Sons of Enron.

The inspiration for this post was the fact that a friend of mine lost a lot of money investing money in Sons of Gwalia, a gold mining company. The loss occured more than a year ago but they recieved a form asking to put their names down for a debtor's list - even if there is any money left over very little will go to any shareholders.

My facts are a bit hazy but it happened when Gwalia gambled on gold prices, and took out a gold derivative hedge to lock in a certain price. Prices moved against them and the banks made a margin call, telling them to hand over the gold NOW.

Problem was, Gwalia didn't have enough gold reserves to meet the request. They couldn't go out and buy gold either because the prices had skyrocketed. Gwalia couldn't come up with the $700million in gold and it went kaput. Investors lost out because they failed to disclose this information relating to the hedge.

Obviously, this person is not happy about it but there was little that they could do. The accounts were audited by Ernst & Young, prior financials were strong, and gold prices have never been higher. They were one of the world's biggest producers of gold. IT WAS A BLUE CHIP COMPANY.

But Gwalia never disclosed the true risks to the market of their hedges. They f'd up basically - their judgement was wrong in calculating it.

Why I am angry

We as members of the public hand over money to these big organisations hoping that they will make us money. It might produce a profit or a loss. That's a risk that I as an investor am prepared to take. But at the very minimum, they need to tell us of the risks. They need to disclose that information so we can make fully informed decisions. And if they do disclose it, the essential information is buried in some 60 page annual report, which even the most sophsticated investor has trouble understanding.

We are at the mercy of these organisations - in a very vulnerable position. They know much more than we do, yet they are unwilling to tell us what's going on, but are SO willing to accept our hard earned money.

A lot of people lost money on Gwalia and there was no way that they could see it coming. We have so many laws on what companies should disclose but do they really force companies to tell us what really goes on? Accounting standards are so complex that ways can be found around them. And derivatives, a new kind of financial product weren't regulated by existing laws and accounting standards.

I watched the Enron movie last week, and it annoys me that corporate greed has gone so far. Enron, was the 7th LARGEST corporation in the US before it collapsed. People had blind faith - the share price kept rising, the company kept announcing new markets and services that it was launching. No one really questioned the company until it was too late.

They used a lot dodgy practices and financial engineering to make the company look better than it was. But it was all smoke and mirrors.

You can't do a thing

Whether you like it or not, we are all exposed to this problem. We all make money. And to make that money grow, you need to make it work. If you invest in shares, you can do as much research as you like to "value" the company. But if they aren't providing you sufficient information, you can never make an informed decision to compare prices, risks and future returns. You're on slippery ground from the get go. You have no objective basis for comparison.

But I hear you say "hey I don't invest in the stock market", BUT you do playa. Compulsory superannuation forces you to put money somewhere and it usually ends up in shares, or managed funds, which in turn invest in property or shares. You can't do a thing because when you hand that money over it is up to the discretion of that fund manager to do whatever they want with it. You've lost control of your own money. Sure you might say I want to invest in international equities at steady growth rate. But that don't mean squat.

Best choice? Put your money in a shoebox and lock it away. It'll still be there in a year's time.

Fighting for shareholder's rights,

DJ Ho.