
BR Shetty: The rise and fall of a billionaire - danso
https://m.economictimes.com/nri/nris-in-news/br-shetty-the-staggering-rise-and-incredible-fall-of-a-billionaire/articleshow/75381757.cms
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gwern
> But on that day in August, when Muddy Waters tweeted that it would release a
> report about an accounting fiasco at a London-listed firm, Block noticed an
> interesting development: the stock of NMC Health dropped. “We had tweeted in
> advance an innocuous comment about our intention to initiate a campaign the
> next day on an unnamed London listed firm. NMC happened to drop
> significantly on the tweet. That’s a pretty strong indication that the
> market knows something isn’t right at the company, so we took a look….”
> Block told ET Magazine in an emailed response. What they found was not
> pretty.

That's the most interesting 'event study', as it were, I've heard of since the
Challenger or Alchian's nuclear bomb market study.

It's amazing the things that the market 'knows'. I sometimes wish that event
studies could track down the specific traders responsible and understand what
exactly they know and how they learned it, because it otherwise is such
voodoo.

~~~
hn_throwaway_99
I was confused about this comment, and wish the article explained it more.

When Muddy Waters first put out the tweet, were they:

(a) planning an investigation of NMC, and the market validated their
suspicions when the stock dropped?

(b) planning an investigation of another firm, but then when NMC stock dropped
thought "Hey, did we just freak out a bunch of in-the-know traders that
something fishy is going on with NMC?" and then start the NMC investigation
based on that? If this is the right answer, what was the other firm they were
planning to investigate?

(c) not really planning an investigation of any firm in particular, but threw
out that tweet in the hopes that someone would bite, and when NMC traders
"bit" by selling, that's when they started their investigation?

~~~
jsanford9292
Looks like (b) is the answer. They released this tweet on Aug 7, 2019 (the
next day after announcing they were targeting an LSE-listed company):

[https://twitter.com/muddywatersre/status/1159009866020618241](https://twitter.com/muddywatersre/status/1159009866020618241)

Pretty amazing that they went through and took a look at all the companies
whose stock prices dropped from Aug 6-7th on LSE as a sort of "business
development" opportunity.

~~~
hn_throwaway_99
Thank you! So in my opinion that is even more impressive, and actually
somewhat hilarious. They sent out the tweet which was about prepping to short
Burford Capital (which apparently had such non-existent governance as the CEO
is married to the CFO), then the NMC traders all went "Oh shit, he must be
talking about us!!"

It's like the old trope where the accuser says to a group of people "I know
what you did!", and then everyone in the group confesses to various misdeeds
even though the accuser was only talking about one of them.

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wozniacki
Fascinating story.

I wonder how much of this stuff goes undisclosed in various parts of the
world.

Is there a site / publication that maintains a rogues gallery of such
financial misadventures ( to put it lightly )?

American Greed on CNBC [1] covers some petty ( in the scheme of things )
frauds and fraudsters. Netflix's Dirty Money [2] is another good show. But
there is good reason to speculate that much bigger whales never really get
caught if they get their accounting / creative financing ducks in a row.

Surely there are other publications / shows that get into the nitty gritty &
gory detail of how they pulled these off.

[1] American Greed [https://www.cnbc.com/american-
greed/](https://www.cnbc.com/american-greed/)

[2] Dirty Money
[https://www.netflix.com/title/80118100](https://www.netflix.com/title/80118100)

~~~
hogFeast
Haven't seen American Greed. Dirty Money is mostly terrible and fictional (I
was involved in one of the stories, you had people on that program claiming
they were involved who I have never heard of...Netflix docs are usually very
sensationalist/inaccurate).

In other parts of the world, HK being a good example, this happens and can go
undisclosed for a long period of time. But in the US, actual fraud is almost
always discovered quickly, and there are no bigger whales who never get caught
(the reason these frauds work is the difference between what you can get away
with temporarily and the long-run...in the long-run, you won't get away with
it). There are books (and now reports) on pretty much all the big frauds.

The exception to this are all the earnings management and reporting
shenanigans (for example, choosing to close an acquisition on a certain date)
or managers/bankers who list shitty companies constantly. None of this is
illegal of course, it isn't damaging in itself but it is also not particularly
ethical. Knowing about this is usually market knowledge i.e. following a
company for a while, and seeing that the CEO is constantly changing
strategy/lying, etc. This happens far more often than people think, and is
almost never punished (in fact, these people are usually feted in
society...they go after fame, they know how to claim reward and divert blame).

