This month, activist investor Bill Ackman lost around $4 billion on an investment in Valeant Pharmaceuticals. Ackman’s loss is one of many stock market trading losses in recent years.
Because of the secretive nature of many hedge funds and fund managers, some big losses may never be reported to the public.
Following are five painful stock market losses in recent years.
In 2015 and 2016, Valeant Pharmaceuticals faced criticism about drug price hikes and the use of a specialty pharmacy to distribute its specialty drugs. The company’s stock price fell around 90 percent since the peak, according to Wikipedia. Valeant reversed the price hikes and changed its specialty drugs distribution.
Ackman’s Pershing Square Holdings fund held a major stake in the company before selling out in March 2017 for a reported loss of $2.8 billion.
In March of 2017, Ackman sold his remaining 27.2 million share position in Valeant to the Investment Bank Jeffries for around $300 million. The total cost of the position was $4.6 billion, leading to a loss of more than 100 percent of the original price of the securities.
In April of 2016, Ackman, along with Valeant Pharmaceuticals’ outgoing CEO, J. Michael Pearson, and Valeant’s former interim CEO, Howard Schiller, testified before the United States Senate Special Committee on Aging. The committee asked the men about repercussions to patients and the health care system posed by Valeant’s business model and pricing practices.
Howard Hubler III
Howard Hubler III, a former Morgan Stanley bond trader, is believed to have played a major role for the single biggest trading loss ever, according to Wikipedia. Hubler made a successful short trade in subprime U.S. mortgages. To fund his trades, he sold insurance on AAA rated mortgages that market analysts considered less risky, but turned out to be worthless, ending in a massive net loss on the trades. $9 billion was lost in 2007 and 2008.
Hubler took over the Global Proprietary Credit Group (GPCG) in 2006.
The GPCG was required to post premiums to their counter parties until the bonds were considered to be in default. Because the group was paying large amounts to keep the credit default swap (CDS) trades in place, their profitability was low. To finance their operations, Hubler told his traders to sell CDSs on $16 billion in AAA-rated collateralized debt obligations (CDOs). GPCG bought $2 billion in CDSs on risky mortgages, and sold $16 billion in what they considered safe CDOs.
Due to the opaque nature of the CDOs on which they were selling CDSs, CPCG did not realize the CDOs they were insuring had similarly risky subprime mortgages to the bonds they were shorting. On account of this, Hubler assured company officers and risk management teams their position was secure.
As the housing market started to collapse and defaults on subprime mortgages began to grow, disputes between Hubler’s group and their counterparties began emerged over the value of the bonds and CDOs that were subject to CDSs. When notified by the counterparties that the value of the CDOs had fallen to levels warranting a payout, Hubler disagreed and said the GPCG’s models indicated the CDOs were worth most of their expected value.
Because of his failure to follow the procedures outlined in the CDSs, Morgan Stanley’s position worsened. By the time upper management intervened and removed Hubler, Morgan Stanley was liable for nearly all the expected losses. Hubler’s group managed to sell $5 billion worth of the CDOs they had prior to the market collapse and realized another $2 billion in revenue from the original CDSs, taking losses for the group to $9 billion. Morgan Stanley lost $58 billion in the financial crisis.
Jérôme Kerviel is a French trader convicted in the 2008 Société Générale trading loss for forgery, breach of trust and unauthorized use of the bank’s computers, ending in losses valued at €4.9 billion, according to Wikipedia.
Bank officials said throughout 2007, Kerviel was trading profitably in anticipation of falling market prices. But he exceeded his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure much higher than the bank’s market capitalization.
Bank officials said he tried to conceal the activity by creating losing trades to offset his early gains. According to the BBC, he generated €1.4 billion in hidden profits in 2008.
The bank uncovered unauthorized trading and closed out these positions over three days in January 2008, after which the market suffered a big drop in equity indices losses estimated at €4.9 billion ($7 billion).
The bank claimed Kerviel took massive fraudulent directional positions in 2007 and 2008 beyond his authority and that the trades involved European stock index futures. Some analysts suggest that unauthorized trading of this scale may have gone unnoticed initially due to the high volume of low-risk trades typically conducted by his department.
Whenever the fake trades were questioned, Kerviel would describe it as a mistake, then cancel the trade, after which he would replace it with another transaction using a different instrument to avoid detection.
Bank officials said Kerviel closed the trades in two or three days, just before the trades’ timed controls would trigger notice from the bank’s internal control system. Kerviel would shift the older positions to newly initiated trades.
He was charged on Jan. 28, 2008 with illegal access to computers and abuse of confidence.
He was found guilty and sentenced to five years in prison, with two years suspended, full restitution of the $6.7 billion lost, and a permanent ban from financial services.
Brian Hunter was a natural gas trader for the now closed Amaranth Advisors hedge fund, which had more than $9 billion in assets but collapsed in 2006 after Hunter gambled on natural gas futures, according to Wikipedia.
Hunter became co-head of the firm’s energy desk in 2005. He believed that 2006/2007 winter’s gas prices would rise. He shorted the near summer/fall contracts. When the market turned against this view, the fund was pressed for margin money to sustain the positions.
When the margin requirements crossed $3 billion around September 2006, the fund offloaded some positions, eventually selling them to JP Morgan and Citadel for $2.5 billion. The fund took a $6.6 billion loss and had to be dissolved.
The Commodity Futures Trading Commission (CFTC) accused Amaranth and Hunter of conspiring to manipulate natural gas prices. A congressional hearing found Hunter not guilty of driving up prices.
The CFTC then accused Hunter of trying to push the prices too low. The Federal Energy Regulatory Commission (FERC) leveled similar charges.
The FERC levied a $30 million fine against Hunter in connection with the alleged manipulation of natural gas prices in 2006. Hunter appealed the fine in court.
On March 15, 2013, a U.S. appeals court ruled that FERC acted outside its statutory mandate in imposing this fine since the CFTC has authority over derivatives trading.
F.S. Comeau, a Canadian investor, recently made a Youtube video of himself losing on a trade of Apple stock, according to MarketWatch.
Comeau posted a 5,000-word explanation on Reddit about why he was risking hundreds of thousands in hopes of making millions. He live-streamed himself wearing a wolf mask and watching his money disappear.
The video drew 15,000 viewers.
Comeau drank champagne through a straw, promising bottles of maple syrup to his followers. He howled through his wolf mask as he watched the impact of the company’s strong earnings report.
The trade screen shown in the video showed a demo account, however. Some viewers wrote the video off as a hoax.
“I was streaming my demo account online as I did not want to accidentally reveal my account number and address,” Comeau said in an email. “People are just looking for a reason to be outraged.”
Comeau stuck to his hopes Apple would reverse course and his $240,000 options play would pay off. But so far, Apple is in positive territory.
See the unedited original live stream recording here:
Fidelity Investments is Mining Cryptocurrency
Fidelity Investments is a multi-billion dollar brokerage that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.
CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.
Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”
The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.
The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.
Well Ahead of the Pack
The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.
Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.
Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.
The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.
Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.
Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.
Chinese Government Eyeing Fresh Bitcoin Legislation?
The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.
The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.
The Case for AML
The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.
SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.
SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.
China’s Stance Looms Large for Cryptocurrency Market
Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.
According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:
“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”
Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.
«Featured image from Shutterstock.»
Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment
Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.
In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.
Upon securing 30,000 bitcoins, Draper told Fox Business:
“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”
Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.
While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.
Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.
Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.
“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.
Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.
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