‘Shorts’ turn rumours into share routs
THEY were reviled in the age of Rembrandt, outlawed in the time of Newton and, in the days of Napoleon, branded enemies of the state. Now short sellers have embraced the age of Twitter — and the results are almost as explosive.
The internet has given a new generation of short sellers and researchers tools to spread bearish investment advice in a blink— and sometimes anonymously. Occasionally a post or tweet from a faceless source can wipe out billions of market value.
The development has left executives struggling to contain the damage and rekindled age-old questions about the methods and motives of those who would drive down share prices. This much is certain: in today’s hi-tech marketplace, internet speed is changing the game.
“They have methods of communicating views instantly to potentially millions of people,” said Marshall Front, chief investment officer at Front Barnett Associates and a 40-year Wall Street veteran.
“There are a lot of people with a lot of money who will move capital based not upon an idea but upon an algorithm tied to one word. So if someone comes out and casts aspersions on management, they’re not waiting around.”
To fans, short sellers are heroes — people who work against the grain to expose bad investments. To detractors, they are opportunists who try to profit by talking trash about solid companies.
The numbers suggest shorts are growing bolder. Last year, short sellers, named and unnamed, waged 146 campaigns, up from 121 in 2013, according to research firm Activist Shorts.
Among the dramas stirred by internet-powered bears, few have drawn as much attention as the one surrounding Noble Group.
The Hong Kong-based commodity trader was targeted last month by famed short Carson Block after a firm calling itself Iceberg Research began publishing unsettling allegations on its website in February.
Until recently, no one had ever heard of Iceberg, which says it does not sell short but plans to. Iceberg said, in essence, that Noble had finessed its books, a claim the company vehemently denied.
That did not keep Block and others from pushing bearish bets against Noble, and the stock lost more than 25%.
Noble said the posts came from a former employee and filed a lawsuit in Hong Kong. It told its shareholder meeting that Iceberg intended to “deliberately drive our share price lower to profit from short selling”.
Who is behind Iceberg is unclear. In response to emailed questions to Iceberg, a person who identified himself only as David replied: “Short sellers face a lot of pressure and sometimes intimidation. We could not hire people at Iceberg if we cannot protect them.”
Short sellers were cheered and jeered long before the internet came along. James Chanos, a prominent US short seller, was celebrated for raising red flags about Enron. Hedge fund manager John Paulson drew criticism for his big short of the housing market.
Daniel Yu, a short seller who operated anonymously for years, said it was not easy to make a living by going public. People tended to “shoot the messenger”.
While operating anonymously, Yu published research from his firm, Gotham City Research, questioning the finances of Let’s Gowex, a Madrid-based Wi-Fi provider. Founder Jenaro Garcia later said he had falsified financial accounts.
But Yu said going public with bearish views risked lawsuits from companies and investors. Investors, Yu said, could quickly determine what was true and what was not. Company executives, under pressure to keep their share prices rising, often missed that point, he said.
“The market has a miraculous ability to call out bull****,” Yu said. “These guys make it sound like anyone can put out some report and the market will actually care.”
Anonymous firms that get it wrong rarely survive long, and going against the grain is not easy. Activist Shorts found that of 84 negative campaigns on companies with more than $500-million in market value announced in 2013, their shares actually rose 4.4% in the following year. Short sellers are more likely to choose anonymity when targeting companies in Asia, a region that holds special perils. Muddy Waters founder Block gave up on China in 2012. After Jon Carnes, who contributed research to Block, began unmasking corporate fraud in China in 2010, authorities there discovered he was behind the Alfred Little blog and jailed one of the analysts at his investment firm, EOS Holdings. —