The World According to a Free-Range Short Seller With Nothing to Lose
Marc Cohodes, the scourge of Wall Street, is back. And he’s passing along his “dying art” to a new generation of troublemakers.
The roosters start crowing at 4 a.m. on Alder Lane Farm, about an hour north of San Francisco on the edge of Sonoma wine country. While horses stir in their stables and chickens begin to roam the 20-acre property, one of the world’s most fearsome short sellers puts on his usual attire—shorts and flip-flops—and makes his way in the dark to the room behind his garage. Six pinball machines, a gigantic flatscreen, and a pingpong table compete for attention. If not for the Bloomberg terminal in the corner, you might assume this was your typical man cave.
But let’s not dwell on Marc Cohodes’s pastured chickens, or his show-jumping horses, or even his homemade apricot jam that, on special occasions, San Francisco’s Una Pizza Napoletana puts on its pies in lieu of tomato sauce. Some of the most respected people in the investing industry say that, dating back to the 1980s, nobody has had a better nose for sniffing out fraud than the 56-year-old Cohodes. He’s exposed suspect accounting at a number of high-profile companies, including the Belgian speech-recognition software developer Lernout & Hauspie, which went bankrupt in 2001 after being valued at about $10 billion, and mortgage lender NovaStar Financial, where his efforts earned him a Harvard Business School case study published in 2013.
“I would not want to be his adversary if I was still a criminal today,” says Sam Antar, who was sentenced to six months of house arrest and 1,200 hours of community service for cooking the books at New York consumer-electronics chain Crazy Eddie in one of the largest securities frauds unearthed in the 1980s. “A character like Marc”—the two crossed paths later in his life when both were focused on detecting fraud—“you stay away from.”
And that’s been relatively easy for at least part of the past eight years. In 2008 the hedge fund Cohodes worked at for more than two decades went out of business under controversial circumstances. He maintains that Goldman Sachs, its prime broker, closed it too hastily by making needless margin calls, a claim Goldman disputes. The fallout spurred a bout of what Cohodes likens to post-traumatic stress disorder. “What happened to me would put the average person under,” he says. He retreated to his farm, where he recuperated by spending his days delivering eggs to San Francisco, cheering on the Oakland Raiders, and traveling to see a friend’s rock band, Collective Soul. Besides, the vast majority of stocks were rising because of central bank stimulus, depriving him of ideal opportunities as a short seller.
Now Cohodes is back. His time among the horses and chickens—outside the money management industry—may even have helped him return to the top of his game. Slimmed down and fighting fit, he’s been winning big on a series of short bets against Canadian companies since he made his comeback. Cohodes says he’s been betting against embattled Valeant Pharmaceuticals International since the summer of 2015. Around the same time, he began shorting another debt-laden Canadian drugmaker, Concordia International, which he calls “the poor man’s Valeant.” Both stocks lost most of their value last year.
Cohodes says he’s committed to exposing companies that he believes may be ripping off ordinary, unwary investors—“Joe Six-pack,” as he puts it. “Legitimate companies don’t know who the f--- I am. And they don’t care,” Cohodes says. “The bad guys? They know. And they do care.” And he’ll go to great lengths to chase them down: dumpster-diving to find clues of wrongdoing, lambasting enemies on Twitter (where his rambunctious character is on full display), and hotfooting it across Las Vegas to check whether new business offices reported by NovaStar were real. (They weren’t, according to Cohodes; one was a private home, another a massage parlor.) “I’m a pretty driven guy,” he says.
Indeed, press him on his return to the markets, and Cohodes will reveal another reason that brought him back from the wilderness. Short selling—borrowing stock and selling it, hoping to profit by buying it back later at a lower price—is a “dying art,” he fears. Short-biased funds managed only $5.5 billion in assets as of the end of September, a tiny fraction of the roughly $3 trillion the hedge fund industry oversees, according to Hedge Fund Research. The number of short-biased funds had fallen to 18 at that time, from 50 in 2009. Cohodes wants to make sure the “old-school” craft gets passed along to a new generation of people with—he jokes—that “genetic defect” that makes them want to take on all of Wall Street.
