Breakout Point is in the business of tracking activist short-sellers and their campaigns against public companies. We track what the allegations are, how does the stock perform and what are the developments after the initial report is released. In the last part, we often see a response to the allegations by the management, the company or shareholders.
In this post we looked at some of the most peculiar responses we have ever seen. We also feature insights from one of the most successful activists short sellers in our records, Gabriel Grego of Quintessential Capital Management (QCM) about his experience.
We start light with a roasting response featuring actress from the famous ad of the targeted company but end with full-blown responses that involve legal actions and even governments.
Buckle up for a ride that activist short-sellers and critics have to sometimes face.
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Tweets, memes and videos
Probably the most recent widely circulated response to a short seller was the video of the 'Peleton girl' responding to Citron Research. The actress from the infamous Peleton (PTON) commercial was hired by anon investor twitting under @typicalVC handle to address, or perhaps better to say to roast, Citron, after short seller targeted the stock couple of times this year.
While the response did not really address the valuation of PTON in relation to its subscriber count which was, according to the short seller, supposedly valued at 2286% premium to the average, it is certainly showcasing an original way to respond. Interestingly, PTON is, so far, down about 8% since Citron released their initial report.
The next video we selected from our archive is the response of NexTech AR (NEXCF) which made a couple of videos addressing the campaign of Hindenburg Research. The most interesting video was done by the CEO who 'took apart' the campaign. The video starts by CEO commenting on the founder of Hindenburg, while looking at corresponding LinkedIn profile, and then addresses allegations of Hindenburg's report while scrolling through the report. The words 'short and distort' can be heard a number of times.
Going from videos to memes, we have to include the following by Mr. McAfee. After short-sellers targeted his investment vehicle of sorts, MGT Investments (MGT), he tweeted this in 2016.
Even such material, however, did not seemingly work to keep the shares above the current share price of about two cents.
Talking more generally about the internet, we should certainly highlight the time when Stanford, allegedly, wanted to prevent a student from using the university WiFi to research Care.com. The babysitting platform was exposed by the short-seller for allegedlly having improper security checks as the author of the report was able to pose as Harvey Weinstein and apply for babysitting jobs. The CTO of Care.com apparently complained to Stanford about the initial report. The whole saga can be explored in Stanford's student paper.
This, however, did not stop the Wall Street Journal to publish an in-depth report about Care.com and point out the findings of Mr. Dorsey.
However, threats to 'naysayers' are multifaceted. Who could forget the 'a**hole' comment by the CEO of Enron?
More recently, Mr. Musk comments on Tesla's earnings call caught a lot of attention. For example, he dismissed a question about capital requirements as 'boneheaded' and 'boring'.
He declared short-selling should be illegal.
Exactly. Short-sellers are value destroyers. Should definitely be illegal.— Elon Musk (@elonmusk) October 4, 2018
And he threatened to sue Montana Skeptic, a critic of Musk, who was active on Seeking Alpha and Twitter. Mr. Musk apparently found time in his busy schedule to call the employer of Montana Skeptic and deliver the message personally. Montana Skeptic is now back online and scrutinizing Mr. Musk and his company.
Important stuff here. Really, I'm stunned that the $TSLA directors have allowed this to happen. Corporate governance in the U.S. has reached its nadir. Thank you, Jay Clayton & @SEC_Enforcement. https://t.co/GAUuXmOup0— Montanner Skeptic (@montana_skeptic) April 29, 2020
Lawsuits, investigations and short-selling bans
For now, we talked about threats that were aimed to silence the critics, but now we are going deeper in our archive where the reality can be lot less entertaining. We are entering a place where threats materialize into lawsuits and investigations with the active participation of governments.
It seems that, particularly, small-caps can sometimes create significant legal issues. This was the case of founder of Mox Reports and Vuzix (VUZI). The former wrote an in-depth account of how the company, apparently, sued him in the wrong court and used the wrong name which cost him money and valuable energy. The lawsuit was dismissed, while VUZI is trading about 79% lower than prior to the initial report by Mox Reports.
4/n. The lawsuit Vuzix vs. Ricardo Antonio Pearson was recently dismissed in NY for lack of jurisdiction. Dismissal was an easy path for the court, but the court had to recite again the "Ricardo" allegations made in the complaint it was now dismissing https://t.co/YwDXIQ5RiDpic.twitter.com/sFAUEqo80K— MoxReports (@MoxReports) November 26, 2019
Another interesting case was Bio-On which was targeted by Gabriel Grego of Quintessential Capital Management (QCM), one of the most successful short-sellers in recent years with several picks ending up as zeroes. When we asked Mr. Grego about the most surprising management responses, he called the behaviours of CEO of Bio-on as the most puzzling ones. Mr Grego mentioned that parts of of the response were a defamation suit and complaints about market manipulation to the public prosecutor. As described in this in-depth account of Bio-On developments, Mr. Grego is vindicated, the company was declared insolvent in December, while CEO faces charges of market manipulation and accounting fraud..
Another short-seller with probably a lot of experience with 'puzzling' management behaviours is Carson Block of Muddy Waters. After Muddy Waters shorted Groupe Casino, a French chain of supermarkets, someone posing as WSJ reporter scheduled a meeting. The video of a meeting ended-up being reported by WSJ. The French regulator even launched an investigation into Muddy Waters, not Casino, after Muddy Waters released its report.
Recently, a short documentary produced by Muddy Waters Capital was released about the whole saga.
The documentary ends with a mention of another similar case where the targeted company and the government scrutinized the short-sellers. This is the case of Wirecard and a group of short-sellers. This time even the reporting of Financial Times (FT) was in lot of focus. FT also reported about related surveillance activities here: "Wirecard critics targeted in London spy operation", while both the short-sellers and the FT were part of an investigation by BaFin, German financial regulator. Back in 2019, BaFin also banned short-selling in this specific name. Note that Wirecard is again in a lot of focus after the release of KPMG's report.
