| Apr 09 13:11 | 10 comments | Share
Can you spot a lie? What about a half-truth, a sin of omission or the telling smirk of someone who thinks they got away with it? How about the grand lie, so big it has pillars and caverns of mis-truth, or the subtle wave of misdirection? Short sellers like to look for lies, in company accounts or in what management say. Find one, stick a red flag in it and go looking for more, on the basis if there’s one there’s several: lies multiply. There is also a small cottage industry in the art of deception, from books of facial expressions to help you play poker all the way to ex-CIA consultants offering interrogation advice.
For instance, the latest report from Muddy Waters on the commodity trading group Noble, which includes some “third party behavioural analysis” of management statements. Muddy Waters engaged Qverity to analyze management’s statements on the February 26th Q4 2014 results call for deception. (The call is the only time Noble management has spoken extemporaneously in public about the recent criticism.) Qverity provides behavioral analysis, and is founded and staffed by former United States Central Intelligence Agency experts in detecting deception. Its principals authored the books “Spy the Lie” and “Get the Truth”.Noble was addressing claims made by Iceberg Research in a series of reports about the company’s accounting. Noble has denied all the claims by Iceberg, which centre on the alleged use of aggressive accounting techniques, and claims the reports are the work of a disgruntled former employee. Noble’s position is its own accounts and statements represent the truth, and Iceberg’s work is the flawed representation. In a statement the company said it “completely rejects the allegations” made by Muddy Waters and is “studying the report in detail”.
Feel free to read the report and draw conclusions. Our interest is in techniques to assess the truthiness of a speaker. Talks from such experts make for an entertaining half hour at the sort of conferences due diligence professionals attend, and there are some useful tips to keep in mind.
Some are reasonably well known to anyone who has watched a politician be interviewed. Look out for answers to a question which wasn’t asked, or a very specific denial: “I did not have sexual relations with that woman”.
Supposedly, a clear conscience leads to sweeping statements: “I’ve never stolen anything in my life!”.
People generally don’t like lying, so also watch out for a failure to deny something, perhaps masked by an appeal to an outside authority. Are you legit? “Our accounts are thoroughly audited by one of the big five audit firms”, a claim you could only have made before it became the big four accounting firms.
However, if you can watch the person, consider the body language as well. Tells are said to include a small involuntary smirk at the corner of the mouth as the subconscious celebrates the deception, or shaking your head when you should be nodding (don’t forget to practice the gestures which go with your dissembling).
Then there are more advanced tactics. Here’s Qverity expert Phil Houston analysing a 2011 interview of Lance Armstrong, when the cyclist denied doping charges.
In those cases where the allegations are true, and “I didn’t do it” is not a reality that the untruthful individual can psychologically rely upon, he must focus his comments elsewhere. That focus is quite often on what we call “convincing behavior,” or “convincing statements.” In the deception detection field we refer to the phenomenon as “convince vs. convey” – the aim of the deceptive person is to convince us of something rather than to convey factual information.
Several examples of this can be seen at a number of points in this clip. When Armstrong was asked if he “can unequivocally say” that he has never used an illegal substance, he responded with a number of convincing statements. Although he made his one denial in his response to this question, he spent much more time trying to convince us of his innocence by saying such things as, “Why would I then enter into a sport and dope myself up and risk my life again?” and “I would never do something like that.” To the untrained ear, such statements often sound logical and compelling, which is how the untruthful person hopes they’ll be heard. But in actuality, those statements don’t really answer the question. In this case, the truthful answer would have simply been, “Yes, I can unequivocally say I haven’t used an illegal substance.”
Offering inconsequential details can also help to convey the impression of candour. Here’s the FT in October 2001, on analyst clamour for clarity from Ken Lay:
Enron, the US energy trader which is under intense scrutiny by analysts who have demanded the company release more detailed financial information, on Wednesday gave details of a $1.2bn charge against equity it skipped over in its third quarter results briefing on Tuesday.
On Wednesday, Enron outlined details of a $1.01bn charge against earnings in its result, due to failed investments in its telecommunications, retail energy sales and water businesses.
Ken Lay, chairman, fleetingly mentioned a separate $1.2bn charge against equity, or a dilution of equity on the company’s balance sheet, in a conference call with analysts and the media, and said it would not affect the company’s credit rating.
Many analysts apparently thought this was the $1.01bn charge Mr Lay was willing to break down and to answer questions about.
Mr Lay met analysts on Wednesday in New York, but there was again no mention of the $1.2bn charge. Mr Lay apparently initially refused to answer questions from frustrated analysts. In August, after the departure of Enron’s chief financial officer, Jeff Skilling, Mr Lay promised to provide more earnings transparency.
“It was unbelievable. Questions were asked and he moved around it and then finally he [Mr Lay] gave a roundabout answer. The [$1.2bn] charge was all related to the writing down of the failed investments,” one analyst said.
“They were trying to sneak it by. They already have a credibility problem and this did not help it,” he said, adding that Enron never disclosed the charge’s net effect and Moody’s Investor’s Services, the credit rating agency, placed Enron’s $13bn of debt on hold minutes later. “We told them we felt they should have been more honest in the presentation [yesterday].”
Still, dealing with aggressive questions is stressful. “Why would I murder my wife?” is a perfectly reasonable protestation when a one armed man really did it. There are exceptions to all the rules — Nixon was emphatic, “I am not a crook”.
People also do improbable things. John Hempton gave a brilliant presentation at last year’s Camp Alphaville on the greatest short that never was, an investigation by Bronte Capital into a Canadian miner where each piece of research built the case that something was wrong, right up to the point where it all fell apart — a conversation with a worker on an Indian reservation who loaded sacks of ore by hand at a little used railhead.
Look for anything hard enough — be it a lie, the number 21 or reasons for London property to increase in value — and you start to see it everywhere. The truth is, it’s all part of the fun of looking for companies to sell short: are they lying, or are you just a paranoid cynic?
April 10, 2015, 12:59 A.M. ET
Noble Group: Muddy Waters Concerns Over Fair Value Gains “Valid,” Says UBS
By Shuli Ren
Commodities trader Noble Group (N21.Singapore) said it “categorically reject” the allegations made by short seller Muddy Waters yesterday.
Muddy Waters complained about the discrepancy between Noble Group’s cash flow and income statements and said that Noble Group intentionally inflated its income profit by booking paper gains.
In a report published this morning, UBS’s Louis Chua, who has a Neutral rating and 1 Singapore dollar price target for Noble Group, said “the recognition of fair value gains on offtake agreements is a valid cause for concern and scrutiny, given its rapid growth and significance on Noble’s balance sheet.” Net fair value gains have grown from $406 million in 2010 to $4.6 billion last year, now representing 90% of Noble’s total equity.
But UBS did not accuse Noble Group of fraud, writing “to date there is little to suggest that Noble has intentionally mispriced its book to bolster its balance sheet,” but also adding ” [fair value] valuations are very subjective, and investors would have to lean heavily on Noble’s own assessment of the veracity of these assets’ value.” Muddy Waters yesterday said its short position on Noble was a short on its management.
Interestingly, Noble does not seem to have trouble with financing. It recently announced a $2.25 billion unsecured revolving loan facility, with 15 banks signing up as book runners.
Shares of Noble Group rose 1.7% this morning after slumping 5.5% yesterday.