Senator’s Stock Trades Make Trouble


Hereyou go:

Federal agents seized a cellphone belonging to a prominent Republican senator on Wednesday night as part of the Justice Department’s investigation into controversial stock trades he made as the novel coronavirus first struck the U.S., a law enforcement official said.

Sen. Richard Burr of North Carolina, the chairman of the Senate Intelligence Committee, turned over his phone to agents after they served a search warrant on the lawmaker at his residence in the Washington area, the official said, speaking on condition of anonymity to discuss a law enforcement action.

The seizure represents a significant escalation in the investigation into whether Burr violated a law preventing members of Congress from trading on insider information they have gleaned from their official work.

We havetalked about Burr’s case afew times before. As (former?) chairman of the intelligence committee, Burr was getting daily classified briefings on the progress of the pandemic when he dumped a large portion of his stock holdings on Feb. 13. (There is alsoa brother-in-law involved.) A number of other senators dumped stocks around this time, some after getting those same briefings, but Burr is different. Everyone else’s defense has been some variant of “didn’t dump stocks, I am a well-advised rich person, someone else manages my stocks, and they dumped stocks without any input from me.” That’s a good defense! It’s not insider trading if you don’t trade; if your investment manager sold your stocks without input from you then you’re fine. Of course they could be lying, but in context the defense seems pretty plausible. (Kelly Loeffler, for instance, controversially dumped about0.6% of her portfolio at around the same time, which sure seems like the sort of thing an investment adviser would do without any input from her? You could call your adviser and say “a disaster is coming, sell everything!,” but calling them to say “a disaster is coming, sell a tiny bit!” seems pointless.)

Burr doesn’t have this defense: He made his own decision to sell, and he sold stocks representing a large percentage of his net worth. His defense, instead, is that he sold based on public information: “I relied solely on public news reports to guide my decision,” he said in a statement. “Specifically, I closely followed CNBC’s daily health and science reporting out of its Asia bureaus at the time.”

This is, on its face, a bad defense. It doesn’t really work like that. If you’re the chief executive officer of a company, and you are secretly negotiating to sell your company at a premium, you can’t go out and buy a bunch of stock and then say “what, no, I bought it because people on CNBC said our earnings would be good, I just decided not to think about the merger.” If you have highly material secret information, and you also have public information, the secret information is what matters; it’s no defense to say that you could have made the same trading decision based on public information.

On the other hand if the secret information isn’t highly material then this is a perfectly fine defense. Burr’s real defense has to be “I dumped my stocks because I saw scary public information on CNBC, and the private information I got in my congressional briefings added nothing to it.” In other words, his defense has to be that he had no material nonpublic information: Whatever he was told in his classified briefings by intelligence officials added nothing to his understanding of the world, or at least, of the economic prospects of American public companies facing the coronavirus. That is, implicitly, what he is saying when he says “I relied solely on public news reports”: All of the useful information that he had, about how the coronavirus would impact the U.S., came from television.

That defense strikes me as … not implausible? Like, you can’t really spy on the coronavirus; I have never received a secret congressional intelligence briefing, but as an outsider it is easy for me to imagine that intelligence briefings on the progress that Asian countries were making in fighting the coronavirus in early February would not have contained a lot of information relevant to the stocks of the U.S. hotel companies that Burr sold.  

But it is a hard defense to say, publicly. Burr can’t really just announce “sure I got secret intelligence briefings about the virus before dumping my stocks, but they told me nothing I didn’t already know from watching television.” That makes the intelligence briefings sound bad! It makes the intelligence community sound bad! It makes the Senate Intelligence Committee and its chairman (Burr) sound bad! It sounds like an admission that the government was flying blind, that the secret intelligence briefings given at the highest level of the U.S. government told senators nothing that they couldn’t learn from TV, that their ability to predict and plan for the effects of the virus on the U.S. economy and society was no better than anyone else’s. Again: not completely implausible? But maybe worse than insider trading!


There are two theories about non-GAAP accounting. One theory is that companies report “adjusted” results, alongside their required results that comply with generally accepted accounting principles, because the adjusted results give investors some insight into the true state of the business that the GAAP results obscure. So a company that has big unusual one-time charges in a quarter might report non-GAAP adjusted earnings to give investors a sense of what its recurring revenues look like, some sense of what to expect in the steady-state future.

The other theory is that companies report adjusted results to deceive investors, that they include lots of ordinary recurring costs as “one-time charges” in order to make their results look better. Investors look at the adjusted numbers rather than the “real” ones, and the adjusted numbers are not held to any consistent objective standard, so companies massage the adjusted ones to trick investors into thinking that they’re better than they are.

