Saturday, May 9, 2009

SEC War Story

This is a true story. Like in the 1954-62 "Dragnet" television series, the names and certain facts have been changed to protect the innocent, one name was not changed, to expose the guilty, the SEC. Here are the "revised " facts:

1. Company A issues 10 million shares to Company B's shareholders to buy B when the market price of A's shares was $5 per share, market value = $50 million.
2. Company B's shareholders give Company A $20 million simultaneously as part of an "integrated transaction".
3. The Internal Revenue Service has a "step-transaction doctrine" which states that a series of transactions can be compressed into one to elevate the substance over the form.
4. The elevation of substance over form is integral to accounting and the law.

Question: what did A pay to buy B?

My answer: $30 million, $50 million in shares less $20 million "cash back". The SEC was told the $20 million is analogous to getting $3,000 "cash back" when issuing a $30,000 note to buy a car. You paid $27,000 for the car, not $30,000. The SEC Chief Accountant's office apparently concluded you paid $30,000, stating A paid $50 million! What to do with the $20 million to keep A's books in balance? The SEC's answer: credit it to additional paid in capital. Can you believe this? What should we expect from and SEC which couldn't figure out Bernard Madoff was perpetrating a fraud?

1 comment:

Anonymous said...

Wow... "paper capital"

Well... I guess we'll see a wave of "simultaneously integrated transactions"...

That would solve the bank's capital needs... oh... maybe that has already happened?

Madoff is the poster boy of "regulatory capture"...