Date post: | 18-Oct-2014 |
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Career |
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Title Slide If You See Something, Write Something Roddy Boyd, founder Southern Inves3ga3ve Repor3ng Founda3on
SABEW conference, Bal3more, Md., March 27, 2014
Boyd Roddy
Investigative reporter and founder of the Southern Investigative Reporting Foundation. He has worked for Fortune Magazine, the New York Post, !e New York Sun and Institutional Investor News; founded !e Financial Investigator website; and wrote "Fatal Risk," on the collapse of AIG. An independent nonpro"t, SIRF provides document-driven investigative and accountability reporting on publicly traded companies.
Twitter: @boydroddy Web: SIRF-online.org
What is corporate fraud? A few kinds of corporate fraud
• Securities fraud • Ripping off investors • Consumer fraud • Ripping off (retail) customers • Tax fraud • Ripping off taxpayers (that’s you) Bottom line: Fraud boils down to to saying one thing and doing another, for pro"t.
One de!nition:
“Business fraud is, very simply, fraud in any business activity that resorts
to deceitful practices to cause economic injury.”
-- Cochran law "rm (plaintiffs’
attorneys)
!ings !at Make You Go Hmmm • Logic Leaps • Cash is King • Manias of the Moment • We Take Care of our Own
Image: Wikimedia.org
Logic Leaps
Save Suspension of Disbelief For "e Movies
Does What "ey Say Make Sense? • Spectacular Results • Taking on Entrenched Competitors • What !e Hell?
Spectacular Results It’s not easy for large companies to grow massively • Ex: Merrill Lynch 2005 earnings • http://tinyurl.com/kg7racw • 33% Rev boost = Massive risk! Common Sense is most uncommon
Image: Jack-‐Benny, hJp://flic.kr/p/ePdxxP
Dancing With !e Big Boys • Watch for WCOM: Fast Rising in Brutal Industries
• How Come No One !ought of it Before?
• Are Independent Experts Wowed or Impressed?
• Common Sense: Killing a King Ain’t Terribly Easy
Cash Is King
! No doubt about it, companies not generating cash over time are in hot water. At some level, the inability to generate cash is involved in 99% of frauds.
Image: Jack-‐Benny, hJp://flic.kr/p/ePdxxP
Basics: Cash Flows Key points: • Find Statement of Cash Flows in 10-K, 10-Q • Check to see if company can generate cash • Look to see if company is “living in the market” • Discern trends, if possible Example • United Continental’s Conundrum (p.62): http://tinyurl.com/qx4r2yw Example: • Google’s sweet spot: http://tinyurl.com/pgxymdf
When the Cash Generator Breaks...
When companies can’t, over time, generate cash they have to: • Access the markets by stock and debt sales • Dilution, interest expense and debt loads • Markets shut down (1989, 1994, 1998 & 2007-2008) • Asset Sales • Delayed Investments (Lower Cap-Ex, Maintenance) • Expense cuts
Manias and Fads Companies in Manias are de!nitionally at a higher risk for wrongdoing • Pressure to last beyond boom cycle • End of a mania is a brutal reckoning • Watch for late stage mania co’s e.g. Pets.com • Manias are funding grabs, pure and simple
Look for incongruities
We Take Care of Our Own
• Related Party Transactions • 10-Ks and especially Proxy (Def-14A) "lings • Why have an RP for SOP deals? • Major red $ag: RP receivables
• Don’t sweat a relative (usually)
• Look for “once removed” RPs, like real estate • Hidden RPs: board consulting deals
Son of Related Parties: Perks
• Rank Excessiveness • Hidden Comp: Well into six "gures annually • ProTip: Look for “Gross Up,” or paying tax bill • Compare to others CEOs, corp. Stock Px Perf.
• Disclosure vs. Non-Disclosure • Has the company been in a period of downsizing?
• Unexplained & poorly explained capital raises