General Electric: A Bigger Fraud Than Enron
gefraud.com
gefraud.com
>Prior to the initial distribution of this Report on August 15, 2019, the Company entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation. That compensation is based on a percentage of the profits resulting from the third-party entity’s positions in the securities, derivatives, and other financial instruments of, and/or relating to, General Electric Company (“GE”) (NYSE: GE). Those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease.
So there exists a class of professional services designed to temporarily crash stock prices to make short sellers money? Curious.
Ex: https://www.bloomberg.com/opinion/articles/2018-10-15/inside...
See, e.g., https://corpgov.law.harvard.edu/2017/01/18/insider-trading-l...
I would strongly caution anyone in possession of material non-public information to consult a congressman to conduct the trade on their behalf.
https://theintercept.com/2015/05/07/congress-argues-cant-inv...
(And yes, there have been reforms, but those reforms were later neutered).
If you e.g. count trucks leaving a company factory and feel you know nonpublic information about the company's finances as a result, feel free to trade based upon this info.
Often non-public information can be inferred through careful observation, aggregation, and analysis of public information or information that can be seen from a public location.
Or you can just see nonpublic information in public.
If you're at a restaurant and you see the CEO fighting with the board and then exclaim "I quit!!" --- knowledge that the CEO quit is material nonpublic information to the board. It must be disclosed in a specific way with securities filings. They cannot trade based upon it until there is public disclosure.
You, however, can do what you want.
Then we have to ask ourselves, what made the information transition from nonpublic to public? Was it the publication by the newspaper? If so, what makes it different (other than the number of outsiders who know about it) than the information that was once held by a smaller group of outsiders, namely, the other people who were at the restaurant at the time?
This is explicitly considered by the SEC. Indeed, from their guidance on the matter-- read the last clause ;)
Of course, note this states "include" for recognized channels of distribution; there are other means by which information can become public. But "can be found out by the public" and "are broadly disseminated to the securities marketplace" are different standards.
> All information about the Company is considered nonpublic information until it is disseminated in a manner calculated to reach the securities marketplace through recognized channels of distribution and public investors have had a reasonable period of time to react to the information. Generally, information which has not been available to the investing public for at least two (2) full business days is considered to be nonpublic. Recognized channels of distribution include annual reports, prospectuses, press releases, marketing materials, and publication of information in prominent financial publications, such as The Wall Street Journal.
Also note-- e.g. your buddy Tom who has signed a nondisclosure agreement tells you that they loaded 50 trucks full of product today-- if you trade upon this you are probably committing insider trading because the information was misappropriated.
But your friend Bill who was sitting outside the factory on public land watching the loading can trade upon it freely.
You can't trade upon it until Bill's news story has been out for 2 full business days, because you already know the material nonpublic information by virtue of it having been misappropriated.
You're right in that 'nonpublic' information isn't really defined and there isn't real SEC regulation or even a whole lot of case law about it.
I think we can probably agree that
A) there are things that someone outside the company without unlawful assistance or misappropriation could figure out and use in trading
B) while someone within the company and knowing the same things based on their privileged role could not yet lawfully using in trading, because they have not been widely disseminated and are considered nonpublic information.
?
Sometimes the defendant isn't even the person who traded - it's been the person who tipped off the trader, and who gained some benefit from that trade. Where the trader is family or another close relationship, such benefit is often presumed in the law.
(Disclaimer: I am an attorney but this is not legal advice. Consult a licensed attorney in your jurisdiction.)
I suggest you consult a securities lawyer before giving advice to others to consult security lawyers.
When you don't have hedge funds on speed dial you have to try to take the risk with your own money yourself.
Wow congratulations you got a 20% gain on the $1,000 to your name.
When you make a big row about it, you protect yourself from having these disclaimers. It protects you from private litigation from people that copy your "not-advice", and it protects you from the SEC who will simply say you didn't disclose it.
The SEC is funny because they will write a line by line statement of how bad you are and how you did all these insidious things, and you ask them what you were supposed to do, and they'll say "oh, just write a three sentence disclaimer next time and those exact same actions are state sanctioned"
Yes. The technical term is "activist short selling". The broad consensus is that it's good for the market, as it provides an incentive for investors and researchers to uncover fraud and mismanagement. Obviously someone could just make up a bunch of nonsense about a company to try and tank their share price, but that's all sorts of illegal.
I think it's valid to think of activist short selling as a kind of distributed bug bounty program for the financial markets.
There's a subset of people who find this aspect appealing.
You can't just sell a stock and wait passively for it to eventually go down. You HAVE to be out on CNBC and elsewhere trying to actively prove that the company is overvalued.
