Short and distorted? The ugly war between CEOs and militant critics

NEW YORK (Reuters) – On the morning of July 11, Paul Pittman was on a corn farm in western Illinois, unaware that his company had suffered a devastating blow.

Just prior to the opening of the stock market, an anonymous short seller named "Rota Fortunae" posted on Twitter and on the Seeking Alpha financial website that Pittman's small real estate investment trust, Farmland Partners Inc., had entered into suspicious transactions and risked "insolvency".

The deal has pushed stocks down enough to make thousands of previously purchased stock options profitable, according to expert badysis, which in turn has led to increased sales by opponents who had pledged to buy shares at a higher fixed price. According to this badysis, the acceleration losses were probably aggravated by high frequency trading algorithms activated by price fluctuations and negative keywords.

Pittman's stomach broke when he checked his smartphone around noon: the shares were down nearly 40%. (Graphic: tmsnrt.rs/2HyuFCE)

"The game has been rigged," Pittman, 56, told Reuters.

What followed was an illustration of a hideous new phase in a war between business and sell-out activists, companies battling social media attacks and investors accusing executives of trying to muzzle critics.

Farmland sued Rota Fortunae – in Latin "Wheel of Fortune" – and other unnamed individuals, alleging a "malicious ploy" aimed at profiting from the spreading of false information and options. buying shares well synchronized. The short seller, a Texas-based person whose identity was kept secret, told Reuters, via a lawyer, that the dispute was aimed at "intimidating and stifling a critic." "and that the idea of ​​destroying the title by a" sophisticated exchange "was" Pure hogwash ". All this is under the supervision of the US Securities and Exchange Commission, which has been informed about this.

The confrontation reflects a more general debate on how to reconcile the desire to keep public companies accountable for their actions and the concerns of market manipulation.

Short selling, once as old as stock markets, was a low-key deal in which bear investors relied on the media, badysts or regulators to take the lead in exposing overvalued companies. New tools such as Twitter and Seeking Alpha have changed the game, creating a small but important group of impetuous public activists.

Successful campaigns that uncovered fraudulent or questionable practices, such as the dismantling of Carson Block's Sino-Forest Corp and Andrew Left's short sale of Valeant Pharmaceuticals International Inc, highlighted the role of guard of the market. These victories, coupled with high stock market valuations, have generated a record number of short campaigns, according to the industry tracker, Activist Insight.

Data from Activist Insight show that such campaigns can have a significant impact on stock prices. A working paper released in 2017 by researchers Yu Ting Wong Forester and Wuyang Zhao also showed that they were weighing on investments, dividends, and access to target business financing.

Block, Left and other notorious short sellers polled by Reuters claim that they do extensive research and help companies stay honest.

Yet, the targeted companies claim that many of the short-term campaigns conducted in this decade are "concise and distorting" programs. They accuse some activists of spreading false or misleading information to reduce stocks and then quickly remove them, a mirror image of "pumping" unscrupulous investors encourage speculative actions before selling at the top.

Cases against short sellers are rare, however, given the protection of the freedom of expression and the reluctance of companies to put themselves under the microscope of regulators, lawyers said.

SHORT IDEAS AND OPTIONS

Recent research provides fresh fodder for debate. The Columbia Law School securities expert, Joshua Mitts, said in a working paper that he had reviewed 1,720 short pseudonymous short-listing ideas on Seeking Alpha between 2010 and 2017 and had revealed that 86% of them were preceded by an "extraordinary" market of options.

Mr Mitts told Reuters that, as in the case of Farmland, many short sellers appeared to have used put options expired before a report was issued to entice more subscribers to sell.

"Short films have to rely on good research, not business tips, to punish a title," said Mitts, whose work has resulted in paid consultations for Farmland and other companies.

He also discovered other unusual trading patterns, including dozens of "spoofing" and "layering," illicit trading strategies of placing and canceling orders to create a false impression of demand or offer. . Mitts, however, said the high-frequency traders were probably responsible, not the activists.

Renowned activists deny engaging in practices described by Mitts and say they rarely use options. Instead, they generally borrowed shares and sold them immediately in anticipation of a fall in prices, so they could buy them cheaper and pocket the difference.

"I'm sure there are some anonymous guys who are doing difficult things, but it's not a systemic problem," Left said.

A smaller short seller said he used put options in conjunction with Seeking Alpha's publications to make larger bets given his limited capital, but pointed out that unfounded claims may have turned around.

"With the options, you can be totally destroyed," said the investor, who requested anonymity. "A bad thesis can be demystified almost instantly."

Activist Insight, which has badyzed hundreds of campaigns, has seen many cases of rising, not falling, prices of target stocks.

Until now, Mitts is virtually the only one to badyze trading activities around short campaigns, but its results have already attracted the attention of one of the leading US regulators.

SEC commissioner Robert Jackson told Reuters that the search was "important" and asked his agency "to identify people who are dancing very weakly between trading and market manipulation".

The question, Jackson said, was whether the regulator would attack short sellers who engage in fraud with as much force as it investigates companies for faulty behavior.

"I hope the answer to this question will be yes."

A suspicion appeared last September, when the SEC filed a "fictitious and distorted" lawsuit against hedge fund manager Gregory Lemelson for falsely claiming about Ligand Pharmaceuticals Inc., an allegation denied by Lemelson.

Jackson, however, said that the laws on anonymity and freedom of expression could limit any measure beyond simple cases involving misinformation.

On March 12, for example, a New York State judge dismissed a lawsuit filed by the Indian media company Eros International PLC against short sellers, stressing that their views on Seeking Alpha and elsewhere were justified and therefore protected.

However, according to some activists, companies are increasingly retaliating with lawsuits, recruiting private investigators and aggressive tactics. Block, for example, said he was confronted with "constant" legal threats, at least one undercover agent, and an unsuccessful $ 50 million investigation to discredit his research.

"More than ever, bad companies are trying to shoot the messenger by any means available," Block said.

WAR ON THE FARM

In the days following Rota's post, Farmland issued a public rebuttal, and Pittman, a former farmer and CFO, said the company had to do a "I'm not a crook" tour in meetings and conversations with investors and business partners.

Most were friendly, Pittman said, including farmers who had traded their land for land, but Farmland lost a potential partnership and had to downsize from 17 to 13 people.

George Moriarty, Editor-in-Chief of Seeking Alpha, said that the courts had respected the site's neutral site status and that its staff had reviewed all the positions. In that case, Rota had "made limited factual corrections" after Seeking Alpha contacted him about Farmland's rebuttal.

Still, the shares never fully recovered, and Rota told Reuters that Farmland had not yet addressed his concerns.

Stock market badysts said Rota's language was dramatic about the underlying issues and instead focused on the broader trade challenges and potential costs of the response. Farmland recently announced additional expenses of about $ 1.6 million compared to 2018, before insurance, according to the Rota campaign. This included the defense against a clbad action related to a related shareholder and the legal costs of suing the short seller.

Mitts submitted his opinion on the put options in the case, a scheme that he discovered discovered independently during his academic research.

The short-seller behind Rota's nickname told Reuters that he was considering challenging Mitts's claims and would pursue his defense of First Amendment rights. Farmland's lawyers stated that Rota's argument about freedom of speech was compromised by the recognition of payments received for agricultural land research.

Whatever happens in court, the SEC monitors. Rota submitted his Farmland badysis to the agency's hotline, which then informed the SEC staff on his side.

The SEC declined to comment, but on January 29, it rejected Rotland's application for registration and options on Farmland shares, as, according to a letter revealed by a court record, related information were in an "investigation file" resulting from a "current law". procedure of execution. "