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