The young and the reckless

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IT’S a morality play worthy of Shakespeare himself. A 25-year-old dealer, John Hartman, was sentenced to prison this week for insider trading. The talented and popular son of a respected Sydney obstetrician, Keith Hartman, he was schooled at Riverview and Sydney University. He had the best and he blew it.

By the time Hartman’s friends are passing from their nightclub phase to engagement parties, Hartman will be coming out of jail – three years after being sentenced. It’s a brutal lesson. He may yet appeal but his lawyers will be mindful of Ian ”Rocky” Chalmers – a fast-living Macquarie Bank dealer busted for selling cocaine, who appealed against the severity of his sentence only to have the appeal court make it even longer.

In his sentencing, the judge said Hartman deserved to be punished for his crimes but he also depicted the young trader as a victim of the system, taking aim squarely at the finance industry.

”Paying $350,000 to a recent graduate of 21 years of age carrying out a task of modest responsibility underlines the extent to which the values which underpin our society can be compromised,” Justice Peter McClellan said, noting the temptations the young man faced.

Indeed. What was his employer Orion Asset Management doing paying $350,000 to a kid straight out of uni? It reflects poorly on the superannuation system that workers around the country fork out almost a 10th of their wages to this rollicking super gravy train only to have young playboys hitting Vegas and shouting long leggy blondes $20 cocktails.

As far as insider traders go, Hartman was far slicker than Rene Rivkin, whose fateful trade in Qantas made him only $3000. Hartman made $1.9 million by ”front-running” Orion’s client orders. That is, he knew his firm was in the market to buy a large quantity of let’s say, Transpacific, so he would buy some Transpacific himself via another broker, knowing that Orion’s large order would push the price of Transpacific stock higher.

It was a low-risk play, financially, but high risk legally. As another fund manager noted: ”It wasn’t front-running your client, it was front-running your own fund. Stupid!”

From this reporter’s observations as a former stockbroker – albeit one of exceedingly poor ability – front-running is the most common forms of insider trading. It is ubiquitous in broking and funds management circles – and often as simple as one dealer around a trading desk knowing that another dealer has a large client order in a stock. He then buys some for himself and, if ever reproached, says: ”Okay, I did know you were a buyer of XYZ stock but, hey, I thought it was a good investment too”.

It is also common wisdom, as evinced by the fact that shares move before almost every price-sensitive public announcement, that insider trading in general is rife. Inside information, in many circles, is synonymous with ”good information”.

And as the information is transmitted mostly by ”word of mouth” it is hard for regulators to prosecute it, let alone police it. So Hartman’s sentence is not light, albeit there is no excuse for his crimes no matter how common. He was, if nothing, a prolific offender.

We will all be hearing wonderful news from the Nine Network during the next few months – the glowing stories have already begun – as Nine’s private equity owners prepare to offload the PBL TV network and magazine empire into the sharemarket.

And the PR hoo-ha will be hard to miss because Nine’s owners, CVC, will have torched about $1.4 billion. As they say in the private equity trade, 2007 was a poor ”vintage”. That was the year CVC closed the deal with James Packer. It also marked the top of the bull market.

The original deal was announced in October 2006 and closed in February 2007. CVC stumped up $1 billion for a 50 per cent stake, before debt of $4 billion – private equity gears up its acquisitions to billy-oh – and that debt has remained constant. Later in 2007 CVC bought another

25 per cent from Packer for $500 million and then – during the height of the financial crisis – tipped in another $300 million as an equity cure for its distressed banking covenant.

Nine was teetering on the brink of corporate obsolescence. Its advertising revenue was not covering the interest payments on its borrowings.

All up then, the privateer’s equity exposure comes to $1.8 billion.

Now to pricing for the float: Nine’s rival Ten Network is presently fetching an earnings before interest, tax, depreciation and amortisation multiple of seven times. PBL’s forecast EBITDA for 2011 is $570 million. If we assume Nine is refloated on the market at seven times EBITDA, that brings $4 billion in the door for CVC. It merely matches their debt.

The swing factor is the Carsales asset. It seems to have been a wise decision for CVC to have clung to PBL Media’s Carsales stake as its market value has risen. PBL owns 49 per cent off Carsales, or 114 million shares. At $4.63 a share that stake is worth $528 million. It trades on 15 times.

Taking Carsales into account then, the owners of the Nine Network and ACP Magazines are staring at a loss of $1.3 billion or thereabouts on a four-year turn. So in the next few months we’ll see phalanxes of PR people mobilised to spruik the float.