“Short Activism: The Rise in Anonymous Online Sh
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“Short Activism: The Rise in Anonymous Online Short Attacks”
https://corpgov.law.harvard.edu/2017/11/27/sh...t-attacks/
“Short Activism: The Rise in Anonymous Online Short Attacks”
note: bold/italics/red are my adds ...
In recent years, anonymous online hit pieces against public companies have become an increasingly common and effective form of short activism. Given their success in driving down stock prices, anonymous online short campaigns are likely here to stay. Anonymous online short attacks pose unique challenges to public companies. In order to defend successfully against anonymous online short attacks, public companies must have ready-to-execute plans in place—whether or not an online short attack appears imminent.
This post has five main sections: Section I discusses the rise in anonymous online attacks, Section II analyzes the effectiveness of short seller campaigns, Section III discusses how anonymous short attacks are waged, Section IV analyzes the challenges that anonymous online attacks pose for public companies, and Section V discusses different considerations in determining whether and how to respond to anonymous online attacks, and the strategic decisions required to successfully defend against them.
I. A New Breed of Short Activism: The Rise in Anonymous Online Short Attacks
Short seller activism is generally associated with prominent hedge funds and “celebrity” activists, such as David Einhorn and Bill Ackman. These short sellers often launch short attacks capitalizing on their notoriety and name recognition. [1] In recent years, however, a new breed of short activism has emerged: individuals who anonymously post negative research reports and articles about targeted public companies on widely followed online financial and research platforms, such as Seeking Alpha. According to Activist Insight, “activist short sellers are more often than not anonymous entities and funds.” [2]
Unlike the typical investor, a short seller seeks to take advantage of bear markets and profit from the decline in a company’s stock price. Short attacks are most effective where long investors lose confidence in their own appraisal of a stock’s value. This most commonly happens when a company’s financial position is complicated, when a new industry or product is being valued, when a government investigation is disclosed to or suspected by the market, or when other forces create ambiguity in the valuation.
Under current regulations, investors are not required to disclose short positions, making it difficult for companies and the market to track the existence of short sellers and monitor their activity. [3] The inherent anonymity of the internet exacerbates these challenges. As long as online short activists have access to the internet, they can theoretically launch a short attack that reaches millions of investors from anywhere at any time—and with little accountability. [4]
Until recently, the market dismissed anonymous short activists as illegitimate and not credible, as “real” short sellers with legitimate claims do not hide behind fake pseudonyms and aliases. [5] That premise has been proven wrong . Anonymous short sellers can be, and often are, disguised prominent hedge funds and individuals. For example, in December 2015, a short seller using the pseudonym “Investors for Truth” published an anonymous report about United Development Funding IV (“UDF”) on the investing websites Harvest Exchange and Value Investors Club, causing UDF’s stock price to plummet 35%. After much speculation, Kyle Bass, founder of Hayman Capital Manager, eventually claimed responsibility for the articles posted under the pseudonym Investors for Truth. [6] Such prominent short activists have incentive to post under pseudonyms in order to protect against litigation and reputational risk in the event of public or company backlash, and to protect their bets against premature public exposure.
II. Anonymous Short Attacks Can Send Stock Prices Spiraling
Anonymous online attacks can have an immediate negative impact on a target company’s stock price and generate market momentum for prolonged periods of time—or, at the very least, trigger serious stock volatility. The following examples demonstrate just how devastating and long-standing such an attack can be.
1. Banc of California: Short Attacks Cause Stock Price to Plummet 29%
In October 2016, an individual using the pseudonym “Aurelius” posted an article on Seeking Alpha about the Banc of California. Among other things, Aurelius alleged that the company’s directors had ties to an imprisoned con man. [7] The mainstream media picked up the story, lending credibility to Aurelius’s allegations. The next day, Banc of California’s stock plummeted 29% to its lowest stock price since 2002. [8] In response, the company sent an unsuccessful request to Seeking Alpha to take the article down and issued a press release announcing that it was conducting an internal investigation. Even though the company’s internal investigation revealed no evidence of wrongdoing, the company’s CEO and Vice Chairman have since resigned, and the company announced that it is under investigation by the SEC regarding the statements made in the press release, which it now admits were inaccurate. [9]
2. Bank of the Internet: Prolonged Short Attacks Bring Stock Price Down 37%
Anonymous online short attacks can also subject target companies to years of stock price volatility. For nearly three-and-a-half years, the Bank of the Internet (“BofI”) has been, and still is, the target of short attacks brought by several different individuals posting anonymously on Seeking Alpha, as well as known short sellers Kerrisdale Capital Management and Citron Research. Between March and October 2014, after a series of anonymous negative articles, BofI’s stock dropped approximately 37% to $16.38. Since that time, BofI has been the target of no less than 30 short seller pieces on Seeking Alpha by several known short sellers and anonymous bloggers. BofI’s trouble did not end there. BofI is currently embroiled in two high-profile lawsuits and has confirmed that enforcement agencies have inquired about the allegations. [10] In response, BofI’s CEO has promised to hold the anonymous short sellers responsible for their share of BofI’s stock price volatility, [11] but has been unable to do so—in part, because BofI has been unable to unmask the identities of its anonymous attackers. [12]
3. Eros International: Short Attacks Gain Momentum and Push Stock Price Down 50%
Eros International PLc (“Eros”), an Indian-based Bollywood filmmaker, has been the subject of short attacks since 2015. For example, Alpha Exposure, an anonymous short seller that primarily publishes its research on Seeking Alpha and Twitter, first targeted Eros on October 30 and November 10, 2015. Alpha Exposure accused the company of, among other things, pervasive accounting fraud and questionable related-party transactions. [13] In response, the company issued a press release denying Alpha Exposure’s allegations on November 12, 2015. [14]
Alpha Exposure’s allegations gained momentum, prompting attacks from other short sellers and causing at least one investor to publicly demand that the company overhaul its board and improve corporate governance. Despite the company’s efforts, short sellers have continued their attack throughout 2017, with Alpha Exposure most recently releasing a short report on August 14, 2017, claiming that the company is facing bankruptcy. [15] On October 3, 2017, Eros sued a number of hedge funds and anonymous short sellers under the name “John Doe” for trade libel, defamation, and civil conspiracy, among other claims. Eros announced that “the filing of th[e] lawsuit marks another important step in Eros’ vigorous defense of itself and the company’s stakeholders.” [16] Since October 2015, Eros shares have fallen approximately 50%.
