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....