EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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CONTENTS

Book information

Author information

Technical details

Contact information

Sample chapters

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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BOOK INFORMATION

Simon Cawkwell, (aka ‘Evil Knievil’) is a living legend in trading circles. Famous for spotting overvalued stocks and ‘shorting’ them, Cawkwell has been known to make as much as £500,000 in just one week.

Evil’s Good: Book of Boasts and Other Investments offers a rare insight into the mind of the UK’s most famous ‘shorter’. Read all about his triumphs (and downfalls) and learn the common sense methods behind Cawkwell’s phenomenal success and great wealth.

Part autobiography, part training guide, Evil’s Good is a fascinating and often amusing read offering an insight into some of the darker realities of the City.

Revealing and uncensored, Cawkwell’s book details a shadowy sector of the market certain private investors and traders love to play in, despite their efforts usually resulting in large amounts of cash down the drain.

Evil’s Good is written by a man who loves a fraud, because exposing that fraud equates to a big payday. The book allows a rare look over the shoulder of an extremely talented stock picker and the chance to observe a true master at work.

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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AUTHOR INFORMATION

Simon Cawkwell, aka Evil Knievil, is a prominent spreadbetter who has earned the title ‘The King of Short Sellers’ and built up a legendary status.

Best known for publicly identifying companies whose share price he believes are going to fall, he can make or lose hundreds of thousands of pounds in a day — and when he takes a position on a stock, his actions can inflict serious damage on a company.

He is Britain’s best-known bear-raider, the man who first exposed the accounting fraud of Robert Maxwell, and his background as an accountant gives him unrivalled skills to unravel accounting fraud or irregularities.

A puncturer of pomposity, Evil Knievil is always prepared roundly to declare that the emperor is stark naked.

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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TECHNICAL DETAILS

- Price: £6.17

- Format: Kindle Edition

- File Size: 2663 KB

- Publisher: ADVFN Books

- Sold by:  Amazon Kindle Store

- Language English

- ISBN: 978-1-908756-04-6

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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CONTACT INFORMATION

Press Department
ADVFN Books
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London EC2N 2AN

Email: bookspress@advfn.com

Phone: +44 (0) 207 070 0932

ADVFN Books website: http://www.advfnbooks.com

Contact us and ask for a review copy of Evil’s Good: Book of Boasts and Other Investments

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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SAMPLE CHAPTERS

A Bear’s Background

The Art of Shorting

Evil’s Boasts

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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SAMPLE CHAPTER:

A BEAR’S BACKGROUND

“Give us this day our daily bread.

And forgive us our debts, as we forgive our debtors.

And lead us not into temptation, but deliver us from evil.”

— The Book of Matthew, chapter 6 verse 9 (also, plausibly, Robert Maxwell)

My parents arrived at Oxford from New Zealand in latish 1946. My father came on a Rhodes scholarship and having picked up a respectable degree walked a hundred yards from Christ Church to become a don at University College in 1950. He is still there but is now an emeritus fellow. I think he gets dining rights but has nothing to do with the administration of the place. Nothing whatsoever about his conduct in or attitude towards life has anything to do with gambling. He is about as financially risk averse as it is possible to be. I do not know why. His aversion may be genetically derived or it may come from a childhood in the thirties where he saw at first hand the consequences of a deep and sustained depression. My mother has virtually nothing to do with money and, save in the practical sense of recognising it as a means of exchange for life’s necessities, has absolutely no interest in the subject whatsoever. I have never once heard her raise it as a topic of conversation and, although she has not said so, I think she thinks the subject pretty boring and a mark of inferiority on the part of the speaker if raised.

My father’s second name is Law. This is rumoured to be because he, and thus I, are descended from John Law, the Scottish financier who set up the Mississippi scheme and was generally in charge of financial scams in France in 1720 (he might have operated the South Sea Bubble here at the same time but for being wanted on murder charges). So there’s a hint as to my interest in financial markets. That said, there is absolutely no evidence that John Law has anything to with my family whatsoever. Anyone got a pocket DNA kit to take to John Law’s grave in Venice? Cash paid.

