The new Enron - Implications for the market?

[basilio]

Some members might be aware of the unravelling of the multi-billion dollar Valeant Pharmaceutical Co. Essentially it looks like re -run of Enron and when one reads what has gone down so far it seems highly unlikely to have a happier ending.

This is a company that was valued $90billion earlier this year. Wonder what the impact will be on the markets as it plays out.

Interestingly enough one of the first people to call it out as dodgy was John Hempton from Bronte Capital. He has a long history of identifying companies that have doubtful legitimacy, outlining the case and then shorting the hell out of them.

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

Is this an Enron moment for the markets?

Date
October 24, 2015

HAS THE ENRON MOMENT ARRIVED IN THE US?

In June last year the founder of the Sydney-based Bronte Capital hedge fund, John Hempton, began blogging about a Wall Street superstar, Valeant Pharmaceuticals.

Valeant's shares had risen from around $US7 to $US129 in just over half a decade on the back of dozens of acquisitions by the time Hempton disclosed that he was shorting the stock, and explained why.

They continued rising and hit $US262.52 in August, valuing Valeant at just under $90 billion. Since then, they have more than halved to $US110, and in the past week – after the publication of reports alleging that Valeant has been pumping up its revenue – they have plunged 37 per cent, slashing Valeant's market value by more than $US20 billion.

The first thing Hempton did last year was point out that Valeant was reporting sensational growth in earnings that were adjusted for what it classed as non-recurring takeover costs, but reporting losses using America's default GAAP (Generally Accepted Accounting Principles​) accounting template.

Debt was more than 15 times Valeant's GAAP cash flow, he said, adding that on that measure, Valeant was a goner.

http://www.canberratimes.com.au/bus...n-moment-for-the-markets-20151023-gkgnxs.html

 

[basilio]

Re: The new Enron - Implications for the market ?

Had to add a little story that John Hempton (purportedly) told hs 12 year son to explain his work as a short seller of shares.

Fun interesting..

Daddy you are more evil than I thought.


....But then the area our fund is best known for came up. I am a short seller.

I went through the mechanics of short-selling. I borrow a share from a broker. I sell it in the market. If the stock goes down I get to buy it back for less than I sold it. I repay the loan by returning the share and I keep the profit. I explained it does not work so well when the stock goes up.

Then I got to the nub of the issue: I am a short-seller of frauds and stock promotes. I look for people in the stock market who have fake accounts and who are stealing from gullible shareholders (also known as marks, dupes, fools, day traders or mutual fund managers). There is a torrent of money being ripped off (many billions of dollars for instance in the case of the Chinese frauds a surprising amount of which came from Fidelity). Through short-selling I stick up my sail on my little boat in the hurricane of theft and some of that loot drops into the cabin.

He asked me how I find all these fake accounts and fake companies and I told him a few of our methods (we have many).

He asked if I ever dobbed the scammers in to regulators and I said I did sometimes but it was mostly not a satisfactory experience. To be a good short-seller I only need to be right about 90 percent of the time. If most the companies I short-sell have fake accounts I will do fine. However if I dob them into regulators I need to be absolutely right in that it does not bode well to dob an honest person into the authorities. So mostly I keep my gob shut and express my opinion (and it is an opinion) in a bet in the financial market.

Moreover talking about which stocks you think are frauds is a dangerous thing. Regulators sometimes (even foolishly) have been known to investigate short-sellers for telling the truth. (Being short Lehman Brothers and vocal about it was a good way of getting an SEC investigation for talking truth to power.) Also crooks sue short-sellers giving you nasty and expensive legal bills.

Silence is altogether a better strategy.

But then he came to the nub of the issue. The easiest scammer to find is a repeat offender. We actively seek out people who promote dodgy stocks and who who are repeatedly involved in dodgy companies. The slogan is “once a scumbag, always a scumbag”. That slogan is probably not strictly accurate - but we only need to be right 90 percent of the time to be fantastic at this business – and the recidivism amongst scammers is surprisingly high.

In that sense long sentences for people like Bernie Ebbers are not in my interest. I would prefer slime-bags to be back-in-business rather than in prison. More opportunities for me.

