Zachary Barron sat on the edge of the leather armchair opposite Kat’s desk, his designer suit and tie at odds with her office’s shabby chic décor. He seemed oblivious to the furnishings and the million-dollar view outside.
Kat’s office windows framed a view of the Vancouver harbor, spectacular even in the rain. The docks were deserted, though. The giant cruise ships that sailed the Alaska Inside Passage run were gone for the season. The only waterfront activities today were a dozen plump seagulls scavenging for food.
Zachary leaned forward, his elbows on Kat’s desk. “I want you to investigate my partner.”
“Your partner? But isn’t he your—”
Zachary’s mouth hardened into a frown. “Nathan Barron. Yes, he’s my father. That doesn’t make him any less capable of fraud.”
“He founded Edgewater.” Kat knew about the father and son’s tangled web of inter-related companies from Zachary’s divorce proceedings.
“Twenty years ago. But the company he started is nothing like Edgewater today. Back then it was just small trades, mostly table scraps his university buddies threw his way. And business was drying up.”
“What changed?”
“Ten years ago I joined the company. I built Edgewater into what it is today.”
Modest he was not. “How so?”
Zachary leaned back and straightened his tie. “My proprietary trading model turned Edgewater into the second-biggest hedge fund worldwide. The financial results point to our success, but where’s the money? I had trouble settling a trade last week. The bank said we didn’t have enough money. How can that be?”
“Maybe it was a timing issue?”
“No way. For a multi-billion-dollar hedge fund, our business is very simple. We buy and sell currency using my proprietary model. Trades settle a few days later, and the brokerage fees are paid as part of the trade settlement. Besides office rent, salaries, and expenses, there’s nothing else to spend the money on.” Zachary handed Kat the most recent Edgewater annual report.
“Nathan’s always handled the back-office stuff, and I’ve done the trading. I never paid attention to the administrative side until last week when the bank said we were short. Where’s all the money going?”
Kat knew the preliminary year-end results: they had been part of the Barron divorce proceedings. She flipped the report open to the income statement page. Her mouth dropped open. She hadn’t seen the final, audited results until now. “Edgewater made two billion dollars after tax? Much higher than I thought.”
Had Zachary timed the annual report’s release to favor his divorce proceedings? Whether he did or not, it had certainly worked out that way.
“That’s my point. Where did the money go? Two billion in earnings, yet only a few million in the bank. Edgewater’s fully extended on our line of credit. Why is there so little cash when most of our trades are hundreds of millions of dollars?”
“That doesn’t necessarily mean fraud, Zachary. It could be mismanagement.” Kat was suddenly aware of Uncle Harry hovering just outside her office. He paced back and forth, his forehead creased in a frown.
“That’s supposed to make me feel better?”
“No, but we need to consider all the possibilities. At any rate, I’ll check it out. When do you need this?” Kat hoped to stretch the deadline. She glanced out to the hallway. She needed a diversion for Harry pronto.
“Yesterday. Without access to cash, Edgewater can’t operate for more than a few days.”
“You’ve talked to Nathan about this?” Kat knew things were tense between father and son from Zachary’s divorce proceedings. Her valuation of Edgewater Investments assumed an equal partnership. However, Nathan disagreed and was even contemplating legal proceedings against his son.
“No. I want you to poke around first before I talk to him. I need all the facts.”
“I can do that. What about investment losses? That could also wipe out your cash balances.” Kat craned her neck towards the hall just as Harry disappeared again.
“Impossible. We’ve had a great year. At least three home runs, and double-digit returns. We should be tripping over cash. Instead, we’re practically broke. I’m not involved in daily operations—Nathan does that—but at the trading level, I know exactly what I’ve bet on, and the percentage return.”
“What about redemptions? A few big investors cashing out could decrease your cash on hand.” Uncle Harry was back outside, clutching his checkbook. She should have known. He’d been trying to balance it for weeks, but had refused any help.
Zachary scowled. “No, exactly the opposite is happening. Investors are scrambling to get into our fund. Matter of fact, new investments outnumber the redemptions by more than two to one. The Evergreen fund has stellar returns—all due to my trading model. Our investment return is way better than our competition’s.”
Uncle Harry peered anxiously around the doorframe.
“Uncle Harry? Everything okay?”
“Uh, yeah.” Harry checked his watch and then disappeared down the hall again.
Kat turned back to Zachary. “I’ll need access to your office and all of Edgewater’s financial records, payroll—anything else involving payments or receipts. And access to the accounting system.” She checked her watch. It was just after three. “I can start tonight.”
“Great. I’ll be at the office till about ten. Nathan’s away again, so come by as soon as you can.” Zachary rose. “I should go.”
“Before you leave—why are you so sure there’s a fraud? Nathan founded Edgewater. Why would he steal from it?”