I was born in 1946 and brought up in north Oxford in what I now recognise were virtually idyllic conditions — only, needless to add, I did not even begin to realise it at the time. The place was stuffed with kind enthusiastic intelligent and honourable people. My contemporaries had parents who had been through the war. They did not complain and they put their backs into getting things done. So, although there was not a lot of cash around, all was always provided for in the most stimulating and equitable environment any child could conceivably wish to be born into.

Aside from a rather handsome married vicar who publicly canoodled with a woman who was not his wife, I never heard of any hint of marital infidelity in my childhood Oxford. Divorce was regarded as socially inferior.

The Dragon School, on the banks of Oxford’s river Cherwell, was heaven for young boys and, as far as I am aware, so remains. Although I am the son of a don and was therefore expected to shine in the academic department, I did nothing of the sort. Only occasionally could I be bothered to put in any sort of effort. So I was eclipsed by the swots. And, given that one or two of the swots were clever fellows into the bargain, the eclipsing was pretty thorough and, worse, persistent. I do not know what would have happened had I gone to a school where my contemporaries would have been less able. But I suspect the result would have been much the same.

The only activity in which I excelled was target shooting and I was told by the shooting master that I was the best he had ever trained. I think it may have been because I was quite tall for my age and, having a good eye, obtained the same picture round after round and squeezed gently through. It led to consistently high scores. The shooting master gave me a letter of introduction or something like that for me to hand on to the captain of shooting at Rugby, my next school. On arrival and quite understandably I took along my letter of introduction and, on being tested alongside members of the Rugby shooting eight, trounced or equalled the lot and I asked when I would be admitted to the eight. I did not know that thirteen year old boys are not supposed to talk like this.

As it happens I never made the eight since I developed a flinch when using .303 rifles as the kick forced the thumb of my left hand smartly into my cheek — I am a left-hander. I assure you that if you do this for long you will develop a bruised area and you will flinch each time you pull the trigger. This is not good for scores. I presume that the butt of my rifle was just too short for some reason. By the age of fifteen I had lost all interest in shooting — and this despite having terrorised every bird in north Oxford over the previous five years.

I went to Rugby because my father had been capped in the sport of the same name for Scotland. He argued that I would be sufficiently tough for the game — my brother went to Shrewsbury since he was and is less physically robust than I and thus more suited to soccer. But I am basically effete or, if not that, indolent and I have never played rugby since I left school. I may have watched twenty games — almost all on television and as a result of a bet. So much for my father’s hopes by way of sporting prowess.

The summer game was of course cricket. My father played for a variety of teams. There were the Barnacles, the Academics, the Cryptics and others who were rather posher. I heard names such as I Zingari and had various ties pointed out to me. Goodness me, that world has changed. Nobody under fifty today wears a club or school tie. Yet, when I started in the City, Friday was always a club tie day, particularly school and regimental ties. I cannot say that this change matters. It is just a fact.

My family’s aged Vauxhall Wyvern would trundle to village cricket grounds all over Oxfordshire and neighbouring counties. I can’t readily remember the names of the villages now. But, to my mind, the best ground was that of Cookham Dean. It was so small that sixes were easily scored. Those matches were followed by invitations to the nearby house of a wine wholesaler based on Paddington Green. My father then used to buy wine for University College and I well remember the merchant’s elegant labels on the occasional half bottles that were given to my father as samples by which to encourage trade. Curiously, given that I must drink more wine per annum than anybody else in London and, for all I know, the universe, I did not take to wine until I was approaching sixteen years. That said, I have been making up for those lost years ever since. The drawback has been that, since I am what is referred to in the animal husbandry business as a good converter, I turn those excess calories into fat.

When I was eleven I broke bones in both feet during the Easter holidays. Thus the following summer term’s cricket was a complete write off and I never really regained a personal playing interest and hardly ever watched a match of any sort. But I attended a number of matches at Lord’s when I lived in St. John’s Wood in the early nineties and a few years ago took a bit of a swing at betting on them. The result has been that I now think test match cricket is extraordinarily interesting. What seems such a slow game in fact fluctuates enormously — sometimes in the space of a few balls. And, whilst I will never understand what those crafty bowlers are preparing, I enjoy having it explained to me after they have done it. (Some people do not enjoy cricket. And the most prominent opponent of the game of whom I am aware was the late Lady Menzies, whose husband, Sir Robert, was Prime Minister of Australia. She observed that she had been to a cricket ground and had visited it twenty years later only to find that the same two batsmen were still at the crease.)

