Doing the Right Thing: Upside? Zero. Downside? Financial Ruin…
In a typically breezy, highly readable and highly informative blog post (Bronte Capital: Daddy you are more evil than I thought), hedge fund manager (and friend, for the record) John Hempton writes an at once amusing and illuminating description of what he does and why he does it, to the admiration/horror of his son.
(John leaves out the ‘how’ he does it, but I can tell you it is the ‘how’ that makes John so good).
However, by summing up his work in the manner he does such that it generates his son’s amusingly alarmed reaction (quoted in the title of the piece), John, I think, diverts attention away from the real underlying issue that anybody who plays on both sides of the investing fence faces when considering going to the press or to the authorities with negative information about a public company.
The real underlying issue is this: the downside of going public with damaging information on a public company, even if that information could bring down a bad guy and stop the bad guy from doing damage to other innocent investors down the road (e.g. Robert Maxwell, whose favored broker was Goldman Sachs, as described here), is so much greater than the upside that it makes no sense (in America, at least) to bother. So you just keep your mouth shut.
What is the downside to going public? There are many facets, but the two main ones are these:
1) Getting sued by the offending scammer, who, being CEO of a public company, can spend unlimited company money (not his own), on the effort to shut your mouth, run you out of business and keep the scam going;
2) Getting ignored (or worse–see David Einhorn’s grim experience with the unintended cost of being right in “Fooling Some of the People All of the Time“) by the Feds.
Now, what is the upside of going public?
Well, the upside is you may ultimately be proven right, and the bad guy may go to jail, in which case the investors and shareholders and analysts and investment bankers who hated your guts during the process and wanted to see you die because it was you (not the bad CEO) who was destroying their company, will finally admit you were right and shower you with kisses—no, wait.
They will still hate your guts.
In fact, they’ll hate your guts even more, because they will perceive that it was you who brought their company down. After all, without your efforts the fraud they were profiting so handsomely from would not have collapsed.
They’ll think, in fact, that you’re evil, because, as you will learn the hard way, scammers never, ever admit culpability: they blame short-sellers on the way to jail, in jail and out on parole.
So, to summarize: Upside to doing the right thing by going public? Zero. Downside? Financial ruin.
Still, while the bad guys John has exposed (and there are more than a few) may agree with the title of his blog, his investors (I am not one) would probably say that John Hempton is way less evil than his son fears.
And simply based on what I know of the work he does in arriving at his unwanted, non-conscencous, frequently scam-busting conclusions, I would tell his son, “No, your old man’s alright.”
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011) Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.