Arbitrage is a trade strategy to generate gains from the difference in a security’s price in different markets. You purchase assets from one market at a lower price and sell them in a another at a higher price, thus generating a profit.
A crazy application of this principle can be found in the classic Seinfeld episode called ‘The Bottle Deposit,’ in which insane neighbor mailman Newman learns that bottles and cans can be refunded for 5 cents in New York but go for 10 cents in Michigan. The scheme bonds Newman and fellow loony Kramer into and adventure that goes sideways, as is usually the case.
This scheme has been widely used in real life, but – as it happens – it’s against the law. California prosecutors say that a family that made $7.6 million from recycling materials that they purchased in Arizona has, in fact, defrauded the state of California.
Yahoo reported:
“A California family that earned millions of dollars just by recycling cans and bottles has now been accused of multiple felonies that could lead to years behind bars.
In a felony complaint filed this month, state prosecutors charged eight family members in Riverside County with defrauding the state by importing used bottles and cans from Arizona — some 178 tons in 8 months — and recycling them in California.”
Besides the money the family already made from the sales, authorities also found more than $1 million worth of ‘illegally imported beverage containers’.
“‘California’s recycling program is funded by consumers, and helps protect our environment and our communities’, [prosecutor] Bonta said. ‘Those who try to undermine its integrity through criminal operations will be held accountable’.
In the criminal complaint, prosecutors accused family members of unlawfully conspiring to commit grand theft and defrauding the California recycling program on a ‘chronic and ongoing basis’ by seeking reimbursement for out-of-state containers and containers that had already been redeemed within California.”
Felony grand theft is an offense that carries a hefty sentence in California. The three years in state prison can be increased by another three years because the family was redeeming out-of-state containers in such a massive amount.
This illegal ‘arbitrage’ capitalizes on the discrepancy in recycling redemptions from state-to-state.
When someone purchases a plastic or aluminum bottle in California, they pay 5 to 10 cents in ‘Redemption Value’, which the one can have repaid by returning the items to one of the state’s more than 1,200 recycling centers. Arizona has no such program – meaning you can buy the recycled material much cheaper.
In the classic ‘The Bottle Deposit’ episode, the math is a little different.
Kramer tells Newman it is impossible to gain a profit from depositing bottles in Michigan due to the gas, tollbooth and truck rental fees.
While insanely crunching the numbers by himself, Newman realizes that there will be a surge of mail the week before Mother’s Day to be sorted in Saginaw, Michigan.
He signs up for a mail truck that will carry spillover mail from the four main trucks, leaving plenty of space for bottles and cans to refund in Michigan, and thereby avoiding truck rental fees.
Newman and Kramer set off collecting and stealing cans and bottles.
BUT – while driving the mail truck to Saginaw, Kramer spots Jerry’s stolen car on an Ohio highway and alerts Jerry by mobile phone.
At Jerry and Elaine’s urging, Kramer diverts from the road to Saginaw to pursue Jerry’s car. Struggling to keep up, Kramer – in true Seinfeld style – dumps their bottles, cans, mail bags, and ultimately, Newman himself to make the truck move faster.
