Category Archives : Ideas

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.

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.

Fun with FOIA 1

Disclosure: Short WRLD.

I don’t often write about World Acceptance Corporation, a position that was the subject of a detailed report last year but has since become relatively difficult to borrow. With potential CFPB enforcement action expected within the next few months, the stock is discounting uncertainty around the scope, severity, and consequences of the Bureau’s oversight. It remains a modest position, and I anticipate that an eventual wind-down/dissolution of the business remains probable, with varying potential equity recovery depending on the nature of the enforcement action.

I have little to add on the exact nature of the CFPB’s theories of legal liability, although I have previously speculated that credit insurance, repeated refinancing, fee disclosures, and collection practices represent potential sources of concern. However, as an illustration of what is becoming an increasingly popular step in the investment process, I thought I would share a recent response from the CFPB regarding inquiries into that very question.

Under the Freedom of Information Act (FOIA), government agencies are required to provide a wide variety of information generated by their operations, subject to several limitations. In particular, there is an exemption allowing agencies to withhold records compiled for law enforcement purposes. Investors and analysts have cleverly used this exemption as a way to confirm the existence of undisclosed SEC investigations.

Cable Car submitted a FOIA request to the CFPB requesting copies of the NORA letter and response from WRLD. Under the law enforcement exemption, the agency must demonstrate that disclosing material would reasonably be expected to impair the enforcement process. Cable Car argued unsuccessfully that disclosing the CFPB’s theories of legal liability would not negatively impact an enforcement proceeding and sought redacted copies of the documents in the alternative. The latter request was unfortunately denied on the amusing basis that “release of any non-exempt information would produce only incomplete, fragmented, unintelligible sentences composed of isolated, meaningless words.” The semiotics of such a document might still be interesting, but I digress.

PDF iconRead the CFPB response to Cable Car’s FOIA request.

Even when a FOIA request is denied, the response can be illuminating. Over the past few weeks, there have been unfounded rumors floated in the marketplace that World’s CFPB review was nearing an imminent resolution without material consequences to the company. On the contrary, the CFPB’s response indicates that an enforcement action remains reasonably anticipated. The FOIA response stated:

“Premature disclosure of the Bureau’s theories of liability, as well as the recipient’s responses to those theories, could reasonably be expected to interfere with reasonably anticipated enforcement proceeding.”

Precedent enforcement proceedings have been initiated several months after a NORA response, so the rumor never made much sense to begin with. I believe a reasonably negative outcome for World Acceptance remains reasonably likely.

Healthcare Cost Inflation

Disclosure: Short EXAS.

CMS has preliminarily determined not to change the reimbursement rate for Cologuard.

Turing Pharmaceutical’s decision to dramatically increase the price of Daraprim in order to achieve investment returns and fund incremental research drew widespread condemnation this week. Turing became emblematic of wider biotechnology industry practices that collectively contribute to healthcare cost inflation. Optimal drug pricing is a more nuanced question than the immediate outrage suggests, but the systemic problem is not limited to pharmaceuticals.

Even government payors do not always feel empowered to consider cost-effectiveness when establishing reimbursement rates. Unlike the niche commercial toxoplasmosis market served by Daraprim, CRC screening is in large part a publicly financed benefit recommended for almost everybody over the age of 50. Americans are now being asked to pay more for non-invasive screening.

The transformation of Exact Sciences from a heavily promoted penny stock with a failed DNA-based CRC detection technology at the end of the last decade to the multi-billion dollar company of today was premised on what now appears to have been a remarkably foresighted decision:

The company took a decades-old screening test, licensed expensive diagnostic biomarkers not reimbursable for screening on their own, and then spent millions demonstrating that, predictably, administering diagnostic assays to screening populations catches a few incremental early-stage cancers at a very high cost with a large number of false positives.

They then successfully lobbied a government agency to increase the price for the combination by 23x over the predecessor test.

It seems that decision will stand.

Last night, CMS released its preliminary 2016 payment determinations. The rationale for new code 81528 was thin:

CMS Recommendation: Crosswalk to codes 81315 PLUS 81275 PLUS 82274.
Rationale: We believe that the 2015 pricing of code G0464 is the correct reimbursement rate, and this molecular pathology test is replacing that code. Commenters recommended other formulas. While we appreciate the comments that payment of this test should be based on various mathematical equations, it is our belief that the crosswalk to the current 3 codes best represent this test. The Clinical Laboratory Diagnostic Test Panel also agreed.

