Infitialis

I’m not sure if it’s something in the air, but there’s been quite a wave of “twitter fights” recently. A heated conversation between John Hempton and “Infitialis”, seemed like yet another frivolous fight. If you read through the conversation carefully, however, you gain a rare glimpse into some of the philosophical differences of opinion that exist among certain short sellers:

@Infitialis_ And why would you want to do that? Seriously. Are you a victim? Are you a short-seller. Do you need and crave a crooked market?

— John_Hempton (@John_Hempton) June 19, 2013

@Infitialis_ Yes and the NASDAQ/NYSE people are often just graduated penny stocks…

— John_Hempton (@John_Hempton) June 19, 2013

@Infitialis_ Absolutely. I wake up every morning and pray for incompetent regulators.

— John_Hempton (@John_Hempton) June 19, 2013

@Infitialis_ It would be very bad for my business if stock fraud were properly punished. Then there would be less of it.

— John_Hempton (@John_Hempton) June 19, 2013

@Infitialis_ Microcaps don’t move the needle. You just count them as your successes.

— John_Hempton (@John_Hempton) June 19, 2013

@Infitialis_ Pro-bono my ass. You touted your record based on penny stocks. Loser.

— John_Hempton (@John_Hempton) June 19, 2013

My Take

I believe that these discussions are healthy for markets, if you can look past the personal insults. The above raises some valid points and questions. I for one am not in complete agreement with either Mr. Hempton or Mr./Mrs. Infitialis.

I personally favor freer, lower barriers to entry markets  ( for the purpose of going public, and raising capital). As Americans, we are blessed with the best market system in the world (or in Churchillian terms, the “least worst”). It is imperfect, it has its flaws, but boy, it is one of our competitive advantages. As such, I want to see more companies go public so I have more choices as an investor.

HOWEVER, I also believe in tighter and more frequent enforcement. The number of fraud/accounting related SEC enforcements currently is pathetically low (I believe at a 10-15 year low). The good news is the SEC is very aware of this, and appears to want to do something about it.

I believe our market system needs greater freedom and greater law enforcement  in order to bring out the natural benefits that the free market system tends to bring out (that is, the efficient and effective allocation of capital, competition/lower prices, and innovation) while keeping it honest, and worthy of trust.

Regulators cannot regulate the human heart, but perhaps they can be better equipped to respond more quickly (and frequently) than they do so now (I’m no policy expert, but perhaps giving the SEC some criminal enforcement powers, and more staff from non-legal backgrounds might help for starters).

Questions for John Hempton 

  1.  You claim that you “ wake up every morning and pray for incompetent regulators” yet don’t you want competent regulators who are able and willing to take swift enforcement action against alleged fraudsters? Stock halts, de-listings, and other enforcement actions tend to be favorable for short sellers.
  2. “It would be very bad for my business if stock fraud were properly punished. Then there would be less of it.” Is this statement necessarily true? Take for example: suppose the supply of product coming to market simply exceeded the ability of  market participants and regulators to analyze them (and for the latter to take action)? Wouldn’t that create an environment where promising short opportunities would abound, even with competent regulators?

Questions for Infitialis 

  1. Doesn’t your success and the track record you tout (100% hit rate…or otherwise) depend on the existence of the very microcap frauds you propose could/should be banned? Wouldn’t you not exist, and your track record not exist, if it weren’t for these stock promotes?
  2. Rather than suggesting these items shown here,https://twitter.com/Infitialis_/status/347172243043934208/photo/1 , why not propose changes to enforcement ? For example, the tangible equity requirement you propose seems anti-capitalist, and a bit arbitrary. Note that many medium/large cap companies have negative tangible equity. What do you make of these real companies, with very negative tangible equity?
  3. Can you explain how your proposed “4 simple rules” could eliminate up to 99% of all Microcap fraud? Doesn’t the history of fraud show that it is a game of adaptation? And aren’t microcap frauds largely successful due to the many enablers who purposefully (but lawfully) buy into them… no law will change their behavior. So isn’t microcap fraud partly inescapable, so long as greed and ignorance exist?

“The greatest victory is the one with least bloodshed” – the Art of War

By The Long Short Trader