(Bloomberg Opinion) -- Tesla Funding, Lawsuit, Accounting, Podcast, Etc. Watch 2018.
Huh, you don’t see this every day:
Citron Research founder Andrew Left, an activist short seller known among other things for calling beleaguered drug company Valeant a “pharmaceutical Enron,” is suing Tesla Inc. and Chairman Elon Musk for inflating the company’s stock price.
In his lawsuit, Left seeks to represent a class of investors who traded Tesla shares from Aug. 7 to Aug. 17. The suit cites Musk’s “long-standing public feud with short sellers,” claiming he manipulated the price of Tesla securities to hurt such investors -- and in so doing damaged all buyers of the company’s shares by issuing false and misleading information.
To be clear, the reason you don’t see it that often is that generally short sellers are happy when companies fraudulently manipulate their stock. Short sellers love it when they find a company that is a market darling but secretly just a bunch of cobwebs: Then the short sellers can sell the stock at a high price (because the market is fooled), wait until the market notices that there’s nothing there (and perhaps help that process along by publishing negative research), and then buy the stock back at a low price when the market collapses. When Elon Musk tweeted on Aug. 7 that he was thinking about taking his company private at $420 per share, and the stock shot up from $340ish to $380ish, that was a great short selling opportunity, if you correctly concluded that he wasn’t actually going to do it. (There were signs!) The stock closed yesterday at $280.95. If you did that trade, you did great and have no reason to sue Musk.
Left’s problem is that he bought Tesla shares after Musk’s tweet. “In response to the tweets,” says his complaint, “many Tesla short-sellers were forced to cover their positions at artificially high prices, losing approximately $1.3 billion in a single day.” (An exhibit to the complaint makes clear that he was trading very actively in the hours and days after Musk’s announcement, alternately shorting and covering.) I don’t know how universal that experience is — probably plenty of short sellers just kept their positions on, and others gleefully jumped in to short Musk’s announcement — but Left argues that it was Musk’s goal:
Defendant Musk has a long-standing public feud with short-sellers and has threatened them in the recent past. For example, on May 4, 2018, he tweeted that the “short burn of the century [was] comin[g] soon” and that the “sheer magnitude of the short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit[.]” He then tweeted on June 17, 2018 that Tesla short-sellers had “about three weeks before their short position explodes.” As described herein, Defendants’ statements were an ill-conceived attempt to artificially manipulate the price of Tesla securities in order to “burn” and “squeeze out” the Company’s short-sellers.
Left’s class-action complaint isn’t limited to short sellers — it’s on behalf of anyone who bought or sold Tesla securities between Aug. 7 and Aug. 17 — but it probably does help that he can point to Musk’s obvious personal animus against people like him. If you’re accusing someone of securities fraud, it helps to have a reason that they might want to defraud the market; often the reason is “because they were selling stock into the fraudulent demand,” but here Musk and Tesla weren’t selling stock. Musk’s extremely public and intensely self-documented desire to burn short sellers, though, is a pretty plausible explanation for why he might announce a going-private transaction without actually intending to do it.
Also I have to say there is something tidy and logical about a short seller suing a company for securities fraud. Usually the plaintiffs in these cases are stock owners, and there is an obvious inefficiency when shareholders sue their own company: If they win, then the company will give them money, but it was their money in the first place. It’s just a transfer of money from shareholders to shareholders, with lawyers taking a cut. Meanwhile short sellers really want to cost the company money; if they win their lawsuit, then it is just a pure win for them.
Elsewhere, Tesla’s chief accounting officer is quitting after a month on the job, which is fine, it’s fine, don’t worry about it, it’s totally normal and fine:
Dave stated: “Since I joined Tesla on August 6th, the level of public attention placed on the company, as well as the pace within the company, have exceeded my expectations. As a result, this caused me to reconsider my future. I want to be clear that I believe strongly in Tesla, its mission, and its future prospects, and I have no disagreements with Tesla’s leadership or its financial reporting.”
I mean to be fair he started the day before Musk tweeted about going private, which really did increase the public attention focused on Tesla in a way he couldn’t have predicted. On the other hand it also increased the public—and regulatory—attention focused on Tesla’s numbers, which the Securities and Exchange Commission was looking into even before it was forced to look into Musk’s going-private tweets. You hate to see your chief accounting officer quit because he is stressed out by people paying so much attention to your accounting. That’s exactly when you need a chief accounting officer!
Also Tesla’s head of human resources quit this morning.