As the bounty hunters of the stock market, short sellers have uncovered some major failings over the years. Think Jim Chanos’s role in highlighting the fraud at Enron, or David Einhorn’s call on Lehman Brothers. But the long list of allegations against short sellers is as old as the markets themselves. They spread false rumors to profit when stocks fall, a practice dubbed “short and distort” that has sometimes gotten them into trouble with regulators. They conspire to torpedo share prices in “bear raids.” They destroy good companies and cause people to lose their jobs. They have many natural enemies, including investors betting shares will rise, analysts issuing buy recommendations, and executives whose whole careers are suddenly called into question when short sellers level charges against them. And they’re not regulated the way Wall Street analysts are, so they aren’t as accountable.
To short a stock and then publicly recommend selling it “absolutely should be illegal,” says Amir Anvarzadeh, head of Japanese equity sales at brokerage BGC Partners in Singapore, stressing he doesn’t know Cohodes and is talking about short selling in general. “It’s morally wrong. It’s called front-running, and it’s wrong.”
At the same time, the risks short sellers take can be huge. Stocks tend to edge higher naturally, doubling or tripling even when the case against them is justified. That can mean losses for the short seller, not to mention psychological despair. Then there’s the vilification—and the lawsuits, four of which Cohodes has experienced. It’s “just a nasty, difficult, ruthless, bare-knuckled, tough business,” he says. “And no one cuts you any breaks.”
Yet there are people who wouldn’t do anything else.
Cohodes’s journey to the top ranks of short selling began in Chicago, where he didn’t do well at school—he recalls his second-grade teacher worrying he’d end up in jail. He managed to avoid that fate, graduating from Babson College in Massachusetts, where he studied finance. In 1982 he landed a position back in his hometown with Northern Trust, where he met an analyst named Paul Landini who taught him about short selling. The two began visiting a local gaming arcade after work. There, one of Landini’s hunches grew into a conviction as they watched people spend their quarters: Video games would soon usurp pinball machines. They shorted a major pinball company, Bally Manufacturing, and watched with euphoria as the shares lost half their value from the start of 1983 to the end of 1984. Cohodes was hooked.
In 1985, Cohodes took a job in New York with David Rocker, who’d just started a hedge fund that would come to specialize in short selling. “They were very thorough, swung big, and put together a really nice track record in short selling, which is really hard to do,” says Jeff Ubben, who runs ValueAct Capital Management, an activist fund in San Francisco. Rocker Partners posted a gross annual return of 12 percent from April 1985 to the end of 2007, when shorting the S&P 500 would have produced an 11 percent yearly loss.
One of Cohodes’s most famous shorts at Rocker Partners came from a desire to help his son Max, now 30, who was born with cerebral palsy and lives in his own house on the farm. Cohodes thought Lernout & Hauspie’s speech-recognition software might help Max communicate, but he soon found it recognized little of what people said. In the summer of 1998, Rocker Partners started shorting the company, which counted Microsoft as a large shareholder. So began a long campaign of tipping off the U.S. Securities and Exchange Commission to irregularities in L&H’s books and briefing financial journalists.
The stock almost tripled in the first three months of 2000, causing several investors to withdraw money from Rocker Partners. Only afterward did the hedge fund get its big break. When L&H started filing detailed quarterly U.S. disclosures following the acquisition of two American companies, Cohodes and others noticed unusually large sales to South Korea, which were largely exposed as fake. In 2001 the company filed for bankruptcy. In 2010 a Belgian court sentenced founders Jo Lernout and Pol Hauspie to five-year prison terms, two years of which were suspended. The doggedness with which Cohodes pursued L&H was typical of him, says Jeff Matthews, who worked at Rocker Partners from 1989 to 1993: “He has the biggest balls of anyone I’ve ever known.”
Bet the jockey, not the horse, Cohodes says. Find executives who once ran companies that performed poorly or were accused of wrongdoing. Look for red flags—serial acquisitions of companies, opaque accounting, overstated numbers. If things don’t add up, don’t stop until you find out why. “He’s like a terrier,” says Herb Greenberg, who co-manages investment analysis company Pacific Square Research. “When he gets his jaws on the leg of whatever he’s going after, he can’t let go.”
Cohodes and Rocker Partners’ successes include NovaStar, the subprime lender he sparred with before the financial crisis; it was delisted from the New York Stock Exchange in 2008. Another was AremisSoft, a business-management software provider that artificially inflated revenue. It filed for bankruptcy in 2002, but not before it sued Rocker Partners and others for stock manipulation, a suit it quickly dropped. In 2010, Roys Poyiadjis, the former chief executive officer, was sentenced to probation for a stock fraud that a judge said was “of almost unthinkable magnitude.”