To start with, and for a fortnight a year during the summer holiday, my family rented a cottage by the sea, typically in Cornwall or Wales. This entailed Walls plain vanilla ice cream, rock pools and sand between one’s toes along with brief dips into cold seas — global warming had yet to arrive. For myself, I can’t get enough global warming.

However, and later on as I entered my teens, my family went to the Lake District and a house set above Lake Buttermere. These holidays involved walking up hills and back down again. I never enjoyed this since, although I appreciated the view from the top, I did not think it especially interesting to walk up hills — it seemed as pointless an activity as that undertaken half the time by the Grand Old Duke of York’s ten thousand men.

That said, I went on long walks around Lake Buttermere and its environs and have never lost an interest in watching water and fishing. Those days out must have entailed covering comfortably upwards of fifteen miles at a time. Thus I always thought marches of (say) three miles when I was in the corps at Rugby entirely pathetic attainments. I suppose that Rugby’s point was that a high proportion of my then contemporaries came from the soft South East where not a lot of walking was done at all.

Regrettably, I have not continued with fishing. My addiction to gambling and the market rather pathetically does not let me lift my eyes from the screen. Save for lunch, I suppose. That said, I have taken fishing quite seriously: for instance in 1969, my wife and I left Lusaka at 5.00 a.m. one day and arrived perhaps two hours later under the shadow of the Kariba dam. This mighty enterprise chewed fishes through its turbines with the result that all variety of predators waited below to take the ready-chopped harvest. One of those waiting proved to be a tiger fish, which may have weighed about ten pounds. It elected to pursue my spinner. It fought ferociously and had fearsome teeth. I think I chucked it back — I could see no future in cooking it.

But it was a hot day and, since I had seen a Rhodesian bush ranger type swimming around with a spear gun and wearing, as it happens, a black Stetson (I can’t think why he had it on for swimming — however, it certainly looked glamorous), I took a swim myself in the calm waters at the side of the great swirling Zambezi. I may have been in the water for half an hour. It was not until I returned to Lusaka that it was pointed out to me that it was up these quiet side waters that crocodile who might be intent on a spot of fishing themselves might be found. Looking back, I cannot imagine why the risk of proving to be a crocodile’s lunch did not occur to me at the time — it might have been my protected upbringing. Nor was that all. For I could have contracted bilharzia, an appalling disease which is prevalent in all African water and is a massive curse throughout the continent. You can get rid of it by spending a few weeks in London’s Hospital for Tropical Diseases. But the vast majority of Africans cannot get there and, in any event, I am told that every day in that institution you get brown soup, which puts one off hospitalisation for life. Further, I doubt if the Burgundy is up to much either.

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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SAMPLE CHAPTER:

THE ART OF SHORTING

“As for the virtuous poor, one can pity them, of course but one cannot possibly admire them.”

— Oscar Wilde, the Soul of Man Under Socialism.

My first book, Profit Of The Plunge (POTP), was published in 1995 and covered short-selling. It was the first book in the UK so to do. It has enjoyed a mild success but not that great a success. It is now out of print. But Tom Winnifrith of t1ps.com thought that a further book might assist — partly to update POTP but also to include my views on buying equities for the long term. Given that I am widely believed only to short stocks this book is an opportunity for me to correct this misunderstanding.

Several readers will note that I have reproduced extensively from POTP. I do not apologise for having so done — after all, both POTP and this book are primarily intended as books to assist investors with the nuts and bolts of short-selling. But, equally, I have cut out much of the merely illustrative parts of POTP in the belief that events have taken over and fresh illustrations have become available. However, I make not even a hint of an apology for including my engagement with Maxwell since the DTI report into the activities surrounding the flotation of Mirror Group has now been published — in early 2001 or more than eleven years after the frauds were committed. I have read this report and it changes nothing that I originally wrote. I would only add that the tone of the report is very much determined with the benefit of hindsight. Many think that that is not available in real life.

