The Avon hoax: sign of a top?

Investors eventually came to their senses over a hoax takeover bid for cosmetics firm Avon. But not before $91m had changed hands.

Cosmetics company Avon Products was the subject of a fake bid last week. A firm calling itself PTG Capital Partners offered to pay nearly triple Avon's market price. Avon's shares shot up, but inconsistences and typos in PTG's announcement saw it discounted as a hoax within a half hour. But by then, $91m of Avon shares had changed hands.

"Why anyone would want to pay nearly triple the market price for the long-beleaguered Avon was a mystery," says Randall Forsyth in Barron's. Then again, given Avon's poor performance in recent years, and the clamour for a sale, you can see why some investors might fall for the fake bid.

The Securities and Exchange Commission (SEC) is investigating whether the Avon episode was an attempt to "generate quick profits in a sleepy stock", or malicious hackers trying to disrupt the financial system.

The incident "points to a hole in the plumbing" of America's securities market, says Andrew Ross Sorkin in The New York Times. The SEC's online database, Edgar, allows applications such as PTG's takeover of Avon to be released without verification, which caused the confusion. And could this episode be another sign of the market "entering a silly stage"? asks Forsyth.

In 1987, David Herrlinger, a Cincinnati investment adviser, appeared to make a bid for Dayton Hudson, the forerunner of Target. The stock went nuts before it transpired that there was no bid, "and Herrlinger was hospitalised" he had apparently called the Dow Jones News Service after suffering a mental breakdown. This happened a few months before the market's crash in October 1987.

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