[bumby]

I think that argument gets lost when the company actively lies. In Theranos’ case, they forged letters by Pfizer claiming the system was validated. If a company is forging, say accounting books, it’s hard to claim due diligence would have prevented being swindled.

[mschuster91]

> In Theranos’ case, they forged letters by Pfizer claiming the system was validated.

Wirecard did the same with accounting statements from the Philippines, and EY accepted them without verifying that the statements are correct at the bank offices, they didn't even cross check if the billions of dollars could even be on the books of the Philippine banking system, and now EY is in hot waters.

If I were an investor and were presented with claims of validation of a technology that is hotly contested, the very first thing I'd do is call up or otherwise contact the issuer and verify the authenticity of that claim. It's like ten minutes to find out the contact information of Pfizer's Investor Relations team and compose a letter - investors who are unwilling to commit at least this little bit of verification deserve to be relieved of their money and office.

[bumby]

EY = Earnst & Young?

You bring up good points (although I think I disagree with your conclusion that people ‘deserve’ to be defrauded). There seems to be active collusion at times between oversight and the companies being audited. This isn’t the first time EY has been accused of this and we see it with credit ratings agencies too.

I think I come to a different conclusion because we all outsource our quality assurance on a daily basis. Did you review the airworthiness certificate of the last plane you flew on? If not, do you “deserve” to crash because you outsourced to the FAA without verifying it yourself?

I’d say the blame should fall to the third party auditors who failed the system, not necessarily to those who trusted them.

[mschuster91]

> Did you review the airworthiness certificate of the last plane you flew on? If not, do you “deserve” to crash because you outsourced to the FAA without verifying it yourself?

Am I a normal airline passenger/pilot or did I sign up as a test pilot for experimental / new / freshly repaired aircraft?

The latter get higher pay simply because that risk is part of their job, and to my knowledge test pilots have the option to refuse jobs they deem to be too dangerous. Same is for investors, with the difference that human lives can irrevocably be lost whereas money is only a virtual thing.

[bumby]

I don't think that's a good analogy to illustrate the risk profiles. You are incurring a risk by getting on a plane, but you have generally assumed that risk is mitigated by a third party verification process (namely, certification by the FAA in the U.S.). Likewise, an investor relies on third parties (auditors, SEC, etc.) to mitigate risk. Test pilots, by definition, are flying non-certified airframes meaning they are paid to take on the additional risk not mitigated by a third party verification process. This is why many investors will abstain from investing in companies from countries with weak third party certification processes.

The system breaks down when the third party is corrupted or incompetent in terms mitigating that risk. If we're going to say investors/airline passengers 'deserve' an outcome regardless of the role of a third party verifier, I'd probably say there's no reason for an SEC, FAA, audits, or even journalists for that matter. We've largely said as a society those organizations play an important oversight role in mitigating risk.

[mschuster91]

There's a difference in the term "investor".

Your everyday normal "retail" investor should be protected by the law and regulatory agencies, e.g. requirement that companies offered to trade their stocks for unqualified investors need to follow SEC guidelines on accounting and business best practices, that insider and politicians' deals are regulated/reported, that environmental, consumer protection and labor laws are followed and that such companies are audited for compliance. For investment vehicles (e.g. funds, stock options that are not part of "employee stock" programs), that the risk of major or complete loss is limited (=investments done by these with the assets of normal investors should follow the same rules, and that investments into assets requiring accreditation do not exceed 20% of the assets under management of the investment vehicle). Obviously, that also limits the return of investment aka the pricing of risk.

Accredited investors / investment vehicles allowed to invest in high-risk assets however? The accreditation should represent an exchange: you get the potential to higher return of investment unlocked, but as a price for that you have to:

1. prove you can stomach significant losses (=you have to own your residence and can only invest 80% of your net worth into investments requiring accreditation)

2. spread investments so that no single or related (e.g. by majority ownership) high-risk investment exceeds more than 20% of your total portfolio. Exceptions can be made for holding companies, SPACs and similar investment vehicles, provided that their investors follow the same exposure limit.

3. prove you/your staff are actually qualified to make qualified decisions: professional education (e.g. a university degree in economics, finance and related subjects or training provided as part of employment at a bank or other financial institution) and the time to adequately review the companies you invest (=someone who works 60 hours a week in a non-finance related job should not be assumed to have enough free time and mental capacity to review and follow-up documents)

4. waive your right to protection by regulatory agencies and the judicial system to a degree that reasonably expectable efforts (such as calling up certification issuers to verify authenticity of a certificate) have to be undertaken.

5. agree to be held fully liable for your loss and the loss of your clients if you violate the rules or act negligently.

That way, the assets of the majority of the population are protected against loss of their investments, actual professionals now have a monetary incentive to responsibly invest their assets, and auditors have the incentive to actually do their job (and if they do not do that on their own, their liability insurance will make them do!).

A case could also be made for an intermediate class of investor to allow people not meeting the criteria to invest a limited portion of their assets (e.g. cap at 20% of net worth excluding primary residence, require a minimum net worth of 200k $) into high-risk investment.

We do the same with other high-stakes jobs (doctors, pilots) and organizations (see e.g. how cyber-security insurances force companies to introduce IT security measures as part of providing insurance coverage) - why don't we do the same with the finance industry? There have been more than enough high-profile cases now, some of which actually caused global crisis events.

ETA: Additionally, "margin trading" should be banned or at least strictly regulated for all investors. The amounts one can see in the "Loss Porn" section of r/wallstreetbets are simply inconceivable. No one should be able to YOLO their retirement funds into Gamestop ffs, and no one should feel forced to off themselves because their bank showed them a 730k US-$ margin call [1].

[1]: https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y...

[bumby]

This clarifies your position well and I largely agree. It wasn’t immediately apparent from your earlier post that you were talking about the specific case of accredited investors.

Regarding the margin call type investments, I would add it’s not to just prevent endangering oneself but protects society as a whole. As a layman looking at past economic bubbles, it seems the one corollary is excessive speculation coupled with excessive leverage.