short selling – Techdirt (original) (raw)

Content Moderation Case Study: Huge Surge In Users On One Server Prompts Intercession From Discord (2021)

from the moderating-game-stonks dept

Summary: A wild few days for the stock market resulted in some interesting moderation moves by a handful of communications/social media platforms.

A group of unassociated retail investors (i.e. day traders playing the stock market with the assistance of services like Robin Hood) gathering at the Wall Street Bets subreddit started a mini-revolution by refusing to believe Gamestop stock was worth as little as some hedge funds believed it was.

The initial surge in Gamestop’s stock price was soon followed by a runaway escalation, some of it a direct response to a hedge fund’s large (and exposed) short position. Melvin Capital — the hedge fund targeted by Wall Street Bets denizens — had announced its belief Gamestop stock wasn’t worth the price it was at and had put its money where its mouth was by taking a large short position that would only pay off if the stock price continued to drop.

As the stock soared from less than 5/sharetoover5/share to over 5/sharetoover150/share, people began flooding to r/wallstreetbets. This forced the first moderation move. Moderators briefly took the subreddit private in an attempt to stem the flow of newcomers and get a handle on the issues these sort of influxes bring with them.

Wall Street Bets moved some of the conversation over to Discord, which prompted another set of moderation moves. Discord banned the server, claiming users routinely violated guidelines on hate speech, incitement of violence, and spreading misinformation. This was initially viewed as another attempt to rein in vengeful retail investors who were inflicting pain on hedge funds: the Big Guys making sure the Little Guys weren’t allowed on the playing field. (Melvin Capital received a $2.75 billion cash infusion after its Gamestop short was blown up by Gamestop’s unprecedented rise in price.)

But it wasn’t as conspiratorial as it first appeared. The users who frequented a subreddit that described itself as “4chan with a Bloomberg terminal” were very abrasive and the addition of mics to the mix at the Discord server made things worse by doubling the amount of noise — noise that often included hate speech and plenty of insensitive language.

The ban was dropped and the server was re-enabled by Discord, which announced it was stepping in to more directly moderate content and users. With over 300,000 users, the server had apparently grown too large, too quickly, making it all but impossible for Wall Street Bets moderators to handle on their own. This partially reversed the earlier narrative, turning Discord into the Big Guy helping out the Little Guy, rather than allowing them to be silenced permanently due to the actions of their worst users.

Decisions to be made by Discord:

Questions and policy implications to consider:

Resolution: The Wall Street Bets Discord server is still up and running. Its core clientele likely hasn’t changed much, which means moderation is still a full-time job. An influx of new users following press coverage of this particular group of retail traders may dilute the user base, but it’s unlikely to turn WSB into a genteel community of stock market amateurs. Discord’s assistance will likely be needed for the foreseeable future

Originally published on the Trust & Safety Foundation website.

Filed Under: content moderation, game stonks, short selling, stock trading, wall street
Companies: discord, gamestop, reddit

Security Startup MedSec Shorts St. Jude Medical Stock To Punish It For Flimsy Pacemaker Security

from the broken-workarounds-for-a-broken-system dept

Wed, Aug 31st 2016 06:34am - Karl Bode

The one-two punch of incompetent IT administrators and botched connected device security has resulted in an unsurprising spike in ransomeware attacks across the medical industry. And while the rise in easily hacked “smart” TVs, tea kettles, and kids toys is superficially funny in the consumer internet of things space, it’s less amusing when you’re a patient relying on poorly secured pace makers and essential medical equipment. But much like the internet of things space these devices are not only poorly secured, they’re supported by companies that aren’t very good at releasing timely security updates.

Case in point: a team of hackers working for cybersecurity startup MedSec found a bevy of flaws in medical devices sold by St. Jude Medical Inc, ranging from a lack of overall encryption to vulnerabilities letting unauthorized devices communicate with the company’s pacemakers and defibrillators. And while we’ve talked about the threat of hackable pacemakers for more than a decade, hackers are increasingly worming their way into poorly secured radiology equipment, blood gas analyzers and other hospital and nursing home equipment to steal data for identity theft, giving the threat an added dimension.

