The Dark Money Secretly Bankrolling Activist Short-Sellers

If you’ve spent any time following the conversation around Tesla on Twitter, you’ve probably seen them: Anonymous short-seller accounts constantly spinning conspiracy theories and screaming about supposed fraud. Maybe you’ve wondered: Who are they, and who is supporting them? Are they really making money shorting stocks? Or are they just the vocal face of a much bigger, more secretive operation that wants to stay out of the spotlight?

Thankfully a few weeks ago Michelle Celarier published an amazing piece in Institutional Investor magazine that digs into these exact issues. As some of you know I’ve been dealing with harassment and threats from a mob of online anonymous Tesla short sellers, so I’m very interested in trying to understand how their business works. Let’s dig through this long piece together now:

John Fichthorn had been in the hedge fund business for more than 20 years when a half-hour phone call with a stranger put him on high alert.

“There’s a multibillion-dollar fund out there going around with a short report trying to pay people to publish it on their behalf,” Fichthorn recalls the man saying.

“He was very nervous about telling me any of this,” says Fichthorn. Short-sellers soon began pounding the stock, so he called the man back and says he finally convinced him to provide the alleged name behind the offer. According to Fichthorn, that name was a Hong Kong-based hedge fund.

Who the fuck is that?” thought Fichthorn.

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This is an intriguing concept: What if the loudest and most vocal short-sellers aren’t the ones actually making the big trades? It makes sense: Trying to push a story in the media is a very different job than trading stock options. The real money behind these short campaigns is nameless, faceless, and likely in a foreign country –– beyond the jurisdiction of the SEC. They want to profit off the trade, but the last thing they want is to draw attention to themselves. So they hire others willing to be the face of the campaign, and those vocal “activist” shorts make money whether there’s a profit on the trade or not.

Fichthorn may never have heard of the fund, but it has become well known in short-seller circles for being what’s called the “balance sheet” behind some of the activists who trumpet their short research on social media — a phenomenon that has turned the world of short-selling upside down over the past decade. These noisy activists, many of whom are anonymous and have little money of their own, have taken on outsize importance during a time when the bull market has ravaged short-sellers and a Twitter mention can move a stock.

More than a dozen short-sellers interviewed by Institutional Investor in an effort to penetrate this murky terrain say there are numerous players and various permutations of the model that may involve the sharing of ideas and research along with either a cut of the gains on the short trade or a set fee. In fact, some short-sellers believe that almost all of the activists have such backing — even those running small hedge funds themselves. 

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The balance sheet behind the social media short sellers. Of course. It’s all starting to make sense now. But if all activist short-sellers have this backing, I wonder who the balance sheet behind TSLAQ is? How about the balance sheet behind Aaron Greenspan and the Think Computer Foundation?

Wary of both reputation risk and litigation risk — and eager to avoid the drama that swirls around activist short-sellers — some hedge funds even give away their research for free to the activists. The hope is that, once publicized, a damning report will be the catalyst for a downward move in a stock they’ve shorted. 

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If you’re doing something immoral or illegal, make sure nobody knows it was you.

The backdrop for all this is the stock market’s relentless rise, which in recent years has brutalized short-selling. Many short-biased hedge funds have either shut down or bled assets; industry insiders say that more could close shop in 2020

Into this vacuum has stepped a slew of upstarts, often touting their research on Seeking Alpha and posting links to their blogposts on Twitter. As of October 21, 38 activist short-sellers — many anonymous — had published short research on 128 companies this year, according to Activist Insight Shorts, which tracks the naysayers. The Bear Cave, a weekly online newsletter, reported that during one week in October alone, eight new short research pieces were published. 

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Desperate times call for desperate measures.

The trend has raised alarms — and not just from the companies they target. Seasoned short-sellers say the information overload risks “commoditizing” the research and also raises red flags about its originality, accuracy, and depth. Critics also note that reports sometimes arrive just prior to the expiration of options that can send stocks into a tailspin, risking market manipulation allegations. They also fear that these problems could lead to tougher regulation of short-selling, which could make it even less profitable — and allow frauds to go unchecked in the markets. 

Short of a court order or federal investigation, however, it is impossible to know who is behind the action. 

But there are clues.

