It would grow ever more powerful, and eventually pose a threat to every listed company in the world. Social media and online investment forums have helped create a new generation of investors where anyone can be impactful and there is no shortage of imitators.

Activist short-selling, which couples short-selling with investor activism, was no longer the domain of very rich men on Wall Street. It also fuelled the rise of anonymous research houses – with names like Aurelius, Viceroy and Iceberg – which began using social media to disseminate detailed and devastating reports into companies that were designed to bring their share prices down.

It's no surprise that the targeted companies – which started with a group of Chinese reverse IPOs in 2010 and 2011, but quickly spread to include big names such as trading giant Noble Group and China Huishan Dairy Holdings – hate this new type of aggressive, and sometimes anonymous attack.

But for the broader market, when a bombshell piece of research lands, and the company and its cheerleaders scramble to discredit it, it is difficult to figure out in the moment who will be on the right side of history.

Because even though the shorts have proved time and time again to be right, their modus operandi remains under attack.

'Go down fighting'

A good example is provided by Viceroy, a formerly anonymous research firm co-founded by two 23-year-old school friends living in Melbourne, Gabriel Bernarde, who resigned in 2017 from his role as a junior analyst at Ferrier Hodgson, and Aidan Lau.


Despite some successful campaigns against companies such as Steinhoff, the pair find themselves at the centre of a case that underscores the stakes are as high as ever for activist short-sellers.

Bernarde and Lau, and their UK-based partner, 44-year-old Fraser Perring, are named in a Florida libel suit brought by Nasdaq-listed MiMedx, a smart-bandages maker they accuse of sales fraud and misleading investors. MiMedx, which rejects Viceroy's allegations, accuses Viceroy of plotting a "short and distort" scheme; the defendants dispute any wrongdoing.

Viceroy has apparently mastered the evolution from keyboard warrior to money maker. The firm returned 44 per cent in 2017, according to Activist Insight, more than double the top-ranked Australian long-short fund in Mercer's 2017 survey. That is measured by total campaign return, accounting for any dividends or stock splits, of campaigns initiated last year, however Viceroy declined to confirm this.

"Our returns on short investments fund our research into corporate misconduct. There is not one without the other," the group says. Viceroy are fierce advocates for the democratisation of research, "so long as the research is publicly verifiable".

In a handful of cases, anonymous research is not just the domain of hobbyists and amateurs.

In February, well-known short activist firm Muddy Waters admitted to being behind the online nom de plume Dupre Analytics, which accused Hong Kong-listed Chinese aluminium group Zhongwang of inflating its sales by shipping inventory to offshore companies under its own control.

Carson Block, founder and director of Muddy Waters, uncovered one of the great Chinese frauds. DAVID PAUL MORRIS


In 2016, Kyle Bass appeared to put his firm's name to Ernest Poole of Investors For Truth, an online identity whose report caused the share price of Texas real estate developer United Development Funding IV to plunge. The developer was raided by the FBI and its shares were de-listed. Nonetheless, in late 2017, UDF filed a complaint against Bass alleging he waged a "short and distort" scheme to offset his outflows, and was acting on personal hostility to UDF's CEO stemming from a 2009 property dispute. Bass's reply slams the lawsuit as "baseless", an attempt to "deflect blame for [UDF's] own financial demise", and denies all allegations.

And yet, the scoreboard favours short-sellers; a 2004 paper titled "Go down fighting" published by the Massachusetts-based National Bureau of Economic Research, finds that companies that stand in the way of short-sellers, by implementing legal action or recalling borrowed stock to trigger a short squeeze, underperform the market in the subsequent year by 2 per cent a month based on a sample of 266 companies which waged anti-short campaigns.

Regulatory response

But short-sellers do not tend to elicit the sympathy of regulators.

In 2016, Citron Research's Andrew Left (who was also one of the early crop of China fraud activists) was banned from securities trading in Hong Kong – a "cold shoulder" order – for five years upon being found to have in 2012 disclosed false or misleading information in the publication of a research report on Evergrande Real Estate Group alleging insolvency and fraudulent accounting. The Market Misconduct Tribunal heard that Left received an anonymous package in the United States containing a 68-page draft analysis on Evergrande which formed the basis of his own research, described as "tabloid" in style.