I think there is some truth to both of these theories, and if you believe one of them exclusively you will be confused a lot. For instance if you believe only the first theory you will wonder why non-GAAP earnings are consistently higher than GAAP ones, why one-time costs keep recurring, etc. If you believe only the second theory—that non-GAAP earnings are a trick—then you will misunderstand EBITDAC:

Companies have always strived to present their financial results in the most flattering light. Now some are going a step further, presenting a new customised metric they are calling ebitdac: earnings before interest, tax, depreciation, amortisation — and coronavirus. 

This week Schenck Process, a German manufacturing group, added back €5.4m of first-quarter profits that it said it would have made were it not for the hit caused by state-mandated lockdowns. Its operating profit for the period — “adjusted ebitdac” of €18.3m — was almost 20 per cent higher than the same period a year earlier, rather than 16 per cent lower.

Schenck Process is not the only company tinkering with the presentation of its results. When The Azek Company, a Chicago-based manufacturer of building products, raised $325m of junk bonds last week it included a term that would allow it to add back “lost earnings” as a result of Covid-19 in future. That was a first for the corporate debt market, according to research firm Covenant Review. …

“When you’re looking at coronavirus, these revenues will never come back; it is literally a fiction,” said Sabrina Fox, executive adviser at the European Leveraged Finance Association. … “It’s a bit ironic to say we’re adding back the effects of coronavirus to deal with the effect of coronavirus,” she said.

No! It’s not ironic! The way for companies to deal with the coronavirus is for investors to be a little patient with them, to look past an exogenous and hopefully short-lived disaster in 2020 to try to figure out the company’s long-term earnings power. How much money you make when the economy is shut down tells investors relatively little about your long-term prospects. (If you survive to see the long term! Which is kind of up to those investors.) If you borrowed money last week, your investors surely knew that the coronavirus would make things tough for a while. If they demanded that you meet normal leverage covenants from the beginning, then you would immediately be in default and the bonds would be pointless. So you have to have some mechanism to (1) have covenants that protect investors from bad decisions by the company but (2) build in exceptions so that the coronavirus does not immediately trigger everything.

“Earnings before coronavirus” is, basically, that. Iwrote last month about Live Nation Entertainment Inc.’s version of EBITDAC in its credit agreement:

When Live Nation calculates its earnings for 2020, for covenant purposes, it will delete the second and third quarters of 2020 and replace them with the second and third quarters of 2019. As far as Live Nation’s banks are concerned, it will spend six months of 2020 in 2019. I wish I could do that! I think a lot of us would prefer to delete spring 2020 from our lives and replace it with reruns of spring 2019; it is nice that Live Nation’s banks will let it do that.

“It is literally a fiction,” yes, but that’s good! That’s what you want in your non-standard earnings figures. You want them to be easily distinguishable from the standard ones; you want investors to be able to use GAAP earnings for some purposes and the clearly labeled non-GAAP ones for clearly distinguishable other purposes. EBITDAC is a fiction that everyone knows about and that is prominently labeled as a fiction. Nobody is deceived. No investor thinks that “earnings before coronavirus” are the company’s actual earnings, that the hypothetical add-backs are real. Everyone understands that EBITDAC is a collective way of dealing with a crisis, a way to share the risk and cost of an event outside of the companies’ and the investors’ control. It is not a tool for reporting objective reality; it is an agreement, or at least an attempt to reach an agreement, on how to respond to that reality.


AMC Networks Inc. is a company that owns cable television channels and streaming video services. AMC stands for “American Movie Classics.” It has the ticker symbol AMCX. AMC Entertainment Holdings Inc. is a company that owns movie theaters. AMC stands for “American Multi-Cinema.” It has the ticker symbol AMC. You can probably seewhere this is going:

The UK’s Daily Mail kicked off the roundelay with a report on Sunday that Amazon had held discussions with beleaguered theater circuit AMC Entertainment. While that scenario was never confirmed by anyone involved, it still sent shares of the exhibitor skyrocketing 40% and fueled at least 24 hours of think pieces by the business and entertainment press.

CNBC anchor David Faber, it was noted on Twitter, theorized on-air Monday that the Daily Mail could have identified the incorrect AMC. A report Tuesday by CTFN, a specialist in M&A news, argued just that, citing two unnamed sources. It asserted a mixup of ticker symbols (AMC instead of AMCX), a not-infrequent occurrence with the companies.

