The Garden of Betrayal

36

“Shit,” I said, tossing my pencil at my computer screen. “I’m an idiot.”

“I already knew that,” Kate shot back deadpan. “What idiotlike thing have you done now?”

It was just after eight. Claire and Reggie had left ten minutes before to pick up dinner from an Italian place a few blocks away.

“Spent the better part of four hours trying to figure out Mohler’s bizarre trading strategies without ever spotting the obvious. Come look.”

She carried her chair around the table we were working at and sat down next to me. I picked up my pencil and touched the eraser to my screen.

“Thanks to your genius, I was able to copy all Mohler’s positions and transactions for the past six months into an Excel spreadsheet. He’s operating in thirty-four different accounts, so I copied each one to a separate page. The first thing I noticed is that he only trades on the first business day of every month.”

“Is that unusual?”

“So-so. There are a lot of money managers out there who practice something called ‘technical trading,’ which means they make buy and sell decisions based on statistical measures, like the moving average price of a stock and the daily trading volume, and pretty much ignore fundamental information, like how much money a company happens to be earning at any given point in time.”

“Wait a second,” Kate objected. “That’s crazy, isn’t it? How can you invest in a company and not care how much money it makes?”

“Two reasons. First, because you assume that any news a company might release is already reflected in the price of the stock-”

“There’s something wrong with that logic,” she interrupted, frowning.

“You’re not the first to think so. There’s an old Wall Street joke about two economists walking to lunch. The first spots a ten-dollar bill on the sidewalk and tries to point it out to the second. The second refuses to look, asserting that if there were a ten-dollar bill on the sidewalk, someone would have picked it up already.”

“I thought jokes were supposed to be funny.”

“Nice. At any rate, the second reason technical traders don’t bother with fundamentals is that they believe that stocks go in and out of favor, like women’s fashion, and that it’s more important to figure out what stocks other investors want to buy than it is to have an opinion on what stocks they actually should be buying.”

Her lips moved silently for a moment as she parsed my explanation.

“So, they just follow the crowd, no matter how stupid the crowd might be.”

“Pretty much. You remember the whole dot-com bubble?”

“Not personally, but I’ve heard of it.”

“The dot-com bubble was this weird period where people paid crazy prices for Internet companies that didn’t have any realistic prospect of making money. Fundamental traders recognized that the stocks had no value, sold them short, and got murdered. Technical traders didn’t care that the stocks were junk. They bought them because other people were buying them, and made buckets of money on the ride up.”

“But the dot-com bubble collapsed, right?”

“Right. In the long run, stocks tend toward the value of their discounted cash flow, which for many of the dot-com companies was zero. But it’s a basic trading aphorism that the markets can stay irrational longer than most people can stay solvent. The fundamental guys were wiped out years before the bubble burst. The technical guys who were long on the way up sold out and went short when the market started going down, just because everybody else was selling. They made money both ways.”

“So, are you a technical guy?” she asked dubiously.

“No. I pay attention to technicals, because they drive so much flow, but I’m a fundamental guy at heart. The real problem with technical trading is that it’s easy to get whipsawed, which is what happens when you’re constantly buying on small up moves and selling on small down moves, and losing a little bit of money each time. All of which brings us back to Mohler. One way the technical guys try to avoid getting whip-sawed is by not reacting to every small up and down move, and only trading at fixed time intervals. Once a day is pretty standard, and once a week isn’t unusual. Mohler trades once a month, which is less common but still regimented enough to make me suspect he had some kind of technical program going.”

“And does he?”

“Nope. That’s why I’m an idiot-because I kept looking for the pattern I wanted to see and ignored the one that was staring me in the face. Check it out,” I said, clicking over to a second Excel workbook. “These are all Mohler’s trades. This particular box here lists a group of trades he did in Intel about a month ago. You notice anything unusual?”

“No.”

“Mohler’s buying in some accounts and selling in others. If he was a technical guy, he’d be getting a buy signal or a sell signal, not both. When I dug a little deeper, I noticed that all of his buying was through one broker, and that all of his selling was through a different broker.”

“Which tells you what?”

“The benign explanation is that he’s stupid. He’s paying two spreads and two commissions to buy and sell the same security, when he could just be moving stock between the accounts and saving himself the transactions costs.”

“But he’s not stupid?”

“I don’t think so.” I dragged my cursor down the screen and highlighted a box at the bottom. “Look. This number here is the net profit of all of his purchases and sales of Intel in all his different accounts on this particular day.”

“Zero?”

“Zero. Exactly. And it’s the same with every stock he trades, every time he trades. He buys in some accounts and sells in others, always through different brokers, and the net always works out to zero.”

“I don’t get it.”

“You will.” I tabbed to another section of the workbook. “This is the profit and loss generated by each of the thirty-four accounts, listed month by month for each of the last three years.”

“Four of the accounts always lose money,” she said hesitantly, “and the other thirty always make money.”

“And the net of the money lost and the money made?”

Her eyes flicked to the far right-hand column of the spreadsheet.

“Zero?”

“Right. Which only makes sense because Mohler isn’t really trading. All he does is buy stock through one broker and sell it through another…”

“And then put the losing trades in the first four accounts and the winning trades in the other thirty,” she finished in a rush. “It’s like the whole IPO thing with Petronuevo. It’s all just a way of moving money from one pocket to another pocket.”

“Bingo. And not just moving money. Mohler’s making payoffs to people and simultaneously laundering the money so the gains look legitimate. All of which explains why he can spend his entire day looking at Internet porn. He doesn’t care if the market goes up or the market goes down. All he has to do is allocate the winners and the losers to the right accounts at the end of the month.”

Reggie and Claire entered, laden with carryout food. Kate stood up to intercept them.

“Let me deal with that,” she said. “You have to listen to Dad. He’s figured this whole thing out.”

“Hardly,” I protested.

“Almost,” she insisted. “You were only wrong about one thing. You’re not an idiot at all.”

“Okay,” Reggie said, pushing his empty plate away fifteen minutes later. “Bottom line, we know what Mohler’s doing.”

“Right,” I said. “The problem is that we don’t know who he’s doing it for. There aren’t any names in his trading records.”

“Any luck breaking into his hard drive?” Claire asked, glancing toward Kate.

“Nope,” she replied glumly. “I’ll check with Gabor again when he wakes up, but whatever kind of firewall Mohler’s running is doing what it’s supposed to do. No matter what I try, his machine just doesn’t respond.”

“So, what are our options?” Claire persisted.

“Beyond breaking in and just grabbing his computer? A couple of things, I guess. We can send him a virus and hope he’s dumb enough to open it, and that he’s not running any antivirus software. That would let me into his computer. And we can keep an eye on his incoming and outgoing mail. We might learn some names that way.”

I stood up from the table where we’d been eating dinner, feeling restless and frustrated.

“No. I don’t want to lose momentum. Kate’s supposed to be at school. And the more time we spend screwing around with Mohler’s records and his network, the more likely it is that someone figures it out and comes right back at us. We need to keep the initiative.”

“I like that idea,” Reggie said.

“What idea?”

“The idea of trying to get these guys to come back at us. The one thing we know about this gang is that they’re not shy. Maybe we can use that against them, to set a trap.”