What if the SEC were to Launch a Largecap Fraud Task Force: the Ode to the SEC Edition

The Securities and Exchange Commission (“SEC”) recently launched a Microcap Fraud Task Force. It appears that the SEC’s efforts are already bearing fruit:

Washington D.C., Aug. 5, 2014

The Securities and Exchange Commission today charged four promoters with ties to the Pacific Northwest for manipulating the securities of several microcap companies, including marijuana-related stocks that the agency has warned investors about in recent weeks.

The SEC alleges that the four promoters bought inexpensive shares of thinly traded penny stock companies on the open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks.  They then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially.  However, these companies had little to no business operations at the time. The promoters reaped more than $2.5 million in illegal profits through their schemes.

Two of the companies manipulated in this case – GrowLife Inc. and Hemp Inc. – claim to be related to the medical marijuana industry.  The SEC has issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industries to lure investors into stock manipulation schemes.  Other schemes by these four promoters involved an oil-and-gas company – Riverdale Oil and Gas Corporation – and three other microcap stocks, ISM International, Allied Products Corp, and Aden Solutions.

The SEC was able to unearth the schemes through the work of its recently created Microcap Fraud Task Force.

“Our Microcap Fraud Task Force is taking direct aim at abusive practices and serial violators within the microcap markets like these four promoters seeking to exploit retail investors for personal gain,” said Michael Paley, co-chair of the SEC’s Microcap Fraud Task Force.  “In this case, we meticulously reviewed trading records and developed the evidence necessary to connect these four promoters and their coordinated trading efforts.”

Source: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542594818#.U-GbJvldVz7

Here are a few thoughts that come to my mind:

  • The SEC has done an excellent job recently in addressing microcap related fraud. The SEC (nor any government or private operator) cannot eliminate bad behavior, nor is it to blame for others’ wrong-doing. It can, however, react swiftly, justly, and thoughtfully in the instances of alleged wrong-doing.  The SEC is very clearly part of the solution, not the problem. It is evident to me that they have responded very effectively in many of these recent microcap fraud cases. The SEC was remarkably quick to respond to the CYNK fraud recently, contrary to claims otherwise. The SEC is very clearly part of the solution, not the problem. The SEC deserves praise and the full support of all those willing to speak up against bad behavior in the markets.
  • It remains a shame that it is far easier to earn $2 million by manipulating and promoting stock frauds, rather than exposing them. That being said, we Americans are blessed that the SEC targets the stock fraud promoters, rather than the short sellers who seek to expose them. It seems clear that the SEC is aware that for every 1 short seller who may break the law, there are likely 100s-10,000s+ longs and corporate issuers/managements who break the law via stock manipulation, fraud, etc. Nearly all the illegal profits/injust enrichment are reaped by the longs/corporate issuers.
  • If the SEC were to create a thoughtful and nimble Largecap Fraud Task Force (coinciding with similar efforts on the part of the Justice Department and certain state Attorney Generals)… one can only dream. The societal and market-places benefits would be immeasurable. I estimate the societal and market-place benefits would last for at least a generation. More on this (possibly) later.

 

“My business is to comfort the afflicted and afflict the comfortable” – Mother Mary Jones

The Greatest Victory is the one with Least Bloodshed: The Microsoft/Valueact Edition

Even former Microsoft CEO Steve Ballmer noticed a change at his company when ValueAct showed up last April, saying shares were undervalued in part because investors were overlooking Microsoft’s continued success selling many of its software products to corporations. The longtime executive credited ValueAct for helping to change investor sentiment toward Microsoft.

“Maybe starting with the ValueAct investment…there was a wave of, ‘Oh yeah those guys have a phenomenal enterprise business,’” Mr. Ballmer said in a May interview.

The other sea change at Microsoft around ValueAct’s investment was Mr. Ballmer’s surprise retirement, announced a week before ValueAct got on the board. Mr. Ballmer and other Microsoft officials said pressure from ValueAct played no role in his departure.

Source: http://blogs.wsj.com/moneybeat/2014/06/20/success-of-valueact-hedge-fund-has-dented-its-maneuverability/

 

As measured by market cap impact, it seems Valueact’s Microsoft activism has been the most effective. And they achieved it with minimal heads rolling, minimal/zero glitz/glamour, and minimal/zero Jersey Shore media campaigns. In short, the greatest activist victory (in recent memory), was achieved with the least bloodshed (and fanfare).

I believe it’s safe to say Valueact wants to remain low key, maintain a low profile (except to the extent that further attention will cultivate and bring about culture change in the investment world, specifically but not limited to, shareholder activism).

That being said, it would seem that it will be very difficult (for now) to maintain a low profile:

But its maneuverability appears to have been dented. For most of its history, stock prices of companies it took activist stakes in generally ticked down in the year after the firm disclosed its positions, letting it scoop up more shares for a discount  said ValueAct President and Microsoft board member Mason Morfit. In the last year, the stock prices of its picks have “popped” as other investors mimic ValueAct’s moves. All the attention is “to our chagrin,” Mr. Morfit added.

