Fortune - USA (2020-12)

FORTUNE DECEMBER 2020 /JANUARY 2021 60

F

ROM THE JUMP, activist short

campaigns are decidedly antago-

nistic—the tone is Accounting 101

meets WrestleMania. The shorts

allege endemic fraud at the high-

est levels. “Money grab,” is a term

that appears often in the reports. A Chinese

sportswear company is not just cooking its

books, it’s dropping “turds in the punch bowl,”

blares one Muddy Waters report.

The attack-dog language is deliberate.

(Ackman, the hedge-fund manager famed

for his short bets, has honed it to a fine art.)

Short-sellers get no points for prosecuting a

good argument. Their research pays off only if

the reader takes action, dumping her shares.

TIP NO. 2

EXPECT A FIGHT, AND DON’T PLAY NICE.

It seems every activist short has horror stories

they could dine out on: the white whale that

nearly ruined them, the lawsuits, the PIs and

PRs, the hostile regulators, the death threats.

Fraser Perring, founder of Viceroy Research,

says one of his short targets sent heavies to his

native England in a clumsy attempt to kidnap

his daughter. (Fortune could not verify this

claim.) “At one stage there were bugs in the

kitchen, cameras in the hedge. It was some-

thing out of a novel,” he says.

“A lot of guys have come and gone in short

activism” over the past decade, Block says.

“People thought, ‘Oh, wow, this is really easy.

It’s a great way to make money.’ And it’s not.

Relative to being on the long side, it takes a

lot more effort to make each dollar.”

Shorting stock is indeed not for the faint of

heart. Believing a stock will fall, an investor

opens “short” position by borrowing shares—

delisted the company for its misbehavior.

Though Chinese firms were Block’s first focus, he realized that

the flaws he found in those companies could be found everywhere.

“The conflicts of interest, the ineptitude, the laziness that enabled

these empty boxes to raise money in the U.S. and trade at real

valuations—I mean, those are global issues,” he explains.

One of the California-based firm’s best-known takedowns came

closer to home. In early 2016, Abbott Laboratories announced a

$25 billion bid to buy St. Jude Medical, combining the two top

players in the $30 billion market for “heart failure devices.” But in

August of that year, Muddy Waters entered the scene with guns

blazing, announcing a short position in St. Jude and alleging that

some of its pacemakers and defibrillators were vulnerable to hack-

ing. The disclosure pushed St. Jude shares down 10% in a single day.

The Muddy Waters report relied heavily on evidence compiled

by MedSec, a cybersecurity research firm. MedSec had approached

Block’s team first with the juicy information, rather than alerting

St. Jude per Food and Drug Administration guidelines. St. Jude

sued Muddy Waters and MedSec for defamation. But a few months

later, the FDA and Department of Homeland Security confirmed

that the devices were indeed vulnerable, and they issued a recall.

The shorts cashed in; the defamation suit was eventually dismissed.

“I WAS NEGATIVE MILLIONS”

Shorts like Fraser Perring of Viceroy Research face

huge losses if the stocks they short rise dramatically.

NATHAN ANDERSON • HINDENBURG RESEARCH

I think fraud is more pervasive than at any time

I’ve been in the market.” Until regulators step up,

“we’re going to see a proliferation of short actors.”

PHOTOGRAPH BY SOPHIE GREEN