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coolsank
Having grown up in the United Arab Emirates in the 90s, I've personally seen
the growth of NMC / UAE Exchange along with other firms (GEMS Education Group,
the Lulu Group, Danube etc.) that are giant corporate entities. This story arc
isn't going to be the last of what we see from firms that saw such growth. One
of the biggest hurdles with such firms listing in public stock markets
internationally is the lack of corporate accountability / governance in their
home markets. As much as I'd hate to say it, building and growing companies in
tax havens such as Dubai helps them only to develop corporate cultures to
brush off problems under the rug that come to bite them later. Because they
don't have to pay taxes, there isn't a government entity they need to be held
accountable to. One of the few reasons where having an income / corporate tax
system might just help public shareholders. As always, this is all anecdotal.

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denzil_correa
> A private investigation revealed it might have understated its debt by $4.5
> billion in 2019. Shetty’s financial services firm Finablr, an LSE-listed
> enterprise that owns the remittance firm UAE Exchange, has discovered that
> $100 million worth of cheques were issued from the company without the
> board’s knowledge.

The interesting question here would be - Who should foot the bill? The
shareholders can only take action based on data they have in public. It's the
job of govt agencies along with the corporation to ensure that the data is
appropriate. Now, you have people investing into equity based on data ...
which was falsified.

~~~
Retric
Shareholders should discount companies without proper financial audits. The
trade off in theory is higher risk for higher rewards without that overhead.
In practice that’s not what happens.

It’s really several short and long term feedback loops. If the market is
efficient then excessive due diligence is a waste and a low overhead ‘dumb’
investment strategy is ideal. However, should everyone take that stance
company management has huge incentive to cheat and fleece that dumb money.

If dumb money is being fleeced that pushes for regulations while ‘smart’ money
has higher profit. But, should those regulations work they get torn down as
excessive wastes.

~~~
denzil_correa
There should never be a company that runs for an extended period of time
without proper financial audits. It is THE job of regulators to ensure
appropriate audits. NMC Health IPO'd on 2012 and the fraud was found in 2019.
Muddy Waters a private research firm was able to discover the fraud which puts
into question the regulators here. One can't just simply push responsibility
of audits on the "reward - risk" line to ordinary folk.

~~~
Retric
Which regulator’s job do you think it is to audit all public companies every X
years, and based on what laws?

There are rules around audits, and it’s illegal to do specific things in the
US. But enforcement is reactive not proactive.

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superasn
Much easier to read this version:

[https://outline.com/8AGwZC](https://outline.com/8AGwZC)

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jsanford9292
Unpopular opinion but to me this reinforces the massively important role of
short sellers in free markets. Yes they are often on the wrong side of these
"exposés" (Tesla comes to mind) and can create some harm in those cases, but
being able to uncover frauds affecting tens of thousands of people is
extremely valuable. These frauds may have lasted years and years longer and
caused much more damage if not for firms like Muddy Waters.

~~~
sk5t
Why are shorts necessary in the presence of put contracts?

I think the problem some folks have with short selling is that it creates for
the market an illusion of willing sellers where there may not be supply.

~~~
rahimnathwani
It's analogous to the reason coal was necessary even after we had electricity:
short positions enable the production of put contracts. By selling you a put
option, I'm taking a long position on the underlying stock. So I probably want
to hedge that by selling a bit of my existing stock. But if I don't already
own stock in that company then, without short selling, I can't provide that
liquidity.

Short selling typically involves the sale of borrowed stock, mediated through
dealer-brokers, so the stock that's sold short does exist. So there's no issue
with supply.

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vadym909
Seems like Muddy Waters Research has been dong this successfully for a while.
Seems like Ehealth is their latest target, interesting model.

Is there a similar model for common investors to benefit from such research
instead of just hedge fund (big) investors alone.

~~~
graeme
Not really. The idea of doing the research is you can get into a short
position cheaply. You then announce it, and the stock likely drops. This
raises the price of a short position.

Before the short is announced, the research is private information. Once it is
announced, everyone knows about it, and so much of the profit potential is
gone. There’s still some profit potential to following them, but it is much
riskier.

The only real way to benefit from this would be to do your own research.

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1cvmask
Fascinating story of fall from grace.

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known
Many more similar scandals in India
[https://archive.vn/1X1Un](https://archive.vn/1X1Un)