4. Akoustis Technologies: Stock Price Down 43% and Still Falling
Most recently, Akoustis Technologies (“Akoustis”), a U.S.-based electronics company, has come under attack by an anonymous short seller Mako Research and a short seller blog called The Street Sweeper. In April 2017, The Street Sweeper published two short reports, claiming that the company was a pump-and-dump scheme with “no meaningful revenue” and disclosing that it informed the SEC of the Company’s multiple inconsistent SEC filings. [17] In August 2017, Mako Research published an article on Seeking Alpha, alleging that the company’s core patents are “obsolete” and predicting that it had a 96% downside. [18] Akoustis shares traded down almost 5% in the hour after Mako Research published its report, and have fallen approximately 43% since The Street Sweeper’s first reports in April 2017. [19]
III. The Online World of Anonymous Short Attack Campaigns
Online short sellers often post articles and research from a crowdsourcing research platform, such as Seeking Alpha or Scribd, that they consider “home.” These platforms offer ready-made audiences that short activists can reach immediately upon posting an article, and have become sources of financial information for institutional and individual investors alike.
Many online short activists have developed significant followings and generated credible track records. For example, anonymous blogger The Pump Stopper has approximately 1,700 followers on Seeking Alpha, and has launched approximately 24 short campaigns with an average campaign return of -39.80%. Likewise, Alpha Exposure has approximately 1,800 followers on Seeking Alpha, and has launched approximately 25 short campaigns with an average campaign return of -33.90%. In addition to using research platforms such as Seeking Alpha, online short activists also frequently create their own websites and use Twitter to further disseminate their short ideas. This allows short sellers to share their investment ideas instantaneously with potentially millions of people. [20] At the same time, online short activists—like their mainstream counterparts—turn to other methods, including whistleblowing to regulators or tipping off the mainstream media.
IV. Challenges in Defending Against Anonymous Online Short Attacks
Anonymous online short attacks create a number of challenges for public companies, primarily because public companies often struggle to unmask their short attackers. This makes it difficult to mount an effective counterattack or engage the activist to reach a private resolution. As Eros’s CFO aptly put it, “It feels like we’re shadowboxing …. We’re fighting a ghost.” [21] Public companies face the following additional challenges:
First, online short attacks generally give public companies no advance notice, in part because their success largely turns on catching companies off guard. As a result, online short sellers are unlikely to privately engage companies before going public.
Second, the company bears a high burden of proof in refuting a short seller’s allegations. A short seller need only prove that a fraction of the allegations is true, while the company must disprove each and every allegation.
Third, the mere existence of short seller campaigns may prompt federal agencies to investigate the allegations made by anonymous online short attackers. [22] In a recent statement, for example, BofI’s Chief Legal Officer refused to confirm reported investigations by the SEC, DOJ, Treasury Department, and OCC into potential money-laundering, but admitted that “[d]ue to false allegations made in short seller hit pieces and pending litigation, agencies routinely ask questions to assure themselves that such allegations are without basis.” [23] Such inquiries, even if eventually dropped by the government, distract management and divert company resources.
Last, public companies have been largely unsuccessful in litigating claims against anonymous short attackers for libel, defamation, and/or stock manipulation, in large part because these claims implicate First Amendment rights. [24] For example, BofI unsuccessfully moved to compel compliance with two subpoenas to unmask “Aurelius,” an online blogger who has posted 13 short reports on BofI since October 2015. In each instance, the Court found that BofI failed to make a showing necessary to overcome Aurelius’s strong First Amendment rights to anonymous speech. [25]
Given the difficulty in defending against online short attacks, public companies are exploring novel defensive strategies, such as alliances with other companies to promote sharing of crisis-management advice [26] and entering into consulting engagements with known short sellers in order to better understand how anonymous short sellers develop and share their opinions online. [27]
V. Begin Preparation Now and Have a Response Plan in Place
As the above challenges demonstrate, it is critically important to have a response plan in place, even if there is no sign of an online short attack. Short sellers generally try to evade detection precisely so that they can catch the company off guard. Once short sellers post their hit pieces online, the damage can be extensive and immediate, regardless of whether or not the allegations have any merit.
There a number of different options in responding to an online short attack. First, the company can do nothing. This strategy may be effective if the attacker lacks credibility or if a company is confident in its valuation such that the market quickly corrects itself and dismisses the attacker’s allegations. Moreover, the company may avoid drawing further attention to the attacker’s campaign. Second, the company may offer a limited response—attacking either the merits of the short seller’s allegations or the credibility of the short seller itself—to address investor concerns and maintain market confidence. Last, the company can fully engage the attacker, such as by offering point-by-point rebuttals to the attacker’s allegations or initiating litigation. Regardless of the response, the company should be prepared to assess its strategic options and react immediately by considering the following steps:
Pre-Attack Preparation. Monitor the internet for unusual online activity, particularly financial blogs like Seeking Alpha, as well as unusual short activity and media attention. As a general defense to activism, it is also important to develop strong shareholder engagement and communications programs, and demonstrate responsiveness to shareholder concerns. Ongoing shareholder engagement makes shareholders more likely to be supportive of management and receptive to their positions in the event of a short attack. [28]
Identify Your Attacker. The first and most important step in responding to an anonymous online attack is to identify your attacker. This will help you determine whether a response is necessary or appropriate, and will influence how you frame your response. Possible steps to take to identify your attacker include:
Engage a forensic analyst firm. Online attackers almost always leave an electronic footprint, such as an IP address that tracks the computer to a physical address.
Review FOIA requests submitted to government agencies about the company. This creates a short list of individuals focusing on the company to determine, for example, whether any federal agencies are investigating the company, which a short seller may use to buttress claims of the company’s wrongdoing. [29]
Consider whether the attacker is an insider. If the allegations rely on or convey inside information, your attacker may be a current or former employee or may be in contact with one, narrowing the pool of potential attackers.