In the case of AaiPharma—a drugmaker in North Carolina that was delisted, and whose former chief operating officer pleaded guilty in 2005 to fraud conspiracy charges—victory was particularly sweet for Cohodes. He recalls when the company announced in April 2004 that it had received subpoenas from a grand jury seeking testimony and documents concerning its financial reporting. “I just, like, opened the window, and I yelled out at the top of my lungs,” Cohodes says. “This piece of s--- stock was kicking our ass for so long.”
It was the knock-down, drag-out fight with Utah-based Overstock.com that may have helped sink Rocker Partners. Patrick Byrne, the founder and CEO of the discount retailer, sued the hedge fund in August 2005, claiming it worked with a research firm to manipulate the company’s shares. Byrne suggested that “miscreant hedge funds,” journalists, foreign stock exchanges, and a clearinghouse were among those conspiring to drive down his stock using naked shorting—that is, selling short shares that haven’t been borrowed.
Byrne says he was “completely vindicated,” because defendants in lawsuits Overstock brought, including Goldman and Cohodes’s firm, eventually settled. There’s a difference between betting against a horse and “trying to poison” it, he says. Still, “I have a strange affection for Marc as one sometimes develops for an opponent,” Byrne says of Cohodes now. “At the end of the day we sort of put it behind us.”
The 2005 lawsuit hastened Rocker’s retirement the following year—at least according to Cohodes—and indirectly had a hand in the fund’s demise. As for Rocker and Cohodes, they don’t speak. Cohodes blamed Rocker for unnecessarily riling Byrne, while the argument can be made that the tactics Rocker Partners used against Overstock were no different from those it employed for any other short investment. (Rocker declined to comment for this story.)
Whatever the case, Cohodes was left in control of the company, whose name he changed to Copper River Partners. Then came the financial crisis, which should have been a godsend for a short-biased fund. “We were having an outstanding year. Outstanding,” Cohodes says. “We were knocking the ball out of the f---ing park.”
Until things started to go wrong.
On Sept. 15, 2008, Lehman Brothers filed for bankruptcy. Lehman Brothers International in London, which Copper River used as a prime broker, owed the hedge fund about $100 million at the time, says Phil Renna, who was Copper River’s chief financial officer. Copper River lost access to that money. Days later, in an echo of Byrne’s campaign, the SEC took action against naked short selling. That spurred buying of heavily shorted stocks including Jos. A. Bank Clothiers and Overstock, creating what Cohodes calls “horrific” losses for Copper River. Then the SEC banned short selling of financial companies, which again sent shares the fund was short surging.
At that point, Goldman stepped in. As Copper River’s main prime broker, it instituted house margin calls, which unlike regulatory margin calls are made at its discretion. Before long, Goldman was liquidating Copper River’s short positions. Goldman blocked Cohodes’s attempt to sell them to another hedge fund, he says. By October the company’s funds were down more than 50 percent. Copper River was unsalvageable. “It’s almost like a bomb blows up near you or near your brain, and it sort of blows your eardrums out, but it doesn’t kill you,” he says.
Testifying in 2011 in connection with a lawsuit Overstock brought against Goldman and others in California, Cohodes said he and his partners speculated that Goldman shut the fund because it hadn’t borrowed shares for Copper River’s short sales and was covering its tracks after the SEC clamped down on naked shorting. He also said he didn’t know for sure. Goldman was removed from the case, which contended that prime brokerages intentionally drove down the price of Overstock’s shares through naked short selling, on the grounds that none of the alleged conduct had taken place in that state. Overstock later said that Goldman had settled a New Jersey action for Racketeer Influenced and Corrupt Organizations (RICO) and securities fraud claims following the California rulings. Goldman also agreed to pay fines to the SEC last year and in 2010 for violations of securities lending rules, not related to Copper River, without admitting or denying the allegations either time. “Mr. Cohodes is wrong,” Michael DuVally, a Goldman Sachs spokesman, said in a statement. “We met our obligations under applicable law,” he said. “Copper River’s problems were the result of the extreme stress in the financial markets at the time.”