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Yes, short-sellers on Twitter aren’t exactly known for their accuracy and depth of research. But the fact that veteran short-sellers are worried about accusations of market manipulation and tougher regulations is news to me. Even seasoned short-sellers are raising their eyebrows at these aggressive social media campaigns!

Start with Carson Block, the founder of Muddy Waters Capital, who launched the new breed of short-seller activist in 2011 with his blockbuster research on Sino-Forest Corp., a Toronto-listed Chinese company whose investors included then-hedge fund star John Paulson. Block also appears to have pioneered the balance-sheet approach. And now that he runs a hedge fund with more than $200 million under management, Block occasionally offers such financial support to other short activists whose research he deems worthwhile.

“There are some firms out there that are in the balance-sheet business,” asserts Block. “Full disclosure: We are.” 

He declined to say which activists he has funded.

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Amazing. Block and Muddy Water Research were part of the “TSLAQ” short campaign against Tesla:

Block and his firm have also been in frequent communication with other Tesla short-sellers including Aaron Greenspan, the short seller who has been harassing and threatening me for almost two years now. Is it possible that Muddy Waters is one of the many firms acting as the “balance sheet” for Aaron’s fraudulent short-selling charity Think Computer Foundation? If not, has he shared any tips with Aaron Greenspan on how to find a “balance sheet” to sponsor his harassment and threats against Tesla customers?

I could go on with more tweets but they definitely seem to have some kind of relationship. PlainSite seems to be promoting their work, and defending them –– even against a random account with 7 followers.

“When I started out, I had no money. I had negative net worth,” he says. “So I worked with balance-sheet partners.” 

Block declined to say who his original balance-sheet partner was. According to The Wall Street Journal, Block sold his research on Rino International Corp., another suspected Chinese fraud, to Oasis Management, as well as to other hedge funds, in 2010. That was just before Block says he turned to the balance-sheet model, offering his research reports to a single fund for a cut of its profits on the trade.

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Balance sheet partners got Muddy Waters started ten years ago, so now he’s funding other broke activist shorts. How touching.

Muddy Waters’ next big short was Sino-Forest, and Oasis was short that Chinese company three weeks ahead of Block’s report, according to a lawsuit Oasis filed in London in an effort to get Morgan Stanley to pay the $9.3 million Oasis claimed it was owed by the investment bank for its Sino-Forest puts.

Oasis founder Seth Fischer and portfolio manager Alexander Shoghi did not respond to requests for comment for this story. 

Block defends the practice, saying it is a collaborative effort that benefits both parties.

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They manufacture the news needed to make sure their puts pay out. Both for them, and the balance sheet that bank rolled them.

Activist short-selling is a hardscrabble life,” [Block] says. “It’s actually a shitty business for a number of reasons. One of the reasons is that it’s subscale. There are very few activist short-sellers who can regularly short names that have real capacity in the trade,” he explains. 

Most don’t have enough capital to start a hedge fund. “If your trade capacity is around five to ten to 25 million dollars, that doesn’t justify raising a fund. You won’t be able to generate returns on that.”

Instead, Block says, with a balance-sheet partner “the performance fee is effectively paid by a hedge fund. It has the capital and the institutional pipes.” Short-sellers borrow stock, hoping to pay it back at a lower price and profit on the differential. Hedge funds have relationships with prime brokers at investment banks that can lend them shares — relationships Block found he could not form in the early days.

“A lot of these names — U.S.-listed Chinese scams — were hard to borrow,” he recalls. “We went to the big, pretty institutional primes who had access to borrow, and they told us we were too small and controversial.” 

Big hedge funds also have analysts who can call both the companies and sell-side analysts to get information they aren’t going to reveal to a known activist short-seller. Perhaps most importantly, a balance-sheet partner can also provide legal support, which can run up to $1 million if the short-seller gets sued or investigated by a regulator, Block says. 

From their end, hedge funds prefer to work in the shadows for a number of reasons — one being that their own investors, particularly institutional investors like endowments and sovereign wealth funds, may look askance at short activism. 

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It makes sense. The big hedge funds don’t want to risk their reputation, or legal repercussions. The small guys can’t play the game without a hedge fund partner. You have to work together to survive, so everyone does.

When it comes to short-selling, however, disclosure is not something most hedge funds want.