While there is another comment period before the rates are finalized later this year, there is very little else to say about how much the reimbursement rate exceeds both the unit cost of the test and the cost of gaining equivalent life-years through more efficient screening modalities.

I stand by Cable Car’s analysis and thank the staff at CMS for their consideration.

Reconsideration Update 10

Disclosure: Short EXAS

As promised in my previous post, you may now download Cable Car’s public comment in response to statements made at the Public Meeting in July. Comments are normally available only through a FOIA request, but in the interest of transparency I wanted to share my views more broadly. I believe Kevin Conroy made several statements at the Public Meeting that are not accurate and deserve a public accounting. The comment letter discusses the legal basis for the reconsideration request, claims regarding compliance and cost-effectiveness, and additional cost analyses. Exact Sciences shareholders can take comfort in the fact that the company has impressive operating leverage, irrespective of the Medicare payment rate. The incremental cost per test in recent months appears to be less than $100.

Following the preliminary determination on the reconsideration request expected sometime in September, there will be an additional 30-day comment period before the 2016 fee schedule is finalized.

CMS Panel

This morning, CMS convened the first meeting of an advisory panel on Clinical Laboratory Diagnostic Tests. Steve Phurrough, the CMS Medical Officer who asked Conroy several questions at the Public Meeting that are addressed in my letter, chairs the panel but is not a voting member.

The panel was established under the Protecting Access to Medicare Act (PAMA), which is also changing the rate-setting process for the clinical lab fee schedule beginning in 2017. Since the PAMA rulemaking is not yet complete, the purpose of this initial meeting was to provide input into the new codes for 2016 that were discussed at the Public Meeting in July. The panel’s recommendations are advisory and non-binding.

The bulk of today’s debate involved highly technical, controversial determinations regarding the most comparable tests, from a methodological standpoint, to use for several new test codes. Cost-effectiveness concerns were not mentioned at all.

Disappointingly, the panel’s brief discussion (starts at 1:26:30) of code G0464 resulted in an 11-0 vote, with 1 abstention (likely the representative from the Mayo clinic) from the 12 panel members present, in favor of maintaining the current crosswalk. More accurately, there was no discussion. The panel did not discuss their reasoning at all; the only comment was from one individual who questioned why code 81315 had no connection to colon cancer and such a high reimbursement level before voting to include it in the crosswalk anyway.

The panel members are all very well-respected scientific experts, but it does not appear that they devoted much, if any, deliberation to the substance of the reconsideration request. In particular, despite asking many clarifying questions regarding the most appropriate factors to consider for other tests, in the case of G0464 there was no debate whatsoever about the appropriateness of considering a test’s purpose, rather than its methodology, in assigning a crosswalk.

It is unclear whether or not the panel had the opportunity to review the reconsideration request in full or the further comment letter. As the panel’s recommendation is non-binding, I strongly urge CMS to take all available information into account in reaching its determination.


Cable Car Presentation at the Clinical Lab Fee Schedule Public Meeting 1

Disclosure: Short EXAS.

On Thursday, July 16, I presented Cable Car’s reconsideration request regarding code G0464 on the Clinical Lab Fee Schedule before the annual Public Meeting at CMS. The slide presentation is now available for download. You can view my prepared remarks and those of the other speakers on Youtube [starts at 24:45] or in the player embedded below.

I will publish a further comment and rebuttal to Kevin Conroy’s presentation after the public comment window ends in August.

I appreciate having had the opportunity to share my perspective with CMS.

Q2 2015 Letter and Presentation to CMS

Cable Car’s Q2 2015 Letter has been published.

The Cable Car Composite returned +22.7% versus +0.3% for the MSCI ACWI in the second quarter of 2015.

On Thursday, July 16, I will be presenting the reconsideration request to CMS at the annual Clinical Lab Fee Schedule Public Meeting. The presentation and prepared remarks will be made available on the website afterwards.

Please view important disclosures regarding performance reporting.

Your Capital (still) at Risk Part 12: Legal Consequences 1

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.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Customer complaints suggest Plus500 often treats users unfairly and in possible violation of law. I believe Plus500 will face material legal consequences for its treatment of customers, marketing activities, and disregard for local regulatory requirements.

After publishing this series, I have been contacted by several former Plus500 customers who believe they were defrauded by the company. One individual in the Netherlands shared a long and extensively documented complaint, which was submitted to the FCA and the Financial Ombudsman in April.

