| Here is a hypothetical: - You like to trade stocks, and you are active on social media. "Nothing here is investment advice," you say, at the top of all your social media feeds.
- You come across a stock called XYZ. You open up its most recent annual report and read the first paragraph. "We are the leading manufacturer of widgets in Ruritania," it says. It hooks you. "This company looks cool," you think.
- You go to your brokerage app and buy 1,000 shares of XYZ.
- You tweet: "Just bought 1,000 shares of XYZ. This company looks cool! It's the leading manufacturer of widgets in Ruritania, which is a great position to be in."
- You read the second paragraph of the annual report and it's terrible. You read the third paragraph and it's even worse. You realize that in fact XYZ is a terrible investment, and you decide to sell.
- You go back to your brokerage app and notice that XYZ is up 5% in the five minutes since you bought it.
- You sell, at a profit, five minutes after you bought (and four and a half minutes after you tweeted about it).
- You neglect to tweet that you sold.
Is this bad? I mean, I am trying to write in a way that isn't very bad. You bought and sold based on public information. Were you a little sloppy, buying after the first paragraph and selling by the time you hit the third? Well, maybe, but that's not unreasonable. Sometimes investment opportunities are short-lived, and it might make sense to establish a position on a hunch before you have done extensive due diligence. Here's George Soros: I also developed the practice of "investing first and investigating later." It worked very well because if an idea was appealing enough to attract me on first hearing, it was likely to have the same effect on others. If, on further investigation, I found it to be flawed I could always turn around and liquidate my position with a profit provided I was not the last one to hear it. If the idea checked out, I was better situated to increase my position because I had already bought at a lower price. …
Same with you: The company appealed to you on first hearing, you bought, on further investigation you noticed it was flawed, you turned around and liquidated your position with a profit. No problem. Did you mislead other investors? The people reading your tweets? Well. First of all, everything that you tweeted — about XYZ and about your own purchases — was true, or your honest opinion, at the time you tweeted it. It was a bit sloppy and under-researched, sure, but so what? You were not a fiduciary for your readers; you were not giving them investment advice. It said so right at the top of your feed. You were just tweeting the truth about your own purchase and your subjective reasons for it. If your readers wanted to copy you, that's their business, and they assumed the risk that they might not be able to copy you perfectly: They can't really have expected you to keep them posted in real time when you changed your mind. A while back we discussed a disclaimer from activist short seller Kerrisdale Capital at the back of one of its research notes: Note that we're not recommending readers of our communications to buy, sell, short or otherwise transact in any securities; we are just explaining our own reasons for having a long or short position in a given security. Given that no recommendations are being made (we're not your financial advisor, let alone even know who you are), we are certainly not recommending that you, or anyone, hold a security until our estimated fair value of the security is reached.
On the other hand there's something a bit too cute about this. Why did you tweet? Why did Kerrisdale publish that report? Why didn't you, and they, just quietly do the trades without telling anyone about them? What is the purpose of explaining your own reasons for trading? Presumably you tweeted for some combination of reasons including: - The reason anyone tweets: You wanted attention; you wanted people to notice you, to be impressed by your prowess or amused by your prowesslessness.
- You wanted to participate in an exchange of ideas: Perhaps your audience is smart and would raise objections to XYZ; your tweet could serve as a way to investigate your thesis.
- You thought, "if an idea was appealing enough to attract me on first hearing, it was likely to have the same effect on others," so you helped it along. You told other people about your idea, so that they'd buy the stock, so that "if, on further investigation, I found it to be flawed I could always turn around and liquidate my position with a profit."
Those reasons do not add up to "you are a fiduciary for your readers, providing them with investment advice, and you have an obligation to make sure that your advice is reasonable and based on sufficient investigation, and to alert them if it turns out that you were wrong or change your mind." But neither do they quite add up to "this is for entertainment purposes only and surely no one was taking your advice." If you were trying to get your audience to find you impressive, or to follow your trades and push up the stock, maybe you owe them something. Because the bad form of this hypothetical it's a pump-and-dump scheme: - You buy XYZ.
- You go out to your devoted social-media followers and say "XYZ is a SCREAMING BUY, you gotta own this!!!!"
- You know from experience that they will buy XYZ on your advice, and they do, pushing up the stock.
- You sell as they buy, making a profit.
- You don't care about XYZ as an investment, you don't even know what they do, you are not actually picking stocks, you are just engineering a result from your followers' attention.
