Who’s left holding the bag?
Posted: September 13th, 2011
This guest post is written by Gurpreet Banwait who is the director of Insight Solutions Product Management at FINCAD.
It seems every few years a new scandal is uncovered where information provided by a company is found to be fraudulent and investors are left wondering where their money has gone. We’ve certainly seen a number of Ponzi schemes over the years, and when you see the list on Wikipedia it’s actually rather frightening. While Madoff’s case was one of the more famous ones, the list is long and it seems that there is always some other company finding a new and innovative way to separate a fool from his money.
When people start pointing the finger at a company that has perpetrated a massive fraud, the usual defences kick in as we hear the company proclaim their innocence in press releases and analysts still saying there is nothing wrong and investors should continue to buy. Ultimately, the truth comes out and, not to our surprise, the company really did commit fraud.
In some cases, the fraud continues as principals of firms are selling their shares or advising close acquaintances to not buy or even to short sell the company’s shares. These individuals will then profit as the share price inevitably falls.
So what’s my point with this story? It continues to amaze me that with this many smart people involved with the company, whether it’s lending the company money, providing their recommendations or auditing the company’s financial statements, that if they can’t see through this potential fraud, what chance does an investor have? Typically, there are both small and large investors that lose their money, but the ones most hurt will be the smaller investors who thought this company was a safe bet based on the recommendations and following by much larger investors. I know that some will say that this is the risk of the financial markets, but just think how many so-called experts lost money, lent money or gave their opinion on these companies.
Who is left holding the bag in this mess?