A Long Romp for the Shorts?

On Apr. 19, Michael J. Saylor, the flamboyant chairman of Micro-Strategy Inc., sent a highly unusual and urgent letter to his company's shareholders. "Management believes that the current stock price is attributable in part to heavy selling pressure from short selling in the marketplace," he wrote. The stock's sharply diminished price--it traded as high as $313 a share in March, 2000, and as low as $3 in mid-April--no doubt led Saylor to point the finger at the diabolical short sellers. Truth is, MicroStrategy has been a short seller's dream for many reasons, including a Securities & Exchange Commission probe that resulted in a heavy penalty and aggressive accounting practices that forced the company to restate three years' worth of earnings.

Saylor's blame game reveals the success and influence short sellers are enjoying in a bearish market. Shorts sell borrowed stocks with the hope of buying them back as the stock price falls. They are famously discreet for fear of being kept off company conference calls or worse, attracting lawsuits and even death threats. These days, they have a glut of targets--some are tech companies, but many are in other areas such as biotech, energy, and retail. Typically, these are companies that should have never gone public, shorts say, or are simply suffering because of a severe downturn in capital spending. "Most marginal companies aren't getting financing going forward, so troubled balance sheets and negative cash flows are taking up more of our attention these days," says the famous short seller James Chanos of Kynikos Associates.