Top 10 Activist Short Calls in H1 2020 / August 1, 2020

“Those shorting stocks during the COVID-19 pandemic have made more than $50 billion in profits. Billionaire Bill Ackman recently said that activist short sellers are far more efficient than regulators at unearthing corporate frauds, and that regulators should work with short sellers. Here we take a look at the top 10 best performing activist short calls in the first half of 2020 that paid off big time.

Shorting stocks is a challenging business, especially during an economic crisis when regulators try to restrict short selling. But a crisis also brings tons of opportunities for short sellers. Short sellers bet that a stock is going to fall. They borrow shares of a stock and sell them, hoping that it would tumble within a specified period. When it falls, they buy from the open market at dirt cheap prices and return the borrowed shares to the lender, pocketing the difference.

Breakout Point has compiled the list of best activist short calls that originated in the first six months of 2020. They registered 91 new short campaigns in H1 2020, up from 84 in the same period last year. Notably, just eight short sellers accounted for 54% of the published short campaigns.

J Capital Research has been the most successful activist short seller in the first half of this year. Four of its target stocks declined 28% on average after J Capital published the report. These are the top ten best performing activist short calls of H1 2020, based on stock performance following the release of the report.

Quintessential Capital Management (QCM) targeted Akazoo (SONG) at the Contrarian Investor Virtual Conference in April. The short seller alleged that Akazoo management was running a pyramid scheme. The allegations turned out to be true and the stock collapsed to zero. An internal investigation also concluded that the company management “participated in sophisticated multi-year fraud.”

The next three best performing activist short calls targeted a single company: The Starbucks of China. Luckin Coffee Inc. (LK)’s growth rate had shocked the Wall Street. In January, Carson Block-led Muddy Waters Research published a scathing but anonymous report saying Luckin Coffee was a “broken business” engaged in an accounting fraud.

Just days after Muddy Water’s report, a previously unknown short seller called Ash Illuminations Research published its own thesis targeting the Chinese company. Around mid-February, J Capital Research declared that it was also shorting the stock. When Muddy Waters and J Capital Research both are shorting a stock, you don’t want to be on the other side of the table.

According to Breakout Point, the short sellers spent several weeks tracking the number of daily visitors at Luckin Coffee outlets across 38 cities in China. J Capital Research specializes in targeting Chinese companies. After its fraudulent accounting practices came to light, Luckin Coffee shares plummeted more than 90%. Nasdaq has halted the trading of its shares. Luckin Coffee has since fired its CEO and COO. The Chinese company was fabricating its sales data. According to a WSJ report, Luckin Coffee’s chairman was aware of – if not directly involved in – the fraud.

Hindenburg Research emerged as the most prolific activist short seller. It made 15 short calls in the first half of 2020. Hindenburg founder Nate Anderson told Breakout Point that 2020 presented “more (short selling) opportunities than ever.” Some of its short campaigns have not gone as expected. For instance, Wins Finance Holdings stock has rallied about 30%. Three of Hindenburg’s short calls have earned a place in the top ten. It published a report in May targeting the Hong Kong-listed China Metal Resources Utilization with a target of 100% decline.

The stock has fallen about 88%, making it one of the best short calls. That’s impressive considering it was Hindenburg’s first short call on a Hong Kong-listed stock. Hindenburg had slapped allegations of stock price manipulation and dubious accounting. Just a few weeks later, China Metal Resources Utilization asked its auditor EY to perform extra due diligence. Hindenburg’s other two impressive short calls were Pharmacielo Ltd and Genius Brands International Inc.

Bucephalus Research’s short campaign targeting the UK-based Cineworld Group plc has returned 76.7%. Cineworld is the second largest cinema chain in the world. Little known short seller Ontake Research surprised the community when it said on January 30 that Aurelius Equity Opportunities SE had overstated the proceeds from the sale of its assets. Ontake Research was shorting the German investment firm’s stock. The short call proved rewarding for Ontake Research.”

Anonymous Analytics goes after Corrections Corp. of America
by Max Keiser  /  22 Jul, 2013

“Hedge funds are a powerful force that can be harnessed by activists to change how capitalism operates in our society. A few years ago I launched a hedge fund: KarmaBanque. KarmaBanque’s idea is to bring activists and hedge funds together to leverage their mutual self-interest tying boycotts with short-sales to create web-enabled monopsonies (monopolies of consumers against producers).