Analyze the Attacker’s “Playbook.” Even if you are unable to unmask your attacker, the attacker may have an online track record that enables you to assess their motives and anticipate their next move. For example, how often does the author post articles, are the posts generally tied to the timing of public announcements or filings, and how much traction did the last article or campaign generate? This may also enable the company to undermine the attacker’s credibility and his or her allegations.
Decide Whether to Engage. The natural urge is to respond immediately and forcefully, with a blanket denial in order to reassure stockholders and protect the share price. This is often the wrong approach. Publicly responding to the attack may only legitimize the short seller and his or her allegations. It also guarantees that news of attack reaches a larger audience beyond the short seller’s followers. If the company does not respond, the short seller’s campaign may not gain momentum or may be more likely to stay confined to online mediums. On the other hand, a concise persuasive rebuttal may prevent the attack from gaining momentum or fueling speculation. In determining whether to respond, the company should consider factors such as (1) the company’s vulnerabilities, (2) merits of the allegations, and (3) the track record and credibility of the attacker.
Framing the Response. If you decide to engage the attacker, the response should be concise and deliberate in order to regain control of the dialogue, particularly if you do not know who your attacker is or whether any of their allegations have merit. The response should address and conclusively refute each allegation.
Choosing the Right Channel. There are a number of mediums—varying in terms of aggression and publicity—by which to defend against anonymous short seller attacks. These include (1) issuing a public press release or public statement, (2) addressing the allegations during a public conference or earnings call, (3) posting a statement on the company’s website, (4) announcing the engagement of an independent law firm to investigate the attacker’s allegations, (5) initiating litigation by bringing claims such as libel, defamation, and stock manipulation, and (6) informing federal agencies of any illegal activity, if applicable. In some cases, it may make sense to get out in front of bad news—before short sellers attack—and heavily contextualize the story to control the narrative and prevent market overreaction. It is particularly important to weigh the risks and benefits of initiating litigation. While it may demonstrate the company’s depth of conviction, litigating claims against anonymous short activists will likely be costly, time-intensive, and may publicize the short seller’s allegations. In addition, the company should consider the practical implications of bringing a public lawsuit, such as the risk that sensitive company information would be revealed in public filings and during the course of discovery. Contacting federal agencies may prompt an investigation into the short seller’s allegations, drawing additional unwanted attention and scrutiny. It is therefore critically important to be absolutely certain that the short seller’s allegations do not have any merit and be prepared for a potential follow-up investigation. Companies often employ multiple defenses to defend against short campaigns. For example, Eros chose to immediately respond and refute Alpha Exposure’s attack and engaged an independent law firm to assist in its internal investigation. The law firm ultimately cleared the company of any wrongdoing. Similarly, BofI has emphatically refuted short attack allegations during several earnings calls and has aggressively sought to unmask the identities of its attackers by issuing subpoenas in connection with court proceedings.
Conclusion
Anonymous short attacks have the ability to cripple the stock price of a public company—whether large or small—or, at the very least, cause stock volatility for months or even years. This is particularly true as certain anonymous short sellers, such as Alpha Exposure and The Pump Stopper, gain legitimacy with established short campaign “track records” and broader followings, enabling them to more easily move the market and undermine investor confidence. As anonymous short campaigns become both more common and more effective, public companies should have a defense plan in place and must be prepared to react immediately.
Endnotes
1Steven Davidoff Solomon, Ackman, Herbalife and Celebrity Short-Sellers, New York Times (Jan. 1, 2013), available at: https://dealbook.nytimes.com/2013/01/01/ackma...lers/?_r=0.
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2For example, in 2013, there were only four new anonymous activist short sellers compared to 12 new activist funds. In 2016, there were 12 new anonymous activist short sellers, roughly the same number of new activist funds. Activist Investing Annual Review 2017, p. 34 (Feb. 2017), available at: https://www.srz.com/images/content/1/4/v2/147...w-2017.pdf.
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3Under current federal securities laws, investors must disclose when they acquire a five percent or greater long position in a publicly traded company, and funds must disclose long positions on a quarterly basis to the Securities Exchange Commission (the “SEC”). See 15 U.S.C. § 78m(d); 17 CFR § 240.13f-1. Despite repeated requests, the SEC has declined to promulgate rules requiring disclosure of short positions similar to those governing long positions. See, e.g., Letter from Edward S. Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, Nasdaq, Inc. to Brent J. Fields, Secretary, SEC, dated Dec. 7, 2015, available at: https://www.sec.gov/rules/petitions/2015/petn4-691.pdf (requesting “swift action to promulgate rules to require public disclosure by investors of short positions in parity with the disclosure regime applicable to long positions”).
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4Although outside the scope of this article, anonymous online short sellers may also use the internet to launch unsubstantiated smear campaigns and illegal “short and distort” or other stock manipulation schemes.
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5See, e.g., Keith Fitzgerald, The Short Attack on Ekso Bionics and How to Handle It, Nasdaq (June 3, 2015), available at: www.nasdaq.com/article/the-short-attack-on-ekso-bionics-otc-ekso-stock-and-how-to-handle-it-cm483956.
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6Julia LaRoche, An Anonymous short-seller called a company a ‘Ponzi-like real-estate scheme’ and the stock has crashed 65%, Business Insider (Dec. 11, 2015), available at: http://www.businessinsider.com/short-seller-r...t-2015-12; Julia LaRoche, Kyle Bass is going to war with his latest short target, Business Insider (Feb. 5, 2016), available at: http://www.businessinsider.com/kyle-bass-goes...ng-2016-2; .
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7Aurelius, BANC: Extensive Ties to Notorious Fraudster Jason Galanis Make Shares Un-Investible (Oct. 18. 2016), Seeking Alpha, available at: https://seekingalpha.com/instablog/38682326-a...investible.
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8Zeke Faux, Banc of California Drops Amid Accusations From Short Seller, Bloomberg (Oct. 18, 2016), available at: https://www.bloomberg.com/news/articles/2016-...to-con-man.
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9Jennifer Surane and Zeke Faux, Banc of California Tumbles as CEO Resigns, SEC Begins Probe, Bloomberg (Jan. 23, 2017), available at: https://www.bloomberg.com/news/articles/2017-...d-chairman.
