Short-Selling Expert Explains How Fraud Is Sniffed Out in Frothy Markets
Frothy markets could lead to more fraud.

With the stock market dipping and diving, volatility returning to Wall Street and opportunities for profit hidden in every nook and cranny, fraud has reared its head.

"There's a lot," Jillian McIntyre, chief investment officer and portfolio manager at 221B Capital, told TheStreet on Thursday, May 3. "Unfortunately, there's a lot."

McIntyre, who has become a short-selling expert since beginning her career in the early 1990s, said that although some companies will defraud investors no matter the direction of the broader market, bull cycles breed more fraud than downturns. 

"Companies are under pressure to put up performance," McIntyre said. "The good ones will go the right path, and the bad ones will seek to defraud investors in any possible way. To that end ... yes, I would think now there is probably more." 

The stock market, despite a number of selloffs in 2018, remains in its ninth year of a bull cycle.

It's McIntyre's belief that short-sellers ought to be tasked with sniffing out fraud in any market. Her firm, 221B Capital, is named after the famed fictional address of detective Sherlock Holmes. It focuses on idiosyncratic shorts for companies that will "go down whether the market is going up or way down."

"The job of a short-seller is to uncover things," McIntyre said. "There's a lot of froth in the market and it's uncovering things that people have missed."

For many investors without the resources of short-sellers and the like, the only means of identifying corporate issues or high-level mistakes is sifting through filings with the Securities and Exchange Commission or listening in on earnings conference calls.

But McIntyre explained that the fraud may not always become clear in earnings alone; rather, those reports are the "thesis-confirming" events that prove corporate meddling.

"Earnings will probably be thesis-confirming kinds of events. It's not necessarily the event that will expose the company," McIntyre said. "We're looking for the behavior aspects, but it may not be the actual event that forces the company down."

As for the broader market, the bull-bred fraud may not stick around too long.

McIntyre explained, "I think the market is really coming away and I think investors are being a little more disciplined in terms of not paying up too much."

More from Stocks

The Stock Market Has Every Reason to See a Fresh Rally

The Stock Market Has Every Reason to See a Fresh Rally

3 Simple Tips on Investing From TheStreet's Jim Cramer

3 Simple Tips on Investing From TheStreet's Jim Cramer

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Video: There Are Some Big Changes Coming to the PGA Championships in 2019

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Tesla's Supercharger Network Is Booming -- Here's Why That's a Concern

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly