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Comment by arbuge | Hacker News Reader

An alternative viewpoint:

https://brontecapital.blogspot.com/2019/08/the-flat-out-sill...

As Charlie Munger says, always look at the incentives to understand people's behavior. Markopolos' sponsoring hedge funds are shorting GE:

https://www.bloomberg.com/news/articles/2019-08-15/ge-drops-...

"Markopolos is working with a hedge fund he didn’t identify and stands to benefit from bets that GE’s stock will decline, according to the Wall Street Journal, which reported earlier on the accounting report. Markopolos and his colleagues also hope to collect a whistle-blower reward by reporting their findings to regulators, the Journal said."

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That's an important point. But this is not a one-shot game. When they're all sitting around the table, picking a target to "whistleblow" against, 'pick a target that is actually doing something wrong' is probably very high on the list of criteria.

They're going to want to do this again. They need to preserve their brand, "the guy who busted Madoff and wrote a best selling book about it" is a really valuable brand.

The fact that he's shorting GE should probably give you more confidence that he's right. That demonstrates skin in the game. He's not just speculating idly - he's putting his own assets at risk in the bet.

It seems to me he is being paid by hedge funds to come up with research that supports their short positions. I see no evidence anywhere that he's shorting them using his own personal funds and even that would not necessarily give me any additional confidence he's right.

With your logic one might also claim that promoters of pump-and-dump schemes should be commended for having skin in the game.

> It seems to me he is being paid by hedge funds to come up with research that supports their short positions.

Regardless of whether this is true, should they successfully collect a reward, it would validate the research on merits.

Not if this research is what causes the stock to drop and is what allows them to collect a reward. Then the merits of the accusations doesn't actually matter and they don't have to true for the people shorting the stock to profit from releasing them.

I have no idea if these accusations are true, but the accuser's short position on the stock has zero positive bearing on the validity of the accusations.

> Not if this research is what causes the stock to drop and is what allows them to collect a reward.

I don't understand the causative relationship you're asserting between a drop in value and a whistleblower award that's only granted after an enforcement action. How would a drop in stock value result in a whistleblower award?

Sorry, I misunderstood your comment then. I though you were using "reward" generally. A financial windfall from shorting a stock and then releasing bad news about the stock is a "monetary reward" that doesn't depend on the merit of the accusations. I didn't realize you were speaking specifically about a "whistleblower reward" which wouldn't be awarded until well in the future after the report had been verified.

What are you talking about? There is zero whistleblowing going on here. This is an outside investigative report funded by a hedge fund. The only link to whistleblowing is the investigators biography.

From the disclosures section of the report:

> Prior to the initial distribution of this Report on August 15, 2019, the Company also submitted this Report to the U.S. Securities and Exchange Commission’s Whistleblower Program and the U.S. Department of Justice’s FIRREA Whistleblower Program. Both or either of those submissions may generate profits for the Company independent of the financial performance of GE and/or the securities, derivatives, and other financial instruments of, and/or relating to, GE.

I don't know how the DOJ program works but SEC Whistleblowers can be awarded 10-30% of the money recovered as a result of their information.

SEC FAQ here: https://www.sec.gov/whistleblower/frequently-asked-questions

I think he came out with the report as SEC had already started investigating GE. If he had not come out with his report he might not have been able to trade in GE stock as he would have had insider information and could be dinged for insider trading. After putting the information out in the public he can short all he wants.

How can you be a whistleblower if you use entirely public information?

Time is money. They claim they've been investigating this for a year. That means they have a lot invested into it.

> I see no evidence anywhere that he's shorting them using his own personal funds

From page one of Markopolos' presentation:

> [...] members of the Company are personally in possession of securities, derivatives, and/or other financial instruments of, and correlating to, GE, which may generate profits should the price of GE securities decrease

To be clear: I think Markopolos is on to something here, and the presentation does a pretty good job of showing how GE is sitting on some really really bad news for its investors. But yeah, he's definitely shorting GE personally in addition to whatever he's getting from the sponsor.

And there's nothing wrong with that! This is the whole point of having public securities markets!

Why would I pick a company to short, and then pay someone to bad mouth that company?

Seems like a lot less risk to pay analysts to find possible frauds, and then short them while disclosing what they found.

The Netflix series "Dirty Money" introduced me to this concept, episode 3 "Drug Short" covers the analysts who called out Valeant Pharmaceuticals and took a pay day for their hard work through shorting the stock. Really I found it inspirational :)

You can profit from shorting and be completely wrong.

All you need to do is convince the market that you're right long enough for the price to drop and cover your short.

Sure, but do you have any idea how hard it is to convince the market of something that isn't true about a company the size of GE?

It can't be that hard if you have some credibility you are willing to sacrifice. If this report turns out to be complete BS, they still could have made over 10% return in a single day by the way the market reacted today.

Nobody with any capital in significant amounts is going to take this report at face value. They're going to investigate the claims on their own before they make any moves.

Thats neither here nor there. The market already moved.

Sure, because people decided the claims were credible.

I think you're putting a bit too much faith in due diligence for a market that is largely run by algorithms. There was some Google traffic for "GE fraud" right before market open and then search traffic spiked at 10:40am.[1] Now look at the trajectory of GE's share price this morning.[2]

[1] https://trends.google.com/trends/explore?date=now%201-d&geo=...

[2] https://www.google.com/search?q=GE&tbm=fin#scso=_RrNVXabVDev...

I'm really not. The price closed down quite a bit. It recovered only a little bit of its loss by the end of the day. Which means the algorithms that traded quickly are in agreement with the humans who traded slowly.