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10Kevin Dugan, Feds Probe Bank of Internet for Possible Money Laundering, New York Post (March 31, 2017), available at: http://nypost.com/2017/03/31/feds-probe-bank-...aundering/.
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11BofI Conference Call Transcript (Oct. 14, 2015), available at: https://www.sec.gov/Archives/edgar/data/12997...ript20.htm.
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12See Section IV for a discussion of BofI’s attempts to unmask its anonymous online short attackers since 2015.
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13Alpha Exposure, Unlike the Name, Investors Should Not Love Eros, Seeking Alpha (Oct. 30, 2015), available at: https://seekingalpha.com/article/3621886-unli...love-eros; Alpha Exposure, Eros: Return of the Short Seller, Seeking Alpha (Nov. 10, 2015), available at https://seekingalpha.com/article/3671166-eros...eller-2015.
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14Eros International PLc, Eros Says Content is at the Core of Their Business and Baseless and Misleading Allegations Don’t Change Their Fundamentals, Erosplc.com (Nov. 12, 2015), available at: https://erosplc.gcs-web.com/news-releases/new...seless-and.
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15Alpha Exposure, Eros: Roll the Credits, Seeking Alpha (Aug. 14, 2017), available at: https://seekingalpha.com/article/4098646-eros-roll-credits.
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16Eros International Plc Commences Legal Action Against Market Manipulation, Business Wire (Oct. 3, 2017), available at: http://www.businesswire.com/news/home/20171003005903/en/.
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17Sonya Colberg, Akoustis Technologies, Inc. (AKTS): Deal Guy, Paid Promotions, Discrepancies and Other Risks, TheStreetSweeper (Apr. 11, 2017), available at: http://www.thestreetsweeper.org/undersurveill...ther_Risks.
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18Mako Research, Akoustis: Strong Sell On Product Obsolescence, Paid Stock Promoters, And Ex-Gottbetter Team Involvement, 96% Downside, Seeking Alpha (Aug. 9, 2017), available at: https://seekingalpha.com/article/4096904-akou...nvolvement.
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19Mako Announces a New Short Target, Activist Insight (Aug. 9, 2017), available at: https://www.activistinsight.com/members/viewn...amp;mode=4.
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20Trista Kelley, Hated Short Sellers Get Bold in Anonymous Age of Twitter, Bloomberg (May 5, 2015), available at: http://bloomberg/com/news/articles/2015-05-05...witter-age.
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21David Lieberman, Bollywood’s Eros International Fights To Recover From Anonymous Fraud Claims, Deadline (Nov. 20, 2015), available at: http://deadline.com/2015/11/eros-internationa...201629162/.
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22By contrast, in the absence of egregious and blatant illegal conduct, the SEC will generally not bring enforcement actions against short sellers. Charles F. Walker and Colin D. Forbes, SEC Enforcement Actions and Issuer Litigation in the Context of a “Short Attack,” The Business Lawyer, Vol. 68, 689, 713 (May 2013), available at: https://files.skadden.com/sites%2Fdefault%2Ff...y_2013.pdf. A series of recent SEC enforcement actions, however, suggest that federal regulators regularly monitor online research platforms, such as Seeking Alpha, and may be more willing to bring suit against individual bloggers. For example, on April 10, 2017, the SEC brought 27 enforcement actions against various online bloggers who wrote anonymous bullish articles on financial blogs, but failed to disclose that they were paid to do so by vendors hired by public companies. SEC Press Release, Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, dated Apr. 10, 2017, available at: https://www.sec.gov/news/press-release/2017-79.
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23Kevin Dugan, Feds Probe Bank of Internet for Possible Money Laundering, New York Post (March 31, 2017), available at: http://nypost.com/2017/03/31/feds-probe-bank-...aundering/.
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24See e.g., Silvercorp Metals Inc. v. Anthion Mgt. LLC, No. 150374/2011, 2012 WL 356992, at *7-16 (dismissing company’s defamation suit against anonymous short seller “Alfred Little” on the grounds that the allegedly defamatory statements were constitutionally protected free speech).
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25Aurelius v. BofI Federal Bank, Case No. 2:16-MC-0071 (C.D. Cal. 2016); BofI Federal Bank v. Seeking Alpha, Inc., 1:16-mn-00025 (S.D.N.Y. 2016).
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26For example, Fullshare, a Hong Kong-based company being targeted by short sellers, unveiled an innovative defense plan, called the “anti-malicious short selling alliance.” The purpose of the “alliance” is to unite companies when short sellers attack and promote sharing of crisis-management advice. Lisa Pham and Moxy Ying, Hong Kong’s Short-Seller Invasion Spurs Unusual Defense Plan, Bloomberg (May 22, 2017), available at: https://www.bloomberg.com/news/articles/2017-...fense-plan.
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27For example, BofI’s counsel reached out to Marc Cohodes, a renowned short seller, to engage him as a consultant in order to better understand short seller campaigns, and specifically campaigns waged by short sellers posting under pseudonyms on Seeking Alpha. Not only did Cohodes decline BofI’s offer, but he also took to Twitter and exposed BofI’s attempt to buy him. Owen Davis, Short Sellers: If You Can’t Beat ‘Em, Give ‘Em $15,000 An Hour Consulting Gigs to Turn Rat, DealBreaker (June 28, 2017), available at: https://dealbreaker.com/2017/06/short-sellers...-turn-rat/.
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28See Tarun Mehta, Shareholder Engagement: Maximizing the Shareholder Relationship, ISS Corporate Services, available at: https://www.issgovernance.com/file/publicatio...l_13.3.pdf.
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29See, e.g., Aparecium Research, Axon Enterprise: Questionable Earnings, Possible SEC Scrutiny And Material Weaknesses In Financial Reporting (Oct. 18, 2017), available at: https://seekingalpha.com/embargo/4114102 (“We filed a FOIA request with the SEC to collect any documents related to current or past investigations of Axon by the SEC. . . . We believe that the response letter indicates a possibility that Axon is currently being investigated by the SEC, and – given the questions in the 2015 review – it is reasonably possible that it relates to revenue recognition policies.”).
original post and link courtesy of slcimmuno
https://corpgov.law.harvard.edu/2017/11/27/sh...t-attacks/
“Short Activism: The Rise in Anonymous Online Short Attacks”
note: bold/italics/red are my adds ...