Short-sellers are part of a clubby, cantankerous community that has derisively been called a cabal. They often share research and reinforce each other with what are called “pile on” trades. There is nothing inherently unusual, or illegal, about that. Market participants say that short-sellers at hedge funds skilled in the strategy, like Eminence Capital, Valiant Capital Partners, Sophos Capital Management, and Kingsford Capital Management, also pass along research to activists — but they aren’t believed to have offered to finance them.

For many hedge funds, sharing research is better than a financial arrangement with the activist. “By letting someone else put out the research, then you’re not out there at all and you have total flexibility in how you trade the thing,” says one hedge fund manager. “Once you have a fee arrangement, then it’s a bit problematic.”

Potential legal headaches aren’t the only issue. Hedge funds may have a “belief on a position but don’t want to deal with all the blowback and harassment and the doxing,” says Nathan Anderson, whose Hindenburg Research gained notice after its September short call on electric-truck maker Nikola Corp., which led the SEC and the DOJ to investigate the company and the stock to plummet.

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Yup. They want to harass and doxx others anonymously, but not have to deal with any of those issues themselves.

In April, outspoken short-seller Marc Cohodes stunned the short-selling community when he teamed up with Joshua Mitts, associate professor at Columbia Law School, to author an op-ed in the Financial Times calling for a mandatory ten-day holding period by a firm or individual after the public dissemination of market-moving information. 

To protect themselves from market-manipulation accusations, short activists typically say upfront that they are short the stock of the subject of their report. Buried in the fine print, however, are more details — as well as caveats.

In a recent report, Muddy Waters, whose generic disclosure has been used as a template by others, states that as of the publication of the report, the firm was either long or short the name, “possibly along with or through its members, partners, affiliates, employees, and/or consultants, Muddy Waters Related Persons clients and/or investors and/or their clients and/or investors.” It states these parties may be trading the securities and adds that “neither Muddy Waters Research nor Muddy Waters Capital will update any report or information on its website to reflect changes in positions that may be held by a Muddy Waters Related Person.”  

Such language allows the activist — and any balance-sheet partner — to trade in and out at will. But Cohodes argues that it’s not good policy.   

“Whether you own shares or are betting against a company, I believe it is misleading to tell investors that you have a specific view on a company and then profit from a trade in the opposite direction,” he wrote.

Cohodes alleged that “many bloggers and social media personalities who promote or attack stocks do not conduct a deep investigation of the companies involved. Instead, they republish theses acquired elsewhere and buy and sell quickly to make a fast buck.” 

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Even short-sellers agree: It’s immoral to go on social media and tell everyone a company is a worthless fraud while secretly closing out your short position behind the scenes within 10 days. Imagine if someone advised you “Buy Snapchat stock!”, but you found out that 10 days later they acted contrary to their own advice and sold all the Snapchat stock they had –– profiting from the artificial run up in the stock they created, at your expense. That would be pretty dishonest, right? Well, telling everyone you’re short a stock because it’s headed to $0 but buying the shares back soon afterwards to cover your position is the same thing. If you really think it’s headed to $0, why cover now just as you’re imploring others to start shorting?

In fact, Tesla short-sellers like Aaron Greenspan do just that. Normally there would be no way to know how these anonymous Twitter users are trading, but Aaron Greenspan disclosed some of his Tesla trades in court. That allows us to look at when he chose to close each of his Tesla short bets, and what he was saying publicly at the time.

On January 7, 2020 Aaron Greenspan’s fraudulent charity PlainSite released a short selling report on Tesla in which he slandered me and several other Tesla customers. He called Tesla’s disclosed financials “largely fraudulent” and said Elon Musk was a “habitual liar” (talk about the pot calling the kettle black). Someone who truly believes what’s in this report must be betting against Tesla for the long haul, right? As long as it takes for bankruptcy to happen, because the report will be proven right with time? In the case of a habitual liar like Aaron Greenspan… not exactly.

By his own admission, Aaron Greenspan spent nearly $30,000 to purchase 130 put option contracts on Tesla stock expiring on January 17, 2020 –– exactly 10 days after he published his report. These contracts guaranteed Greenspan the option to sell up to 13,000 shares of Tesla stock at a fixed price. He hoped that the report would drive the stock down, allowing him to buy 13,000 shares and sell them above market price.

