You Have to Threaten People Right

If you know that a public company has done a bad thing, and no one else knows about it, how can you use that knowledge to make money? It is an odd feature of modern life that there are actually a lot of answers to that question, that there are whole specialized industries devoted to extracting money out of public companies that have done bad things.

This is a financial column, so we tend to focus on the financial-markets answers: You can short the company’s stock, or buy put options, or buy credit-default swaps. Then you can either sit back and let the market discover the bad thing, or you can bring it to the market’s attention, by announcing the bad thing and maybe also by taking some extra steps—generally suing or calling up a regulator—to get the ball rolling. This approach has some crucial advantages; most notably, if the company is very big and the thing is very bad, this is a good way to make a whole lot of money. But there are disadvantages too. You tend to need a lot of capital to make a lot of money doing this; if you don’t have enough money to make a big bet against the company, you’ll probably have to sell your idea to a hedge fund that does, and you’ll get only a portion of the upside. There are all the general financial risks of short selling: The stock could go up for reasons unrelated to the bad thing, “the market can remain irrational longer than you can remain solvent,” etc. There are the specific risks of noisy short selling: The company will accuse you of fraud, people won’t believe your revelations because you have money at stake, etc. There is also the risk of insider trading: Depending on how you came to know of the secret bad thing, there may be some legal risk to you from trading on it.