Two mightily fallen capitalists – Rene Rivkin and John Elliott – face disgrace and financial ruin.
Yet capitalism itself booms, particularly in Australia. Unemployment, inflation and interest rate figures look good. The share market might be a bit bleak and the property market a bit over-heated, but there is no hyper-inflation of the 1920s nor recession of the 1930s. Nor do we have the evils of the exploited, starving workforce of the 19th century. In short, capitalism is looking pretty good even if we have a few failed capitalists.
Karl Marx got it wrong, or at least only partly right. He thought there were inherent contradictions in capitalism and that ultimately it would collapse in on itself to be replaced by a workers’ paradise where each worked according to his or her ability and took according to need. But too many humans are too selfish too often for that. The lesson from Elliott and Rivkin is not that capitalism overall is self-destroying, but that some individual capitalists are self-destroying, and that when they fail the system does not fail, but rather repairs itself or those within it repair it.
In a way, both Rivkin and Elliott have been caught by the perpetual repair activity that capitalism undergoes to ensure the system’s survival.
Between them they committed the two deadly sins of early 21st century capitalism – allowing a company to trade while insolvent (Elliott) and insider trading (Rivkin).
True, these have been sins from capitalism’s earliest days, but hitherto they have not been frowned upon so darkly. The railway speculators of the 19th century pushed ahead with arrogant optimism just assuming all would be well. If the venture failed it was too bad. No-one thought that the directors of the company should have asked along the way what shape a company was in and not to throw good money after bad. What was then acceptable risk is now unacceptable mismanagement. The mining boom speculators in the 1960s were seen as heroes not cheats when they got early assay reports of good mineralisation and raced into the Perth Stock Exchange buying up shares cheaply knowing that as soon as the assay results were made public the shares would boom.
But any form of capitalism that allowed that sort of conduct to become acceptable and ingrained would be doomed. It would not be possible to raise the necessary money for capitalist ventures on the share market or through credit if investors thought they were always susceptible to unnecessary loss through insolvent trading or being cheated by insider trading.
Rivkin always made light of the charge against him, and always protested his innocence. Earlier this month, Rivkin was fined $30,000 and sentenced to nine months’ weekend detention after a jury found him guilty of insider trading. The Crown alleged he bought 50,000 Qantas shares (on behalf of others) hours after hearing of a potential merger between Qantas and a struggling Impulse Airlines from then Impulse executive chairman Gerry McGowan. Rivkin asserted that, even if it were true, his potential gains of $346 were so trivial it did not matter.
Rivkin misunderstood the gravity of his action. He had more to gain than the $346. His gain would have been to further his reputation as a maverick on the share market – the man who could buy shares for you which would increase in value. He not only traded in the Qantas shares, he traded and gambled with his reputation. He risked the small chance of ruining his personal reputation for the strong possibility of gaining reputation as a clever trader. He lost.
A millionaire does not do it for the $346. He does it so he can boast what a clever man he is: buying Qantas shares which, against expectation, immediately rise in value. As Justice Anthony Whealy said in the Supreme Court when sentencing Rivkin, Rivkin had displayed a contemptuous arrogance for the processes which had brought him to trial and “this same attitude appears to have played a part in his decision to arrange the prohibited purchase.”
In short, Rivkin’s conduct was a direct attack on the system of modern capitalism in which investors entrust their money to managers in the form of shares and entrust the share market to run honestly. As Australian Security and Investment Commission chairman David Knott said after the sentencing, Rivkin’s attitude “mocks every investor who expects fair dealing and proper disclosure in share market transactions”.
Sure, insider trading has been illegal for a long time. But attitudes to it have changed. It’s a bit like drink driving. In the 1980s it was bad luck to be caught for either offence. Now it is no longer seen as bad luck, but just plain bad. And as with drink driving, the armoury of authorities to detect insider trading has improved. Routine computer checks of unusual trading before share-price-changing company announcements are a bit like random breath testing. Indeed, Knott responded to Rivkin’s assertion that he was being targetted as a tall poppy by saying that the transaction had been picked up in random checks. It was only after the transaction stood out for investigation that the identity of the tall poppy was known. The transaction would have been investigated even if the parties to it had been short pansies.
Capitalism is repairing itself – ensuring that the system of raising capital by shares remains viable. And those who threaten it are removed. Rifkin and Elliott face long bans from being directors.
Elliott is yet to hear his fate after a finding by Justice Philip Mandie in the Victorian Supreme Court that he and fellow directors of Water Wheel allowed the company to trade when it could not pay its debts as they fell due. It is a civil matter, but Elliott faces fines, costs, bans and orders to repay creditors.
Elliott has told the Victorian Supreme Court that he has very little of his former $80 million plus fortune left. Again it is a case of the self-destructing nature of an individual capitalist. Not satisfied with gaining a fortune with Elders IXL (then one of Australia’s biggest companies) and Harlin Holdings and consolidating, Elliott continued attempting to amass more wealth. When it went sour he started again with Water Wheel. He went too far. Instead of doing the right thing by putting his hand up and calling in an administrator he allowed the company to continue to trade. This exposed creditors to further unnecessary risk.
Elliott wanted to be a successful businessman. For that you have to be in business. Business is unlike a lot of other human occupations. In business you buy and sell – paper, property and things – and you hope to make money. If it goes belly up, you have nothing. Business is both who you are and what you are; without it you are nothing. Hence the obsession to keep on going. In other occupations you can at least point to a built house, an invented widget, a written book, a painted painting, a fixed car, a weeded garden, a removed appendix, a cared for aged person.
Moreover, in business you usually use other people’s money. Therein lies the danger, especially when coupled with someone who must keep on going, or in the case of Rivkin show how clever he is.
Since the late 20th century, the regulators and sustainers of capitalism are recognising that danger. They won’t change human nature – its pride and acquisitiveness — but they are increasingly recognising its weakness and increasingly doing more about it with ever more potent computer tools.
So don’t expect a Rivkin an Elliott or even an HIH to destroy capitalism.