But, again, I wrote my hypothetical to be not that bad. There are versions of this that are basically legitimate and well-intentioned, just sloppy. Anyway here's this: The Securities and Exchange Commission [yesterday] announced that Ryan Choi agreed to pay more than $1.8 million to settle charges that he negligently engaged in a scheme to defraud readers of Citron Research in connection with two tweets issued by the platform. In July 2024, the SEC charged Andrew Left, who operates the Citron Research website and related social media platforms, for engaging in a scheme to defraud Citron Research followers by publishing false and misleading statements regarding his supposed stock trading recommendations. The SEC's complaint against Choi alleges that in December 2020, Choi worked with Left on the research and content for two buy recommendations that Left issued through Citron Research. According to the complaint, Choi failed to act reasonably by not conducting adequate research or due diligence, which he provided to Left to support the recommendations that Left included in the Citron Research tweets. The complaint further alleges that Choi quickly traded on price increases that came after the two Citron Research tweets, and negligently failed to ensure that this trading activity was adequately disclosed in the tweets. According to the complaint, Choi made a total of $1,647,217 in profits in connection with his trading around these two tweets.
We have talked a few times about the SEC and criminal cases against Left. Choi worked with Left for a while, and the case against him is sort of a subset of the case against Left. Here's what he did, according to the SEC complaint: On December 18, 2020, Choi purchased VUZI call options between 1:03 and 1:46 pm, meaning that he stood to profit if the price of VUZI increased. That same day at 2:04 pm, Citron Research published a tweet stating "Getting emails about shorting $VUZI. NO WAY we would short this flyer. Small market cap with story that is tied to 5G, $AMZN and $PLUG and Covid. There has to be easier pickings...still doing research. Risk/Reward easier on other high flyers." Choi did not conduct adequate due diligence or research on VUZI, and Left knew that he had not done so when Left issued the VUZI tweet. … Following the rise in the price of VUZI stock immediately after the Citron Research tweet, Choi began to sell his VUZI call options the same minute as the tweet's publication, profiting from the price increase. Choi had completely exited his VUZI position within seven minutes of the tweet. After that, Choi conducted research, including by speaking with VUZI company representatives and industry experts to determine if the company was a good long investment. Choi concluded and communicated to Left that "we can't have enough conviction in this being an actual long."
It's a strange complaint, no? They didn't even say "we're long VUZI." They said they wouldn't short it, and they didn't. Choi "did not conduct adequate due diligence or research on VUZI," says the SEC, but adequate for what? To not short it? To buy some call options? To tweet that tweet? That tweet said "still doing research"! It would be hard to read that tweet and think "Citron has done extensive research on VUZI and thinks it's a buy," since the tweet actually says that (1) Citron is not short VUZI and (2) it's still doing research. You see what the SEC wants to say, what it thinks happened. The SEC thinks that Left and Choi were doing a pump and dump, that they were trying to trick their audience into buying VUZI so they could sell. But it doesn't quite say that, presumably because it doesn't have proof. Instead it says that Choi "negligently engag[ed] in conduct that operated as a fraud on the readers of Citron Research," and "failed
to act reasonably by not conducting adequate research or due diligence." The other situation is a stock called XL, where Choi bought some call options and Left then tweeted that Citron was "long $XL tgt $60," i.e., a price target of $60. The stock went up a bit (from $24.93) and Choi sold immediately, "despite Citron Research's tweet notifying readers that Citron Capital was long and thought the stock price would go to $60." Unlike with VUZI, Citron did say it was long, and kind of pumped the stock. The tweet went on: TAM of $XL over $1T. Electrification as a Service (EaaS) will be massive . . . more than twice $QS and $LAZR combined. Blue chip customer base with FedEx, Coke, Pepsi, DHL and many more. SPACS always cautious-this story has great Risk/Reward.
The stock eventually tanked, a Citron follower complained on Twitter, and: In response, Left admitted the recommendation on XL "sucked" and claimed that "I fired the analyst that made that call," referring to Choi. In fact, Left did not fire Choi and continued to work closely with him through at least 2022.
Yes, well, I suppose saying that you fired an analyst, when you did not fire him, could be considered securities fraud. One theory that I kind of like is that day trading meme-stock options is a gateway drug for sensible retirement investing. The idea is: - You're a young person, bopping along with no thought of the future, just looking to have fun.
