The pandemic of fraud

Short sellers and whistleblowers fight a lonely battle

March 2023 marks the 19^th anniversary of Fraud Prevention Month. Yet, fraud remains a problem in financial markets despite the creation of a huge edifice of investor protection measures, regulatory agencies, auditors, accounting rules and so on. A study published just this January by University of Toronto professor Alexander Dyck and two co-authors  finds that “…. 10% of large publicly traded firms are committing securities fraud every year.”

Short sellers have been one of the more effective groups at detecting stock market fraud. A few of the high profile cases in the past were:

• Enron uncovered in 2001 by James Chanos of Kynikos Associates

• Nikola exposed in 2020 by Nate Anderson at Hindenburg Research

•  Sino-Forest unearthed in 2011 by Carson Block at Muddy Waters Research

•  FTX Trading and Signature Bank outed in 2023 by Marc Cohodes, hedge-fund guy 

But short sellers are not our only hope for deterrence. There is the Ontario Securities Commission’s Whistleblower Program. It just released an update this month on its activities. Since inception in 2016, the program has levied $48 million in penalties against 19 instances of malfeasance. To date, 11 whistleblowers have earned $9 million for their efforts.

Daniela Cambone's interview of Marc Cohodes is worth checking out. It shows just how far fraud has penetrated Western culture that two publicly listed companies, both in the S&P 500, were involved in fraudulent cryptocurrency schemes, which Cohodes says, were part of a “worldwide money laundering story.”

An interesting comment by Cambone during the interview:

“What’s sad, Marc,  you're doing the work that journalists should be doing and unfortunately … the issue with pumping out news faster … has led to the death of investigative journalism and we don't have the time to sit back and do this digging.”