What is a short?

Short-selling (or going a ‘bear’) is the process of selling stock which one does not own in the expectation of buying it back later at a lower price and thus realising a profit. Because there must always be the possibility that no stock is available when one comes to buy to close the short-sold position, there must always be the theoretical possibility that one can lose all that one has. Indeed, so awful is such a prospect that some otherwise apparently sensible people claim that one can lose an infinite amount of money. But, however much money is in the world, the total is surely finite. So one can dismiss the ‘infinite’ argument against short-selling as the commentary of the cowardly and ignorant — and one always does well by ignoring that lot.

The morality of short-selling

It has often been remarked to me that short-selling is somehow ‘bad form’. Such commentators opine that, in life, if one has nothing positive to say, one should say nothing. It is further argued that short-selling is a negative statement in itself and therefore contrary to society’s best interests. But all that a short-seller is doing is reflecting upon his perception of the truth. By the time that a company has entered the short list to be sold, the change in its circumstances has either occurred or is about to occur in any event. It can be argued that rescue finance and/or a rescue order might be deterred by a seemingly artificially depressed price. But that seems a most improbable scenario. Besides, God help the over-confident short-seller that meets the buying orders of a broker for the client who reckons the short-seller has made a mistake about the supposedly beleaguered company.

I would also add that forever talking up the value of assets (which process notably occurred through the agency of the Conservatives and their leader in the mid-1980s, particularly in relation to houses) is much more dangerous: when such bubbles are punctured, the fallout is socially much more serious. The proper conclusion is that accentuating the negative to excess is just as unwise as accentuating the positive to excess. Further, if one buys stock in the normal manner, one is invariably encountering a seller. Is this seller to be pilloried for being negative? Let us not forget that all market-makers are frequently short.

It might be thought that because investment institutions do not generally engage in short-selling there is some reason for this policy based on morality rather than profit. But investment institutions must be careful to avoid offending the managements of potential future investments; so short-selling would not be their natural inclination. Further, such institutions are run by fund managers who are almost invariably proscribed from short-selling on their own account. Were institutions to confront the possibility of their fund managers short-selling through their own broker for their own account but ahead of major disposals by their employers, a major temptation to abuse their clients’ interests would have to be faced. It can, of course, be argued that managers’ own long positions could be handled and thus abused in the same manner. But the temptation thus arising would be much less frequent unless the fund manager’s personal portfolio matched his employer’s — and, then, if he is honest, he might just as well invest in his employer’s fund.

I would mention that there have been a number of instances of rights issues in recent years, which, had investors been better informed, would never have been taken up. One that comes to mind was that by Cedar in 1999 for £60m of convertible loan stock when Cedar’s shares stood at around £6. Tim Steer, then of Collins Stewart, wrote an inspired circular entitled TIMBER which ravaged Cedar’s accounting practices and which I helped to bring to a wider audience via t1ps.com. Unfortunately, it never received enough of an airing through organised short-selling practice and the rights issue succeeded. It never should have. Cedar shares were around 5p when I last looked. In effect, scarce capital has been blown on a bad project.

I should add that a friend, now 80 years old, had a father who, he says, wrote in the 1930s against short-selling. He has often promised to let me have a copy of this tract. But to date he has not been successful. This may be just as well since the chances of the argument being successfully developed strike me as practically zero.

Unlimited losses?

I noted above that in practice the idea that one can rack up unlimited losses from shorting is tosh. However, one cannot rule out facing technical conditions, which can be extremely expensive to surmount. This is not a game for wimps. I am here reminded of the bear ‘squeeze’ which arose in Acorn Computers about fifteen years ago at a time when that company was experiencing commercial difficulty. Although short-sellers were entirely correct to expect declines of the order of 50%+ from the points at which they sold, there was not that much stock about or to be offered by later sellers. As a result, the market-makers (all of whom were perfectly well aware that Acorn Computers was standing at too high a price) simply declined to offer short-sellers stock to enable them to satisfy their short-sale bargains. This was the making of a classic bear squeeze. Before long, one or two short-sellers lost their nerve (this often happens with a short-seller who has not taken the trouble to work out his strategy but, instead, has idly left his decisions to trade to another) and ran for cover. This drove up the price. And only those who had done their homework (and were thus able to resist any argument to justify the new and much higher price) stood their ground.

