Friday, June 29, 2012

Duties morality and short-selling: Part 2

Almost everyone said that I should tell the old man in the last post that he had lost his life fortune and that his advisor was a crook.

Only one person suggested I watch reruns of the Godfather for advice.

Does it change your mind if the crooked advisor is mafia?

What if there is only a 5 percent chance of him being mafia?

What if you plain do not know?







John

Disclosure: a journalist is going to do it for me - or at least sound the victim out. Seems safer that way. At least for me.

35 comments:

Michael Goode said...

Just get someone else to tell him. I volunteer.

Michael Goode said...

Just get someone else to tell him.

Adam said...

Why bother?

In all odds he will associate the bad news with the bearer and probably further resent you for profiting from his demise.

Do you need to accept the mafia risk? If he has no money left then the adviser is probably no longer a threat.

Scott said...

What is the point? Is there a fiduciary contract between the adviser and the loser client? If I suggest you buy ADV stock, you do and it tanks - losing your entire investment; you sue me and I have signed nothing! Is` there a contract? Seems like you just have hearsay.

chris said...

"Does it change your mind if the crooked advisor is mafia?"

Yep.

My bravado can only stretch so far before I begin to question if I'm being tough ... or just plain stupid.

Anonymous said...

You're a resourceful guy, John. Resources exist to send anonymous emails. Send him a message anonymously with incontrovertible evidence.

Anonymous said...

A Few Thoughts:

(1) What's obvious to you (or me), isn't necessarily obvious to others, i.e. X IS a fraud;

(2) What's obvious to you (or me), isn't necessarily the truth; and in the short-selling context, truth and profit don't always align, as you know better than I. I remind myself about Harbin Electric, and how shorts lost money, regardless of the veracity of Andy Left's claims.

(3) Doesn't your blog, and commentary you provide through various media, give ample opportunities for victims, potential victims to save themselves, learn from their mistakes?

LongShortTrader

David said...

If I was the old man I would want to know.

If the crook is in the mafia, which I doubt, I would still tell the old man.

I think the crook would be in more danger than you or the old man.

Nothing more dangerous than an angry old man with not much life left and a grudge!

David

Real Men Do This said...

The elderly gentleman most assuredly has a grandson or perhaps has a friend who does. That grandson should kick that advisor's ass then drag his half dead body and dump it on Adam Reeves' doorstep with a note: "don't bother coming to look for me. I did your job for you, chump. No need for a thank you note."

Americans take it up the rump all too often these days. There is a massive testorsterone deficiency in the USA.

Anonymous said...

mafia is soft these days. you're good.

side note: these pre-post prove you're not a robot tests are hard! fck!

Anonymous said...

In my humble opinion, the mafia angle is irrelevant to this discussion.

The investing business is one area that exhibits the survival of the smartest to a reasonable degree. Of course, luck/connections do play a role, but over long periods the smartest (which includes but not exclusive to, the most informed) survive.

When I get taken out by a more informed market participant, I do not begrudge him/her the success. Likewise, if I happen to be that person I do not care about the losses that others take.

It may sound unfair, immoral even, to some but that is the nature of this business. And then, whoever thought life was fair, anyway.

It behooves the unfortunate old man to have done his homework (including choosing his advisor). While I empathise with the gentleman, I do not sympathise with him.

Altruism is best left for another area.

Anonymous said...

And, yes, I would certainly smell the trail left behind by the advisor. Con artists are interesting people that trigger unintended consequences (positive, here, for the follower).

Always welcome.

derek said...

If he does not know he's been had after losing 2m then what can you tell him?

Anonymous said...

Isn't it a little too late to try to hide your identity? You gave enough details about the stock that I'm sure some people recognize it. If the wrong people hear about it, then it doesn't matter who told the client because they know exactly where the idea came from.

Anonymous said...

journalist is good. It also sounds like you know enough about the guy that you can find his family attorney or trusted advisor - have your attorney call his attorney and tell him the whole story.

That is one of the things attorneys are there for.

Anonymous said...

Why not tell him, extract his remaining investment from the fraud, and then have him invest the proceeds with you while you follow the fraudster to the next shorting opportunity?

You get more AUM, he has a fighting chance to boost his balance sheet, and you get the psychological/altruistic benefit.

buyersstrike said...

Let me assure you that no good deed goes unpunished, and far too often it is the messenger that is blamed.


True believers, whether they are owners of CAGC, CAST, the company owned by the old man, or (as Peter Deutsch and his father are learning) CMEDY and ZSTN, simply WANT to be led, happily, to the slaughter. Sheep indeed.

Anonymous said...

I was an early employee at a seemingly legitimate startup that eventually hit the OTC through a reverse merger. I can definitely attest that organized crime gets involved in this stuff (I got the hell out at that about that point). I'd suggest informing the old man via trusted third party. I think my reasoning has something to do with fighting fights worth fighting, vs fighting fights you can win (that's your day job

Absalon said...

Why tell him? If you felt truly bad about it you would give him part of the profit from your short. If that idea had not occurred to you then you're just wanking.

