This is actually a Globalstar satellite being assembled.

Hedge Fund Dropped Some Hints About Its Big Short

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Kerrisdale Capital, the self-promotin'-est hedge fund in the land, is out with its big billion-dollar short idea, and it's Globalstar. Here is Kerrisdale's report arguing that Globalstar is worth zero, and the 144-slide presentation of the thesis. The basic thesis is that the market dramatically overrates Globalstar's ability to monetize some wireless spectrum that it owns: that Globalstar basically trades as an option on that spectrum, and that spectrum's maximum value is zero, so, y'know. The market so far ... well, it's not at zero, though the stock is down by more than 20 percent so it's having some effect.

In terms of drama, Kerrisdale's Globalstar short is self-consciously modeled on Pershing Square's Herbalife short. Like Pershing Square, Kerrisdale built up advance hype for its presentation, previewing it as "the best short we've come across, ever," and releasing an actually funny preview video calling it "the biggest stock promotion we've come across since Sino-Forest" -- all without releasing the name of the company. Like Bill Ackman, Kerrisdale manager Sahm Adrangi got a room in midtown and put on a big presentation for investors and news media. There's even a website called factsaboutglobalstar.com, which cognoscenti will recognize as a reference to factsaboutherbalife.com.

And, like Pershing Square's Herbalife thesis, Adrangi's Globalstar thesis leaked:

Within hours of releasing the video, some of the leakier corners of Wall Street had heard snippets of Kerrisdale’s presentation. Globalstar’s shares slumped by 17 percent between Wednesday and Friday, closing at $3.01 at the end of the week.

In the Herbalife case, the leak was this silly thing where a Pershing analyst allegedly told his roommate who told the guy down the street who traded some put options and then repented a bit too late. And the roommate and the guy down the street have duly been charged with insider trading, since they apparently knew about Pershing's non-public plans to attack Herbalife and traded on that knowledge.

The Globalstar leaks are a bit different, in that ... well there is this for instance:

Last Friday, Mr. Adrangi enticed Twitter followers to fill out a survey on whether they thought the company would be Globalstar or GoPro.

That's ... weird, huh? I can't think of another investment thesis presented as a 50/50 multiple-choice quiz, but that seems to be how the social-media-savvy kids work these days. Meanwhile Kerrisdale's disclaimer says that Kerrisdale and "others that we have shared our research with" have short positions in Globalstar, and its presentation notes that it "spoke to many experts as part of our research." Kerrisdale also says that it had talked to several long holders of Globalstar stock, and that Wednesday's sell-off might reflect those holders selling down their positions.

So as of Wednesday the following information was public:

  • Kerrisdale was planning to announce a big short thesis -- its best ever, a stock worth zero -- today.
  • Kerrisdale has had a pretty good track record of short selling: Stocks it shorts tend to go down.

And some people had the following information, which was not public:

  • Kerrisdale had been nosing around Globalstar skeptically, talking with people about its short thesis.

Also there was the quiz. Anyway, if you had the non-public information, you could pretty easily put it together with the public information and figure out that Globalstar's price would go down today. (And it did!) And so, on Wednesday, you'd sell some Globalstar stock. (And people did!) Roughly speaking, Kerrisdale has taken over a billion dollars off of Globalstar's market cap since Wednesday, but half of that happened on Wednesday:

So was the drop on Wednesday insider trading?

No! But be careful. There are two possible reasons to say no. One possible reason is: The investing thesis of a hedge fund is not material nonpublic information. This is a view that a lot of people take, and for obvious reasons. Hedge-fund managers and analysts talk to each other. They discuss and debate and share ideas. Most of the time this is not obviously "inside" information. Kerrisdale's Globalstar thesis is not about bringing to light secret accounting maneuvers at the company: It's basically just a re-reading of publicly available information. How can your reading of public information turn it into nonpublic information?

