Illegally Boost EPS via share buyback scams

Illegally Boost EPS  via share buyback scams

The “safe harbour” rule passed in 1982, allowed the corporate world to perpetrate the biggest scam on the unsuspecting American populace.  The Harvard Business Review seems to concur with this assessment

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

This act allows insiders to use valuable company resources to repurchase shares without having to face charges of manipulating the price of their shares. It is a win-win situation; getting paid to do nothing while making it look like you are doing something.  This is an evil way to boost Earnings per share (EPS).


A growing number of individuals are voicing concern over the widespread use of this fraudulent method of increasing EPS

Senators Elizabeth Warren and Tammy Baldwin both share the sentiment that stock buybacks should be forbidden by the SEC because they are a form of market manipulation.

Senator Baldwin issued the following statement in regards to share buybacks:

In 1982, when the Securities and Exchange Commission (SEC) issued a rule to provide ‘safe harbor’ from manipulation liability, buybacks were near zero. Last year, over $500 billion was spent on share repurchases.

Senator Warren also shares a similar sentiment

“These buybacks were treated as stock manipulation for decades because that is exactly what they are,” she said. “The SEC needs to recognize that.”

Does the SEC recognize that; apparently not as the SEC admits it not monitoring stock buybacks to prevent manipulation?  SEC chair Mary White made the following comments in response to a letter addressed from Senator Baldwin

“Performing data analyses for issuer stock repurchases presents significant challenges,” White writes, “because detailed trading data regarding repurchases is not currently available.”

White goes on to state that “because Rule 10b-18 is a voluntary, safe harbor, issuers cannot violate this rule.”

Top Investors Join the chorus

Brian Reynolds Chief Market Strategist at New Albion Partners:

 “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering, and it’s probably going to intensify in coming years.”   

Stanley Druckenmiller:

“If you’re running a business for the long term, the last thing you should be doing is borrowing money to buy back stock.”

Druckenmiller told CNBC in March that he is extremely concerned about the doubling in U.S. corporate debt to roughly $7 trillion, up from about $3.5 trillion in 2007. “Most of that mix has been in more highly leveraged stuff,” he said. “And if you look at what corporations have been using it for, it’s all financial engineering.”

Larry Fink, CEO of BlackRock

 “It is critical … to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time, but to the company and its long-term owners,” Fink wrote in the letter, dated March 31, 2015.

James Montier:

He labels share buybacks as the The World’s Dumbest Idea,”.  He states that shareholders are not providing capital to corporations but are instead extracting it and demonstrates that since 1980 public companies have repurchased more equity than they have issued.

Harvard Business review stated the following in article title profits without prosperity

In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets. Full Story

The old way of increasing EPS was to increase profits, but the cunning and gray method is to decrease the number of outstanding shares.  In the current environment, where real profits are not easy to achieve, taking this route provides unscrupulous individuals in the corporate world with an easy fix.

In a recent report, CNN money states that that dividend and stock buybacks will new a new high of $ one trillion in 2015.  Gold Sachs is expecting that number to surge for 2016; they state this number will increase by 7% in 2016, surpassing the one trillion mark.

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