Money Stuff

Specialty Pharmacies and Black-Market Currencies

Also: prime brokerage, unicorns, academic research, and the debt ceiling's affect on bond market liquidity.


Valeant had a pretty terrible week last week, but somehow this week feels worse already, and it's only Monday morning. Valeant is holding an investor conference call "to lay out the facts including allegations made against our company regarding our relationship with Philidor and R&O," two (one? three? somehow?) specialty pharmacies, and a good place to start would be this:

The three former employees said several people working at Philidor have Valeant ties, with some joining Philidor full-time from Valeant, while others like Mr. Patel did work at Philidor while working for Valeant. In emails, one used the name Jack Reacher, the protagonist of a series of thriller novels and a Tom Cruise movie, and another went by Brian Wilson, the name of a member of the Beach Boys, the former employees say.

The Philidor spokeswoman said the Valeant employees’ “real identities were well known to the other Philidor employees.”

That's from this incredible Wall Street Journal article, and if your employees, or whatever they are, are going around using fake names, then it is only a very partial explanation to say that your other employees know their real names. "The people said this was to conceal the ties so it didn’t appear Valeant was using the pharmacy to steer patients to the drug company’s products, which Philidor strongly denied."

Before this morning's conference call, Valeant announced that it is forming a board committee to review allegations about Philidor. "Based on its review conducted to date, Valeant also believes that the company is in compliance with applicable law," and I feel like if you are a Valeant shareholder you probably wanted a somewhat more unqualified statement than that? Here are the slides for Valeant's conference call. Highlights include the response to that Wall Street Journal article ("This is an issue that the ad hoc committee of the board plans to review," slide 66); a section titled "R&O: The facts as we know them"; and "We do not own or control Philidor" on slide 21, followed by "Valeant has the right to exercise its option for up to 10 years to acquire Philidor for $0" on slide 22. If you have a zero-strike option to buy something, you ... own it? There is a baffling chain of options all the way down:

  • Philidor has an option to acquire Isolani, LLC (Isolani) (not yet exercised)
  • Isolani holds a 10% equity stake and the right to acquire the remaining 90% of equity of R&O (not yet acquired); total transaction value of $350,000

Valeant's litigation against R&O is what exposed this whole thing, but apparently Valeant has the right to buy the company that has the right to buy the company that has the right to buy R&O. Sure! "We are committed to transparency," said CEO Mike Pearson on this morning's call.

John Hempton speculates that the specialty pharmacies were "a mechanism for customers to buy and insurance companies to pay for drugs that they would not have otherwise done so," and has a long list of questions for Valeant. The Journal has its own questionsRoddy Boyd concludes that "Philidor is almost certainly one of the most important parts of Valeant's business." Here is more on Isolani. And: Is Valeant the next BlackBerry?

Meanwhile, "Theranos blood labs under fresh scrutiny on staffing and quality."

Prime brokerage.

I can't entirely figure out what is going on in this story of a Citigroup prime brokerage slip-up, though the gist of it is that Citigroup accidentally extended more credit than it had intended to a $150 million hedge fund called LNG, realized it had messed up, and called in $400 million of credit:

Neil Warrender, a longtime operations and compliance consultant working for LNG, said that Citigroup “panicked” when it discovered the problem. LNG couldn’t immediately pay what Citigroup demanded, about $400 million, so Citigroup had to wait months for LNG to sell the positions, the people familiar with the matter said.

Months! (Warrender calls the positions "not the most liquid bonds in the world.") If you are worried about bond market liquidity, I suppose you can add to your list the risk that big banks have accidentally extended far too much credit to hedge funds holding illiquid bonds, and will call in that credit at exactly the wrong time, forcing rushed fire sales of bonds that normally take months to sell.


Venezuela has a bizarre system of currency controls that includes three official exchange rates, all of which overstate the value of the bolivar. It also has a black market, whose unofficial but widely followed exchange rate is published on a website called DolarToday and is determined "based on daily calls to several currency traders in Cucuta, a Colombian border city where bolivares are openly traded for Colombian pesos." In recent years, the black-market rate has moved further and further away from the official rate. The obvious explanation is that the official rate is moving further away from reality -- it happens! -- but Venezuela's central bank has another theory:

Venezuela’s central bank filed a lawsuit Friday seeking to shut down a U.S.-based website that publishes the black-market value of its tanking currency, the bolivar, alleging the market is destabilizing its economy.

The suit accuses three people behind the website of “cyber-terrorism,” as they allegedly artificially manipulate the country’s currency for political purposes with the site, while enriching themselves.