According to MedSec Chief Executive Officer Justine Bone, St. Jude has a long history of implementing sub-standard security, and then doing little to nothing once these vulnerabilities are pointed out:

“As far as we can tell, St. Jude Medical has done absolutely nothing to even meet minimum cybersecurity standards, in comparison to the other manufacturers we looked at that have made efforts,” Bone said. There are steps St. Jude can take relatively quickly to protect patients, including changing the programming of implanted pacemakers and defibrillators through a method that would involve a doctor?s visit, she said.

So MedSec tried something relatively unique. Historically, many hackers and security firms either contact companies to alert them to vulnerabilities, or try to sell the not-yet-public vulnerabilities to corporate espionage and security firms or government agencies, who then happily exploit any impacted, unpatched systems (in this case, with potentially fatal results). But MedSec did something notably different. It reached out to the Muddy Waters Capital LLC investment firm, suggesting a partnership to short sell St. Jude stock before reporting the vulnerabilities to the FDA. Under the deal, MedSec makes more money the further shares fall.

The report has been posted to the Muddy Waters website (pdf), with both companies standing to profit should the company’s stock price take a tumble (which has already begun, with the stock dropping 12% before trading being halted). The timing is trouble for St. Jude, which is in the process of finalizing a potential $25 billion acquisition by Abbott Laboratories. MedSec, for what it’s worth, says they only took this route because they believed St. Jude would either ignore the vulnerabilities or engage in legal hostilities:

“We were worried that they would sweep this under the rug or we would find ourselves in some sort of a hush litigation situation where patients were unaware of the risks they were facing,” said Bone, an experienced security researcher and the former head of risk management for Bloomberg LP, the parent of Bloomberg News. “We partnered with Muddy Waters because they have a great history of holding large corporations accountable.”

Unsurprisingly, the decision to punish St. Jude in this fashion immediately triggered an ethics debate in the hacker and security community. Some were quick to argue that failing to update necessary medical equipment was the real ethics violation. Some believe both St. Jude and Muddy Waters are being intentionally misleading for the sake of profit and marketing, and others are solely appalled by the short selling tactic itself. In the latter category sits security researcher Kenn White, who called the moved little more than “pure naked greed”:

Not too surprisingly, St. Jude was quick to issue a statement claiming MedSEC used “flawed test methodology on outdated software,” demonstrating “lack of understanding of medical device technology.”:

“We have examined the allegations made by Capital and MedSec on August 25, 2016 regarding the safety and security of our pacemakers and defibrillators, and while we would have preferred the opportunity to review a detailed account of the information, based on available information, we conclude that the report is false and misleading. Our top priority is to reassure our patients, caregivers and physicians that our devices are secure and to ensure ongoing access to the proven clinical benefits of remote monitoring. St. Jude Medical stands behind the security and safety of our devices as confirmed by independent third parties and supported through our regulatory submissions.”

MedSec says it found two 0 day exploits opening pacemakers to attack, either by draining the battery or crashing the device software (both require being relatively close to the target). But the group also found that the company’s pacemakers often use no encryption nor authentication over wireless, and the devices all use the same password to connect to the St Jude network, opening the door to a reverse engineering hack on the network at large. MedSec and Muddy Waters continue to insist the company’s history indicates it would not have fixed the vulnerabilities in a timely fashion using traditional reporting methods and bounties.

Regardless of which side you believe is being more or less self-serving, punishing companies for their security incompetence using the only language they truly understand adds a massive and interesting new wrinkle in the never-ending debate over hacking ethics, and the over-arching quest to bring some accountability to companies still treating life-protecting security like an annoying afterthought.

