Opinions

A Hedge-Fund Tragedy in One Act


James Cordier, founder and CEO of hedge fund OptionSellers.com in Tampa, Fla., June 17, 2008.

James Cordier, founder and CEO of hedge fund OptionSellers.com in Tampa, Fla., June 17, 2008.


Photo:

Tampa Bay Times/Zuma Press

‘Not being the worst stands in some rank of praise,” observes an increasingly befuddled King Lear in the second act of Shakespeare’s play of the same name. As his thankless daughters Regan and Goneril vie to see who can out-downsize dad with draconian cuts to his traveling entourage, the lame-duck king takes a bean-counting approach. Goneril offers 50 servants, Regan 25. He’ll go with Goneril.

Lear’s simplistic yet irrefutable math has played out in a peculiar parallel in the hedge-fund world over recent weeks.

First, James Cordier, founder and CEO of Tampa, Fla.-based OptionSellers.com—in a YouTube mea culpa destined to become a primer on how not to do YouTube mea culpas—announced on Nov. 18 that “a rogue wave” had “capsized our boat.” Stripping away the nautical language, Mr. Cordier seemed to be informing his 290 clients that he’d lost most, if not all, of their money—a sum reported by Bloomberg to be north of $150 million. He had made an extremely risky—but not illegal—“naked short” trade, selling unhedged, out-of-the-money call options on natural gas. When the price of the commodity spiked in late November, the losses were gargantuan and, judging from the YouTube confession, insurmountable.

To add insult to injury, some of Mr. Cordier’s investors are said to be on the hook for margin money that OptionSellers’ clearing firm put up to close those short call positions. If that’s true, these hapless clients lost more than 100% of their money. Talk about giving a windy night a rainy morrow.

A few days after the OptionSellers news broke, the Journal reported that the two lawyers entrusted with recovering the $17.5 billion Bernie Madoff stole from his investors have clawed back an astonishing 75%. That’s 10 times the recovery rate Ponzi scheme victims typically see.

Thus, in a bitter twist of irony, the Madoff victims may wind up losing only 25% of their “investment.” Lamentable—especially considering the opportunity cost of missing out on the nine-year bull market that began, appropriately, just after Mr. Madoff’s March 2009 conviction—but ultimately not devastating. Meanwhile, Mr. Cordier’s clients most likely lost everything, and in some cases, the seemingly impossible more-than-everything.

While Mr. Madoff was a true crook, Mr. Cordier’s crime was one of Icarian arrogance. Lulled into fatal overconfidence by years of successfully dodging volatility bullets, he finally flew too close to the sun on the twine-and-wax wings of his own hubris. We all know how the tale of Daedalus’ son ends. Skilled and persistent lawyers can claw back ill-gotten gains, but in Mr. Cordier’s case, there’s nothing left to claw back—only scattered feathers on the waves.

Sadly, not being the worst (i.e., Madoff) really does stand in some rank of praise. That old Woody Allen gag that defines a broker as someone who invests your money until it’s gone is suddenly not so funny. And in a paradox Shakespeare might have been proud to concoct, it seems only on Wall Street can you make out better with a Ponzi-scheming flim-flammer than an above-board high-roller.

Mr. Opelka is a musical theater composer-lyricist.



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