Czechs And Unbalances

Systemic peculiarities in the Czech market--not "the ways of Wall Street"--have been the basis for Michael Dingman's and Viktor Kozeny's achievements to date ("An island breeze blows in Prague," Finance, Dec. 4).

That Kozeny could guarantee seemingly outrageous returns to investors was due to a deep discount built into the government's privatization scheme. The primary goal of Czech privatization was not to raise funds: Rather, it was to transfer enterprise ownership quickly to a broad cross-section of society. Thus, the price Czech citizens were charged--via the voucher system--for shares in state enterprises was set at a deep discount to the underlying asset value of the enterprises on offer. Investment funds knew that if stock prices approached anywhere near rational levels, the value of the shares they were managing would cover their guarantees.

That Dingman now finds himself in a position where he can reform a broad swath of the Czech industrial landscape is, paradoxically, due to inadequacies of Czech market regulation. At present, shares may be traded off-exchange and registered anonymously with a central share registry. This has led to a two-tier market, whereby insiders trade privately among themselves--at lower prices, with better corporate information, and in larger volumes than are available on the Prague Stock Exchange. Large stakes such as Dingman's can be acquired by market insiders without even corporate insider knowledge. In teaming with Kozeny, Dingman purchased market insider status. Pending legislation promises to fill many of these gaps, precluding future investors from employing Dingman's tactics.

Andrew Willow

New York

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