SEC Needs Short-Seller Tip Line for Fraud Detection, Investor Ackman Says

Date: Wednesday, May 5, 2010
Author: Bloomberg

U.S. securities regulators should create a public system where investors can submit their reasons for buying or short selling a given stock, giving the government access to information that might tip investigators off to potentially fraudulent companies, Bill Ackman said.

The founder of hedge-fund operator Pershing Square Capital Management LP proposed a research aggregator similar to the Securities and Exchange Commission’s Edgar system, where corporations publicly disclose data including financial results to investors.

The SEC failed to heed warnings from money managers during the past decade, including statements from Harry Markopolos about Bernard Madoff, who evaded prosecution until he turned himself in 16 months ago for running history’s biggest Ponzi scheme. Ackman criticized bond insurer MBIA Inc. in a 2002 report, only to face an investigation from the SEC. MBIA’s shares have tumbled 78 percent since the end of 2002.

“If we had a mechanism like that, where there’s a much freer exchange of ideas, it would lead to more accurate security prices,” Ackman, 43, said yesterday at the Bloomberg Markets Global Hedge Fund & Investor Summit in New York. “It would be a great forum for the SEC to comb through to find companies they should focus their investigations on.”

Ackman said the database he has in mind would let investors post research, and as long as they disclosed their financial interest in the stock and didn’t commit libel, they would be protected from liability.

Profitable Bet

Investors in Ackman’s Pershing Square made about $1.1 billion from his bet against Armonk, New York-based MBIA, according to “Confidence Game: How a Hedge Fund Manager Called Wall Street’s Bluff,” (John Wiley & Sons, 2010) by Christine Richard of Bloomberg News. Madoff pleaded guilty in March 2009 to defrauding investors of as much as $65 billion.

The SEC banned short sales against almost 1,000 financial stocks from Sept. 19 to Oct. 8, 2008, after the collapse of New York-based Lehman Brothers Holdings Inc. intensified the financial crisis. Banks, brokerages and insurers in the Standard & Poor’s 500 Index retreated 31 percent during that period. Some investors and chief executive officers such as Morgan Stanley’s John Mack had blamed the bearish bets for driving down shares.

“A lot of people say that short selling is a bad thing,” Ackman said yesterday. “The frustration is that had people paid more attention to some of the alerts, we could have had much less of a wreckage in the credit crisis.”

$20.4 Trillion Lost

The financial crisis that began with defaults on U.S. subprime mortgages cost equity investors around the world $20.4 trillion between October 2007 and March 2009, according to data compiled by Bloomberg.

Short selling involves the sale of borrowed shares in the hope of profiting by buying them back at a lower price and returning the stock to their owner.

Ackman doesn’t just bet against stocks. Target Corp., the Minneapolis-based discount retailer, and restaurant chain McDonald’s Corp. of Oak Brook, Illinois, are among companies he’s purchased. Known as an activist investor, Ackman lobbied for change at both Target and McDonald’s.

The New York-based investor lost money on Target during the credit crisis. His hedge fund that invested in the company fell 68 percent in 2008, or more than twice as much as the shares declined. Ackman and Pershing spent about $2 billion in 2007 for a stake and told Target to buy back shares, sell its credit-card unit and extract more value from its real estate.

Ackman started his first hedge fund at the age of 26, three months out of Harvard Business School in Boston. His investing strategy marries research with showmanship. He flipped burgers for half a day at a McDonald’s in Florida when he was trying to convince the company to sell more restaurants to franchisees.

Activist investors help spur changes at corporations that lead to higher profits that benefit all shareholders, Ackman said yesterday.

“He or she will pay all the costs, spend all the time, the energy and help to create the value, but the other 90 percent of shareholders get to go along for the ride,” he said.