For his part, Cohodes says Copper River didn’t sue Goldman because nobody had the appetite for a drawn-out legal battle. “I’m a really, really, really good investor, but obviously I was s----y at the investment business, because my fund closed due to what I would call factors beyond my control,” Cohodes says. Even so, he accepts responsibility. “I’m the captain of the ship,” he says. “The ship sank.”
Alder Lane Farm, which Cohodes kept in a settlement when he got divorced in May 2011, is sprinkled with physical reminders of battles past. They include the pinball machines (thank you, Bally), a Porsche 911 with customized plates that say “Gowex” (a Spanish telecommunications company he bet against), and a 6-year-old Holsteiner horse named Concordia after the drugmaker whose former CEO is suing him. “It showed up the day I got sued—so it just had to be,” he says. He even names some of his roughly 300 chickens after friends and foes. Anyone who doesn’t take the investing game personally is wrong, Cohodes says.
Which could help explain his time off from investing. “I don’t want to say I took a break from investing, but I sort of took a break from it and just sort of decompressed,” he says of the period following Copper River’s closure. After a couple of years, he began to miss it and started to spend more and more time on short investments. He became a lively presence on Twitter, where he has more than 8,000 followers. He says it’s easier for him to be forthright on social media than it would be if he were still working for a hedge fund, where lawsuits are bad for business.
He can be forthright elsewhere, too. At a Grant’s Interest Rate Observer investing conference in New York in October, Cohodes shared the stage with some of the biggest names in the industry, including Julian Robertson of Tiger Management fame and bond investor Jeffrey Gundlach. Some people in the audience were taken aback by Cohodes’s “rhetorical style,” as Jim Grant, who organizes the event, puts it. “Marc comes across as kind of an angry and certainly intentionally profane growling bear,” he says. “Beneath that exterior beats the heart of an idealist.”
Cohodes himself says his energy for short selling also comes from having a competitive nature that makes him relish the fight—all the more so if he thinks he’s being disrespected, especially by what the straight-talking self-described “scrapper” sees as buttoned-up Harvard types. Making money from short selling, he says, isn’t that important to him, although the two Porsches on his farm suggest he’s far from short himself.
Whatever the motivation, most roads for Cohodes these days lead over the U.S. border into the Great White North. When many other short sellers were descending on Valeant, whose stock fell 86 percent last year, he also became interested in the smaller Concordia, which he says is bedecked in red flags. The company’s founder, Mark Thompson, and other executives previously worked for Biovail, which the SEC charged with fraudulent accounting, Cohodes says, recalling his jockey theory. (Biovail agreed to pay $10 million to settle the charges without admitting or denying the allegations. Thompson, who stepped down as Concordia chairman and CEO in November, wasn’t accused of wrongdoing at Biovail.) Concordia went public through a reverse merger, a process that the SEC says can sometimes lead to fraud and other abuses. It expanded through acquisitions, which short sellers such as Cohodes often see as grounds for suspicion, because they can open the door to accounting tricks. And its business model of buying drugs and jacking up their prices (similar to the strategy that was used by Valeant) is coming under increasing scrutiny. (“Valeant’s new management team is working diligently to earn the confidence of the investment community and deliver on our commitments,” including repaying debt, says company spokesman Scott Hirsch.)
Cohodes became convinced Concordia would buckle under the large debts it assumed to fund its acquisitions. Dissecting the company’s accounts, Cohodes noticed that it was recognizing revenue on shipment rather than when products are sold to the consumer and that it had opaque reserves. Those practices are not illegal but have been used by companies in the past to inflate sales in what’s known as channel stuffing.
Before long, Concordia’s earnings started to miss estimates. Last September, the U.K. government introduced a bill proposing controls on overcharging in the pharmaceutical industry. Debating the bill, members of Parliament said it would close a loophole that allowed companies including Amdipharm Mercury, as Concordia’s biggest purchase was named before Concordia bought it, to acquire off-patent generic drugs with dominant market positions and push up their prices. “When price gouging ends, the channel gets drained and the results just completely suck,” Cohodes says. (Concordia didn’t respond to requests for comment but said in a statement in December that it believes it can service its debt while focusing on developing a new long-term plan.)
