UC Berkeley hosted an intimate discussion in San Francisco of the critical issues, technologies, and policies that drive financial fraud around the world.
One day program in San Francisco where we discussed critical issues, technologies, and policies driving financial fraud around the world.
Welcome remarks by Frank Partnoy (UC Berkeley) and Herb Greenberg (Pacific Square Research)
The Great Shorting Debate:
Debate with Omeed Malik (Moderator), Carson Block (Muddy Waters Research) vs. Joshua Mitts (Columbia Law School)
Fraud and the Media:
Panel with Herb Greenberg (moderator), Roddy Boyd (Southern Investigative Reporting Foundation), Jesse Eisinger (ProPublica), Linette Lopez (Business Insider), Francine McKenna (MarketWatch)
Intimate Discussion with Tom Wright:
A discussion about Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World with Author Tom Wright (Wall Street Journal)
Fraud and the Law:
Panel with Frank Partnoy (Moderator), Robert J. Jackson, Jr. (Securities and Exchange Commission), Michele Johnson (Latham & Watkins)
Fraud and Auditors:
Panel with Jim Chanos (moderator), Emily Alexander (TAFS), Jules Kroll (K2 Intelligence), Lynn Turner (formerly Securities and Exchange Commission)
Expert Tips for Catching Fraud:
Discussion with Bethany McLean (author, The Smartest Guys in the Room), Martin Stapleton (Gladstone Capital Management)
Discussion with Rupert Younger (moderator), Alexandra Wrage (TRACE International)
Closing remarks by Diana Henriques (author, Wizard of Lies)
A Discussion with John Carreyrou:
Post-Reception screening of The Inventor: Out for Blood in Silicon Valley and talk-before with John Carreyrou (author, Bad Blood).
Do you want to get in on that long versus short perspective that there is maybe a bias just against short.
Well it's it's kind of funny because the somebody else who does this injury left said to me years ago does activist short selling. He said you know when people ask me oh did you talk to the company. Did you talk to the company before you wrote this. Like the company speaks all the time.
It's their 10 cuz they're 10 Ks. Their conference calls their press releases. So I guess my my reaction to Josh's point there is when you look at the volume of positive information out there much of it I think in these cases that are disputed is misinformation versus negative.
I mean the positive volume far outweighs or outnumbers that of the negative. So I really do take issue with this idea that you can have these kind of non gap manipulations among short sellers that you know could become widespread and really harm companies that otherwise are you know are very good companies. Do people exaggerate. I mean quite possibly if there are but just like anybody else you know if you step across the line as an active a short seller you should be punished. And I think that that line I suspect and I've always expected this to be the case that we're going to be much more likely to face an enforcement action or at least an investigation as an act of the short seller if we cross that line then an issue or would be for being on the other side.
So let's talk about the line in your research that you were alluding to Professor you have conducted a lot of research to suggest that there are illegal trading patterns present right after a short research is published. So do you actually think that it is the same hedge funds that are here today that are tipping off high frequency trading firms or conducting these types of trades themselves which I think many would say is not even in their bailiwick.
So I think we should distinguish between two kinds of trading and I'll just I'll just say that Carson I agree there is a line but there's been one short and distort enforcement case brought by the S.E.C. in the last at least five years. So the numbers don't seem to back up the proportionality point. What I would say in terms of manipulative trading you know there's really two kinds. When we look at derivatives trading when we look at heavy what I might call ultra aggressive shorting. Reuters wrote a piece about this just a couple of weeks ago involving Farmland Partners in the point that I think we should take away from these cases is not that that company is a perfect company or that it's a company that's not broken. I really don't know but I don't think that crashing the price by 40 percent taking all the liquidity out of the stock by buying five times the daily volume and put options switching immediately or at least half of the volume more 40 percent 50 percent switches to calls on the day of the attack inducing a v shaped trading pattern. I don't think that's the business that short sell it most short sellers are in most short activists around. I think that's the kind of thing that regulators should condemn as far as spoofing and layering in other forms of algorithmic trading here. You know full disclosure I'm an expert witness in cases on the defense side. I think plaintiffs firms and those who are involved in shareholder litigation should be looking carefully at what's driving stock drops following short seller reports. What I'm seeing in the order book is that a lot of those stock drops are driven by cancellations cancel orders which would potentially undercut loss causation and there may be other problems for the case. This is a question that I think academics need to study. I wouldn't necessarily pin that on the short sellers but it is having an effect in the market that that court. That's costly for public companies.
