Dirty Water 5

Disclosure: Short Cadiz (CDZI). This post expresses personal opinion about the company’s political strategy. It is not an investment thesis. Cable Car has no relationship with any of the individuals mentioned herein.

When a public company attacks a short seller, buyer beware.

After years of litigation and bureaucratic wrangling, management’s mounting frustration with the drawn-out approval process for the Cadiz water project is understandable. Proponents of the company’s increasingly long-shot project must have been upset by the October 2015 Bureau of Land Management (BLM) decision preventing it from using an obscure loophole to sidestep a federal environmental review.

Under the circumstances, Cadiz’ aggressive and expensive political response could be forgivable. However, the company’s August 2016 decision to engage in a coordinated smear campaign against an investor and a junior BLM staffer was unfair. The company’s disappointment at political setbacks does not justify public character assassination, nor does Cadiz advance its cause by making unfounded accusations.

Through a FOIA request, Cadiz obtained a series of emails between a BLM employee and Thomas McGannon, a partner at an investment adviser researching the water project. Cadiz issued a press release claiming the emails revealed the BLM decision “lacked objectivity” and provided the documents to the Wall Street Journal, peddling a thoroughly biased interpretation that accused the BLM and Mr. McGannon of impropriety. Perhaps swayed by its own political preferences (Senator Diane Feinstein, D-CA, is the lead opponent of the Cadiz project), the Journal published an unconscionable editorial, “The Pipeline and the Short Seller,” that unjustifiably accused Mr. McGannon of insider trading. The editorial noted that Cadiz provided the emails to the author, and Cadiz quickly amplified the editorial with another press release.

Call for retraction

Investors more accustomed to the investigative journalism the Journal is known for should be offended by the use of its mouthpiece for a company with a history of stock promotion at the expense of the reputation of a member of the investment community. I believe the Wall Street Journal owes Mr. McGannon an apology and retraction for its arguably defamatory editorial. The editorial falsely stated that “one Cadiz investor had inside information that could have allowed him to make a killing” and that the BLM “shared non-public information” with him.

In my opinion, the information exchanged in the emails was neither material nor non-public. Parts of the exchange sought informal views on whether proposed project modifications would be subject to BLM jurisdiction, not any indication of how the BLM might rule on an alternative. The rest concerned primarily procedural updates on the timing of BLM deliberations, not any indication of the likely outcome.

Administrative process timelines are a matter of public record. While agencies have FOIA procedures for releasing more extensive material including internal documents, which are also public information, it is entirely proper for government employees to share quotidian process updates with any member of the public who calls or writes to ask. Investors routinely interact with government agencies in this manner. Furthermore, there is nothing wrong with requesting information that an agency can choose not to release. Erik Pignata, the BLM employee with whom Mr. McGannon corresponded, made clear in one email that he could share only scheduling details, not the outcome of internal BLM discussions.

The Journal also makes hay of the time elapsed between emails and the fact that Mr. McGannon and Mr. Pignata also spoke on the phone. This amounts to an entirely unsubstantiated suggestion that the BLM FOIA office broke the law by failing to release relevant records. There is nothing in the FOIA response that suggests any emails are missing. And while it is theoretically possible that a phone conversation could have revealed non-public information, there is no evidence whatsoever for such an inflammatory suggestion.

According to Cadiz, the company’s requests for status updates from the BLM went unanswered. If their correspondence was also directed to Mr. Pignata and if he did not provide timeline details to Cadiz, he erred in not being equally responsive. Yet despite Mr. McGannon’s expression of opinions, there is nothing in the messages that indicates any substantive bias against the project from Mr. Pignata or his superiors at the BLM. Only a single comment from Mr. Pignata, after the decision was announced, implied that one controversial aspect of the local environmental review might have been “shady.”

The editorial was published in August, but I’m just now writing about it because it took time to receive a reply to my own FOIA request. I obtained the same series of emails by requesting the response provided to Cadiz. I am publishing that response in full here, as the Journal might have done instead of selectively quoting out of context. In my view, Mr. McGannon is at most guilty of being a bit overeager and irritating in his persistence, but you can be the judge of that for yourself:

PDF icon Read the emails

Why wade in?