In 2016, Hong Kong disciplinary action against Moody's was upheld for a report it published on Chinese companies in 2011, known as the "red flag" report.

John Hempton, the founder of global long-short fund Bronte Capital, estimates there are probably 500 or 600 listed frauds worldwide and probably 20 of them are in Australia. It's also late in a long bull market and that tends to conceal wrongdoing, he says.


"As a short-seller, it's actually very frustrating to get involved in [a fraud], they typically double on the way up or triple. Indeed, the more persuasively your target lies the more disconnected from reality the stock price can come."

There are two ways of handling this, Hempton says. The first is to "get short and get loud, and generally I don't do that".

The other tactic is to screen ideas using a proprietary strategy and short a little of all of them. "Your typical sizing is 20 or 30 basis points, it doesn't matter if one triples or doubles on the way to zero. If you're doing that there's no point getting loud, you raise scrutiny of yourself, you get sued, and it's all for 30 bps."

That means Hempton does not have to find slam-dunk frauds, but instead relies on "a reasonably articulable suspicion".

"But if we were to go public about a company we would need to have something stronger than a reasonably articulable suspicion, we would need something that can stand up beyond any reasonable argument."

A lone dissenter

California-based short-seller Glaucus and its head of research, Soren Aandahl, made waves in Australia last year with a research report articulating its short thesis on Quintis, the sandalwood grower. Glaucus put 600 hours into its Quintis research because Aandahl knew that it would be challenged on every single point. That's where anonymous and transparent research differs, he says.

Fraser Perring from Viceroy. The firm is facing legal action in the United States. supplied


"Anonymous short sellers generally have lower standards and are more likely to cut corners because there are fewer consequences. They tend to give short selling a bad name," Aandahl says.

He has a profile in Australia because of his success with Quintis, but in fact Glaucus' break was also in busting the Chinese frauds.

The short-seller had a hand in the exposing of Hong Kong-listed China Metal Recycling in 2013, which was wound up by the securities regulator upon finding its accounts to be fictitious.

Aandahl participates in the forthcoming documentary, The China Hustle (released Friday), which follows the equity market's love affair with Chinese growth stocks and the trail of deception and losses left behind. It is produced by the same people who made the Enron film and the fund manager can be seen in The China Hustle's trailer describing the proliferation of Chinese equity market frauds as the largest financial crime in the last 25 years.

"We're talking about $US50 billion in losses. It was a massive problem here in the US and it broke new ground for activist short sellers who came into the space around that time," he says.

"We have a job because people aren't doing their's. The answer's yes, [outsiders] could be impactful, and the market should encourage everyone. It's just a marketplace of ideas."

While markets perhaps should encourage everyone, that is far from true. Companies, their advisers, the long side of the market and even sometimes regulators stifle dissent. It is not enough to have a strong argument behind an activist short idea, but it also demands someone who is willing to be publicly undermined and quite possibly sued.

"You have to be willing to be an iconoclast and you have to be very comfortable being the one person in a room of 99 other people who think they're right and you're wrong. I love what I do," Aandahl says.


John Hempton, chief investment officer of Bronte Capital Management, blew the whistle on Valeant Pharmaceuticals. Jeremy Piper

"One of my favourite lines attacking short sellers, and someone says it every time, 'don't believe them because they're short so they are financially incentivised to have a negative opinion'.

"Wait a minute, as if the company's not incentivised to have their share price go up? As if auditors are not incentivised to get paid, which only happens if they sign off on an annual report? As if investment banks are not incentivised to promote companies through positive research, because they only get paid by companies when they raise money, go public or engage in another transaction?

"There are so many actors in the financial system that are equally biased in the other direction. The difference is, we freely admit it," he says. "We absolutely have a financial incentive behind our opinion, but so does everybody else. And just because we are biased does not mean we are wrong."

Open source age

Someone who has followed the developments in the activist short community with interest and unease is Cameron Colquhoun, a former cyber and terrorism analyst for British Intelligence who now runs a corporate intelligence consultancy, Neon Century. (He also appears on the UK reality TV show Spies).

