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Tuesday, February 9, 2016
Calling These Stocks Ponzi Schemes May Be Going Too Far. But There Are Similarities.
Bernard Madoff would come to his offices in the Lipstick Building and
What A Nice Empire Madoff lorded over.
spend a considerable amount of time making up fake account statements. In basic terms, Madoff was trading with himself, on paper, steadily increasing the values of the phantom profits shown to clients.
885 Third Avenue
How similar is this criminal technique to what seems to be normal in placing Initial Public Offerings before the public?
Someone comes up with an idea. Maybe its an online app. Perhaps its a way to find a ride. A Private Equity investor, either a richie or a hedgie, provides initial startup money. The idea catches on with the public. More richies and more hedgies add capital. Each round of finance is at a higher valuation so this bring the go-before investors hefty paper profits.
The public starts the "I Want In" phase. The company teases. More private equity flows. Valuations, on paper, streak upwards.
Finally the day comes. You've seen the CNBmute scenes on the floor of the NYSE, momentarily hectic. Finally the first trade. $44.94 for Twitter, up 72% from the initial price. (Twitter now trades below 15.) The first, private investors start cashing out with huge profits.
Eventually reality sets in. Are there real money profits or just a cute idea?