The current AML-related inquiry by the FCA is unlikely to be an isolated event. In light of the company’s actions toward its customers, I strongly suspect that the additional scrutiny stems from multiple such customer complaints.

When a gambler visits a casino, the gambler gambles with the knowledge that the house has an edge. When a novice trader trades with Plus500, the trader knows the odds do not favor long-term success at highly leveraged CFD trading. However, the trader expects that the platform is organized in a way that is fair and objective, and that prices will accurately reflect developments in the underlying securities. A review of customer complaints suggest several ways in which this may not be the case.

In this post, I’ll use a case study of complaints from a single Dutch affiliate forum to set out a few ways in which it appears the company has crossed the line. Thank you to MM for translation assistance. The forum in question is hosted by affiliates of Plus500 and offers Netherlands-based customers of Plus500 a Dutch-language venue to discuss their experience.

Note that many customer complaints are by novice traders. They sometimes mix legitimate concerns with misunderstandings of typical financial contract terms. That does not change the basic facts of their complaints. Suitability considerations and regulatory requirements generally place the burden for properly documenting the terms and conditions of a trading platform on the company, not its users.

I’m sure affiliates will explain away some behavior documented below as being part of industry norms, but the argument is not that Plus500 is necessarily the worst offender among all platforms. Being mostly fair, or fair to most users, is not sufficient. If Plus500 has in fact manipulated its platform to the disadvantage of some users, there will be significant consequences. At a minimum, Plus500 takes advantage of inexperienced traders. If the customer complaints are accurate, it also cheats them.

  1. Arbitrary expiry procedures
    Customers note that Plus500 sets arbitrary expiration dates for contracts that do not match the underlying instruments and are not always clearly communicated or adhered to. Expiry terms are not well-documented, and Plus500 sometimes expires existing contracts early, without prior notice. Contract expiry typically occurs on a weekend at the last Plus500 quoted price on Friday (not necessarily the relevant underlying price)—this is how Plus500 records profits on Saturdays. Plus500 retains sole discretion to roll contracts to the next expiry. Customers opening positions in a new contract do not have transparency into which futures series is used to determine opening prices.

    Trader Rokil
     complains about an unannounced early expiration in Coffee, resulting in a loss. Trader Fredkroket says this happened to him in Bitcoin as well.

    Trader Snarf complains about an expiry date unexpectedly set one week before the expiry date of the underlying front-month contract at CME. Administrator Armijn admits he also missed an expiry date once and lost money because it was written in fine print on the second page of an instrument. Trader Navras replies with the same experience.
    Plus500 retroactively changed the expiry date of an outstanding Bitcoin contract, resulting in a loss for Trader Peacock. Trader Linda mentions a similar experience with Facebook. She claims her trade history on that instrument was erased.

    Trader Freedom Capital
    on an English-language website describes how a Bitcoin contract with a November 30, 2013 expiration date was closed in mid-November and replaced with a daily expiration (with higher costs) without notice. 

  2. Inopportune cancellation of withdrawals
    A basic principle of dealer-model CFD brokerage is that customers cannot owe the brokerage more money than they have on deposit. However, because Plus500 takes a long time to process withdrawals, it sometimes uses the delay to its advantage. Customers have reported withdrawn amounts, which were already debited from their Plus500 accounts but had not yet been transferred, being cancelled and returned without warning, placing the funds at risk to cover open positions. Other customers have reported suspicious timing of rejected withdrawal requests, despite proper documentation, that occurred within minutes of new positions being opened.

    Trader Thomasson
     reports funds he had already withdrawn were returned to his account to cover a margin deficit. The withdrawal was still ‘pending’ but had already been debited from the account for several days when he went below margin. Plus500 used the withdrawn funds to cover the margin deficit, but this amount was insufficient so the positions were closed at a total loss of both the withdrawn amounts and other monies on deposit.

  3. Difficulty closing positions
    Several users have reported unexplained, system errors that prevent positions from being closed while in a profit position. In other instances, profitable positions remain open and exposed to market risk because Plus500 chooses not to make quotes available on the platform at its discretion.

    Trader GBG could not close a USDRUB position at a profit one hour before the stated closing time of the market. He tried unsuccessfully for an hour, the market closed, and the next day his position changed to a loss and could once again be traded. Plus500 support responded that the ruble was unavailable for trade due to ‘low trading volume’ despite external trades taking place in the underlying. GBG has complained to the FCA and changed brokers.

