“Some. Not much.”
“Well, I’m sure more than Manny knows. Anyhow, Summit is a small company. Started by a man named Frederick Milstein. He opened the place with family money and investments from a few clients about twenty years ago.
“He kept Summit private from day one. Never got acquired, never merged. At his peak he had maybe fifty people working for the company. Financial advisors, traders, support staff. The place ran pretty clean for a long time. Maybe a little trading stuff back and forth inside the firm among the top guys for their better clients, fees and commissions not exactly transparent, but nothing really off the charts.”
Beck wasn’t exactly sure why she was telling him all this, but he nodded and said, “Go on.”
“Anyhow, over these last few years it’s been harder and harder for smaller companies to stay profitable. Regulatory costs are crushing them. Competition is insane. Everything’s tougher. Clients are less patient.”
“Uh huh.”
“So more and more small firms are setting up internal trading groups to try and generate profits. That’s where it gets sticky. They set up hedge funds to get the leeway they need. Black box backroom stuff.” Olivia waggled her hand. “Some are legit quants thinking they have a system to rule the markets. Some of it’s flash trading, but that’s way too expensive for an outfit like Summit to set up. Others, not so legit. I’m licensed as a broker and financial advisor, but I don’t really run money. I don’t trade. I mostly monitor other money managers. And administrate. Part of the risk and compliance group.”
“So you know what’s going on.”
“Yes. Although someone at Crane’s level, he doesn’t really report to anyone but Milstein. We’re supposed to monitor every trade, but if they want to intentionally keep stuff from the risk group, we can’t really stop them. But I’ve been with the company for eight years, and I’m close to Milstein. I know who does what, who earns what. Everybody talks to me. So, I pick up stuff.”
“Like what?”
“Like trades that are moving outside the risk parameters.”
“Whose trades? Crane’s?”
“Yes.”
“Anybody else?”
“No. Mostly just the money Crane was running.”
“And Milstein knows about it?”
“Yes. I mean, Milstein makes sure the right firewalls are in place. But he lets Crane run his operation. He knows if something blows up really big, it can take us all down, but he needs the profits Crane generates.”
“And how likely is Crane to blow up?”
“Over the long run, it’s pretty much inevitable. But short term? Who knows? If he’s lucky, it could go on for quite some time.”
“What’s he doing?”
Olivia shook her head. “It’s not just one thing. It’s a series of things. A lot of it connected to short selling. Do you know what short selling is?”
“It’s something you do when you think a stock is going down in value.”
“Right.”
Beck said, “You borrow shares of a stock, own it at a given price. If the stock goes down, you decide at what point you will pay for it, plus the cost of borrowing. The difference in price is your profit. If the stocks go up, you lose. You have to cover the difference. But I admit, the mechanics of it are a little murky to me.”
“I’m impressed. What about naked short selling?”
“Not as clear on that. Isn’t it illegal?”
“It’s not completely illegal. You can do it in foreign markets and in the United States if you follow SEC regulations, but those regulations pretty much eliminate the advantages, so the guys who do it often skirt the legalities. It amounts to short selling, but never actually taking ownership of the stock. Never delivering it back.”
“I’m not going to bother asking how you do that. But what’s the point? You save borrowing costs?”
“For starters. But the main advantage is the leverage. If you don’t plan on delivering the stocks anytime soon, if ever, you can leverage the whole thing by buying up tons of shares. Some guys ratchet up the leverage with options. Crane’s been known to do that, too.
“Anyhow, you don’t take true ownership. Of course, eventually you have to complete the transaction. You can delay delivery for some time, but not forever. If you cover the short, you get creamed, but traders who don’t care about the rules”—Olivia raised her good hand and made a quote sign as she said the word—” buy, huge amounts of stock because they don’t tie up capital to cover it. And then they do all sorts of shady stuff to ensure the stock price goes lower.”
“Wait, you’re telling me they can ensure that a stock goes down?”
“Not really. But they can sometimes influence a stock price more than you think. Don’t get me wrong, it’s hugely risky. But guys like Crane, they do anything they can to stack the deck. They systematically attack companies in ways to drive down the price of the stock. Naked shorting on a massive level to pull down the price. Poisoning the well with lies and rumors. Any kind of deception they can come up with. Bribes, threats. Collusion with law firms to wage class action suits. Manipulating the media. It can get really bad.”
Beck thought about that for a moment and began to see what he might be dealing with now.
“Bad how?”
“Traders that reckless, guys who go all the way out on a limb, they lose perspective. I’m sure I don’t know everything he’s doing. There’s tons of dirty stuff that could be going on.”
“And how do you know all this?”
“I’ve been around for a long time. I worked at other financial services companies. I know how things work. There’s always some group, some people who go too far. In terms of Summit, I know all the gossip, the rumors. People talk to me.”
Looking at her, seeing how agitated she was, Beck decided she was telling the truth.