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Activist Short-Seller Glaucus Says It’s Starting to Target Japan

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Activist short-seller Glaucus Research Group says it’s planning to target Japan Inc.

The U.S.-based investor is investigating a couple of Japanese companies and plans to publish reports on them in about four or five weeks, Soren Aandahl, director of research, said in an interview in Tokyo, declining to name them. Glaucus has hired a Japanese analyst to help with its push into the market.

QuickTake Short Selling

Japan has been calling for more engaged investors under Prime Minister Shinzo Abe, who has instituted codes for shareholders and companies to get them to work more closely together. While that’s led to some recent high-profile cases of traditional hedge fund activism including by Daniel Loeb, short-sellers who disclose their activities have been thin on the ground.

Glaucus will seek to be “a standard-bearer for short-selling in Japan,” said Aandahl, 35, who worked as a lawyer before co-founding Glaucus in 2011. “We think the Japanese investing and Japanese financial community is going to be much more receptive to an open and honest dialogue about accounting practices, about transparency and about accountability, and I don’t think that would be the case three or four years ago.”

Abe’s corporate governance overhaul, along with scandals at companies including Toshiba Corp. and some of the nation’s automakers, means now is a good time to get into Japan, Aandahl said. Glaucus, which started by focusing on Chinese firms that listed in the U.S. using reverse mergers, says its targets in Japan won’t be full-scale frauds where companies completely fabricate sales and profits.

Accounting Issues

“That’s not what we’re finding here,” Aandahl said. “It’s much more focused on the accounting issues, and the treatments of losses and stuff like that. I think what we’re identifying is what we think are breaches of pretty significant accounting protocol.”

Glaucus, which publishes most of its research reports on its website, has targeted 22 companies around the world so far, according to Aandahl, who is based in Austin, Texas. Most of these were for fraud, he said. He says they spend 500-600 hours researching each thesis and tend to have just three or four bearish bets at any one time. Aandahl declined to disclose how much money the firm manages.

Glaucus issued a “strong sell” report on U.S.-listed Universal Travel Group in March 2011, claiming the Shenzhen, China-based company falsified its financial statements. The company voluntarily delisted in April 2012. The next year, Universal Travel and two former executives agreed to pay $935,000 to settle a U.S. Securities and Exchange Commission lawsuit alleging that it defrauded investors.

Metal Recycler

Other shorts included China Metal Recycling Holdings Ltd., which called itself the mainland’s largest scrap-metal recycler. Glaucus published its first report in January 2013, saying the firm was a “blatant fraud that has deceived the market about the size of its business.” Hong Kong’s securities regulator eventually won court approval to liquidate the company. Glaucus finds about half its shorts in Hong Kong.

Aandahl, who says he’s received death threats in the past from “random investors,” says he believes short-selling has a moral purpose and you have to be thick-skinned to do it. Glaucus will be a rarity in Japan, where even conventional long activism has often been viewed with suspicion.

“In markets where there’s a vibrant short-selling community, it’s much more likely management won’t be able to get away with things," such as misconduct, Aandahl said. “They change their behavior because of it.”