It has been pointed out to me that the American drinks firm, Snapple, was ludicrously overvalued for a long time and that the shorters held their position confident that they would get justice in the end. In the event, however, Snapple was taken over by Quaker Oats and the shorters were roasted. The fact that the acquisition of Snapple subsequently destroyed Quaker Oats was no comfort at all.

Indeed, as it happens, there have been some famous short squeezes in the US Resorts International, the casinos concern, in the latish seventies which bust a number of short-sellers.

If I were asked to remark upon a general rule as to the potential loss on a short position, I would reply that a dogmatic view is not possible. The fact is that a takeover bid can be at a 100%+ premium to the current price particularly if market conditions are about to turn to the bull tack. The fact is that a highly geared company, even if in its last months of life, can advance quite spectacularly in percentage terms if the market senses that a rescue can be dreamt up. On balance, one should reserve for a loss of the order of 100% of the opening sale proceeds on each position and, on this basis, never commit oneself to an exposure in excess of 10% of one’s net wealth. One must always judge whether one’s personal balance sheet is excessively geared even though short-sale positions tend to do better when general market conditions are generally bearish.

Some short-sellers of the past: speculative positions; rapid downward price movements caused in the unwinding of speculative positions; who benefited?

(i) Vanderbilt and three corners

A complete history of short-selling would have to encompass the development of stock market regulation and much else besides. Obviously, there is insufficient room even remotely to permit such a tedious recital. Further, it would be incomplete in one sense because, as far as I am aware, there are no detailed records of trading on (for instance) the London stock market in Victorian times. And I must presume that there are many exchanges around the world whose history has never been closely recorded. For instance, while we are about it, I would not mind betting that the story of Shanghai, to name but one centre, would interest many. The Shanghai story will also remain untold.

Nowadays, one should not, if a director of a company, short-sell the company’s stock when a rights issue is on the way. This is because it would be an insider trade. (Mind you, I saw that very conduct several times in the late 1980s.) However, there were no such inhibitions in New York during the nineteenth century. Indeed, it would have been regarded as foolish not to have taken advantage of such an opportunity. That said, one should not be too sanctimonious about Americans: in 1912, Rufus Isaacs, later the first Marquess of Reading, bought American Marconi stock for himself and his Cabinet colleagues ahead of the publication of a contract between the Government and the English Marconi Company. The contract had been negotiated by himself on behalf of the Government. His brother, Godfrey, was a director of English Marconi. Isaacs still became Lord Chief Justice.

There were then many examples of companies controlled from Wall Street by financiers who sold short their companies’ stock and then delivered by the simple expedient of selling a ‘property’ (an industrial concern) to their company in exchange for shares. Strictly speaking, this was not short-selling — because the directors knew they would not be going short by the point when delivery would be compelled. But, technically, until the stock had been issued, they would have been short.

This technique of introducing ‘properties’ was a clear opportunity to ‘water’ stock. In nineteenth century markets, there was a lot of stock watering’ — a term derived from the practice of cramming cattle with salt so that the satiation of their resultant thirst pushed up their weight at the point of sale. Many varieties of derring-do were rampant in nineteenth century New York. But, undoubtedly, Vanderbilt’s two Harlem corners and his Hudson corner still provoke some admiration for his forthright manner during their development.

The New York and Harlem Railroad joined Wall Street at the southern end of Manhattan to Harlem in the north. It had restricted trading opportunities since it was licensed by the Common Council of New York, the local authority. In early 1863, it occurred to some members of that Council, who presumably owed some duty of fiduciary care to the electors (rather, as I must suppose, did the Marquess of Reading) that it would be a good idea to go long of Harlem stock, grant a franchise to Harlem, and then sell the stock that they had acquired. I am quite sure that it had never occurred to them that this was or would be an undisclosed profit for which, by today’s legal standards, they would be obliged to account to the electorate. Further, today, they would be regarded as having breached the obligation of a servant or agent to avoid a conflict of interest. They simply regarded it as a perquisite of election to the Common Council.

