On the morning of July 11, Paul Pittman was on a corn farm in Western Illinois, ...
NEW YORK - On the morning of July 11, Paul Pittman was on a corn farm in Western Illinois, unaware his company had taken a devastating hit.
Pittman's stomach churned when he checked his smartphone around noon: Shares were off almost 40 percent. What followed exemplified a new, ugly phase in a war between companies and activist short sellers, with businesses fighting back against social-media fueled attacks and investors accusing executives of trying to muzzle critics.
Successful campaigns that exposed corporate fraud or dubious practices, including Carson Block’s Sino-Forest Corp takedown and Andrew Left’s shorting of Valeant Pharmaceuticals International Inc, underscored short sellers’ role as market watchdogs. Such victories, coupled with elevated stock valuations, helped spur record numbers of short campaigns, according to industry tracker Activist Insight.
Cases against short sellers are rare, though, given free speech protections and companies hesitant to put themselves under the microscope of regulators, lawyers say.Recent research provides fresh fodder for the debate. Columbia Law School securities expert Joshua Mitts said in a working paper that he had looked at 1,720 pseudonymous short idea posts on Seeking Alpha between 2010 and 2017 and found that 86 percent were preceded by “extraordinary” options trading.
Prominent activists deny engaging in practices described by Mitts and say they rarely use options. Instead, they would typically borrow stocks and immediately sell them in anticipation of a price drop, so they can buy them back for less and pocket the difference. Activist Insight, which has analyzed hundreds of campaigns, found many cases where target share prices went up, not down.
Jackson said, however, laws on anonymity and free speech could limit any steps that went beyond straightforward cases involving false information. Most were sympathetic, Pittman said, including farmers who had traded land for stock, but Farmland lost a potential partnership and had to cut staff from 17 to 13.
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