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Little Big Shorts: How tiny ‘activist’ firms became sheriffs in the stock market’s Wild West

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This summer, investor Nathan Anderson got a juicy tip. The subject: Nikola Corp. 

On June 4, the Phoenix-based electric-vehicle maker had gone public through a reverse merger. In a year of euphoric demand for growth stocks, particularly EV makers, this one stood out. Nikola bulls believed the company would do for hydrogen-powered, long-haul trucking what Tesla has done for electric cars. Within a week, investors had pushed its market cap above $34 billion, enough to overtake Ford and Fiat Chrysler even though the upstart had yet to sell a single vehicle. 

The tipster wasn’t buying the hype. Neither was Anderson, a 36-year-old CFA turned whistleblower turned short-seller. 

The source put Anderson, the founder of Hindenburg Research—a five-person investment research firm with no clients, no license to manage investors’ money, and no phone number or address on its website—in contact with two former business partners of Nikola. The informants turned over a cache of text messages, emails, and photographs that cast doubts on, among other things, various public statements made by Nikola and its founder Trevor Milton about the company’s progress in developing battery and hydrogen fuel cell technology. 

These were tantalizing allegations. But one accusation struck Anderson as almost too flat-out crazy to take at face value. It had to do with a video Nikola posted to YouTube in January 2018 featuring the Nikola One semi, its original prototype rig. The video shows the truck cruising through the high desert outside Salt Lake City. It opens with a long shot of the Nikola One rolling toward the camera at high speed, barreling across a wide valley. The sun glistens off the windshield and the gleaming white roof as it zips across the frame.

Nikola titled the video “Nikola One Electric Semi Truck in Motion.” It generated hundreds of thousands of views online and got wide pickup from the automotive press. At a 2018 ceremony to celebrate Nikola’s new Arizona manufacturing facility, Gov. Doug Ducey watched the video and then gushed, “Nikola Motor Company is coming to Arizona. This is a huge announcement!” 

The insiders claimed the whole thing had been staged. The truck wasn’t traveling under its own power, they told Anderson. Instead, it had been towed to the top of a hill. The person at the wheel then popped it into neutral and started it on its journey downhill—slowly at first, then accelerating. 

The idea that Nikola was pulling a fast one wouldn’t count as outright fraud, Anderson knew, because the video didn’t explicitly claim the truck was self-propelled. But exposing the gimmick would demonstrate the kind of razzmatazz the company was engineering to sustain its hype. Anderson’s problem: How could he prove the video was a ruse?

A self-described “obsessive digger,” Anderson used a technique that’s common to the open-source investigations in the Internet’s most skeptical corners. He slowed the YouTube video down, frame by frame, and cross-referenced those stills with images he found on Google Street View. That helped him establish the precise location of the video shoot, down to the exact mile marker where the Nikola truck came to rest and the starting point of its journey. He called one of his contacts in Utah with an unusual request: Go to that very spot and re-create the truck roll, and film the entire thing. The contact did so, albeit in a 2017 Honda Pilot SUV. It rolled for 2.1 miles and reached a maximum speed of 56 miles per hour—entirely in neutral.


With that, Anderson could show how the company had pulled off the video—a proof point of Nikola going to great lengths to mislead the public. He wrote up his findings, replete with photos and maps. “You just want to be 100% on those things,” he notes.

Tip No. 1 for would-be shorts  

If you’re going to take down a big stock, sweat the small stuff.

On Sept. 10, Hindenburg Research published a 67-page report on Nikola—a huge dump of damning allegations. “Today, we reveal why we believe Nikola is an intricate fraud built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career,” the report began. The opening page set the tone: It included 24 bullet points that poured cold water on the company’s claims that it was developing proprietary battery technology, and that it had cracked the code on cheap hydrogen fuel production. The report took repeated swipes at Milton. And it laid bare how the company gave the Nikola One a push to get across the desert floor. 

Nikola responded the following day, saying the report contained “false and misleading statements” and that it had hired counsel to “evaluate potential legal recourse.” For good measure, it added, “This was a hit job for short sale profit driven by greed.” But three days later, Nikola delivered a more detailed response—in which it copped that the Nikola One was not built to “drive on its own propulsion.”

