Betting against rising stocks can be a tough way to make a living. But as we saw in part 1 of our series on activist short sellers, professional short sellers who expose fraud and other schemes at public companies very often get it right. And sometimes they get it spectacularly right. Here are some of the greatest short-selling campaigns in history.
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Below is our list of the top nine best short-selling campaigns ever.
Jim Chanos issues short report on Baldwin-United
Jim Chanos is arguably the greatest short seller in history -- one could devote a book to his most memorable short-selling campaigns.
But Chanos’ career with short-selling campaigns almost ended when he was just 25 years old. In the summer of 1982, the junior analyst with Gilford Securities was asked to figure out if a proposed deal by Baldwin-United Corp. would be good for the firm’s clients.
Baldwin was a piano company that had transformed itself, by a series of acquisitions, into an insurance giant and Wall Street darling -- but it’s financials were very complex. As Chanos told Yale Alumni Magazine years later, “I was just simply calling up people and asking questions and trying to figure this thing out.”
Then one night when he was working late his direct line rang.
“Is this Jim Chanos?” the caller asked. “You’re the guy asking all the questions about Baldwin-United?”
“Yes,” Chanos answered. “Who’s this?”
“It’s not important who this is.”
The caller pointed Chanos to public files of correspondence between Baldwin and state insurance regulators in Arkansas. The regulators had discovered, among other things, that Baldwin was improperly using insurance reserves to finance its acquisitions.
Chanos’ short sale report came out on August 17,1982 with Baldwin-United stock trading at $24. It was the beginning of what would become one of the longest bull markets in Wall Street history. By early December the shares had risen to $44. “So my sense of timing was impeccable,” said Chanos. Soon the shares traded up to $56. The junior analyst was on the brink of getting fired.
Then, on Christmas Eve came the news: Arkansas had just seized the assets of Baldwin-United. Within one year the company filed for bankruptcy -- the largest to do so in U.S. history up until that time. Barely more than 12 months after Chanos’ short sale recommendation, Baldwin-United shares were trading at zero.
Muddy Waters Research/Carson Block Shorts Sino Forest
On June 2, 2011, Muddy Waters Research issued a “Strong Sell rating with an estimated value of < $1.00” on Toronto-listed Sino-Forest Corporation (symbol TRE, now de-listed), a commercial forest operator in China. In the report, Muddy Waters founder and director of research Carson Block claimed that:
- Like Madoff, TRE is one of the rare frauds that is committed by an established institution.
- TRE, probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since 1995.
- The foundation of TRE’s fraud is its convoluted structure whereby it runs most of its revenues through “authorized intermediaries”.
- TRE massively exaggerated its assets by approximately $900 million.
Sino-Forest CEO Allen Chan called the irreverent 35-year-old Block a self-interested “shock jock” whose research is “inaccurate and unfounded.” A prominent securities analyst labelled the Muddy Waters report “a pile of crap.”
However, Block was proven right. The stock tanked and was delisted nine months after Block's first reports in the short-selling campaigns on TRE came out. Block and his investors eventually banked 100% on the short trade.
After a long investigation, the Ontario Securities Commission ruled in July of 2017 that Sino-Forest and several of its top executives defrauded investors, misled investigators and “engaged in deceitful or dishonest conduct.”
Lumber Liquidators targeted in short-selling campaigns
On March 5, 2015, the CBS television program 60 Minutes ran an expose of Lumber Liquidators (NYSE:LL) accusing it of selling Chinese-made laminate flooring that contained levels of potentially carcinogenic formaldehyde that exceeded the legal limit in California. The news program was tipped off by short seller Whitney Tilson.
Tilson first learned of issues with Lumber Liquidators products months earlier when Xuhua Zhou -- an individual investor that houses his research on Seeking Alpha -- began publishing reports. Zhou, a 2009 graduate from Emory University and finance PhD dropout from UCLA's Anderson School of Management, first published a short-sale recommendation on the Toano, Virginia-based company on June 20 of 2013.