Character is everything in the investment management industry. Even the whiff of impropriety, no matter how unfounded an accusation of wrongdoing, has been known to damage careers, prompting job losses and even investor redemptions. Publicly accusing an investor of misappropriating private information is particularly invidious, as it plays to popular misconceptions about what actually constitutes criminal insider trading. The reputational damage is done by the mere suggestion of cheating. The Journal editorial would implicitly criminalize a great deal of routine due diligence.

While I am wary of criticizing a company as litigious as Cadiz, I feel strongly that the public shaming of a fellow investor is unjust. I regularly seek public information from government agencies, as do my peers in investment research and investigative journalism. That is not wrong, and it should not be portrayed as being somehow insidious. Irrespective of the ultimate approval status of the Cadiz water project and Cable Car’s investment outcome, Cadiz sets a dangerous precedent.

As if the risks of short selling were not high enough, Cadiz has introduced the added possibility of the news media and even Congress (see below) being enlisted in a campaign of reputational damage against critics. Based solely on the project economics and its history, a large number of short sellers have independently reached the same conclusions as the Pump Stopper article cited by Mr. McGannon in one of his emails. The Pump Stopper article mentions unsuccessful attempts by the author to contact Cadiz as well as FOIA requests, which are publicly available. These imply that Cadiz was able to determine the identity of the article’s author, strongly suggesting that the campaign against Mr. McGannon was retaliatory in nature. The Journal should have known better than to get involved.

I have never knowingly interacted with Mr. McGannon, and I do not know if he was the source of the anonymous report. I know nothing of his character. However, I think it manifestly unfair for an individual’s reputation to be tarnished in this manner.

Cadiz protests too much

What passes for acceptable mudslinging in the corridors of Washington can be more damaging to non-politicians. Perhaps the reason for the company’s willingness to attack the BLM and a third-party investor is that Cadiz and its legal counsel/part-time CEO, Scott Slater, are no strangers to lobbying and backroom politics.

Mr. Slater is a shareholder of the law firm of Brownstein Hyatt Farber Schreck LLP (BHFS), which has been the company’s primary legal services provider since he joined as General Counsel in 2008. BHFS has a large corporate and government relations practice that includes significant lobbying work. The firm also operates a political action committee funded by shareholders of the firm, BHFS-E, PC PAC. The PAC makes about $400,000 of bipartisan contributions per election cycle.

Although Mr. Slater became CEO in 2013, he remains employed by BHFS and free to provide other services for them while collecting a $300,000 annual salary from Cadiz. On top of Mr. Slater’s salary, Cadiz pays an additional $300,000 annual retainer to BHFS for legal services relating to the project.

The retainer is a minimum commitment; the actual fees paid to BHFS by Cadiz have not been disclosed in aggregate but are considerably higher. For example, federal filings show Cadiz makes a $110,000 quarterly payment to BHFS for lobbying representation alone, while BHFS has simultaneously represented the company in various legal challenges to the project. Cadiz lobbying payments to BHFS began in Q4 2010 and have ranged from $400,000-440,000 every year since. In total, CDZI shareholders have compensated BHFS at least $2.4 million through June 2016 just for representation in Washington, although in five quarters the disclosures indicated that BHFS was compensated despite performing no lobbying activity.

What’s more, BHFS is eligible to receive incentive compensation based on project approval milestones. The firm has already earned three incentive awards since 2009, a total of 259,312 shares worth over $1.8 million at current market prices. They are eligible to receive a further 200,000 shares worth over $1.4 million upon achievement of additional milestones.

Mr. Slater’s unique employment situation makes BHFS a related party to Cadiz, a status that has been omitted from the related party disclosures in the company’s annual reports and proxy filings. Curiously, it was not until the second quarter 10-Q filed on August 8, 2016 that the company explicitly acknowledged BHFS as a related party in an SEC filing. I will leave it to securities lawyers to debate whether item 404(a) of regulation S-K provided a sufficient exemption from disclosing the total payments to BHFS.

CDZI, a company with only 10 full-time equivalent employees, spent $12.6 million on general and administrative expenses excluding stock-based compensation in 2015 and $9.0 million in 2014. Shareholders ought to know just how much of that went to Mr. Slater’s law firm.

