Thursday, June 28, 2012
Duties, morality and short selling
I am involved in a short that has mostly collapsed. Take it as read that the company and its accounts were almost entirely fraudulent.
The stock however squeezed a fair bit along the way. Had you "played" the stock you could have made considerable money. But you had to understand that when it spiked it was a short-squeeze and short-squeezes are made to be sold.
The short squeeze happened when an elderly man who was rich from a successful mid-sized business started buying the stock aggressively. He purchased over 10 percent of the company - and more than 20 percent of the float. His purchases were well in excess of 10 million dollars - and on market value now he would be down $8-9 million (having been up considerably along the way).
Given this was a fairly easily determined fraud there was a large short interest - and some of those shorts were so big in the stock they had to buy back as the stock went up (short positions alas get larger as they go against you). So the shorts lost some. Short squeezes do that.
The old man lost, and some short sellers lost. Almost all the longs lost too. The only winners were a few short sellers with positions small enough to sit out the squeeze (which fortunately in this case includes Bronte), a few "players", and of course the insiders. Fidelity was a big loser losing tens of millions of dollars.
The insiders were crooks who sold stock more or less continuously. The insiders carved out something like 40 million of neat profit. All fraudulently obtained. Victims included the old man and Fidelity.
I did a fair amount of research into this elderly man. He wasn't usually a big-swinging stock player - instead he was an investor who had been successful in his normal line of business (a form of retailing) and took his (excessive) confidence into the stock market. Much worse though - he was being privately advised by someone who had previously accepted a ban from the securities industry for selling pump-and-dump securities to his own clients. The old man was being advised by a crooked advisor.
However only recently - and after the old man had lost most of his life savings - did I work out the advisor was a crook. Telling the old man now will just deepen his sadness. On paper he has $1-2 million worth of the shares left - but they are not saleable. If he tried to sell them the stock price would collapse to below a penny. He could - if lucky - get out 50 thousand dollars on the way down.
I know what it is in my interest to do. That is follow the crooked advisor to his next victim and short that stock too.
But I don't know what it is my moral duty to do. Do I tell the old man he has been had (and risk retribution from the advisor)? Do I hope he can salvage the last 50 thousand dollars from what was his 10 million plus dollar life savings? I told the regulators but nothing much has been done. (They don't tend to follow leads like that from short sellers. They perceive we have an interest in telling stories.)
I have now more or less covered the stock. I do not have any particular interest in future moves in this security which already trades well below $1.
Should I ring the old man? Would you?
The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.