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Appendix B. A Glossary for Investor Survival

Appendix B. A Glossary for Investor Survival

accounting irregularities

Usually a nice way of saying fraud. Clearly, it is in the interests of some accountants and companies to make the shenanigans sound less terrifying, and it succeeds wonderfully. In his book Accounting Irregularities and Financial Fraud, attorney Michael R. Young writes, “Perhaps out of a belief that the word fraud was too rude for its authoritative literature, accountants have historically avoided the term fraud altogether and, instead, divided financial statement misstatements into two categories: errors and irregularities.”

aggressive accounting

A form of accounting where a desired result, often higher earnings or sales, is put before prudent interpretation of accounting rules and principles. Risks turning into fraud.


A meeting called by a company to hear final presentations from investment bankers seeking its business—often to underwrite its initial public offering. Bake-offs gained notoriety because of the way Wall Street analysts would join the meeting and make positive sounds about the stock’s prospects and often indicate that they would stick a buy label on it. This was widely seen as part of an effort by analysts to win business for their investment bank. (Such meetings are also sometimes known as beauty contests.)

Barney deal

A company desperately in need of revenue, perhaps because it is falling short of forecasts, swaps goods or services—software has been a favorite—with a friendly company. The companies draw up two contracts and both can then book revenues. Usually, there is no business justification for the transaction. The term is named after the children’s TV character Barney, a purple dinosaur who proclaims, “I love you, you love me.”

big-bath charges

A big write-down of the value of assets through restructuring and other one-time charges. If aggressively done, it can in one fell swoop remove costs and artificially boost profits. It can also lead to the miraculous creation of reserves that can be surreptitiously used to bolster future earnings.

black-box accounting

A term often used for financial statements that are indecipherable to the outsider, perhaps because of lack of disclosure or their complexity. It suggests some deliberate obfuscation on the company’s part.

booster-shot reports

Positive analyst reports intended to artificially boost a company’s stock price, usually just as some shares are about to be sold onto the market.


Boosting electricity trading volumes, usually through wash trades (see separate entry), to raise revenue rather than because anybody really wanted to buy so many megawatts to light and heat a factory or a community.

burn rate

The rate at which companies burn through available cash when they have negative cash flow. It became a major focus in 2000–2001 when it became clear that many Internet companies were going to fail and access to new capital raisings was turned off.

channel stuffing

When a company, usually a manufacturer, sends its customers products that they haven’t ordered, or sends them products much earlier than they ordered them. It then books revenue and profits on the unsold merchandize. It is stuffing too many things through the distribution channel and is often used to boost short-term revenue and profits at the expense of future results.

cherry picking

A practice in which money managers, traders, and brokers allocate unprofitable trades to their clients while diverting profitable trades to their own accounts.

Chinese wall

In the New Oxford American Dictionary, “an insurmountable barrier, especially to the passage of information or communication.” On much of Wall Street, it has meant nothing of the kind; it has either been ignored or regarded as a minor irritation to be stepped around.


Excessive and unnecessary trading of a client’s stocks portfolio by a broker or money manager who aims at generating commissions rather than improving returns.

confetti cutter

The recommended kind of shredding machine if you want to make sure that documents cannot be pieced together again by investigators. These machines shred to Security Level 5—the level favored by the Department of Defense and other federal agencies. Often retailing at more than $1,500, Level 5 shredders slice paper into 1/32 by 7/16 inch rectangular shreds. “It would take an infinite number of monkeys an infinite number of years to piece that paper together,” said former State Department employee Sy DeWitt, a managing director at security risk consultants Pinkerton, in an interview with Reuters in January 2002.

corporate governance

The relationship among the forces—mainly the management, board, and shareholders—that determine the direction and performance of a company.

commission kickbacks

Investors pay much higher than normal commissions to brokers for trading shares as a kickback for the investor receiving an allocation of shares in a hot IPO or for being cut in on some other deal. Some investors paid commission rates 50–60 times normal levels during the IPO mania in 1998–2000. This was a way that the investment banks ensured they shared in the windfall profits to be made when prices soared on listing.

cookie-jar reserves

Cash that a company stashes away into reserve accounts in the good times to draw down when conditions are tougher. Often, this is done without full disclosure so that investors are hoodwinked into thinking earnings are lower than they really were in the go-go years and higher than they were in the rougher times.

creative accounting

Manipulation of a company’s accounts to create a desired picture.

death spiral preferred financing

Financing that can kill off troubled companies while the financiers profit. It works like a convertible bond—only the goalposts can move so that the bond owner is entitled to convert into an increasing number of shares the lower the price goes. It gives the convertible bond owner an incentive to sell the stock to drive down its price. (The financial instruments are sometimes known as death spiral convertibles or toxic convertibles.)