Unfortunately for Aaron Greenspan, his plan to drive down Tesla stock failed because nobody believed his ridiculous report. When you’ve been lying your entire life, eventually you start to lose credibility. On January 17, 2020 Tesla’s share price was $510.50. Greenspan had bet that the price would be lower than $100, $75, $50, and $20. Of the $30,000 he invested in shorting Tesla in anticipation of the report, he lost 100%. Of course, that’s just his trades –– it doesn’t include any of the losses from his balance sheet partners!

On May 22, 2019 Greenspan urged Tesla young Tesla investors to immediately sell their shares, warning them their savings would be wiped out. In reality, Tesla shares are up 17x since then, and Aaron Greenspan ended up wiping out his own savings.

He asked how analysts could have a price target for Tesla above $0, implying that’s what he thought the price target should be:

He publicized lawsuits he claimed would bring the company down:

And he implored the Securities and Exchange Commission to take action against Tesla immediately:

As usual, he attacked any journalists that dared to utter a positive word about Tesla:

And he confidently proclaimed that Tesla was in a “death spiral”:

However, his trading history tells a different story. While Aaron Greenspan was telling the world that Tesla would “wipe out their savings”, deserved a price target of $0, was getting sued into bankruptcy, deserved to be prosecuted by the SEC, and was in “a death spiral” he sold $20,000 worth of Tesla puts one month early. Riddle me this: If a company is in a death spiral, and analysts should be setting a price target of $0… why sell when the stock is still at $200 a share? His message to his followers was: “Go buy puts and short Tesla!”. Little did his followers know, behind the scenes Greenspan was one of the people selling the puts to them. He lied straight to his followers faces, giving them advice that would ruin them financially while quietly taking their money behind their back. This kind of blatant deception should be prosecuted as securities fraud.

On October 2, 2019 Greenspan announced a “Breaking News” discovery to his followers: documents from the Texas DMV he had published that supposedly proved Tesla was a fraud:

He also accused Elon Musk of securities fraud:

But behind everyone’s back, he was closing out his Tesla short position the very same day.

Greenspan tried his best to deceive his followers into believing these DMV documents contained evidence of serious fraud. But if he really believed that, why would he close his short position on the “breaking news” release instead of waiting for the fraud to be discovered? It was a classic pump and dump of Tesla put options.

To add an element of tax fraud on top of the securities fraud, Greenspan purchased these Texas DMV documents with funds from his charity. He even solicited donations from other short-sellers, promising that their tax-deductible donation would be used to expose fraud at Tesla, and help them make money on their short bets. Not only did he scam his followers, he illegally misappropriated the funds of a non-profit to try and inure private benefit to his personal short-selling bets, as well as those of his donors. A non-profit charity can use its resources only for an exempt purpose that serves the public good –– not the private interests of any individual, especially the people running the charity!

On March 16, 2020 Aaron Greenspan thrilled his short seller audience by threatening to take Tesla to court –– presumably to expose information that would make the stock fall.

But that very same day, while Greenspan was encouraging his followers to buy puts, he himself was selling the securities to them: $20,642.85 worth, to be precise.

Most of the time, these short sellers don’t even believe what they’re saying. They’ll convince everyone they need to go buy puts immediately, while doing the exact opposite themselves. It’s a simple pump and dump scam, using stock options rather than public equities.

Anyway, that was a long tangent. Back to the Institutional Investor article:

In a rulemaking proposal to the SEC in February, Mitts, Columbia securities law professor John Coffee, and ten other law professors asked the SEC to force short-sellers who publicize their position to “promptly” say when their disclosure of being short “no longer reflects current holdings or trading intention.” They want short-sellers to make that disclosure within 24 hours of a change in trading or by the beginning of the next day’s trading. 

Rapidly closing a short position after publishing (or commissioning) a report, without having specifically disclosed an intent to do so, can constitute fraudulent scalping in violation of Rule 10b-5,” they argued, referring to the SEC’s anti-fraud rule.

Short-sellers like Block rail against Mitts, dismissing him as a “shill” for corporate clients. (Mitts has worked for corporate plaintiffs in lawsuits filed by at least two known targets of short-sellers, Farmland Partners and Burford Capital; Muddy Waters is short Burford.)

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Like Block, Aaron Greenspan was not happy at all that a Columbia professor was pushing for common-sense rules on short and distort schemes. Greenspan immediately began attacking the professor publicly, sending him harassing emails and trying to have him fired.

