Dialectic Capital Management, LLC is a hedge fund, based in New York. Although not well known, the fund has a very interesting way of uncovering shorts. Sources familiar with the CEO tell us that he has a very good way of uncovering frauds. The latest fraud that the fund has a short position has recently been delisted.
First more on the CEO….
Part of his method’s to uncover frauds consisted of the following (in short):
He used to go to Las Vegas and go to tech shows. He would look for the most unscrupulous CEO’s and investigate the companies the companies. He would also look at the ceo’s past careers and hone in one companies that had gone bankrupt under their helm.
The fund is short several interesting names:
Chinacast Education Corporation (NASDAQ:CAST) was a company that the hedge fund was concerned about management, but the more the dug in the worse the situation was.
A group of investors gained seats on the board but were preventing from entering corporate headquarters in Shanghai by management. The court fired the CEO, only to have the office raided, and a few employees beat up. This shows how corporate Governance and investing in China itself is an issue.
In June, the SEC goes to trial with Deloitte Touche Tohmatsu, also known as DTT. A different division of the SEC sued DTT. If the SEC wins, no US listed companies would be allowed to use DTT. Additionally, it would force a restatement of all DTT’s previous audits.
Multi-Level Marketing – is a sector the fund has been short. Many are scams which prey on the most vulnerable people. The fund compares MLMs to publicly traded Ponzi schemes.
An example is Herbalife Ltd. (NYSE:HLF) shake; the company had billions in revenue, despite the fact that few people have ever drunk those shakes. Additionally, no-one can find distributors; the drink is gross and the company is a scam, setting up a quasi-pyramid scheme.
The MLM stocks have a common theme: stock prices increase despite fundamentals, until something some catalyst comes in to change the public’s perception.
In this case, the catalyst was David Einhorn, CEO of Greenlight Capital’s question on the company conference call. The question got to the key of what the company does; regulations require 70% of sales to be made outside that network, the company has been labeling customers as distributors to avoid this scrutiny.
Brookfield Asset Management Inc. (NYSE:BAM) and Canadian Housing are another short. Brookfield to using aggressive assumptions for the cross ownership in the underlying assets. Brookfield Residential Properties has a large percentage of their developments in Alberta Canada. Brookfield Residential Properties changed its revenue recognition policy recently to include loans to developers as revenue. This caused DSO’s to spike. While researching Alberta, the fund noticed the high exposure of Brookfield to the Canadian housing market, and it appears to be overvalued.
Canada recently has allowed the Canadian Mortgage Housing Corp (CMHC) to guarantee high Loan LTV loans. The total number currently stands at $600 billion, which could be a big problem for Canada going forward.
China is another short. Recent sales and remarks by companies like Caterpillar, show clear evidence of a slowdown. Shorting Australian miners are a way to profit off of this.