What does Robert's business actually do? Why is the audit so important and who/what is the connection to Mayfield? I'm not at all good when it comes to financial/investment firms, especially how they appear to be done in the US. Thanks in advance!
shareRobert's company was an investment and trading company; it invested in a number of different things (including the copper mine in Russia which got it into trouble).
It also invested in mortgages and derivatives.
The audit is important because he lost $400 million dollars on the commodities market hedging his copper mine. A company can't lose $400 million dollars and expect to fetch top $ when it comes time to sell the company, hence his big cover up/fraud.
The audit is an important step for Mayfield buying Robert's company. An audit lets a buyer know what the assets of the company are, and whether it is financially sound. That's why Robert is committing fraud by trying to hide his $400M loss for the audit; his company has to look good for the audit or else the sale will never go through.
You must be the change you seek in the world. -- Gandhi
I don't understand why Mayfield's signing of the agreement was such a turning point. Wouldn't Miller still be liable to prosecution as soon as it was discovered he had shifted money in and then out of the company to falsely make it appear viable/profitable?
shareYes, but only if Mayfield exposes it. It seems the scene in the car where his lackey tells him he did an independent audit and found the hole, Mayfield decides to proceed, therefore no discovery would occur. I guess Mayfield saw the exposure to be a bigger liability than the fraud itself.
shareSurely if it went to court, Miller would have earned enough money from the sale to cover the $400 million debt and any fees. He would still have his personal fortune
shareI didn't understand this scene, could you explain it further? Why was Mayfield so accepting of the 400m$ deficit? He did say to Miller he had expected to pay 600m but that's still a loss of 200m.
shareI suspect it doesn't make sense, but is rather designed for dramatic effect. The situation that we are told about is quite complicated, however.
1. Miller invested in a Russian copper mine, but with a change in Russian government, he now has trouble getting the money out. This, however, isn't a loss as such, and he would still be entitled to list the investment in his books.
2. He hedged the copper mine. This would mean he was betting that the price of copper would fall. If the copper price rose he would have lost money, but on the other hand his stake in the copper mine would be more lucrative - at least on paper.
3. To cover his loss of $400 million, he did two things: (a) he inflated the profits of some arms of his business, (b) he took a secret short term loan from a friend. The loan is described as being to show auditors he had money in the bank. This doesn't make sense to me, but perhaps I am wrong.
4. At this point he was so short of cash he couldn't make a donation to the hospital. This makes no sense. None of his businesses could function if he was so short of cash.
5. As soon as he sold his business to Mayfield, the problem was solved. The lawyer indicated that he cannot now face serious charges. I don't understand this.
6. Mayfield found out about the $400 mil loss, and wasn't concerned or even surprised. Miller had said that Mayfield's business was in trouble and he really needed to clinch this deal. Perhaps he can't afford to tell the market any more bad news, but the implication is that he hasn't lost any money. I don't understand this.
The audit showed the missing $400 Million. Miller is not going to expose this fraud because he needed to clinch the deal, as you noted. When the sale goes through, Robert now has the $400 Million to plug the hole. He gets to keep the rest, and Miller gets a company whose books now all check out. The sale did solve things for both men.
You must be the change you seek in the world. -- Gandhi
Jack-Upland explained it well, though he's misunderstood it a bit.
The copper mine is key in the entire failure of the business:
1) He's invested in a copper mine that's become a liability - it's worth next to nothing because a) they can't export the stuff due to a hostile government, which means b) there's no market, and no market means there's no sales, and no sales means there's no income, hence, it's a loss.
2) He's hedged the copper mine by trading in future contracts on the commodities market - a future is basically an instrument that allows the holder to buy X at a set price today at a future date. Miller hasn't bet the price of copper will go DOWN, he's bet that it'll go UP -
3) He's hedged the copper mine on the principle of output, i.e. if the copper mine produces not that much, and therefore it has a poor return, it means he use his futures contracts to buy copper at a set price and then sell it thus making a profit. If output is much greater, then it means there will be a greater rate of return on his investment with increased sales - the supposition being that the price of copper will slightly fall, thus making his futures either worthless or nominally valuable.
4) The hedge he made was unauthorised - basically he committed fraud by fraudulently using investment capital. Because the mine failed and he's exposed to liabilities in the futures market, he's had to plug the hole by using deposited cash from one of his friends.
So because his mine investment is screwed, it means his hedge is screwed - he failed to adequately evaluate the potential of a hostile Russian government.
I don't see how the output of the mine affects the world copper price. I would have thought he would try to hedge against a fall in the price, which would make the mine less profitable.
My recollection is that he can't get the money out of Russia. But even if it's true that he can't export the copper, surely he can sell it in Russia.
He could sell it, but if the mine doesn't have an income then it's worthless. Pretty sure he said he couldn't export the stuff, which would make sense because if he could export, and the mine had an income, then it'd still have a value and be an asset on the company accounts.
To be honest, he could have done either - it's just a film and I think a detailed account of his trades is pretty superfluous to the film!
For example, the output would affect the price of copper through supply & demand - an increase in quantity would see a decrease in price. In which case he could buy futures contracts based upon that principle to protect his investment (what I said above). He could have bought futures contracts against his specific mine to lock in a price for the copper and hence 'hedge' against a fall in price (what you said), but that would mean having to potentially sell for a smaller profit if the output was very high.
Tory, You're close but missing it.
The hedge (the futures) was to lock in the price of copper he was selling. If you have a mine and are producing copper at a minimal cost and can lock in significant premium, you don't even need to worry about the price going down. Supply and demand no longer apply for the most part. (when talking commodities) All you need to do is produce, hence his "printing money" comments and "nothing could go wrong" attitude about it when describing it. Output would not be impacted at all - yes he's limiting his upside to remove the risk - that's the entire point of a hedge.
