Short selling is sometimes viewed as a lowly calling. Despite this, it has been tolerated since stock trading began. When short selling is combined with strategically timed, damaging online articles, however, it becomes an aggressive form of financial activism, even market manipulation.
Short selling is when a stock trader bets against a company, predicting that the value of stock will fall. The trader makes a profit by borrowing stock, selling it, and then waiting a period of time before buying the same stock back at its reduced market value. The trader returns the stock to the lender to complete the transaction, whilst pocketing the monetary difference.
Short sellers claim to be nothing more than truth-tellers, yet their actions and vocal activism, even inside accepted frameworks, have harmful, lasting effects on companies. Reuters suggested this in an article which included a metric presenting a direct correlation between the length of time that a company is subjected to short seller activity and the degree to which that stock falls.
This is suggested when stocks fall simply as a result of activist publications, or when short sellers with significant market influence take on a short position and it effects a similar change. Muddy Waters's founder, Carson Block, managed to crater the stock value of the French company, Casino, with a simple tweet. Short seller pressure, exerted over a three-year campaign, has taken the company from national and international powerhouse to a contender for most shorted stock in Europe. Admittedly, this is one example where the local regulator, the AMF, has decided to pursue an investigation: one that may sting the short seller any day now for market manipulation .
Lennar Corp is another example, one that is even more elucidating, as the home builder was subjected to a damaging 'short and distort' campaign. This involves individuals taking on short positions against a company's stock before trying to harm the company's reputation and credibility in order to cause the necessary fall in stock value needed to turn a profit. A man by the name of Barry Minkow is believed to have short sold Lennar stock prior to false and harmful disclosures being made online. As a result, Lennar's market cap lost half a billion dollars.
This case is noteworthy because the victim was able to pursue a liability case on the grounds of false statements. This is something all too rare in the world of finance, as short sellers often use false names in publications, victims must prove intent to cause damage, and a shorted stock position must be discovered which was evidently coordinated with the damaging article releases.
Financial websites and Twitter, in particular, have become breeding grounds for pseudonymous authors with influence on the market. You only need to look into the fever-like activity of those involved in the twitter hashtag $TslaQ, a crowd-sourced short seller research alliance, to see the scale of such modern campaigns.
Tesla, and in particular its CEO Elon Musk, has been engaged in protracted skirmishes with these short seller activists who claim that the company is not being transparent about its production situation. Motivated by their profits, various short sellers use media bombardement to damage Tesla stock. Having taken on a life of its own, those involved are known to even conduct field research, staking out warehouses, photographing storage facilities for cars, aiming to uncover something that can be used against the company.
The effects of media involvement in short selling campaigns can be devasting. With mass media now available to anyone, the means of publishing articles and building credibility whilst providing commentary on financial markets have never been more accessible. Strategic articles released by pseudonymous writers are not only becoming more common, they are being increasingly manufactured in a cynical and dishonest way to fool less sophisticated, amateur investors.
With websites such as Seeking Alpha releasing huge quantities of market opinion and prediction articles, they have an increasingly powerful effect on market sentiment and investor behaviour.
While research teams working out of Wall Street are required not only to state their interests regarding companies to prevent conflicts of interests or risks of misconduct, the internet is a different thing entirely. There is little to prevent online publications behaving as they please because they are protected by broad laws on free speech, whilst at the same time being shielded from liability as an "information content provider". This is defined in law as any entity or person "responsible for the creation or development of information provided through the Internet or any other interactive computer service."
As a result of the increase in volume and maliciousness, there are many in the financial world calling for regulators to take action in order to bring short selling under control. The argument being that when a company does something wrong it is sanctioned by the regulator. When a short seller commits fraud, should they not be punished as well? Certainly, it would be a good step to dissuade would-be criminals from illegal shorting activities.
In March, in response to growing concerns, the French government launched a project to draft legislation aimed at reining in shareholder activism. Problems in the country regarding aggressive short seller activism have been growing in recent years and it has become clear that the government needs to step in. Hopefully, this is the start of a trend which will begin to be seen around the world, although certainly, short sellers will continue to play down their own significance and deflect moves towards diminishing their power.