4 ms·

Here's a downside I see: Suppose I want to place a short position on a fraudulent company, and then loudly announce that I've uncovered signs of fraud in it. A

Here's a downside I see: Suppose I want to place a short position on a fraudulent company, and then loudly announce that I've uncovered signs of fraud in it. A pretty standard procedure, right? Saving people's money from a con artist and making some money in the process. Now suppose the CEO of the company golfs with a SEC commissioner. Or there's some other relationship, a less direct one. No matter how strong the ethical rules of the SEC are, they can't ban every potential relation between a commissioner/employee and someone from a public corporation. Suddenly the fraudulent company would know precisely what it needs to do (in terms of manipulating it's own stock price) to force me to close my position.

neilv 3y ago
Interesting, and compelling. Question that might complicate: are those privately-funded exposés of fraud always correct? For example, let's say someone pushes an incorrect exposé, moving the market. When it's found to be incorrect, what are appropriate mechanisms for determining who all was involved (including verbal tips to golfing buddies), and whatever corrective action?
- deleted 3y ago
  [deleted]
- username332211 3y ago
  They aren't always correct. Any analysis that doesn't come from an employee in the accounting department of a potentially fraudulent company is an opinion, not a fact. If the expose contains no lies but is nevertheless incorrect, investors and speculators are supposed to figure things out on their own. (How often they succeed is another matter.) Sometimes they can get the help of someone like Carl Icahn who'd tweet about a "short squeeze of the century" after getting a big long position. If the expose contains lies, the SEC and the Southern district of New York are supposed to prosecute. The problem is, that even if the expose is completely correct, a fraudulent company can manipulate it's share price for quite a while until the music stops. The short seller will try to get the music to stop early, whereas the fraudulent CEO will try to continue his fraud as long as possible (thus screwing more and more people as time goes by). If he can get the short seller to a margin call, his fraudulent company will survive for longer. And with the information that the SEC has, any CEO would be able to force margin calls in short sellers whenever they wish.
  - neilv 3y ago
    Thanks. IIUC, there there are shortcomings in regulation/policing, which creates a very market-based/libertarian opportunity for private parties to also police fraud, but that private policing might be defeated if those private parties had to disclose their positions to the SEC (because some SEC personnel could leak/collude with the fraudster)? Is the core difficulty here that people don't trust government enough to handle the fraud problem? Or is it more appeal of profiting from the private policing of fraud? (Both are understandable.) On the trust angle, would it be possible for the government to earn sufficient trust? Or is there some fundamental reason people with government jobs couldn't conduct the same research these private parties are?
    - username332211 3y ago
      The problem with trust is there's existing evidence American regulators have improper relations with private corporations. There's the recent case I mentioned in another thread of the CFTC and the election-betting market websites predict.it and Kashi. Kashi (A VC rich funded startup) hired former a CFTC commissioner and suddenly the regulatory approvals of predict.it (a project by a university in New Zealand) were withdrawn. (It's a bit more complicated than that, but I'd rather not go into all the details. You can research it on your own. Perhaps you'd reach a different conclusion than me. Maybe the CFTC was behaving properly and the internet consensus is just paranoid.) Could regulatory agencies be reformed to be beyond suspicion? Probably. How? Don't ask me, I'm not a politician, I can't pretend to know how.
chollida1 3y ago
> Suddenly the fraudulent company would know precisely what it needs to do (in terms of manipulating it's own stock price) to force me to close my position. I'm guessing you don't work in the equity markets as this sentence doesn't make alot of sense. What specific mechanism are you refer to that would force someone to close a position? I mean, right now every single order that is sent to an exchange is stamped with the owner of the order and has been tagged like this since around 2001. Each brokerage is required not only by law, but also as there is no other way to know who to send shares bough to and whose account to debit. If you are worried about the SEC chairman, then why is there no concern about the CEO of IB or Ameritrade who can already do this? Like all systems, this will be audited so if the commissioner of the SEC does decide to look at your order that will be recorded and they will have to explain why the commissioner is doing something that they are not allowed to do.
- username332211 3y ago
  The mechanism is simple. Publish some very good news (a fraudulent enterprise should have no difficulty manufacturing those), do buybacks, raise the share price, get them margin called. For half the ZIRP era it was so easy to get shorts margin called (as it was done by people who had no business shorting), that shorts accidentally did it to themselves with by misusing options. Obviously overvalued companies were among the best investments imaginable (Beyond Meat, Kodak, Gamestop, etc.) As for the risk of brokers doing it, yes it's also real. But if you suspect foul play from your broker, you could move to a different brokerage. If you mistrust the exchange you trade trough a dark pool if you want to. Can you change your regulator?
  - chollida1 3y ago
    > The mechanism is simple. Publish some very good news (a fraudulent enterprise should have no difficulty manufacturing those), do buybacks, raise the share price, get them margin called. Companies can do that right now without any of this data, the CAT consolidation does absolutely nothing to change this. So again, help me understand the concern you have about this new change.
chrismcb 3y ago
That sounds like insider trading and could potentially be illegal.

