When people do bad things in the marketplace, other shady actors may call them into account.
A reader recently sent me this link to an article about Square, the "fintech" (throw up in mouth a little) company that is basically a credit card processing company (and if that is "tech" then I'm the Pope). You've probably used their services before, and although they are pricey (if you are a retailer) it is a turnkey solution for small businesses and they send you receipts by e-mail, which was a pretty neat feature - ten years ago. Today, there are many competing companies, such as Clover, which we use at the Parcheesi Club.
Anyway, the article alleges (act shocked) that this silicon valley tech-that-is-not-tech company overstated its earnings so that the founders could exercise their stock options and make countless billions of dollars. I know - shocking! A silicon valley company that turns out to be nothing more than a vehicle to cash-out millions, if not billions, for venture capitalists and founding members? I mean, that has never happened before, right? Or is it the blueprint of modern "business" practice?
The game is played like this: You start a company with an idea - a good idea or a bad idea, it makes little difference. Then you do an IPO and before that, a "roadshow" to hit all the financial channels and blogs and newspapers and whatnot (even town-hall type meetings) hyping the crap out of the company. The IPO "drops" and the share price soars - making huge amounts of money for the banks and others who sponsored the IPO, but raising very little actual money for the company.
So what's the point? The point isn't to raise money for the company, but to create a market for what were basically untradable shares of a closely held company, before the IPO. Post-IPO and after the "lockout" period, insiders can sell their shares, which are inflated in value, for a hefty profit. Problem is, you have to sell the shares in a trickle, lest the plebes on r/wallstreetbets catch on to the scam (no worries - they never do, and the well of chumpism is bottomless!).
If the share price starts flagging, well, you go out and hit all the financial channels again and hype the crap out of your stock. You can also hire an army of bots to slam social media with positive spin on your company - and sometimes this is even legal.
In Commercial Law, we call this "puffery" - if you say your company is super-duper great and so on and so forth. It isn't really "lying" to say that you are excited about your prospects for the future or all the great projects you are working on - provided they exist. It is lying to say something works, when it clearly doesn't (Theranos) and you could go to jail for that - and people did. It is lying to say you made a billion dollars in profits when you actually lost more than that.
And that is where Square - or its parent company - comes in to play. Someone is accusing them of over-stating earnings in order to prop up the stock price and cash out big time. But who is that someone?
Hindenburg. Not the Zeppelin, but a hedge-fund type of company that "shorts" stocks of other companies. And I digress here, but a Zeppelin is a rigid lighter-than-air craft (airship) made by the Zeppelin company. A dirigible is a rigid airship of any brand or make. A blimp is an inflatable, non-rigid airship. It pisses me off to see professional writers for newspapers call the Goodyear blimp a "Zeppelin" or refer to the Hindenburg as a "Blimp". A trivial complaint? Perhaps, but words matter and while we expect you and I to be sloppy with language, we expect more from people who write for a living. But what am I saying? Even the NYT and WaPo are riddled with typos these days.
Anyway..... Hindenburg, the company does sort of the reverse of what silicon valley companies do. They buy "shorts" on a company's stock (bets that the price of the stock will go down - and pay off massively if they do) and then do a roadshow (sounds familiar?) telling all the financial press and prognosticators what a shitty company they are shorting is, and how the stock is overpriced and how the company founders are a bunch of fraudulent bastards.
And sometimes, they are even right, too!
People wake up and realize that XYZ company and its purported "hoverboard" product were just vaporware and the company was overstating earnings for the last four quarters. The stock plunges, the short-sellers make millions (if not Billions) and maybe XYZ company goes bust and the founders go to jail. Justice is served, right?
Libertarians and free-market mavens would argue so - that left to its own devices, the free-market is self-policing. After all, the SEC can only level trivial fines and doesn't have the manpower to scrutinize the balance sheets of every damn company out there. So let the free-market balance it all out!
Cold comfort to the small investor who bought $5000 of XYZ stock and is wiped out completely when XYZ goes bust. But hey, he should have known better, right? And that is the conundrum of the Social Media Stock Market - where hundreds of millions of plebes are "betting" small amounts of money on startup companies which - even if legitimate (ha-ha!) - are more than likely than not to fail in short order.
The free market has other self-appointed police besides short-sellers, and like the short-sellers, they profit themselves greatly, while the individual makes little, if anything. Class-action lawyers, for example, can rake in tens of millions of dollars for their firm, as these sort of lawsuits are always settled before trial for a trivial amount ($5 per victim). But you could argue that the threat of class-action lawsuits is enough to keep companies in line, much as the lone gunslinger enforced the law in small towns in the Old West. His law, of course.
Or, you could argue, as many companies do, that these class-action lawyers are just parasites who feed off the success of major companies and contribute nothing to the bottom line. On the other hand, lawsuits like this (along with Patent Troll lawsuits) are a barrier to entry for small companies - who may have to merge with a larger company or go bust - while major corporations just write a check and call it the cost of doing business.
Personal Injury attorneys arguably work the same way. They rarely recover much for the "injuries" suffered by the bulk of their clients (most of these suits are slip-and-fall or minor car crash cases worth only a few grand apiece, which the lawyers take most of). You could argue this makes grocery store aisles safer or makes truck drivers drive more carefully. Or you could argue that it just means the grocery store has cameras in all the aisles now, and that truck drivers are worse than ever before and insurance rates are jacked up and again, considered the cost of doing business.
You can argue it either way. There is something of a poetic justice, though, of a company accused of fraud being taken down by short-sellers. The free-market incentive to police the world is a greater force than actions by government employees - in some cases, anyway. Government employees can be pressured by politicians to back off - or their budgets cut, as the GOP routinely does to the SEC and the IRS.
Congress has, however, in other situations, actually passed laws deputizing the general public to "go after" bad actors. You can sue someone for a fixed amount per phone call or fax if they call you unsolicited or send you junk faxes (back in the day). And a few citizens have cashed in on this (including me) - but the majority of such bad actors are overseas and hard to sue.
And of course, there have been Qui Tam actions for a long time - allowing you to sue on behalf of the government if someone is ripping the government off. You get a percentage of the settlement, which can amount to millions of dollars. And a few people have cashed in on this, as well.
In recent months, however, this sort of thing has taken a dark turn, as States like Texas have passed laws allowing individual citizens to sue doctors if they are suspected of performing abortions - sometimes even across State lines. The net effect, if such laws are upheld, would be to chase OB/GYN doctors out of those States, as is already happening in Idaho.
Sometimes, in the end, Privateers sometimes end up being hanged a pirates!
Maybe real police isn't such a bad thing, after all.