Have You Ever Uncovered Fraud at a Publicly Listed Company
...while analyzing the company as a potential investment and you were able to identify financial shenanigans either by going through the company's public documents or talking to current/past employees or going through stuff on glassdoor / reddit / and other publicly listed sources. Understand that there are some clear examples of some HFs being able to successfully unravel this stuff, but curious to learn about those that don't make it to the public news. For instance, the more recent examples surrounding Greensill and Wirecard thing seem to be obvious now in retrospect, and not trying to center the conversation on them, but wondering what have you come across, what had it made it seem odd to you, and how had you validated your thesis. Thanks.
In case you don’t get any good answers here, I’d recommend having a look at the reports published by some of the better activist short sellers (Hindenburg, Muddy Waters, etc.) if you haven’t done so already
Depends what you mean by uncovered. If you mean outright fraud like muddy waters and $nkla, probably not?
But if you're talking about orange flags(Smoke but no smoking gun), yes.
In fact, it's fairly often. I don't know if you remember, but a few guys on twitter discovered last year that a SPAC(Triterras) was probably fradulent in some shape or form and was hiding/misrepresenting management backgrounds.
Same think for the window SPAC company, or Cassava life sciences etc.
How are they able to raise capital?
Not sure if it counts as 'fraud' - but was patently obvious through 2020/21 that the forecasts being published by lots of SPAC targets had zero chance of being met, and a little bit of digging would demonstrate that the mgmt teams presenting said forecasts knew this at the time. A few of them also had orange flags around related party transactions / sources of funding / founders' backgrounds. Some of this stuff (but not all) has since come to the surface - Nikola was just the tip of the iceberg here.
Unfortunately it's extremely difficult to short recent de-SPACs in size so was hard to make any money out of this. Which might be why the share prices defied gravity for such a long time.
You mention Wirecard - this was obvious to a lot of people in 2016/17 after the India stuff got into the public domain. Again, very hard to make money out of this -> shares went up 5x before it all fell apart and a lot of funds got stopped out on the way.
Generally unwravelling this stuff and getting a real 'smoking gun' (or just enough orange flags to have a high degree of confidence) involves more than just going through public docs & screening for balance sheet red flags.
Spacs are one of the biggest jokes in recent times.
What spac are you referring to particularly
Also: it's supposed to be red flags, not orange flags.
This was fun
that said in most cases it was opportunism/promotion not illegal fraud
clearly worked though, still plenty of market cap to go if you can bear the chop
Do you consider Theranos a fraud? Wework a fraud?
Adding to SPACs in 2018-2019 tons of energy firms were using their best well production results to claim the whole play/acreGe had those results many of those firms dont exist today anymore.
I consider theranos a fraud. Who wouldn't? WeWork's made-up metric community adjusted EBITDA was literally a fucking joke and those who fell for it are even bigger jokers
Yes - several times. Many times it’s helpful for the mosaic but the company ends up declining for other reasons (fraud as a symptom of broken business is most common in stocks imo). In a couple cases I sent tips and accompanying research to regulators and in one case there was action taken but I can’t say if it had anything to do with the tip. Usually I just circulate the pitch to respected peers and don’t try to highlight to journalists/activists - only on rare occasions where I’m certain I’m not wrong and the case is very supportable (vs. sensational character allegations you often see in activist shorts these days)
no one, regulators or investors, care all that much about fraud right now so you need another leg to the thesis that works without regulatory action imo
Agree strongly with this last point. Needs to be another angle that makes the market wake up and re-evaluate the company (which then draws attention to the fraudulent practices), or if fraud itself is the entire thesis it needs to be a company in a highly sensitive / regulated industry (e.g. banks).
To go back to an over-used example - but an informative one - this is why shorting Wirecard was such a painful trade for so many years. The 'end-game' funds were betting on back in 2016-17 was either:
- Payments is highly regulated / sensitive industry due to anti money laundering regulations etc. The argument was that local regulators would take a hard look at WDI on any fraud allegations, or some of WDI's key partner companies would refuse to do business with it (e.g. Visa/Mastercard would kick them off the card networks) due to reputational concerns.
- The stated cash position was fake & WDI was running out of cash as mgmt were extracting it from the company via sketchy M&A. At some point the company would be forced to do a big equity raise, which would make it more obvious the cash position had been fake all along, even to the bulls.
The reason funds lost so much money over 2017-20 is that they were right on the fraud but wrong on these two points.
Ok. Can you talk about a particular industry where you found it, what did you find, and the process behind it? That will be more helpful. Thx for responding tho
I don’t want to go into too much detail but:
- healthcare is the most common, anomalies in claims data and unusual trends in customer concentration or ASPs etc. can highlight passthrough billing schemes or upcoding
- related party transactions that are just enough to hit guidance and always remain as receivables
- a cargo plane company with a regular route from [US City] to Colombia, but curiously the radar data shows it ‘emergency diverts’ to stop in Miami every single trip (drug and gun running)
For all of these examples it’s usually an unusual financial or business datapoint and then confirmed by things like competitor calls and Glassdoor and former employees or sometimes never really get a smoking gun hence why I say you need a non-regulatory thesis too - the fraud angle is usually more helpful for telling how far numbers can be stretched
*SPAC and biotech bankers have entered the chat*
Sorry for reviving this thread. Anyone with experience in whistleblowing?
Whistleblowers are pretty brave, in my opinion. If anyone intends to whistleblow, here's what you need to know before doing it: https://www.jdsupra.com/legalnews/need-a-wall-street-whistleblower-5930…
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