In an episode of the hit NBC sitcom “Seinfeld,” Kramer made a bet at an airport that a Pittsburgh flight would be delayed. Coincidentally, his rowdy friend Jerry was on that plane and held up the takeoff. Unfortunately for Kramer, Earl — his counterpart in the deal — caught on. He took back his check and ripped it to pieces. The bet was off.
If only it was this easy to call off unfair bets in the financial sector. Some hedge funds are copying the Seinfeld model, yet nobody is ripping up the checks and these bad actor hedge funds are making billions.
A handful of hedge funds are shorting companies for profit. They are placing bets that they know will fail because they are taking actions to make the companies fail after they short the company. For these hedge funds, shady financial tactics and deceptive public relations campaigns are part of the business model to kill companies for profit.
It’s ridiculous and it’s absurd, yet it’s happening. And most are getting away with it without a peep from Washington or a cry foul from Wall Street.
Perhaps the most famous case of these shady hedge fund practices came from Martin Shkreli of MSMB Capital Management. Shkreli founded a pharmaceutical company called Retrophin and immediately set out to monopolize the market. To destroy his competitors, he lobbied the FDA to reject approval of their new product offerings, while at the same time short selling their stocks to make a profit off of their demise. Shkreli is now in prison and awaiting prosecution for securities fraud.
In 2013, GSO Capital Partners refused to renew a $120 million loan to gambling company Codere unless it failed to pay interest on its debt in time. The reason? GSO made a bet that its payments would be delayed. In the end, GSO successfully bullied Codere into prolonging payment, and the asset management company is estimated to have made $15 million off the delay.
Overstock.com was subjected to financial distress when Wall Street firms began shorting its stocks before they even gained possession of them. In other words, they created and lent out imaginary shares in order to increase the supply that could be sold short. This manipulative brashness artificially increased the number of shares on the market, hence shredding their value. Wall Street’s antics were severe enough to put Overstock on the National Securities Cleaning Corporation’s “threshold list” — the infamous index of the country’s highest failed deliveries on securities — for a whopping 667 consecutive days.
Bill Ackman’s Pershing Square is the most notorious bad boy hedge fund operation when it comes to hedge fund’s flying close to the line of ethical versus unethical activity. Fortune published an excellent piece last year about Ackman’s one-man war against the health product company Herbalife. Ackman shorted the stock then hired some Washington, DC lobbyists to make good on his bet.
Radio and outdoor advertising giant iHeartMedia has recently found itself under similar attack from the hedge fund Elliott Management, headed by Paul Singer. According to the “New York Post,” Singer’s group, which holds iHeartMedia debt, may have also purchased default swaps. Now, to make these default bets pay off, Elliott Management has reportedly attempted to leverage its ownership of iHeartMedia debt to actually drive them to default.
The actions of these hedge funds are unquestionably unjustified — and yet, in more instances than not, the SEC allows them to continue. The government is displaying a fatal inconsistency by railing against insider trading — the act of buying and selling securities with nonpublic information — and yet permitting hedge funds who use nonpublic information to kill companies in order to make a stock bet pay off.
It’s time to let the free market, not fraud-inducing hedge funds, decide which companies succeed and fail. Any hedge fund that drives a company into bankruptcy by buying up debt then crashing the company is not acting ethically and committing fraud against all the investors who did not know that an insider was going to purchase debt then cause a default. Same with hedge funds who short a company stock then go to the government to kill the company’s stock with rumors of endless federal investigations.
It’s time we put an end to marauding in the financial sector.