The damage was swift. The stock cratered, and investor lawsuits began to mount. In a regulatory filing in November, the company revealed that the Justice Department had issued grand jury subpoenas against Nikola and Milton, and that the Securities and Exchange Commission was investigating whether Nikola had misinformed investors. “We have incurred significant expenses as a result of the regulatory and legal matters relating to the Hindenburg Report,” Nikola disclosed. (Nikola declined multiple requests to answer questions on the matter. Reached through a spokesperson, Milton, who called the report “false and deceptive” in September, would not comment further.) 

Since the report dropped, Nikola’s stock has fallen 30%, and Milton has resigned. But one cohort has walked away the better from the truck wreck. As of mid-November, short-sellers—Anderson among them—had earned $263 million in mark-to-market profits from Nikola’s plunge, according to S3 Partners, a firm that tracks short activity. And they clearly expect to earn more: More than a third of all Nikola shares outstanding were held by shorts. 

Bull markets, the saying goes, ignore bad news. And if you set aside the black-swan pandemic-driven crash of early 2020, U.S. stock indexes have been in bull mode since the financial crisis, almost 12 years ago. Still, there’s a small but influential force in activist investing that is not only paying attention to bad news but also promulgating and profiting from it. 

Anderson’s firm is part of a cadre who identify themselves by many names—some flashy (“short activists”); some self-righteous (“whistleblowing short-sellers”); some deceptively banal (“activist researchers”). These investors research targets suspected of shady behavior, then expose them and short them. 

They share gimlet-eyed DNA with financiers large and small who’ve done the same—from Jim Chanos, who shorted Enron while warning about its accounting skulduggery, to the low-profile contrarians who bet against the subprime bubble, to CNBC-darling hedge fund managers like Bill Ackman and Daniel Loeb. 

The new breed—the little big shorts—stand out because, by and large, whistleblowing and shorting is all they do. Lately, they’ve delivered plenty of pelts from publicly traded Goliaths, powered by meticulously reported jeremiads whose details rocket across social media and the business press. And with few exceptions, they do it for themselves, not for clients: They place bets with their own dough, which means many regulations don’t affect them. Anderson built a personal short position in Nikola through the summer as he became convinced he could take the company down. “It’s a big win for us,” he says, though he declines to specify how big. Critics fume that the shorts’ actions represent a blatant conflict of interest. Precisely, they fire back—no conflict, no interest.

Courtesy of Muddy Waters

Carson Block says he didn’t see short-selling as a profession when he published his first short report in 2010. But in the years following the financial crisis, as investor appetite for growth stocks drove mammoth valuations, it raised mammoth red flags for Block. The former attorney went on to become founder and chief investment officer of Muddy Waters, an activist short firm with the motto: “Doing the work Wall Street won’t.” His firm’s success in exposing fraud—and profiting from it—attracted copycats, many of whom were already raising hell on investor message boards.

Since 2010, Muddy Waters has published short attacks on 38 companies. It came to fame by shorting Chinese firms listed in North America, then delivering devastating haymakers in the form of free oppo research published online. In 2011, Muddy Waters took on Sino-Forest, a Chinese timber firm listed in Toronto, accusing the company of inflating revenues and exaggerating its holdings. The report torpedoed the firm’s shares, and it went bankrupt a year later. Sino-Forest denied Block’s allegations, but Canadian regulators eventually found that its leaders had committed fraud, and the company settled an avalanche of investor lawsuits. Earlier this year, Block went after Luckin Coffee. The company later disclosed in an SEC filing that it had inflated its 2019 sales by $320 million and costs by $200 million. Its CEO and COO were fired, and the Nasdaq 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 hacking. 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. 

From the jump, activist short campaigns are decidedly antagonistic—the tone is Accounting 101 meets WrestleMania. The shorts allege endemic fraud at the highest 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 something 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—say, 1,000 shares of Nikola. He sells them for cash. He’ll eventually have to buy 1,000 NKLA shares to return to the lender. That’s called “closing out the short.” The more the share price falls between opening and closing, the more money the bet makes. 

Photograph by Sophie Green

It can all easily backfire. “You can only ever make 100% of your equity on a short,” Perring explains. If the share price falls from $20 to zero, the difference—$20 per share—is your take. But if the price doubles, your losses double. If the price triples, your losses triple. And so on. (This is one reason so many shorts have lost their shirts on Tesla, a stock that was up almost sixfold year to date as of Nov. 19.)

