Oy Vey, What a Country!
by Kevin Alfred Strom
THE August 5 issue of Business Week carried a story about a little tribe of stock-exchange raiders calling itself the “Scattered Corporation.” Scattered Corporation is headed by a Leon A. Greenblatt (pictured) and, if photographs are still evidence in this digital age, both Greenblatt and his principal lieutenant appear to be members of the Shrewd Minority.
Listeners may be familiar with the stock-market technique called “selling short,” which means to sell stock that you are “short of,” in other words, selling stock that you do not have. This is perfectly legal, and essentially constitutes a bet that the shares of the company you have “sold short” will fall in value, at which time you will replace the shares that were borrowed when you sold them. The difference between your short sale proceeds and the price at which you replace them is your profit for being so smart.
Short selling is a risky business, since share prices go up more often than they go down, and since there is no limit to how far they may rise, though they can obviously fall no more than one hundred per cent.
These risks don’t bother Greenblatt and company too much, though. They have special dispensation from the courts. Greenblatt’s company specializes in a special kind of raid called “bankruptcy arbitrage,” the exact details of which Greenblatt and his henchmen regard as a proprietary invention. According to Business Week, Greenblatt “makes a fetish of secrecy” and won’t reveal how the strategy works. In schematic form, though, it basically consists of selling short the shares of a company about to emerge from bankruptcy proceedings, and then replacing the shares with cheap warrants issued by the reorganized company.
Greenblatt is known for playing fast and loose with the law. Business Week calls it “creative interpretation of the rules.” He routinely ignores the securities regulation requiring short sellers to deposit funds backing their sales within three days. He claims that what he is doing is acting as a “market maker,” and so he is exempt from that rule. But that’s no more valid than claiming that you are an employee of the sanitation department if you pick up a gum wrapper on a street corner. And Greenblatt gets away with it, betting millions with other people’s money, and then cashing out without a dime of his own being risked. If you and I tried that, it would be called “free riding” and could land us in jail. But, of course, your name isn’t Greenblatt.
And that’s not all.
In 1993 Greenblatt and his fellow vultures at Scattered Corporation had descended upon the wounded body of LTV Incorporated, a troubled steel maker involved in bankruptcy. Grabbing for the main chance, Greenblatt sold short 180 million shares of LTV. The trouble was, there were only 122 million shares in existence — and not all of them were available for borrowing. Greenblatt had sold 58 million more shares of LTV than existed. In the process, he pocketed $27 million in 22 days of “work.”
Now, the shareholders of LTV weren’t too happy about this, nor was the Chicago Stock Exchange. Greenblatt was fined $6 million, leaving him only a paltry $21 million on the deal. But our hero wasn’t about to let an injustice like that stand. Like his Pharisee forebears, he had the qualities of audaciousness and persistence. He finally found his prince in Appellate Judge Richard A. Posner (who may have shared some of Greenblatt’s forebears) who overturned the fine in a Talmudically tortuous legal decision.
Posner stated that while Greenblatt and his raiders may be “reckless gamblers, sharpies, wise guys, exploiters of loopholes, even violators of the letter or spirit of the rules,” they nevertheless play a valuable role in the marketplace and can keep their ill-gotten gains and do it again if they feel like it.
Oy vey, what a country is this place America! Orwell, you were right. Some animals are more equal than others!
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Source: Free Speech magazine, November 1996