I clicked the link to download the report. The disclosure you have to agree to is very interesting:
>Prior to the initial distribution of this Report on August 15, 2019, the Company entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation. That compensation is based on a percentage of the profits resulting from the third-party entity’s positions in the securities, derivatives, and other financial instruments of, and/or relating to, General Electric Company (“GE”) (NYSE: GE). Those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease.
So there exists a class of professional services designed to temporarily crash stock prices to make short sellers money? Curious.
>So there exists a class of professional services designed to temporarily crash stock prices to make short sellers money?
Yes. The technical term is "activist short selling". The broad consensus is that it's good for the market, as it provides an incentive for investors and researchers to uncover fraud and mismanagement. Obviously someone could just make up a bunch of nonsense about a company to try and tank their share price, but that's all sorts of illegal.
I think it's valid to think of activist short selling as a kind of distributed bug bounty program for the financial markets.
I recently read that, to be a successful large-scale short seller, you have to be an activist.
You can't just sell a stock and wait passively for it to eventually go down. You HAVE to be out on CNBC and elsewhere trying to actively prove that the company is overvalued.
Look at the way Bill Ackman and Pershing Square Ventures went after Herbalife for years. Not (just) because they thought a fraud was going on. But they were trying to make billions of dollars for themselves too.
Ok, but imagine a bug bounty program where you're paid based on how damaging your website is to the product's short term reputation, regardless of whether you've actually disclosed (or even found) anything or substance.
I'll note that executives are paid based on how much they can hype a company's short-term reputation, so I think the problem isn't really with the short sellers here.
And imagine you lost your computer privileges if you made a bad call on what you found. Many successful activists are careful to make sure they’re right so their funds maintain their prowess, which may as well be the same thing.
Not really. Its illegal to lie like that and you can get sued for defamation. Plus your reputation is at stake. If I said GE is a fraud then no one believes me. But if Bill ackman calls it a fraud, that turns ears.
That's the most cynical way to look at it. Another way is, a guy discovered a huge fraud and planned to make it public. A hedge fund offered to pay him a pile of money for advance information about it.
It sounds like perhaps you aren't familiar with the meaning of "material non-public information". I've found a lot of stuff by Matt Levine on the topic interesting.
It’s only insider trading if the company is improperly using information to trade. 3rd parties can discover and trade on non-public information as long as they aren’t breaking other laws (ie, stealing information, bribing, etc).
The law is far more complex than you suggest, and I would strongly caution anyone in possession of material non-public information to consult a securities lawyer before proceeding to trade securities based on such information.
Your source largely agrees with what he said. That is, you must either misappropriate the information or obtain it from a deliberate breach of duty by an insider for the insider's personal benefit.
If you e.g. count trucks leaving a company factory and feel you know nonpublic information about the company's finances as a result, feel free to trade based upon this info.
If you can count trucks leaving a company factory without trespassing (e.g., from a public highway), then it's not "non-public" information. "Non-public" information isn't strictly a function of how widely the information is disseminated. If anyone could obtain the information without trespassing, then it's not "non-public."
It's not though. It's information derived from a publicly available source which is not quite the same thing as public information.
Often non-public information can be inferred through careful observation, aggregation, and analysis of public information or information that can be seen from a public location.
Or you can just see nonpublic information in public.
If you're at a restaurant and you see the CEO fighting with the board and then exclaim "I quit!!" --- knowledge that the CEO quit is material nonpublic information to the board. It must be disclosed in a specific way with securities filings. They cannot trade based upon it until there is public disclosure.
Let's take your restaurant example further. Suppose a Wall Street Journal reporter were also dining at the restaurant, saw the conversation going on, and then published a story about it. Would it be "nonpublic information" then? (Of course not.)
Then we have to ask ourselves, what made the information transition from nonpublic to public? Was it the publication by the newspaper? If so, what makes it different (other than the number of outsiders who know about it) than the information that was once held by a smaller group of outsiders, namely, the other people who were at the restaurant at the time?
> Suppose a Wall Street Journal reporter were also dining at the restaurant, saw the conversation going on, and then published a story about it.
This is explicitly considered by the SEC. Indeed, from their guidance on the matter-- read the last clause ;)
Of course, note this states "include" for recognized channels of distribution; there are other means by which information can become public. But "can be found out by the public" and "are broadly disseminated to the securities marketplace" are different standards.