- You see a brokerage ad that is like "have fun trading zany financial products," and you decide to check it out.
- The brokerage app is really fun, there's confetti when you do a trade, you can make or lose a lot of money quickly and you get hooked.
- You mostly lose money.
- Eventually you have lost, I don't know, half of the $1,000 you put into the account, and you're like "actually this isn't that fun."
- But now you have a brokerage account.
- And you are two months older and $500 wiser.
- You see a newspaper article that is like "are you saving enough for retirement" and you think "huh I should save for retirement, maybe in my brokerage account."
- You buy low-cost broad index funds and stop checking your account.
I do not want to endorse this theory too strongly, and I'm not at all sure it's true. But the idea is that you can get hooked on the broad concept of "investing" via the fun gambling forms of investing, and eventually mellow and mature into the boring sensible forms. Whereas this does not work as well with, say, sports gambling. There is not really a form of sports gambling that is "invest your money passively in long-term economic growth." The fun gambling is all there is. In Europe things seem even zanier than they are in the US, with a lot of retail leveraged contracts-for-differences (CFD) trading where, instead of buying stocks, you just do a bet with a bookmaker (sorry, "brokerage") on whether the stock's price will go up or down. Here is a fun Bloomberg story about X-Trade Brokers Dom Maklerski SA., a Polish CFD brokerage that has mellowed and matured: [Founder Jakub] Zablocki's plan was simple: give people instant access to leveraged bets across hundreds of global markets. … Two decades later, that simple idea has transformed the firm into one of the largest retail trading platforms in the world, which operates in more than 13 countries, serves about 1 million customers and is worth $1.9 billion. … As online investing became popular, Polish financial regulator KNF started to require XTB to tell potential clients that about 76% of customers on such platforms incur losses.
Right, yes, day trading leveraged CFDs is sort of obviously bad for you. But maybe it's just the starting point of the customer's financial journey, and of XTB's for that matter: XTB has started to expand into real securities. In 2020, it offered trading on the most liquid foreign equities and two years later it launched brokerage accounts allowing free trading on Polish stocks on monthly volumes below €100,000. Last year, XTB started to pay interest for free cash kept by its clients, and this month it offered pension saving accounts exempted from capital gains tax. It's also mulling widening its investment options to bond markets. "We understand that our clients may have different needs, and not everyone is keen on aggressive trading only," XTB's Chief Financial Officer Pawel Szejko said in an interview. "We want to become one-stop shop for all their investments. We prefer our clients to stay longer with us and to diversify their investments, as over half of our revenues comes from spreads."
From the US perspective it is weird to see a broker be like "we want to cater to all of our investors' tastes so we eventually decided we should get into stocks just in case some of our customers might want that," but I guess it is progress. I guess the way it works is that when people get their credit card statement, they look at it, and then they call up their bank to dispute any fraudulent charges. So the day that people get their credit card statement is a busy day for the bank's customer service department. Fortunately, there is not generally one day that people get their statements: Everyone gets their statements on different days, so the work is spread out over the whole month. It would be bad if everyone got their statements on the first of the month: They'd all call customer service that day, the lines would be swamped, calls would get dropped, frauds would go uncorrected, regulators would step in, the bank would be embarrassed and fined millions of dollars. And then the rest of the month the customer service representatives would sit idle. Bad plan. I am not saying this from any particular place of domain expertise about credit-card issuing. I'm not even sure it's right. But there are a lot of domain experts in credit-card issuing, and they tend to work at credit-card-issuing banks, and presumably they have long experience with, and pay close attention to, boring operational stuff like this. Whereas big tech companies and big investment banks maybe don't: Goldman Sachs will be ordered to pay tens of millions of dollars in penalties by the Consumer Financial Protection Bureau over its handling of its credit-card business, according to people familiar with the matter. The enforcement action is tied to an investigation into Goldman's customer service operations, including how it handled fraud and refunds, with a focus on its Apple credit-card partnership, the people said. ... The enforcement action is expected as soon as this week and the exact fine amount couldn't be learned. The total penalties, which include some customer reimbursements, are expected to be north of $50 million. … Privately, some Goldman executives have blamed Apple for regulatory scrutiny that the bank has come under, the Journal has reported. One of the issues: Most card programs send out cardholders' bills on a rolling basis throughout the month. Apple cardholders get their bill at the beginning of each month, which made it hard for Goldman customer-service employees to keep up with a flood of requests early every month.
