Hiring the former CEO and then shorting the shares.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In a somewhat surprising decision, Spain’s High Court said on Friday that it would investigate allegations against two former executives of renewable-energy giant Abengoa, which days earlier had filed for preliminary bankruptcy protection. Some of the creditors had filed claims against former Chairman Felipe Benjumea and former CEO Manuel Sanchez Ortega. In Sánchez Ortega’s case, they alleged that he’d shared insider information with his new employer, the world’s biggest investment fund, BlackRock, that then massively profited from this information.
The Big Short
Sánchez Ortega resigned from Seville-based Abengoa in May this year, walking away with a tidy severance package, a sweet deal for the man who helped sow the seeds of the company’s demise. At the time it was already common knowledge that Abengoa was having financial difficulties; what was not common knowledge was just how serious those difficulties were.
No one had a better idea of the true state of Abengoa’s finances than Sánchez Ortega. Within weeks of leaving the company, allegedly due to heart problems, Sanchez Ortega joined BlackRock as head of strategic development as well as head of the firm’s Latin American infrastructure group. Apparently his role is wholly unrelated to funds trading Abengoa’s securities; it’s pure happenstance that just over a month after Sanchez Ortega’s appointment, BlackRock placed a not insignificant short position – more than 1% of its working capital – against the Spanish firm.
Since that time the company’s short position has waxed and waned while Abengoa’s share price has collapsed 80%. In other words, BlackRock has made untold millions from Abengoa’s fall. What’s more, as one of the world’s most influential market movers, BlackRock’s big short position helped accelerate the Spanish firm’s decline.
Despite still being a felony, insider trading is a broadly tolerated practice in many of the world’s jurisdictions, including the U.S. In October, the U.S. Supreme Court declined to hear a high-profile insider-trading case against Michael Steinberg, who worked at the fourteen-billion-dollar hedge fund S.A.C. Capital Advisors. The court’s decision delivered a potentially fatal blow to the efforts of Preet Bharara, the United States Attorney in Manhattan, to crack down on insider trading in the three-trillion dollar hedge fund industry.
An Insidious Case
The Abengoa-BlackRock case is a particularly insidious example of insider trading, however, for two key reasons: first, the tipster involved had a leading hand in the firm’s billion-dollar downfall and profited handsomely from it. As WOLF STREET reported in August, one of the main causes of Abengoa’s demise was its unrestrained embrace of the dark arts of finiancialization. Like Enron, it used every accounting trick imaginable to conceal the true extent of its debt exposure.
Sánchez Ortega had a frontline role in this process. As he said in 2014, when things get serious, you need to have your wits about you and “Abengoa has always been at the leading edge of financialization.”
The second reason why this case is particularly important is the sheer size, power and influence of the alleged beneficiary of Sánchez Ortega’s privileged information, BlackRock. Here’s what The Economist had to say about the firm in 2013:
It owns a stake in almost every listed company not just in America but globally… Its reach extends further: to corporate bonds, sovereign debt, commodities, hedge funds and beyond. It is easily the biggest investor in the world, with $4.1 trillion of directly controlled assets (almost as much as all private-equity and hedge funds put together) and another $11 trillion it oversees through its trading platform, Aladdin.
For BlackRock it’s not just money it’s after; it’s information. As WOLF STREET recently reported, BlackRock is not only the most influential financial-sector lobbyist in Brussels these days, having gained closer access to the European Commission’s top decision makers than even traditional stalwarts of Europe’s financial industry, like Deutsche Bank and HSBC; it is also the proud owner of confidential data on many of the continent’s banks, thanks largely to its role as financial consultant to the governments and central banks of bailed out nations like Ireland and Greece.
Passive Investors, Active Owners
BlackRock’s financial empire has become so vast that it has even drawn the attention of the academic world. Two recent studies – one by Einer Elhauge of Harvard Law School and the other by Martin C. Schmalz of Stephen M. Ross School of Business and José Azar and Isabel Tecu of Charles River Associates – have confirmed that BlackRock and some other big funds have acquired such large shareholdings throughout the U.S. and global economy that they cause the companies they jointly own to compete less vigorously with one another.
Elhauge’s study, “Horizontal Shareholding as an Antitrust Violation”:
In the banking industry, the top four shareholders of JP Morgan-Chase (BlackRock, Vanguard, Fidelity, and State Street) are also the top four shareholders of Bank of America and four of the top six shareholders of Citigroup, collectively holding 19.2% of JP Morgan-Chase, 16.9% of Bank of America, and 21.9% of Citigroup.
These same shareholders are also the top four shareholders of Apple (BlackRock, Vanguard, Fidelity and State Street) and four of the top five shareholders of Apple’s main rival, Microsoft.
The exact same ownership patterns occur across almost all industries — and not just in the US. Granted, most of the time it’s other people’s money that these firms like Vanguard, Fidelity, and BlackRock are investing, but that’s not to say that they are impartial and disinterested. As Vanguard puts it, they may be passive investors, but they are not passive owners. “We are an active voice,” BlackRock’s chairman and CEO, Laurence D. Fink, is fond of saying — a voice that is now heard in just about every boardroom of just about every major company on this planet.
In the most perverse of ironies, BlackRock’s influence could soon extend to Abengoa’s boardroom. According to El Economista, if Abengoa’s debts are restructured – at the expense of current stockholders and bondholders – and Abengoa is given a new lease of life via a desperately needed capital infusion, a consortium of investment funds is waiting on the sidelines to inject additional funds into the firm. That consortium includes Blackstone, Macquarie, Children’s Investment Fund Management, and… BlackRock (after it presumably covered its big short).
In other words, the firm that helped accelerate Abengoa’s decline and profited from it — allegedly thanks to its use of privileged insider information — could soon have a major say in the way a restructured, resurrected Abengoa operates. In such an outcome Sanchez Ortega’s inside knowledge of the firm will no doubt once again be a major boon to the world’s biggest fund manager. By Don Quijones, Raging Bull-Shit.
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