Zhou’s tests of LL flooring showed levels of formaldehyde above California requirements. The stock fell 4.5 percent to $82.16 that day, then moved 50% higher over the next six months. But in the ensuing two years, LL gave up 90% of its peak value as the short sellers were proven right.
Chris Drose -- Undisclosed deaths at AAC Holdings
The August 5, 2015 headline in the Wall Street Journal was almost comical: “Blog Post from College Student Causes Massive Sell-Off in AAC Holdings.” But there was nothing funny about what analyst Chris Drose claimed to have unearthed -- evidence of multiple undisclosed deaths at American Addiction Centers (NYSE:AAC).
In the days before the short selling campaign, the State of California had indicted AAC’s president along with other employees in connection with the alleged “second-degree murder” of one of the center’s patients in 2010.
But Drose -- at the time a 21-year-old-senior at Furman University -- dropped a bombshell: He claimed AAC knew well before its IPO about the criminal investigation that led to the murder indictment, but didn’t disclose the investigation in its SEC filings. It had also kept secret more recent instances of suspicious deaths at its addiction centers, according to Drose.
AAC went public in October of 2014 and skyrocketed over 240% in the ten months after. Before Drose’s report published under the Bleeker Street Research pseudonym, AAC traded at $38. Two days later it touched $15. By July of 2017 AAC stock had fallen to $6.
Valeant Pharmaceuticals -- Andrew Left/Citron Research/Roddy Boyd/ John Hempton
On October 21 of 2015, Citron Research’s founder and executive editor Andrew Left alleged that Valeant Pharmaceuticals (NYSE:VRX) was using a bogus company-owned network of specialty mail-order pharmacies to inflate sales of its high-priced drugs and to keep patients and their insurance companies from switching to less costly generics. The report called Valeant the "pharmaceutical Enron."
John Hempton and Roddy Boyd of SIRF were also early questioners of the company.
At the time, Valeant stock was also referred in the media as a “Hedge Fund Hotel” -- a highly popular long holding for money managers. Bill Ackman's Pershing Square, Jeffrey Ubben's ValueAct and John Paulson's Paulson & Co. were the top holders just before the Citron report, according to regulatory filings.
The stock had already been cut in half from it’s high of $263 over the prior three months. But Left’s report pushed VRX shares over the edge -- the stock traded below $20 nine months later. Hedge fund titans had got it wrong. Left got it right.
Let’s Gowex -- Gotham City Research
Like the caped crusader in the fictional Gotham City, Daniel Yu is an enigma. He is reportedly a former hedge-fund analyst based in New York who attended MIT. It’s said he is motivated to publish research reports because of corporate fraud perpetrated against him in the past.
On July 1, 2014, Yu’s firm, Gotham City Research, initiated coverage on Let’s Gowex SA, a Spanish Wi-Fi company, with a price target of € 0.00/share (100% downside). The company was trading above €19.00 at the time.
Gowex had been one of the best performers in Madrid’s small-cap MAB stock index. It’s market value had more than doubled between its IPO in 2010 and the release of Gotham’s report. However, among Yu’s claims:
- Over 90% of Gowex’s reported revenues do not exist. We estimate GOW’s actual revenues to be <€10 million.
- The shares will be suspended, just as Pescanova’s [another Spanish stock] shares were suspended.
Astoundingly, just two days after Gotham’s report, Gowex’s CEO and founder Jenaro Garcia resigned after admitting to faking years of financial reports. Then on July 7th -- less than a week after Gotham City Research claimed Gowex was worthless -- the company filed for bankruptcy. Short sellers who followed Yu’s recommendation eventually received a 100% return.
