# Making big bucks from financial frauds



## basilio (1 April 2012)

Just came across a Hedge Fund - Bronte Capital - that does a nice little business in  discovering juicy financial frauds, then shorting the xxxx out of the companies and finally helping authorities and the marketplace  discover the fraud and thus confirming their profits ! For example they were the first to identify the Longtop scram and made out like bandits on the deal. Neat stuff  eh ! 

They also make investments in companies they think have a future but it looks as if they have most of their fun identifying and killing frauds.

Check out a few of their newsletters for examples.

One the interesting points they make however is that the Chinese market is riddled with fraud and corruption. They thought they could make a killing in the usual way but have discovered there is far more government support for these frauds than usual.  

Well worth a read.

Any thoughts on this strategy for making a buck ?

http://articles.businessinsider.com..._1_dtt-financial-communications-audit-reports 

http://www.brontecapital.com/peformance/2011/Client Letter 201105b.pdf\

___________________________________________________________________________________

Their blog makes for fascinating reading. Might be some good tips there.

http://brontecapital.blogspot.com.au/


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## Starcraftmazter (1 April 2012)

Had a read of that newsletter, they are quite forth-coming about their performance aren't they? No silly spruiking here, I do like that!

Definitely seems like a lot of fun.


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## McLovin (1 April 2012)

basilio said:


> They also make investments in companies they think have a future but it looks as if they have most of their fun identifying and killing frauds.




Wrong. Most of their funds are long in large-cap multinationals. They talk their book when it comes to frauds (not that there's anything wrong with that). 

I'm a big fan of John Hempton. He's taught me a fair bit about financial analysis.

There's at least one fraud on the ASX  (IMHO). DYOR.


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## skc (1 April 2012)

Muddywater and their expose on Sino-Forrest was a huge one recently. Even billionaire hedge fund manager John Paulson was caught up in it. http://orderflowforex.com/2011/06/john-paulson-sino-forest-and-a-500-million-loss/

To execute this strategy successfully you need a few steps.
1. Find a fraud.
2. Take a position (direct short or put options).
3. Expose them (and hopefully not get sued).
4. Have enough people believe you so the share price falls.

3) is the difficult part and here's one example a story today on EWC (which Bronte did a piece back in 2008). http://www.smh.com.au/business/for-all-the-gas-expended-little-has-been-produced-20120330-1w3qy.html. No one is calling them a fraud, although most of their promises and projections are somewhere between overly aggressive / optimistic / pie-in-the-sky. Unless you gain good access like an auditor could, it is unlikely that you can be so sure. A wrong move will likely see you get  sued from the company in question. 

4) makes this a difficult strategy for retail investor to execute as you simply don't have the authority / popular following in terms of exposing a fraud candidate. 

There are a few companies on the ASX that simply don't make sense to me but I simply don't know enough in law whether they are frauds or not. Often management make up statements / lie about their activities or progress (revealed in hindsight), but they often use words so watered down that there may not be legal obligation on them. You are sure they are misleading real or would-be shareholders, but you can't risk shorting them because there are also idiots who believe them.

Using EWC as an example again (I am not a close follower of it and only come across it today)... while one cannot conclude it is a fraud you can probably conclude that the Board hasn't delivered on promises for quite some time. But that didn't stop the share rising from 40c low recently to 70c high. That will really test the nerves even though one's short position may be fundamentally correct.


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## basilio (2 April 2012)

Its funny SKC but I was also thinking about EWC as an "interesting" company. I saw the same story and added a comment on the EWC forum.

Totally agree with your analysis which requires both identifying a fraud *and then getting the market  *or regulators to also recognise it.  John Hempton noted that he won't go after Chinese companies any more because it looks as if the Chinese government offers more support than regulation.

One point I did notice was that (according to John Hempton) he informed ASIC about one particular scam and there was prompt action. 

With regard to EWC. Wouldn't it be relatively simple to ask for verification of the existence of the LNG plants and then accountability for the funds raised to build it ?  Wouldn't this be an auditors job ?


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## skc (2 April 2012)

basilio said:


> One point I did notice was that (according to John Hempton) he informed ASIC about one particular scam and there was prompt action.




That scam you refer to was a managed investment scheme which is quite different to listed entities when it comes to regulations.



basilio said:


> Its funny SKC but I was also thinking about EWC as an "interesting" company. I saw the same story and added a comment on the EWC forum.
> 
> With regard to EWC. Wouldn't it be relatively simple to ask for verification of the existence of the LNG plants and then accountability for the funds raised to build it ?  Wouldn't this be an auditors job ?




EWC is certainly being marked down today despite a strong market. The questions you ask are legit but how does one (a retail investor in particular) go about getting the answer? Would the auditor (E&Y in this case) be willing to disclose such information to you and me? 

You think E&Y is a respectable Big 4 accountancy so things should be all good - then you remembered that Enron was audited by Anderson.

I guess scams are everywhere and some of the sizes are astonishing... Enron and Madoff are both shocking in terms of size and duration, but at the same time shows you how the average investor / professional fund manager / asset manager can be pretty ignorant and incompetent.


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## skc (4 April 2012)

Sino Forest files for bankruptcy and sues Muddy Water for exposing them...

http://ftalphaville.ft.com/blog/2012/04/02/944821/a-sino-suit/

Unbelievable if you ask me... a bit like thieves suing detectives, judges and the jury. "We wouldn't be convicted criminals if you didn't find us guilty!".


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## McLovin (4 April 2012)

It's really amazing that a fraud can have existed for so long. I mean this wasn't some 2c stock, this was a $6b company that was well respected.


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## skc (4 April 2012)

McLovin said:


> It's really amazing that a fraud can have existed for so long. I mean this wasn't some 2c stock, this was a $6b company that was well respected.




Enron was $80B and pretty well respected... most innovative, best place to work...


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## McLovin (4 April 2012)

skc said:


> Enron was $80B and pretty well respected... most innovative, best place to work...




True. Although from what I understand there's was accounting fraud (from what I've read no analysts could actually understand the accounts at all). Sino seems to be outright lying about assets you don't even have.


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## basilio (19 November 2020)

Thought I should revive this thread.

I think the Bronte Capital model  still offers some excellent opportunities in investment both long and when they identify some really smelly businesses.
Good story on John Hempton outlining his history and success/failures.









						Australia hedge funds: Hedgie seeks corporate scumbags
					

Bronte Capital’s John Hempton takes a unique approach to finding the stocks he wants to short; it has given him a cult following in his native Australia and beyond.




					www.euromoney.com
				







__





						Bronte Capital
					

The sometimes eccentric views of John Hempton




					brontecapital.blogspot.com


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## basilio (8 December 2020)

Not sure if this is the best place for this story so I will also post it elsewhere.

Where are the big shopping Malls  going in the US ? Do they have a future ? Are they viable ? 

*Could you make a killing by betting against the survival of shopping malls ?*
What would happen if you tried this stunt ?

*The $2 Billion Mall Rats*

The inside story of a black sheep hedge fund, their massive bet that shopping malls would crash, and how they proved Wall Street wrong.





						The $2 Billion Mall Rats
					

The inside story of a black sheep hedge fund, a massive bet that shopping malls would crash, and how they proved Wall Street wrong.




					www.esquire.com


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