There is an increasing trend in financial securities markets for critical public activist-based stock price manipulation. Short sellers are acting with suspicious timing and coordination at the same time as damaging publications drive down company stock prices. The number of cases is mounting, leading many business executives to suggest that unethical, illegal practices are being conducted through the anonymising power of social media.
Short sellers have become notorious since the stock market crash for their often cynical and unethical practices. Most recently, Tesla’s Elon Musk has been locked in a feud with regulators as a result of pressure from short sellers who said that his statements on Twitter were illegally affecting Tesla stock prices. This came after months of dubious short seller activity and harmful social media campaigns against the electric carmaker.
It is understandable that short sellers and executives are not natural friends given their zero-sum relationship: short sellers, after all, are betting that your company does badly. If your company fails and hundreds of people lose their jobs, that is either a big win for the right short seller, or a missed opportunity for those that did not have a shorted position on your stock.
Deliberate, malicious ‘short and distort’ activity can be debilitating to a company, as was the case for relatively small real estate investment fund, Farmland Partners. As a result of critical posts by an anonymous short seller named “Rota Fortunae”, on Twitter and the financial website Seeking Alpha, Farmland Partners stock price tumbled 40 percent.
The posts claimed that the company had engaged in questionable transactions and was on the brink of insolvency. The timing of the posts, just before the stock market opened, was clearly suspect to begin with. More suspicious still were the unnamed investors who just prior to the post bought thousands of short-dated put options, betting that the company stock would fall significantly in the next few days. Clearly someone was profiting as a result of the deliberate damage caused to the company stock, and they must have known prior to the article’s publication.
In the words of Farmland Partners’s CEO, Paul Pittman, “The game was rigged”.
Seeking Alpha, where many such manipulative publications are released, has previously been under fire for its practices. In a letter to the Securities and Exchange Commission (SEC), Prof. Schmuel Hauser of the Israeli Securities Authority was asked to take regulatory action against the site.
“The SEC and ISA’s involvement is necessary because the fraud that runs uncontested on this platform is systemic, involves large sums of money, and takes advantage of relatively unsophisticated investors. SA has not addressed these issues adequately. This may be due to the fact that doing so conflicts with its business interests,” the letter read.
The letter went on to say that “Seeking Alpha provides an idyllic environment for the illegal manipulation of small cap securities”. The letter cited the anonymity of authors, a light editorial policy, and a large distribution providing legitimacy for misleading articles, as reasons that the site should be considered a facilitator of bad actors.
Columbia Law University’s Joshua Mitts is a securities expert who has noted similar concerns. In an academic paper Mitts found that of “1,720 pseudonymous short idea posts on Seeking Alpha between 2010 and 2017" 86 percent were preceded by “extraordinary” stock trading.
Mitts's work studying trading activity, specifically short campaigns, is a rare example of the industry coming under appropriate scrutiny. The short selling option has existed since trading began, but it is only in the age of social media that such campaigns have begun to grow in volume and severity.
A Reuters metric shows that in 2006 there were just 69 campaigns. By 2014 that figure rose to 763. For whatever reason, perhaps as a result of the maturity of social media, in 2012 to 2013, there was a sizeable jump in the volume of campaigns, with figures doubling. It was also noted that on average the amount that a stock fell correlated with the duration of the short campaign. The longer the campaign the more damage was done.
In mid-February of this year, German regulator, BaFin, was forced to ban short-selling of shares of Wirecard, the German payment service company. The move came as a response to regulator’s concern that relentless short selling aggression could harm the wider market.
BaFin and German prosecutors subsequently began an investigation into irregularities at Wirecard to examine alleged market manipulation committed by a Finanical Times journalist. The journalist is suspected of notifying someone about Wirecard’s irregularities before the paper published an article on the matter.
Another example of such activity came recently in France, with the local market regulator opening an investigation into a damaging short campaign against the company Casino, led by Muddy Waters’ founder, Carson Block. After three years of persistent attacks, Casino has become one of the most shorted stocks in Europe. The French goliath hit a 22-year low in stock value on the same day that Block tweeted about the companies allegedly late financial accounts.
Due to the nature of such campaigns, particularly when authors use pseudonyms, it can be nearly impossible to prove that laws are being broken. Evidence from robust research, particularly by Joshua Mitts, demonstrates that illegal activity is almost certainly taking place, even if the writers of article’s and the actors’ names are unknown. What is clear is that changes need to be made. In the current climate in which criminals can send letters to their victim without fear of retribution, regulatory rethinking is clearly long overdue.