Statement on apparent bias

Readers familiar with CDZI will have noticed that I have not yet mentioned the letters sent by Jason Chaffetz (R-UT) of the House of Representatives Oversight and Government Reform Committee to the BLM and Whetstone Capital. Partly that is because the committee’s activities appear to be rather more focused at the moment on another manufactured government email controversy and are unlikely to go anywhere. Yet the letters present the same concerns as the Cadiz press releases and Journal editorial. They also raise the separate question of why a Congressional committee would so readily adopt a financially interested company’s misleading insinuations of wrongdoing when describing innocuous correspondence.

It is probably only a coincidence that Representative Chaffetz has received 3 donations totaling $5,000 from BHFS-E, PC PAC. Cynthia Lummis (R-WY), his co-signer, received $1,000 from the PAC in 2013.

According to Federal Election Commission records, Mr. Slater has been an unusually prolific donor to politicians. He has given at least $78,977 of his personal funds to political committees and candidates for federal elective office, including $26,817 through the BHFS-E, PC PAC. I do not wish to insinuate that there has been any explicit quid pro quo from politicians in response to Mr. Slater’s or the PAC’s donations. Nevertheless, political contributions are a potential source of bias. The significant flow funds from CDZI investors to BHFS makes their political action activities important to consider as well.

Cadiz has focused its lobbying efforts during the current session on trying to insert an appropriations rider that would nullify the BLM decision. These efforts were primarily oriented toward Department of Interior appropriations legislation, which eventually passed the House but has been deferred to the lame-duck session by the most recent continuing resolution. I believe the language is highly unlikely to become law due to Senator Feinstein’s continuing opposition.

Interestingly, Cadiz’ second quarter lobbying disclosure form for BHFS added a new category of lobbying activities relating to the “Senate FAA authorization bill and amendments.” Obviously, the FAA reauthorization bill had nothing to do with water in the California desert, but BHFS evidently tried unsuccessfully to add a rider to that legislation sometime during the second quarter.

The Senate version of the bill was sponsored by John Thune (R-SD), Chair of the Commerce, Science, and Transportation committee. Mr. Slater donated $1,000 to Senator Thune on June 1, 2016, his first and only donation to the Senator. BHFS had not supported him since 2010. Senator Gary Peters (D-MI), a junior member of the committee who had not received any money from BHFS since 2011, made headlines in March for inserting other unrelated amendments into the legislation. On May 15, 2016, Mr. Slater donated $1,000 to Senator Peters. Neither senator faces a competitive reelection contest at the moment, giving Mr. Slater’s donations the appearance of an overt attempt to gain influence during concomitant lobbying efforts sponsored by his company.

Cadiz has also tried to win support from California’s federal Congressional delegation. Tim Sheehan, Cadiz CFO, supported Wendy’s Greuel’s unsuccessful House bid in 2014. Richard Stoddard, former CEO, donated to John Tavaglione’s ill-fated 2012 bid. Tavaglione is a Riverside county supervisor who has supported the project publicly. Both candidates for Barbara Boxer’s Senate seat this year have received contributions from either Mr. Slater or Keith Brackpool, Cadiz’ board chairman. To be fair, receipt of donations does not guarantee preferential treatment; even Senator Feinstein received $4,500 from the BHFS-E, PC PAC in 2012 (though nothing since).

In all, 19 current and former representatives are listed by the company on its most recent project support list. No doubt Cadiz has also supported local officials on the list as well, but since FEC data is more readily available, consider just the listed federal supporters of the Cadiz water project. At least 10 of these representatives have accepted money from Cadiz insiders through the second quarter of 2016:

Cumulative contributions from Cadiz insiders to stated supporters of Cadiz water project

