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This month, activist investor Bill Ackman lost around $4 billion on an investment in Valeant Pharmaceuticals. Ackman’s loss is one of many stock market trading losses in recent years.
Because of the secretive nature of many hedge funds and fund managers, some big losses may never be reported to the public.
Following are five painful stock market losses in recent years.
In 2015 and 2016, Valeant Pharmaceuticals faced criticism about drug price hikes and the use of a specialty pharmacy to distribute its specialty drugs. The company’s stock price fell around 90 percent since the peak, according to Wikipedia. Valeant reversed the price hikes and changed its specialty drugs distribution.
Ackman’s Pershing Square Holdings fund held a major stake in the company before selling out in March 2017 for a reported loss of $2.8 billion.
In March of 2017, Ackman sold his remaining 27.2 million share position in Valeant to the Investment Bank Jeffries for around $300 million. The total cost of the position was $4.6 billion, leading to a loss of more than 100 percent of the original price of the securities.
In April of 2016, Ackman, along with Valeant Pharmaceuticals’ outgoing CEO, J. Michael Pearson, and Valeant’s former interim CEO, Howard Schiller, testified before the United States Senate Special Committee on Aging. The committee asked the men about repercussions to patients and the health care system posed by Valeant’s business model and pricing practices.
Howard Hubler III
Howard Hubler III, a former Morgan Stanley bond trader, is believed to have played a major role for the single biggest trading loss ever, according to Wikipedia. Hubler made a successful short trade in subprime U.S. mortgages. To fund his trades, he sold insurance on AAA rated mortgages that market analysts considered less risky, but turned out to be worthless, ending in a massive net loss on the trades. $9 billion was lost in 2007 and 2008.
Hubler took over the Global Proprietary Credit Group (GPCG) in 2006.
The GPCG was required to post premiums to their counter parties until the bonds were considered to be in default. Because the group was paying large amounts to keep the credit default swap (CDS) trades in place, their profitability was low. To finance their operations, Hubler told his traders to sell CDSs on $16 billion in AAA-rated collateralized debt obligations (CDOs). GPCG bought $2 billion in CDSs on risky mortgages, and sold $16 billion in what they considered safe CDOs.
Due to the opaque nature of the CDOs on which they were selling CDSs, CPCG did not realize the CDOs they were insuring had similarly risky subprime mortgages to the bonds they were shorting. On account of this, Hubler assured company officers and risk management teams their position was secure.
As the housing market started to collapse and defaults on subprime mortgages began to grow, disputes between Hubler’s group and their counterparties began emerged over the value of the bonds and CDOs that were subject to CDSs. When notified by the counterparties that the value of the CDOs had fallen to levels warranting a payout, Hubler disagreed and said the GPCG’s models indicated the CDOs were worth most of their expected value.
Because of his failure to follow the procedures outlined in the CDSs, Morgan Stanley’s position worsened. By the time upper management intervened and removed Hubler, Morgan Stanley was liable for nearly all the expected losses. Hubler’s group managed to sell $5 billion worth of the CDOs they had prior to the market collapse and realized another $2 billion in revenue from the original CDSs, taking losses for the group to $9 billion. Morgan Stanley lost $58 billion in the financial crisis.
Jérôme Kerviel is a French trader convicted in the 2008 Société Générale trading loss for forgery, breach of trust and unauthorized use of the bank’s computers, ending in losses valued at €4.9 billion, according to Wikipedia.
Bank officials said throughout 2007, Kerviel was trading profitably in anticipation of falling market prices. But he exceeded his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure much higher than the bank’s market capitalization.
Bank officials said he tried to conceal the activity by creating losing trades to offset his early gains. According to the BBC, he generated €1.4 billion in hidden profits in 2008.
The bank uncovered unauthorized trading and closed out these positions over three days in January 2008, after which the market suffered a big drop in equity indices losses estimated at €4.9 billion ($7 billion).
The bank claimed Kerviel took massive fraudulent directional positions in 2007 and 2008 beyond his authority and that the trades involved European stock index futures. Some analysts suggest that unauthorized trading of this scale may have gone unnoticed initially due to the high volume of low-risk trades typically conducted by his department.
Whenever the fake trades were questioned, Kerviel would describe it as a mistake, then cancel the trade, after which he would replace it with another transaction using a different instrument to avoid detection.
Bank officials said Kerviel closed the trades in two or three days, just before the trades’ timed controls would trigger notice from the bank’s internal control system. Kerviel would shift the older positions to newly initiated trades.
He was charged on Jan. 28, 2008 with illegal access to computers and abuse of confidence.
He was found guilty and sentenced to five years in prison, with two years suspended, full restitution of the $6.7 billion lost, and a permanent ban from financial services.
Brian Hunter was a natural gas trader for the now closed Amaranth Advisors hedge fund, which had more than $9 billion in assets but collapsed in 2006 after Hunter gambled on natural gas futures, according to Wikipedia.
Hunter became co-head of the firm’s energy desk in 2005. He believed that 2006/2007 winter’s gas prices would rise. He shorted the near summer/fall contracts. When the market turned against this view, the fund was pressed for margin money to sustain the positions.
When the margin requirements crossed $3 billion around September 2006, the fund offloaded some positions, eventually selling them to JP Morgan and Citadel for $2.5 billion. The fund took a $6.6 billion loss and had to be dissolved.
The Commodity Futures Trading Commission (CFTC) accused Amaranth and Hunter of conspiring to manipulate natural gas prices. A congressional hearing found Hunter not guilty of driving up prices.
The CFTC then accused Hunter of trying to push the prices too low. The Federal Energy Regulatory Commission (FERC) leveled similar charges.
The FERC levied a $30 million fine against Hunter in connection with the alleged manipulation of natural gas prices in 2006. Hunter appealed the fine in court.
On March 15, 2013, a U.S. appeals court ruled that FERC acted outside its statutory mandate in imposing this fine since the CFTC has authority over derivatives trading.
F.S. Comeau, a Canadian investor, recently made a Youtube video of himself losing on a trade of Apple stock, according to MarketWatch.
Comeau posted a 5,000-word explanation on Reddit about why he was risking hundreds of thousands in hopes of making millions. He live-streamed himself wearing a wolf mask and watching his money disappear.
The video drew 15,000 viewers.
Comeau drank champagne through a straw, promising bottles of maple syrup to his followers. He howled through his wolf mask as he watched the impact of the company’s strong earnings report.
The trade screen shown in the video showed a demo account, however. Some viewers wrote the video off as a hoax.
“I was streaming my demo account online as I did not want to accidentally reveal my account number and address,” Comeau said in an email. “People are just looking for a reason to be outraged.”
Comeau stuck to his hopes Apple would reverse course and his $240,000 options play would pay off. But so far, Apple is in positive territory.
See the unedited original live stream recording here: