Chapter 11

One day Sam and I were talking about our relationship, and I became confused about how we should refer to ourselves.

“Sam, how would you classify the relationship between the four of us?”

“What do you mean, Ward?”

“I started to call our relationship a four-way relationship because there are four people involved, but I wasn’t sure if that was correct. I know that a relationship between three people is referred to as a three-way relationship. But is that because there are three people involved or is it because there are a total of three unique two-person groupings?

“Furthermore, shouldn’t we consider the total number of unique groupings that can be formed with a given number of people? If you stop to work out the number of unique grouping, then with four people there are six unique groups of two people each, four unique groups of three people, and one group of four people. So should we refer to our group as a four-way, six-way, or eleven-way relationship?”

“That’s a weird question, Ward.”

“I know. It’s just something that popped into my mind.”

“My understanding, Ward, is that it is the number of people in the relationship, but I don’t think any of us really care as long as we are all happy together. However, if it really matters to you, Karen, Mary, and I refer to ourselves as being in a four-way relationship when we talk about our family.”

Yeah, I know I sometimes look at things from a weird perspective; however, my wives were used to it. Personal matters were complex to me, but business matters were usually much simpler for me to understand.

I hadn’t been in the office that day. So over dinner that evening, Sam said, “You received a call from the SEC today. Their representative would like to talk with you about your recent stock transactions. He said that he would be in the area on another matter for at least the next two days. If possible, he would like to speak with you during this trip instead of making a special return trip to talk with you. I made an appointment for you at 10:00 tomorrow morning. If that is not convenient, I can change it.”

“Did he mention anything about his concern?”

“Not really, although he did indicate that the timing of the sale and purchase of three different stocks at the peaks and valleys of their price changes was very unusual.”

“I see. Harry told me they might have questions if the SEC noticed our transactions. Well I doubt he will just go away if I ignore him, so I suppose tomorrow is as good a time as any to talk with him.”

Karen asked, “What exactly does he want to discuss, Ward?”

“Cathy had the Guidance Council evaluate my financial investments. I think it was eleven months ago, they made a recommendation regarding three stocks that I owned. Based on what Cathy told me I decided to follow their suggestions, although I did make a few minor changes.

“According to the Guidance Council, I was to dump my C&J Metals stock because the company was having financial troubles and they projected these troubles would result in their going bankrupt. Their stock’s price now, has dropped to about thirty percent of its former value.

“They told me that Sam’s Smelter’s stock price would suffer a major drop in price due to an error their accountant made. Once the error was corrected, the stock price would recover to its current level.

“I immediately sold all of my stock in Sam’s Smelter and my stock in C&J Metals. I also had some stocks that weren’t performing as well as the Guidance Council would like, so I sold those also.

“The Council found out that there was an internal power struggle at Simple Products over the release of a new product. That led to an internal takeover bid and I sold their stock at a very good price. Later the stock’s price dropped significantly, and I repurchased as much of their stock as I could. A month later, the product was released and the stock’s price is still rising.”

Karen said, “That sounds like smart investing to me, Ward. Why does the SEC want to talk with you about the transactions?”

Sam replied, “Karen, there is nothing wrong with acting on this type of information as long as you don’t obtain the information from a source within the company. That is known as insider trading. Ward thinks that the SEC suspects him of insider trading.”

Karen said, “Well, all Ward has to do is explain how he got the information and that should satisfy the SEC.”

“Karen, I can’t do that. I got my information from the Guidance Council and they got some of the information from company employees, which makes it insider trading. Besides, how would I go about explaining my relationship with Cathy and the Guidance Council?”

“Oh, I didn’t think about that. Do you know what the Council’s sources where?”

“Yes, I contacted Cathy and explained what was happening. She got back to me early the next morning with a list of public sources for most of the information the Council used in their analysis. I was able to develop a legal rationale for my stock trades.

“If the SEC representative has further questions about the sources of my stock transactions, I can point to a number of public sources the SEC will probably accept. I can also claim I extrapolated on that information to project what would probably happen to the value of the stocks. I had enough confidence in my conclusions that I made my stock transactions on that basis. Of course they will keep their eye on my future trades, so I will need to document a rationale for all of my future stock trades.”

Sam showed Mister Wilson into my office at 10:00 and introduced us.