A term for the slash and burn, take-no-prisoners approach of Albert (“Chainsaw Al”) Dunlap, who was the CEO of paper products maker Scott Paper and then of kitchen appliance manufacturer Sunbeam in the 1990s and who fired thousands of workers soon after taking over at each. Dunlap often used the term himself in interviews. The original sense was more positive, indicating that a company had been turned around with dizzying speed. However, Dunlapping lost credibility when Dunlap was fired after results started to deteriorate as questions about the company’s aggressive accounting began to grow.

earnings management

Strategy in which a company seeks to manage the volatility of its earnings so that they have a smooth appearance from quarter to quarter. It is all about disguising what is happening in the real world during a particular period. Often, it means borrowing sales or profits from one quarter and putting them in another or giving an artificial impression about recurring growth through the use of asset sales, reserves, and pension fund returns.


Earnings Before Interest, Tax, Depreciation, and Amortization. A measurement of earnings that has been promoted by many companies as giving a better idea of performance than net profit, which includes ITDA. Companies often wrongly refer to it as cash flow. It is also open to manipulation. As Mulford and Comiskey write in their book The Financial Numbers Game, it “is truly a creative income statement-based measure.”

financial engineering

The narrowest definition of this term is the combining or cutting up of existing financial products to make new ones. But, the term is increasingly being used to describe any complicated use of derivatives and other financial instruments as well as the use of various structures aimed at improving the look of a balance sheet.


The purchase by investors of shares at the initial public offer (IPO) price and then rapid sale at a profit once trading begins. Many top clients of major brokers flipped their shares during the Internet IPO boom.

forensic accountants

Accountants who have been specially trained to delve deep into a company’s books and affairs to ferret out fraud. A cross between a detective and an auditor, they are usually called in when a company’s accounts are the subject of an investigation.

friends and family allocations

Shares reserved in initial public offers for executives and other employees of the issuing company and its affiliates—plus some for others with close ties, such as customers and suppliers. During the Internet boom, some of these shares were taken by investment banks as part of an underwriting agreement and were allocated to “friends of the investment bank.”

front running

The practice in which a broker or trader buys or sells a stock in full knowledge that a client has just placed a big order to buy or sell that security. The broker or trader is taking advantage of inside information from the client, who may well be put at a disadvantage if the broker’s order moves the market and the final price of the original order is worse as a result.

going concern qualification

When accountants slap a “going concern qualification” onto their audit of a company’s financial statements, it means they fear the business is in such poor financial condition that it could go under.

golden parachute

A large cash payment or other financial compensation guaranteed to a CEO or other executive in the event of a takeover of a company. In recent years, this term, and the term platinum parachute, have also been used loosely for large payments made to executives when they have resigned under pressure or have been fired.


The practice of encouraging investors who are allocated shares in an initial public offering to put orders in at set higher prices when the stock first trades so that it will climb up a ladder of orders. Failure to place the orders may mean that the investor concerned might not get as generous an allocation of shares in the next hot IPO.

lazy Susan

(Sometimes known as the round tripper.) A swap that allows two companies to boost their revenue without any real goods or services changing hands, very popular in the energy trading and telecommunications businesses in 2000–2001. Advantage: investors think your revenue has gone up and yet it hasn’t cost you more than the paperwork.


As in “to be Lerached.” A term used by Silicon Valley attorneys and companies facing class-action lawsuits for alleged securities fraud that were filed on behalf of investors by Bill Lerach, co-managing partner of the law firm Milberg Weiss Bershad Hynes & Lerach and the most prominent attorney in this line of business.

piggy backing

Same as front running.

proxy statement

A statement issued annually by publicly traded companies ahead of an annual meeting. It includes board nominations, voting instructions, shareholder resolutions, and important information about a board, compensation of executives, and ties between directors and the company.