The hedge fund community was fine with the idea and the Washington Legal Foundation wrote a legal opinion endorsing the idea as something that was sorely needed in the capitalist system (as practiced in the USA and UK).  Unfortunately, the activist community was not ready for the idea. I met with leaders of the largest NGO’s in the world who all expressed distrust of an idea that engaged the markets in some way. They feared this would put off donors.

Times have changed. Today we may finally have the right combination of activists and opportunistic hedge funds who will deliver market justice to bad actors on the corporate stage.  Anonymous Analytics, a group associated with Anonymous has been shopping around for awhile looking for a suitable target to apply the shame and short-sale technique. They have decided on Corrections Corp. of America.

The report issued by Anonymous Analytics details why Corrections Corp. is a bad investment. Just like any Wall St. report, they dig into hidden risk factors that investors may not have taken on board.  “Anonymous points outs that state governments are increasingly enacting policy reforms designed to reduce their reliance on incarceration – including top CCA “customers” like California and Colorado.”

The message to hedge funds is to ‘short’ this stock (make negative bets selling borrowed shares in anticipation of a price fall) and wait for  these risks being recognized by the market at some point; triggering an outflow of funds and a price drop. Hedge funds have the power to ‘short’ a stock’s price to zero. Famously, Huntingdon Life Sciences Ltd., a UK medical research firm, was the subject of an activist-investor research report whereupon hedge funds sold-short that stock down to zero; forcing the company to leave the UK altogether.

Presently corporations have become efficient ‘risk-transfer’ mechanisms in that they transfer most of the risk of doing their business; interest rate risk, environment risk, etc., from their balance sheet to society’s balance sheet. (They privatize gains and socialize losses). Groups like Anonymous Analytics seek to reverse this trend and restore a more equitable balance of risk and reward in our capitalist economies. Once again, let me point out that the Washington Legal Foundation, in a report written by Larry Ribstein concluded that this type of ‘investor activism’ was legal and should be welcome by those who support free markets.

Additionally, I should point out, that to turbo-charge this type of activism: use boycotts. In other words, if the target of an activist campaign was Coca-Cola and enough activists around the world boycotted Coke this would trigger hedge funds to sell-short Coke’s stock. And as the boycott grew, so too the hedge fund’s short-sales. If the goal of activists was to completely decapitalize Coca-Cola by encouraging hedge funds to monetize dissent and discount future earnings collapse based on current boycotts it would not be difficult at all to remove Coke as an ongoing enterprise.

Think of the jobs created by replacing duopolist Coke with 10 or 15 new competitors? Everybody wins (except Coke’s shareholders).  Anonymous Analytics deserves support for their efforts to restore balance to the economy not only for the elimination of bad actors in the corporate world but for the many jobs their actions will create as the result of the new, more competitive companies created in the wake of the collapse of these societal leaches.”

Money Talks: Max Keiser   /   October 31, 2011

The Occupied Times: So Max, what on earth is going on?
Max Keiser: Well, the global problem of predatory banks has engendered a global response. But unlike the anti-globalization movement of the past decade, this one is rightly targeting banks.

OT: The crisis isn’t a problem for everyone though, is it?
MK: Here’s what’s happening – the basic plumbing of the global banking system is broken and it’s gushing cash. One or two houses are being flooded with cash pouring straight from the central bank, cash that can be immediately converted into hard assets. If you live anywhere else you’re getting the runoff and barely surviving.

OT: What kicked off the current crisis?
MK: The 30 year bull market in financials came to an end (for the bottom 99%). Until recently, falling interest rates fuelled a speculative housing bubble that allowed people to ‘extract’ cash by borrowing against their ever appreciating house. This ended in 2007. Four years later, the consequences finally hit home and we’ve seen riots followed by ‘occupylondon.’ The top 1% have hedged themselves, and even profited from the crash.

OT: What makes you, personally, most angry about the global financial situation?
MK: The financial ‘Jim Crow’ laws. If you’re at the top of the tree you can borrow money at close to zero, and in some cases below zero percent. For everyone else, interest costs are considerably higher, reaching annualized rates of over 300% for ‘payday’ loans. Keep in mind that those who borrow at zero percent (Wall Street banks and top clients) have a horrible track record paying back their loans. Which is why we need successive rounds of bailouts, to bailout the deadbeats on Wall Street and the City of London. Meanwhile, we know from micro-lending shops like Kiva that lend to the poorest of the poor, the rate of paying back loans is over 97%. It’s just like in the US during the Jim Crow days. It’s discrimination: using interest rates to perpetuate poverty. It’s financial apartheid.