“Why else would the money vanish? Nathan is a thief.” Zachary spat the words out.
Apparently not on good terms. How did father and son manage to work together every day? A recent grudge, or a long-standing one?
“Any proof of your suspicions?” Kat leaned back in her chair, studying Zachary. Forensic accountants were a little like financial shrinks. Her psychoanalysis was based on open-ended questions. When people talked freely, they always revealed more.
“No, but you’ll find it. I’m sure of that.”
“If there really is a fraud, why all of a sudden now? Why not five or ten years ago?”
“The more successful I am, the more resentful he gets. It can’t be the money itself. He’s got all he needs. You can’t even spend the kind of money we’re bringing in.”
Harry was back again. Only this time he didn’t wait in the hall. “Kat—sorry to interrupt. You gotta help me. We need to get to the bank before it closes. I need a loan.”
“Uncle Harry, give me a minute.” Kat felt bad asking Harry to wait, but a paying client was sitting right in front of her. She turned back to Zachary. “If Nathan is stealing, maybe it’s his way of evening the score with you. Like you said, billionaires like Nathan don’t need more money.”
“You’d think he’d be grateful. The funds grew astronomically when I joined Edgewater. My proprietary trading model picks winners, and our performance is better than anyone else’s. He gets to bask in the glory without any effort.”
“What’s so special about your model? Why couldn’t he do it without you?”
“Currency speculation is part technical analysis and part gut feel. My model crunches the numbers—GDP, government debt, interest rates, and other economic data. Then it uses game theory to evaluate every possibility.”
“Game theory?” Kat remembered the mathematical model from school. Players either competed or cooperated to maximize their own individual payoffs.
“In the simplest terms, it means everybody’s out for their own personal gain, even at the expense of others.”
“I know what it means, Zachary.” Kat fought to control her annoyance. “My question was about how it factors into your model.”
“You don’t need to understand the details.” Zachary dismissed her with a wave of his hand. “My model determines the likelihood of any event happening or not, based on how rewarding it is to the players involved. Then I make my bet and corner the market. My bet alone will move the currency, because our fund is so big. But the real payoff is when traders follow, thinking it’s a sure thing. It becomes a self-fulfilling prophecy, making Edgewater even bigger profits. The other traders still score, as long as they get out before I sell my position. Then fortunes reverse.”
“You’re manipulating the currency.”
“Absolutely not. I’m just taking a position. A huge one, perhaps. But I’m no Pied Piper; other speculators don’t have to blindly follow me. Just because they do doesn’t mean I’m manipulating them.”
“But most of those followers will lose. Like a hot potato, the big players or insiders reap profits at the expense of those who buy when they’re ready to sell. Whoever’s late to the game suffers. Is that fair?” Zachary and his father were each billionaires in their own right. They had more money than ninety-nine percent of the world’s population. What more did they need?
“There are no victims here. They know my motives are to make a profit.”
“Thus weakening the currency further.”
“It’s a free world, Kat. Free choice, free will.”
“And then the government intervenes?”
“In theory. They buy up their currency to prop it up. But they can’t really control it—the currency markets do. The markets trade about four trillion dollars per day—run mainly by speculators like me. Government reserves are less than a tenth of that.”
“Huge,” Kat agreed. “So you place a bet, say, that the U.S. dollar will drop. What happens next?”
“All currency trades in currency pairs. Say I bet against the U.S. dollar. I’ll sell it at the same time I’m buying another currency—or betting it will go up. Let’s say that’s the Euro. The U.S. dollar will drop because I’ve sold more than other people are buying. The Euro will rise against the U.S. dollar simply because I’ve just bought a huge position in it.”
“Supply and demand,” Kat said. “An exclusive game only a few can play.”
“Anyone can play.”
“Only with enough money. You need a huge amount to move the market. Smaller players can only be followers.”
“Technically, yes. But people who follow me can potentially make a lot of money.”
“If they get the timing right.”
“Of course. Timing is everything. Or they can just invest in Edgewater’s hedge fund instead.”
“Isn’t the minimum investment five hundred grand? That’s too rich for most investors.”
“Maybe.” Zachary stood. “I can’t worry about other people. I focus on what I do best—making money.”
“You sure you don’t want to talk with Nathan first? Maybe there’s a logical explanation.”
“No point—he’s never around. He’s off on one of his sailing trips, or maybe big game hunting in Africa. He doesn’t tell me where or when he goes.”
Zachary probably liked it that way. He ran the business without much interference from his father. Most fraud was kept quiet. No one wanted to take responsibility for theft on their watch, and unless it significantly impacted their business and the profits of their shareholders, management usually forced the perpetrator to quietly resign. Retribution was rare: usually the money was already spent.
Kat scribbled a few notes on her legal pad. “What if your suspicions are confirmed and I do find fraud? What happens next?”
“I’ll destroy him.”