Friday, February 9, 2018

Nasdaq and the New York Stock Exchange (and possibly Herbalife) team up to help organised crime

Charlie Gasparino suggested in a tweet and a story that Herbalife, the Nasdaq and the New York Stock Exchange have teamed up to produce an anti-short-seller Bill. The Bill forces disclosure standards on short sellers.

I have no conclusive evidence either way as to whether Herbalife is involved behind the scenes or not. However the Bill is real and Charlie is usually a fairly thorough reporter and I have no reason to disbelieve him. And Herbalife has not denied the story.

The Bill is a threat to my physical safety. 

I want to assure readers that I am not exaggerating in the slightest. 

Bronte has a business model on the short side of maintaining a large database of people we regard as crooked and finding stocks associated with them and shorting those stocks. Often we do not know the full extent of the crook's business - we are just running on pattern recognition.

One such stock was China Agritech. We were short it originally because there was a minor crook associated with it. We worked out plenty including some ridiculous disclosures such as "proprietary nano-honeycomb embedding and microelement deep complexing technologies" in their organic fertiliser. Shorting a company associated with low-level scammers that literally claims to sell high-tech shit is just my style. 

Unbeknownst to me at the time however the Chief Financial Officer of China Agritech - Mr Yau Sing (Gareth) Tang- had a history. Mr Tang and Mr Jimmy Hueng were the directors of a Hong Kong Company called Win's Prosperity Group which collapsed. The story is told by Professor T. Wing Lo in the British Journal of Criminology. The direct quote (about a Hong Kong stock scam) is:
This case began with the renaming of a listed construction company, OLS Group, as China Prosperity Holdings (CPH) on 29 April 1999. Coincidentally, both the Chinese and English words for ‘Prosperity’ were the same as in Jimmy’s company, Win’s Prosperity Group. Jimmy Heung and a Mr Tang were the only directors of Win’s Prosperity Group. Tang was also the Executive Director of CPH, but Jimmy, as a triad figure, is not allowed to hold directorship of any listed company.
Jimmy Heung - now deceased but then Gareth Tang's regular business partner - was easy to find. His father was the founder of the Sun Yee On Triad. It was widely reported he was the Triad boss at the time China Agritech was fleecing American shareholders.

Anyway I publicly ridiculed China Agritech on this blog. Obviously I did not know of Triad involvement when I did this as I am not stupid or reckless. But not knowing Triads are involved does not obviate their involvement.

I stopped talking about China Agritech when I received threats of violence by phone from China from people who made very clear that the threats were credible. I reported these threats at the time to the Federal and local police which made it apparent to me that the Australian system wasn't well equipped to handle cross-border threats from China.

And more importantly I vowed to become far more restrictive about what I would say about short positions and what I would disclose about short positions in the future

Whatever - China Agritech was listed on the NASDAQ. It wasn't a small pink-sheet company and it had institutional shareholders. 

China Agritech is dead and buried now - and so is the Triad figure who was responsible for this fraud - so I feel safe enough talking now. I do not feel safe talking about this stuff generally. Indeed I would never willingly disclose such a short. Unless forced to by this Bill.

What this Bill will do is allow Triads and other organised crime gangs to list stocks on American stock exchanges and not worry about market participants anonymously exposing the natures of their crimes. The short-sellers will have to disclose themselves, not only to the SEC, but also to the those that will do them harm.

I say - without fear of exaggeration - that this is the Organised Crime Stock Fraud Protection Bill.

I can understand why crooked companies might support this Bill. And it gives me pause that Charlie reports a company that I own supports this Bill. But I have no understanding (other than a cynical grab for listing fees) as to why the NYSE and NASDAQ are happy for Sun Yee On Triad companies to list on their exchanges and why they support a Bill to protect them.


Why should shareholders have to disclose positions anyway?

Running a funds management company you only really have one output. Positions in stock market. That is your intellectual property. 

There is no other business I know where the business is forced to disclose the entirety of their intellectual property.

That said - I can think of a decent reason to force disclosure of long positions. If I own a share I own a vote. If you own a share you also own a vote. If own 30 percent of a company in most cases I can effectively control it. My votes impinge on the power of your votes. 

Because my ownership of shares can change the value of your ownership of shares most countries force disclosure when ownership stakes become large enough to matter (typically, but arbitrarily at five percent). This seems a reasonable compromise between keeping the buyer's intellectual property private and allowing the rights/control issues around a company to be visible to market participants.

However when I short a share I have no rights whatsoever - just an obligation to buy back the stock sometime. My short position doesn't impinge on your long position except in as much as there are deferred buyers in the stock. The above argument for forcing disclosure simply does not apply.

Indeed other than symmetry for symmetry's sake I can't think of a single argument for forcing short disclosure and I can think of strong arguments opposing it.

