Friday, October 2, 2015

Eight Days a Week:Pershing Square Calls Mulligan, Manipulates NAV Report

It seems that Bill Ackman and Pershing Square have learned some accounting tricks from their frenemies at Valeant. WallStCynic, John Hempton & AZ Value have done excellent work on the subject, and much of this work focuses on a troubling pattern of opacity in Valeant's numbers as well as inadequate disclosure. Based on yesterday's performance report released by Pershing Square Capital Management's publicly traded investment vehicle, I am left wondering just how opaque PSH:AM's disclosures are.

By their own guidelines, Pershing Square reports both on their own website, as well as through very public press releases

"Weekly net asset value (“NAV”) is calculated as of the close of business on each Tuesday and posted on the following Thursday. In the event that Tuesday is not a business day, the Company will calculate the close-of-business NAV as of the business day immediately preceding that Tuesday. In the event that Wednesday or Thursday is not a business day, any such weekly NAV will be posted the next business day following that Thursday. End-of-month NAV is calculated as of the close of business on the last day of the month and will be posted within two business days thereafter." (emphasis added)

Unfortunately, Pershing Square chose this week to completely ignore their own public guidelines and representations to their investors by releasing weekly numbers that aren't based on TUESDAY, September 29th's close of business, but on WEDNESDAY September 30th's close of business.  Down to almost $15B on Tuesday, Bill probably wishes that Tuesday was "not a business day", but I can assure you it was. You can look back at the history of Pershing Square's reporting and see for yourself that their choice of recognizing an 8 day week is anomalous (to say the least). Let's not mince words here: the difference between accurately reporting weekly NAV based on Tuesday's close versus Wednesday's close was ~$1B in value which equates to ~6% of the total fund value.

Novel idea really: manipulate public markets and the regulatory regime overseeing those markets whilst simultaneously manipulating the value of the publicly traded vehicle that partially derives it's value from those manipulations.

We're all human. I've lied to my parents, I've called in sick and gone to the museum, I've even cheated on a drug test (many many years ago, and P.S. I still failed, so the lesson is don't do drugs, or at least don't lie about doing drugs). That's to say that I understand the motivation behind fluffing your numbers, but I don't understand the legality. You want to pre-announce monthly numbers???...sure go ahead, I've got no problem with that provided they are accurate. Choosing to report a +$1B swing in your favor by ignoring your own reporting guidelines should not be legal though(if it already isn't). Pershing Square has strayed away from two reporting principles they've distributed to the public markets since October of last year:

  1. Weekly NAV/performance is calculated based on Tuesday's close, and released on Thursday
  2. Monthly NAV/performance is calculated based on EOM close and released within 2 days.
It's bad enough for Pershing to publicly conflate Tuesday NAV with Wednesday NAV, but by choosing to bring forward the monthly number's release date to Thursday while simultaneously conflating weekly NAV's makes it appear that there could be a coordinated attempt to misinform the investing public about the value underlying the PSH vehicle as well as the investment fund for which PSH is a surrogate of.  I don't know anybody that would savor informing investors that they lost 16% instead of 12%, but isn't accurate disclosure supposed to be about accurately disclosing risks and values?

From Ackman's own August Management report, Pershing Square clearly has their eye on the relationships between NAV, trading price of PSH and *ahem* transparency.
"The Board monitors the trading activity of the Company’s shares on a regular basis. The Company publishes its NAV per share weekly on its website together with monthly performance reports and transparency reports disclosing certain information with respect to the Company’s underlying positions, which are predominantly in large cap listed companies. The Board and the Investment Manager believe that this transparency should help the Company’s shares trade (over the long term) at or above NAV."
There are couple of curious factoids that don't really mean anything other than they are convenient mental anchors for me:

  • the public vehicle that is being manipulated has a larger market cap than the public company he's trying to destroy.
  • the size of the manipulation is about the size of the firm's much publicized Herbalife short

But, what's $1B between friends, and regulators, right? 

Maybe what Pershing Square has done is actually legal, but probably only on the eighth day of the week.

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