OT: You’ve been angry for a while now…
MK: We started the ‘Global Insurrection Against Banker Occupation’ five years ago, and I really think the occupy movements will begin to embrace the ideas we’ve been suggesting on how to take down banksters, using what I call ‘reverse capitalism.’ This basically means recognizing that the protesters have a big enough global economic footprint to change the dynamic of how the global economy works, by simply applying some intelligence, tactics and economies of scale.

OT: More European bailouts are being negotiated – will they work?
MK: They’re not bailouts in the sense of one credit worthy institution lending money to another. The IMF, World Bank and others are also bankrupt. When they say ‘bailout’ what they mean is that they are changing the laws so that they can keep less cash on their books to lend against, and take a huge fee. The people doing the bailing out know that they are on a suicide mission, but they want to grab as much cash as they can before the system implodes.

OT: Max Keiser is given 24hrs to fix the global financial system, what’s the first thing he does?
MK: Raise the ‘margin rate’ charged to speculators to borrow and speculate with until the global derivatives outstanding is reduced by 90%. This is actually the only thing you have to do to fix the system. The speculators would have to reduce their speculative positions and the threat of collapse and bailouts goes away. The Bank of England and the Federal Reserve both have the power to do this, they don’t because they are at the service of the speculators.

OT: Who should we be looking to for support?
MK: Look to yourselves, your strength is in your numbers. Organize campaigns tied to decapitalizing banks and corporations by levering dissent and leveraging vulnerabilities in the system that #occupy can exploit for its gain.

OT: Should the occupation brand itself ‘anti-capitalist’.
MK: It’s not anti-capitalist, it’s reverse-capitalist. Reversing the past 30 years of bank fraud is job number one. From there, other reforms can take place. The problem is not capitalism, the problem is bankers. Capitalism, the Adam Smith kind, grew out of the Enlightenment which gave birth to the ideals shared by all #occupy participants. Keep in mind that in 1776, we have the birth of America, but also the publication of Wealth of Nations.

OT: Where should Occupy LSX go from here?
MK: The question is how to monetize dissent and change how the economy works with lethal non-violent economic tactics directed toward offending banks and corporations. Narrow the list of vulnerabilities down to one or two, and match that up with the strength of a global movement, and victory is assured. Here’s an example: Gandhi figured out the vulnerability of the British in India was the monopoly on the salt trade. He simply convinced them all to make their own salt. Victory followed.

Think of a global consumer product like Coca-Cola. It’s a 160 billion dollar. company with Warren Buffett as its largest shareholder. Simply by boycotting Coke you begin to topple this huge company and all its banker affiliates – and you attract the attention of hedge funds, who will sell-short Coke’s shares to oblivion. Coke is the most vulnerable company in the world to a global boycott and the goal should simply be to take the stock price to zero as a show of strength.

OT: What about job losses at Coke if it went bust?
MK: Rest assured, if Coke went out of business, several new companies would take its place and for every job lost at Coke, at least two would take its place; the market would be much more competitive and everybody wins, except the monopolists at Coke and their bankster supporters.

Why is the Public Corporation in ‘Eclipse’?
by Larry Ribstein of the University of Illinois College of Law / February 15, 2007

Martin Lipton’s speech last week in Miami, Shareholder Activism and the ‘Eclipse of the Public Corporation’noted yesterday, got a strong reaction from the NYT‘s Gretchen Morgenson on Sunday – she called it a “rant,” as I discussed on my blog. But while Lipton is clearly angry, his speech is no mere rant, and I’m going to give it the attention it deserves. Briefly, Lipton identifies alien forces that have besieged the modern corporation and are threatening the functionality of its key institution–the board of directors.

Among other things, Lipton indicts:
–Activist investors who pressure the board to “manage for the short-term”;
–Experts who “reduce boardroom collegiality”;
–Powerful committees that function as “distinct fiefdoms”;
–Disruptive special investigation committees;
–Public pension funds that demand meetings with independent directors;
–Withhold-the-vote campaigns used to “embarrass compensation committee members”;
–The use of shareholder litigation as “a type of extortion”;
–“Media critics and governance watchdogs [who] simplify scandals and assume that all directors are at fault when something goes wrong”;
–Burdensome director screening that that discourages service by qualified candidates; and
–Governance watchdogs who “justify their existence and satisfy political motivations by finding new governance practices to propose each year”.

