101 University Photography

cial statement analysis. At the time, fund a holding of 720 shares (includ- How a group of ENE was trading around $40/share ing splits) at an average purchase price and was widely touted by analysts as of $29.40. business students being the company best placed to take The very next year the sell call was sold Enron a year advantage of accelerating deregulation taken up again, this time in greater in energy markets. urgency. A role in managing the Cayuga before the collapse To their own surprise, the team Fund is part of the required curriculum returned a “sell” recommendation based for second-year students. Two of them, By Gregory DL Morris on the strict application of the funda- Feidhlim Boyle and Tyger Park, were mental tools Professor Lee had taught assigned the energy, mining and manu- Wall Street lore says that no one them. Although the team did note that facturing sectors, including Enron. As saw the collapse of Enron coming. the eight-variable Beneish model indi- Boyle and Park settled back into the Chairman Kenneth Lay, CFO Andrew cated possible earnings manipulation, class routine that summer of 2000, Fastow, COO and their sell recommendation was based nothing was hotter than ENE, which their band of brigands had done such primarily on an intrinsic value of about was trading higher than $90/share. a good job of fooling accountants, $35/share versus the then-current price Boyle and Park were in Profes- auditors, investors and regulators that of $48/share in a 52-week range of $35 sor Lee’s analysis course two years the implosion was a shock to all. Like to $51.50/share. later, and were familiar with the 1998 much conventional wisdom on Wall Later that year JGSM started the evaluation. Again the recommenda- Street, this is not entirely true. Cayuga Fund, a live-money invest- tion was sell on ENE, but this time it In May 1998 a team of students at ment opened with $650,000. The sell involved real money. Boyle and Park Cornell University’s Johnson Gradu- call on ENE had proved prescient, stood in front of their class and made ate School of Management (JGSM) in and the fund took a modest position a case to sell one of the highest fliers Ithaca, NY, selected Enron as the sub- in ENE in December 1998 at around on Wall Street. ject of their term project for Professor $27/share. A separate purchase in The class accepted their argument, Charles M. C. Lee’s course in finan- October 1999 at $40/share gave the as did the faculty and staff supervisors.

Financial History ~ Spring/Summer 2009 12 www.moaf.org The Cayuga Fund sold its entire posi- actually happened. Our students sim- known that at least one financial firm tion in ENE at $67.38 on December ply did careful analysis that showed has approached JGSM, and sources in 1, 2000, booking a return of 129%. that what was going on with ENE was the financial sector and in academia To be sure, neither the 1998 team nor not sustainable. No one knew the level suggest there have been several such Boyle and Park saw at the time the of fraud.” contacts at other schools as well. enormity of the Enron fabrication. But Doubling its money on Enron stock The attraction is clear: pure, funda- their recommendations were hardly is certainly a point of pride, but it is mental analysis that is essentially free a lucky call. They didn’t believe the just one of many good picks made at from bias. But the devil is the details, hype, but they did do the math. JGSM and at several of the other top most importantly how to insulate the Exactly one year and one day later, B-schools in the country. Thomas says schools from liability and maintain December 2, 2001, Enron filed for he and his fellow deans have explored that objectivity, and secondly how bankruptcy. the idea of monetizing the analysis to make reporting regular and con- that students, faculty and alumni do. sistent. “We can do the analysis,” Theory In Practice “We’ve discussed it, and we’ve real- says Thomas, “and we have discussed Joe Thomas became dean of the JGSM ized that it would take resources that selling the output. But it would have in 2007, but has served on the fac- we don’t have.” to be at arm’s length. There would ulty for more than 30 years. While Occasional interest has also come have to be legal protection.” He adds exceedingly proud of the fundamental toward B-schools from Wall Street that there is nothing along those lines analysis done by the students, he is firms. Thomas says he cannot com- underway at present. quick to note that there was no sense ment on any such feelers, but it is of clairvoyance at the time. “It was mostly a non-event,” Thomas recalls. Right: Cornell student Feidhlim Boyle was part of the team that “There was some feeling that Enron analyzed Enron and advised the class was too good to be true, but no one to sell the company’s stock in 2000. was prescient enough to foresee what Opposite and below: Photographs of Cornell’s Parker Center. University Photography

www.moaf.org 13 Financial History ~ Spring/Summer 2009 University Photography Digital ticker in the Parker Center at Cornell University.

For the time being the only real donated, most comes at a discount, fund at a research university. “The Uni- money at stake is in the Cayuga Fund. and in return we help the vendors with versity of Michigan is probably most Thomas stresses that the Cayuga Fund their beta testing,” she adds. comparable to us, but that is because it “is not just play money. We do seri- According to a recent survey by was modeled after us,” she says. “The ously want to make money, and we Brian Bruce, director of the Alterna- University of at Austin also has are very proud of the return, especially tive Asset Management Center of the a trading room and a fund.” as this is an educational fund and we Cox School of Business at Southern She further differentiates among don’t use any leverage.” Methodist University in , there the educational funds. “I believe that As of May 2009, the fund had assets are at least 275 schools that have many of the larger funds hold a lot under management of $11.6 million, student-managed live-money invest- of Treasuries and are managed more according to Lakshmi Bhojraj (BA ments. Total assets under management passively. We are among the largest ’95, MBA ’01), director of the Parker were about $340 million, but that was actively managed.” Bhojraj also notes Center for Investment Research at pre-recession. “It may be as low as that many educational funds handle JGSM. She is also a classmate of Boyle $250 million now,” says Bruce. “That mostly endowment money. “We have and Park. The center was established is why we are renewing our survey and real investors. The endowment is one in 1998 concurrently with the creation hope to have results later this year.” of them, but it is not a significant of the Cayuga Fund and the school’s Most B-school funds are quite small, investor.” move from a Modernist box on the with average assets under management The Cayuga Fund uses both a quan- edge of campus to Sage College, a lov- of $1.4 million and the median hold- titative and a fundamental approach, ingly restored Queen Anne complex in ing of just $400,000. Ohio State and and a proprietary model to screen the very center of the university. the University of Minnesota had more stocks. Screened stocks are passed to Bhojraj says that Parker Center is than $20 million in the last survey, the student sector managers for funda- a state-of-the-art facility, comparable latter split evenly between a growth mental analysis. The faculty director in capability, if not size to any trad- and an income fund. Cornell and the and Parker Center director supervise ing floor on Wall Street. “We have University of Texas are the only other and manage the risk of the portfolio cool data walls with live feeds. The schools with more than $10 million. all year. This includes taking positions software and analytical tools alone Bhojraj notes that Cornell is one of as hedges and supplementing student would cost $1.8 million just for fees the few institutions to combine a full- recommendations with quant picks. at a commercial operation. Some is scale trading floor and a live-money They actively rebalance and manage

