Venture Capitalist Made Some Pretty Good Deals for Himself
Where nobody knows what a thing is worth, there are more opportunities to find buyers who are willing to pay way more than sellers want. When that happens, the value of making a deal can be really large, and the services of a middleman can be really valuable. And the temptation for that middleman to take all of the value for himself can be overwhelming.
A lot of people succumb to temptation! There is the case of Jesse Litvak, the former Jefferies mortgage-bond trader who was convicted of fraud for conducting negotiations in that vein. There is the case of Yves Bouvier, an art dealer arrested in Monaco for allegedly doing something like this with a Modigliani painting. If you are a middleman in opaque markets, your whole value-add is knowing the buyer and seller and their respective reservation prices. And one way to measure and be compensated for your value-add is to just take the difference between those prices for yourself. If the seller’s reservation price is $1.5 million, and the buyer’s is $3.5 million, then there’s two million dollars of value to be gained in the transaction. By someone. Why not you?
Well, one reason would be that this sort of thing can stray perilously close to fraud, as, you know, those fraud cases suggest. Different markets have evolved different norms about what you can and can’t say or do in your efforts to capture that spread, but none of them seem all that clear. Generally speaking it’s a bad idea to outright lie: You can maybe insinuate that you’ve got a seller at $3.5 million and a buyer at $1.5 million, or be strategically vague about who your seller is and where exactly you’re sourcing your thing, but you shouldn’t literally say the words, “I have a seller who’s demanding $3.5 million,” if you don’t. At least don’t put it in writing. But I emphasize that this is not legal or ethical advice and that the exact rules applicable to bond traders, or art dealers for that matter, are very much contested territory these days.
On the other hand if you’re on the board of directors of the seller, and an investment adviser to the buyer, then all of this is right out. Definitely don’t do this (conflict of interest!!!)