> All information about the Company is considered nonpublic information until it is disseminated in a manner calculated to reach the securities marketplace through recognized channels of distribution and public investors have had a reasonable period of time to react to the information. Generally, information which has not been available to the investing public for at least two (2) full business days is considered to be nonpublic. Recognized channels of distribution include annual reports, prospectuses, press releases, marketing materials, and publication of information in prominent financial publications, such as The Wall Street Journal.
Also note-- e.g. your buddy Tom who has signed a nondisclosure agreement tells you that they loaded 50 trucks full of product today-- if you trade upon this you are probably committing insider trading because the information was misappropriated.
But your friend Bill who was sitting outside the factory on public land watching the loading can trade upon it freely.
You can't trade upon it until Bill's news story has been out for 2 full business days, because you already know the material nonpublic information by virtue of it having been misappropriated.
That material you quoted is not actually published SEC policy, nor is it law - it's a corporate policy that was published by TherapeuticsMD, Inc. and distributed to their internal shareholders, and included as part of a 10K filing. It provides a very conservative description of insider trading designed to keep folks at a safe distance from any activity that could be plausibly construed as such. If I were in their shoes, I might use the same definition - but that doesn't mean it's the same as the law. :-)
Yah. Sorry for that. Just grabbed something quickly on mobile.
You're right in that 'nonpublic' information isn't really defined and there isn't real SEC regulation or even a whole lot of case law about it.
I think we can probably agree that
A) there are things that someone outside the company without unlawful assistance or misappropriation could figure out and use in trading
B) while someone within the company and knowing the same things based on their privileged role could not yet lawfully using in trading, because they have not been widely disseminated and are considered nonpublic information.
Yes, I think that's a fair conclusion. More case law on this subject has been centered around the relationship between the defendant and the company. In particular, does the defendant owe the company a _duty of care_, or, put differently, is the defendant _entrusted_ with protecting a company's secrets? If no, then typically defendants have not been held liable.
Sometimes the defendant isn't even the person who traded - it's been the person who tipped off the trader, and who gained some benefit from that trade. Where the trader is family or another close relationship, such benefit is often presumed in the law.
(Disclaimer: I am an attorney but this is not legal advice. Consult a licensed attorney in your jurisdiction.)
>I would strongly caution anyone in possession of material non-public information to consult a securities lawyer before proceeding to trade securities based on such information.
I would strongly caution anyone in possession of material non-public information to consult a congressman to conduct the trade on their behalf.
I have and I do. There are nuances, but it’s a false perception that me reverse engineering a trade secret and then using it for financial gain is inappropriate.
I suggest you consult a securities lawyer before giving advice to others to consult security lawyers.
>So there exists a class of professional services designed to temporarily crash stock prices to make short sellers money? Curious.
There exists a class of professional services designed to uncover financial fraud. That's what this is (allegedly) an example of.
Investors can make money by correctly betting that a stock price will go down, hence they might be interested in funding research that uncovers financial fraud. The key point is that the stock price goes down _because of the fraud_ that was exposed -- not because someone _accused_ GE of fraud.
If someone put out a false report accusing a company of fraud with the hope of causing a temporary price drop, that would be illegal. They would be fined / go to jail and would be barred from working in the financial industry again.
For the record, I think Markopolis's analysis is wrong. Whether it was done in good or bad faith is another matter.
There are services designed to figure things out before the general public. Because companies tend not to keep good news secret, what’s left to figure out is typically bad news.
So from my understanding of what happened this investigation was initially self funded with the aim of getting paid through the SEC whistleblower program, not sure how the hedge fund got involved though. You can watch the interview with the accountant here https://www.youtube.com/watch?v=3jE10T250bo
Is it interesting? Thats what you are supposed to do.
When you don't have hedge funds on speed dial you have to try to take the risk with your own money yourself.
Wow congratulations you got a 20% gain on the $1,000 to your name.
When you make a big row about it, you protect yourself from having these disclaimers. It protects you from private litigation from people that copy your "not-advice", and it protects you from the SEC who will simply say you didn't disclose it.
The SEC is funny because they will write a line by line statement of how bad you are and how you did all these insidious things, and you ask them what you were supposed to do, and they'll say "oh, just write a three sentence disclaimer next time and those exact same actions are state sanctioned"
The causal relationship you are describing should not be inferred by that language. Note the "prior to the initial distribution." The work was already done.
