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.
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.
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).
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.