Scandals serve to remind people: Trust, but verify

By DAVID MOON, Moon Capital Management
March 3, 2002

Former Enron employees now reveal that the company maintained a phony trading floor, much like a Hollywood movie set. The faux trading floor was filled with employees only when Wall Street analysts visited the company to evaluate Enron's operations. Employees would sit at usually empty desks, talking on the phone to each other, giving the impression of activity. The actor/employees brought family photos and clutter from their real desks to complete the illusion. Former employee Carol Elkin said the intent was 'to impress them [the analysts] and make our stock go up ' [we would] sit and pretend we lived and worked there.'

The analysts bought the charade, then wrote glowing reports on Enron. Investors, greedy and eager to believe anything that would make them a profit, believed the reports, driving up the share price, just like the plan. Everyone lied to someone, even if only themselves. David Copperfield would have been proud of their illusion.

Who can we trust any more?

Several times a week it seems, another company is under investigation for faulty or fraudulent accounting records. Enron accountant, Arthur Andersen, audited the books of several companies and at least one non-profit organization that are under investigation for faulty audits. Only a year ago, most people considered an audit from Andersen as one of the 'gold standards' in auditing.

A stockbroker for Lehman Brothers has been accused of stealing more than $200 million in client funds. As his office's top producing broker, he was exempted from his firm's own internal controls and, in fact, was actually the boss of his own compliance officer. He mailed phony statements to his clients, depicting millions in illusionary gains, while generating millions in real commissions.

The federal budget surplus is now gone, even though it actually never existed.

Can we trust anyone?

Many mutual funds that promised to provide safety and security were actually invested in profitless dot.coms. Three years worth of gains and untold opportunities vanished in 20 months. So much for trusting your mutual fund.

Schoolteachers arrested for child pornography. More priests are discovered molesting the children of their flock. Hundreds of human corpses piling up outside a Georgia (non) crematorium.

And when an innocent journalist is gruesomely beheaded, leaving behind a young widow and unborn child, any thinking person has to wonder about trusting the core fairness of life. How do faith systems explain that?

Society vacillates between too trusting and too skeptical. Consider the financial markets. During much of the late 1990s, investors were willing to believe almost anything; they were afraid not to. They believed was more valuable than a bushel full of established traditional, profitable retailers. They believed earnings were irrelevant. They believed it was their God-given right to expect to make five percent every few weeks in the stock market. Those investors certainly don't trust the NASDAQ any longer.

Ronald Reagan used to describe his approach toward the USSR's promise of reducing certain parts of its nuclear arsenal as 'trust, but verify.' That advice works in a lot of life's areas. There are very few things in life a person should accept solely on faith. The proper treatment of your money certainly isn't one of them. When investor profits are seemingly too easy, the vultures appear, willing to accept your eager trust. But after a rash of noteworthy violations of trust, it is tempting to stop trusting anything. Neither extreme is healthy.

Remember who is ultimately responsible for both your well being and your money: you. When dealing with both of them, trust, but verify.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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