We talked the other day about two theories of Tesla’s problems: One is that the culture of 24/7 workdays and reckless decision-making causes trouble, while the other is that Tesla is beset by saboteurs who are secretly working for short sellers. Which one is this? It sure looks like the first one: The CAO is burned out by “the pace within the company” and the attention brought down by Musk’s impulsive tweeting. But if he pops up next week working for a Tesla short seller, and using his knowledge of Tesla’s books to bet against it, then … one, that will be amazing, but two, I will have to concede that Musk has a point.
In more Tesla news, I was on Bloomberg’s Odd Lots podcast to talk about Musk’s dalliance with going private. And: “Elon Musk sipped whiskey and smoked marijuana during a 2 1/2-hour podcast with California comedian Joe Rogan that touched upon everything from flame throwers and artificial intelligence to the end of the universe,” and I have to say that for a man who complains constantly about working 120-hour weeks, sleeping at the office and never seeing his family, he sure seems to waste a lot of time on the internet. Of course I find that extremely relatable.
Lending for IPOs.
We have talked many times before about how investment banking is a Maussian gift economy in which banks bestow lavish gratuitous gifts on companies with the expectation that one day the companies will do the same for them. The basic rationale for this system is probably that it is hard to evaluate investment banking services — it is all advice and introductions and negotiation and judgment — so giving potential clients a free sample is a good way to convince them that you know what you’re doing. But from the banks’ perspective there are some other big advantages. It is probably more lucrative than just, like, charging people for services: The pricing is less transparent, people are more willing to pay you a lot if they are bound to you by gratitude and friendship, and these relationships of loyalty and trust probably do reduce grubby price competition.
More than that, though, it is nice for the bankers. They are not just tradesmen doing a service and collecting a check; they are trusted advisers and essential partners and respected peers and beloved friends to their corporate-executive clients. Their relationships are deep and rich, and when they work through the night advising a client they are not just giving up time with their families for money: They are being good people, good advisers, good friends; they are deepening the connections to important people in their lives; they are doing the right thing for a client who needs them. There is a nobility, a sense of purpose, in building and sustaining relationships that you don’t get from just doing some work for a check.
Anyway obviously you gotta lend to clients to get roles in their initial public offerings, but this feels a little grubby and sad:
SoftBank Group Corp. has told potential underwriters seeking a large role in the blockbuster IPO of its Japanese wireless unit that they should offer to lend to other parts of the parent company’s empire, said the people, who asked to not be identified because the matter isn’t public.
One option being discussed is banks lending a combined $8 billion, said two of the people, with SoftBank’s stake in British computer-chip designer ARM Holdings Plc being used as collateral, one of them said. Loans against stakes in other companies have also been considered as the group dangles the carrot of participating in the IPO of SoftBank Mobile, the people said. Firms offering financing are seen as much likelier to get a spot on the IPO, they said.
So much of life is about the fine but important distinction between a “relationship” and a “quid pro quo.” Not — to be clear — that there’s anything wrong with the quid pro quo here. Giving money to SoftBank executives in exchange for a role in the IPO would obviously be bad, but lending money to SoftBank to win banking business with SoftBank is utterly normal and expected. It’s just socially nicer if it’s a little more subtle and indirect, if it’s more like “we will be a good partner to you because we want a long-term mutually beneficial relationship” and less like “the price tag for an IPO mandate is $2 billion of loans.”
Crisis anniversary.
Next weekend marks 10 years since the day that Lehman Brothers Inc. filed for bankruptcy. I suppose you could argue for other dates being the pivotal moment of the global financial crisis, but I think most people sensibly take Lehman Day as the anniversary of the crisis. Certainly I have a vivid memory of where I was on Sept. 15, 2008 (on vacation, in Napa, very confused about why no one around me was freaking out), which is not true of, say, Bear Stearns Hedge Funds Day. So expect a lot of crisis commemoration in the next week or two.
Here’s one from the Wall Street Journal about some people who definitely remember where they were on Sept. 15, 2008: at Lehman Brothers, starting their first day of work. Oops! “During training, everyone was learning to do things like model Excel while we watched the stock price drop,” says one. (The official start date was Sept. 15 but the training was before that; after training, there was no stock to drop.) But not really that oops:
I was preparing for a licensing exam in my apartment on Sunday, Sept. 14, and there was a new news story every minute. I refreshed my computer browser and all a sudden there was a headline that Lehman declares bankruptcy. I got that feeling in the pit of my stomach. The next day we all went in to work, but everyone was a zombie.
I kept working there, but this cloud was hanging over us. I worked in the fund of hedge funds group for two and a half years, but then got super jaded. I went to Peru and worked for a nonprofit for almost a year.
