I came across an intriguing story today. A hedge fund was exposed in court for paying a researcher to release false reports on popular financial site Seeking Alpha.
One cautionary tale emerged in court after Dallas-based Sabrepoint Capital agreed to pay a short-selling researcher a monthly retainer of $9,500 in 2018. Sabrepoint encouraged him to dig into real estate company Farmland Partners Inc. The researcher, who also wrote publicly under a pseudonym, later published an article on Seeking Alpha, setting off a 39% drop in Farmland’s share price. The company sued and used a judge’s order to force him to reveal his identity: Quinton Mathews.
Mathews later said in a statement that he subsequently learned his article “contained inaccuracies and false allegations” and retracted it.
Sabrepoint likely booked a handsome profit from this “FUD (fear, uncertainty and doubt)” campaign. I’m all for confronting uncertainty and having doubts, but they should be well founded, not fabricated for profit.
This does not appear to be an isolated incident:
Studies by Columbia University law professor Joshua Mitts have found that short sellers’ reports can briefly induce bouts of panic selling before shares rebound. In those jittery moments — sometimes mere minutes or hours — well-positioned short sellers can cash out of trades and pocket significant gains.
Mitts examined more than 1,700 reports made by pseudonymous short sellers from 2010 to 2017, concluding that they contributed to more than $20 billion in dislocated values or temporarily mispriced stocks.
Given the massive losses hedge funds have taken in meme stocks like AMC Entertainment Holdings, Inc. and GameStop Corp. this year, I suspect hedge funds have used “short and distort” tactics in those stocks as well. It’s important to remember that information on sites like Seeking Alpha may not be reliable.
The good news is the Department of Justice is investigating these and other hedge fund abuses. And unlike the SEC, the DOJ can charge people criminally and put them in jail.
Here’s hoping justice prevails!
What do you think of these “short and distort” campaigns and the DOJ investigation? Leave a comment at the bottom and let me know!
More on markets:
Parody Site Sues Citadel to Stop Shutdown
How Did High Dividend Stocks Perform In the Last Crash?
Citadel Holding Nearly $500 Million in AMC Options
Photo: “BilLIARds” by Johnny Vulkan is licensed under CC BY-NC-SA 2.0
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