Vast DOJ Probe Looks at Almost 30 Short-Selling Firms and Allies; Last Sane Man on Wall Street; I received eight free COVID-19 tests
1) In the 18 years I ran hedge funds from 1999 through 2017, I was investigated, sued, and deposed a handful of times by regulators and companies, mostly in instances where I was short the stock and went public with my bearish views.
While I had never done anything wrong, much less illegal, it was always a big headache and cost me a lot of time and money.
So I had a strong reaction to what I read in this Bloomberg article: Vast DOJ Probe Looks at Almost 30 Short-Selling Firms and Allies. Excerpt:
The Federal Bureau of Investigation seized computers from the home of prominent short seller Andrew Left, the founder of Citron Research, in early 2021, some of the people said. In more recent months, the Justice Department subpoenaed certain market participants seeking communications, calendars and other records relating to almost 30 investment and research firms, as well as three dozen individuals associated with them, the people said, asking not to be identified discussing confidential inquiries.
Many on that roster – a veritable who's-who of the activist short-selling realm – said they haven't been contacted directly by the government, leaving some exasperated about being left in the dark. Reached for comment, Left also said he's frustrated.
"It's very tough to defend yourself when you haven't been accused of anything," Left said. "I'm cooperating and I have full faith in the system and the First Amendment," he added, referencing protections on free speech.
The long list of names underscores the breadth of the Justice Department investigation first described by Bloomberg in December and shows how authorities are trying to map out alliances and understand how short sellers handle research and arrange bets that stocks will fall. It remains unclear which, if any, of the names mentioned in subpoenas might be targets of the inquiry or merely have ties to other people or entities of interest.
SEC Scrutiny
The Securities and Exchange Commission also has sent some requests for information, people with knowledge of those inquiries said. Spokespeople for the Justice Department and SEC declined to comment. No one has been accused of wrongdoing, and in many cases, the opening of a probe doesn't lead to anyone facing charges.
Prominent firms and their leaders mentioned in the Justice Department's requests to some market participants include Melvin Capital Management and founder Gabe Plotkin; Orso Partners and Nate Koppikar; Sophos Capital Management and Jim Carruthers; as well as Kerrisdale Capital Management. The list also includes well-known researchers such as Nate Anderson and his Hindenburg Research, as well as Fraser Perring and his Viceroy Research.
If regulators have reason to believe that a particular investor (whether long or short) has violated securities laws, then they certainly should investigate.
But that's not what this looks like... Instead, it appears to be a fishing expedition that will be costly and have a chilling effect on short sellers, especially those with the courage to speak publicly about their findings. This is exactly the opposite of what our frothy, fraud- and hype-filled markets need...
2) Here's an insightful profile of one of the best activist short sellers, Nate Anderson of Hindenburg Research: Last Sane Man on Wall Street. Excerpt:
Anderson belongs to a cranky cohort of "activist" short sellers. They make money by taking positions in the stocks of shaky or shady companies, which pay off if the price goes down – an outcome the shorts hasten with public attacks, publishing investigations on their web platforms and blasting away at their targets (and sometimes at one another) on Twitter.
To their many powerful enemies, they are little more than Internet trolls, a fun-house-mirror image of the day-trading dumbasses on Reddit who drive up meme stocks for the lolz. Anderson prefers to think of himself as a private detective, identifying mischief and malfeasance that might otherwise go undetected by snoozing regulators. He used to poke around in shadowy corners, but lately he has been seeing fraud sitting right in the blazing light of day.
"The scale of it is quite massive," the lanky, bearded 37-year-old told me when we first met one sultry morning in August. "I don't think any system can sustain itself with that scale of grifts happening"...
After all, you have to be a little crazy to bet against a market that has proved impervious to inflation, supply-chain instability, and a plague that has killed millions of people. You have to be even crazier to do it in defiance of the stresses that come with being a short seller, which can include (in reverse order of annoyance) being yelled at by Jim Cramer, being doxed, being hacked, fending off shadowy private-intelligence firms, defamation lawsuits, and the distinct possibility that, rather than following up on your findings, government regulators will instead start investigating you. And after all that, your warnings may still be ignored or, even worse, trigger a counterreaction among bullish investors that could end up costing you everything.
"Yeah," Anderson says. "That's the torture."
I'm quoted in the article here:
"Shorting is just a notoriously difficult business," says the former hedge-fund manager Whitney Tilson, who got out of the game. It involves taking a lot of risk for what is, by finance standards, relatively little upside. The people who do it often behave as if conflict were its own reward.
When it works, defying the foolish crowds can make you look like a genius, as it did for the traders who made billions betting against the mortgage bubble in 2008, some of whom ended up being immortalized in the book and movie The Big Short. But it's a high-anxiety activity. The best thing that can happen is that a security becomes worthless, an outcome the shorts call "going to zero." But if its price rises, traders can lose much more money than they stood to make from a victory. "Mathematically," Tilson says, repeating a common adage, "shorting is a business where the most you can make is 100%, and your potential losses are infinity."
A trader might have a portfolio of 10 short positions. "You can be right on eight of them," Tilson says, "but if one of them is Tesla (TSLA), you've just been blown up." This is not a hypothetical. A lot of shorts – including Tilson – have bet wrong on Tesla.
3) In my January 21 e-mail, I wrote:
Every household (not person) in the U.S. can now order four free rapid (antigen) COVID-19 tests, which should arrive in the next week or two.
Here is the government website (www.covidtests.gov) and here is the order form (https://special.usps.com/testkits), which took less than 30 seconds to fill out (no credit card required).
My daughter (who lives with us) and I both ordered tests – I'll let you know if the government's computer systems pick up our inadvertent double order...
The answer: no, as we received two packages on Monday, each with four tests. Here's a picture of them:
I of course don't recommend gaming the system, but it's good to see that households that need more than four tests and can't afford them can apparently get them by placing more than one order.
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.