Representative District Status BHFS-E, PC PAC Slater Other CDZI Executives Total
Jim Costa D-Fresno in office - 7,400 32,200 $39,600
Duncan Hunter R-El Cajon in office 5,500 - - 5,500
Darrell Issa R-Vista in office 4,000 - - 4,000
Ed Royce R-Hacienda Heights in office 4,000 - - 4,000
Ken Calvert R-Corona in office 2,500 500 500 3,500
Paul Cook R-Yucca Valley in office - 2,000 1,000 3,000
Linda Sanchez D-Cerritos in office 1,000 - - 1,000
Loretta Sanchez D-Santa Ana in office - 1,000 - 1,000
Gary Miller R-Redlands retired - 1,000 - 1,000
Doug LaMalfa R-Auburn in office 500 - - 500
Tony Cardenas D-Panorama City in office - - - -
Tom McClintock R-Roseville in office - - - -
Scott Peters D-San Diego in office - - - -
Collin Peterson D-Minnesota in office - - - -
Dana Rohrbacher R-Huntington Beach in office - - - -
Norma Torres D-Ontario in office - - - -
Mimi Walters R-Laguna Niguel in office - - - -
John Campbell R-Irvine retired - - - -
Gloria Negrete-McLeod D-Ontario retired - - - -
Totals $17,500 $11,900 $33,700 $63,100

In the company’s words, apparently now a “palpable dark cloud” hovers over the Congressional decision-making process.

Gambling with financial products 5

Disclosure: Short Plus500.

At root, what illicit online brokerages have in common is the promotion of trading activity as a form of gambling rather than investment.

In my last letter, I mentioned that the Times of Israel has recently drawn attention to abuses within the online brokerage industry in Israel. The Times kindly asked me to provide a perspective on ways to detect potentially abusive firms. My opinion piece has a dual audience: it lists a few quick tips for individuals who may be considering a new brokerage relationship, and it provides a longer list of potential red flags for regulators and the broader industry to consider.

Over the past year, Cable Car has communicated with more than a dozen regulators around the world regarding Plus500 and other abusive online brokerages. It has become clear that, like the online gambling businesses they emulate, many brokerages take advantage of very aggressive regulator shopping, while operating with impunity and little oversight in many jurisdictions.

Operating a broker-dealer generally requires licensing, capital requirements, and strict regulatory supervision. Despite laws on the books prohibiting online brokerages from accepting local clients without registering, many countries defer to a brokerage’s home regulator for enforcement. Scandalously, the home regulators often refuse to supervise conduct that occurs outside their borders. In some cases this confers an artificial air of legitimacy on the worldwide activity of companies that may be conforming to requirements only for clients in regulated jurisdictions.

The Times noted in its initial exposé that some brokerages target customers in impoverished parts of the world with hopes of quick riches. Others seek customers in countries with significant demand for investment but less developed securities markets and regulatory apparatus. When a brokerage based in Israel or Cyprus violates local law in Qatar or Sudan, local authorities have few resources to do anything about it. When a brokerage flaunts regulatory requirements in more established markets like Hong Kong or Singapore, the local authorities may investigate, but to-date they have done little more than warn potential customers.

The United States, ever the world’s policeman, has been relatively effective at bringing enforcement actions against some of the worst offenders who operate within its borders. Hopefully we will see more actions in the future. Yet smart brokerage operators avoid the small handful of countries that have refused to tolerate illegal conduct by overseas firms, such as the United States, Canada, and New Zealand. Even the US has been reluctant to bring enforcement actions against companies that make only indirect use of US means of commerce. In my view, a great deal of responsibility rests with the Israeli Securities Authority to take a more active role in supervising the worldwide actions of its companies.

Below is an excerpt from the op-ed. Please read the whole piece on the Times of Israel website. Comments are welcome.

As the online brokerage industry faces increased regulatory scrutiny in Israel and around the world, it is essential for regulators and prospective customers to understand what separates a legitimate brokerage firm from the “wolves of Tel Aviv.” At root, what illicit online brokerages have in common is the promotion of trading activity as a form of gambling rather than investment. It is no coincidence that many brokerage developers got their start in the online gambling business, and gambling firms have recently diversified into online trading.

Although the bulk of industry criticism has focused on trade in binary options, many binary brokers at least have the virtue of explicitly describing client positions as wagers. Spread betting, a form of contract for difference (CFD) trading popular in the UK, is similarly upfront about what customers are really doing (allowing the results to be taxed as gambling losses rather than capital gains).

