By the same token, people who buy the stock before engaging in "pump and dump" have skin in the game before making their statements.

duh, whether it's true or not when their accusations are release the initial knee jerk reaction from the sheeple will be to sell which will drive down the price.

Shorting GE before making the accusations is profiteering in my book. If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.

The entire stock market is a ponzi scheme for insiders.

No, if Markopolos's allegations are correct then this is exactly how financial markets are supposed to work. They are about price discovery - the reward for this information integration is the profit that Markopolos and the Hedge Fund have made / are about to make. If these allegations prove to be baseless then they will receive a hefty fine by the SEC which I'm sure will at the very least take away any profits they've incurred.

>If these allegations prove to be baseless then they will receive a hefty fine by the SEC which I'm sure will at the very least take away any profits they've incurred.

No they will not. There are no rules against exaggerating information about a company you don't operate. The SEC does not fine hyperbole as it's not covered by the exchange act.

Maybe.

The so-called short-and-distort scheme may violate the Securities Exchange Act anti-fraud provisions, as well as SEC Rule 10b-5, just like the better known antithetical "pump-and-dump" scheme. It checks all the boxes: (1) misrepresentation to the market (through articles, blogs and social media); (2) materiality (often including false statements about a company's financial condition or viability); (3) an intent to deceive (manipulating the market to create downward pressure on the share price to make a profit); and (4) connection to the purchase or sale of securities (initiating a selloff of securities to allow the short seller turned analyst to cover their short position). Likewise, this scheme may violate state securities and consumer protection statutes and common law.

https://www.dlapiper.com/en/us/insights/publications/2018/10...

Has to be proven false first, and my guess is they're trying to push the whistle-blower safety laws to prevent it.

> There are no rules against exaggerating information about a company you don't operate.

I doubt that this reflects the regulatory complexity. "Everything is securities fraud" as Matt Levine often says.

When Matt Levine says that, he's talking about things done by the company itself and its employees and board members. Different set of rules.

>Shorting GE before making the accusations is profiteering in my book

It's also how you call companies out on their bullshit and counter their PR deflection game.

And yep, if I do a shit load of accounting research, figure out one of the biggest conglomerates has about $38 billion in fraud, you bet your ass I expect to get paid for the effort. I'm morally on board with the authors getting the first shorts in.

> If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.

Explain

It's simple: GE is down, as of right now, over 11%. Knowing the sensational allegations of the report would have a short-term deleterious effect, they shorted the stock. They can turn the profit from the successful short around into buying GE at its depressed price, and profit a second time when the stock returns to normal levels after the report is found to be exaggerated.

This assumes the report is, in fact, exaggerated.

That would be market manipulation[1] and a violation of the Exchange Act[2].

[1] https://en.wikipedia.org/wiki/Market_manipulation

[2] https://www.law.cornell.edu/uscode/text/15/78i

> If it turns out they were wrong they'll still be able to make money on the short

This would be called "short and distort". That'll win you a friendly visit from the SEC.

maybe it should be illegal for them to profit from the stock going down for the next 4 years or something like that....

Isn't it more the reverse? They shorted GE, so now they're well positioned to reap the benefits of convincing other people to short GE, regardless of the truth of the accusations.

Also creates an financial incentive to try and spread FUD to tank the stock. "Skin in the game" is overrated. It inclines one towards partiality rather than impartiality.

That's sort of the whole point of these things. Not like they're writing this report for free ...

I wonder if that could be considered securities fraud. They had insider knowledge that their report would damage the stock price of GE.

If you hold the stock and make a knowingly false statement about the stock in an attempt to move the market, particularly without disclosing that you hold the shares, it may be securities fraud.

The line is very difficult to draw between constitutionally protected speech and securities fraud. [1]

[1] - https://scholarship.law.missouri.edu/cgi/viewcontent.cgi?ref...

Prior to the initial distribution of this Report on August 15, 2019, the Company also submitted this Report to the U.S. Securities and Exchange Commission’s Whistleblower Program and the U.S. Department of Justice’s FIRREA Whistleblower Program. Both or either of those submissions may generate profits for the Company independent of the financial performance of GE and/or the securities, derivatives, and other financial instruments of, and/or relating to, GE.

Is it insider knowledge? Or merely non-public knowledge that they legally generated from their own research efforts?

If the information was synthesized from public knowledge, then it is fair game. Non-public is not determined by "how many people know this information".

Actually this is standard practice in the shorting industry and perfectly legal since the information is publicly available. It was entirely their goal to push the stock price down just as there are legions of folks trying to do the opposite (in perhaps not so immediately obvious ways).

Short answer: probably not unless they're willfully lying.

I posted a column related to short-selling a while ago. https://news.ycombinator.com/item?id=18017060.

>They had insider knowledge

No, as the author stated all of the information used is publicly available

To paraphrase Matt Levine - everything is securities fraud

So long as the information is public it's not insider trading.