. If an Executive Is a
Philanthropist with Shareholders' Money. When Executives Bail Out of Their Company's
Stock.
5. Caffeine Badly Needed:
Sleepy, Inept, and Tainted Boards
Sudden Unexplained
Resignation of a Director from a Board. When the Board Rarely Meets. When
"Independent Board" Means the CEO's Grocer Is a Director. Boards Lacking Outside
Directors Who Are Respected Business Figures. Companies in Which the Chairman and the CEO
Are the Same Person. Professional Directors Who Are Keener on Collecting Fees Than Aiding
Shareholders. Boards That Have a Large Number of Long-Serving and Elderly Directors. Too
Many Academics and Ex-Politicians May Lead to an Uncritical Board. A Compensation
Committee in the CEO's Pocket Lacks Independence. Cross-Board Memberships Can Lead to
Conflicts of Interest. Directors Who Don't Own Much of Their Company's Stock. When a
Company Hits Low Points in Corporate Governance Rankings. Audit Committees That Don't Take
Responsibility for Policing Auditors.
6. Growing Mushrooms: The
Art of the Opaque, Sneaky, and Buried
A Press Release That Buries
the Net Earnings Figure. A Press Release Begins with a Questionable Measurement of Profit.
When the Earnings Table Is Produced in a Creative or Confusing Manner. If the Press
Release Omits a Cash-Flow Statement or Balance Sheet. When the Company Treats One-Time
Charges As if They Aren't Real Money. The Upbeat Tone of a CEO's Comments Is Not Matched
by Performance. If a Company Has Had a History of Over-Optimistic Forecasts. A Company
Doesn't Include Accounting Policy Details in Its Press Release. Stock Options Accounting
Policy and Its Impact Are Not Fully Explained. Too Much of the Wrong Kind of Disclosure
Can Bury Vital Information. When a Company Says It Has Changed Its Revenue Recognition
Policies. Hidden Announcements of a Probe by the Government or a Regulator. Disclosure of
Major Litigation Problems or Reserves for a Settlement. When a Board or CEO Treats an
Annual Meeting with Contempt. When a Company Tries to Bury Bad News on or Just before a
Holiday 110 When a Company Doesn't Hold Conference Calls. If a Call Is So Controlled That
Probing Questions Are Not Addressed. When the Press Is Barred from an Annual Meeting. If a
Company Delays Publishing Financial Results without Good Explanation. If a Normally
Talkative Company Official Suddenly Clams Up. When Drug Companies Spin and Obfuscate the
Results of Drug Trials.
7. Culture of Greed:
Sports Stadiums, Shooting the Messenger, and Rank and Yank
When a Company Abruptly
Transforms Its Corporate Strategy. If a Company Fires a Whistleblower or Faces a Suit from
a Whistleblower. A Company Cuts Research and Other Spending for the Future. A Company
Doesn't Handle a Crisis Directly or Quickly and Allows It to Fester. A Company Hides
Behind Anti-Takeover Devices and Ignores Votes to Change. When Companies Are Legally
Incorporated in Unusual Places. A Company That Buys a Stadium, a Sports Team, or Their
Naming Rights. The Edifice Complex: Lavish HQs Can Signal Waste and Excess. Companies That
Treat Staff Ruthlessly May Signal a Screwed-Up Culture. Companies Confronting Rather Than
Talking to Pressure Groups. When Unexplained Events Cast Doubt on an Entire Investment
Story.
8. Earnings Tricks and
Games: Manipulating the Numbers and "Creative" Fraud
Companies That Always Meet
or Beat Earnings Expectations. The Use of One-Time Gains from Asset Sales to Reach
Earnings Targets. When a One-Time Charge Becomes a Permanent Part of Results. Companies
Dipping In and Out of Cookie Jar Reserves. Serial Acquirers Who Disguise Performance with
the Next Big Deal. Using Aggressive Pension Fund Assumptions to Reach Earnings Targets.
Companies That Talk of New Paradigm Measurements of Performance. Beware of Companies That
Use Risky Stock Hedging Strategies. When Net Profit Is Rising but Cash Flow Is Declining
or Negative. Now, a Contradictory Warning-Cash Flow Can Also Be Manipulated. A Company
Grows Much Faster Than Its Rivals with No Clear Explanation. When Earnings Growth Is a Lot
Faster Than Sales Growth.
