I l@ve RuBoard • Table of Contents Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble By D. Quinn Mills Publisher : Financial Times Prentice Hall Pub Date : June 19, 2002 ISBN : 0-13-009113-8 Pages : 288 In Buy, Lie, and Sell High, Harvard Business School Professor Daniel Quinn Mills offers the first systematic analysis of both the Internet stock bubble and the Enron scandal. Drawing upon extensive new research and insider interviews, Mills uncovers both systemic causes and outrageous misbehavior. He demonstrates how each link in the "financial value chain" failed, from venture funds to auditors and regulators. Finally, he offers practical guidance for investors and policymakers seeking to avoid the "next" speculative disaster. I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard • Table of Contents Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble By D. Quinn Mills Publisher : Financial Times Prentice Hall Pub Date : June 19, 2002 ISBN : 0-13-009113-8 Pages : 288 Copyright Preface FINANCIAL TIMES Prentice Hall Financial Times Prentice Hall Books Acknowledgments Part I: The Bubble and Capital Markets Chapter 1. How to Use This Book Why This Book Has Been Written How This Book Was Written An Unusual Feature of This Book: Contributions from Others The Message of This Book: How to Avoid Another Bubble and How to Protect Yourself If It Occurs Talking Points Chapter 2. Destroyed by the Bubble The Capital Markets as an Engine of Progress The Social and Economic Utility of Capital Markets The Internet, Capital Markets, and Innovation The Early-Stage Financing of the Internet The System Hits a Glitch Talking Points Part II: How the Bubble Happened Chapter 3. Causing the Bubble The Technology Bull Market The Bubble Why Did the Bubble Form? Day Trading and the Source of the Bubble Other Bubbles in History The Software Cycle This document is created with the unregistered version of CHM2PDF Pilot The Transfer of Wealth Talking Points Chapter 4. Inflating the Bubble: the Financial Value Chain The Financial Value Chain Diagramming the Financial Value Chain When Economic and Financial Value Diverge Why the Huge Valuations for Internet Companies? How the Financial Value Chain Should Have Worked Defending Enormous Valuations Talking Points Chapter 5. What it Meant to "Do the Right Thing" at Enron Enron as an Internet Company Inflating the Enron Bubble Wall Street's Involvement The Key Role of the Accountants Equity Analysts Promote the Company Politicians Lend Their Aid Evaporating Employee Pensions Unethical, Unfair, but Illegal? Enron's Significance Talking Points Part III: Inexperienced Leaders Chapter 6. Dumb Kids? Blaming the Entrepreneur—He's Dumb Amazon.com's Miracle How Amazon Flouted the Rules The Learning Failure Talking Points Chapter 7. How Some VCs and Bankers Led Entrepreneurs in the Wrong Direction Having to Go to the Venture Firms Pressure to Spend A Strategy's Limitations Like Sheep to the Slaughter Get-It-Right Instead of Get-Big-Fast Talking Points Part IV: How Venture Firms Changed Their Criteria Chapter 8. Building to Flip Venture Capital Rushing to an IPO Exiting an Investment How Their Own Rules Were Changed by the Venture Capital Firms The Baby Goes Out with the Bathwater Talking Points Chapter 9. Choosing the Wrong People Whom to Back Garden.com: A Mistake from the Get-go Boo.com Did the Venture Firms Make Money from the Bubble? This document is created with the unregistered version of CHM2PDF Pilot Talking Points Part V: Taking Start-ups to the Public Chapter 10. How Investment Banks Inflated the Bubble The Banks Bend the Rules The Investment Banks and Institutional Investors Who Brought Those Duds to Market? Mass Hysteria or Fraud The Blame Game Mass Hysteria What Did the Venture Firms Know? Did Wall Street Cross the Line? If You Can't Sue City Hall, Can You Sue Wall Street? Beware of "Buyer Beware" Talking Points Chapter 11. The Retail Investor: Victim or Fool? The Buyers' Side of the Capital Market Why Mutual Funds Got on the Bandwagon Speculating with Pension Money Momentum Investors in Disguise Blaming the Investor—She's a Pig How Important Is the Freedom to Speculate? Talking Points Chapter 12. Influencing Factors: Where Does Responsibility Lie? What the Accountants Should Have Done and Didn't The Hype Machine The Fed Was Also at Fault Talking Points Part VI: The Road Kill of Capitalism Chapter 13. Sell, Sell, Sell! theglobe.com Not a Smart Thing to Do Young People Succeeding Early The Return of Big Company Values Talking Points Chapter 14. Dire Consequences Creating a New Business Cycle Economic Losses Caused by the Bubbles Starving Entrepreneurs of Capital Setting Back Technological Innovation What Happened in e-learning Meanwhile, in Germany… Another Wave of Internet Companies Is Coming A List of the Economic Consequences of the Bubble Insuring Public Confidence Talking Points Part VII: A Troubled System Chapter 15. Can America Lead? This document is created with the unregistered version of CHM2PDF Pilot The United States as the World's Financial Leader Should American Leadership Be Followed? Dare We Privatize Social Security? Why Current Regulation Isn't Working Well Enough Talking Points Chapter 16. Reforms to Protect Small Investors The German Experience Every Investor a Qualified Investor Extending Fiduciary Responsibility Improving Disclosure and Governance at Mutual Funds A Return to a More Restrictive Prudent Person Rule Preventing Another Enron New Regulations to Protect Investors in IPOs Nine Reforms to Restore Confidence and Rebuild the Economy Talking Points Part VIII: Less Damage Next Time Chapter 17. What Does the Future Hold? Do We Want Another Bubble? Will There Be Another Bubble? Smaller Bubbles and Less Damage Appendix A. NEMAX (The German New Market) and NASDAQ Appendix B. Financial Value Chain Influencers Contributors Notes I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot Copyright Library of Congress Cataloging-in-Publication Data A catalog record for this book can be obtained from the Library of Congress. Credits Editorial/Production Supervision: Carol Wheelan Composition: Ronnie K. Bucci Cover design director: Jerry Votta Cover design: Talar Boorujy Art director: Gail Cocker-Bogusz Interior design: Meg VanArsdale Manufacturing buyer: Maura Zaldivar Executive editor: Jim Boyd Editorial assistant: Allyson Kloss Marketing manager: Bryan Gambrel ©2002 Pearson Education, Inc. Publishing as Financial Times Prentice Hall Upper Saddle River, New Jersey 07458 Financial Times Prentice Hall books are widely used by corporations and government agencies for training, marketing, and resale. For information regarding corporate and government bulk discounts please contact: Corporate and Government Sales (800) 382-3419 or corpsales@pearsontechgroup.com Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. 