The professors first posted about their petition around February 12, 2020:

Link to Blog Post

And Aaron Greenspan had already emailed him and started threatening him publicly within four days:

The harassment from short sellers got so bad that Professor Mitts soon had to delete his Twitter account:

Why the obsession with Professor Mitts? It’s simple: short sellers will harass into silence anyone who calls out their fraudulent activities, because they know that if anyone finds out what they’re doing they’ll be charged with securities fraud. Recall that Aaron Greenspan had Tesla options set to expire 10 days after his report. That meant that if the SEC adopted Mitt’s proposal, he would have committed securities fraud over the publication of his false and libelous report. No wonder he was trying to get the poor guy fired.

“The vast majority of short activists would not even be viable if their balance sheet wasn’t getting really concentrated in each name . . . then closing out a decent portion of that position,” says one short-seller. 

“If you don’t take advantage of the elevated volume, in subsequent days you could start bleeding some money and giving back,” he explains. “You know that on day two, the company comes back with everything they’ve got. And you don’t know how long it’s going to take for the market to become skeptical of management,” he adds. “In the meantime, you could get hit with a lawsuit.

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In other words, without completely defrauding your followers there’s no way to make money. You have to rip people off and lie to survive.

Mitts raised some of these issues in a declaration filed in support of a defamation lawsuit brought in Colorado federal court in 2018 by Farmland Partners against short activist Rota Fortunae, a front for Quinton Mathews, the managing member of QKM, a Dallas-based registered investment adviser with no assets under management, according to its most recent ADV filing with the SEC. This year, Mathews was forced by the judge to reveal his identity. The short-seller later disclosed the name of the Dallas hedge fund, Sabrepoint Capital Management, that was paying him for his short research on a monthly retainer basis. Sabrepoint is now also a defendant in the case, which is pending. Both Mathews and Sabrepoint have denied the accusations.

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I bet we can get a list of all the short-sellers and balance sheet partners that have been funding Aaron Greenspan and his fraudulent charity in court. Maybe that’s why so many anonymous accounts are trying to smear and threaten me: They’re worried about being exposed for their financial ties to Aaron Greenspan and his charity. Greenspan, PlainSite and the Think Computer Foundation could be the domino that brings all of TSLAQ down. Since most notable Tesla short sellers have donated to his charity (with some specifically saying they donated because of his harassment activities), if Greenspan’s criminal activity is revealed the donations could implicate all of TSLAQ in a criminal conspiracy to commit securities fraud, tax fraud, and threaten strangers in an attempt to distort the conversation around certain stocks.

Fichthorn declined to give the name of the short-seller who alleged a hedge fund was offering to pay activists to publish its short thesis on Health Insurance Innovations. 

But for the next year and a half, short-sellers battered the company on Twitter and elsewhere. One anonymous short activist, Marcus Aurelius Value, wrote five reports on Health Insurance Innovations, starting in November 2018 and ending in June of this year.

Aurelius Value did not respond to a Twitter message asking if he had worked with a balance-sheet partner on the short and, if so, whether the partner provided him with research. 

At one point, the options action made Health Insurance Innovations the biggest short in the market, with more than 100 percent of the shares shorted, says Fichthorn. “It was kind of ironic that I, as a professional short-seller, was on the board of the company that was the most shorted stock in the market.”

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Would it surprise you to learn that this account, which may have accepted money from a Hong Kong hedge fund to smear a company, associates with members of TSLAQ?

But I’m sure TSLAQ accounts have never done anything like that… right?

“The reality is if enough of them pile on and write enough bad stuff, they can destroy companies. I watched it from the inside. They called our customers and they were making shit up,” bemoans Fichthorn, pointing specifically to a short-seller rumor that the FBI was at the company’s headquarters. It wasn’t. 

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Similar to TSLAQ’s attacks against prospective and current Tesla customers.

This is some dirty, dirty business. Some of the people involved in this stuff are extremely dangerous, because they know that they could potentially face criminal charges if people knew what they were doing.

We’ll continue investigating TSLAQ short sellers until they finally leave us alone. If I turn up dead under mysterious circumstances, investigate Aaron Greenspan and his TSLAQ associates. Look at the donors to his charity to build a list of suspects. They will do a good job hiding any evidence of their involvement, but don’t be fooled too easily. (I’m only half joking).

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