Whether he was using the proceeds of the sale to plug the hole was a bit confusing - it makes sense in retrospect though when he says he would have taken $400 for the company. He's rubbing in his face the hole he'll later find out about.
The reason the buyer didn't bring up the hole is because of the damage it would do to his company and his job. Easier to continue the lie.
RE: The $400m in question...
My interpretation was that there was a hole in the business due to the copper, he borrowed the funds from a friend to plug it up so the sale would proceed and was going to repay it - with his own proceeds of the sale - as soon as the business was sold .
Miller said something to his daughter along the lines of 'at least we'll get to the keep the house' which (to me) says he was just interested in surviving and leaving those around him relatively unscathed (shareholders etc).
Since there were actually funds in the business to plug the hole, I can't imagine this would have been legally transferred out as soon as the ink dried which affirms my impression that Miller was repaying it from his own money and that is why Mayfield wasn't concerned.
The point I made earlier still stands.
So long as he owns the copper mine he can still list it as an asset. Even if it is idle, which is not what the movie says, anyway. There is such a thing as a non-performing asset. This mine clearly has a lot of potential, and if he is really unable to operate it, he should just sell it. Is he really unable to find a buyer for a copper mine???
My impression was that he couldn't take his money out of Russia. That's inconvenient, but it's not a problem for accounting. The money's sitting in a bank account in Russia. He is perfectly entitled to put that on his books. And as a smart businessman he should be able to wrangle something anyway.
If the problem is that he can't export copper, which is what everyone else thinks, then he should still be able to sell copper in Russia, which is a vast country with a lot of power lines, heavy industry etc. Again, no problem.
To sum up, the copper mine seems to represent a cashflow problem, but not a balance sheet problem, and the cashflow problem should be something that such a powerful businessman could get round.
With regard to the hedge, I don't believe this copper mine is going to affect the world copper price. It's not that big!!!
As stated before, the business aspects, including the title, don't stand up to scrutiny.
it's russia. Vlad putin said, your money is mine now. He has done this to many american corporations doing business there
shareExactly. To simplify it think of it like this (forget the mine, it's worthless and is a red herring to set up the scenario of him needing to close the deal quickly and doing so without scruples);
There is a company "CO", and three people involved X, Y & Z (the figures might be wrong, I can't remember the exact amounts)
X owns CO
Y wants to buy CO
Z is a very wealth associate("friend" would be pushing it, as he is clearly making money from the scheme), and knows X.
X made a bad deal (the mine, a write off) and lost $400 million from CO's accounts
Y wants to buy the company, but is unaware of the loss
Z lends X $400 million to plug the hole and they do some creative accounting to make the loss disapeer (which is what his daughter discovers)
Y buys the company for $525 million (as he says; he would have accepted 400 million, the amount needed to pay back Z before he recalls his loan from the escrow account)', most, if not all, of this money goes to X. X then pays Z his 400 million back (plus interest) with this money, leaving the original 400 million (by way of Z) in the company.
Y finds out about the loan after buying the company, at this point the assets (400 milllion) is still in the company. It's not in his interest to disclose what X did because CO is turning over a healthy profit, he hasn't lost anything personally because the money Z paid into the CO account is still there.
I read the whole thread, and from your explanation, I understood the business transactions.
Thanks Pioflife for that clear explanation!
What did any of it have to do with arbitrage? Was that just a fancy name to use for the title because most people don't know what it is but they've heard of it?
shareEnglish_Tory has it right, particularly in his item #4. The fact that he cannot get the money out is secondary. His fund is not chartered to invest in mines. Yes, this little fact is very important to the SEC. You know that prospectus you get before you invest in a fund? It legally limits the types of companies that a fund may invest in.
So if Miller had been able to get his money back out of the mine, perhaps he would have been able to hide this violation. I assume he had thought of a way to do this before he ever invested in the mine.
Now that he cannot get the money back out, the investors are definitely going to find out about this illegal use of investment capital, and also are going to be angry about mismanagement -- loss of that capital.
As for selling to Mayfield, we are not told what Mayfield's connections to Russia are. He may have ways to get the capital out. He may already be heavily invested in Russia, and able to transfer the capital.
Didn't read every post, but as far as Mayfield's motivation:
He's a CEO with an $18 million /year salary, and who knows how much of a retirement bonus in the future. The last thing he wants is to look foolish to his board and stockholders. So, when presented with evidence of a $412 million cover up, he immediately decides to ignore it. If he were to act on it, they'd he'd be the guy who just bought a company in financial trouble, and that would ruin his reputation.
It's like in the art world: If you buy a Picasso for $20 million, then later find out it's a fake, you just keep your mouth shut, hold onto it for 5 years, and then sell it for $30 million.
Thanks for the explanations, the financial stuff is all gibberish to me in these movies anyway.
I look at things like this as a "Maguffin", a plot device to move the story along.
lol, strlslvr987, you are so right. Especially since the plot was such a rehash of many other movies for the last 80 years . . . the point was to see the protagonist's reaction, rather than our overanalysis of the legal and financial aspects.
shareYou and many other investors give Miller $1000, next year and every year he gives you back $154 dividend and, supposedly you can withdraw your $1000 anytime. But what if they don't have the cash to pay you because half of it is locked up in Russia? Miller's staff would be busy investing in various businesses and securities to achieve higher rates of return than banks pay. Bernie Madoff was similar but wasn't actually investing well rather using investor money.
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