In recent years, anonymous online hit pieces against public companies have become an increasingly common and effective form of short activism. Given their success in driving down stock prices, anonymous online short campaigns are likely here to stay. Anonymous online short attacks pose unique challenges to public companies. In order to defend successfully against anonymous online short attacks, public companies must have ready-to-execute plans in place—whether or not an online short attack appears imminent.
This post has five main sections: Section I discusses the rise in anonymous online attacks, Section II analyzes the effectiveness of short seller campaigns, Section III discusses how anonymous short attacks are waged, Section IV analyzes the challenges that anonymous online attacks pose for public companies, and Section V discusses different considerations in determining whether and how to respond to anonymous online attacks, and the strategic decisions required to successfully defend against them.
I. A New Breed of Short Activism: The Rise in Anonymous Online Short Attacks
Short seller activism is generally associated with prominent hedge funds and “celebrity” activists, such as David Einhorn and Bill Ackman. These short sellers often launch short attacks capitalizing on their notoriety and name recognition. [1] In recent years, however, a new breed of short activism has emerged: individuals who anonymously post negative research reports and articles about targeted public companies on widely followed online financial and research platforms, such as Seeking Alpha. According to Activist Insight, “activist short sellers are more often than not anonymous entities and funds.” [2]
Unlike the typical investor, a short seller seeks to take advantage of bear markets and profit from the decline in a company’s stock price. Short attacks are most effective where long investors lose confidence in their own appraisal of a stock’s value. This most commonly happens when a company’s financial position is complicated, when a new industry or product is being valued, when a government investigation is disclosed to or suspected by the market, or when other forces create ambiguity in the valuation.
Under current regulations, investors are not required to disclose short positions, making it difficult for companies and the market to track the existence of short sellers and monitor their activity. [3] The inherent anonymity of the internet exacerbates these challenges. As long as online short activists have access to the internet, they can theoretically launch a short attack that reaches millions of investors from anywhere at any time—and with little accountability. [4]
Until recently, the market dismissed anonymous short activists as illegitimate and not credible, as “real” short sellers with legitimate claims do not hide behind fake pseudonyms and aliases. [5] That premise has been proven wrong . Anonymous short sellers can be, and often are, disguised prominent hedge funds and individuals. For example, in December 2015, a short seller using the pseudonym “Investors for Truth” published an anonymous report about United Development Funding IV (“UDF”) on the investing websites Harvest Exchange and Value Investors Club, causing UDF’s stock price to plummet 35%. After much speculation, Kyle Bass, founder of Hayman Capital Manager, eventually claimed responsibility for the articles posted under the pseudonym Investors for Truth. [6] Such prominent short activists have incentive to post under pseudonyms in order to protect against litigation and reputational risk in the event of public or company backlash, and to protect their bets against premature public exposure.
II. Anonymous Short Attacks Can Send Stock Prices Spiraling
Anonymous online attacks can have an immediate negative impact on a target company’s stock price and generate market momentum for prolonged periods of time—or, at the very least, trigger serious stock volatility. The following examples demonstrate just how devastating and long-standing such an attack can be.
1. Banc of California: Short Attacks Cause Stock Price to Plummet 29%
In October 2016, an individual using the pseudonym “Aurelius” posted an article on Seeking Alpha about the Banc of California. Among other things, Aurelius alleged that the company’s directors had ties to an imprisoned con man. [7] The mainstream media picked up the story, lending credibility to Aurelius’s allegations. The next day, Banc of California’s stock plummeted 29% to its lowest stock price since 2002. [8] In response, the company sent an unsuccessful request to Seeking Alpha to take the article down and issued a press release announcing that it was conducting an internal investigation. Even though the company’s internal investigation revealed no evidence of wrongdoing, the company’s CEO and Vice Chairman have since resigned, and the company announced that it is under investigation by the SEC regarding the statements made in the press release, which it now admits were inaccurate. [9]
2. Bank of the Internet: Prolonged Short Attacks Bring Stock Price Down 37%
Anonymous online short attacks can also subject target companies to years of stock price volatility. For nearly three-and-a-half years, the Bank of the Internet (“BofI”) has been, and still is, the target of short attacks brought by several different individuals posting anonymously on Seeking Alpha, as well as known short sellers Kerrisdale Capital Management and Citron Research. Between March and October 2014, after a series of anonymous negative articles, BofI’s stock dropped approximately 37% to $16.38. Since that time, BofI has been the target of no less than 30 short seller pieces on Seeking Alpha by several known short sellers and anonymous bloggers. BofI’s trouble did not end there. BofI is currently embroiled in two high-profile lawsuits and has confirmed that enforcement agencies have inquired about the allegations. [10] In response, BofI’s CEO has promised to hold the anonymous short sellers responsible for their share of BofI’s stock price volatility, [11] but has been unable to do so—in part, because BofI has been unable to unmask the identities of its anonymous attackers. [12]
3. Eros International: Short Attacks Gain Momentum and Push Stock Price Down 50%
Eros International PLc (“Eros”), an Indian-based Bollywood filmmaker, has been the subject of short attacks since 2015. For example, Alpha Exposure, an anonymous short seller that primarily publishes its research on Seeking Alpha and Twitter, first targeted Eros on October 30 and November 10, 2015. Alpha Exposure accused the company of, among other things, pervasive accounting fraud and questionable related-party transactions. [13] In response, the company issued a press release denying Alpha Exposure’s allegations on November 12, 2015. [14]
Alpha Exposure’s allegations gained momentum, prompting attacks from other short sellers and causing at least one investor to publicly demand that the company overhaul its board and improve corporate governance. Despite the company’s efforts, short sellers have continued their attack throughout 2017, with Alpha Exposure most recently releasing a short report on August 14, 2017, claiming that the company is facing bankruptcy. [15] On October 3, 2017, Eros sued a number of hedge funds and anonymous short sellers under the name “John Doe” for trade libel, defamation, and civil conspiracy, among other claims. Eros announced that “the filing of th[e] lawsuit marks another important step in Eros’ vigorous defense of itself and the company’s stakeholders.” [16] Since October 2015, Eros shares have fallen approximately 50%.