So, perceptively my son asked whether it was in my interest to dob scammers into regulators – he asked whether the reason we did not do it much was because of the reasons stated above or because we liked the scammers to be free and profitable. Alas – and I had to confess it – at least part of it was that being a successful short-seller required that regulators were inadequate to the task of policing fraud.

I did not talk about this with him – but it is becoming harder under Mary Schapiro. The SEC is getting better at their job – and that is not good for me. It would be better if regulators stayed hopeless. Alas they are getting better.

So, says my son asks you like nasty people to steal from poor investors, mutual funds (and he did not say pension funds for school teachers) so that you can join them in taking the loot by being a short-seller – and you don't want the regulators to do anything about it because there are more opportunities for you?

Sheepishly I confess yes.

And he says with a mixture of admiration and horror: “daddy you are more evil than I thought”.

http://brontecapital.blogspot.com.au/2012_04_01_archive.html

 

[basilio]

So Monday came and went and Valeant held a press conference to (try) and bat away the questions surrounding it's marketing and finances.

The hole is getting deeper. Turns out not only did they set up their own captive speciality pharmacy but it seems that Valeant staff worked there under false names. Why is this so ? John Hempton sums it simply

So here is the pertinent question: why would Philidor (which is staffed by Valeant staffers using false names) use the name of a two-bit pharmacy to send prescriptions all over the United States including to States where the two-bit pharmacy was not licensed?

The only explanation I can come up with - and one that the company should address in the conference call - is that they did it because they were getting rejections or audits from insurance payers when using Philidor's name. Hence they used the NPI number of another pharmacy and the payers paid without audit.

I expect the company to provide an alternative explanation in the conference call because this looks like deception using a mail service to deprive property from a financial institution: classic mail fraud. And because it is against an insurance company (a finacial institution) the monetary penalty is up to $1 million per instance. And each instance is separate and fines are cumulative.

Don't even try to work out the fine.

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

Meanwhile Valeant is trying to get the SEC to investigate the US company that called it out on it's practices.!

 

[Tyler Durden]

This is the first I've heard of it. Wonder why it hasn't been in mainstream media?

 

[skc]

So Monday came and went and Valeant held a press conference to (try) and bat away the questions surrounding it's marketing and finances.

Thanks for sharing this. A very interesting story.

Meanwhile Valeant is trying to get the SEC to investigate the US company that called it out on it's practices.!

I think Sino Forrest tried to sue Muddy Water for exposing it... or something ridiculous like that.

This is the first I've heard of it. Wonder why it hasn't been in mainstream media?

Shorting fraud is a pretty specialist field.

 

[Tyler Durden]

Thanks for sharing this. A very interesting story.



I think Sino Forrest tried to sue Muddy Water for exposing it... or something ridiculous like that.



Shorting fraud is a pretty specialist field.

Sorry I meant why hasn't there been any news on Valeant.

 

[skc]

Sorry I meant why hasn't there been any news on Valeant.

Do you mean news in Australia mainstream media? Probably because it's not nearly as interesting as what "name your pop star" has been wearing of late!

There's been plenty of media coverage in the States.

Note that Valeant hasn't collapsed like Enron yet. It's being accused of doing something dodgy and it's struggling to overcome those accusations... but you can give them beneift of the doubt and say there's no actual proof of anything illegal happening yet.

 

[basilio]

No proof of actual wrongdoing/ anything illegal SKC ?

Not quite sure what that means. If you read the material compiled by John Hempster there seems to be a mountain of evidence to show illegal behaviour with regard to running captive pharmacy's and other activities.

At this stage it hasn't been before a court do it hasn't been formally found guilty of wrongdoing. And of course the way the law works nothing still might occur. However the financial jiggery pokery may well cause investors to bail out quickly.

 

[skc]

No proof of actual wrongdoing/ anything illegal SKC ?

Not quite sure what that means. If you read the material compiled by John Hempster there seems to be a mountain of evidence to show illegal behaviour with regard to running captive pharmacy's and other activities.

Proof of something illegal can only be achieved through the court of law. There may be lots of evidence... but it has yet to reach the definition of proof.