Here are some ideas:

  • Talk to management teams under assumed names (rather than Valueact’s)
  • Add some serious capital allocation to short selling (probably need to hire someone to lead the charge). This way, it’ll be easier to confuse market participants

 

 

Goldman Sachs, Illegal Market Manipulation, and Short Squeezes

In 2011, the U.S. Senate Permanent Subcommittee on Investigations said Salem and other Goldman Sachs traders tried to manipulate prices of derivatives linked to subprime home loans in 2007 for their own benefit. The subcommittee’s assertions were based in part on Salem’s self-evaluation, in which he wrote “we began to encourage the squeeze with plans of getting very short again after the short squeeze caused capitulation of these shorts.”
Goldman Sachs denied any attempted manipulation.
“The translation of that sentence is, you know — is very different than it was, at times, made out to be,” Salem said at the hearing. “There’s no wrongdoing in that sentence.”

 

from: http://mobile.bloomberg.com/news/2014-06-18/ex-goldman-trader-says-bonus-cut-to-8-25-million-unfair.html

Idea Generation: Revisiting Broken Investment Theses (In Celebration of 13Fs)

In 2013, long Yahoo! (“YHOO”) was a big winner for some in the activist/event-oriented world (e.g. Third Point). Yet the long Yahoo! thesis had been around … for quite some time (remember Icahn circa 7 or so years ago?). Recall Greenlight articulated largely the same long Yahoo thesis in 2011…and capitulated in 2011. Long Yahoo! was a broken thesis that transformed into a beautiful thesis.

Microsoft was a perma value play, coming up as a popular long idea in value-oriented conferences, and value circles… but it was ValueAct in 2013 that really got it right.

So perhaps the far more elegant way to use 13Fs are not to follow what other investors have done… but to look for ideas that they give up on, and bet the other way (or examine the merits of doing so). 

Remember Meredith Whitney? Remember all the negative sentiment (rightly so or otherwise) towards her in the last few years, specifically with respect to her munifinance/bond prognostications?

For some reason, this recent @MuniLass* kerfuffle got me thinking that perhaps Whitney’s broken thesis is worth re-examining. From a narrative perspective, it just makes sense –  I’m going to give it 24-36 month to come to fruition, in some form.

 

* Blessed are those who protect the anonymous. I find her outing troubling… that being said, I once followed her briefly years ago, but unfollowed her because I found her unnecessarily nasty towards others. The disrespect and vitriol I sensed in her words (towards those who have variant views) were notable. Short seller regularly receive far worse than I ever saw her receive, but nearly all short sellers simply ignore the threats, false accusations, etc.

::UPDATED on May 16, 2014 8:45 AM EST::

Perhaps a 50% haircut on WWE is reason enough to revisit its long thesis…

Third Point LLC – Letter to Investors Q1 2014

Mister Pink’s take on the markets…

The Best Remedies Against Executive Excess & Malfeasance = Activist Investors & Shortsellers

Recently, Joe Nocera politely explained how Warren Buffett’s de facto support of Coca Colas’ latest executive compensation plan seemed in stark contrast with Buffett’s past words regarding excessive executive compensation http://www.nytimes.com/2014/04/26/opinion/nocera-buffett-punts-on-pay.html

I’ve written about my mixed feelings regarding Buffett here , and am not surprised Buffett’s words and actions considerably differ. But the purpose of this post is not to criticize Buffett, but to answer the following question Joe Nocera poses at the conclusion of his editorial: “How sad. If Warren Buffett won’t use his unparalleled clout to rein in excessive compensation, how can we expect anyone else to?”

 

THE ANSWER: The entities that are naturally motivated to ferret out excessive compensation and malfeasance, respectively – Activist investors and Short sellers.

Make no mistake: there is no panacea for human misbehavior. I’m a firm believer in imperfect knowledge, and imperfect understanding. Activist investors and short sellers do not solve all corporate governance-related maladies. But at the very least, they are (in the Churchillian sense) “the least worst” answer. As a result, the public and regulators would be wise to protect and encourage the activities of activist investors and short sellers. Though both are profit seeking entities, there are spillover benefits resulting from their natural activities.

Short European Sovereign Debt , and Treat Yourself to some Currywurst, Tapas, etc. Later

The thought/idea came to mind around a month ago. Spoke recently with someone much more knowledgeable about sovvies he mentioned the idea (someone who knows more about sovereign bonds than I do, and has demonstrated ability to monetize).

Then early this morning started seeing that Spanish bond yields are than Uncle Sam’s! Uh huh. Central Banks are Omnipotent (All-Powerful) and Omniscient (All-knowing)… until the Market saith otherwise. The market will humble the ECB.

Can yields go even lower? Yes. Then what? Short more. I started shorting FaceBomb around 69, added more around 71. I didn’t get the top. Oh well.

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