Broker, Trader, Lawyer, Spy - Eamon Javers [79]
CHAPTER SEVEN
Tactical Behavior Assessment
On August 2, 2005, a group of executives in Alameda, California, gathered around their telephones for a second-quarter “earnings call” with investors. As far as they knew, this call would be business as usual. Hong Liang Lu, the chairman and CEO of a company called UTStarcom, would walk through the numbers with a telephone audience of Wall Street investment bankers.1
With his slicked-back hair, rimless glasses, and wide smile, Lu projects an image of intelligence and competence. He began his call with a benign comment: “Thank you everyone, for joining us this afternoon. Q2 was a constructive quarter for UTStarcom.”
Lu couldn’t know that the phone call was also being patched into a room thousands of miles away where interrogators trained by the CIA would analyze each inflection in Lu’s voice. The analysts were human lie detectors, working for Business Intelligence Advisors (BIA), a company with deep connections to the CIA. They were trying to find out whether Lu was telling the whole truth about UTStarcom’s financial health. When they came to their conclusion, they’d report it to BIA’s client, an enormous hedge fund. The secret intelligence they produced would help the hedge fund decide whether to buy or sell UTStarcom stock. If the intelligence analysts did their jobs, the hedge fund would be far ahead of the rest of the market. The information they gleaned from this phone call could be worth millions of dollars.
Earnings calls are an important Wall Street ritual. They’re a direct line from the corporate boardroom to the trading floor, allowing the company to put its best spin on the events of the quarter and give investors a sense of where it is headed in the three months to come. During the calls, analysts for top-of-the-line investment houses ask probing questions of senior management, enhancing their already intimate knowledge of the company’s technical details. Earnings calls are capitalism in action, as information flows from the company to the markets, where it is used to calibrate the value of the company’s stock. Generally, the calls are open to professional analysts and the media, but anybody can dial in.
For people trained in interrogation by the CIA, an earnings call is a bonanza of other indicators about the people speaking on the line. In this instance, the investment analysts were sharp, but BIA’s analysts were about to make them look like amateurs.
The company Hong Liang Lu ran sells broadband, wireless, and handheld Internet equipment and technology around the world. It had generated more than $700 million in revenue that quarter, and although it was still losing money, that performance was good enough to bring it close to profitability. The company thought the results were positive, and the CEO seemed optimistic.
Investment analysts from Bank of America, Smith Barney, Deutsche Bank, and other Wall Street powerhouses were the official participants in UTStarcom’s call. Using their own skills, they were trying to do the same thing that BIA’s interrogators were trying to do. They had just gotten a look at the company’s balance sheet for the second quarter, and were investigating signs of weakness or unexpected strength. They thought the company’s numbers were good, but not great. On August 2 the stock price would drift down from $8.82 per share to close at $8.54. The analysts prepared their best questions to help them figure out where the price would go in coming days. Would UTStarcom emerge as a hot stock in the third quarter? Or should investors sell shares and eat their losses before things got much worse?
Lu’s opening remarks were laced with the complex jargon of the financial and technical worlds. (Only a truly determined analyst—or a spy—can penetrate a sentence like “We believe the new ASICS can take approximately 10 percent out of our cost of handsets and will bring our PAS handset gross margin back into the high teens in the next several quarters.”) He then threw open the session to questions from the Wall Streeters.
One of them, Mike Ounjian,