Somehow Venezuela got two U.S. law firms -- Morris, Nichols, Arsht & Tunnell LLP and Squire Patton Boggs (US) LLP -- to sign off on the complaint, which is a hoot ("The activities of central banks, particularly in the United States, are often shrouded in mystery, and are simultaneously the objects of adulation and awe as well as targets of conspiracy theories"). I do not think there is much precedent for U.S. courts shutting down websites critical of Venezuelan economic policy? But the theory here is not just that DolarToday is mean to Venezuela; there are also almost Libor-esque accusations of manipulation:

Armed with advance knowledge of what the DT Rate would be (because they were setting it through the DT Site), the Central Bank is informed and believes that the Individual Defendants have enriched themselves and/or their unnamed co-conspirators. Put another way, Defendants are not reporting on a market. Rather, by posting an artificial DT Rate daily, Defendants are deliberately misrepresenting and effectively manufacturing a market – a phony, distorted market for the exchange of bolívares into dollars and vice-versa, with the aim of lining their pockets with ill-gotten gains.

If you just say mean things about Venezuela's exchange rate, you're probably safe, though I guess you might worry about libel. But if you say mean things about Venezuela's exchange rate while also trading bolivares, your rights to free speech are considerably less absolute. Still I am not betting on Venezuela in this one.


Uber "is planning to raise close to $1 billion in new venture capital from investors," and "at a valuation of $60 billion to $70 billion," which would make it a sexagintacorn or a septagintacorn, though I suppose it will always remain an Ubercorn. Facebook topped out at the quinquagintacorn level, so this "would make Uber the world’s most valuable private start-up by far." If Uber went public and raised just under a billion dollars, that would be the fourth-largest U.S. initial public offering this year. If it remains private and raises just under a billion dollars, that will be the fifth-largest Uber fundraising this year.

Here is the Economist on the unicorn as "the most interesting alternative to public companies," and Stephen Bainbridge on "the boundary of firms." Elsewhere, "a 10-month-old start-up has raised $250m" to take on Uber. Palantir is a viginticorn. There's a unicorn emoji in iOS 9.1.

Equity duration.

This is sort of nifty:

This paper examines the duration of individual stocks, i.e., the sensitivities of their prices to changes in interest rates. Counter to the intuition from the dividend discount model, we find that stocks that pay higher dividends tend to have longer duration, experiencing greater price declines (increases) when interest rates rise (fall). Using data on mutual fund flows and institutional investor holdings, we find evidence of "reaching for dividends": when interest rates fall, investors switch more funds to income-oriented equity mutual funds, and the weights of high dividend stocks in the portfolios of income-dependent institutions such as income funds and insurance companies increase. The resulting higher demand for high dividend stocks appears to increase the sensitivities of their prices to interest rate changes, thereby contributing to their long duration puzzle.

High-coupon bonds have shorter duration than low-coupon bonds of the same maturity, because more of their cash flows come earlier. High-dividend stocks, you'd think, would have shorter duration than low-dividend stocks, because more of their cash flows come earlier. But, nope, it's the other way around. One simple model would be that high-dividend stocks feel like bonds (and respond to interest rates), while low-dividend stocks feel like lottery tickets (and don't).

Elsewhere on SSRN, "Activism Mergers":

Activism targets with unsuccessful takeover attempts experience substantial improvements in real policies and significant share price appreciation, suggesting a value-enhancing role of activist hedge funds in mergers. Stock returns to shareholders of both targets and third-party bidders are higher when an activist is involved in the target firm. In contrast, activist bidders appear to create limited value. Our findings illustrate specific mechanisms through which hedge fund activism facilitates change of control transactions.

And "Trust and Consequences: A Survey of Berkshire Hathaway Operating Managers." And here is Gretchen Morgenson on an academic study finding that "After one company was found to have misstated its earnings, the study determined, others in its industry often followed suit and began massaging their own numbers, ultimately resulting in their own restatements."

People are worried about the debt ceiling and bond market liquidity.

"The impasse over the U.S. debt limit is gumming up the machinery of the world’s most liquid securities market," as Treasury last week "said it will postpone an auction of two-year notes because the sale might end up breaching the debt cap." Nice bond market liquidity you have there, it'd be a shame if a debt ceiling were to cave in on it. If only there were a way to raise money not covered by the debt ceiling when you auction Treasury bonds. Debita impendiorum maximorum vendenda sunt!

Meanwhile, if for some reason you are a retail investor trading individual bonds, liquidity will be expensive. And: "Creeping Recognition that Regulation Has Created a Liquidity Death Star."

Things happen.

Argentina opposition candidate forces election run-off. Bill Gross Could Make Money for His Old Pimco Investors Before His New Ones at Janus. US escalates Deutsche Bank probe into Russian trades. Standard Chartered Winding Down Equity Derivatives Business. A Global Chill in Commodity Demand Hits America’s Heartland. One of my favorite insider traders settled (earlier). What’s the Harm in Issuer-Licensed Insider Trading? "Drug conspiracy defendants are no less deserving of a second chance than bribery conspiracy defendants." The agave is safe. "There are no depths of irony, or bad taste, to which capitalists won’t sink if they think they can make money out of it." Literary vending machines (via). Eye-Scanning ATM. Murder houses. Bug restaurant. Pizza Raccoon. Monkey shoulder. Mr. Badger. Parachuting beavers. Bad seagull. "People between 18 and 34 are not so affected by imaginary moral values." Why Self-Driving Cars Must Be Programmed to Kill

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