Look at the way Bill Ackman and Pershing Square Ventures went after Herbalife for years. Not (just) because they thought a fraud was going on. But they were trying to make billions of dollars for themselves too.
https://www.nytimes.com/2018/02/28/business/dealbook/ackman-...
Ackman spent 5 years on the road doing roadshows, on TV, trying to make the case for fraud.
They're all either publicly available numbers, or an analysts opinions. It would be very hard to sue them.
There exists a class of professional services designed to uncover financial fraud. That's what this is (allegedly) an example of.
Investors can make money by correctly betting that a stock price will go down, hence they might be interested in funding research that uncovers financial fraud. The key point is that the stock price goes down _because of the fraud_ that was exposed -- not because someone _accused_ GE of fraud.
If someone put out a false report accusing a company of fraud with the hope of causing a temporary price drop, that would be illegal. They would be fined / go to jail and would be barred from working in the financial industry again.
For the record, I think Markopolis's analysis is wrong. Whether it was done in good or bad faith is another matter.
Citron says the report didn't "pass the smell test".
It's quite a lengthy report. One could simply read it and make a point by point rebuttal. But they don't do that at all.
They say:
> The credibility of Mr. Markopolos has to be questioned immediately when he was asked on CNBC and other media why he chose GE now. To this he responded: “They moved their headquarters to Boston last year. My hometown. I don’t appreciate when you’re running a scam in my hometown.”
They then go on to frame this as a giant 'AHAH! Gotcha.' Instead of rebutting the actual report.
They then go on to claim that "Aggressive accounting" is not fraud. LOL. I nearly fell out of my fucking chair when I read that one.
HOW DARE YOU, SIR. IT'S NOT FRAUD. IT'S AGGRESSIVE ACCOUNTING.
wut's aggressive accounting?
Aggressive accounting refers to an accounting department's deliberate and purposeful tampering with its company's financials in order to outwardly characterize its revenues as higher than they truly are.
So fraud?
[HOW DAAAARE YOU!] "Aggressive accounting" .... "has helped fuel a growing economy" [AND EVERYONE DOES IT SO THERE!] (actual quote in quotation marks)
In summary, their arguments are.
- Aggressive accounting is not fraud (it is)
- Activist short selling is the real culprit (This is like blaming bug bounties for bugs in code. Even more confusing is that THIS IS LITERALLY WHAT CITRON'S BUSINESS MODEL IS. WTF!?)
- The author has a big head and we don't like him (so therefore made the whole thing up??? Or Something?)
- The CEO bought 3 million in stocks as a demonstration of his belief in GE, therefore NOTHING TO SEE HERE, WOW. 3 MILLION. MUCH CONFIDENCE!
Citron's arguments wouldn't be out of place in The Onion.
>The arrogance of that statement alone discredits his whole argument.
What? I had never heard of Citron before five minutes ago, but that's an embarrassingly terrible analysis. Do people trust the advice of this Citron with their own actual money?
> The arrogance of that statement alone discredits his whole argument.
And I must say that struck me the wrong way as well.
The stock has rebounded since, so seems like the big market voting machine thinks this report is bunk. Time will tell who is right.
"First, a stiff recession after ten years of domestic economic growth, will see that the next chapter in GE’s history is Chapter 11."
You can't predict a recession, or when it comes how it's going to go, so how is that "first" when it comes to discovering accounting fraud?
Um, OK.
He's saying they don't have the cash in the bank to make a payment that they have coming due next year.
Um, OK.
Not really fraud, no. I think this is more of a "hope the stock falls in the future so we can get rich" kind of thing.
Systemic fraud usually doesn't have a foundation of calculating rational actors but instead irrational exuberance and magical thinking; as if economic fundamentals need not apply.
Look at the dotcom bubble, bitcoin bubble, or the housing crash. The biggest offenders were also the biggest devotees to the dream.
I say this being a shareholder in GE. I honestly hope I'm wrong and things turn around but insiders doubling down in hope of a brighter tomorrow is a poor investment indicator signal. It doesn't mean much.
https://www.cnbc.com/2018/10/05/new-ge-ceo-larry-culp-inks-s...
It's very much in his interest to stabilize the stock price.
Put another way, did the CEO have any other choice? It's not like dumping shares would have been a kosher.
Other GE executives/directors likewise bought more stock after the report came out.
More significantly than any of the above, in my opinion, is that one of the world's most respected investors, Stanley Druckenmiller, stated he bought more after the report came out:
https://www.cnbc.com/2019/08/15/stanley-druckenmiller-says-h...