Lehman Bros. -- David Einhorn
In May 2008, David Einhorn, founder and president of Greenlight Capital, first publicized his most famous short-selling campaign -- Lehman Brothers -- during a speech at the Ira W. Sohn Investment Research Conference. Here’s how New York magazine described his presentation in it’s June 23, 2008 issue:
“Dressed conservatively in a dark suit and tie, Einhorn explained that he was there to speak, despite the possibility of legal and personal attacks, because “I believe it is important and the right thing to do.” The ratio of BlackBerrys to humans in the room was probably greater than one to one, and they all seemed to light up simultaneously. This was going to be good.
Einhorn proceeded with a bracing analysis—including a recap of the Allied saga and a careful dissection of Lehman’s recent financial filing—that had all the moral fervor of a prosecutor’s closing argument. It was as if he were putting away a killer.
His firm had a short position on Lehman Brothers, he maintained, not only because Lehman had fudged its numbers but because its recklessness had put the financial system as we know it at grave risk. He ended with a call to federal regulators to “guide Lehman toward a recapitalization and recognition of its losses—hopefully before federal taxpayer assistance is required.”
Everyone knows what happened next:
Enron - Jim Chanos
In its October 5, 2000 issue, Fortune wrote: “No company illustrates the transformative power of innovation more dramatically than Enron.” The magazine went on to say that over the past decade Enron has grown from “a $200 million old-economy pipeline operator to a $40 billion new-economy trading powerhouse.”
"Enron has built unique and, in our view, extraordinary franchises in several business units in very large markets," said Goldman Sachs analyst David Fleischer.
However, to Jim Chanos of Kynikos Associates, it appeared that Enron wasn’t a pipeline or utility business, but was a "hedge fund in disguise." Most of Enron's growth came from taking positions in the trading of energy contracts -- similar to a hedge fund. And by the short seller’s measure, it wasn't as profitable as the average hedge fund. So why was it such a pricey stock? Mostly, Wall Street loved it because it consistently met or beat earnings targets.
"You look for patterns in my business," Mr. Chanos told the Wall Street Journal. "The fact that this was a 'trust me' story, while management was voting with its feet [by selling stock] was another check. While we didn't have a smoking gun, we certainly saw a reason to perhaps not trust management at its word that these earnings were what they said they were."
Isaac Le Maire -- The Dutch East India Company
It’s only right that we pay homage to the man who started it all back in the early 17th century -- Isaac Le Maire, the first stock short seller. Even though, according to historical accounts, his first of his short-selling campaigns ... was also his last.
According to Lodewijk Petram, author of The World’s First Stock Exchange, Amsterdam in the early 1600’s was the securities trading center of the world -- though the shares of only one company were traded -- the Dutch East India Company.
Le Maire was initially a director at Dutch East India. It was one of the dominant spice trading companies in the world. But there was a financial disagreement that cost LeMaire and got him ousted from Dutch East India. He wanted revenge.
As Petram told NPR in a 2015 interview:
He hatched a plan to take down the Dutch East India Company. And even better, make money at the same time by placing a bet that the stock price would drop. The bet itself - the short - was fairly easy to do. Back in those days, you could bet that, say, the price of grain would drop. Le Maire did the same with shares of the Dutch East India Company - bet they would drop in value.
But, as history tells it, Le Maire got in trouble when he supposedly tried to drive the price of the stock down by spreading rumors -- stories of shipwrecks, rotten loads of pepper, etc. The Dutch East India Company reacted by proposing something familiar to modern day traders: The company called for a ban on short-selling campaigns, and the Dutch government backed the corporation and its shareholders.
Isaac Le Maire was not allowed to cover his short. According to one historian Le Maire and accomplices lost what today would be $10 or $20 million. He died broke and in exile.
But maybe the short seller was telling the truth -- it’s easy to imagine all kind of shenanigans going on in the Dutch East India Company, with 500 ships sailing the seven seas, gone for years at a time, overseen by rum-soaked captains. Maybe Le Maire was simply silenced by more powerful forces who wanted Dutch East India stock to trade higher.
The first stock short seller’s tombstone reads: “Here lies Isaac Le Maire, a merchant for more than 30 years, blessed by the Lord, he gained a lot of money and lost it all, except for his honor.”