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Short and distorted? The ugly war between CEOs and activist critics

NEW YORK (Reuters) – On the morning of July 11, Paul Pittman was in a cornfield in western Illinois, unaware that his company had taken a devastating hit.

A story about the Searching Alpha site about Farmland Partners Inc is shown in this picture illustration on March 1

5, 2019. REUTERS / Chris Helgren

Just before the stock exchange was opened, an anonymous card seller named "Rota Fortunae "on Twitter and Financial Website Search Alpha that Pittman's small investment fund, Farmland Partners Inc, was engaged in dubious transactions and risked" insolvency. "

The printout pushed the shares down enough to make thousands of previously purchased stock options profitable, according to a later expert analysis, which in turn causes more sales of them on the other side of the trade that is committed to buying shares at a higher price . The accelerating losses were probably amplified by high-frequency trading algorithms enabled by price fluctuations and negative keywords, according to that analysis.

Pittman's stomach churned when he controlled his smartphone at noon: The shares were off almost 40 percent.

"The game was rigged," Pittman, 56, told Reuters.

As a successor, a new, ugly phase was shown in a war between companies and activist card sellers, where companies fought back against social-mediated burnt attacks and investors accused leaders trying to muzzle critics.

Farmland Defeated Rota Fortunae – Latin for "Confidential Wheels" – and other unnamed individuals who claim a "malicious scheme" to take advantage of the spread of false information and overtime options. The short seller, a Texas-based person whose identity has been kept secret, sent a statement to Reuters via a lawyer whose trial was "scaring and mitigating critical opinion" and that the idea of ​​breaking down the stock through "sophistication" trade "was" Utter hogwash. " It is all under the direction of the US Securities and Exchange Commission, which has been informed of the case.

The stand-off reflects a broader debate on how to balance the desire to hold public corporations accountable to concerns about market manipulation.

Card sales that said to be as old as the stock markets used to be a low-profile affair, where bearish investors pleaded with the media, analysts, or regulators to take the lead in exposing overpriced companies. New tools like Twitter and Search Alpha have changed it, creating a small but prominent group of brash public activists.

Successful campaigns that revealed farm fraud or dubious actions, including Carson Blocks Sino-Forest Corp takedown and Andrew Left's shorting by Valeant Pharmaceuticals International Inc, highlighted the short seller's role as market watchdogs. Such victories combined with elevated inventory estimates helped spur record numbers of short campaigns, according to the business track Aktivist Insight.

Activist Insight data shows that such campaigns can have a significant impact on stock prices. A 2017 working document by researchers Yu Ting Forester Wong and Wuyang Zhao also showed that they were weighing the investment firms' profits, dividends and access to finance.

Block, Left and other prominent card sellers interviewed by Reuters say they do thorough research and help keep companies honest.

But targeted companies say many short campaigns have played this decade into "short and distorting" schemes. They accuse some activists of spreading false or misleading information to drive down a warehouse and then quickly pay out a mirror image of "pump and dump" where unscrupulous investors promote speculative stocks before being sold at the top.

Cases against short sellers are rare, but given speech protection and companies hesitant to sit under the supervisory authorities' microscope, lawyers say.


New research provides fresh feed to the debate. Columbia Law School securities expert Joshua Mitts said in a working document that he had looked at 1,720 pseudonym short idea entries at Seeking Alpha between 2010 and 2017 and found that 86 percent were predicted by "extraordinary" options trading.

Mitts told Reuters that his review of the posts showed that, like many agricultural companies, many short-term salesmen seemed to be using quick expiration options purchased before the release of a report to accelerate more sales of underwriters.

"Shorts need to rely on good research, not trade in tricks, to punish a stock," Mitts said, whose work has led to paid advice for Farmland and other companies.

He has also found other unusual trading patterns, including dozens of cases of "spoofing" and "layering", illegal trading strategies to place and cancel orders to create a false impression or demand. However, Mitts said that high-frequency traders were probably responsible, not activists.

Prominent activists refuse to engage in practice described by Mitts and say that they rarely use opportunities. Instead, they will typically borrow shares and immediately sell them in anticipation of price drops, so they can buy them back for less and pocket difference.

"I'm sure there are a few anonymous guys out there doing evil things, but it's not a systemic problem," said the left.

A smaller card seller said he used sentence options along with Seeking Alpha positions to get bigger bets given limited capital but highlighted making unjustified claims come on fire.

"With opportunities you can be completely destroyed," said the investor, who requested anonymity. "A bad dissertation can be rejected immediately."

Activist Insight, which has analyzed hundreds of campaigns, found many cases where target prices rose, not down.

So far, Mitts has been practically alone in analyzing trade activity around short campaigns, but his results have already drawn attention to a top US regulator.

SEC Commissioner Robert Jackson told Reuters that research was "important" and challenged his agency to "identify people dancing a very fine line between trade and market manipulation."

The question, Jackson said, was whether the regulator would go after short sellers who involve fraud as heavily as it investigates companies for bad behavior.

"I hope the answer to that question will be yes."

A hint came in September last year when the SEC brought a rare "short and distorted" case against hedge fund leader Gregory Lemelson to make false claims of Ligand Pharmaceuticals Inc, a claim denied by Lemelson.

However, Jackson said that laws of anonymity and freedom of expression could limit any action that went beyond just cases of false information.

On March 12, a New York State Prosecutor acquitted, for example. A lawsuit against short sellers of the Indian media company Eros International PLC, who took note of their statements on Search Alpha and elsewhere, was substantiated and therefore protected.

Still, companies are being justified in litigation, hiring private investigators, and using other aggressive tactics, according to some activists. Blok, for example, said he was facing "constant" legal threats, at least one undercover operative, and a failed $ 50 million investigation to discredit his research.

"More than ever, bad companies are trying to shoot the messengers in every possible way," Block said.


In the days following Rota's post, Farmland issued a public re-affirmation, and Pittman, a former farmer and finance director, said the company had to go on an "I'm not a villain" tour in meetings. and conversations with investors and business partners.

Most were sympathetic, said Pittman, including farmers who had traded land to stock, but Farmland lost a potential partnership and had to cut staff from 17 to 13.

George Moriarty, chief editor of Seeking Alpha, said that courts have respected the site's status as a neutral platform and its employees monitored all posts. In this case, Rota made "limited factual corrections" after Seeking Alpha contacted him about Farmland's recall.

Shares have never been right, and Rota told Reuters that Farmland has not yet taken significant account of his concerns.

Stock analysts said that Rota's language was dramatic in relation to the underlying issues and instead focused on major business challenges and the potential cost of fighting back. Farmland recently reported $ 1.6 million in additional costs during 2018, before insurance, referring to Rota's campaign. It meant defending against an associated shareholder class action and legal costs from his suit against the short seller.

Mitts has given his opinion on sentence options in the case, a pattern he said he discovered independently during his academic research.

Slideshow (5 Images)

The short seller behind the Rota moniker told Reuters that he was planning to challenge Mitts & # 39; allegations and would continue his defense of the first change rights. Farmland's lawyers said that Roto's speech argument was undercut by his recognition of payments received for research at Farmland.

Whatever happens in court, the SEC sees. Rota presented his Farmland analysis to the agency's whistleblower hotline while Farmland later informed the SEC staff on its side.

SEC refused to comment, but on January 29, it denied Farmland's request for Rota and options trading records because, according to a letter revealed in a court application, related information was in an "investigative file" from an "on ongoing law enforcement procedure. "

Reporting Lawrence Delevingne. Editing by Neal Templin and Tomasz Janowski.

Our Standards: Thomson Reuters Trust Principles.

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