Harlem’s stock had been standing at $6 in October 1857, attaining $28 by early January 1863. As one of America’s financial and commercial titans, Cornelius Vanderbilt took control in the opening months of 1863. The price rose — to $87 by early May 1863. There were 57,000 shares in issue. These figures give some idea of the true forces behind the subsequent movement. I regret that I do not hold indices for either the New York Stock Exchange (NYSE) or railroad stocks in general to allow for adjustment for relative strength. But it is very probable that Harlem had far outperformed the market by early May 1863 notwithstanding the inflationary conditions caused by the Civil War. Harlem may indeed have seemed overbought. The Common Council members schemed first to acquire Harlem stock and then to sell a franchise to Harlem (both of which they did) to extend its operations for 10% of the turnover generated and a flat annual charge of $25 per railcar — a charge, all told, to the franchisee of approximately $300,000 pa. This figure was rated by the market as highly profitable to Harlem. The scheme had the undisclosed distinction of an intention to repeal the franchise after the Common Council members had short-sold the stock.

The combined effect of the Councilmen’s initial long positions and Vanderbilt’s further purchases caused Harlem to touch $116.25 by 18 May. At this point, the Councilmen clandestinely liquidated their longs through the market to, as it turned out, Vanderbilt and his associates and proceeded to go short. The price declined to $109 by 1 June and $106 four days later. By 9 June it stood at $97.5 and crashed to $83 the following morning, only to recover to $89 that afternoon. However, by 17 June, it stood at $77. And, on 18 June it was traded down to $69.5, even if jumping to $79 in the afternoon.

The Councilmen then decided to cover their shorts. But, being professional men, they did so after announcing that the franchise to Harlem had been rescinded. After all, it helps to see that stock is to hand when one wishes to buy. However, the stock only fell to $72 on the announcement of the rescission. This was because Vanderbilt was supporting the price. It was then that the squeeze started and, two days later, Harlem had risen to $94. By 27 June, it had touched $106. It was then that the Councilmen met and rescinded the rescission subject to their being allowed to close their shorts at $94.

One contemporary writer remarked that: “it may seem anomalous that Harlem should rise 30% on the repeal of the grant and fall on the repeal of the repeal”. Many would agree even now. But there was still a short position and, despite civil unrest in New York quite otherwise occasioned, Harlem showed massive strength throughout July and hit $135 by 4 August and $179 on 24 August. The highest bargain was 500 shares at $180. And that was that. The corner was settled and Vanderbilt let the price drift. By December, Harlem stood at $87.5 — which was probably about where it should have been all along. The approximate decline in value of the company from its high was $5,000,000. This is a helpful sum today. But then, it was astronomic.

Astonishingly, Vanderbilt, who must have had the coolest of cool heads, a sort of cucumber of the century, was simultaneously handling a quite separate operation in Hudson railroad stock. Its price had declined to $123 by 20 June 1863 as a result of a sustained bear-raid. Vanderbilt instructed his brokers to buy all stock that was to hand. He then pulled the masterstroke. He sold his stock and simultaneously bought call options to get it back. This was leaked by Vanderbilt to the short-sellers, who, knowing that such a transaction is very expensive finance in effect, judged that Vanderbilt was short of cash. Accordingly, they sold the stock again through the market to, of course, Vanderbilt, who then exercised his options and called for his stock. The bear-raiders looked round for some. It just was not there and Hudson, on 9 July, hit $180 for cash settlement because Vanderbilt had made it plain that he wanted his stock and would not countenance delay — I presume that any failure to deliver under the then rules of the NYSE would have seen the defaulting short-seller bought-in (q.v.) at market price.

