One to watch: Glaucus vs. Blue Sky

There’s a battle brewing in Australia that deserves everyones’ attention – if for nothing else because it pits one alternative asset manager against another.


On March 28, short-seller Glaucus Research published an extensive report on Australian asset manager Blue Sky Alternative Investments Ltd (ASX: BLA), which has interests in private equity, real estate, private debt and real assets. The main thrust of the report accuses Blue Sky of marking up the value of the private companies and other assets in its portfolios and thus inflating the value of its fee-generating assets under management – the key to how it’s profits. Glaucus says they’re inflating them by more than 60%.

Blue Sky claims the Galucus report is all a bunch of horseshit drummed up by a “foreign activist short seller” looking to make a quick buck off of the stock drop. Nothing to see here. Blue Sky’s Managing Director Rob Shand even penned a letter to shareholders promising better communication with them and rejecting all of Glaucus’ claims. The stock has still fallen by over half.

Jonathan Shapiro, a columnist with The Australian Financial Review, wrote that Shand and Blue Sky really dropped the ball by not taking any questions on the initial conference call with investors after the Glaucus report. Shapiro called it “a stunning error of judgement.” Shand also asked regulators to probe Glaucus for market manipulation – a common tactic among activist short seller neophytes.

At it’s heart, this is a PR battle the will come down to how much Blue Sky discloses about its underlying funds and private investments. Investors are demanding transparency and the onus is on Shand to come up with something more than platitudes to blunt his critics. Glaucus probably won’t go away.


Is activist short selling market manipulation? Ask Bill Ackman


Today it was reported by CNBC that famed activist investor, and reported billionaire, Bill Ackman has sold out of his losing short bet against Herbalife. Five year’s ago when he announced the short thesis, Ackman said he would go “to the ends of the earth” with his campaign. Ultimately, the end was based on government regulators shutting down the nutritional supplements company for being an illegal pyramid scheme. (Ackman must have had a lot of trust in government regulators!)

Unfortunately for Ackman and his investors, the government came in, fined the company, made it change some of its sales practices, but stopped short of calling it a pyramid scheme. Herbalife’s stock has nearly doubled since Ackman made the bet, costing his investors hundreds of millions of dollars.

Over the 5-years he was short Herbalife, Ackman’s Pershing Square Capital Management spent millions on lobbyists, PR firms, consultants, event space for their hours-long presentations and on and on. In the end, Ackman got shaken down by an old fashioned short squeeze from a bunch of prominent investors who said they disagreed with his thesis and a company who bought back massive amounts of their own stock.

When you’re a short seller, being right and making money aren’t always the same thing. We all remember David Einhorn’s decade-long battle against Allied Capital and numerous other short campaigns that have cost short sellers in reputation and money – think Jim Chanos and Tesla.

All this is to say that critics who think activist short sellers can simply publish reports or tweet something negative about a company and sit back and count their profits don’t understand the true risks of short selling. Forget for a second the death threats and nasty emails from stock pumpers, short sellers risk being squeezed by a giant company buyback or a big investor who enters the market with billions and publicly comes out in support of the target company. If you own a stock, the most you can lose is your invested capital. A stock can only go to zero. Short sellers can lose many times their original investment because stocks can go up indefinitely.

Ackman’s bet against Herbalife took five years and he counted up the losses every step of the way. No one is crying market manipulation over that report.

The true market manipulator faces no risk of losing money. Think about the Libor manipulations – those banks made money every day of the week on that trade, that’s why they did it and why it was illegal. Activist short selling relies on other investors believing what they say to be true and, in Ackman’s case, the government actually confirming the thesis. That’s a lot of uncertainty and it’s why Carl Icahn, who successfully squeezed Ackman on the Herbalife trade, has said he would never in a million years announce publicly that he’d taken a short position in a company’s stock. Ackman also said recently he’s unlikely to publicly short a stock again. It’s a tough business.

Video: Marc Cohodes confronts MiMedx management at JPMorgan Conference

This could be one of the best things we’ve seen. Marc Cohodes, who has been going after biopharma company MiMedx for months, slipped into the JPMorgan healthcare conference and confronted the CEO and other management. It’s fun – check out the video from Adam Feuerstein via this link here.  (sorry we can’t embed it)

Big Win for Muddy Waters: OSI Systems Discloses Probe into Bribery

giphyMuddy Waters Capital should be spiking the ball on OSI Systems right now.

Last Thursday, the security company disclosed it was being investigated for FCPA (Foreign Corrupt Practices Act) violations not just by the Securities Exchange Commission but also by the Department of Justice. The fact that OSI felt the need to disclose the existence of the probe in the first place (many companies don’t) means it’s serious and material to their business. That’s not surprising given that criminal authorities are involved. We’re not just talking about a big fine here, but executives could possibly go to jail. OSI hasn’t yet been accused of any wrongdoing but the stock dropped nearly 18% on Friday wiping out nearly $200 million of the company’s value.

The company also said the authorities were also looking into unspecified trading in its securities and a senior-level employee had been dismissed.

Muddy Waters’ allegations centered on bribery and corruption in Mexico and Albania, but the DOJ might be taking this matter extra seriously given that OSI makes screening systems at airports and ports – obviously something that is extremely important for national security. If OSI is truly “rotten to the core” as Carson Block told the Wall Street Journal, it’s hard to see how the company can retain any of its contracts in the U.S. These investigations typically take years, so we’ll see what happens but airports and ports across the country have to question whether they can use a company for such an important job while it’s under investigation for bribery. Indeed, in 2013, the TSA ended its contract with OSI’s Rapiscan unit over controversy with the software in its body scanning machines.

