Levine on Wall Street: Fake Transcripts and Fake Walnut Prices

Nobody knows how to calculate diluted share counts, or how to think about leveraged ETFs, or what to do about LightSquared, or the price of walnuts.

You just can't win with LightSquared.

Oh is the Dish/LightSquared saga the best. The latest is that Charlie Ergen's Dish Network withdrew its bid to buy LightSquared out of bankruptcy, but a "group of lenders that has backed Dish's bid reportedly may seek to compel the company to complete its takeover efforts." If you're following along, some LightSquared stakeholders are suing Dish saying that it can't buy LightSquared, while others might sue Dish saying that it has to. Meanwhile, some Dish shareholders are also suing to prevent Dish from buying LightSquared, but Dish stock was down 2.5 percent yesterday on the news that it's dropping its bid.

You gotta know how many shares there are .

One way to figure out how much a stock is worth is to do some sort of fundamental valuation of the underlying business -- "it's an $8 billion company" or whatever -- and then divide by the number of shares of stock. The first part is hard. The second part really ought to be easy. Here is an amusing note (and press release) from Kerrisdale Capital -- whose founder I have previously made gentle fun of -- about ServiceNow, a company whose stock Kerrisdale is short. Kerrisdale's complaint is that sell-side analysts calculate how much they think ServiceNow is worth, then divide by its 137 million-ish shares outstanding to get their target stock price. But ServiceNow "really" has about 169 million shares, economically speaking, if you count shares underlying very in-the-money options and restricted stock units that will almost certainly be exercised, so you've got to divide its value into many more, smaller, pieces. If you use the fully diluted share count, your price target based on your fundamental valuation should be 19 percent lower than if you use the undiluted share count.

This is a big issue with Twitter too: "At $70, Twitter could be worth $38 billion or $49 billion," depending on how you count options and so forth. I guess there the fundamental valuation is uncertain enough that you shouldn't sweat the share count too much, but still, think too hard about this and your sense of the foundations of financial analysis will come a bit unglued.

You gotta know what you're paying for walnuts .

This accounting scandal is nuts. *Punches self in face.* Diamond Foods, which sells a lot of walnuts, decided to beat earnings estimates through the simple expedient of lowering the price that it paid growers for walnuts, and making up for it by just giving the growers extra payments with silly labels like "continuity payments" and "momentum payments" that it didn't count in its cost of walnuts. Diamond settled securities fraud charges yesterday for $5 million. The weird thing is that, according to the SEC's complaint, Diamond had long-term contracts with growers that required them to sell walnuts to Diamond, with Diamond unilaterally setting the price after it had already taken the walnuts. So Diamond could make up whatever price it wanted! And it still managed to do it fraudulently.

You probably shouldn't sell leveraged and inverse ETFs to retail customers.

I mean, I'm sure some retail customers can handle it, but can you? Stifel, Nicolaus & Company and Century Securities Associates could not: "FINRA found that between January 2009 and June 2013, Stifel and Century made unsuitable recommendations of non-traditional ETFs to certain customers because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs." The brokers didn't know what they were selling, so they sold it to people who didn't know what they were buying, and that worked out unsurprisingly badly. $1 million and change of fines and restitution for Stifel and Century. Seriously, retail brokers, stop doing this.

You can't fake your transcript .

I don't even know what to tell you. Mathew Martoma, the former SAC Capital analyst on trial for insider trading this week, "was expelled from Harvard for creating a false transcript when he applied for a clerkship with a federal judge," and then "tried to cover his tracks by creating a fake paper trail that included fabricated emails and a counterfeit report from a computer forensics firm that Mr. Martoma had created to help conceal his activities." What, come on. Come on. I wonder if he was expelled before or after the class on not insider trading. In other news, Martoma now has a jury, which includes several people with (presumably) real un-forged law degrees; I'm not sure if it includes the "film professor at New York University who spent much of the day chewing on an unlit cigar" during jury selection but let's hope so.

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    Matthew S Levine at mlevine51@bloomberg.net

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