Filed Under: cybersecurity, internet of things, pacemaker, security, short selling
Companies: medsec, muddy waters, st. jude medical

Could A Hedge Fund Manager Trying To Short Stocks Of Pharma Companies With Bad Patents Derail Patent Reform?

from the that-would-suck dept

A few months ago, we wrote that it looked like much needed patent reform had stalled out in Congress, despite expectations that it would fly through Congress easily this year, having the strong support of both the majority party in Congress and the President. And this year, unlike last year, the trial lawyer lobby wouldn’t be able to intervene. Of course, the one big obstacle — as with every time patent reform is proposed — would be the pharmaceutical industry. But even that seemed like it shouldn’t be a huge problem because nearly all of the (relatively mild and fairly weak) reforms proposed really targeted trollish behavior, using overly broad patents to shake down innovative companies. Whether or not you approve of the way drug companies use patents, the trolling issue is a bit outside of that industry’s concern, and thus it was believed that while pharmaceutical companies might whine a little bit, they wouldn’t really stand in the way.

Except… something changed. As Julie Samuels explains in a blog post detailing the state of patent reform as it stands today, a Wall Street hedge fund guy got the pharma industry all riled up, by making use of a provision in the previous patent reform law to play some silly Wall Street game:

Enter Kyle Bass. The well-known hedge fund manager?s most recent enterprise involves using the IPR process to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. The pharmaceutical industry, which relies heavily on patent rights, is far from pleased. And despite the fact that the IPR process contains significant protections for patent holders and the fact that Mr. Bass? actions can already be addressed by the SEC, the pharmaceutical industry has been able to shoehorn its issue into the larger reform efforts.

Let’s unpack that a little. The “IPR” process stands for “inter partes review” and it’s a process by which anyone can try to challenge a bad patent, by presenting specific evidence that it shouldn’t have been granted because of prior art. This process is somewhat useful in helping to get the Patent Office to toss out some bad patent claims that it never should have approved in the first place. It’s a fairly limited process too. You can file for an IPR, but the Patent Trial and Appeal Board (PTAB) will only take up the effort if it decides “there is a reasonable likelihood” that it will invalidate the claims based on the submitted material. In other words, it’s a pretty high bar to cross, and anyone filing frivolous IPR claims won’t get very far at all.

Now, back to Kyle Bass. He’s been making news in the last few months by filing for an IPR against pharma patents, while simultaneously shorting the stock of the pharmaceutical firms that hold the patents. He’s set up an entire organization to do this, called the Coalition for Affordable Drugs.

Kyle Bass, head of Hayman Capital Management LP?which made a fortune wagering on the housing bust?is targeting patents that he says have little value other than to drive up prescription drug prices. His new fund bets against companies whose patents it believes are spurious, and invests in those that would profit if the patents are invalidated, said people familiar with the matter.

His latest challenge seeks to employ a relatively new and inexpensive petition process to invalidate a Jazz Pharmaceuticals PLC patent for Xyrem, a narcolepsy drug with sales of $779 million last year, two-thirds of Jazz?s 2014 revenues.

Mr. Bass created the Coalition for Affordable Drugs, an organization that is the lead petitioner in several patent challenges filed with the U.S. Patent and Trademark Office. He says he plans to pursue the cases regardless of share price moves. ?We will not settle,? he said in an interview.

The Coalition has been busy of late, filing a whole bunch of IPR petitions against a whole bunch of phamaceutical firms. And, boy, are those pharma firms pissed off. Celgene, for one, has talked about seeking sanctions against Bass, claiming that Bass is using the process as a form of extortion:

Celgene attorneys made this point in a June 3 email to the patent office. But there was more. They also alleged that his coalition threatened to challenge Celgene patents ?unless Celgene met their demands.? Those demands weren?t specified, but the email states that ?when Celgene did not pay,? the patent challenges were filed, according to the patent office order, which cited the email.

And, using this whole story, to argue that the whole IPR process is a disaster, the pharmaceutical industry is trying to revamp and effectively destroy the entire (important and useful) IPR process.