    Trader Verlangen complained that he could not close his position at a profit; the close button did not work. After his trade entered a loss position, he could close it again.

  4. Miscellaneous platform inconsistencies and policies
    Traders cite a variety of arbitrary rules and actions by the company that work to their detriment, including closed accounts, price divergence from the underlying, and different withdrawal limits for different users. Some traders claim prices quoted on Plus500 demonstrate higher volatility than the evolution of the underlying, resulting in additional losses for leveraged traders. As discussed in Part 8, traders worry about the definition of “scalping” in the User Agreement. While Plus500 appears to ultimately resolve scalping complaints in favor of the users who push back (after several months, in the case of two different Singaporean users), how many more inexperienced traders simply go along with it when they are told that their profits are illegitimate?

    Trader Linda
     concludes that with a definition like “a systematic trading strategy” Plus500 can call just about anything scalping. Plus500 support is quoted: “Please note that scalping has no specific time definition. A trader is considers as scalper when using a systematic trading strategy of holding short-term positions. Please be aware that when examining a scalper we look at the overall trading activities, rather that just on a certain position.”

    Discussion about scalping
    ; traders worrying if trades under ten minutes are considered scalping.Trader Ikbener somehow managed to open two accounts and made EUR 4,500 from his sign-on bonus. The profitable account was closed, and he was not allowed to collect the profit.
    Trader Johanserv
    complains about inexplicable differences between quotes at Plus500 and on other financial sites.

    Trader Pokemon
    asks about the minimum amount of money he can withdraw. Administrator Armijn and Linda figure out that it is different for all users. For the administrator himself, the minimum has increased over time; he speculates that it might reflect higher bank costs. Trader Linda concludes that it is completely unclear how and why Plus500 determines the minimum withdrawal sum for various users.

    Trader Vijo
    complains that Plus500 closed his account after two years of trading, without announcement or reason, and made a new one for him while not transferring all of the money or positions on his old account. Plus500 support stated that his new account was reopened at Plus500′s Cyprus subsidiary, Plus500CY. The miscalculation of money in the old account was never fully explained.

The message to Trader Vijo from Plus500 support, dated February 23, 2015, confirms that Plus500 has been transferring UK-regulated client accounts to Cyprus, as reported on LeapRate and Business Insider last week. Trader Vijo’s experience confirms that Plus500 has been attempting a regulatory arbitrage for months before the recent voluntary action. Why would Plus500 transfer EU clients to Cyprus while under investigation by the FCA? This action strongly suggests the company is trying to take advantage of the EU passporting mechanism from a jurisdiction with less stringent oversight. Full email reproduced from the thread below:


We reviewed your account and would like to inform you That as you already agreed by accepting the New User Agreement, due to a regulation change – from The Financial Conduct Authority (FCA) to the Cyprus Securities and Exchange Commission, your old account was closed on 02.16.2015 and the balance of (€ -157.67) was Transferred to a new account with the same email address, but under the new regulation. 

You can still have access to your previous account under the email: and your old password, for information and taxation Purposes, for 30 days after the opening of your new account. After That period the old account ( will be closed and you will be trading into account: 

This change did not have any effect on your account’s trading only the change in e-mail. 

Your current account is exactly the same as the old one, simply under a different regulation. 

Customer Support 
Plus500 CY Ltd 
1 Siafi Street 
3042 Limassol

In addition to the above individual experiences, the customer complaint to the FCA documented an extensive list of ways in which the Plus500 User Agreement is inconsistent with Dutch Law and the UK’s Unfair Contract Terms Act. It also highlighted numerous ways in which the trading platform is risk-enhancing and unsuitable for novice traders. Minimum order sizes and thresholds are in some cases larger than the tick size of the underlying instrument. Default order sizes are very high relative to customer account balances. Plus500 also upgrades most users to a “Gold account” after a short period of activity, setting the default order size and leverage limit to a much higher level.

I am not an attorney, but I have four theories of how legal liability could attach to Plus500 as a result of these and other actions, some of which were referenced in Part 9. While customers have been contacting journalists, short sellers, and the FCA, they really should be in touch with a competent multi-national law firm. The allegations just among Dutch customers alone appear sufficient to support a class action suit. This is a situation where a determined prosecutor or advocate could make a real difference for customers who have lost money unfairly.

