Whitney Tilson’s email to investors discussing Kyle Bass’s feud with United Development Funding (UDF) spotlights short-selling tactics.
Q3 2020 hedge fund letters, conferences and more
Kyle Bass's Feud With UDF
1) I've been writing frequently about activist short-sellers, in part because I think they're healthy for our markets, and because I want to warn my readers about stocks that could blow up in their faces.
I also have a great deal of respect for these folks. What they do is extremely hard and dangerous, not only because of the inherent risk in short selling, but also because – in speaking out and sharing their research and conclusions publicly – they risk being pilloried in the media, investigated by regulators, and attacked by the companies they're targeting.
This BNN Bloomberg article is an in-depth look at one such case, when Kyle Bass of Hayman Capital went after a Texas real estate investment trust called United Development Funding ("UDF") – and, as a result, became involved in a lawsuit filed by UDF and is under investigation from the local Texas U.S. Securities and Exchange Commission ("SEC") office: Kyle Bass's Texas Feud Spotlights Short-Selling Tactics. Excerpt:
Bass's Texas Feud Spotlights Short-Selling Tactics
Best known for shorting subprime mortgages ahead of the financial crisis, a Powerball-type win that brought him fame and fortune, Bass had come to believe that UDF was a crooked company hiding losses amid fraudulent transactions with developers. His fund, Hayman Capital Management, had spent months building a short position that would pay off if UDF's shares tanked...
Bass made about $30 million on his bet, a person familiar with the returns says. But now, five years later, he's embroiled in a lawsuit filed by UDF accusing him of defamation and interference with its business. And the same SEC office in Fort Worth that Bass reached out to is investigating whether he and his firm violated securities laws...
There's nothing illegal about making money by exposing suspected fraud. The government pays some whistle-blowers for doing exactly that. Activist short sellers, who stand to profit from a company's collapse, do it all the time. They operate in a profession where it's legal to use subterfuge, including fake names, while trying to move stocks. It's also common to alert federal agencies. It's even okay for short sellers to do all this without revealing their motives.
There's just one catch: The short seller can't knowingly spread false information. And that's where UDF says Bass crossed the line. Its lawsuit, filed in state court in Dallas in 2017, alleges that his posts were misleading because the public was getting only part of the story – the part Bass wanted people to see.
Bass calls the lawsuit harassment and says he spared potential investors from plowing money into a corrupt company. His lawyer, Lawrence Friedman, says the SEC didn't raise any concerns about Bass's actions at the time and that any review now would result in "no action involving Hayman."
The unfolding legal battle provides a rare look into a short-selling campaign. Hundreds of pages of documents and emails that have come to light show how Bass's firm reached out to law enforcement and the media while trying to bend the market to where he wanted it to go. And they open a window on the symbiotic relationship between informants and the SEC, which looks to investors like Bass to help ferret out fraud in the marketplace...
