The short-seller and the CEO: A war of words over an Alberta company gets even hotter
Badger Daylighting Inc. missed analyst expectations when it issued first-quarter results on May 12, 2017, sending its share price tumbling. But that wasn’t the biggest thing that happened to the company that day. Aggressive U.S. short-seller Marc Cohodes, already engaged in a noisy battle with Canadian mortgage lender Home Capital Corp., announced that he was also targeting Badger, an environmental company that specializes in soil extraction for governments and oil companies. Badger has been taking a public beating from him ever since, with Mr. Cohodes citing accounting issues, executive departures and a pattern of illegal dumping of toxic waste, an allegation he said has been brought to him by company whistleblowers. However, in May of this year, Badger took the unusual step of announcing that the Alberta Securities Commission (ASC) had concluded an investigation “into allegations by short-sellers” with no enforcement action taken against the company. Badger said it was “pursuing all avenues to bring parties engaged in abusive [short-selling] practices to account.” The shares have since completely recovered from their May, 2017, declines. Now it seems Badger has persuaded the regulators to pursue its accusers, as the ASC said Thursday that it has applied for a cease-trade order against Mr. Cohodes related to his Badger position. Badger CEO Paul Vanderberg testified under oath to the ASC, laying out a case against Mr. Cohodes, and provided supporting e-mails from shareholders that encouraged the regulator to go after the short-seller. The application is set to be heard next week in Calgary.
Ramandeep Grewal, a corporate lawyer at Stikeman Elliott LLP, says it’s fairly new territory for securities regulators to pursue actions against short-sellers. “It’s rare and it’s interesting that they’re starting to go after these short-sellers, because historically you didn’t see any repercussions at all,” Ms. Grewal said. If it were Badger’s desire to silence Mr. Cohodes, the opposite has occurred. The Californian has launched a fresh attack, alleging the ASC is protecting the company while suppressing legitimate criticism. The ASC, his attorneys say, never asked Mr. Cohodes for evidence supporting his allegations about Badger. “It’s a constitutional issue. They can’t tell me to shut up. That’s for sure. That will never happen,” Mr. Cohodes said Friday. Spokespeople for Badger and the ASC both declined to comment Friday, citing the ongoing proceedings. Badger employs about 1,800 people across more than 150 locations in Canada and the United States. About 670 employees are in Canada. The company’s technology uses pressurized water and powerful vacuums to expose buried infrastructure such as pipelines and cables. It posted just under $520-million in revenue over the past 12 months and has a market capitalization of about $1.1-billion. Mr. Vanderberg said in an affidavit that “false allegations” by Mr. Cohodes have coincided with “notable drops” in Badger’s stock price and spikes in trading volumes, harming investors. For example, Badger’s stock price skidded 14 per cent after the short-seller first disclosed his position, with nearly five million shares changing hands. That represented 13 per cent of the outstanding float at the time – the highest trading volumes in Badger’s history, according to the affidavit. By the following week, the shares had slumped by 28 per cent. Some investors subsequently told the company they were selling their shares because of shortseller allegations, Mr. Vanderberg said in the affidavit. “I believe that if Cohodes is permitted to continue making false statements about Badger, there will be substantial harm to Badger’s investors, Badger’s business and reputation, and the Canadian and Alberta capital markets,” he said in the affidavit. The affidavit is padded with pages of Mr. Cohodes’s Twitter salvos. A June 27, 2018, post accused Badger of “illegal toxic dumping.” (The company has repeatedly denied such allegations). He has also called Badger “the biggest fraud in Canada.” Mr. Vanderberg argues the social media platform is just one venue used by Mr. Cohodes to lob false statements about the company. However, lawyers for the short-seller accuse Badger of cherry-picking events and exaggerating the impact of his commentary. For example, they attribute the immediate drop in Badger’s share price after Mr. Cohodes disclosed his position to poor quarterly results that missed market expectations. While an unusual move, it’s not the first time a Canadian securities regulator has taken on a short-seller over negative comments about a company. In 2013, the British Columbia Securities Commission alleged that Jon Richard Carnes had perpetrated a fraud by anonymously publishing a negative report about Vancouver, B.C.-based mining company Silvercorp Metals Inc., driving down the company’s share price and allowing him to profit from his short position. But a BCSC panel dismissed the fraud allegations in 2015. The commissioners wrote in their ruling that while they found Mr. Carnes’s conduct “unsavory,” it was not clearly abusive to the capital markets and it is not the commission’s role to punish “morally unsupportable” conduct. An order against Mr. Carnes could have had significant implications beyond that case, they added. “For example, would research analysts who publish recommendations on stocks be subject to such a standard and what would that mean when those reports are built upon opinion? It is not our role to sanction all persons who publish opinion about public companies, regardless of how fair or warranted some of those opinions might be.” However, Ms. Grewal said that such a move doesn’t necessarily mean there will be a “chilling effect” on legitimate research opinions by stock analysts. “From what we’ve seen, the securities regulators are very careful that they’re really going after the ones where they do believe there is a public interest concern.”