Far more insidious, in my view, is the way in which other brokers offering complicated financial products blur the lines between trading for investment purposes and trading for entertainment. Gambling may have its place, but it should not involve financial products. It harms the integrity of capital markets when companies encourage financially unsophisticated individuals to take risks they may not fully understand or have adequate resources to bear.

Complex derivatives like binary options, CFDs, futures, and other leveraged financial instruments were originally developed for professional investors to manage risk and lower tax and transaction costs. They were never intended as gambler’s chits. The risks of binary options, CFDs purchased on margin, and highly leveraged forex trading are wholly unsuitable for all but the most sophisticated individual investors.

Existing laws governing customer suitability, registration requirements, false advertising, and contract fairness already prohibit much of the industry’s conduct, but they have not been adequately enforced across national boundaries. It is not enough for brokerages to simply be registered. There is an urgent need for coordinated international regulatory enforcement to protect the public. Jurisdiction shopping is common, and companies facing sanctions in one country sometimes simply move customer accounts to another.


Luck and Lakshmi 2

Disclosure: Long one Lakshmi coin.

My wife and I recently returned from a visit to India over the holidays. The trip capped a very eventful year for Cable Car and left me in a reflective mood, despite the tumultuous start to 2016 in the markets. Although experiencing a different culture is invariably educational and I had the small thrill of trading from airport lounges on several continents, this was leisure travel. Due to regulatory restrictions, Cable Car is not able to invest in domestic Indian equities, and there are only a few US-listed ADRs available. We elected to watch the popular Bollywood film Bajirao Mastani in theaters rather than meeting with its controversial distributor, Eros International (no position).


At the risk of relying on what Amartya Sen termed an “exoticist” lens to understand India, I thought I’d share a serendipitous anecdote from the trip not entirely unrelated to investing.

On our second day in Chennai, which has a long coastline on the Bay of Bengal, we asked an auto-rickshaw driver to take us to the beach. The route passed through Besant Negar, a neighborhood that suffered significant damage during last month’s flooding and which I’m pleased to report has rebounded strongly. Many of the street vendors displaced by the floods had returned, and there was a hubbub of rebuilding activity. We arrived at the southern tip of Elliot’s Beach, in front of a large temple we hadn’t planned on visiting.

We had come unexpectedly to the Ashtalakshmi Temple, which is dedicated to the eight incarnations of Lakshmi, goddess of prosperity. The temple is open to all and was uncrowded, so we wandered inside. As we worked our way up the stairs, we passed shrines for each of the eight incarnations, each representing a different form of prosperity in turn. The Dhanya Lakshmi represents the bounty of a good harvest; the Vijaya Lakshmi symbolizes success in the face of adversity; the Vidya Lakshmi stands for the wealth of knowledge. At the very top of the temple, with panoramic views of the Bay to the east, sits the Dhana Lakshmi, bringer of money and gold.

Lakshmi coin

Lakshmi coin from Ashtalakshmi Temple, Chennai

Hindu temples serve an important charitable function in the local community, collecting funds for the temple itself as well as alms for the poor. At each shrine, a priest sought a small donation, but the Dhana Lakshmi’s pandit was different. In keeping with Dhana Lakshmi’s association with money, he had a uniquely convincing pitch. In asking for the donation, the pandit stated that it was not to be viewed as a gift, but as an investment. What you give to the goddess, you shall receive many times over in return. I think the analogy to investing is quite apt. We gave generously, and soon found ourselves garlanded in flowers and given a small coin as a token of good fortune.



I am not a particularly superstitious or religious person, but I am quite fond of ritual and spirituality. A more cynical type might not have enjoyed the experience, but from my perspective, a shrine on a beautiful beach in Tamil Nadu is as good an avatar of good fortune as any.

Visiting the Ashtalakshmi temple left me contemplating the role of luck in investing. As I look back over a very successful year for Cable Car, I am keenly aware of the importance of luck. 2015 felt at times like a constant parade of potential pitfalls—whole sectors moving suddenly out of favor, precipitous repricing of currencies and commodities, comedowns by investors others look up to—to have avoided some of the year’s worst outcomes was the just reward for healthy skepticism, but in other instances it was a mere case of (not) being in the right place at the right time. Investing provides constant reminders that there are many factors influencing each investment that cannot be hedged and are totally outside an investor’s control.