This price contrasted with the simultaneous price for delivery of stock two weeks later of $150. I expect that such quotations were borne in mind by Goldman Sachs when they squeezed the London market in Maxwell Communication Corporation stock some 128 years later. Vanderbilt then lent stock to the market at 2% per day. Nice business if you can get it. And Vanderbilt got it. Having got it, he forced the bears to close and, that done, the price withered away to $140 a week later. Child’s play, really. In 1864, only a year later, Harlem, which was clearly one of those stocks one never holds (because they are only for buying and selling), re-emerged as a scam vehicle. For, despite the New York Councilmen’s experience in 1863, some New York State senators, based in Albany, took up long positions and then spread the belief that legislation to assist Harlem’s position would be passed. This took the stock up from the low $100s to $149 by mid-March. The senators and their associates closed their longs, opened their short positions and awaited the Senate’s judgement. This was indeed that the legislation sought for Harlem would not be passed. And, by 26 March 1864, Harlem had fallen back to $101.

Vanderbilt watched all this and proceeded to build his corner. In fact, he bought so much Harlem stock that his total holding exceeded Harlem’s entire issued capital by 27,000 shares. His control of Harlem meant that he knew that there was no chance of more shares being issued. So from its low of $101, Harlem advanced to $122 by 31 March and, by 18 April, to $195. Incidentally, the 18 April sixty day delivery price was $168 — as clear a backwardation pursuant to a bear squeeze as one could ever use by way of illustration. By mid-July, it touched $285. Vanderbilt had played the same stock twice and won.

En passant, I do not think Vanderbilt can have been a very nice man. For it is recorded that, at the outset of the Hudson squeeze, referred to earlier, he had advised his own son to sell 10,000 Hudson shares at $110 — just so that he could get hold of stock. But his son, judging that his father would or might deceive him, bought rather than sold. This made the son a substantial profit. It will be seen that today’s legislation covering disclosure of holdings, particularly directors’ holdings and concert parties would make Vanderbilt’s game much harder to copy. Indeed, it is probably impossible. I qualify ‘impossible’ because I reckon that it is wise to assume that anything is possible in a stock market.

EVIL’S GOOD: BOOK OF BOASTS AND OTHER INVESTMENTS

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SAMPLE CHAPTER:

EVIL’S BOASTS

“When a man says that his word is his bond . . . Take his bond.”

— Evil Knievil, 2001.

It is always hard to find a fraud and to remember that one might have made a mistake as one plunges to gather the harvest of one’s forecasting ability. But it is thrilling to realise that the market has been had and that death awaits the stock. The best that I can recall since 1995 are Display.IT, Lanica Trust (Lanica did not die — it just shrunk — and how) and Equisure. Pan Andean was not a fraud but it was a tremendous opportunity. I have revisited Access Satellite, Maxwell, Polly Peck and Spring Ram largely for old times’ sake and have also boasted about my triumphs in shorting the (non frauds) at Ashtead and Baltimore.

In the past, I have exposed frauds via a column in Sunday Business and thereafter on the website UK-iNvest but I fear that most editors are too timorous to hire bears these days. Companies — and their lawyers — are far less likely to kick up a stink when faced with a soggy buy puff than when faced with a stinging sell note. These days my only outlet is via a fortnightly webcast on the Internet site www.t1ps.com.

DISPLAY.IT — the textbook fraud

In mid to late 1996, a friend mentioned that he had bought a few shares in Display.IT at the equivalent of 20p (in due course, there was a five for one split — but I here ignore that and confine myself to one set of values to avoid confusion). Display.IT purported to be a financial information services provider with a difference in that it circumvented the need to use Reuters or Bloomberg (services which cost then and still cost something of the order of $25,000 p.a.). The Display.IT customer had merely to pay USD 100 or so and slot in the Display.IT disk and, hey presto, the user’s PC was ready to take financial prices off the net in real time.

It was not emphasised that there were in practice substantial further costs to the user by way of stock exchange fees. Nor was it stressed that the disc did not work properly since, as will become clear, these were rather subsidiary considerations. Certainly, when I was told of this service I thought that some miraculous and patented opportunity for the consumer had arisen and it was on that basis that I visited Display.IT’s offices in Cannon Street to listen to Peter Levin, the boss, spell it out. I was completely fooled.