Concordia shares plunged 95 percent in 2016, handing Cohodes a huge profit. He also got slapped with a libel and defamation lawsuit from then-CEO Thompson for comments he made on Canadian TV about the executive’s work history. Cohodes traveled to Toronto in January and filed a 494-page motion to contest the suit, which he sees as a standard tactic to silence short sellers. (Peter Downard, Thompson’s lawyer, disagrees: “Don’t be diverted by the suggestion that Mr. Cohodes is being sued for criticizing Concordia. Mr. Cohodes went on television and alleged that Mark engaged in misconduct early in his career, long before he was involved with Concordia.”) Cohodes continues to berate Thompson on Twitter. He says he spent about 2,000 hours researching the company and considers it his best-ever short investment.
Since the fall of 2014, Cohodes has also been shorting another Canadian business, mortgage lender Home Capital Group in Toronto. The company said in 2015 that it suspended 45 brokers for alleged mortgage fraud, and its stock fell by almost half from November 2014 through the end of January. (Home Capital declined to comment for this story, but it said last year that “there have been no unusual credit issues on these mortgages.”)
For all the good bets, Cohodes says, there have been plenty of bad ones, too. Take Ebix, a U.S. supplier of software to the insurance industry, and Keurig Green Mountain, a specialty coffee maker. Ebix surged more than sixfold from June 2013, and Keurig Green Mountain was taken private at a large premium. Still, Cohodes says his return to short selling has “been blessed” and he’s “had two really good years,” but he declines to give details.
As well as betting against many companies in Canada, which he sees as a prime hunting ground, Cohodes has appeared frequently in Canadian media since 2015 to expose what he sees as the reason for the bubble in Vancouver real estate. He says the provincial government has ignored or even encouraged illegal money entering the country from China. Cohodes says he’s campaigning on this issue without a profit motive: His Canadian real estate shorts have no exposure to Vancouver, where the price of a typical single-family home surged to C$1.5 million ($1.1 million), about 20 times what the median household earns in a year. In August, British Columbia’s government imposed a 15 percent tax on foreign buyers to address the situation that Cohodes helped highlight. Vancouver home sales plunged 40 percent in January over a year earlier.
In addition to looking after his son and communicating to regulators, investors, and journalists about his short bets, Cohodes makes time to mentor people who share the fraud-sniffing gene and whom he’s identified as bright prospects in the short-selling business. He speaks with them regularly about their ideas—something he says also benefits him, especially because he no longer has the research and analytical resources of his own fund.
It’s something he’s always done. Jerome Souza was a batboy for the Oakland A’s before Cohodes took him under his wing, gave him a job at Copper River, and taught him how to be a short seller. After the fund closed, Cohodes was supportive when Souza decided to use the detective skills he learned there to go to work for the U.S. Drug Enforcement Administration. Souza says Cohodes is like a dad to him. The Sunday after Thanksgiving, Souza, 32, and his family drove 13 hours from Tucson to have dinner with Cohodes, his second wife, Aurora, 51, and Max.
Then there’s Fahmi Quadir. “I don’t know whether to call him my ideal father or ideal lover,” says Quadir, 26, who started short selling in 2015 at Krensavage Asset Management in New York. Cohodes calls her “the assassin,” because she operates in the shadows and her short research can be devastating. “He’s so passionate about what he does,” she says of Cohodes. “Meeting Marc changed my life and made me realize what it means to be a short seller.”
Cohodes says he’ll never go back to managing other people’s money, because his new setup gives him the joys of being a short seller without hassles like meeting investors. “Marc has figured out a way to be in the game without being in the game,” Pacific Square’s Greenberg says.
At Concordia’s shareholder meeting in April 2016, according to local media reports, then-CEO Thompson said, “If you are a chicken farmer, your chickens will come home to roost.” Cohodes interpreted this as a threat: that he’d get what’s coming to him. Being threatened, Cohodes says, isn’t something he takes kindly to, and when he is he becomes even more determined.
As for those chickens, sure, Cohodes’s eggs may sell for $13 a dozen at Bi-Rite Market in San Francisco, but he warns Thompson and other targets, present and future, not to underestimate him. “Yeah, I have chickens, and yeah, I sell eggs in the city, but I spend about 1/32nd of my day doing chicken work,” he says. “I’m happy that he thinks I’m a chicken farmer. But I’m still intensely focused on some stuff. I will knock their heads off.”
—Redmond is Japan markets editor for Bloomberg News in Tokyo. With Dakin Campbell, Luke Kawa, Sarah McDonald, Marine Strauss, and John Martens