  1. Class action complaint by customers: I recognize that the United States is a much more litigious society than Europe. Here, there would already have been multiple shareholder derivative actions based on all the things people were upset about at the AGM. However, the allegations documented above are serious and warrant investigation. If a court determined that Plus500 acted abusively, restitution and punitive damages could be significant.
  2. Foreign regulatory fines and claims: Plus500 operates without a license in many parts of the world, as detailed in Part 11. Any customer losses attributable to the platform are in theory null and void, as the company operated without authorization and could not enforce its user agreement. While it might be difficult or impossible for a foreign regulator or court to enforce a judgement upon Plus500, the risk remains. Plus500 operates using currencies and the international banking system in ways that may bring it into the regulatory net of other countries, including the US.
  3. Local marketing violations: Plus500 notes in the Admission Document that its affiliates may run afoul of local securities marketing requirements. It does not note explicitly that it accepts affiliate marketers located in jurisdictions where it is not authorized to operate, including the United States. Affiliates who receive revenue sharing arrangements are in effect participating in a multi-level marketing scheme and receiving up to 30% of the turnover of an unlicensed broker-dealer. The US SEC and Department of Justice are not likely to look kindly upon US persons profiting from the operations of a foreign securities firm that is not authorized to operate in the US, while using US means of commerce to promote that entity. Local authorities have been notified.
  4. UK or Cyprus regulatory fines or loss of registration: So far, the FCA has not shown itself to be particularly punitive. At the AGM, Plus500 said there was no evidence that the FCA will issue a fine for Plus500′s AML procedures. However, if the allegations by customers are true, there may be meaningful consequences for other behavior.

With that, I will reiterate the question I raised in Part 10: Would you do business with Plus500?

Your Capital (still) at Risk Part 11: Unanswered Questions 9

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.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Cable Car remains short Plus500 with a revised price target of 52 pence (GBP 0.52). Plus500 faces material legal liabilities and has yet to address its undisclosed Belize activities, filings inconsistencies, and misrepresentations regarding customer losses.

Below, I will address the wholly inadequate response from Plus500, which was published in an RNS last Wednesday.

Before I do, however, I have one small mea culpa. In publishing such a large volume of material, I inadvertently neglected to translate Plus500′s stated cash balance of $88 million from USD to GBP. As a result, I published a price target that was too high. Using the updated cash balance of $92.2 million and an exchange rate of 1.53 GBPUSD, Plus500 has approximately GBP 0.52/share of cash on hand today. The per-share lifetime value calculations in Part 3 are similarly expressed in USD and are thus too high by the same factor. Consequently, I now value the cash plus potential earnings from the current customer base at GBP 0.84-0.98. This estimate is based on the potential profitability of the customer base as of Q1 2015 using 2014 ARPU and margins. It does not include remediation costs, reduction in trading activity, or loss of users due to the ongoing account freeze, all of which are likely to be significant.

I regret the error. If any other aspect of this series is factually misrepresentative, I will gladly correct the record.

I continue to believe that if the questions raised in this series are not adequately addressed, the company will ultimately cease to continue as a going concern and hence reiterate the stated cash balance as my price target. In addition, I believe Plus500 will face material legal consequences from its marketing activities, geographic presence, and treatment of customers. More details are in Part 12.

The company’s statement is reproduced below:

The Board is aware of recent press and blog commentary regarding Plus500′s accounting policies and business model and rejects the assertions made as misrepresentative and baseless. The Board reiterates that the Company’s accounts, along with those of its subsidiary, Plus500UK Limited, have received unqualified audit opinions from PwC and the directors are comfortable with the disclosures made therein.


In response to the specific issue raised in respect of the restatement of Plus500UK’s subsidiary accounts and the implication that Group revenue is substantially over-stated or a substantial amount is generated in unlicensed jurisdictions, we clarify that both assertions are incorrect.  The application of the new Financial Reporting Standard 102 resulted in the reallocation of gross revenues attributable to Plus500UK’s customers to Plus500 in the Company’s 2014 results. This also required the 2013 results to be restated.  The reallocation has no impact on Group consolidated revenue.

While I was hardly expecting a detailed, 10-part follow-up to the questions raised by this series, this response is rather anemic. Plus500 has addressed one concern raised in the report. Now what about all the others?

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?

The basis for each statement made in this series has been painstakingly documented; I stand behind every assertion and challenge the Board to identify any claim that is baseless. I further pledge to correct any misrepresentation, as noted above.

