lecture 8 Flashcards
whistleblower
A person often an employee who reveals information about activity within a private or public organization that is deemed illegal, immoral, illicit, unsafe or fraudulent.
E.g. Sherron watkins, Cynthia cooper and harry markopolos
Incentives to blow the whistle
Ethics: doing the right things
Monetary rewards
Reputations
Incentives not to blow the whistle
Incriminating ones self
Potential retaliation and danger to oneself and close family
Future career at risk
Whistleblower protection program: SOX 2002 and dodd-frank 2010
Aim: to minimize the harm to investors
To preserve the integrity of the united states capital markets
To switfly hold accountable those responsible for unlawful conduct
Actions: whistleblower protection: anonymous claimant
Whistleblower awards can range from 10 -30 % of the money collected when the monetary sanctions exceed 1 million
Wirecard
German finetech champion
Online payment processor and publicly listed company
june 2020 wirecard admits missing 1.9 billion
FTX
Prominent cryptocurrency exchange
Coindesk reported that the alameda research holds significant amount of affiliated company FTX token FTT
Binance, a competing cryptocurrency exchange sold its FTT assets and cause the collapse of FTT and massive withdraws from FTX by its customers
november 11alameda and 100 affiliated companies filed bankruptcy. about 8 billion customer deposits are missing “accidentally”
Short selling
An investment or trading strategy that speculates on the decline in a stock or other securities
Short sellers
Are a kind of hedge fund activism, without share ownership of target firms
Conduct deep investigative research and fundamental analysis on target public companies
Denounce fraud, corporate malpractices, financial misreporting and flawed business models
Causes shares to fall or collapse
Short selling activism - challenges
Regulation
Regulators often ban short selling in the fear of volatile stock movements
2008 financial crisis and COVID crisis have triggered new short sell bans in many countries
Short selling activism - challenges
Margin calls
Short sellers need to have sufficient margin at stock exchanges
Margins fluctuate with market price. When the short sellers position is challenged, his margin also falls, then he also needs to pay margin call to restore the margin account
Short selling activism - challenges
Short squeeze
Share price rise rapidly due to shortage of supply and excess demand from short sellers to buy back the shares
Gamestop shares rising rapid because retail investors bet against short sellers
Multi-player fraud
London Interbank Offered Rate (Libor)
* The reference rate for mortgage, loans and
derivatives (more than $350 trillion
globally)
* Traders from prestige banks rig the Libor
rate
* Misreporting was known in 2008, but only
widely investigated in 2012.
* $9 billion fines and criminal charges
against 13 individuals
Multi-player fraud
London Interbank Offered Rate (Libor)
* The reference rate for mortgage, loans and
derivatives (more than $350 trillion
globally)
* Traders from prestige banks rig the Libor
rate
* Misreporting was known in 2008, but only
widely investigated in 2012.
* $9 billion fines and criminal charges
against 13 individuals
The libor scandal:
Initial setting
British Bankers’ Association appointed major banks to submit their borrowing rate.
The highest and lowest rates are discarded. Libor is the average of the remaining rates.
Many banks manipulated the rate to increase profits.
* After the scandal was widely reported in 2012, oversight of Libor was transferred to UK
regulator.
* In 2014, NYSE Euronext Rates Administration Limited became the new administrator of
Libor. UK authorities regulates this firm.
* Market solution? Bloomberg suggested to issue Libor based on credit default swap. This
option is not adopted.