And while it seems likely that Bass’s efforts are much more about enriching himself via the stock shorting than actually making drugs more affordable, arguing that his efforts somehow undermine the entire IPR process is a stretch. Indeed, as noted earlier, there are built-in protections that make it rather inefficient for anyone to really abuse the process the way pharma companies are portraying. Again, the special board in the Patent Office, the PTAB, has the ability to just outright reject any IPR petition it doesn’t think has a chance of surviving. And, in fact, a recent report by the Patent Office shows that (1) less than half of all IPR requests result in actual challenges and (2) even then, the vast majority of claims being challenged are actually allowed to stand. As of the end of June of this year, you can see that the PTAB rejects most petitions, many more are “terminated,” and of those that go to a full trial, many retain patentable claims that were challenged:

Even more to the point, if you look at the total number of claims actually challenged, against those that end up being found unpatentable, it’s a fairly tiny number: only 4,225 claims out of were challenged. That’s less than 12%. Hell, even if you look at just those claims that the PTAB initiates proceedings on, less than 25% of them are invalidated.

In short, the idea that the IPR process is making it easy to simply kill off good patents is not even remotely supportable. Instead, it appears to be doing what it’s intended to do: make it more reasonable to help people kill off bad patent claims. If pharma firms are worried about what Bass is doing, it should only be if the patents they have are questionable in the first place. If they’re legit, they won’t pass the laugh test, and the whole process won’t get anywhere.

And yet… because the pharma industry just doesn’t like having to deal with Bass at all, it’s trying to destroy the whole IPR process, saying that’s the only way that it will support the other aspects of patent reform. But undermining IPR would do serious damage to patent reform as a whole, and take away a key tool that actually does work in more quickly invalidating crappy patents. Whether or not you approve of the way in which Bass is doing what he’s doing, the process isn’t really open to abuse in a manner that should raise any real concern. And, for everyone else, the IPR process remains an important element in stopping abusive patents.

Filed Under: inter partes review, ipr, kyle bass, patent reform, patents, pharma, pharmaceutical industry, ptab, short selling, uspto
Companies: coalition for affordable drugs, hayman capital management

European Nations Wish To Ban Negative Thoughts Or Investments On Their Financial Position

from the towards-a-more-patriotic-hedge-fund dept

It seems that no country is immune to the sting of financial opinions. As we saw recently, S&P’s decision to strip an “A” off their rating for the U.S. debt resulted in President Obama’s dismissal of the rating (“We’re still AAA.”), Michael Moore’s call for something a bit more drastic (“show some guts and arrest the CEO of Standards and Poors“) and, finally, the Senate Banking Committee’s decision to explore its options, including a possible hearing involving S&P (“We won’t arrest them. We’ll just take them downtown to answer a few questions.“)

Being unable to graciously accept financial criticism isn’t just an American problem, however. As several European nations continue their slide into bankruptcy, their respective governments have stepped up to do the only thing that makes sense: ban short sales on government-backed bank shares (following on a similar plan to ban negative ratings). It’s yet another case of governments attempting to suppress expression it doesn’t like (i.e., “We think failure is the most likely option.”) through legislation. And as Matt Levine of Dealbreaker explains, there’s a whole lot of unintended consequences to banning “sad thoughts about banks:”

This is hard to believe because all European banks are obviously well capitalized and any suggestion to the contrary is just rumor and speculation. But! Sometimes things go wrong. Sometimes banks need to raise money. When equity investors are staying away from them, sometimes they do this by selling convertible bonds…

The short sale bans are mostly for just 15 days, but repeatedly changing the rules in the financial markets will have effects well beyond the brief share-price gains. If you’re a convertible arbitrage investor, it’s now pretty clear that you should never buy convertibles issued by a European bank, because you may not be able to hedge when you need to. Which can’t be good for the banks’ future capital raising needs.

Oddly enough, the protectionist legislation meant to protect the banks from “evil” speculation will also work against their ability to raise funds in the future, which extends the damage from “just right now” to “an indefinitely longer period.”

Then there’s this bit of extremely broad terminology coming from Spain’s entry into the “the only correct position is a positive position” ban-happy sweepstakes:

This preventive ban affects any trade on equities or indices, including cash equities transactions, derivatives in regulated markets or OTC derivatives, that has an effect of creating a net short position or increase a previous one, even if on an intraday basis. A net short position means any position resulting in a positive economic exposure to falls in the price of the stock.