Viceroy, a three-person shop, has the manpower to research only a few firms per year. Wirecard was far and away its biggest score, Perring says. The share price of the now-insolvent German payments provider collapsed from €104 in mid-June to 60¢ this month following an accounting scandal that landed former CEO Markus Braun in jail. When whistleblowers, journalists, and short-sellers like Perring leveled allegations of malfeasance at Wirecard in 2019, Germany’s securities regulator, BaFin, investigated the tattlers instead. BaFin also temporarily outlawed short-selling of Wirecard shares: “Short attacks,” it said, “posed a risk to market integrity.” But further investigation vindicated the critics, igniting a national reckoning in Germany’s conservative investor culture. 

“Wirecard was a war, a four-and-a-half-year fucking war,” Perring groans. At one point, he says, “I was negative millions. And that’s not bragging.”

“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.”

Nathan Anderson, Hindenburg Research

The 47-year-old says his ship came in in 2020, thanks to Wirecard and his muckraking behind Grenke, a German leasing company that Viceroy came after in a report in September. Viceroy’s central charge is that Grenke used acquisitions to obscure how little cash it had on its books. Viceroy’s accusations are “completely unfounded,” Grenke said in a statement; still, the damage has been severe. Grenke shares are down one-third since the report came out, and its founder stepped aside from the board. BaFin, meanwhile, opened an investigation into Grenke days after Viceroy’s report hit; it was ongoing at press time.

Perring has taken plenty of arrows for his short attacks, as well as for his conduct outside the market. A former social worker, he was barred from such work in England eight years ago following allegations he forged documents. (He sued his former employer and won a settlement in that case.) A 2018 report commissioned by a South African business group accused Viceroy of “substantially” plagiarizing a hedge fund report in its efforts to take down Steinhoff, a South African holding company. Perring shrugs off his critics. “If you’re worried about your ego, don’t get into short-selling,” he says.

When pressed on Viceroy’s finances, Perring would only say he has one outside backer, whom he would not name. “We’ve never commented on our profit,” he adds, “because we’re only as good as our last report anyway.” That’s even truer in 2020, Block adds; for every Nikola, there “are probably five really frustrating results.”


Tip No. 3

Like Hollywood, short-selling is a hits-driven racket.

FOMO rallies. The retail-investor army. The $60 billion boom in blank-check IPOs. These bullish forces have pushed the Cassandras to the fringes of the market in 2020. Cumulative short positions held on NYSE-listed firms generally hover between 4% and 6% of shares outstanding; by early November, they had fallen to less than 1%.

The exuberance persists despite the reality that we’re enduring the worst recession and labor-market collapses in living memory; that companies are piling on debt; that earnings have collapsed. Analysts at banks and brokers—the go-to research source for many retail investors—aren’t exactly playing the skeptic. FactSet calculates that of the 10,322 analyst ratings affixed to the stocks in the S&P 500, only 6.2% are a “sell.” It seems as if we’ve all bought a dog to get us through the pandemic, and yet Wall Street can’t find any. 

Even Nikola, for all its flaws, has been able to stay afloat on the rising tide: Shortly before the Hindenburg report was published, General Motors said it would buy a stake in the company and would agree to collaborate with Nikola on fuel-cell and pickup-truck development. Publicly, GM says the partnership remains a go, though on Nov. 30 the Detroit automaker scaled back its involvement and said it wouldn’t take an equity stake after all.

In this permissive era, the shorts see themselves as a necessary force for good. In the Wild West, they’re sheriffs—sheriffs who drive Audis, mind you. “I think fraud is more pervasive than at any time I’ve been in the market, certainly,” says Hindenburg’s Anderson. Until regulators and auditors step up their game, he adds, “we’re going to continue to see a proliferation of short actors.”


Tip No. 4  

Don’t shoot the messenger, at least until after you’ve read the report.

Nikola isn’t Anderson’s first big scoop, but it stands out. Usually, his reports enrage long investors, and he hears from them. “We get more angry emails, or death threats to murder me and my entire family,” he says. But not this time. In fact, kudos have been coming in from a tough crowd: fellow shorts. “The Nikola report,” Perring says admiringly, is “bulletproof.” 

A version of this story appears in the December 2020/January 2021 issue of Fortune with the headline, “Little big shorts: Sheriffs in a Wild West market.”

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