After reading this book, I found myself digging through earnings reports to look for signs of shenanigans, and have found cases that raise my armchair-accountant eyebrows.
It's really fascinating. If you're willing to dig into the financial statements (and ones from the past), you can learn a ton about how a company defines "performance" and whether or not it's reasonable.
Despite GAAP accounting rules, there is enough gray area for companies to hide a lot of bad information.
It's pretty interesting to study the mechanism of the fraud. Enron did a lot of things, but one of the big ones was how they booked revenue. Since they were a middleman, they should have booked their cut (i.e. fees) as revenue, but rather they booked the entire purchase as revenue, drastically inflating their growth.
Short their stock?
Raise awareness of their fraud, while holding a short position?
> Transcripts of conference calls with stock analysts can also be revealing. If the company keeps moving the goalposts, then be on alert.
They are for me, apparently because I'm using cloudflare's DNS service, and cloudflare is returning its own IP when I query for archive.vn's.
$ dig +short @188.8.131.52 archive.vn
$ dig +short @184.108.40.206 archive.vn
$ dig +short @220.127.116.11 google.com
I believe the film is currently streaming on Hulu.
But what happened since? The film was released in 2017 (BABA around ~90) and now the stock is trading around ~195.
So if you offloaded your stock, you'll have lost on some nice gains. It's worse if you have shorted: It'd have been a real hustle and it's not clear when the stock will correct.
So it is risky no matter what, just perhaps risk/reward ration increases maybe?
Even when applied to large number of real companies' journal entries, the amount of false positives is overwhelming.
> In indictments involving the case, prosecutors said HBOC sold software or services to more than a dozen hospitals with conditional "side letters" that allowed the hospitals to back out of the deals. The side letters were then hidden from auditors and the transactions were reported as sales.
McKesson (and perhaps other pharma wholesalers) also played games by timing invoice payments and chargebacks to increase quarterly growth.
Edit: Another tactic is hiding rebate and chargeback transactions in numerous ~unauditable spreadsheets, stored on individual employee machines. Or even only as hard copy.
a few links
Ideally, auditors would verify the legitimacy of a transaction with the counterparty. As in, physically visit their office and speak to the person whose signature is on the contract.
Unfortunately, this is impractical when there are hundreds or thousands of such contracts every year. There aren’t enough auditors and there’s not enough time. So mostly, auditors rely on the assumption that they’re not being provided with falsified documents, and they’re not being lied to.
Unfortunately, that’s sometimes (often?) just not true. Even though it’s illegal, it’s still highly vulnerable to exploitation.
The Match King
The Smartest Guys in the Room
Billion Dollar Whale
Also, famed short seller Jim Chanos teaches a class on frauds and recently posted this short list of recommendations: https://twitter.com/WallStCynic/status/1256962642499035137?s...
it would help rebalance the legal system toward the service of people over corporations.
Do you have something else in mind? A discussion here could be very interesting!
built on Neo4J, that's how I know about them.
on edit: you might also like to read https://commons.erau.edu/cgi/viewcontent.cgi?article=1401&co...
There were initially created to combat civil rights cases. For a long time, minorities who were seeking legal relief against large companies could not afford to mount legal battles.
The class action lawsuit was created as way for plaintiffs to pool resources and incentivize lawyers to take these kinds of cases. Only later on was the class action lawsuit applied to regular civil cases.
Which probably isn't that much of a gain. Finding a company that seems shady doesn't appear particularly difficult.
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If so, then this would be a very good stock to short.
As I understood it, the idea was that to perpetuate a financial fraud, a criminal relies on being present and able to intercept / continue feeding fraudulent information to others and not be discovered. Or maintaining some fraudulent trading position.
The tactic I liked about this was the thinking about what's required to perpetrate a fraud, and make the conditions difficult or impossible for someone to go undetected.
Rather than retroactively finding the fraud and just trying to detect it better when it has already happened.
Nobody would be upset if you bought a company you thought was undervalued and told other people they should buy it too.
However short selling companies before dropping your investigation is a massive conflict of interest. Muddy waters is incentivized to produce a scandalous hit piece, rather than necessarily do fair or accurate reporting. They will make money regardless. The damage their reporting does may make a self-fulfilling prophecy, ensuring they don't get a reputation hit for inaccurate scoops.
I'm surprised the economist didn't even include a nod to the potential manipulation going on here.
I recorded one once on TV, and carefully went through the spiel. It was fairly complex, and I was suspicious it was hiding something. Turns out, it relied on tricking the other party into accepting a bond with a maturation value of $10,000 instead of $10,000 now. The money was made on the difference.
More generally, one should be suspicious of anyone whose business model is not "get rich doing X" but rather "get rich by selling the secret of how to get rich doing X".