They were reviled in the age of Rembrandt, outlawed in the time of Newton and, in the days of Napoleon, branded enemies of the state.
Now short sellers have embraced the age of Twitter -- and the results are almost as explosive.
The Internet has given a new generation of short sellers and researchers tools to spread bearish investment advice in a blink, and, sometimes, do so anonymously. Accusations fly, many fall on deaf ears, but occasionally a post or tweet from a faceless source can wipe out billions of market value.
The development has left corporate executives struggling to contain the damage and rekindled age-old questions about the methods and motives of those who would drive down share prices. This much is certain: in today’s high-tech marketplace, Internet speed is changing the game.
“They have methods of communicating views instantly to potentially millions of people,” said Marshall Front, chief investment officer at Front Barnett Associates and a 40-year Wall Street veteran. “There are a lot of people with a lot of money who will move capital based not upon an idea but upon an algorithm tied to one word. So if someone comes out and casts aspersions on management, they’re not waiting around.”
To fans, short sellers are heroes -- people who work against the grain to expose bad investments. To detractors, they’re opportunists who try to profit by talking trash about solid companies.
It’s difficult to know which is which. The numbers, however, suggest shorts are growing bolder. In 2014, short sellers, both named and unnamed, waged 146 public campaigns, up from 121 in 2013, according to research firm Activist Shorts.
Among the dramas stirred by Internet-powered bears, few have drawn as much attention as the one surrounding Noble Group Ltd.
The Hong Kong-based commodity trader was targeted last month by famed short Carson Block after a firm calling itself Iceberg Research began publishing unsettling allegations on its website in February.
Until recently, no one had ever heard of Iceberg, which says it doesn’t sell short but plans to. Iceberg said, in essence, that Noble had finessed its books, a claim that the company has vehemently denied.
That didn’t keep Block and others from pushing bearish bets against Noble to the highest in almost a year as the stock lost more than 25 percent.
Even though Iceberg was unknown and its website lists neither names nor contact information of its supposed analysts, the posts helped drive down Noble’s share price.
Noble’s travails have ignited debate about the role of critical research reports and the fairness of secrecy. Noble subsequently said the posts came from a former employee and filed a suit in a Hong Kong court.
Reached on May 4, Noble declined to comment on Iceberg’s allegations, referring to a statement from its shareholder meeting where it said Iceberg intended to “deliberately drive our share price lower to profit from short-selling.”
Who exactly is behind Iceberg is still unclear.
In response to e-mailed questions to Iceberg, a person who identified himself only as David replied: “Short sellers face a lot of pressure and sometimes intimidation. We could not hire people at Iceberg if we cannot protect them.”
Short sellers were both cheered and jeered long before the Internet came along. James Chanos, a prominent U.S. short seller, was celebrated for raising red flags about Enron Corp. John Paulson, the hedge fund manager, drew criticism for his big short of the housing market.
Daniel Yu, a short seller who operated anonymously for years, said it isn’t easy to make a living by going public. People tend to “shoot the messenger,” he said.
While operating anonymously, Yu published research from his firm, Gotham City Research, questioning the finances of Let’s Gowex SA, a Madrid-based Wi-Fi provider. Founder Jenaro Garcia later said he had falsified financial accounts; the company collapsed, filing for insolvency last year.
But Yu said going public with bearish views risks lawsuits from companies and investors. That’s why many short sellers keep their identities under wraps.
Investors, Yu added, can quickly determine what’s true and what’s not. Company executives, under pressure to keep their share prices rising, often miss that point, he said.
“The market has a miraculous ability to call out bull---- ,” Yu said. “These guys make it sound like anyone can put out some report and the market will actually care.”
Critical research should stand on its own, regardless of who does it or how it’s disseminated, Yu said.
Anonymous firms that get it wrong rarely survive long, and going against the grain isn’t easy. Activist Shorts found that of 84 negative campaigns on companies with over $500 million in market value announced in 2013, their shares actually rose 4.4 percent in the year following.
Lei Chen, who analyzed short selling on Chinese companies while a research fellow at the London School of Economics, said the advantages of being unnamed are negligible -- at least when it comes to performance.
“Anonymity doesn’t matter,” said Chen, who’s now at the Southwestern University of Finance and Economics in Chengdu, China.
Short sellers are more likely to choose anonymity when targeting companies in Asia, a region that holds special perils. Muddy Waters founder Carson Block, whose research preceded the collapse of Hong Kong-based Sino-Forest Corp., gave up on China in 2012.
After Jon Carnes, who contributed research to Block, began unmasking corporate fraud in China in 2010, authorities there discovered he was behind the Alfred Little blog and jailed one of the analysts at his investment firm, EOS Holdings.
Although eight of the firms that Carnes criticized were delisted from U.S. exchanges, he said most of his profits were erased by soaring legal costs.
“My whole team was arrested,” Carnes said. “That’s one of the things that makes it doubtful that there are bad short sellers out there. When you start to talk to short sellers, you start to hear the stories you just heard from me.”
He was also accused of fraud in 2013 by the British Columbia Securities Commission, which said he wrote a false negative report on Silvercorp Metals Inc. Carnes has contested the allegations. The commission has yet to rule on the matter.
Yu, of Gotham City, said people who bet against stocks are no worse than the ones who bet on them. That goes for short sellers who hide behind the Internet.
“There are lots and lots of rumors on the long side,” Yu said. “I don’t see anyone chasing after them.”