However, I am firmly of the belief that for investors, the saying “You make your own luck” is a truism. Not by donating to Hindu shrines, although perhaps that will help in some small way, but by creating a universe of attractive potential outcomes. We are fortunate in the investing business to be given the opportunity to specify our preferred probability distribution. The task of portfolio construction is the luxury of assembling a collection of only those investments where research suggests the odds are favorable. I approach investing by trying to minimize the consequences of mistakes and misfortune, while maximizing the likelihood of good luck.

Yet ultimately we cannot control outcomes, only the research process, and the best investors will retain their focus on research irrespective of the market’s gyrations. I’m not immune to Schadenfreude, but I do not enjoy seeing famous investors in the headlines for a tough year. There but for the grace of Lakshmi, perhaps, go I. It is far too soon to count out some of the boldface names who had a difficult go of it in 2015.

Often, I feel that the timing of returns is the most significant element of randomness. When taking the view that the market has mispriced a security, it is difficult to predict when and if that will change. We can try to influence market perceptions and corporate actions through activism, but there is an element of uncertainty to every investment. Returns are path dependent—the opportunity to redeploy capital from a positive outcome can be a powerful contributor to future performance. I consider myself fortunate both when the market agrees with my positioning and when volatility provides an opportunity to adjust exposures.

Just as it can feel like a stroke of luck to have avoided pitfalls in the marketplace, it can feel like a blessing to be able to obtain borrow on an obviously overvalued stock, or to be unable to obtain it on a stock that later squeezes higher. I have had occasions to be fortunate to be at my desk during breaking news, and fortunate to be away during moments when others have acted rashly.

Most of all, I feel fortunate to be entrusted by my clients with their capital in a role that I love. Whatever your personal Dhana Lakshmi, I wish you good fortune and many happy returns in the year ahead!

Yes, your capital is still at risk 5

Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Playtech and Plus500 terminated their agreement today after FCA scrutiny. Cable Car’s questions remain unanswered.

I’m visiting with family for the Thanksgiving holiday this week so will offer only a brief comment on Plus500. There are ample grounds for the observance this year after a truly remarkable 2015.

The FCA raised confidential, unspecified objections to Playtech’s proposed acquisition of Plus500. I do not know whether it was Playtech’s shareholders’ personal histories, its gambling business, its acquisition of Epsilon Finance, its connections to unlicensed trading firms, Plus500′s unlicensed activities, its ongoing regulatory issues, its business conduct, or the characteristics of the business itself that led the FCA to block the transaction.


In any case, who is allowed to operate Plus500 in Europe may shortly become irrelevant. As made clear by Playtech’s attempted expansion into financial products, highly leveraged CFD speculation is a tacitly acknowledged form of gambling. CFDs are not suitable as an investment product for the vast majority of retail investors. Under MiFID II regulations expected to take effect in 2017, European brokerages will be required to attest that complex financial products, including CFDs, are “appropriate” for clients. Guidelines remain in flux, but much of Plus500′s product offering as currently constructed appears designed for its activities in “unregulated” jurisdictions. How much revenue does Plus500 currently generate in regions where it operates without a license?

UK clients seeking to open a Plus500 account today are directed to Plus500′s Cyprus subsidiary, and it is unclear if Plus500 will ever again be allowed to onboard new clients under its FCA approval. Despite the change in control objection, the FCA has not historically shown itself to be a terribly toothsome regulator. I do not expect dramatic fines and regulatory sanctions of Plus500′s conduct, although the outright withdrawal of the FCA license remains a plausible outcome. However, the scandal of passporting the Cyprus authorization remains.


For the time being, I therefore assess Plus500 as a going concern. The company now proposes to repurchase shares and resume its dividend. Assuming completion of the full US$20 million buyback at today’s closing price of GBp 329, Plus500 would have approximately 110.9 million shares and GBp 45/share in cash. Added to this, the customer lifetime value approach described in Part 3 remains the only reasonable method of calculating the company’s franchise value.

I recently updated the cumulative new accounts chart to reflect customer additions and churn from Plus500′s Q2 and Q3 trading updates. In both quarters, despite additional customer acquisition costs, the number of newly inactive accounts increased more than the number of newly active accounts. The total number of inactive customer accounts reached further record highs.