Financial History ~ Spring/Summer 2009 14 www.moaf.org the portfolio when the students are PMSI, a medical services and benefits Buffet to the effect that if you can’t not in session. The fund also has its management company for workers understand the footnotes it is because own board of directors, while the compensation, based in Tampa. “He management does not want you to. dean and the faculty director are the had a passion for the energy business, That led Boyle and Park to the Parker designated managers (equivalent to and he was a second-year student, so Center to take a closer look at the raw general partners) of the fund. seniority ruled in our company selec- data feeds and histories. “I remember JGSM is also host to the annual tion.” pulling up the insider trading chart for intercollegiate MBA Stock Pitch com- Krueger recalls that “Enron’s core ENE and it was a sea of red. It was petition held the first week of Novem- energy business was easily comparable, just crazy, unreal. I remember it very ber every year since 2003. Cornell but we really struggled to find some way vividly. There were consistent multiple placed highly in the first few years, but to compare the energy trading business. insider sales in large amounts. It was has not fared as well recently. “The The company’s business model was like an epiphany, it was so striking.” winners are based on how convincing changing, and there was a great deal of Those harsh red lights overshad- their pitches are, not on how their complexity. There was a lack of clarity owed the many positives for the com- picks perform,” says Bhojraj. “Our in the capital and trading unit.” pany, Boyle says. “This was a highly picks have done well on a perfor- The professor recalls that their admired company. Their managers mance basis, so starting this year we findings were, “no biggie. They ran were so bright, and they were in every- are going to track performance, and through their paces, made their pre- thing from natural gas to broadband also back-test our picks for the last sentation, got a good grade, and we to yak milk. Their valuation was 50 couple of years.” posted the paper online. They did times earnings. But they had lots of Bruce adds that intercollegiate a nice job, but a lot of good work debt, and they were not paying taxes stock picking and pitching competi- is done by students.” Lee stresses because they had no cash flow. They tions are growing. He notes the Texas that students don’t have any incentive had derivative contracts going out 25 Investment Portfolio Symposium is issues the way many professional ana- or 30 years on interest rates. There held every March, with the winners lysts and asset managers might. were a lot of ways that things could go going on to the CFA Institute regional The following year Boyle and Park wrong. We were not convinced there and global challenges. Doug Vieland, picked up the trail. Boyle’s father Phelim was fraud, but it was clear the finances executive director of the Association of is a professor of finance at Wilfrid Lau- were very confused, and we were just Collegiate Business Schools and Pro- rier University in Waterloo, ON, and not comfortable holding the stock. We grams says his organization is looking clearly the apple does not fall far from pitched to the class selling 100% of into several different ways to raise the the tree. The younger Boyle is today a the holding.” profile of the research conducted by principal at Tirgarvil Capital, a private How did teams of B-school stu- students at member institutions. Those asset management firm in Waterloo. dents see plainly what professional could include tracking and communi- Park is an asset manager with the large analysts, asset managers, and regula- cating the number and performance of hedge fund Millennium Partners. tors missed? They did the math. student-managed funds as well as the Boyle is quick to credit Lee with “There are three lessons,” says Krue- various competitions. providing the tools and critical ger. “First is don’t invest in anything thinking skills to him and his class- you don’t understand. Second, lever- Parsing the Red Sea mates — although not without some age can get you sideways in a hurry. All that was years into the future when stress: “those first few months were And third would be diversify. All Partho Ghosht, Juan Ocampo, Lori like drinking from a fire hose,” says those people who lost everything when Harris, Erik Simpson, Jay Krueger and Boyle. By October of 2000 the stu- the stock became worthless — it’s just Jay Vaidhyananthan put Enron’s num- dents turned to run their analysis. a very sad story.” FH bers to the test in Professor Lee’s class. “We saw weakening for ENE on the “For the capstone project of the class, quant scores. As in the earlier analy- Gregory DL Morris is an independent each team selected a company and sis, the Beneish model showed likely business journalist based in New York. applied the tools,” says Lee, now a vis- earnings manipulation.” Boyle recalls, He is principal and editorial director iting professor at the Graduate School “Also, we could not understand the of Enterprise & Industry Historical of Business at Stanford University. footnotes in the annual report. We Research, and is an active member of “Partho had an internship with an took them to Professor Lee, and he the Museum’s editorial board. He can energy company, and I think was talk- found them obscure as well.” be contacted at gdlm@enterpriseand- ing to Enron about an opportunity,” Boyle remembered a comment from industry.com. says Krueger, now chief strategist for Benjamin Graham’s disciple Warren

www.moaf.org 15 Financial History ~ Spring/Summer 2009