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Dedication To Betsy and Shirley This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard Preface About Jonathan Lebed—a teenager who made money day trading on the Internet but ran afoul of Federal regulations—Arthur Levitt, former Chairman of the Securities and Exchange Commission, is said to have commented, "Put it this way, he'd buy, lie, and sell high."[1] I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard FINANCIAL TIMES Prentice Hall In an increasingly competitive world, it is quality of thinking that gives an edge-an idea that opens new doors, a technique that solves a problem, or an insight that simply helps make sense of it all. We work with leading authors in the various arenas of business and finance to bring cutting-edge thinking and best learning practice to a global market. It is our goal to create world-class print publications and electronic products that give readers knowledge and understanding which can then be applied, whether studying or at work. To find out more about our business products, you can visit us at www.ft-ph.com I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot [...]... warnings, and at the inflation and then bursting of the bubble We looked at who made money in the outcome, and who lost We have read the literature on financial manias and explored the explanations being given for the recent bubble The key explanations are that (1) it was an accident: A group of forces came together like the perfect storm—new technology, an affluent investing public, and a booming economy and. .. was not, as we'll see later The bubble was the consequence of interaction between capital markets and the innovation process That this interaction took the form of a bubble raises important questions regarding the role of the capital markets in the innovation and investment processes in Western economies In the recent bubble, the system which links technological innovation to the investor via capital... Part II: How the Bubble Happened The Internet bubble was like a great storm—many different forces had to come together for it to happen I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard Chapter 3 Causing the Bubble The Technology Bull Market The Bubble Why Did the Bubble Form? Day Trading and the Source of the Bubble Other Bubbles in History The Software... interpretations and any errors are my responsibility alone Daniel Quinn Mills Boston, Mass May 2, 2002 I l@ve RuBoard This document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard Part I: The Bubble and Capital Markets The great Internet bubble in the stock market burst in the spring of 2000, but the repercussions of the mania continue Even today, companies that have held on since the. .. though it had deep roots in the earlier 1990s Appendix A charts the bubble on America's NASDAQ and Germany's Nemax Though it is convenient to speak of one bubble, there were in fact four bubbles, one rapidly following another This helped account for the remarkable overall size of the craze that is now referred to as a single entity: the Internet bubble The first bubble consisted of the stocks of companies... legitimate firms; and we looked at the litigation now underway about how IPO sales were conducted We asked whether or not a bubble was a necessary consequence of the operation of our free markets the way western economies raise capital to fund technological innovation? Or, alternatively, whether the bubble was a dangerous aberration that should be avoided if possible? Our research convinces us it is the latter,... This Book: Contributions from Others An unusual feature of this book is that it includes short contributions from people other than the author and his team Several American and German participants in the bubble have consented to give their experiences and their views about the issues with which this book is concerned, so that this book provides a forum within which some of the players in the Financial... Glitch Ventro and Kabel New Media are but two of literally hundreds of examples showing what happened to entrepreneurs and investors during the great bubble of the turn of the 21st century A vast amount of wealth was apparently created, then disappeared How did it happen, and why? And what are the consequences? Significantly, the bubble was similar in Germany and America, but the impact on small investors. .. private equity entered the development of the technology via the foundation of Netscape Netscape was the first search engine but the public needed a way to access the Web to be able to use it Along came America Online, and then other competitors, and thus the Internet as we know it today, with its availability to the public, its millions of Web sites, and its commercial applications All this was some... inflated; and (4) it was another example of the madness of crowds—individual investors were prone to mass hysteria and didn't do their homework and so drove stock prices to unreasonable levels, and when the bubble burst, got what they deserved We also asked whether or not the entrepreneurs, venture firms, investment banks, brokerages, and mutual funds really thought that the companies they sold the retail . document is created with the unregistered version of CHM2PDF Pilot I l@ve RuBoard • Table of Contents Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble By D. Quinn Mills Publisher. Mills Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble Dale Neef E-procurement: From Strategy to Implementation John R. Nofsinger Investment Blunders (of the Rich. I l@ve RuBoard • Table of Contents Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble By D. Quinn Mills Publisher : Financial Times Prentice