You have all the best of intentions, you have just purchased that great new book on stock market history, all the materials are there to start that new home project, or this for sure is the night that stack of mail is to be attacked. All of a sudden things start happening at once, traffic seems to be backed up, you’re a little thirsty after that workout, the Cubs are starting early, and you happen to be in front of your favorite bar. No one thing could have been strong enough to deter you from your earlier goal, but this amazing combination of events has overwhelmed you and there you are, sipping a cold one. A similar thing happened to me this morning. I was for sure going to continue talking about option execution, payment for order flow, crossing orders, and internalization of order flow. In cleaning up some old clippings and looking at the stock market carnage of the last few days I have been overcome by what I fear may be developing, and maybe the other topics can wait.

We have been talking recently in somewhat general terms about a lot of interrelated topics, unwillingness of companies to pay dividends, ineffectiveness of various corporate boards in working for the shareholder and controlling management, the general ineptness and seeming duplicity of the accounting profession and the SEC, the boldness of some CEO’s, and the almost laughable mistrust and lack of confidence in the ability of our elected officials to provide solutions.  This has been done in a fairly light-handed manner considering the gravity of some of the issues. This morning, however, two independent articles happened to land in front of me at the same time that have caused me to ask more serious questions about lack of integrity and maybe flat out fraud.

The first article was actually e-mailed to us by a viewer of our weekly show on www.WebFN.com (you can view it live every Thursday at 4:30 PM CT). It is an article published on the website Smart Stock Investor.com entitled “NASDAQ 100 Companies Report Combined Losses of over $82 Billion to the SEC While Reporting Profits of $19 Billion to Shareholders.” To say that title causes you to read further is an understatement. A brief summary is essentially that companies are diverging very rapidly from the Generally Accepted Accounting Principles required by SEC filings in reports to shareholders in an attempt to meet earnings projections. Of particular note is that the five largest NASDAQ 100 companies, Microsoft, Intel, Cisco Systems, Oracle, and Dell, companies actually making money, inflated their combined profits from $4.4 billion reported to the SEC to $13.4 billion to shareholders. Given the content of the news lately, the tone of what is contained in this article should not come as a total shock to most investors or followers of the markets. I have to admit that the magnitude of the numbers was a big shock to me, and the way this article did not sugar coat the problem and fired the numbers right at you was both enlightening and sobering.

While I am all for the entrepreneurial spirit, and for paying large sums for people of rare talent, I find it hard to believe all these people possessed either of those traits. More than likely the rare talent was in selling such a compensation package to the board for approval. The study goes on to draw some conclusions about how unhealthy it is to have this kind of wage gap in a population, and how bad it could be for government functions and future public policy to have the U.S. president and other elected officials essentially earning chump change compared with the average CEO. Someday, I hope we may have the time to talk further about those conclusions and ramifications, as they certainly are interesting topics.

Today, however, I would like to address the issues of these two articles taken together. If you combine the over-reporting of earnings, or imaginary earnings, with huge paychecks for those involved, essentially justified by the earnings, do you get flat out fraud? What would salaries be if based on the real numbers? My position on the current environment has been on the side of those looking for some reforms, the re-awakening of common sense, and some method where the shareholder gains back some influence with company management and boards. This morning I started to get this eerie feeling that I may be underestimating the scope of these problems and potential management stealing by a huge factor. It is sort of like working hard for funds to plug a few leaks in a dam, never suspecting that the real problem was a totally rotten foundation due to fraud in the construction of the dam. Are we dealing with a whole group of people, aided and abetted by consultants, accountants, investment bankers, etc. who have raised huge sums of cash using phony assumptions, paid themselves absurd amounts, lied again about performance numbers, and who are now escaping worthless companies either freely or with a huge retirement packages. Is the scope of this fiasco way greater than my previous estimates, maybe enough to make the recent Savings and Loan problems look like small potatoes. Are the Enron boys the only ones to get caught and maybe brought to task, sort of the Charles Keating of this scandal?

I still have not totally bought into this fraud on a massive scale scenario, but it seems like every day my old position that this is a problem we will work through and be stronger for going forward seems a little more wobbly. I think now that at least some companies, many more than just the ones currently in the news, were total scams from beginning to end, and maybe this time (rather than the S&L solution) it is necessary for the national consciousness to find those responsible and make them pay. I would certainly appreciate your opinions on this and other columns. I can be reached at tph@ptihedge.com.
   

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