This could get ugly, but thanks to again to the activist shorts, a government investigation is under way.


Ballard Power: No Charging Station Here

tenorEveryone who follows activist short selling should check out Spruce Point Capital Managment’s research on Ballard Power Systems (BLDP). It’s a small company based in Canada with little institutional or media coverage to speak of. In fact, it’s majority owned by retail investors who have experienced a more than 100% return over the past year – if they got in 12 months ago that is.

Spruce Point, a highly-respected although small shop run by former investment banker Ben Axler, hired some investigators in China and determined that Ballard’s joint venture partners were dubious, engulfed in eventual cash crunches or riddled with related party transactions that benefitted their owners. (no surprise for China companies) The stock dropped 20% after Spruce Point came out with their report even though some bulls continue to blindly push the stock on Twitter and elsewhere like their financial future depends on it – because it probably does!

Ballard eventually responded with a press release announcing the date for their upcoming earnings announcement and a bullish statement by their CEO. The stock went down again, most likely because Ballard didn’t specifically address any of the accusations in the Spruce Point report. We’ll see what happens.

Randy MacEwen, President and CEO said, “As we noted on our last quarterly conference call, with a substantial order backlog and order book of expected deliveries over the subsequent 12-months, Ballard was well positioned to deliver strong full-year 2017 results and have a solid set-up for 2018. In addition to confirming strong 2017 results on our March 1st conference call, I am also looking forward to providing a business update and outlook.”



Citron to Aurora Cannabis: “What are you smoking?”

resize_marijuana_leafMarijuana stocks have been all the rage for the past several years as states have moved towards legalization. But the Trump Administration put a damper on that this week right after Andrew Left’s Citron Research blasted Aurora Cannabis (TSE: ACB) with a litany of claims including “Enron-type accounting” and no path to profitability.

Aurora VP Cam Battley said the company made a strategic choice to operate at a loss while it builds up production capacity, which is supposed to hit 250,000 pounds of marijuana per year by the middle of 2018.  That’s a lot of weed! He added that Citron “doesn’t have a clue what he’s talking about.”

Aurora’s shares popped 20% on the day Citron came out with their thesis – not the best outcome on for an activist short seller on the first day. We’ll have to see where it goes from here, especially in light of the new Jeff Sessions-crackdown on the legal marijuana industry in the U.S.

Eagle Bancorp’s CEO calls Aurelius Value “Shrewd Scumbags”

arnoldgif2CEOs who come under attack by activist short sellers often don’t know what hit them.

The guiltiest among them often lash out with personal attacks against their critics. In this case, Aurelius Value, an anonymous activist short seller known for its research on banks and other financial-sector firms, posted a scathing report on Washington D.C.-based Eagle Bancorp Inc. (EGBN) on Dec. 1 alleging bad loans, kickbacks to management and lack of internal controls. That dropped the stock by over 24% on the day of the report even though financial companies are typically hard for short sellers to get right. (See AIG, Lehman etc.)

Shares of EGBN have recovered somewhat but that didn’t stop the name calling by CEO Ronald Paul (not Ron Paul) and COO Michael Flynn (not the indicted Michael Flynn.)

“These are shrewd scumbags,” Paul told S&P Global Market Intelligence. Flynn called Aurelius “short-sale bandits” in the same article. Here’s how they are planning to combat the allegations.

From S&P Global Market Intelligence:

In the interview, Paul said Eagle is consulting with Wall Street experts and has hired a lawyer with special expertise in U.S. Securities and Exchange Commission matters to provide a playbook for the bank as it anticipates further attacks from Aurelius. Paul said that, “as hurt as I am” by the Aurelius allegations, Eagle does not plan litigation against the short seller. “That’s just not our style,” he said, but the bank does intend to be fully prepared to refute further allegations that it determines to be false.

Prescience Point Keeps on Truckin’ with Celadon Group (CGI)

celadon1Prescience Point, the respected activist short seller based in Baton Rouge, LA, is sticking to its thesis on major trucking company Celadon Group. The firm recently issued an updated report reiterating its original position that Celadon has survived solely on the generosity of its lenders, whose patience is likely running out. Prescience Point first issued a report on Celadon in April 2017. After a big decline, shares of Celadon rose nearly 300% from their lows on the back of a management replacement and three amendments to its credit agreement from lenders.

From Prescience Point’s update:

In the prevailing 9 months since we released our reports, CGI’s auditor BKD withdrew its audits of CGI’s financial statements; CGI’s top 3 executives were replaced; CGI disclosed an active formal SEC investigation; and, CGI violated its debt covenants and would have already declared bankruptcy if not for the generosity of its lenders who have amended the credit agreement three times since May.

We believe Celadon’s runway is ending and that the equity is worthless.

On Dec. 22, Celadon’s creditors gave the company another 3 months to refinance its term loan but they’ll have to pay a higher interest rate and agree to turn over more collateral in the event of a default. Time will tell and it’ll be interesting to watch this one play out.

New academic study touts the benefits of activist short selling on corporate ethical behavior

University-level-research-paperVery interesting academic study on the limits of government regulation and how activist short sellers can motivate corporate ethical behavior.

Note the new buzzwords for activist short selling including “monetized self-regulation” and “inverted moral markets” or IMM.

To provide insight on internally driven controls, this article examines how a newer form of monetized self-regulation, referred to as inverted moral markets, might be leveraged to motivate corporate ethical behavior. Inverted moral market (IMM) operations target firms suspected of unethical action, providing a type of market whistleblowing.

Download here – Inverted Moral Markets IMMs as market regulators