neilv 3y ago

Interesting, and compelling. Question that might complicate: are those privately-funded exposés of fraud always correct? For example, let's say someone pushes an incorrect exposé, moving the market. When it's found to be incorrect, what are appropriate mechanisms for determining who all was involved (including verbal tips to golfing buddies), and whatever corrective action?

deleted 3y ago
[deleted]
username332211 3y ago
They aren't always correct. Any analysis that doesn't come from an employee in the accounting department of a potentially fraudulent company is an opinion, not a fact. If the expose contains no lies but is nevertheless incorrect, investors and speculators are supposed to figure things out on their own. (How often they succeed is another matter.) Sometimes they can get the help of someone like Carl Icahn who'd tweet about a "short squeeze of the century" after getting a big long position. If the expose contains lies, the SEC and the Southern district of New York are supposed to prosecute. The problem is, that even if the expose is completely correct, a fraudulent company can manipulate it's share price for quite a while until the music stops. The short seller will try to get the music to stop early, whereas the fraudulent CEO will try to continue his fraud as long as possible (thus screwing more and more people as time goes by). If he can get the short seller to a margin call, his fraudulent company will survive for longer. And with the information that the SEC has, any CEO would be able to force margin calls in short sellers whenever they wish.
- neilv 3y ago
  Thanks. IIUC, there there are shortcomings in regulation/policing, which creates a very market-based/libertarian opportunity for private parties to also police fraud, but that private policing might be defeated if those private parties had to disclose their positions to the SEC (because some SEC personnel could leak/collude with the fraudster)? Is the core difficulty here that people don't trust government enough to handle the fraud problem? Or is it more appeal of profiting from the private policing of fraud? (Both are understandable.) On the trust angle, would it be possible for the government to earn sufficient trust? Or is there some fundamental reason people with government jobs couldn't conduct the same research these private parties are?
  - username332211 3y ago
    The problem with trust is there's existing evidence American regulators have improper relations with private corporations. There's the recent case I mentioned in another thread of the CFTC and the election-betting market websites predict.it and Kashi. Kashi (A VC rich funded startup) hired former a CFTC commissioner and suddenly the regulatory approvals of predict.it (a project by a university in New Zealand) were withdrawn. (It's a bit more complicated than that, but I'd rather not go into all the details. You can research it on your own. Perhaps you'd reach a different conclusion than me. Maybe the CFTC was behaving properly and the internet consensus is just paranoid.) Could regulatory agencies be reformed to be beyond suspicion? Probably. How? Don't ask me, I'm not a politician, I can't pretend to know how.

chollida1 3y ago

> Suddenly the fraudulent company would know precisely what it needs to do (in terms of manipulating it's own stock price) to force me to close my position. I'm guessing you don't work in the equity markets as this sentence doesn't make alot of sense. What specific mechanism are you refer to that would force someone to close a position? I mean, right now every single order that is sent to an exchange is stamped with the owner of the order and has been tagged like this since around 2001. Each brokerage is required not only by law, but also as there is no other way to know who to send shares bough to and whose account to debit. If you are worried about the SEC chairman, then why is there no concern about the CEO of IB or Ameritrade who can already do this? Like all systems, this will be audited so if the commissioner of the SEC does decide to look at your order that will be recorded and they will have to explain why the commissioner is doing something that they are not allowed to do.

username332211 3y ago
The mechanism is simple. Publish some very good news (a fraudulent enterprise should have no difficulty manufacturing those), do buybacks, raise the share price, get them margin called. For half the ZIRP era it was so easy to get shorts margin called (as it was done by people who had no business shorting), that shorts accidentally did it to themselves with by misusing options. Obviously overvalued companies were among the best investments imaginable (Beyond Meat, Kodak, Gamestop, etc.) As for the risk of brokers doing it, yes it's also real. But if you suspect foul play from your broker, you could move to a different brokerage. If you mistrust the exchange you trade trough a dark pool if you want to. Can you change your regulator?
- chollida1 3y ago
  > The mechanism is simple. Publish some very good news (a fraudulent enterprise should have no difficulty manufacturing those), do buybacks, raise the share price, get them margin called. Companies can do that right now without any of this data, the CAT consolidation does absolutely nothing to change this. So again, help me understand the concern you have about this new change.

chrismcb 3y ago

That sounds like insider trading and could potentially be illegal.