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Corporate Crime Accounting Scandals and Investor Confidence (2002)

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Published on Jan 28, 2015

Outside of academia, the controversy surrounding market timing is primarily focused on day trading conducted by individual investors and the mutual fund trading scandals perpetrated by institutional investors in 2003. Media coverage of these issues has been so prevalent that many investors now dismiss market timing as a credible investment strategy. Unexposed insider trading, accounting fraud, embezzlement and pump and dump strategies are factors that hamper an efficient, rational, fair and transparent investing, because they may create fictitious company's financial statements and data, leading to inconsistent stock prices.

Throughout the stock markets history, there have been dozens of scandals involving listed companies, stock investing methods and brokerage. A classical case related to insider trading of listed companies involved Raj Rajaratnam and its hedge fund management firm - the Galleon Group. On Friday October 16, 2009, he was arrested by the FBI and accused of conspiring with others in insider trading in several publicly traded companies. U.S. Attorney Preet Bharara put the total profits in the scheme at over $60 million, telling a news conference it was the largest hedge fund insider trading case in United States history.[4] A well publicized accounting fraud of a listed company involved Satyam. On January 7, 2009, its Chairman Raju resigned after publicly announcing his involvement in a massive accounting fraud. Ramalinga Raju was sent to the Hyderabad prison along with his brother and former board member Rama Raju, and the former CFO Vadlamani Srinivas. In Italy, Parmalat's Calisto Tanzi was charged with financial fraud and money laundering in 2008. Italians were shocked that such a vast and established empire could crumble so quickly. When the scandal was made known, the share price of Parmalat in the Milan Stock Exchange tumbled. Parmalat had sold itself credit-linked notes, in effect placing a bet on its own credit worthiness in order to conjure up an asset out of thin air. After his arrest, Tanzi reportedly admitted during questioning at Milan's San Vittore prison, that he diverted funds from Parmalat into Parmatour and elsewhere. The family football and tourism enterprises were financial disasters; as well as Tanzi's attempt to rival Berlusconi by buying Odeon TV, only to sell it at a loss of about €45 million. Tanzi was sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in September 2008.

Day trading sits at the extreme end of the investing spectrum from conventional buy-and-hold wisdom. It is the ultimate market-timing strategy. While all the attention that day trading attracts seems to suggest that the theory is sound, critics argue that, if that were so, at least one famous money manager would have mastered the system and claimed the title of "the Warren Buffett of day trading". The long list of successful investors that have become legends in their own time does not include a single individual that built his or her reputation by day trading.

Even Michael Steinhardt, who made his fortune trading in time horizons ranging from 30 minutes to 30 days, claimed to take a long-term perspective on his investment decisions. From an economic perspective, many professional money managers and financial advisors shy away from day trading, arguing that the reward simply does not justify the risk. Despite the controversy, market timing is neither illegal nor unethical. Attempting to make a profit is the reason investors invest, and buy low and sell high is the general goal of most investors (although short-selling and arbitrage take a different approach, the success or failure of these strategies still depends on timing).

http://en.wikipedia.org/wiki/Stock_tr...

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