I mean he stayed there for two and a half years and left, not because he was working for a bank that had imploded and couldn’t pay him anymore, but because he got “super jaded.” Another one “was fortunate that my position was maintained at Neuberger Berman [an investment-management firm then owned by Lehman], and I spent eight years there” — and now works for Dick Fuld at his new firm. It is all a bit eerie to read. Of course Lehman’s bankruptcy led, fairly rapidly, to many job losses in the financial industry, and particularly — of course — at Lehman. But there is a lot of populist anger to the effect that investment bankers brought down the global economy and escaped relatively unscathed, and that anger will not be much assuaged by learning that these young bankers — who, to be fair, had nothing to do with bringing down the economy! — kept their jobs for years after Lehman’s bankruptcy and left only when they felt super jaded.
Elsewhere in crisis commemoration, here are “The Regrets of Lewis Ranieri,” who invented private mortgage-backed bonds. And today is actually Fannie/Freddie Day, another key crisis anniversary; Congress marked it by announcing yet another proposal to end the current state of affairs in which Fannie Mae and Freddie Mac are essentially government-owned mortgage guarantors:
House Financial Services Chairman Jeb Hensarling unveiled a proposal Thursday that would effectively shutter Fannie and Freddie. Their roles would be replaced by enabling private companies and Ginnie Mae to backstop the trillions of dollars of mortgage-securities that underpin the U.S. housing market. Ginnie is a government corporation that guarantees mortgage bonds.
“The legislation has slim chances of advancing during an election year.”
Everything is wire fraud.
It’s not that long ago that Congress passed a law saying that “spoofing” — entering orders in markets with the intent to cancel them before they execute — is a crime. And the government has prosecuted people for spoofing. And sometimes it has won and they have gone to prison, and other times it has lost and they have gone free. These odds are apparently not good enough for prosecutors, though, so they’ve fallen back on the old reliable:
Late July the Justice Department took a new tack. Rather than use the spoofing law, prosecutors charged two former Deutsche Bank traders, James Vorley and Cedric Chanu, with wire fraud. The government claims the pair placed and quickly canceled orders for precious metals futures contracts to create the impression that there was greater supply or demand.
I sometimes think that if I were made king I would write specific laws covering specific types of white-collar crime. There’d be a spoofing law setting out penalties for spoofing, and an insider-trading law setting out penalties for insider trading, and a public-company-accounting-fraud law setting out penalties for accounting misrepresentations, and a Ponzi law setting out penalties for Ponzis, and so forth. The penalties would be based on how harmful the crimes are, how bad the criminals’ intent is, how hard they are to catch, and sure yes also on how big the dollar amounts involved are. There’d probably be a residual “other bad fraud” statute, because people will always dream up new frauds that aren’t directly covered by other laws, but I’d try to encourage prosecutors to prosecute people for the specific thing they did rather than for the catch-all “dishonesty using a computer.” Anyway I look forward to someone murdering someone and then saying over the phone “no I didn’t murder that guy,” and being prosecuted for wire fraud.
Until then there’s this!
Federal prosecutors are investigating whether former Hollywood producer Harvey Weinstein violated wire fraud or other laws in any efforts to silence women who accused him of sexual misconduct, say people familiar with the matter, an indication he could still face federal charges after his arrest in May on state charges.
I like to say that everything is securities fraud, and sexual misconduct is clearly securities fraud, but that’s mostly if you do it at a public company. But even the things that aren’t securities fraud are wire fraud, and it looks like private-company sexual misconduct is also somehow wire fraud.
People are worried about bond market liquidity.
“ETFs edged out credit-default swaps — at the single-name and index level — and were second only to corporate bonds themselves as a way for professionals to access fixed income,” it says here, and of course those professionals are worried about liquidity:
“Credit market participants have been forced to make a trade-off between liquidity and specificity, and they’re choosing liquidity,” according to Ken Monahan, senior analyst on the market structure and technology team at Greenwich and author of the report.
It’s the theme du jour. Angst over “vanishing” liquidity was the chief concern expressed by credit buyers in Europe in Bank of America Corp.’s client survey last month.
Things happen.
Deutsche Bank Top Holder HNA Is Said to Plan Exiting Stake. Deutsche Bank Courts New York Hedge Funds After Cuts. Justice Department Probing Wells Fargo’s Wholesale Banking Unit. Third Point’s Loeb Pushes to Oust Entire Campbell Soup Board. CBS Directors, Les Moonves Negotiating His Exit as CEO. The New Mortgage Kings: They’re Not Banks. Rising Rates on Wall Street Loans Push States to End Swap Deals. Racial Bias in Muni Market Costs Black Colleges, Research Shows. The Phenom Behind Blackstone’s Real-Estate Machine. Britain's first blockchain-enabled co-working space isn't blockchain-enabled. Toward a Critical Edition of “If You’re Happy and You Know It.”
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
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