4. Akoustis Technologies: Stock Price Down 43% and Still Falling
Most recently, Akoustis Technologies (“Akoustis”), a U.S.-based electronics company, has come under attack by an anonymous short seller Mako Research and a short seller blog called The Street Sweeper. In April 2017, The Street Sweeper published two short reports, claiming that the company was a pump-and-dump scheme with “no meaningful revenue” and disclosing that it informed the SEC of the Company’s multiple inconsistent SEC filings. [17] In August 2017, Mako Research published an article on Seeking Alpha, alleging that the company’s core patents are “obsolete” and predicting that it had a 96% downside. [18] Akoustis shares traded down almost 5% in the hour after Mako Research published its report, and have fallen approximately 43% since The Street Sweeper’s first reports in April 2017. [19]
III. The Online World of Anonymous Short Attack Campaigns
Online short sellers often post articles and research from a crowdsourcing research platform, such as Seeking Alpha or Scribd, that they consider “home.” These platforms offer ready-made audiences that short activists can reach immediately upon posting an article, and have become sources of financial information for institutional and individual investors alike.
Many online short activists have developed significant followings and generated credible track records. For example, anonymous blogger The Pump Stopper has approximately 1,700 followers on Seeking Alpha, and has launched approximately 24 short campaigns with an average campaign return of -39.80%. Likewise, Alpha Exposure has approximately 1,800 followers on Seeking Alpha, and has launched approximately 25 short campaigns with an average campaign return of -33.90%. In addition to using research platforms such as Seeking Alpha, online short activists also frequently create their own websites and use Twitter to further disseminate their short ideas. This allows short sellers to share their investment ideas instantaneously with potentially millions of people. [20] At the same time, online short activists—like their mainstream counterparts—turn to other methods, including whistleblowing to regulators or tipping off the mainstream media.
IV. Challenges in Defending Against Anonymous Online Short Attacks
Anonymous online short attacks create a number of challenges for public companies, primarily because public companies often struggle to unmask their short attackers. This makes it difficult to mount an effective counterattack or engage the activist to reach a private resolution. As Eros’s CFO aptly put it, “It feels like we’re shadowboxing …. We’re fighting a ghost.” [21] Public companies face the following additional challenges:
First, online short attacks generally give public companies no advance notice, in part because their success largely turns on catching companies off guard. As a result, online short sellers are unlikely to privately engage companies before going public.
Second, the company bears a high burden of proof in refuting a short seller’s allegations. A short seller need only prove that a fraction of the allegations is true, while the company must disprove each and every allegation.
Third, the mere existence of short seller campaigns may prompt federal agencies to investigate the allegations made by anonymous online short attackers. [22] In a recent statement, for example, BofI’s Chief Legal Officer refused to confirm reported investigations by the SEC, DOJ, Treasury Department, and OCC into potential money-laundering, but admitted that “[d]ue to false allegations made in short seller hit pieces and pending litigation, agencies routinely ask questions to assure themselves that such allegations are without basis.” [23] Such inquiries, even if eventually dropped by the government, distract management and divert company resources.
Last, public companies have been largely unsuccessful in litigating claims against anonymous short attackers for libel, defamation, and/or stock manipulation, in large part because these claims implicate First Amendment rights. [24] For example, BofI unsuccessfully moved to compel compliance with two subpoenas to unmask “Aurelius,” an online blogger who has posted 13 short reports on BofI since October 2015. In each instance, the Court found that BofI failed to make a showing necessary to overcome Aurelius’s strong First Amendment rights to anonymous speech. [25]
Given the difficulty in defending against online short attacks, public companies are exploring novel defensive strategies, such as alliances with other companies to promote sharing of crisis-management advice [26] and entering into consulting engagements with known short sellers in order to better understand how anonymous short sellers develop and share their opinions online. [27]
V. Begin Preparation Now and Have a Response Plan in Place
As the above challenges demonstrate, it is critically important to have a response plan in place, even if there is no sign of an online short attack. Short sellers generally try to evade detection precisely so that they can catch the company off guard. Once short sellers post their hit pieces online, the damage can be extensive and immediate, regardless of whether or not the allegations have any merit.
There a number of different options in responding to an online short attack. First, the company can do nothing. This strategy may be effective if the attacker lacks credibility or if a company is confident in its valuation such that the market quickly corrects itself and dismisses the attacker’s allegations. Moreover, the company may avoid drawing further attention to the attacker’s campaign. Second, the company may offer a limited response—attacking either the merits of the short seller’s allegations or the credibility of the short seller itself—to address investor concerns and maintain market confidence. Last, the company can fully engage the attacker, such as by offering point-by-point rebuttals to the attacker’s allegations or initiating litigation. Regardless of the response, the company should be prepared to assess its strategic options and react immediately by considering the following steps:
Pre-Attack Preparation. Monitor the internet for unusual online activity, particularly financial blogs like Seeking Alpha, as well as unusual short activity and media attention. As a general defense to activism, it is also important to develop strong shareholder engagement and communications programs, and demonstrate responsiveness to shareholder concerns. Ongoing shareholder engagement makes shareholders more likely to be supportive of management and receptive to their positions in the event of a short attack. [28]
Identify Your Attacker. The first and most important step in responding to an anonymous online attack is to identify your attacker. This will help you determine whether a response is necessary or appropriate, and will influence how you frame your response. Possible steps to take to identify your attacker include:
Engage a forensic analyst firm. Online attackers almost always leave an electronic footprint, such as an IP address that tracks the computer to a physical address.
Review FOIA requests submitted to government agencies about the company. This creates a short list of individuals focusing on the company to determine, for example, whether any federal agencies are investigating the company, which a short seller may use to buttress claims of the company’s wrongdoing. [29]
Consider whether the attacker is an insider. If the allegations rely on or convey inside information, your attacker may be a current or former employee or may be in contact with one, narrowing the pool of potential attackers.