“Good morning, Mister Wilson. My Assistant informed me that you wanted to discuss my stock transactions. Is there some problem?”

“As you know, the SEC monitors the investment community for suspicious activity. One of our analysts brought your stock trades to my attention. It is not common for an investor to sell large blocks of several stocks just before the stocks’ prices take a major dip and buy a large block of stock just before a significant rise in its price. So, when a single investor makes a series of major sales and purchases of stock in just a few companies like you did, we start looking at the investor a bit closer. Would you mind explaining to me the reason for the timing of your stock trades?”

“Am I correct, Mister Wilson, in assuming that the SEC is concerned that I may have used insider information to decide when to make my sales and purchases?”

“I think that is a fair assumption, Mister Conrad, but we are not making any accusations at this time. We just want to understand your decisions.”

“All right. I normally would not explain my decisions and personal business, but considering the potential problems that I might have to deal with otherwise, I will do so this time.

“My in-laws, Art and Mary Ambrose, and my wife were killed in a traffic accident. The executor of Art and Mary’s estate told me he would have to sell a large portion of their stock in order to pay the estate taxes. The executor, the senior Vice President of Art’s company, and I started to look at the stocks that were in the estate’s stock portfolio to decide what stocks should be sold. During the review we sold two stocks. When we finished our review, there were eleven stocks that we felt should be sold.

“The stock prices were on the rise, so we decided to delay the sale of the eleven stocks. Then my personal situation changed, so I asked the executor to sell the stocks we had marked for sale, so he could close the estate. He did and the estate was finalized about a month later.

“Rather than go into the details of the sale of all those companies’ stock, are there any specific companies that caused the SEC concern?”

“Yes, there were stock trades in three companies that caused our analysts to come to me. Just a minute while I get my notepad. Ah, here it is. The companies are: C&J Metals, Sam’s Smelter, and Simple Products.”

After a moment of consideration, I said, “Yes, I can understand how you might have some concerns. C&J Metals is probably the easiest to explain.

“During the review, I stopped at a Denny’s restaurant for lunch one day and I was seated next to two men who were having a disagreement about C&J Metals’ acquisition of a company. One of the men was arguing that it was a brilliant business deal that would strengthen C&J Metals for future expansion. The second man felt that the company had been starting to have financial difficulties, and the purchase of the company may have caused them to overextend their financial position.

“This of course raised a red flag in my mind for the C&J Metals’ stock in the portfolio had seemed like a sound investment. After lunch, I started researching C&J Metals. What I found was that both men were correct. The acquisition would place C&J Metals in a very good market position. Unfortunately, C&J Metals had made several poor investments and purchase of the company appeared to overextend their financial position. That led to me to investigate what had been going on over the past four years that led to their current financial state.

“I saw a pattern that caused me to question the decisions that C&J Metals’ board of directors had been making. I had a bad feeling about their future profitability and decided to sell my stock immediately. That was one of the two stocks I sold during our review of the stock portfolio. Since I sold the stock, the share price of the stock has been declining. I expect that the company will be bankrupt in the near future.”

“What was your source of information that led you to this conclusion?”

“It wasn’t one source. I searched the internet and found articles in trade journals, newspapers, and magazines. There are also reports from financial analysts and other people in the industry. I don’t recall which articles and reports I read, but the overall consensus combined with the company’s annual report to stockholders left me with a bad feeling. I’m not sure of everything that gave me that feeling, but I have had it before in other situations and learned to listen and act on my instincts.”

“All right, Mister Conrad. I can accept that, for I sometimes have that type of feeling myself. Why did you sell your Sam’s Smelter stock?”

“That will be easier to explain after I explain my Simple Products’ stock transactions.

“The financial section of the newspapers reported on the Simple Products’ annual stockholders’ meeting. The newspapers said there was some dissension within the company regarding the release of their new product.”

Wilson said, “Yes, I recall reading about that in the papers.”

“Well, I looked into that as part of my research. I found several social media sites where people were discussing the possibility of a takeover bid by the group that wanted an immediate release of the new product. The consensus was if a takeover attempt was made, the company would probably be in bad shape regardless of who won the fight.

“I received letters from both of the two sides asking me to sell them my stock. I decided to wait, for apparently the social media sites were correct. So I waited for the stronger of the two sides to make me what I thought was their best offer and I accepted it. Once the battle was over, the stock’s price dropped.