So it was that a few weeks later I wrote an extremely bullish article for my column in the original Sunday Business (then controlled by Luke Johnson). For Levin had explained that although sales were relatively slight in this country they were charging ahead in Germany and the US. This was of course another variation of a fraudulently promoted company’s operations being elsewhere than where the investor can check claims.

By then, Display.IT was capitalised at around £100m and looked capable of making £20m p.a. a year out and a further £40m another year later. £100m looked a steal and the shares accordingly sat at 630p — having visited 800p.

It was a day or two later that I was lunching with Jim Slater who heard all this and then suggested that I ask myself the same questions again that I had asked Levin and see if I came up with the same answers. Needless to add, I had a Pauline conversion. It was obvious that I could not see anybody at the Cannon Street offices since there was nobody there. It was obvious why the sales to Warburgs had not materialised since the IT manager thought the discs were no good. It was obvious that a friend who had tried the disc thought it was no good — despite buying the equipment specified as ideal by DIT — since the disc was indeed no good. It was obvious that the equipment servicing department/customer query service had no address and only occasionally answered the telephone since, in fact, there was no such department — merely a fellow paid to act as if there was one.

So I sold tens of thousands of shares on behalf of myself and others. It was a no brainer. DIT was quoted on Ofex which is often thought of as a market but which is in fact a dealing facility operated by J P Jenkins. At the time there was quite a trade in DIT and it was relatively easy to sell stock since JPJ had buyers on the other side — in practice these buyers were chums of Levin acting to keep their fantasy going and spurred on by Levin’s assurance that Cawkwell was a complete fool and that he was going to get terribly burnt.

Things might have remained there for an irritating period during which I might have been compelled to buy back to close had it not been for a remarkable breakthrough. Levin claimed that DIT had sold a block of disk licences for USD11.5m to Alsina, a company in Luxembourg, which would take over the European distribution of the licences and, most importantly, pay DIT this very sum forthwith. Needless to add the shares recovered their poise after that and it was beginning to look a little squeezy for me and mine.

However, a journalist pal interviewed Levin in front of a reliable witness and where Levin confirmed the figures for the Luxembourg deal and advised that the investors behind Alsina remained confidential but that one of them was Ross Perot, the Texan founder of EDS and presidential hopeful. This was the lead that I required. A solicitor known to me drafted a suitable letter to Perot and I got the reply I really needed when Perot’s office stated that Perot was frequently claimed to be associated with fraudulent promotions but that this was the largest yet.

Not that I particularly care about those defrauded by Levin, I nonetheless took it upon myself to report his conduct to the DTI eighteen months after DIT had gone bust — just to see if they would do anything. It transpired that by then Levin had departed for the US. A fellow from the Serious Fraud Squad visited me (why on earth take such trouble? What’s wrong with a telephone call?) and advised that the government’s chief concern was the money laundering behind the financing of DIT. Why they could not be bothered to deal in good time with the most blatant and persistent breaches of S47 of the Financial Services Act 1986 that I have ever encountered is utterly beyond me.

Lanica Trust

Lanica started life as The New Guernsey Investment Trust and by the time it came to my notice had approximately £3m in cash in its balance sheet and nothing else. However, the interesting feature was that it was capitalised at around £100m. A dealer, one Andrew Regan, had persuaded various institutions to take stakes in Lanica as a condition of their providing mezzanine finance for Lanica to take over substantial operating assets of the Co-op. Quite how a £100m capitalisation is achieved in these circumstances is and was beyond me. So, naturally, I sold it short. I took the trouble to write a piece in my Sunday Business column and, I believe as a result of this and various other expressions of astonishment, the LSE suspended the quotation. The effect of that was to remove a public valuation of the very currency which Regan was trying to offer for his schemes.

Thereafter, matters developed into pure farce with directors of the Co-op meeting Regan’s men in motorway cafes to hand over confidential documents which Regan knew or ought to have known were not theirs to release. Two directors subsequently got the sack. Their defence would be that the Co-op was only heading downhill and that it would be best to get on with breaking up the organisation while there was something to break up. Although I sympathise with their stance, they had nonetheless contracted with the Co-op’s members to put such a point of view to them rather than to anybody else in the first instance.

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