Analyze the Attacker’s “Playbook.” Even if you are unable to unmask your attacker, the attacker may have an online track record that enables you to assess their motives and anticipate their next move. For example, how often does the author post articles, are the posts generally tied to the timing of public announcements or filings, and how much traction did the last article or campaign generate? This may also enable the company to undermine the attacker’s credibility and his or her allegations.
Decide Whether to Engage. The natural urge is to respond immediately and forcefully, with a blanket denial in order to reassure stockholders and protect the share price. This is often the wrong approach. Publicly responding to the attack may only legitimize the short seller and his or her allegations. It also guarantees that news of attack reaches a larger audience beyond the short seller’s followers. If the company does not respond, the short seller’s campaign may not gain momentum or may be more likely to stay confined to online mediums. On the other hand, a concise persuasive rebuttal may prevent the attack from gaining momentum or fueling speculation. In determining whether to respond, the company should consider factors such as (1) the company’s vulnerabilities, (2) merits of the allegations, and (3) the track record and credibility of the attacker.
Framing the Response. If you decide to engage the attacker, the response should be concise and deliberate in order to regain control of the dialogue, particularly if you do not know who your attacker is or whether any of their allegations have merit. The response should address and conclusively refute each allegation.
Choosing the Right Channel. There are a number of mediums—varying in terms of aggression and publicity—by which to defend against anonymous short seller attacks. These include (1) issuing a public press release or public statement, (2) addressing the allegations during a public conference or earnings call, (3) posting a statement on the company’s website, (4) announcing the engagement of an independent law firm to investigate the attacker’s allegations, (5) initiating litigation by bringing claims such as libel, defamation, and stock manipulation, and (6) informing federal agencies of any illegal activity, if applicable. In some cases, it may make sense to get out in front of bad news—before short sellers attack—and heavily contextualize the story to control the narrative and prevent market overreaction. It is particularly important to weigh the risks and benefits of initiating litigation. While it may demonstrate the company’s depth of conviction, litigating claims against anonymous short activists will likely be costly, time-intensive, and may publicize the short seller’s allegations. In addition, the company should consider the practical implications of bringing a public lawsuit, such as the risk that sensitive company information would be revealed in public filings and during the course of discovery. Contacting federal agencies may prompt an investigation into the short seller’s allegations, drawing additional unwanted attention and scrutiny. It is therefore critically important to be absolutely certain that the short seller’s allegations do not have any merit and be prepared for a potential follow-up investigation. Companies often employ multiple defenses to defend against short campaigns. For example, Eros chose to immediately respond and refute Alpha Exposure’s attack and engaged an independent law firm to assist in its internal investigation. The law firm ultimately cleared the company of any wrongdoing. Similarly, BofI has emphatically refuted short attack allegations during several earnings calls and has aggressively sought to unmask the identities of its attackers by issuing subpoenas in connection with court proceedings.
Conclusion
Anonymous short attacks have the ability to cripple the stock price of a public company—whether large or small—or, at the very least, cause stock volatility for months or even years. This is particularly true as certain anonymous short sellers, such as Alpha Exposure and The Pump Stopper, gain legitimacy with established short campaign “track records” and broader followings, enabling them to more easily move the market and undermine investor confidence. As anonymous short campaigns become both more common and more effective, public companies should have a defense plan in place and must be prepared to react immediately.
Endnotes
1Steven Davidoff Solomon, Ackman, Herbalife and Celebrity Short-Sellers, New York Times (Jan. 1, 2013), available at: https://dealbook.nytimes.com/2013/01/01/ackma...lers/?_r=0.
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2For example, in 2013, there were only four new anonymous activist short sellers compared to 12 new activist funds. In 2016, there were 12 new anonymous activist short sellers, roughly the same number of new activist funds. Activist Investing Annual Review 2017, p. 34 (Feb. 2017), available at: https://www.srz.com/images/content/1/4/v2/147...w-2017.pdf.
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3Under current federal securities laws, investors must disclose when they acquire a five percent or greater long position in a publicly traded company, and funds must disclose long positions on a quarterly basis to the Securities Exchange Commission (the “SEC”). See 15 U.S.C. § 78m(d); 17 CFR § 240.13f-1. Despite repeated requests, the SEC has declined to promulgate rules requiring disclosure of short positions similar to those governing long positions. See, e.g., Letter from Edward S. Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, Nasdaq, Inc. to Brent J. Fields, Secretary, SEC, dated Dec. 7, 2015, available at: https://www.sec.gov/rules/petitions/2015/petn4-691.pdf (requesting “swift action to promulgate rules to require public disclosure by investors of short positions in parity with the disclosure regime applicable to long positions”).
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4Although outside the scope of this article, anonymous online short sellers may also use the internet to launch unsubstantiated smear campaigns and illegal “short and distort” or other stock manipulation schemes.
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5See, e.g., Keith Fitzgerald, The Short Attack on Ekso Bionics and How to Handle It, Nasdaq (June 3, 2015), available at: www.nasdaq.com/article/the-short-attack-on-ekso-bionics-otc-ekso-stock-and-how-to-handle-it-cm483956.
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6Julia LaRoche, An Anonymous short-seller called a company a ‘Ponzi-like real-estate scheme’ and the stock has crashed 65%, Business Insider (Dec. 11, 2015), available at: http://www.businessinsider.com/short-seller-r...t-2015-12; Julia LaRoche, Kyle Bass is going to war with his latest short target, Business Insider (Feb. 5, 2016), available at: http://www.businessinsider.com/kyle-bass-goes...ng-2016-2; .
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7Aurelius, BANC: Extensive Ties to Notorious Fraudster Jason Galanis Make Shares Un-Investible (Oct. 18. 2016), Seeking Alpha, available at: https://seekingalpha.com/instablog/38682326-a...investible.
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8Zeke Faux, Banc of California Drops Amid Accusations From Short Seller, Bloomberg (Oct. 18, 2016), available at: https://www.bloomberg.com/news/articles/2016-...to-con-man.
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9Jennifer Surane and Zeke Faux, Banc of California Tumbles as CEO Resigns, SEC Begins Probe, Bloomberg (Jan. 23, 2017), available at: https://www.bloomberg.com/news/articles/2017-...d-chairman.
