> 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.
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?
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.
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.
My reading of the article is that Muddy Waters first performed some quiet investigation, then established a short position with respect to NMC, then subsequently sent out a vague tweet concerning a report Muddy Waters would release the next day; certain market participants suspected NMC would be implicated in the teased report and sent the shares a-crashing.
That seems somewhat unlikely. Only a few insiders would realize the full dimension of the accounting fraud or the implications of some obscure figures, insider sales are reported and ones which aren't part of pre-planned sales are often noticed, to singlehandedly tank the stock would require a lot of sales, and why would these insiders be avidly following the tweets of a relatively obscure short-seller and instantly commit a large fraction of their net worth to a sale based solely on the possibility that a random tweet refers to them?
Hard to tell without knowing what happened to other like companies. Perhaps they all went down on the news? If so it wouldn’t make me feel any better About those others.
The whispernet is strong and favors those in the right cliques in after work drink scenarios. Guess when people realize the whispers are true it leads to market behavior indicative of the implications before.
That's true, but as the example of Muddy Waters shows, a good investment analyst who focuses on frauds can find enough evidence to short a stock without relying on anything except public information. It's entirely possible that NMC was someone's short thesis and the tweet from Muddy Waters gave them enough new information that they decided to trade.
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.
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).
> 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.
GE would be good example of this. It was never really "caught". Maybe because it was too big to fail. Jack Welch who started it all still has huge fan following among Process/MBA types.
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.
> 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.
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.
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.
“The government” should use their surveillance facilities to penetrate companies like that and destroy them before they start hemorraging taxpayer money.
I am surprised they still haven’t used that as a way to justify surveillance policies.
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.
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.
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.
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.