Yeah exactly. I think that everyone here agrees that that type of market manipulation both on the short and long side is something that should receive S.E.C. scrutiny. But when Carson I were speaking about this in preparation you know the issue of proximate cause came up. So you know Carson your mind if these high frequency trading firms are engaging this activity you know how can the share the short seller be held liable.
Right. Yeah. And I want to emphasize that there are there's one and a half points on which Josh and I disagree about what you just said.
Number one buying put options beforehand that actually from what I've observed is most likely if you buy heavy amount of puts as a short activists that's most likely to backfire against you because it will almost inevitably lead to a reversal of the stock price as the hedges beat due to the Delta hedges and they're coming off as you sell the as you sell the plots. So we don't agree on that. Now this idea of a high frequency trading around activists reports the whole point of being an HFT is that you don't need to be tipped off. So I don't think that's happen. And when I look at we are among activist hedge fund managers or dedicated activists short sellers I should say. I mean we have the largest pool of assets I think we have the most sophisticated pipes and trading capabilities and there is no fucking way we know how to do the kind of stuff Josh is talking about. So I really doubt right that the guy and Farmland Partners knows how to do it either.
But you know I think so if the question is Well gee Carson you know shouldn't you be under some kind of duty then to try to do something to mitigate these these other traders these HFT easier from from doing what they're gonna do.
I mean the analogy that I gave to all meat when we were talking as I like if I'm standing on a corner and there's somebody behind me somebody across the street with a rifle and I want to cross the street when the light turns green and as I'm crossing the street the guy pulls the trigger and kills the person behind me. Look man I'm acting lawfully. I can't be responsible for that. So HFT is that or manipulating stock prices. And I think there's also some ambiguity when we got into it as to whether. That's amazingly whether some of these things actually rise to the legal level of manipulation by the age of. But to the extent they are absolutely go after these guys. I do believe these HFT is for this reason are a problem for my business. I believe their problem for all fundamental investors because they are duped into mediating fundamental analysis from from markets and from stock prices. So yeah I'd love to see somebody put him down.
Do you want to respond on the proximate cause issue or do you have a moral responsibility to stop the person to take the shot with a rifle in your mind.
Yeah so I tend to agree with Carson that a short seller who who does a good and genuine as genuine intent does a lot of research puts that sort report on and then we see millions of cancelled shares within five seconds of the posting and that mechanically crashes the price. That's not the short sellers fault. It I think behooves the plaintiffs firms in this room to look at those trading data because years of litigation can result on a stock drop that is not necessarily predicated on investors trading but rather on on prices being manipulated. So there are other costs in the system is the S.E.C. bringing these cases. Not unfortunately at the moment. So there's a regulatory problem when we take it back to short sellers. I would say that I think on this on this point we agree this is happening on the long side too there are flash pumps like there are flash crashes and all of us would benefit from markets where information is evaluated for information sake and where prices are not driven in one way or the other by trading or or worse spoofing kind of activities.
The other aspect president in the case you reference as well as a lot of these others that having more frequently is the anonymity of short sellers so you start talking about the difference between short sellers Carson that our out there but or others that might not be as out there.
But then there's that are out there but they're anonymous. You don't even know who it is and they're using message boards.
So in both your minds what are the pros and cons about having anonymity with these short sellers that are posting on social media or their message boards.
So I definitely understand and respect those who adopt pseudonyms when they're publishing this research. When I published my first report years ago on a company called Orient papers a Chinese company listed in the U.S. I thought OK I'm going to put my bio up there because I need to credibility. So on Carson Block and this is these are the things I've done and etc.. And within 24 hours I was thinking that was a complete mistake.
Now over the medium to long term things did work out for me. But you know when we get sued which I know I get sued on average once every two years I mean I'm dealing with some bullshit suit right now that I don't.
I mean we're probably over half a million dollars in legal fees and we haven't even you know we're still like arguing over pre pretrial discovery. So it's if you want to do this and try to take on these companies and you don't have the resources that we have then yeah I definitely understand it. And then the next level of that of course are the threats. So I mean we've had you know I've had to deal with private investigators some notably idiotic ones. But yeah I mean death threats you know every now and then I think to myself Yeah right now there could be somebody outside going through my trash and getting my baby daughter's diapers and you know thinking like what a disappointment.
So I you know I really do understand it and I don't think there's anything to far yes about it. And the other final thing I'll say on this point is I think most of the people who publish pseudo anonymously understand that you can't hide from the regulator. Again I mean you're you're shorting your trading into these things. So I don't think it's an attempt to escape accountability these of you regulators. I think it's just a defense against you know harassing litigation which happens all the time.