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10Kevin Dugan, Feds Probe Bank of Internet for Possible Money Laundering, New York Post (March 31, 2017), available at: http://nypost.com/2017/03/31/feds-probe-bank-...aundering/.
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11BofI Conference Call Transcript (Oct. 14, 2015), available at: https://www.sec.gov/Archives/edgar/data/12997...ript20.htm.
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12See Section IV for a discussion of BofI’s attempts to unmask its anonymous online short attackers since 2015.
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13Alpha Exposure, Unlike the Name, Investors Should Not Love Eros, Seeking Alpha (Oct. 30, 2015), available at: https://seekingalpha.com/article/3621886-unli...love-eros; Alpha Exposure, Eros: Return of the Short Seller, Seeking Alpha (Nov. 10, 2015), available at https://seekingalpha.com/article/3671166-eros...eller-2015.
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14Eros International PLc, Eros Says Content is at the Core of Their Business and Baseless and Misleading Allegations Don’t Change Their Fundamentals, Erosplc.com (Nov. 12, 2015), available at: https://erosplc.gcs-web.com/news-releases/new...seless-and.
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15Alpha Exposure, Eros: Roll the Credits, Seeking Alpha (Aug. 14, 2017), available at: https://seekingalpha.com/article/4098646-eros-roll-credits.
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16Eros International Plc Commences Legal Action Against Market Manipulation, Business Wire (Oct. 3, 2017), available at: http://www.businesswire.com/news/home/20171003005903/en/.
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17Sonya Colberg, Akoustis Technologies, Inc. (AKTS): Deal Guy, Paid Promotions, Discrepancies and Other Risks, TheStreetSweeper (Apr. 11, 2017), available at: http://www.thestreetsweeper.org/undersurveill...ther_Risks.
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18Mako Research, Akoustis: Strong Sell On Product Obsolescence, Paid Stock Promoters, And Ex-Gottbetter Team Involvement, 96% Downside, Seeking Alpha (Aug. 9, 2017), available at: https://seekingalpha.com/article/4096904-akou...nvolvement.
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19Mako Announces a New Short Target, Activist Insight (Aug. 9, 2017), available at: https://www.activistinsight.com/members/viewn...amp;mode=4.
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20Trista Kelley, Hated Short Sellers Get Bold in Anonymous Age of Twitter, Bloomberg (May 5, 2015), available at: http://bloomberg/com/news/articles/2015-05-05...witter-age.
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21David Lieberman, Bollywood’s Eros International Fights To Recover From Anonymous Fraud Claims, Deadline (Nov. 20, 2015), available at: http://deadline.com/2015/11/eros-internationa...201629162/.
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22By contrast, in the absence of egregious and blatant illegal conduct, the SEC will generally not bring enforcement actions against short sellers. Charles F. Walker and Colin D. Forbes, SEC Enforcement Actions and Issuer Litigation in the Context of a “Short Attack,” The Business Lawyer, Vol. 68, 689, 713 (May 2013), available at: https://files.skadden.com/sites%2Fdefault%2Ff...y_2013.pdf. A series of recent SEC enforcement actions, however, suggest that federal regulators regularly monitor online research platforms, such as Seeking Alpha, and may be more willing to bring suit against individual bloggers. For example, on April 10, 2017, the SEC brought 27 enforcement actions against various online bloggers who wrote anonymous bullish articles on financial blogs, but failed to disclose that they were paid to do so by vendors hired by public companies. SEC Press Release, Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, dated Apr. 10, 2017, available at: https://www.sec.gov/news/press-release/2017-79.
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23Kevin Dugan, Feds Probe Bank of Internet for Possible Money Laundering, New York Post (March 31, 2017), available at: http://nypost.com/2017/03/31/feds-probe-bank-...aundering/.
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24See e.g., Silvercorp Metals Inc. v. Anthion Mgt. LLC, No. 150374/2011, 2012 WL 356992, at *7-16 (dismissing company’s defamation suit against anonymous short seller “Alfred Little” on the grounds that the allegedly defamatory statements were constitutionally protected free speech).
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25Aurelius v. BofI Federal Bank, Case No. 2:16-MC-0071 (C.D. Cal. 2016); BofI Federal Bank v. Seeking Alpha, Inc., 1:16-mn-00025 (S.D.N.Y. 2016).
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26For example, Fullshare, a Hong Kong-based company being targeted by short sellers, unveiled an innovative defense plan, called the “anti-malicious short selling alliance.” The purpose of the “alliance” is to unite companies when short sellers attack and promote sharing of crisis-management advice. Lisa Pham and Moxy Ying, Hong Kong’s Short-Seller Invasion Spurs Unusual Defense Plan, Bloomberg (May 22, 2017), available at: https://www.bloomberg.com/news/articles/2017-...fense-plan.
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27For example, BofI’s counsel reached out to Marc Cohodes, a renowned short seller, to engage him as a consultant in order to better understand short seller campaigns, and specifically campaigns waged by short sellers posting under pseudonyms on Seeking Alpha. Not only did Cohodes decline BofI’s offer, but he also took to Twitter and exposed BofI’s attempt to buy him. Owen Davis, Short Sellers: If You Can’t Beat ‘Em, Give ‘Em $15,000 An Hour Consulting Gigs to Turn Rat, DealBreaker (June 28, 2017), available at: https://dealbreaker.com/2017/06/short-sellers...-turn-rat/.
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28See Tarun Mehta, Shareholder Engagement: Maximizing the Shareholder Relationship, ISS Corporate Services, available at: https://www.issgovernance.com/file/publicatio...l_13.3.pdf.
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29See, e.g., Aparecium Research, Axon Enterprise: Questionable Earnings, Possible SEC Scrutiny And Material Weaknesses In Financial Reporting (Oct. 18, 2017), available at: https://seekingalpha.com/embargo/4114102 (“We filed a FOIA request with the SEC to collect any documents related to current or past investigations of Axon by the SEC. . . . We believe that the response letter indicates a possibility that Axon is currently being investigated by the SEC, and – given the questions in the 2015 review – it is reasonably possible that it relates to revenue recognition policies.”).
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