Holy Litigation! Shortman
After years of the sell side bearing the brunt of litigation (by individual and
institutional investors), short sellers have recently been the target of a
number of suits by New York Stock Exchange-listed companies.
The most public case has been that of Overstock.com, with Biovail (BVF) coming in a close second. Most recently, Fairfax
Financial (FFH) has filed a whopping $5 billion suit
against short sellers.
I have no idea as to the validity of the claims behind these three suits
(though I have a gut feel they are without merit based on my general knowledge
of the integrity of the defendants), but I do have a general view that the role
of short sellers on markets is a constructive one.
As well, I have an interesting anecdote in which I was a target of a suit
(in the early 1990s) that I wanted to relate in today's opening missive, which
makes me somewhat more sympathetic to the defendants.
Gee Whiz! Short Sellers Sport the Smarts
Short Sellers Generally speaking (and as a professional short seller I am
really trying to be objective and not talk my book), I
have found short sellers to be more inventive, more detailed and more informed
in their analysis of companies. (But unfortunately, sometimes
more dogmatic!)
Importantly, I have found that serious fundamental short sellers (as
contrasted with momentum-based short sellers which dominate the short-selling
landscape) are substantially better stock analysts. Indeed, the two leading practictioners, David Rocker (Rocker Partners) and Jim Chanos (Kynikos), are the two
single best, pure securities analysts I have ever met. Their understanding of
balance sheets and power of analytical dissection is far superior to any other
analysts I have met in my 30 years on Wall Street.
Though at times individually vociferous, short sellers are dramatically
outnumbered by long buyers, so in the aggregate they are far less vocal as
compared to the legions of generally bullish talking heads in the media and
certainly to the Wall Street sell-side community (who, despite New York
Attorney General Spitzer, remain more cheerleaders and reporters than
analysts).
Splat! Crashing Head-First Into Marvel
My experience being the target of a suit by a New York Stock exchange-listed
company (for my negative analysis) goes back to the early 1990s. During the
summer of 1990, I was driving a harness horse at the Lycoming County Fair in
For a lengthy period of time I was restricted to a hospital bed. After a
year I got increasingly bored and began to do some research on Marvel
Entertainment (MVL), the Google of its time.
In 1991-92 comic book collecting was all the rage
as investors lost interest in the collection of other physical assets like
equities and real estate! Marvel Entertainment (then controlled by conglomeratour Ron Perlman) was a
hugely successful 1991 IPO. Coupled with Perlman's
string of profitable takeover transactions, Marvel became the darling of the
momentum crowd and enjoyed a several-billion-dollar enterprise value, despite
its leveraged balance sheet, one-product profile and modest earnings.
Holy
During 1991 I began to canvass comic book stores to determine the value of
Marvel's franchise position and growth prospects. As my research expanded, it
increasingly became clear to me that the popularity of comic book collecting
was ebbing (at the time comics were 100% of Marvel's product offerings) and
that Marvel Comics' had begun to lose its creativity (by increasingly
stereotyping male Super Heroes as muscular and female Super Heroes as buxom and
sexy. In turn, leading independent comic book publishers had begun to take market
share from Marvel and younger, hipper readers were increasingly turned off to
Marvel's product line. Stated simply, Marvel was headed for a fall.
Cha-ching! Making Dollars and Sense
On the first day I was permitted out of my apartment (where a hospital bed had
become my home for months), I went outside in my wheelchair with full time
nurse in tow. I vividly recall asking my nurse to get me a cup of coffee from
the local Korean store (Starbucks was only a pup then!) and I sat in that
wheelchair in front of my apartment with paper coffee cup in hand.
A silver-haired gentleman walked up to me and deposited two quarters in my
cup with the words, "Good luck, son." With
my hand out, extended with a fully-drunk coffee cup, he clearly thought I was
asking for money!
On that note my day started.
Wowie! A Visit With Mr. Abelson
After completing my analysis of Marvel Entertainment's declining fortunes, I
thought about sharing it with several of my friends in the media, some of whom
might want to write up my view in their employer's newspapers. Then I got a
different idea. For 20 years I had admired Barron's Alan Abelson (dutifully reading his column by 6:30 a.m. every
Saturday morning). I had considered him a journalistic treasure, someone who
was iconoclastic and willing to consistently write (in vivid prose) about
contrary views against the market's prevailing (and bulllish)
bias.
So, after accepting the 50 cents in the cup by that nice gentleman, I traveled
in a van to the headquarters of Dow Jones on
There was one problem. I had never spoken to Mr. Abelson
and didn't have an appointment!
Nevertheless, I boldly asked the receptionist if i
could see Mr. Abelson as I had prepared a negative
analysis of a company that I thought he would have an interest in. The
receptionist was very nice (probably she felt sorry for me) and explained that
Mr. Abelson does not meet "with walk-ins."
At that very second, Mr. Abelson appeared. He had
just apparently come out of the mens room and had
heard the tail-end of my conversation with the reception.
Seeing me in a wheelchair and with exterior fixation in my leg (sort of like
an erector set!), he obviously also felt bad for me and brusquely led me to his
office, essentially saying he had about a minute for me. I asked him if he knew
of Marvel Entertainment. He pointed me to a table in his office - where a copy
of Marvel's IPO prospectus was! He went on to tell me that he had been doing
some preliminary work on the company and I explained to him that I had spent
weeks doing research on Marvel and that I had written up a synopsis of my
findings.
Zoom! On to the Front Page of Barron's
He then asked me to give him a copy of my findings and that he might "get
back to me" at some time. That sometime was about 9 p.m. that night (!) in
which he told me that, with the assistance of his editor, it would make a great
cover story for Barron's.
And that Saturday morning, only three days after my initial meeting with Mr.
Abelson, my story on Marvel Entertainment (Pow! Smash! Ker-plash!
High-flying Marvel Comics may be headed for a Fall !) appeared in Barron's
Great Scott! Analyst 'Realizes' Estimates Are Too Low
When markets reopened on Tuesday, Marvel's common shares fell by almost 20% and
Marvel's Perlman lost over $100 million on paper.This occurred despite First Boston's analyst
(Marvel's investment banker on its IPO) reiterating his buy on the stock (and
raising estimates) because on a long seven-hour trip to his ski lodge in
Vermont he "realized his estimates were too low." It was clearly the
pre-Spitzer era!
Not surprisingly, Marvel's management ridiculed my article, citing the
company's strengths. However, to make matters worse, at the end of the trading
day, Marvel announced that eight of its most important comic book writers
planned to leave the company and to join a leading independent company, Malibu
Graphics.
Pow!
Embroiled in a Law Suit Over My Analysis
Weeks later, Perlman' s Marvel Entertainment filed suit against me and my
employer, charging that our clients (at the time I had just started to run
First Albany's institutional division) front-ran the article by shorting the
shares (they did not, as no one was informed!) and that my analysis was
ill-founded and inflammatory (it was very well researched with copious notes
and documentation).
First
I (and Mr. Abelson) were
mad as hell and on two additional occasions, I followed up with negative
interviews on Marvel in his column in Barron's. (And an important
relationship between Alan Abelson and I had been
forged).
Up, Up and Away!
Two years later Marvel Entertainment filed bankruptcy (and Perlman
lost his entire investment) -- and two years after that, they filed bankruptcy
again!
And I became known as a short seller.