Basically, the theory goes, there were rumors that Inc. might buy AMC. Some AMC. If you hear that Amazon might buy AMC, it is natural to assume that Amazon will buy the company with the name AMC and the ticker AMC. There is a certain amount of logic to it—“in 2018, [Amazon] looked at buying American arthouse cinema chain Landmark Theatres,”the Mail noted—though not all that much; a chain of movie theaters is not the most obvious fit for Amazon, a giant internet company with a streaming video service. My Bloomberg Opinion colleague Tara Lachapellewrote on Monday:

What Amazon would be buying is a heap of debt and empty auditoriums. And what in the world is Bezos going to do with 11,000 exhibition screens? If the future of entertainment is streaming content, then a company like AMC Networks — the channel known for “Breaking Bad” and “The Walking Dead” — is a much more fitting candidate than AMC theaters.

Yes but while AMC Networks makes more sense than AMC Entertainment as an Amazon acquisition target, AMC Entertainment has one crucial advantage, which is that its ticker is AMC. If the rumor you hear is “Amazon is buying AMC,” your first reaction might be “I need to buy some AMC stock,” and so you go buy the stock of a company whose name and ticker are AMC. And then AMC Entertainment stock goes up. Someone else hears “Amazon is buying AMC” and notices that the stock whose ticker is AMC is spiking, and so they are quite sure that the AMC that Amazon is buying is AMC Entertainment. So they buy AMC Entertainment, its price spikes more, and the rumor gains momentum. Meanwhile, AMCX, what is AMCX, Amazon is buying AMC, not AMCX.

It is not at all clear that either of these rumors was true, or false for that matter. AMC Entertainment’s stock soared on Monday morning before slowly drifting back to earth, while AMC Networks’ stock was down on Monday before soaring Tuesday afternoon; it too then drifted down again. Amazon might not be buying either of them, or it really may be buying one or the other, but certainly the trading is consistent with (1) a rumor that Amazon will buy AMC, (2) everyone buying the stock with the ticker AMC, (3) everyone sheepishly realizing that “AMC” probably means the stock with the ticker AMCX and dumping AMC for AMCX, and (4) everyone feeling dumb about the whole thing and selling both stocks.

Thereis aliteraturehere but it still feels like academic finance could do more with, like, Typographical Markets Theory. We have talked aboutCOKE,POT,NEST, so many others; it is a recurring theme around here. The point of financial markets is to propagate information: If Facebook Inc. announces good earnings, then Twitter Inc. stock will go up or down as diverse market participants reflect on what Facebook’s earnings imply for Twitter based on the similarities and differences in their business models. Quantitative finance and algorithmic trading have automated that process and made it more statistical; information about one company is propagated into the stock prices of other companies based on historical correlations and subtle relationships that are not visible to the naked eye. Also though having a ticker that sounds like another company still matters. In a world dominated by quantitative computer trading, would it matter more or less? Would the computers, immune from laziness and confusion, ignore the irrational connection between names and tickers and focus on essentials? Or would the computers, which are trained on decades of human trading data and have no real concept of what a movie theater is, just conclude “meh, AMC, AMCX, basically the same company”?

The Covid economy

If you spend a lot of time reading U.S. Securities and Exchange Commission enforcement actions, as I do, you will end up with a very skewed view of the U.S. economy. The biggest industry in America, you might have thought a few years ago, was cannabis. A couple of years after that you would have been confident that the biggest industry was blockchain. In May 2020, you’d be absolutely convinced that the biggest business in America is the response to Covid-19, tests and vaccines and treatments and hand sanitizer. (That one may be true!)

What is notable, from the SEC enforcement actions, is that it is the same (tiny) companies that do all of these things, one after another, as fashions change. Microcap companies were constantly pivoting from cannabis to blockchain; now they are pivoting to Covid-19. The point is not that there are a lot of small public companies that were really into cannabis for a while, then really into blockchain, then really into hand sanitizer. The point is that there are a lot of small public companies that are really into stock promotion. One way to make money in business is to tell investors that you have a good business, and sell them stock, and not worry too much about doing the actual business. If that is your business model it is helpful to be in a popular industry, something that speculative day-traders will Google a lot. If everyone is looking to buy cannabis stocks, you sell them a cannabis stock; if they all want to buy Covid-19 stocks instead, you sell them a Covid-19 stock. If your business consists mostly of writing press releases to sell stock, the costs of pivoting are low: You are not retooling a factory or hiring scientists, you are just spending 20 minutes learning the jargon of your new industry well enough to write a vaguely plausible press release to get people to think that you’re doing hand sanitizer now.

