Your Opinion: Letter trades and underbilling

Dear Editor:

A recent television program about Bernard Madoff showed that many of his investors were knowledgeable veteran investors.

I theorize that they felt it was possible to get the seemingly unrealistic returns he promised. Two methods of doing this are letter trades and underbilling.

A letter trade was discussed on Wall Street Week a few years ago. A company wished to raise a lot of money without diluting and depressing the stock price. They sold a lot of stock at 50 percent of its market price on the condition that the buyer would only sell back into the market slowly, so the market price would not go down. They carried the stock on the books at 100 percent not 50 percent. This was a favorite strategy of the go-go "70s.

Underbilling was explained in a book I read. In a theoretical example an Italian company sold machines to a German company at a very low price. It then told its workers it was struggling to survive in order to get concessions. It used the same story to avoid paying the government taxes. The two companies owners then split the difference of the actually paid higher price from the lower claimed price.

A famous shipping magnate was rumored by his enemies as having changed papers on world sugar to show it as U.S. produced and price supported sugar worth twice as much. They also rumored that he tipped off German U-boats as to where his obsolete but insured ships would be. A very well-known company in 1996 sold stock options worth 296 percent of the value of the company.

It could be theorized that those buying these options felt that by directing business from other companies they influenced and by getting business, regulations politically it could ensure the success of that company.