Muddy Waters pioneered this concept I believe. The reason they need to partner with hedge funds is because building a compelling enough case requires expensive on-the-ground detective work. Their work on Olam is my favorite.
>“They moved their headquarters to Boston last year. My hometown. I don’t appreciate when you’re running a scam in my hometown.”
>The arrogance of that statement alone discredits his whole argument.
What? I had never heard of Citron before five minutes ago, but that's an embarrassingly terrible analysis. Do people trust the advice of this Citron with their own actual money?
edit: turns out this rebuttal was by Andrew Left, a serial activist short seller himself, who was banned from trading in Hong Kong for falsifying reports on his website. LOL.
Citron says the report didn't "pass the smell test".
It's quite a lengthy report. One could simply read it and make a point by point rebuttal. But they don't do that at all.
They say:
> The credibility of Mr. Markopolos has to be questioned immediately when he was asked on CNBC and other media why he chose GE now. To this he responded: “They moved their headquarters to Boston last year. My hometown. I don’t appreciate when you’re running a scam in my hometown.”
They then go on to frame this as a giant 'AHAH! Gotcha.' Instead of rebutting the actual report.
They then go on to claim that "Aggressive accounting" is not fraud. LOL. I nearly fell out of my fucking chair when I read that one.
HOW DARE YOU, SIR. IT'S NOT FRAUD. IT'S AGGRESSIVE ACCOUNTING.
wut's aggressive accounting?
Aggressive accounting refers to an accounting department's deliberate and purposeful tampering with its company's financials in order to outwardly characterize its revenues as higher than they truly are.
So fraud?
[HOW DAAAARE YOU!] "Aggressive accounting" .... "has helped fuel a growing economy" [AND EVERYONE DOES IT SO THERE!] (actual quote in quotation marks)
In summary, their arguments are.
- Aggressive accounting is not fraud (it is)
- Activist short selling is the real culprit (This is like blaming bug bounties for bugs in code. Even more confusing is that THIS IS LITERALLY WHAT CITRON'S BUSINESS MODEL IS. WTF!?)
- The author has a big head and we don't like him (so therefore made the whole thing up??? Or Something?)
- The CEO bought 3 million in stocks as a demonstration of his belief in GE, therefore NOTHING TO SEE HERE, WOW. 3 MILLION. MUCH CONFIDENCE!
Citron's arguments wouldn't be out of place in The Onion.
At GE's low after the report, it had fallen about 14% for a loss of $10 billion in market cap. You could interpret this as the market assigning an expected value of fraud at GE of $10 billion. The report claims $38 billion in fraud, so either market participants don't believe the accusation, or fraud was already priced in.
The stock has rebounded since, so seems like the big market voting machine thinks this report is bunk. Time will tell who is right.
yeah I'm surprised as I read through this a lot of it seems predicated on assumptions of what will happen outside of GE. I'm far from a finance guru (but I did buy some holiday IHG stock last night)...but this one doesn't read as fraud as much as a time bomb that could blow up at any moment, it just hasn't yet. Fraud is an entirely different level of claim. Dishonesty about the risk...sure...probably GAAPish'ing your way into a higher than deserved stock price...sure. But I can't even parse through the reports repetitions of the same information over and over with increasing strident bolded red text and skull and cross bones emojis what is the core thesis.
I find the title whimsical because GE actually bought part of Enron after its collapse, specifically GE Wind is a spinoff of Enron's wind energy division.
Many of Enron people also believed in their own malarkey.
Systemic fraud usually doesn't have a foundation of calculating rational actors but instead irrational exuberance and magical thinking; as if economic fundamentals need not apply.
Look at the dotcom bubble, bitcoin bubble, or the housing crash. The biggest offenders were also the biggest devotees to the dream.
I say this being a shareholder in GE. I honestly hope I'm wrong and things turn around but insiders doubling down in hope of a brighter tomorrow is a poor investment indicator signal. It doesn't mean much.
Actually he bought $3m worth two days before the report came out, and another $2m after the report came out, for a total of $5m.
Other GE executives/directors likewise bought more stock after the report came out.
More significantly than any of the above, in my opinion, is that one of the world's most respected investors, Stanley Druckenmiller, stated he bought more after the report came out:
It's even more of a signal then. If these insinuations were true, there'd be no point whatsoever to spend $5M to buy shares of the company which he knows is insolvent. It's not like if this is true his share purchase would buoy all of GE.
https://news.ycombinator.com/item?id=20705449