This was more normally associated with Mafia-run “boiler room” brokerages, but some believe that the whole Internet and technology IPO market was one giant pump-and-dump scheme. In the classic “pump and dump,” perpetrators will seize on a tiny company with very few shares on issue and a very low share price. They will buy a large number of shares and then start a promotional campaign to stir up positive interest in the stock, possibly through cold calling to investors, newsletters, messages in chat-rooms, message boards, and emails. They then sit back and watch the stock price rise as some people are duped into buying. The low number of shares available for purchase (low original issue and the manipulators own a lot) should accelerate the rise. They can then sell out at a profit and the stock will sink because there was no fundamental reason for its gains in the first place. The losers are the investors who bought the stock based on the promotional campaign by the manipulators.

rank and yank

A brutal system for assessing employees used at Enron. They were ranked every six months on a 1–5 scale, with 15 percent put in the lowest category and then given six months to improve or be fired (yanked). Corporate America has had similar systems before, at General Electric Co. for example, but these tended to be only annual measurements with fewer employees sent packing.

related-party transactions

Another name for deals with entities and individuals that are in some way affiliated with the company concerned. Examples include a contract from the CEO’s privately owned aircraft company to fly the company’s executives around the world. These deals create the perception that a favor was given or that a company received a worse bargain than if it had gone to a provider of the service that had no such relationship.

repricing of stock options

Often a desperate measure taken when a company’s share price has dropped so far below the exercise price of its management and employee stock options that the options are next to worthless. The company reprices them or replaces them with new options.


When a company reduces the number of shares it has on issue by swapping out a larger number for a substantially smaller number. Often companies will give shareholders 10 shares for every 100 or 200 they had originally, through a one-for-ten or one-for-twentysplit. It is often a desperate measure to lift its notional share price by a company trying to avoid delisting by an exchange, such as the New York Stock Exchange, after its share price falls below $1.

ricochet trading

A technique allegedly used by Enron and others in the California power crisis. The energy traders would buy power in California at capped prices, move it to another state, and then sell it back to California at higher uncapped prices.

roundtrip trading (or round-tripping)

See lazy Susan. Also sometimes called a Boomerang deal.


Tampering with results during gold mining exploration by adding gold dust brought in from outside the area of drill testing. The word is derived from the most primitive form of salting—the use of a salt shaker to sprinkle gold dust onto rocks. Extensive salting of deposits in Indonesia was thought to be behind the collapse of Canadian gold mining company Bre-X in 1997.

Sarbanes-Oxley Act of 2002

The main corporate reform legislation passed by Congress in 2002 in response to the wave of scandals.

short and distort

In many ways the opposite of the pump-and-dump. In this scheme, a short seller will short a stock and then spread false rumors about its financial health or other issues. When the stock drops on the rumors, the short seller will buy back the stock at a profit. The likely losers are the company concerned and any investors who sold as the stock declined because they believed the rumors.

special-purpose entities

These are vehicles set up to allow a company to place certain assets off its balance sheet and then finance them. Because the assets are off balance sheet, there is often minimal disclosure. The problem occurs if the risk of holding those assets remains with the original company rather than the new SPE. In that case, if something goes wrong, investors are suddenly faced with liabilities they didn’t know existed, which is what happened at Enron.


A trading term for a kickback or commission, which are sometimes the same thing.


A term used to describe an underwriting investment bank’s allocation of some shares in a hot IPO deal for a corporate chief in the hope or expectation that the executive will return the favor by giving the investment bank some choice business.


Completing the acquisition of a company after making sure that it has delayed reporting revenue while bringing forward expenses. The idea is that the company’s performance will suddenly appear to have improved under new ownership, artificially boosting the acquirer’s sales, earnings, and possibly its share price.

stock options

Stock options offer the right but not the obligation to buy a stock at a set price within a particular timeframe.


The case in which loans are granted to companies by banks only if the companies also agree to give the lender more lucrative investment banking business, such as underwriting for stock sales and mergers advisory work. Such quid-pro-quo arrangements became widespread in the late 1990s. Laws aimed at preventing tying were circumvented through the use of different affiliates for various transactions. A link is also very difficult to prove.

wash trading

Same as roundtrip trading.



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