With $2 Million Lost, Fraud Can Be Hard Lesson
"Character cannot be developed in ease and quiet. Only through the experiences of trial and suffering can the soul be strengthened, vision cleared, ambition inspired and success achieved."
- Helen Keller, 1938
It's not the easiest thing in the world to lose $2 million of someone else's money, and emerge with your halo intact.
First, you have to get $2 million. Then, you have to blow it, and still reflect dignity and class.
Meet Tom Maguire.
Tom had a bad day a week and a half ago. That's when the $2 million, actually $2.1 million, evaporated. This story is not unique. It has happened before and will happen again.
Several lessons make Maguire's situation compelling:
-- Fraud guys, at least the best among them, will burn investors, no matter how sophisticated.
-- A mutual fund, such as the Safeco Growth Fund Maguire directs, offers such widespread diversity that a $2.1 million hit can be absorbed without destroying performance.
-- Such a mistake can happen, and a level of understanding fostered by open communication can ensue so spleens are not vented and careers are not ruined.
Maguire is 38, a Seattle native who graduated from Blanchet High School and eventually got his master's degree from the University of Washington. An 11-year career at Safeco, the insurance-company rock of the Northwest, made for a settled life. Maguire and his wife, Rowayne, have two youngsters.
After five years of co-managing the Safeco Equity Fund, Maguire inherited the reins of Growth two years ago. With a mixture of smaller and larger companies, the fund continued to prosper. In the year ended in September, the fund had returned 70 percent, placing it in the top 2 percent nationally.
Assets in Maguire's fund virtually doubled from when he took over, to $157 million from $81 million.
Then, trouble struck. The head of a relatively small Florida company, Cascade International, vanished. Word spread that the whereabouts of the 126 fashion and jewelry stores claimed by Cascade could not be verified (although at least half exist).
Trading in the company stock was halted. Safeco, with 1.1 million shares, was Cascade's largest institutional investor. The average share price was just over $2.50 apiece. The stock had soared past $11, but shrank convulsively as rumors and, then, fact swept Wall Street.
Maguire has written down the shares to 25 cents each. That's how the fund lost $2.1 million. But because of the fund's size, that reflected only a 22-cent-a-share penalty. On the day of the writedown, the fund would have closed at $17.55. Instead, it closed at $17.33, about a 1.3 percent impact.
"The most important thing is Cascade is just one of 63 stocks in the fund," Maguire said.
He's done a great deal of thinking about fraudulent stock practices in recent weeks.
"You've got to put it in perspective," Maguire said. "A lot of people don't. They say, the stock's gone down, there's fraud, how could you not catch it. Hey, the people closest to the company didn't catch it.
"I spent a lot of time talking to outside legal counsel in New York, to Bernard Levy the auditor, to one of the outside directors who had just invested in 700,000 shares at $3.50 and who felt the company was maligned. From the outside, it's easy to say here's telltale signs, but believe me, they weren't telltale signs."
As the fall progressed, rumors rose. Each time Maguire called Cascade, Chairman Victor Incendy got on the line to issue angry denials.
"He shot down those rumors so easily," Maguire said.
One of the main things that kept the Safeco man aboard was Incendy's own large position in the stock.
"I tried to think how a fraudulent mind would work," Maguire said. "The man never filed for any stock sales. If a fraud is perpetrated, how is he benefiting by not selling shares?"
That is still unclear. All of the company's financial information remains in doubt.
"One of the things you learn is you have to be cynical," Maguire now says. "You can't trust financial statements any more. I've been in the business 11 years, and I've never had to question a financial statement." That is, the validity of the statement.
The toughest time hasn't been the past week and a half, when the stock was written down.
"I think the worst part of it was the two months up till the Monday or Tuesday when the news came out" of Incendy's disappearance. "You're fighting an uphill battle, checking the rumors, coming away satisfied the rumors are wrong."
Once it was learned Incendy was missing, "there was some relief that it's over, I don't have to fight this anymore," Maguire said.
On Wall Street, short sellers borrow stock and sell it, hoping to buy it at a lower price later. They profit from collapses. In general, short sellers are viewed with suspicion, as rumor mongers intent on sabotaging a stock price through a whisper campaign.
Maguire's estimation of short sellers soared during this period. He said they did a service to those willing to listen.
Since the crisis, Maguire's comments have appeared in The Wall Street Journal, The New York Times, and in the publications of almost anyone who has called.
"A number of people say you should not answer your phone, not take calls, but I say, geez, this is newsworthy. Why hide under a rock?" Maguire said. "If I call a company and don't get a response, that's the worst thing."
Maguire, among many professionals bamboozled by Incendy, recalled earlier schemes when the stocks of ZZZZ Best and Melridge rose to a frenzied high, only to explode when it turned out crooks were in charge. But he doesn't count himself among them.
"I didn't do anything wrong," Maguire said. "I relied on financial statements. I was talking to my wife, and I said if you go to the store and someone robs you, are you stupid for being robbed?"
The Dow Jones industrial average of 30 blue-chip stocks lost 8.05 points to close at 2,894.68.
The Murphey Favre Northwest 50, 50 stocks weighted by their regional economic impact, rose 8.78 points to 2,059.22.
Once again in bonds, shorter maturities outperformed the long end as players continue to expect more bad news on the economy and additional interest-rate cutting by the Federal Reserve.
The U.S. Treasury's bellwether 30-year bond inched $6.25 higher to close at $1,007.50 per $1,000 of face value. That was priced to yield 7.93 percent.
Activity on U.S. bond markets was light. In the tax-exempt municipal sector, prices ended generally unchanged, reported Judith Cochrane, Security Pacific first vice president.
But the next two weeks will be busy, Cochrane predicted. A heavy calendar of new issues will vie for investor interest, with most institutional accounts eager to get 1991's work done by mid-month, leaving time for a little window dressing and the holiday season.
On portfolios: Here are percentage gains since the start of the year for two sets of stocks:
Readers' Portfolio (10 NW stocks preferred by readers) - Alaska Air +10.0 percent, Boeing -2.5, Costco +100.0, Immunex +36.4, Intermec +60.0, Microsoft +93.9, Nike +46.3, Nordstrom +56.2, QFC +49.4, Washington Federal S&L +39.2. Average: +48.9 percent. What $1,000 invested in those stocks would be today: $1,489.
Readers' Non-Portfolio (10 NW stocks picked randomly, excluding the readers' top 10) - Arctic Alaska Fisheries +69.2 percent, Bohemia +118.2, Data I/O +144.4, Hecla Mining +35.3, McCaw Cellular +52.2, Momentum Distribution -17.9, Plum Creek Timber L.P. +50.3, ProCyte +45.2, Puget Power +23.9, U.S. Bancorp +38.9. Average: +56.0 percent. What $1,000 invested in those stocks would be today: $1,560.
Wall Street Recap appears Sundays in the Business section.