And yet! The Securities and Exchange Commission's thesis in the Herbalife insider-trading case is precisely that: That Bill Ackman's plans to announce his short constituted material nonpublic information, even though he had no nonpublic information about Herbalife. (The SEC calls it "market-moving information," not "inside information.") This is fiercely counterintuitive but also ... probably the law? Material nonpublic information is information that (1) is not public and (2) would have "significantly altered the ‘total mix’ of information available" to investors if it was public. There's no requirement that it actually be inside information. If Company X is planning to buy Company Y, and you get that information from Company X and then trade Company Y stock, then that's insider trading even though you have no information from inside Company Y. If Heard on the Street is going to publish a negative view about a company, and you find out and trade the company's stock, then that's insider trading even though your information comes from inside the Wall Street Journal and not the company.

The question is basically: Is it market-moving news that Hedge Fund X will announce a big short position in a company next week? For Pershing Square, the answer is plainly yes. For Kerrisdale, a much smaller and less established (and yet more social-media-savvy!) fund, the answer is debatable, but still clear enough with respect to Globalstar. It announced its short and the stock went down. So, y'know, material, QED.

No, the reason that nobody will (probably) get in trouble for trading on Globalstar is not that they didn't have "inside" information, but rather that they didn't misappropriate that information. Here is how the SEC describes insider trading:

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Bill Ackman's analyst had a duty to keep Pershing Square's information confidential; Pershing Square has a whole policy about it. And the analyst's roommate had a duty to the analyst to keep it confidential, asserts the SEC, though the duties of roommates are a pretty weird area of law. So the inside information was misappopriated, and the trading on it was illegal.

That doesn't seem to have happened here. Kerrisdale analysts called people up to talk about Globalstar, not in breach of their duties to Kerrisdale, but as part of their duties at Kerrisdale. They were doing research on Globalstar. They called experts and talked about Globalstar. At the end of those conversations, the experts presumably had an inkling about Kerrisdale's views. They called Globalstar investors and talked about their thesis. At the end of those conversations, the investors presumably had an inkling that Kerrisdale, y'know, disagreed about the value proposition. But none of those people got those inklings in underhanded ways. Kerrisdale meant to share information with them. Sharing information is part of how Kerrisdale came to its thesis.

Similarly, those people had no obvious duty to Kerrisdale. When Kerrisdale calls up another investor and says "Hey, what do you think of Globalstar?" that creates no duty of confidentiality. Investors do that all the time, and keep trading. It's not like they're roommates or anything.

You can see how this standard would be a bit confusing. Hedge-fund analysts share ideas with each other. Most of the time that's fine, either because it's not material nonpublic information, or because it's not misappropriated, or both. But occasionally it's insider trading, because it's important enough, and taken from an investor who did not intend to share it.

I guess stealing information is a bad thing? I mean, you might think that the remedy in the Herbalife case would be for Ackman to sue the guys who traded on his information. Pershing Square is the victim! But instead the SEC brought an insider-trading case, which at least suggests that it thinks that the victim is not Pershing Square but rather innocent investors and the capital markets as a whole. Level playing fields! Fairness! No one should be allowed to trade on material nonpublic information! Except, you know, the many many people who are.

  1. That tweet seems to no longer be online. One imagines that Adrangi's lawyers sent him an e-mail to the effect of "unfollowed, blocked and reported, bro." Come on. "One of these companies is a giant scam that's worth nothing, and the other isn't! Guess which!" GoPro was up on Friday, incidentally; Globalstar was basically flat.

  2. As, mostly, was Bill Ackman's original Herbalife case, though there's also been some digging up of secrets there.

  3. Also, I mean, I first wrote about Adrangi after that New York Magazine profile in which he talked openly about wanting his pronouncements to move stocks. So obviously Kerrisdale thinks that its positions are material, or at least that they should be.

  4. I guess Kerrisdale could have gotten confidentiality agreements, but that would be a little weird to ask of all of the experts. It would be insane to ask of the long Globalstar investors.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net