9. Goosing, Stuffing, and
Faking: Tricks of the Trade to Drive Revenue Up and Costs Down
Any Signs That Companies Are
Reducing Costs by Capitalizing Them. When Companies Depreciate Assets over an
Unrealistically Long Time. Fabrication Is Possible When a Company's Top Customers Don't
Check Out. If a Company Pumps Out Too Many Goods in a Particular Period. When a Company Is
Taking Longer to Convert Sales into Cash. Companies Bringing Forward Revenue from
Longer-Term Contracts. Companies That Record Bogus Revenue Achieved through Swaps. Beware
of Companies That Record the Entire Value of Trades As Their Revenue. Companies That
Indulge in Barter Deals Should Raise Suspicions. When Companies Provide Vendor Financing,
It Can Backfire. If Companies Use Their Own Assumptions to Assess the Value of Contracts.
When Plane Makers Use Wrong Assumptions to Spread Project Costs. When Construction
Companies Include Disputed Cost Overruns in Revenue.
10. Beyond Their Means:
Balance Sheet Clues That May Stop You from Losing Your Shirt
If There Is Any Sign
a Company Retains Risks from Off-Balance Sheet Items. Avoid Anyone Boasting About Using
Financial Engineering to Reduce Debt. Rating Agencies Cut a Company's Long-Term Debt to
Junk Status. A Rating Downgrade Triggers Obligations, Such As Debt Repayments. When a
Company's Debt Levels Are Much Higher Than Those of Rivals. When a Company Has Large
"Contingent" Liabilities. When Insurance Against Defaults on Bonds Goes through
the Roof. A Company Whose Return on Capital Is Below Its Costs of Funding. When the
Interest Coverage Ratio Drops Below One-to-One. When a Company Is Rapidly Burning through
Its Cash.
11. Snakes and Ladders:
Spinning, Flipping, and Walking through Wall Street's Walls
When an Analyst Doesn't Kick
the Tires or Even Read a Company's Filings. If an Analyst Hypes a Stock or Uses
Superlatives to Describe Management. When an Analyst's Estimates and Recommendations Often
Don't Pan Out. When a Highly Reputable Analyst Cuts a Rating, It Is Often a Sell Signal.
When an Analyst Stops Covering a Company without Notice. You Are Probably Behind Wall
Street's Top Clients on Research News. Buying Hot IPOs After Trading Begins Is an Easy Way
to Lose Your Shirt.
12. At the Scene of the
Crime: Funds Became Part of the Happy Conspiracy
Your Mutual or Pension Fund
Has Clear Conflicts of Interest. Funds That Won't Tell You How They Are Voting Your Shares
at the Time of the Decision. Funds That Don't Issue Shareholding Information Every Month.
Funds That Play Cloak and Dagger Games with Fund Managers' Identities. When a Fund Manager
Quits Suddenly, Especially if No Clear Reason Is Given. When a Fund Management Firm Is
Dropped by a Big Pension Fund. Lowered Ratings from Morningstar or Lipper. When a Fund Has
a History of Moving Away from Its Advertised Intentions. When the Shareholder Letter Is
Merely Used As a Sales Tool. Managers Who Divert Hot Stocks into One Fund at the Expense
of Another. High Fees That Suck Up Returns, Especially in a Bear Market. Advertising That
Boasts of Stellar Returns over a Short Period.
13. Where Were the
Auditors? Counting Fictitious Beans
The Auditor Suddenly Resigns
or Is Fired without a Good Explanation. The Auditor Questions Whether a Company Can
Survive. A Company Restates Its Results. Companies That Answer Criticism by Stressing
Compliance with Accounting Rules. When an Auditor's Record Suggests Lax Practices or
Conflicts of Interest. If an Audit Committee Hints at Internal Conflicts or Accounting
Concerns. If Management Doesn't Seem to Care Much About Internal Controls. If a Fraud Is
Declared, Expect News to Get Grimmer As More Is Uncovered. A Warning from the New Auditor
Watchdog. Beware of Accountants Who Are Promoters of the Latest Business Fad.
14. Media Munchkins and
Masters: Separating Puff Piece Writers from Hard Diggers
If a Top Publication
Exposes Dubious Accounting or Corporate Behavior. Magazine Covers and Awards Aren't an Aid
to Smart Investing. Journalists Who Fail to Ask the Hard Question. Be Aware That Some
Media Commentators Also Trade Stocks. Take Media Popularity Polls with More Than a Pinch
of Salt. Speed Requirements Can Leave Reporters Open to Hoaxes. News Reports That Only
Rely on Analysts Who Provide a Very Narrow View. Details of a News Report May Have Leaked
Out Before Publication.
15. Abstention to Follow
Addiction: When Disenchantment with Low Returns Hits Home
Appendix A. Tips for
Handling Your Broker, Financial Adviser, or Financial Planner
Appendix B. A Glossary for Investor Survival
Index
265 pages