Tiny settlements

By DAVID MOON, Moon Capital Management
July 1, 2007

We had an amazing windfall at Moon Capital Management this week. It was like winning the lottery without even knowing we purchased a ticket.

Sort of.

The New York Stock Exchange (NYSE) and the Securities and Exchange Commission allege that from 1999 to 2003, five NYSE specialist firms were illegally taking profits from trades that should have been provided to their customers.

Since our firm initiates millions of dollars in securities trades each month, we were a member of the injured group of people.

We received two checks totaling $24.57.

Momma can finally have that operation she's been needing.

Don't laugh. This is actually one of the more lucrative settlements I've seen in the last 25 or so years. Do you recall the 2003 Wall Street scandal de jour about the misleading nature of brokerage research?

Then New York Attorney General (and now governor) Elliot Spitzer looked into the matter and discovered that (surprise!) much of the research produced by Wall Street firms was designed to produce trades or curry favor with the firms covered in the reports.

Spitzer hasn't yet investigated whether or not Barry Bonds ever used steroids or who gave Adam the forbidden fruit.

When Spitzer reached a $1.4 billion settlement with 12 Wall Street firms, it was hailed as 'the dawn of a new day on Wall Street.' The headline of his press release read, '1.4 Billion Global Settlement Includes Penalties and Funds for Investors.'

We haven't seen any of our funds from that one yet. Not even $24.57. And the only difference I can see in the research industry today is that there are four pages of disclosures at the end of each report, detailing the firm's conflicts of interest.

As long as there is some sort of disclosure ' no matter how convoluted or seldom read ' almost anything still goes.

What about when the management of a company absconds with shareholder money and the company agrees (usually with court-ordered, class-action 'encouragement') to make restitution to its former shareholders? Have you ever been involved in on of these situations?

You begin receiving letters and legal-looking documents. You think you may have once owned the stock, but that was years ago. You've tried to put WorldCom or Enron out of your mind. But here it is again, with a letter from a bunch of New York lawyers.

You throw it away.

But like plucking a nose hair, every time you dispose of the letter, two more show up.

You finally read it. The lawyers say that if you'll tell them exactly when you bought and sold your loser stock, they'll see if you're entitled to participate in the settlement and, if so, they'll send you some money.

Out of a multi-hundred-million-dollar settlement, you might get something as useful as a certificate for $10 off your next purchase or maybe a check for a few pennies.

The lawyers' third of the settlement proceeds isn't paid in gift certificates, however.

When the five NYSE specialist firms were taking profits from their customers, ultimately the money came from the pockets of our clients, not Moon Capital Management.

As a silent protest against the lunacy of these actions, I was tempted to hold the checks uncashed in an attempt to mess up someone's bookkeeping. Or we could send each of our clients a few cents, their share of the $25.

Instead, I think we'll send some money to Second Harvest, in honor of the deprived and hungry people on Wall Street.

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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