In much simpler words: investors are not allowed to profit when stock prices dip. This also means that investors can’t mix in a few shorts with the rest of their investments to insulate themselves against price drops. Or rather, that they can do that, but only if the end result of the investments is that they lose money when stock prices fall. Spain, it would seem, is only going to allow bullish investments despite the realities of the market, and it will be watching this on a day-to-day basis, if the language above is to be believed. Adios, bear market day traders!

France ties things down even further in its extensive AMF document:

3 – Is an investor allowed to create a net short position in one of the securities concerned by using derivatives? No, investors are not allowed to use derivatives to create a net short position; they may only use derivatives to hedge, create or extend a net long position.

France is also savvy to other devious, speculative moves as well:

6 – Are trades in index derivatives allowed where the basket of securities includes one or more of the securities concerned? a) Investors exposed to the equity market are allowed to hedge their general market risk by trading in index derivatives. In this context, the AMF accepts the marginal net short positions in the securities concerned that may result from that trading in index derivatives. b) Trading in index derivatives for any other purpose than hedging general market risk is not allowed unless the resulting net short positions in the securities concerned are offset by long positions.

Again, this overly broad ban against speculators who have the audacity to express their lack of confidence in a financial system via their market activity will also steamroll “legitimate” investors who are just looking to “not lose money,” as Levine points out:

We wonder how you would test whether a net short position in an index derivative is for the purposes of “hedging general market risk” or for the purposes of “profiting on spreading false rumors” (or other non-legitimate purposes, like hedging specific market risk). Presumably anyone shorting European indexes does so because they don’t want to lose money when the market goes down. Even speculators.

Oh, and one more thing: these bans are still in effect if you’re a citizen of these short-sale-banning countries, no matter which country you actually reside and/or do business in:

The Decision applies to any natural or legal person, French or foreign, regardless of whether trading takes place in France or in another country, or on a regulated market or not.

All of this ridiculous legislation is due to various governments suddenly developing very thin skin when investors insult them tangentially with their financial decisions and opinions. There’s nothing to be gained by banning short sales and plenty of unintended consequences to unleash into an already-disrupted marketplace. Levine sums up their attitude this way:

You take shorting of bank shares as a personal affront, and your goal is not to have functioning markets but just to prove that you’re tough.

While I’m sure most governments would love all of their citizens to believe that their respective nations will overcome all odds and rise to greatness once again, in the meantime, investors are still going to bet on what is likely, rather than just wrapping themselves in the flag and throwing their money into whatever the legislative body deems to be proper, patriotic investments.

Filed Under: debt, economics, europe, markets, opinion, short selling, sovereign

Sorry, But The Current Financial Crisis Has Nothing To Do With Naked Short Selling Or A Wikipedia Edit War

from the please dept

For quite some time, Overstock’s CEO, Patrick Byrne, has been on something of a… campaign against the practice of “naked short selling.” Byrne isn’t known for holding back his opinions on just about anything, and his complaints about naked short selling resulted in a rather massive Wikipedia edit war — with folks on every side pointing fingers and arguing with each other over supposed dirty tactics by folks on the other side. Now, with the whole financial collapse thing happening, The Register (one of few publications to take Byrnes’ side most of the time, often due to its irrational dislike of Wikipedia) is claiming that Byrne has been “vindicated,” first on the evils of naked short selling, and second on the Wikipedia edit wars.

If only it were so simple. As this excellent Alex Blumberg/Planet Money podcast makes quite clear, while naked short selling may be sketchy, it’s impact is minimal, if anything. And, as anyone with a most basic understanding of markets can tell you, short selling (naked or otherwise) doesn’t drive down the price of a stock. The Register also suggests that Byrne was vindicated in the Wikipedia edit war, by noting proof (that is not shown, and was only provided to The Register by Byrne) that a reporter who had formerly denied taking part in the edit war, actually had been involved. That’s not exactly a huge smoking gun either. It may be that this guy had a personal vendetta against Byrne, but it’s got little to do with the financial crisis going on today. There are lots of things that created this mess: but naked short selling (even if the SEC came out against it, in part) is currently a minor scapegoat, not the cause.

Filed Under: financial crisis, naked short selling, patrick byrne, short selling, vindication, wikipedia