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  • HLF: Why Markopolis Will Prove Ackman Wrong 0 comments
    Jan 23, 2013 2:04 AM | about stocks: HLF

    Taking a look at the largest and most blatant ponzi scheme to ever exist in the history of the world, that of Bernard Madoff. I am reminded of a 60 Minutes story with Harry Markopolis and Steve Kroft to justify my current long position in HLF.

    I ask anyone holding a short position in HLF to look beyond William Ackman and to consider your faith in the federal government and it's willingness to take action in the face of detailed analysis showing fraud . . . and to believe the SEC will do so with consideration for stopping the losses of a powerful hedge fund manager.

    The more I read about this story the more I actually see Ackman . . . regardless of whether or not he is ultimately correct as little more than someone who must see himself as a God amongst us mortals.

    A simple trip to the Department of Motor Vehicles is sufficient enough to demonstrate the pace at which the government moves and the efficiency in which it works.

    I would not place a bet for so much as $1 long that the Federal Government or SEC is capable of delivering a cup of coffee correctly and in a timely manner. And I certainly would not place a short bet on a company that would potentially hinge government action to keep from being completely wiped out. If I were to take such a sizeable short position . . . I do not think I would broadcast it to the world in the way Ackman did either if my prophecy rested on the shoulders of timely government intervention.

    In the words of Harry Markopolis according to a 60 Minutes story with Steve Kroft at the height of the financial crisis.

    Steve Kroft: "How Long did it take you to know it was a fraud?"

    Harry Markopolis: "It took me 5 minutes to know it was a fraud. It took me almost another 4 hours of mathematical modeling to prove that it was a fraud."

    Steve Kroft: "In May of 2000 Markopolis took his suspicions about Bernie Madoff to the Boston office of the Securities and Exchange Commission. Did you have any financial motive?"

    Harry Markopolis: "Yes. He was a competitor of mine from 2000-2004 while I was still in the industry. And when someone is competing on your playing field who is a dirty player you want him tossed off the field."

    Steve Kroft: "In your first letter to the SEC back in 2000 your a little tentative. You say . . . look, I have no smoking gun."

    Harry Markopolis: "In 2000 it was more theoretical. In 2001 it was a little bit more real. By 2005 I had 29 red flag that you just COULDN'T MISS ON. By 2005 the degree of certainty was approaching 100%."

    Steve Kroft: "Over time and with some simple math calculations Markopolis concluded that for Madoff to execute the trading strategy he said he was using he would have had to buy more options on the Chicago Options Exchange than actually existed. Yet no one he spoke to there remembered making a single trade with Bernie Madoff's fund.

    Steve Kroft: "In January 2006 the New York office of the Securities and Exchange Commission finally opened a case file to look into Harry's allegations about Bernie Madoff. Despite uncovering evidence that Madoff had misled them about his investment activities. The SEC closed the case 11 months later without opening a formal investigation. The staff said there was no evidence of fraud"

    Harry Markopolis: "What I found out with my dealings with the SEC over 8.5 years is that their people are totally untrained in finance. Their un-schooled. Most of them are just merely lawyers without any financial industry experience."

    Harry Markopolis: "Even when their pointed to fraud their incapable of finding fraud."

    How much money would you put on the table that hinged on the action of the federal government? And their ability and or willingness to take action. Even in the face of incredible evidence?

    I see my bet long Herbalife and short the Federal Government. Which is a bet I would take on most anything having to do with our current bureaucracy.

    Disclosure: I am long HLF.

    Additional disclosure: I am currently long HLF. Not based on the fact that I believe William Ackman to be incorrect. But based on the fact that I would never place a bet based on the Federal Government acting correctly or in accordance with a needed time frame to keep from losing.

    Stocks: HLF
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