Roughly $7 billion in value disappeared from GE's market cap today. People are certainly going to investigate this more and the stock will move in one direction or another depending on the validity of the report, but regardless of the ultimate outcome significant capital was moved around today which presented an opportunity to make a lot of money.

Of course - but it moved precisely because people with money decided the claims were credible.

The market moved too quickly for the parties acting to have had time to actually digest the merits of the report. The market moved because the people who released the report had credibility.

It's possible that that was part of it. But the market closed with GE's price barely recovering. Which means people who analyzed it more slowly agreed with the initial movement. Which means there is no evidence for the view that the initial movement was spurious or unvetted.

It can also move by algos that listens to news coverage and they dont do much dd.

also, prison, for fraud.

they really better genuinely believe that this is true, and have lotsa evidence - or the fact that they stand to gain financially is going to be used to hit them very, very hard.

Alot of people just lost money, if it's for reasons - they will suck it up. If it's because "you made it up" then they will get their pounds of flesh, and not from the numb bits.

No, they don't. They just need a whistleblower. SEC doesn't fine hyperbole, just provably false information.

Wouldn't the liability from libel me much higher than the conceivable gains?

GE was founded 130 years ago, they've been through some shit and one of the most stable and well-known brands in the history of America if not the world. We're not talking about Uber here.

They are a shell of their former glory. Not the beloved blue-chip stock of yesteryear.

Besides, just because a company is old doesn't mean it's viable.

see Sears

GE has been in decline for quite a few years now. Being kicked out of the Dow was quite an embarrassment.

And then you get charged for fraud, SEC doesn't take these things lightly... with this much public attention you'd have to be crazy to try to pull of a scam like that hoping to get the money without showing any proofs to the claims...

Might as well go to the SEC's offices and beg them to fine you.

SEC only fines short and distorts if the information being shared is proven false. Hyperbole isn't fined.

Do you believe that these anti-GE claims aren't credible?

I don’t know enough to comment on that, but the point is that so long as they are based on a shred of truth, even if over emphasized, it is hyperbole not fraud.

Precisely. Short sellers can't spread deliberate, provably-false information, but the SEC doesn't care about exaggeration.

He’s putting his reputation up against it, which apparently is powerful enough to make the stock slide. He makes money either way (since correctly seeing he can move the stock price), the question is whether he comes out of it with his reputation.

It depends on when he closes the shorts. If he holds them I am fine but it’s also conceivable to buy shorts, publish bad news, see the stock drop and immediately close them.

I’m not an expert on this by any means but isn’t this securities fraud? It looks to me like securities fraud.

How can it be fraud if it's true?

It's my understanding that "publishing bad news" does not equate to the subject in question being "true", certainly not in today's media climate. Had the OP said something like: "publishing evidence of bad things" then of course that the discussion would have been totally different. And to judge by the discussion in this thread the linked article is not "evidence", is merely "news".

To recapitulate: willingly publishing "bad news" (which you don't have any evidence that they might be true or not) in order to financially gain stuff on a stock exchange should be treated as securities fraud.

Which part of what Harry Markopolos is saying do you think isn't true or lacks evidence?

> lacks evidence

The part where he says that he hasn't make everything available because he has fw-ed some information to the police/authorities. Until said police/authorities take the necessary actions (if needed) based on the provided info is best for the parts involved to let said authorities decide if the facts provided are evidence enough.

Also the part where he complains about GE's profit margin being the same as Madoff's, i.e. a guy who was active in a completely different industry, while companies/conglomerates active in the same markets as GE post similar profit margins as GE. This part is fake news pure and simple.

Are the people shorting Tesla right about EVs being useless?

> As Charlie Munger says, always look at the incentives to understand people's behavior.

Should that include looking at the fact that GE constitutes ~7% of Bronte Capital Management’s portfolio?

I’d want to spin things positively for them too, with that much skin on the line.

While it can certainly color Bronte Capital's motivations, the author of the paper (John Hempton) has generally been forthright in his analysis of other companies and his analysis of GE doesn't seem different from his other comments.

Sure. But “they have skin in the game therefore the analysis is invalid irrespective of any actual criticism of the content of the analysis, which I have not bothered to mention” is OP’s insinuation, not mine.

I’m just pointing out that that cuts both ways. If there’s a problem with Markopolus’ report it should be critiqued on its merits. OP didn’t bother to bring any of that forward and just focused on shortselling.

As has been pointed out by others, the alternate viewpoint is from a GE shareholder.

https://whalewisdom.com/filer/bronte-capital-management-pty-...

Wow, that comparison with Madoff's returns is so sleazy that the person who created that image has to know they're being a dishonest scumbag. For context, the suspicious thing about Madoff's returns wasn't just the size of the returns, it was that his Ponzi scheme returned that amount consistently year after year, seemingly risk free, regardless of what the markets did. That was the part that was "too good to be true" - the average returns of Madoff's scheme were pretty unremarkable. Also I'm pretty sure that's comparing apples to oranges, or rather return on investment with profit-to-income ratio.

> returned that amount consistently year after year, seemingly risk free, regardless of what the markets did.

Reminds me of something someone pointed out. GE hit it's quarterly numbers to the point for 20 years under Jack Welch.

http://www.robwalker.net/contents/mm_welch.html

The alternative viewport by Hempton is valuable, but I think the ad hominem against Markopolos is not. That's not how short-selling even works anyway. Could you please discuss it on merits instead?

That's not an 'alternative' viewpoint. Reading the headline already told me he was shorting the stock. An alternative viewpoint would be: All the numbers add up and we expect growth.

Looks like he’s willing to put his money where his mouth is.

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