If you do tell him and the advisor winds up dead maybe you're an accessory to murder.

If you do tell the victim and the victim sues you probably get dragged in - the American legal system is so dysfunctional you want nothing to do with it.

Your public duty is to tell the relevant authorities that the stock was a fraud and the advisor was in breach of a ban.

If you want to go further than that, write some articles about how investors like your subject get cheated. In my experience investors like your victim usually have deep anti-government biases and think either that they are trading on inside knowledge or are engaged in a tax evasion scheme.

Anonymous said...

John, I never interfere in another Man's business without invitation. The market is the market It's not personal, it's business .
V Corleone

Bobby_dolce said...

I don't get it, half the guys here could care less about the old man and claim it's his own fault. Hog wash! This is a position I assume coming from professional hedge fund traders, and other industry types and shows a complete moral disregard for the less sophisticated investor. $10 or $10 million, a crime is a crime.

This is what's wrong with the investment industry and why the common man has given up on the ponzi scheme we call the stock market. The whole bloody things a sham run by crooks!

I applaud you John for having the courage and conviction to root this SOB out! You're a breath of fresh air in what otherwise confirms to me from allot of the responses here the true lack of regard for the fiduciary morality an investment adviser has to his clients and to the industry as a whole.

You're doing the right thing, those apposed to your views, and those who would ignore this are self centered cowards and should leave the business if they are representing clients. They are what's wrong with the markets and why the whole thing is falling apart.

It's high time someone stood up with some balls and started shinning a light on these SOB's. When the industry cleans up it's act for good maybe then the public will come back into the markets.

I'm proud of you John, there's more to life than making a fistful of dough!

I see you're one of the few that have figured that out.....

Bravo!

Anonymous said...

Ok John,
You have lost your moral compass if you even see a need to question what the right course of action to take is. Did it ever occur to you to NOT make any money out of this and let the old man know before it turned to shit? At would have been the right thing to do this time.
I wonder what your son would think of you if you told him the story? Would he be proud of you?

Anonymous said...

I've been thinking about this, and if I were that elderly man, I would NOT want to know. Probably no one, including himself, will ever know his motivation for risking most or all of his wealth. But if it was a choice between considering myself unlucky (market went against me), or foolish (not vetting the adviser), I'd take unlucky.

My reaction applies only in this specific situation - at this stage in his life and his finances, he has no reason to try to improve his market skills. You're right. It's sad.

John Hempton said...

There is one comment here that definitely needs answering... it is the one that suggests I should have told him WHILST I was going on...

Not true. Not true at all. If I did that I would have been a conflicted shortseller. The advisor would have simply dismissed me as a shortseller and that would have been the end of the story.

That was a losing strategy. Indeed I will come out and demonstrate why in another post.

J

Anonymous said...

I am surprised to see the amount of discussion this issue has prompted but a very simple point needs to be stressed. Most fund managers are not employed by investors to make ethical/moral judgements. Fund managers only have a duty to maximise returns subject to the requirements of relevant laws and regulations. Of course, if a fund manager wishes to adopt certain ethical/moral stances, they must be disclosed and fully described in disclosure documentation so potential investors can either accept or reject them as influences on the way the fund will be managed. The most disturbing aspect of this episode is that John seems to reserve the right to allow his investment decisions to be be somehow informed by his personal sense of morality without disclosing and defining any of his views in a form that would allow investors to evaluate them.

Jeff Matthews said...

John,

This is much ado about very little. You owe him nothing and he owes you nothing: what you owe is to your investors, and to them you owe everything.

Besides, as a professional in this trade, you already know there is nothing to be gained by trying to "help" anyone.

A long time ago, after hearing a "naked short-selling" conference call tirade by a CEO long since discredited in both his business acumen and his conspiracy theories, I wrote a blog to say the short-selling world doesn't work like that. I thought I was doing his naive audience a favor. I got repaid by being called far worse things than you've been called in some of these comments.

I learned quickly that what Paul Simon wrote was very true: "A man hears what he wants to hear and disregards the rest."

And to reiterate Point #1: any time you waste thinking about, or writing about, this patsy is time you haven't been thinking about your investments, of which your time is far more valuable, as you have proven.

Jeff Matthews

Anonymous said...

Amazing

if the old man went for a walk and was mugged in front of you, what would you do? "Its his fault for going for a walk"

Fraud is theft and theft is a crime at least where i come from. Give the old man the information to persue the necessary channels to prosecute for fraud. Last I looked they still do that in the USA.

"The only thing necessary for the triumph of evil is for good men to do nothing." Edmund Burke

"Cassandra" said...

Hasn't the CAIA entertained most flavours these conundrums, at least in spirit? Wouldn't the exam question look like:

Brenda is asked by a Portfolio Manager to research Fuorescent Thongs Mfg Ltd. for possible investment. In gathering data for her report, she discovers what she believes is incontrovertible evidence that its accounts are fraudulent and its directors and management have been acting fraudently in contravention of national securities law. Brenda should FIRST:

(a) Tell her boss by writing the details of her findings in research report and recommend immediately taking a short position,

(b) Detail her findings to her company's compliance officer.