With regard to the restatement of Plus500UK subsidiary revenues, I speculated in Part 4 that there were several possible reasons for the restatement:

  1. Revenues at the Group level were overstated.
  2. The inter-company agreement was modified or terminated.
  3. The FAS 102 transition (FAS 102 is a modified form of IFRS that replaced a previous UK GAAP standard) required revenues to be reported net of payments to the parent, instead of gross.

The company says that the third explanation, which I suggested was the most charitable possibility, is the case. Very well then. Net revenue presentation in the subsidiary will unfortunately reduce transparency and make it more difficult to reconcile Group revenues going forward, but if that’s what accounting rules require then so be it.

The subsidiary accounts remain somewhat puzzling. PwC’s own summary of the differences among old UK GAAP, FRS 102, and IFRS does not suggest any inventory or financial asset fair value reporting changes that appear to require restating a cost of sales item as an offset to turnover. It is also unclear why the adoption of FRS 102, which did not modify revenue recognition, would result in a switch from gross revenue to net revenue reporting in the first place. The variable treatment of “introductory commissions” is also odd considering the only categories of funds payable to the Parent under the inter-company agreement are 78% of dealing spread revenue above $300,000, 5% of credit card transactions, and the profit/loss on offsetting hedge transactions. Credit card transactions are reported as a separate cost item. Why is the bulk of introductory commission recorded as a reduction in revenue while a portion is recorded as a distribution cost?

In any case, investors will ultimately have to trust that the accountants know what they’re doing here. I’ve highlighted why their work deserves scrutiny.

Additions and amplifications

Brevity is clearly not my strong suit: the latter half of this series received noticeably less traffic than the first few posts. If you’re still with me, there are several very important points raised in the latter half of the series that I would like to emphasize and update.

  • In Part 6, I documented the magnitude of revenue reported from customers outside of regulated jurisdictions (line C). The amounts were particularly egregious in 2010-11 when Plus500UK was the only regulated subsidiary, but even in 2013 the extra-legal amount significantly exceeds revenue reported at Plus500AU (approximately $3.2 million). To be clear: $67 million (27%) of the company’s reported revenue from 2010-2013 came from customers in locations where Plus500 did not have legal authorization to operate. This is significantly more than disclosed in the Admission Document and annual filings.
  • In 2013, estimated revenues from customers in Europe were also disclosed. They have been added to lines D and E in the table below. Similar geographic disclosures were not made in 2014, so it is no longer possible to track the contribution from unregulated jurisdictions and Europe overall. However, the inconsistency in Plus500′s disclosures remains. For the period from 2010-13, Plus500 claimed European customers generated $40 million more gross revenue than was actually reported by Plus500UK.
  • I cannot think of a charitable explanation for this. One or more of the following must be true: Group revenue was overstated, customers in Europe were served by an unregistered subsidiary, or the geographic disclosure deliberately overstated the proportion of revenue generated in regulated jurisdictions.
Comparison of Group and Plus500UK turnover 2010 2011 2012 2013
A. Group reported revenue 24,211  50,028  56,127 115,088
B. Plus500UK reported revenue, translated into USD 1,553 28,993 44,692 99,864
C = A – B. Revenue generated elsewhere 22,658  21,035  11,435 15,224
Plus500UK as % of Group reported revenue 6.4%  58.0% 79.6%  86.8% 
D. Stated revenue from EEA/Gibraltar customers 18,667 42,874 49,785 103,832
E = D – B. Missing revenue from regulated customers 17,114  13,881  5,093 3,968 
  • In Part 7, I focused on, an unlicensed Plus500 clone that operated until mid-2010. It turns out it was not the only one. MeVideoCY also operated a very similar site called from 2009 until at least March 2011. Not only is this site unregistered and undisclosed by the company, but there are several violations of securities advertising rules on the site, such as referring to sign-up bonuses as “free”. How many other unlicensed sites did Plus500 operate? Is Plus500 operating unlicensed websites today?
  • A correspondent reminded me that in Part 7, I omitted Norway from the long list of regulatory authorities that have warned against Plus500.

In Part 8, I commented that I have no way to asses the merits of individual claims of unfair treatment on the Plus500 platform. In Part 12, I try to remedy this by investigating some specific allegations of abusive practices and considering the potential consequences in more detail.


On to Your Capital (still) at Risk Part 12: Legal consequences –>