7 ms·

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

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.

jdc 7y ago
The existence of said arrangements may be of some interest to the SEC as well.
- woah 7y ago
  Obviously they’re not very worried about that since they made the above public disclosure
stephenSinniah 7y ago
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 https://www.youtube.com/watch?v=3jE10T250bo
tlb 7y ago
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.
- jgalt212 7y ago
  sounds like they paid to acquire "material non-public information".
  - yasp 7y ago
    The information that formed the basis of the report was public.
    - pg_is_a_butt 7y ago
      The information that formed the basis of the report was buried.
  - dodobirdlord 7y ago
    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. Ex: https://www.bloomberg.com/opinion/articles/2018-10-15/insider-trading-isn-t-so-simple https://www.bloomberg.com/opinion/articles/2018-10-15/inside...
  - prepend 7y ago
    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).
    - otterley 7y ago
      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. See, e.g., https://corpgov.law.harvard.edu/2017/01/18/insider-trading-law-after-salman/ https://corpgov.law.harvard.edu/2017/01/18/insider-trading-l...
      - 7y ago
jonahbenton 7y ago
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.
rolltiide 7y ago
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"
MaupitiBlue 7y ago
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.
jdietrich 7y ago
>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.
- TheSpiceIsLife 7y ago
  > but that's all sorts of illegal There's a subset of people who find this aspect appealing.
- unreal37 7y ago
  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. https://www.nytimes.com/2018/02/28/business/dealbook/ackman-herbalife-pershing-square.html https://www.nytimes.com/2018/02/28/business/dealbook/ackman-... Ackman spent 5 years on the road doing roadshows, on TV, trying to make the case for fraud.
  - dbuder 7y ago
    I have a lot of respect for Ackman, but he got married to that trade.
  - simula67 7y ago
    And he lost
    - david38 7y ago
deleted 7y ago
[deleted]
Mengkudulangsat 7y ago
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. [1] https://www.muddywatersresearch.com/ https://www.muddywatersresearch.com/
- qwhelan 7y ago
  They're on the young side for the business and definitely didn't pioneer the concept. Also, Muddy Waters (Capital) is a hedge fund at this point.
foldingmoney 7y ago
>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.

jdc 7y ago

The existence of said arrangements may be of some interest to the SEC as well.

woah 7y ago
Obviously they’re not very worried about that since they made the above public disclosure

stephenSinniah 7y ago

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 https://www.youtube.com/watch?v=3jE10T250bo

tlb 7y ago

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.

jgalt212 7y ago
sounds like they paid to acquire "material non-public information".
- yasp 7y ago
  The information that formed the basis of the report was public.
  - pg_is_a_butt 7y ago
    The information that formed the basis of the report was buried.
- dodobirdlord 7y ago
  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. Ex: https://www.bloomberg.com/opinion/articles/2018-10-15/insider-trading-isn-t-so-simple https://www.bloomberg.com/opinion/articles/2018-10-15/inside...
- prepend 7y ago
  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).
  - otterley 7y ago
    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. See, e.g., https://corpgov.law.harvard.edu/2017/01/18/insider-trading-law-after-salman/ https://corpgov.law.harvard.edu/2017/01/18/insider-trading-l...
    - 7y ago

jonahbenton 7y ago

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.

rolltiide 7y ago

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"

MaupitiBlue 7y ago

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.

jdietrich 7y ago

>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.

TheSpiceIsLife 7y ago
> but that's all sorts of illegal There's a subset of people who find this aspect appealing.
unreal37 7y ago
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. https://www.nytimes.com/2018/02/28/business/dealbook/ackman-herbalife-pershing-square.html https://www.nytimes.com/2018/02/28/business/dealbook/ackman-... Ackman spent 5 years on the road doing roadshows, on TV, trying to make the case for fraud.
- dbuder 7y ago
  I have a lot of respect for Ackman, but he got married to that trade.
- simula67 7y ago
  And he lost
  - david38 7y ago

deleted 7y ago

[deleted]

Mengkudulangsat 7y ago

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. [1] https://www.muddywatersresearch.com/ https://www.muddywatersresearch.com/

qwhelan 7y ago
They're on the young side for the business and definitely didn't pioneer the concept. Also, Muddy Waters (Capital) is a hedge fund at this point.

foldingmoney 7y ago

>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.