Colquhoun's introduction into this world was on his brother's bucks night in Barcelona when a trader told him about Wirecard, a German payments processor, which was knocked down more than 20 per cent in a session because of a report published by an unknown author, Zatarra, and his "mind was blown".

Wirecard fell 12 per cent on February 24, 2016, and as much as 25 per cent intraday. At 9:55am GMT, Bloomberg carried the headline: "Wirecard falls; FT Alphaville carries negative Zatarra report". The report appeared as the share price plunged.


Colquhoun concludes that large public companies are leaving such a vast digital footprint that anyone can construct almost any narrative, no matter how damning, and not necessarily be wrong.

"There are enough facts out there that in theory everything is true," he says. But the problem is the facts are overloaded with bias and lack the rigour he would have had to apply in intelligence. Colquhoun has also coined the term "stock-doxing" to describe a sinister attack on a company's stock using one-sided and misleading information.

Quintis is the target of a potential shareholder class action. Ralph Bestic

"I am just stunned how traders in the financial world will read a report and believe the allegations," he says. Whether individual investors believe such allegations is unclear, but they are reacting to them judging by the share price response negative research can elicit.

Wirecard is now a €12 billion ($19 billion) company, but uneasy questions about its operations still emerge; it denied the findings of an investigation into an acquisition in India published by the Southern Investigative Reporting Foundation in January 2018, including documenting the business's unusually high turnover of auditors.

The mysterious and apparently defunct Zatarra has a connection to Viceroy: Perring, the former social worker from Lincolnshire, was a member of the group. His partners, Bernarde and Lau, have not been linked to Zatarra but MiMedx alleges in its libel action Viceroy is for all intents and purposes Zatarra 2.0.

Munich prosecutors opened a case into Wirecard in 2016 following a request from the Federal Financial Supervisory Authority (known as BaFin). About 30 people have been linked to the case. Part of the prosecutors' probe is to see whether the report by Zatarra led to the sharp fall in Wirecard's shares and whether Zatarra continues to function. The case is ongoing.

Ethical questions


In late 2016, Muddy Waters was approached by a cyber-security firm called MedSec with the results of research that would expose apparent vulnerabilities in pacemaker products made by $US25 billion ($32 billion) firm St Jude Medical (now owned by Abbott). The pacemakers could be hacked.

Carson Block's Muddy Waters is among the most feared and followed of the activists after it exposed one of the great sharemarket heists of the decade: the trees purportedly owned by the $C6 billion Toronto-listed Sino-Forest didn't exist, leaving investors, brokers and regulators exposed and embarrassed.

Muddy Waters hired the cyber-security firm as a consultant, paid it a licensing fee and a percentage of any profits from the investment, Block said in 2016. The St Jude example sparked an intense debate about the ethics of financially benefiting from discovering and exposing flaws in medical products.

But as news of this short position and the MedSec findings broke, it was Muddy Waters that was being attacked. It was sued by St Jude and accused of spreading false and defamatory statements.

In 2017, the US Food and Drug Administration found cyber-security vulnerabilities linked to St Jude's pacemakers were valid and approved a firmware update, the equivalent of a recall. A study of the St Jude example shows the folly of damning the shorts just because they highlighted an uncomfortable truth.

However, Colquhoun is not convinced the activist shorts are as noble as they claim to be.

"They see themselves as the white blood cells of capitalism but I would be astonished if that was true. There must be more going on behind the scenes," he says.

He also questions the role of journalists in giving airtime to ideas which he suggests would remain confined to corners of the internet but for media coverage. "So there's a strange mix of research analysts and former intelligence agents and add to that journalists sharing and tweeting and giving these reports oxygen when they would have gone unnoticed."


And in the case of Wirecard, he wonders whether some journalists are "forming unholy alliances", citing the vigour in which the Zatarra research on Wirecard was picked up.

That could be superseded by the age of social media where firms are building their own followings. "But in the beginning Zatarra was sitting alone in the dark and they needed contacts with journalists," Colquhoun says.

MiMedx wobbles

The Viceroy war against MiMedx strongly favoured the short-seller when in February MiMedx delayed its quarterly results and stated there was an internal review under way investigating its sales practices following the allegations of short-sellers and former employees. The shares plunged. It has also been linked to a Department of Justice investigation, which it finally confirmed this month when it also issued revenue guidance.

