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Nobody chases fraud at all-time highs
Why fraud waits
Nobody goes after frauds at all-time highs. They only get pursued after investors have lost money, because these kinds of things are political. A company's stock price is its harshest prosecutor and its staunchest defense attorney.
The cycle turns
That timing sets the pattern for the whole cycle. On the down part of it, the bodies float to the surface, as they always do. The longer the cycle has run, the more fraud there is to cover.
A short seller's view
The short seller who called Enron now teaches a course on the history of financial fraud, and he suspects this cycle will end the same way.
How did Enron's collapse unfold?
In October 2001, Enron reported a $618 million quarterly loss and a $1.2 billion reduction in shareholder equity tied to partnerships it had kept off its main books. The SEC opened an inquiry, and the company filed for bankruptcy on December 2, 2001. Enron's stock had traded above $90 in the summer of 2000 and ended below $1. Congress passed the Sarbanes-Oxley Act in July 2002, requiring chief executives and chief financial officers to certify their companies' financial statements.
Why does fraud surface when prices fall?
Rising prices and easy financing let weak or dishonest firms keep raising money to cover gaps. A Ponzi scheme pays earlier investors from new deposits, so it survives only while inflows exceed withdrawals. Bernard Madoff's scheme collapsed in December 2008 when clients asked to withdraw about $7 billion that he could not pay. Warren Buffett used the image of swimmers found naked when the tide goes out in his 2001 letter to Berkshire Hathaway shareholders.
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