Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

As he faces one of the first official inquiries in Asia related to short-seller reports, Andrew Left, founder and owner of Citron Research, argues that firms like his defend shareholder rights by digging into companies' accounting.

While some recent cases have resulted in problems being uncovered, in others, short sellers are making a quick buck and causing shareholders pain. All this while largely avoiding regulatory scrutiny.

The Chinese developer Evergrande Real Estate said Left misled investors when he published a research note on the company in 2012. While the company's stock dropped 20 percent in the wake of his report, it went on to recover all of that and more.

Missed Target
The damage caused by Citron Research's reports on Evergrande was short-lived
Source: Bloomberg

Singapore-traded Noble Group had a different experience. Its shares have plunged more than 65 percent in the past year, and on Tuesday, the company was downgraded to Ba3, three notches below investment grade -- a level it held as recently as December -- by Moody's Investors Service. The reversals resulted partly from a series of reports from another short seller that goes by the name Iceberg Research. Unlike Citron, the people behind it have never been identified.

Downward Spiral
The reports of Iceberg Research helped start a 70 percent drop in Noble shares
Source: Bloomberg

Similarly, the stock of Rolta India, a computer-services company, is down 52.2 percent since April 2015, when Soren Aandahl, from Glaucus Research, questioned the company's accounting.

The short sellers' impact in the Rolta and Noble cases, compared with Evergrande, is one barometer of where such traders set their sights. Rolta and Noble have complex businesses that are hard for the average investor to understand. That makes assertions about their finances stickier. For Rolta, government defense contracts, which are necessarily shrouded in secrecy, limited how much the company could disclose to brush off concerns raised by Glaucus. For Noble, the issue was how it values long-term contracts, a skill (not easily) acquired in business school.

So even after those companies responded in detail to short-seller criticism, enough investors had lost faith to trigger a downward spiral that was possibly disproportionate to anything in their accounts.

Short sellers have at times helped protect the integrity of the market. The Chinese forestry company Sino-Forest ended up delisting in Canada after a series of reports from Carson Block's Muddy Waters.  (Block has had a few misses too, including Singapore-listed commodity trader Olam International.) Overall, though, Block probably has helped fill a gap created by shrinking research desks at banks.

Short sellers should face the same scrutiny as the companies they target. Short-sell reports are nothing new, but in the days when they were faxed or mailed, there was a cost involved and a way to track them. The internet has made it easier to avoid taking responsibility for mistakes.

The market needs more experts to look at every line of financial statements of even the smallest companies. To win the integrity argument, however, short-sellers should fully identify themselves, register with the authorities and be held responsible for any misleading research -- just like bank and fund analysts.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net