The three-man group has been prolific this year, but ran foul of regulators again when a recent report into German media company ProSieben flouted a rule requiring the regulator be informed of its recommendation before publishing on a company.

Viceroy does not seem troubled. It has been advised that it is not in violation of the law. "Viceroy Research is entitled to views and opinions under the freedom of speech and public interest. We have a full disclaimer to advise of conflicts. As stated previously, our research is from publicly available sources and easily validated, contrary to media assertions," the group says.

A spokeswoman for Germany's BaFin said the financial supervisory authority had launched an investigation into whether Viceroy had been involved in market manipulation in issuing on March 6 a sell recommendation for shares of ProSieben.

In a statement on March 12, BaFin said it issued "a warning" that Viceroy had not followed financial transparency procedures and had infringed the German Securities Trading Act.


Viceroy has subsequently taken on an even more ambitious scalp: the $US11 billion Nasdaq-listed chipmaker AMD which it accuses of fatal security flaws. It relies on the work of CTS Labs, a cyber-security researcher, in a report that has parallels with Muddy Waters-St Jude case.

AMD, according to Viceroy, is worthless and headed for chapter 11.

Bronte's John Hempton agrees short-sellers can be wrong sometimes and he has been on the other side of one of the biggest shorts of all time: Bill Ackman's bet against Herbalife.

"There are places where short-sellers go wrong. Short-sellers are attracted by weird businesses whose accounts say they are profitable. But some businesses are just unusual and weirdly profitable."

Herbalife is his favourite example because "the idea that a multi-level marketing scheme like Amway but selling diet protein shakes can have tens of millions of happy customers, and yet a sophisticated New Yorker has never met any of them, is strange".

"But it is completely real. Bill Ackman, a very famous short-seller, got short a billion dollars in the stock and loudly alleged fraud. He was wrong. It was an astonishing opportunity to profit by trading against the short-seller."

His starting point is that short-sellers' reports should be treated with the same respect as a highly bullish analyst report from a broker: "That is, no respect at all. Do your own work."

There is one case that does not flatter the actions of activist short-sellers and that pertains to another Canadian company, Fairfax Financial, whose war with some of the world's top hedge funds in 2005 was documented by journalist Matt Taibbi in his book The Divide.


Basing his reporting on court filings and interviews, Taibbi found the campaign, aided by a hired middleman, went as far as ritual prank calling of the Fairfax Financial CEO's cancer-stricken secretary in the middle of the night, and sending sinister letters to the CEO's pastor.

Home truths

Hempton anticipates the Australian market will lend itself to more "hit-and-run" style activism at the hands of overseas investors who are not discouraged by Australia's legal system and the ability to launch defamation actions.

"They've actually done a pretty darn good job. Quintis was well known amongst short sellers, I must have heard the argument that Quintis was a fraud at least 20 times before Quintis was hit. But it took an American to actually expose the scam. The American was protected by their first amendment" – which protects free speech – "and could avoid Australian defamation laws. It's even hard to serve them."

As Soren Aandahl explains it, the US is home to the most voracious activists because as well as first amendment protections, states have passed "anti-slapp" statutes, meaning that in a defamation action there is a significant burden on the plaintiff early in the litigation to prove not only that they have a claim but they're likely to win.

The effect is that companies are limited in their attempts to use legal resources to exhaust their opponents.

"These statutes have gone a long way into protecting free speech in the US, and by extension promoting a freer and more efficient market," the Glaucus short-seller says.

In 2015, the Supreme Court of Western Australia dismissed an application for discovery made by the then-TFS (later Quintis) against stockbroker Taylor Collison following a 57-page research report that the plaintiff alleged was misleading, deceptive and damaging.

The court found the research to be "sceptical" in tone but contained nothing "which could be regarded as misleading or deceptive", dismissing the application and awarding costs to Taylor Collison.

Large Australian companies cannot be defamed, but executives can. It's a system Hempton argues is rigged in favour of crooked businesses.

"Maybe our best defence is Americans who frankly don't give a damn," he says.