Cumulative new accounts through Q3 2015

At 30 September, I estimate Plus500 had 103,146 “potentially active” accounts using the methodology described in Part 3, which will generate potential net income of no more than $83 million before churning, or GBp 50/share after buybacks under the assumptions described in the original report.

In other words, the market continues to place a significant premium on future customer acquisitions in 2017 and beyond, despite the major upcoming regulatory change in what is purportedly Plus500′s largest market. At current margins, the price is ~5x the value of the current customer base.

How much unsegregated cash does Plus500 actually have?

The company continues to have remarkably lax internal controls and financial reporting. Despite additional scrutiny of its financial statements, Plus500 has managed to reference three different cash balances (excluding customer funds) as of 30 June 2015. Does Plus500 properly segregate its customer funds? Which of the three mysteriously dwindling balances is correct?

  • “Net cash stood at $97.5m as at 30 June 2015″ (9 July Trading Update)
  • “Net cash stood at $95.5m as at 30 June 2015″ (27 August Interim Results)
  • “The amount of cash held at 30 June 2015, excluding client balances which are held is segregated accounts, was $95m” (23 November RNS)

The interim report put cash and equivalents at $95.533 million, so the third amount isn’t even a rounding error.

Unanswered questions

Finally, Plus500 still has yet to address the host of disclosure inconsistencies and misrepresentations documented in the original report and reiterated in Part 11. As I wrote there:

Notwithstanding PwC’s unqualified audit opinion, I question how the Board could possibly be comfortable with the 15 inconsistent disclosures identified in part 4, which have been forwarded to the FRC for review. Presumably, PwC did not also audit Geostrading, the mysterious Belize-based subsidiary the company has yet to acknowledge. Are the directors also comfortable with the historical operations of that entity? With respect to revenue generated from unlicensed jurisdictions, perhaps the Company could clarify how its purported European revenue in 2010-13 exceeded the gross revenue recorded at Plus500UK, the only licensed subsidiary at the time. Are any members of Plus500′s affiliate program related parties?

Failing to address material historical omissions and misstatements could perhaps be forgiven in the context of a pending acquisition and delisting.

Now that Plus500 intends to continue trading as a standalone public company, the Board of Directors and Nominated Adviser must meet their legal obligation to ensure that public disclosures accurately reflect the company’s true operations and financial position as soon as possible. I call on the company to respond directly to the outstanding questions raised in this series. Plus500 should immediately restate its disclosures and address its omissions regarding historical and ongoing unlicensed activity.

Final Public Comment on Cologuard 1

Disclosure: No position in EXAS.

This month’s draft recommendation by the United States Preventative Services Task Force on colorectal cancer screening was deeply validating. The task force highlighted the specificity reduction introduced by combining FIT with a diagnostic DNA assay, a point emphasized by many market participants and independent observers over the years. Cable Car submitted comments supporting the task force’s recommendation.

I will have more to say about the impact on Exact Sciences and Cable Car’s positioning in the forthcoming third quarter investor letter.

In the meantime, I had one more public comment to research and submit first. Cable Car’s final public comment on the reconsideration request, which was preliminarily denied in August, is now available. The comment is styled as a compromise and follows an enlightening conversation with the staff at CMS regarding their constraints.

Cable Car has advanced a new crosswalk proposal: 82274 (FIT) + 81275 (KRAS) + 81288 (MLH1 methylation). As a diagnostic assay that is explicitly excluded from reimbursement for screening purposes, KRAS still has no business in the crosswalk, in my opinion. However, it appears Exact Sciences is going to get away with its clever exploitation of policy, which makes it virtually impossible to argue on methodological grounds that a KRAS assay is not a KRAS assay. This is no different from the old abuses of “code stacking” and is one of the many shortcomings of the current process the new PAMA procedure will seek to address. 81288 is a far better comparator for the methylation assay than any previous proposal, but it was only recently priced through the gapfill process.

I am hopeful that at this point in the process CMS will still be able to give the compromise crosswalk its full consideration.

PDF iconRead the comment letter.