(c) Report her findings the appropriate regulatory authority

(d) Take a short position for her own account in the shares of the fraudulent company

(e) Report her findings to the press to help prevent further investors from damage.

Of course this is a bit unfair, since I used "incontrovertible", and whether the information one possesed was "material non-public information" which itself would would entail obligations to charterholders and citizens - both moral and legal. I think you have no responsibilities to a victim or a fool other than to report actual or suspected fraud as early as possible ( BEFORE acting upon it for parochial gain) in the spirit of civically protecting the public interest. If no justice comes about, your sensibility of exposing the fraud through alternative means is admirable and should be pursued aggressively irrespective of mafiosi connection since there are plenty of avenues that allow one to anonymous expose cheats and frauds.

jreny said...

By helping him do you not provide him an advantage over the other smaller shareholders? If he sells all of his shares would he not move the price thus putting later sellers at a disadvantage who lack your advice? And the basis of them not receiving your advice, they were not wealthy once?

Put it on your blog or on yahoo.

Hank said...

Maybe I'm missing the points, but what regulatory body is it that does nothing to stop a crooked advisor?

Anonymous said...

John,

If you ask for opinions from a wide audience, I'd guess it includes me, so here's one take of it:

Nope. No duty whatsoever.

Short reasoning:
A man with 10 millions to invest could have hired you to advise him (or indeed invest with Bronte if you take that sizes). He didn't. Therefore, you don't work for him. You work for clients that pay you. And that means, you made them money on the stock, and you don't risk yourself professionally for reasons other then doing so.

Long version:
I have worked extensively with this kind of private investors - 3-20$m "to spare" and, from some angle, a very innocent image. And when I work for them, I do my best to do the best for them (ugh).
But the image your consciousness paints of that "old man" is wrong. 10 millions is definitely enough money to do your due diligence and hire good professionals. It's NOT the "life savings" story whatsoever - that would be 50k some REAL poor old man has on his retirement account.

What actually happened is that "old man" was either cheap, incompetent, or both. This always happens. Of all my clients, only ONE ever invited me and payed my admittedly very serious rate BEFORE he got into the trouble. Nope, they all start off with some "nice guys advisors" and "managers" (for when they try start-ups instead of stock investments) who's getting chosen and paid i-dont-know-how. Then they don't even monitor things enough while the disaster is unfolding.
And then at some point they are down, and they make this innocent look about how they "got made" and stuff - and that's what you're painting for us, and I presume for yourself. Sometimes they hire better guys (like myself) when things are really past point of no return, expecting some miracle. I actually had to turn several assignments down that way because after a hour-long examination I couldn't fathom a way I may help things (not a "crook" and don't want so sign up on DoA projects).

Knowlege of who is a crook and what is a scam is your professional expertise - you make your money off it. If you ever feel like doing some pro bono work, do it for charity or genuinely poor people - not for someone who was perfectly capable of "paying your rate" (in whatever form that could apply, e.g. invest with you or whatnot) to begin with but didn't.

(One reasonable exception is doing a demo work expecting further business, but this case doesn't look like that at all).

You didn't do nothing neither illegal nor amoral here.

Regards,
Dmitry.

Glen said...

I think the journalist angle is a good one.

I think you the old man should be told, but expect that he won't react too well immediately. The old man wasn't careful and is probably very angry, and probably won't listen to a reasonable explanation of what happened. He may even still believe his smooth talking adviser.

You can do less to help this old guy, who can't get his money back, then put pressure on this crook.

And while its doubtful he's organised crime, it's not selfish to think very seriously about getting involved with nasty people, particularly when you are jepodising his ill-gotten gains.

But giving the journo's or other public advocate type people the information they need to expose this type of guy - while remaining at arms length - would be a good thing, if it's possible to do it that way.

Thanks for putting up this story. This is a moral conondrum, and life is about far more than making money. It's a shame some other commentators show little empathy.

In this type of situation, often i genuinely don't know whether i should ring the old man. Often i know i should but really don't want to.

Anonymous said...

John,

Just because the guy had a lapse, that doesn't mean that he can't recover his reputation.

Take old Joe Kennedy for instance. In the 1920s, he really cleaned up with some notorious stock scams. Nothing illegal as such (at the time) but he certainly sailed close to the wind. Later, of course, he used his riches to buy himself a clean image - eg, with some well placed political contributions, he was able to secure himself a nice little ambassadorship. And, of course, three of his boys went on to have stellar public careers too, fueled by the old man's money, but without any of the stench of where it came from.

It just goes to show you that it is possible for someone to rehabilitate himself.

Regards, brolgaboy_redux

Anonymous said...

The old man knows as does those who follow the space. The real question is are they patsies or is this a bigger launder than it first appears.


http://www.thefinancialinvestigator.com/?p=740

John Hempton said...

Not that guy. Not that stock.

John

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