Perhaps one of the most alarming accounts of how far company retaliation can go is provided in The China Hustle documentary and this The New York Times article. Both document how a person spent two years in a Chinese jail after contributing to a research that led person's employer to recommend a short position.
To conclude this category we have to mention Marc Cohodes and his experiences with the FBI. When he was deep in investigating MiMedix, whose CEO was recently charged with securities fraud and the shares trade OTC, his house was visited by two FBI agents. One of the agents asked Cohodes to "stop sending threating tweets" about the CEO, while, one tweet by Cohodes was especially referenced in media.
He talks about this in the below in-depth interview:
Most common responses
From our experience, most of the targted companies actually respond in a relatively plain manner.
A recent boilerplate response could have been recognised in the initial response from Luckin Coffee which eventually admitted to fake sales last month. The management started with the usual '...Luckin Coffee categorically denies all allegations in the Report. The methodology of the Report is flawed, the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events...'
A well-known short-selling focused twitter handle WPWAM called some of these boilerplate replies 'triplets'.
IR pro-tip: triplets.— WPWAM (@WillauerProsky) December 18, 2019
"NMC will review the
assertions, insinuations and accusations
made in the report, which appear principally
unfounded, baseless and misleading..." https://t.co/zRNNkGksIg
Overall, we might see more of these triplets as companies are getting used to being targeted. Recently, on Law360 even a sort of guidebook on how to react to anonymous short-seller claims was published. Perhaps certain companies should tamper less with aggressive accounting and not be fraudulent. Then they might not be targeted and might not need to respond at all.
The right response?
While we listed some negative responses, we certainly want to point out that there are good management responses. For example, one of the responses that stands out from the list, is the rebuttal of Tilson's short thesis on Netflix. The CEO of Netflix, wrote the rebuttal and provided a number of sensible counter-arguments in, what we consider to be, a professional manner.
However, Mr Grego of QCM highlights why these responses are perhaps hard to come by.
Q: What should managements do better when engaging with an activist short? Have you ever seen a well-presented response?
A: It depends on whether management is right or not. In our case, our targets were all frauds so no response was the right response. If the management is in the right, the best strategy is to be transparent, respond to ALL of the allegations and even engage the short seller in a productive dialogue to show them the company's point of view and why the short thesis is wrong. But we see this rarely, usually the approach is to deny all allegations (without addressing them), to accuse the short seller of conflict of interest and to threaten litigation. That is the worst response and in our cases, it usually speeds up the bitter end for the company. We become ferocious when they threaten legal action and we have the resources to put up a very tough legal fight (ask Bio-on...)
It is also about the short sellers
While we showcased how toxic and absurd can the situation sometimes get, Mr Grego of QCM did raise a good point in his last insight which is an important parting note for this post.
Q What should short-sellers do better when targeting corporate governance of companies? Have you ever seen an example of how not to do it?
A: It is full of abysmal examples of short attacks: full of innuendos, unsubstantiated allegations and imprecise/incorrect evidence. These "attacks" are very damaging to the hard work of those of us who strive to maintain high ethical and professional standards.
Have we missed your favourite response by management? Contact us.
Update-1: Few more suggestions we received: #1 Saga about David Einhorn and Allied, eg check FoolingSomePeople website; #2 Short selling and Overstock: especially developments around 2005-2007, eg check under "Miscreants Ball" on DeepCapture website.
Update-2: Peculiar public response to Citron Research, allegedly by an IR professional of a targeted company:
This is a first, Never had IR of a company threaten to "slap my face". How about we do it at the SEC office? IR represents company.....aggressive and reckles https://t.co/CQUaSlCTpr— Citron Research (@CitronResearch) May 7, 2020
Update-3: "Just cover yourself, don't ruin your family", said CEO of Sorrento Therapeutics in his public message. Two weeks after this message the share was trading more than 20% lower.
BREAKING NEWS— RagingBull (@RagingBull) August 25, 2020
President & CEO of Sorrento Therapeutics has a message to those who tried to manipulate $SRNE stock
100+ PHDs working on COVID-19
The manufacturing facility is impressive
... "I'm giving them a fair warning shot. Just cover yourself, don't ruin your family" pic.twitter.com/LlZ2pjTp0V
Update-4: In response to Hindenburg Research allegations that Nikola One prototype was "simply filmed rolling down a big hill" in a promotion video, the company said:
Nikola never stated its truck was driving under its own propulsion in the video, although the truck was designed to do just that (as described in previous point). The truck was showcased and filmed by a third party for a commercial. Nikola described this third-party video on the Company’s social media as “In Motion.” It was never described as “under its own propulsion” or “powertrain driven.”
The media did not mince the words when commenting this reponse eg "Nikola publishes detailed rebuttal to short-seller's claims of deception — and admits it staged a promo video by rolling a truck down a hill".
Update-5: Penumbra called QCM "sleazy short sellers" in their statement and mentioned that the report "reads like an internet conspiracy written by teenagers". QCM has one of the best track records in our database.
Update-6: CEO of Lordstown Motors had this to say to CNBC following a report by Hindenburg Research
"We never said we had orders. We don't have a product yet so by definition you can't have orders," @LordstownMotors CEO Steve Burns tells @lebeaucarnews. "I don't think anybody thought we had actual orders. That's just not the nature of this business."$RIDEpic.twitter.com/64G9gvBsQS— Squawk Box (@SquawkCNBC) March 18, 2021
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* Note: Except for denoted updates, presented data and analytics is as of available on 2020-05-02, UTC 12:00.
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