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Lancer: market value manipulation

Lancer Fund

A $800m hedge fund that went under in 2000. The money disappeared.

The fund looked unusual. In some months, the fund had made returns of over 50%. This was at a time when stock market prices were falling. How do funds artificially make big returns? One way is to artificially inflate the prices of the investments.

The fund allegedly invested in unheard of stocks, which were closely held and thinly traded (few buyers and sellers) on small exchanges. The problem with thinly traded stocks is that the market price might not represent the fair value of the stock.

The fund would allegedly buy shares in a stock at the start of the month at the market price. Towards the end of the month it would buy just a few shares in the same stock, but offer a price much higher (sometimes 50% higher) than what it was trading at the day before. But because it was a thinly traded stock, that higher offer set the market price, ie. it artificially increased the market price. The investment manager then revalued all the shares bought at the start of the month at this artificially overinflated market price. Thus, increasing earnings.

When the auditors tested the investments, they looked for market evidence to support the revaluation. They checked closing stock prices on Bloomberg against the closing prices used by the fund. The prices agreed. There was market evidence to justify the gain. What the auditors didn’t address was why the fund was making ludicrously high returns.