“The social media site was right for when the stronger group won, the company was in a poor cash flow position, and the decline in stock price led to a panic sell situation. I believed that the value of the Simple Products’ stock would increase drastically once the new product hit the marketplace, and I thought that would happen once the new product made it to the marketplace. I decided that when the stock price appeared to bottom out, I would buy as many shares of Simple Products’ stock as I could, which brings me back to my Sam’s Smelter stock.

“When I learned of the problem within Simple Products, I decided that if the price of the Simple Products’ stock dropped in the future, I would need funds available immediately to make a major investment in Simple Products’ stock.

“When we were going through the stock portfolio to determine which stocks to sell so the executor could gain enough funds to pay the estate taxes, we noticed Sam’s Smelter stock was dropping in price. We didn’t see a reason for the price drop, so we immediately sold my Sam’s Smelter stock, and as I said, we later sold the other eleven stocks.

“I thought about buying back my stock when the stock seemed to have bottomed out. However, I didn’t have a good feel for how long it would take for the price of their stock to recover. Since I needed cash for purchasing Simple Products’ stock, I decided to pass on buying back my Sam’s Smelter stock. Several weeks later, I decided Simple Products’ stock price appeared to have bottomed out, and I bought as much stock as I could afford.

About a month later, Simple Products released their new product and the stock prices have increased significantly. I project that the value of the stock will continue to rise for at least another month before stabilizing.

“I hope that helps you in understanding why I sold and purchased stock in the way I did. I can understand how the SEC might think I was making my decisions based on insider information, but that isn’t what happened. I made my decisions based on information that was available publicly and my intuition as to what would happen to the value of the three companies’ stock.”

“Yes, it did help. I will have to give the matter further consideration. It sounds reasonable, but I wish to discuss it with the analyst who brought the matter to my attention before making a decision.”

“Thank you, Mister Wilson. There is one thing more that you should know about my stock trading. I am not comfortable with most of the stocks that I inherited. I have been looking at a number of the up and coming high tech companies. I’ve decided to sell most of my stock portfolio in the near future and reinvest the monies in the high tech stocks.

“I suspect your analyst will probably be keeping an eye on me. If he should decide that my stock transactions are questionable, he is free to contact me directly. That would probably alleviate the necessity of your having to make trips to my office. Do you have any other matters that we need to address, Mister Wilson?”

“No, not at this time. I believe you have been truthful in what you said, Mister Conrad. But like you, I trust my instincts and my instincts tell me there is more to this matter than what you have said. I would be interested in pursuing that at another time.”

“I’m not sure what you sense, but I would be happy to address it with you when you can be more definite.”

“Thank you for your time, Mister Conrad. I need to get lunch before my next meeting, so goodbye for now.”

Well, it appears that I will be seeing Mister Wilson at some point in the future. I need to document a public source of information for any stock transactions I choose to make in the future. It may be useful for me to read up on the definition of insider trading. I don’t want to be charged with that because of some oddball interpretation of the legislation.

After Sam and I arrived home, I made myself comfortable and asked Cathy to link with me.

’Good evening, Ward. What’s up?”

“Cathy, I need to talk with you about where the Council is on reviewing my personal finances. The Council said it had finished its initial review of my personal finances. At that time, I started focusing on what I could do to earn the money that would be needed to finance the Mission.

“Then the Council surprised me by deciding I should sell my current stocks and purchase stock in what they think will be highly lucrative companies. I’m okay with selling the majority of my stock, but the SEC visited me today and asked questions about my prior stock sales. I told them about Simple Products, so that is one of several stocks that I do not want to sell at this time. I would like to complete any further stock transactions the Council feels are necessary, so I will be able to focus on building the solar car. Will you find out what the status of that effort is?”

“Alright, Ward.”

The second thing is, does the Council have an estimated date for providing me with the theory and design information of the three devices?”

“I’ll ask about that, Ward, when ask about the status of your personal finances.”

When Cathy ended the link, Sam asked, “Are we going to create a company or is this to be a private effort?”

“Why would I need to create a company, Sam?”

“Well, if I recall correctly, you and Cathy decided that you should design and sell a solar-powered car. If that is what you are going to do, you will need quite a few employees to research, design, build, and sell the car, and the effort will require a large investment. It might be best to have the research and design be done by a business. At least you will be able to take advantage of the tax breaks.”