[A-List] New Economy Bull: Soros Convicted

["Annewilliamson" <Annewilliamson@xxxxxxx>]

December 20, 2002 8:08 a.m. EST





French Court Finds Soros
Guilty of Insider Trading

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP


PARIS -- A French court on Friday convicted U.S. billionaire investor George
Soros of insider trading, fining him ?2.2 million ($2.3 million).

The fine by the court is the same amount the Hungarian-born magnate was
accused of having made from buying stocks at French bank Societe Generale SA
with insider knowledge 14 years ago.

Mr. Soros, 72 years old, the president of Soros Fund Management, denies
having had privileged information.

He was not in court Friday. In court testimony in November, Mr. Soros said:
"I have been in business all my life, and I think I know what is insider
trading and what isn't."

Societe Generale was privatized in 1987. A year later, its stock price went
up during an unsuccessful takeover bid. Mr. Soros was accused of having
obtained insider information before the abortive corporate raid pushed up
the stock price.

Paris magistrates said Mr. Soros illegally bought shares of Societe Generale
in 1988 after he was consulted and asked to join a group trying to take
control of the bank. Though Mr. Soros didn't join that group, he
acknowledges buying Societe Generale shares for his flagship Quantum Fund,
one of the world's first hedge funds.

Mr. Soros's attorneys say the information he had about Societe Generale
didn't qualify as inside information and that French law at the time defined
insider trading more narrowly than it does today.

The fine was in line with the request by prosecutors.

 URL for this article:
http://online.wsj.com/article/0,,SB1040388970251017473,00.html




Updated December 20, 2002 8:08 a.m. EST





 Copyright 2002 Dow Jones & Company, Inc. All Rights Reserved

Printing, distribution, and use of this material is governed by your
Subscription agreement and Copyright laws.

For information about subscribing go to http://www.wsj.com


----- Original Message -----
From: "Michael Keaney" <michael.keaney@xxxxxx>
To: <a-list@xxxxxxxxxxxxxxxxxxx>
Sent: Friday, December 20, 2002 5:20 AM
Subject: [A-List] US legitimation crisis: IPOs


> Put corruption under the hammer
> By Lawrence Ausubel
> Financial Times: December 20 2002
>
> It is tempting to hope that an apparently imminent global settlement with
> Wall Street firms, together with recent developments at the Securities and
> Exchange Commission, will halt the news of malfeasance and scandal
emanating
> from corporate America.
>
> Unfortunately, some superficial changes in the role of stock analysts and
> some relatively painless fines will not materially alter the incentives
that
> created the current mess. Nor will simple changes in regulatory personnel
> significantly advance the ability of government to end abuses. Fundamental
> structural reform is needed to accomplish any real improvement.
>
> Take one of the roots of today's problems: the mechanism for allocating
> shares in initial public offerings. The share price in IPOs often bears
> little connection to the equating of supply with demand. IPOs are
sometimes
> massively oversubscribed and the share price increases by as much as a
> factor of five from the offering price to the close of the first day of
> trading. Shares in these oversubscribed offerings are rationed not
according
> to willingness to pay but to favoured clients of the underwriting
investment
> banks.
>
> In one famous instance, customers were required to kick back a third of
> their IPO trading profits to the investment bank. It seems that the
payment
> took the form of inflated commissions on other stock trades. When an
> investor pays a stock-trading commission of $3 per share on a trade of
> 10,000 shares, one can be relatively sure that it is a kickback.
>
> In other instances, underpriced IPO shares have become the currency for
> implicit rebates to executives. Sometimes it looks as though the
executives
> may have received their personal allotments in exchange for swinging their
> companies' business to the investment bank. For example, five
> telecommunications executives apparently received IPO shares yielding $28m
> in quick profits, at the same time that their employers paid $240m in fees
> to the investment bank.
>
> In short, it has become increasingly clear this year that the system for
new
> security issuance is fundamentally corrupt.
>
> Periodically, regulators contemplate drafting new rules to curb the abuses
> associated with IPOs. But no such rule will be effective, as long as new
> issues continue to be deliberately underpriced relative to market
> conditions. As long as the basic economic facts of under- pricing,
> artificial shortage and instant profitability persist, the underwriting
> banks will maintain some discretion to dispense the valuable shares to
> parties of their choosing. And one can be certain that, regardless of the
> rules, the shares will be allocated in return for value received in other
> transactions.
>
> Fortunately, there is a way to clean up the entire process. The current
> book-building procedure could be replaced by a modern, dynamic auction.
The
> auctioneer begins by announcing a low stock price and bidders respond with
> electronic bids representing the quantities of shares desired. If demand
> exceeds supply, the auctioneer announces a higher price and bidders again
> respond with quantities desired. The iterative process continues until
> demand equals supply, concluding the auction.
>
> An auction process would bring the new issues market into equilibrium.
> Access to shares would be determined by price, not by a secret quid pro
quo.
> Indeed, an IPO auction offers the promise of all but eliminating the
current
> underpricing. In principle, the clearing price in a well designed auction
is
> virtually equal to the market price, so the first-day return should be
> essentially zero.
>
> IPO shares would no longer be the currency for kickbacks and favours,
since
> the instant profits and the associated scarcity would vanish. There would
be
> no need for the government to set rules for share allotments, since the
> underlying incentives for abuse would be gone.
>
> Of course, there are obstacles to IPO auctions. One is that, while an
> auction in advance of an IPO is allowed, current SEC rules appear to
require
> that the bids be indicative and non-binding. Any policy requiring bids to
be
> non-binding is clearly detrimental; for an auction to work effectively,
bids
> need to have real consequences. At the same time, there is no good
rationale
> for such a requirement, so it should be feasible to get the SEC or courts
to
> overturn the rule.
>
> Perhaps the greatest barriers to auctions are the vested interests earning
> rents in the current process. The IPO auction is not a panacea. Indeed,
the
> danger of overpromoting shares of worthless companies would remain; an
> auction does not eliminate the risks of hype or asset bubbles.
>
> Yet modern, dynamic auctions have been successfully applied in many other
> sectors of the economy and they can eliminate the incentives behind
several
> aspects of today's Wall Street scandals.
>
> The writer is professor of economics at the University of Maryland
>
>
>
>
>