Lipton concludes by “embracing Professor Michael Jensen’s 1989 article [The Eclipse of the Public Corporation] less for the reasons he espoused in 1989 and more as the solution to the problems created by rampant, unrestrained and unregulated shareholder activism.” I sympathize with Lipton’s litany of woe.  I’ve discussed and criticized a lot of what bothers him on my blog over the years. Moreover, I think he’s correctly identified where all this is headed–the end of the publicly held corporation.

Indeed, this was my topic at the AALS Agency, Partnership, LLCs and Unincorporated Associations Section of the AALS last month, where I presented a paper on the same topic, also drawing inspiration from Jensen’s “eclipse” paper. However, I disagree with Lipton about what’s fueling the disruptive influences on corporate governance. To condemn all “shareholder activism”  is to imply the irrelevance of accountability.  Surely no organizational form is sustainable if it doesn’t deal successfully with agency costs.  And this somehow has to involve the residual claimants.

The problem is that Lipton’s Goths who are storming the boardroom, while surely “activists,” are not quite so clearly “shareholders” in the sense that they are acting on behalf of the residual claimants. There’s at least an argument that the diversified shareholders care more about identifying successful new business strategies than they do about who sits on the compensation committee. Yet all these groups Lipton attacks are clearly speaking to somebody.  Why does anyone listen? Let me put that question aside for a moment to agree with Lipton about his prediction of the eclipse of the publicly held corporation.

At the AALS I put these developments in the perspective of the rise of what I call the “uncorporation.” This is what is Jensen said was producing the “eclipse” of the public corporation sun.  I refer not just to publicly held uncorporations like master limited partnerships, but also to the limited partnership private equity firms that are the descendants of the LBO associations Michael Jensen discussed in 1989, and to the limited partnership hedge funds that have intervened aggressively in corporate management (and are among the activist shareholders Lipton condemns).

These firms’ portfolios may be populated by corporations, but the uncorporations provide the critical managerial discipline. In other words, as I’ve said, this boom isn’t just about the restructuring and the leveraging of the portfolio firms, but about the structure of the “uncorporate” firms that are provoking and supervising these changes. This structure includes strong financial incentives for managers and real capital market discipline (because owners’ capital contributions are not permanent).

The rise of public equity is also fueled by the internal governance gaps of the public corporation form.  Effective agency cost control requires more than just independent directors and shareholder proposals, but also more high-powered managerial incentives and owner discipline than the corporate form is able to provide.  I discuss these problems in more detail in my articles Why Corporations? and Accountability and Responsibility in Corporate Governance.

Moreover, the rise of financial and supply markets is making the large publicly held firm less necessary.  Outsourcing and derivatives are combining with regulation and shareholder activism to drive the standard public corporation form increasingly to the margin. One indication of these developments is that one of the biggest financial events of the last week or so was the IPO of Fortress–an LLC that manages limited partnerships.

Finally I return to the mystery of what empowers the “activists” Lipton criticizes. I think part of the blame can be laid at the feet of Lipton himself.  Lipton, after all, helped derail the takeover movement of the 80’s that Jensen wrote about, with his poison pill and high-tech arsenal of takeover defenses.  The decline of takeovers created an accountability vacuum, which lent credence to arguments that public corporations needed some other form of “activism.” But I don’t want to put too much stress on takeovers.  I doubt that in the long run a continuation of the 80’s takeover boom would have saved the public corporation, any more than I think private equity will do the same today.  The more fundamental forces that are marginalizing the public corporation form would still be present.

Which leads me to my final point.  As I discussed in my Why Corporations? article, the corporation has stayed dominant through modern business history in part because it has had political support. In other words, perhaps we should be asking not why the public corporation is threatened, but why, despite everything, it continues to survive. The answer, I think, is that without the pseudo-democracy of the public corporation form, the activists that Lipton condemns would have no access to the levers of capitalism.  Indeed, this explains at least some of the political hostility to private equity and hedge funds. These organizations, which truly serve the residual claimants, are a bit too much “shareholder activism” for the so-called “shareholder activists.”

In short, the activists that Lipton scorns are less a threat to the public corporation than its raison d’etre.  The question is how much longer these groups will be able to stop the rise of the new business forms that are threatening to eclipse the public corporation.”



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