I would like the NYSE and the NASDAQ to lay out a cogent argument (other than mere symmetry) why disclosure should be forced and why this does not protect organised crime.

If Herbalife is truly behind this Bill (as Charlie Gasparino reports) then I would also like an explanation of why they support the Bill.

John Hempton

Post script: Charlie Gasparino has since contacted me and assures me that Herbalife has confirmed the story. 


Anonymous said...

Sucks to be bitten in the arse by your own integrity-lacking machinations, doesn't it John.

Asian Trader said...

Ackman was not exactly hiding the fact that he was short so this focus on disclosure is a stalking horse with disclosure as the acceptable [to all but short sellers]front with the real agenda attached behind it.

HLF in my opinion is pushing this because it has to stop some further digging going forward.

My guess is the recent changes appear not have had any real effect on volumes because as might be expected distributors have found ways to circumvent them (as touched on by @richardorionllc) Likely this could be dug up by short sellers and any denial to it might put them in conflict with regulator/SOX disclosure scrutiny. The amount of urgency with which they are pursuing this might be a corroborator of that.

P.S Ackman was a fool of the highest magnitude if he thought career risk/Pension accruals sensitive regulators were going to do the necessary to make his thesis work out.

Anonymous said...

I assume there will be a ceiling above which you have to disclose, i.e. short position above 5pc of shares outstanding.

As a short seller, you really shouldn't get above this due to simple risk management considerations.

What about a derivative position like Ackman with HLF? Will that even be included in the bill?

Anonymous said...

You might not like Bill (Ackman) for whatever reason. But in this case you are sleeping with the wrong people (HLF).

Anonymous said...

"integrity-lacking machinations" let me guess.. you were long a stock he exposed haha.

Anonymous said...

It still astonishes me that you do not recognise the Fraud that Hebalife is

Anonymous said...

Sounds like a good reason to stop supporting the NYSE and NASDAQ and look to the future with blockchain. Check out Overstock's T0 (Tzero). It is only a matter of time until we switch from the old school tech into a more modern one. But I do agree this seems like a terrible idea.

Rahul Deodhar said...

This argument about why shareholders have to disclose" needs to be spread. Many think if longs have to disclose then so should shorts. And like the anchor reacted - it appears unjust to layperson.

But there is some merit in conflict of interest arguments when shorts buyers try to influence not simply inform the market. Ackman however disclosed his short before his public battle. So cant fault him. Others do try.


Anonymous said...

Very valid argument John. Fully agree with you on this one. The threat is real. The only instant that I would like short positions to be disclosed is if there is a public announcement being made by the short seller that alleges that there is something wrong at an entity. People need to know that there is a vested interest.

Unknown said...

You make a good argument here, John. But coming from you it's a bit surprising. You have tried to bring harm to people because you disagree with their skeptical views on Herbalife (a company that paid $200 million to settle an FTC investigation into how it deceived its distributors): You have worked to get people fired from their jobs and even arrested. You also continually call people out as racists, in what would appear to be an attempt to direct hostility toward these people and their families. So your story about threats from Triads falls flat with me. Christine Richard

Unknown said...

The hatefulness you've spread around has left a trail. It will always be part of who you are, which is a person who cannot tolerate disagreement and resorts to threatening people rather than discussing the issues.

Patrick said...

Great article John... I find your IP argument strong, to me it's a trade secret. In an earlier post, someone mentioned the importance of a public announcement disclosing the amount of the short in cases where the short seller is actively attacking the company. What are your thoughts on this?

Unknown said...

Short sellers, acting in good faith, serve the public interest.

Similar to whistleblowers

Both get short changed by the system but it really shouldnt be like that

Imagine if Madoff had been listed and we had a chance to actually look at his 10K! A lot of people would have lost a lot less $$

Anonymous said...

Look into prugen pharmaceuticals/GenRX = Philidor

Grim reaper said...

You are scum of the earth. You admit that you agreed but Ackman’s thesis on Herbalife. You say it profits off poor people, the Government doesn’t care about poor people. Yet you position yourself long in the most obvious “short” in the market. You have no morals Mr. activist short-seller. You sell your soul for blood money. I hope it all comes crashing down before you can get out. I hope you suffer a long painful agonizing death. Money won’t matter then, it won’t cure your suffering.

shikha said...

I like this argument about short positions and discloser about short positions in the future. SOME EFFECTIVE WAYS THAT MAY HELPS IN RAISING YOUR STOCK RETURNS

jim smith said...

Am somewhat in agreement with those excoriating John for his HLF long. It's obviously a disgustingly immoral company that preys on peoples' weaknesses and systematically rips them off. The idea that John Hempton would support that company is so sad to me. I used to think he was a man of integrity, but not really anymore. Yes, he's still a nice guy, but for goodness sake. We have to draw the line somewhere. A disappointed, former fan.

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