It's not quite that it's illegal to send out all your credit-card bills on the first of the month. "If you send out all the bills on the first of the month you'll pay a $50 million fine" is an unexpected product of the interaction between consumer financial regulation, fraud prevention and customer-service utilization rates. If you're new to credit cards you might not know that. There are things that you should not put in email. Some are obvious: If you're planning to rob a bank, don't send emails with subject lines like "Bank Robbery Plan." Others are more technical: If you are a manager at a giant tech company and you are looking for ways to increase your market share, you might think nothing of sending an email saying "ways to increase market share," but nooooooooooo, that's bad, don't do that. (Not legal advice!) For a while, if you worked at Goldman Sachs and emailed your colleagues to say "my favorite literary adaptation is the Muppet Christmas Carol," you'd get in bad trouble. In different industries, at different times, there are different terms of art that will get you in trouble if you put them in writing. One problem is that in this age of mostly written permanently preserved electronic communication, people tend to put everything in writing, including the bad stuff. A meta-problem is that, in this age of mostly written permanently preserved electronic communication, if you want to tell people "hey stop putting this in writing," you will probably do that in writing. And that's worse. An email saying "ways to increase market share" is probably less bad than an email saying "if you are going to email about ways to increase market share, make sure to call it 'query share,' because we don't want to get in trouble for being monopolists." Mounjaro is Eli Lilly & Co.'s blockbuster weight loss drug. Its active ingredient is tirzepatide. You can, apparently, buy tirzepatide "as a research chemical for lab research and veterinary purposes," and you will pay a lot less for it than you'd pay for Mounjaro. Then you just mix it with water, put it in a syringe, jab it into yourself, and boom, you're losing weight for a fraction of the price. This is extremely not medical advice, or legal or investing advice for that matter. Don't inject yourself with homemade veterinary weight-loss drugs, come on. Still this arbitrage is obvious enough that: A drug vendor in Washington state is accused of running an outlandish scheme to sell do-it-yourself kits to make illicit knockoff versions of weight-loss and diabetes drugs, Zepbound and Mounjaro. For the alleged scheme, vendor Pivotal Peptides has customers buy a set of ingredients they have to mix together to create their own injectable versions of the drugs. Customers don't need a prescription or even a medical consultation to order the kit, even though the brand-name drugs are prescription-only. That may not be surprising, though, since the dubious white powder customers receive is stated to be "a research chemical for lab research and veterinary purposes only." Once purchased, the kit's instructions recommend users disinfect their home work surface before beginning and stress the importance of using the sterile water included in the kit to dissolve the powder to the desired concentration. The instructions then explain how to inject oneself with the homemade mixture using a 30-gauge syringe.
That is from Ars Technica, reporting on an Eli Lilly lawsuit against Pivotal Peptides. Here is the complaint. That's not even the fun part. The fun part is that Lilly sent a cease-and-desist notice, and Pivotal Peptides allegedly did this: Fully aware that its actions are illegal, Defendant instructed customers in coded (but obvious) language that: "If a favorite product (starting with T) was your go-to, that name can't be used in any correspondence with me or listed on my price sheet anymore. Therefore, I need another identifier and decided (for now) to call this peptide '11mg.'" The letter went on to state that the code-named product "is Pivotal Peptide's [sic] bestseller," and "it is the only T size available from PP right now except by special order." At the end of the email, Defendant reiterated: "Remember to order '11 mg' with the latest price to identify the product you want, if applicable, and no longer use T in our communication."
Whatever could it be. I sympathize! You want to use a system of codes to avoid putting bad stuff in email, but the most natural way to coordinate that system of codes is by putting it in email, so you end up here. The Quarter-Trillion-Dollar Rush to Get Money Out of China. Frontier, Spirit Airlines Revive Merger Talks. Deutsche Bank Loses Court Fight With Postbank Shareholders. HSBC east-west overhaul reignites break-up debate. A Small Bank's Failure Leaves Big Depositors Feeling the Pain. Nigeria drops money laundering charges against detained Binance executive. Applications to M.B.A. Programs Soar. How Much Fun Can You Take at Your Work Conference? No One Knows How Big Pumpkins Can Get. Donald Trump's ex-chief of staff John Kelly says he is a fascist and would govern as a dictator. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
No comments:
Post a Comment