Anyway here is anSEC enforcement action against a company called Applied BioSciences Corp. (It’s one of two related Covid-19-related securities fraud actions that the SECannounced today.) It begins:

Seeking to exploit the COVID-19 pandemic for profit, microcap company APPB dramatically shifted its focus in late March 2020 from cannabinoid-based products to pandemic-related products. 

What did the pivot consist of? It bought and resold some hand sanitizer. And on March 31, it announced that it “has begun shipping Coronavirus Test Kits … in the United States”:

These Coronavirus Tests Kits are CE certified, accurate, affordable and reliable results in under 15 minutes [sic]. . . . This is an expansion of products that will help battle the spread of the coronavirus (“COVID-19”).

These CE certified Kits can be used for Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.

The Home Test Kits can be found on the Company’s online store. . .

The kits were not approved by the Food and Drug Administration, the company had not actually begun shipping the test kits, it apparently never did ship any, and it “now claims it did not offer, sell or intend to sell the test kit for home or private use,” so the SEC thinks this press release was misleading. Where did it get the kits?

In fact, APPB had simply entered into an agreement to purchase test kits from the Essential Oil Company, a company that prior to the COVID-19 pandemic sold “vitamin essential oil aromatherapy diffuser sticks[,]” and whose sole officer has a background in acting and modeling. The Essential Oil Company in turn sourced the test kits from a manufacturer in China.

Aromatherapy, cannabis, pandemics, whatever. If you casually pivot into the Covid-19 business, you might as well buy your Covid-19 products from other companies that have equally casually pivoted into it. 

“During trading on March 31, APPB’s stock price increased almost 80 percent from the previous day (from $0.45 to $0.80), and its volume increased by a factor of 85,” says the SEC; at an $0.80 share price, APPB’s market capitalization was about $11 million, and that big volume day represented about $109,000 worth of trading.

One widely held theory about stock promotions is that most of the victims are, effectively, in on the joke. If you see a microcap company announce a pivot from cannabis to Covid-19, you don’t buy the stock because you think the company will cure Covid-19 and become a $100 billion company. You buy the stock because you think other people might buy the stock and there’ll be a fun roller-coaster ride, and because you hope you’ll be able to get off before it crashes. You are not allocating capital based on your evaluation of the company’s business prospects; you are gambling on whether it can pump its stock successfully.

A good project in securities regulation might be to find a way to let everyone have their fun harmlessly. Like you create a special Pump ‘n’ Dump Stock Exchange, it lists microcap companies that don’t have real business, they’re allowed to issue fake press releases, and all of the “investors” are on notice that it’s all fake. It is an exercise in collective fiction writing, likethat Facebook group where people pretend to be ants. The companies pretend that they’re big innovative businesses and put out press releases saying that they’ve cured cancer, the investors pretend that they’re financial geniuses and develop complex trading strategies and detailed financial models, and it all takes place in a virtual universe that everyone agrees is offered for entertainment purposes only. Let them gamble real money, sure, why not, it is a game of skill, better than sports gambling really, but just wall them off from everyone else. Make sure that everyone on the Pump ‘n’ Dump exchange is there to pump and dump, not to invest. I’m not sure how big a change that would be.

Just for fun I pulledall of Applied Bioscience’s annual reports on Form 10-K from the SEC website. It didn’t get its current name until2018, and its 2019 10-K reports that it has revenue, from selling cannabis-related stuff. In2015 it was called First Fixtures, Inc., “a development-stage company that intends to market and sell kitchen and bathroom fixtures online through its’ intended website.” Same in2016. By2017 it was called Stony Hill Corp., “a vertically integrated company focused on multiple areas of the cannabis industry,” though Stony Hill is actually a pretty good name for selling either kitchen fixtures or pot. 

Things happen

UberDiscusses Grubhub Takeover Valuing Food Deliverer at Roughly $6 Billion. Uber Brings $900 MillionBond Sale After Grubhub Deal Report. Banking: the greatreturn to the office. Consumers SeekingDebt Relief Amid Coronavirus Face Jammed Phone Lines, Overwhelmed Lenders. Fed SendsFresh Rebuke to Deutsche Bank. Tesla CanReopen California Plant With New Measures, County Says.Police Visit to Tesla Shows U.S. Confusion on Lockdown Loosening. Behind Elon Musk’sFight to Reopen Tesla in California: Keep Up With Detroit. CLOs: ground zero for the next stage of the financial crisis? Brookfield revamps unusualownership structure. Dividend tax withholding and tax fraud: The case of ‘cum-ex.’ “Until they canplay all 18 holes, we’re not really keeping score.” 

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