Short Shrift
Short Selling
Loosely speaking, short selling is borrowing shares of stock to place a bet that its value will go down. You put up some margin to borrow the stock - generally not its full value - and interest payments depending on how long you float the loan, and at some point in the future you ‘buy’ the stock, hopefully when it’s a lot cheaper. The difference between the higher and lower price, minus your borrowing costs, is your profit.
Despite the number of angry CEOs who blame short sellers for their stock falling, it is not a particularly common nor profitable endeavor. Primarily, this is because it is dangerous to short a stock - since stocks can go up a lot, you have what is called ‘infinite’ downside. If I buy a stock at $5 and it goes to $0, I lose five bucks. If I short a stock at five and it goes to a thousand, I’ve lost a lot of money. Also, regulators and even the DoJ have put scrutiny on short sellers as of late, buying into Wall Street’s accusations their actions amount to market manipulation.
So if short selling is so risky, why do people do it? For some, shorting is a way to keep markets honest. We’ve detailed a couple of the most successful short campaigns in these pages - Luckin Coffee was exposed by Muddy Waters and went bankrupt, Nikola is still hanging on but its founder is headed to prison for fraud.
Nikola was exposed by a plucky researcher named Nate Anderson who runs Hindenburg Research out of New York. In the last few years, his team has put out reports exposing accounting and management issues or outright fraud at thirty companies, taking short positions against them. Since its blockbuster Nikola story, Hindenburg has gained respect in the markets, and its reports push stocks down an average of fifteen percent upon release. This year alone, Anderson has wiped out almost a hundred billion dollars in net worth from three prominent billionaires, and shaved hundreds of billions off companies’ valuations. Hindenburg must be making a killing, right?
Not really. For example, Hindenburg recently released a scathing report on Carl Icahn’s company:
Within four weeks, the stock’s plunge erased $17 billion of the billionaire’s wealth. Yet the combined gain for all investors who shorted the shares before the report would have been about $56 million if they timed their exits perfectly, according to data from S3 Partners. And that’s not counting the cost of setting up the bets.
Fifty-six million isn’t pocket change, but that’s across every short seller in the stock, in a fantastical best-case scenario. Hindenburg may have made a few million dollars off Icahn, but it’s barely a fraction of the ‘wealth’ it erased. Anderson says he does it because it’s the right thing to do - exposing malfeasance - not to make himself as fabulously wealthy as the billionaires he sometimes targets.
Isn’t there, like, some kind of agency that is supposed to regulate securities and their exchange and catch these things? Last week we talked about how audit firms don’t keep anyone (including themselves) honest. Where’s the SEC in all this? Before founding his firm, Anderson tried to work directly with them:
After a few below-the-radar jobs on Wall Street, he tried earning a living by submitting tips to the Securities and Exchange Commission’s whistleblower program, hoping to collect rewards from successful federal investigations. But he struggled to make ends meet. So he published more reports online.
Unlike the researcher who spent years sounding the alarm about Madoff while the SEC ignored him, Anderson took his research to the people, who were more inclined to believe him than the people in charge of regulating the markets.
Thus far we’ve only discussed short sellers in US markets, but what about foreign firms? That can be a more dicey proposal:
In some locales, organized crime is endemic. Short sellers say threats of physical violence and death are common.
Fahmi Quadir, a hedge fund manager who has bet against companies outside the US, said she was hit by a masked man wearing brass knuckles while she was walking her poodle in Manhattan.
Yikes. In the US, a short may have to deal with legal threats and lawsuits, but if they go into less structured markets they could end up in a Double Dragon encounter. Cool! Even in European nations, regulators can be extremely sympathetic to the targets of researchers and journalists, rather than the other way around.
The biggest target Hindenburg set its sights on is the Adani Group in India - wiping as much as $150 billion off the value of a group of companies run by the Indian billionaire Gautam Adani. Anderson exposed a shadowy network of shell companies, mostly owned by Adani, engaged in a variety of accounting gimmicks to keep a murky web of energy and transportation companies growing at a breakneck pace.
India is not America, though, and setting aside Adani’s close ties to the country’s president, the growth fueled by his shady accounting has given the billionaire such a lock on domestic markets it may be impossible to impose any real penalties:
Adani companies handled about 43% of all shipping containers in this nation of 1.4 billion, a third of all coal transported, about 22% of private thermal power capacity, the largest number of solar and wind plants, and 51% of India’s private electricity transmission. His airports help move nearly 75 million people annually, more than the population of France, and his ambitions are now expanding to doorstep delivery and logistics.
We’ve talked about tech companies using predatory pricing to illegally grab market share, but that pales in comparison to what Adani has done over the last decade. He’s made himself and his companies indispensable to the world’s fastest growing economy. Hindenburg has shone a spotlight on how he went about doing that, but in a country whose future depends on delivering electricity and goods to more than a billion people, Adani may have made himself un-shortable.
IRL
Is it worth talking about a ‘social media app’ (gigantic air quotes) no one’s heard of not once but twice in these pages? I suppose that depends on whether you enjoy spicy court filings detailing the internal workings of a fraudulent company run by fraudsters. If you do, please continue reading, because boy oh boy:
At the time of SoftBank’s investment, IRL was funneling tens of thousands of dollars to proxy services to enable an army of “bots,” the entire purpose of which was to make IRL appear to be a thriving social media site while Defendants orchestrated an elaborate scheme to defraud investors. IRL also paid hundreds of thousands of dollars monthly to a firm (the “Agency”) secretly operated by IRL’s own Head of Growth, in a coordinated scheme to conceal IRL’s user acquisition costs and further IRL’s image as a thriving social media app.
Two things: one, I am paraphrasing from Matt Levine’s write-up of this lawsuit and a few other Tweets about it because I am not a lawyer and/or reading 40 pages of legal filings and two, this is a complaint filed by Softbank so it’s going to sound as damning as possible because they’re the plaintiff. Still, one presumes Softbank has actual proof of most of these claims, which makes stuff like this very funny:
On March 16, 2021, less than a month before the Series C discussions with SoftBank commenced, a CEO of another tech company noted in an email to Abraham Shafi that “IRL got hit by a massive bot attack generating millions of fake groups to join.”
[…]
Abraham Shafi boasted about IRL’s sudden user increase the very next day. On March 17, 2021, Abraham Shafi received an email from an investment firm who was impressed with IRL’s meteoric buildup of active users: “What’s happened with DAUs recently? Whoa.” In response, Abraham Shafi falsely explained that “[n]othing specific happened” other than “[e]ngagement is increasing and usage is spiking. Our servers are on fire. We are just beginning our journey of massive growth and engagement!”
Yes, their servers were on fire with the millions of bots Shafi and his colleagues had unleashed upon them. Sometimes a CEO trying to perpetrate a fraud to make themselves millions will keep said fraud from lower-level employees so incriminating statements don’t end up in company chats or emails. This was decidedly not the case at IRL:
On August 19, 2021, an IRL employee created a Jira ticket titled “A series of users for IRL bot that spurs engagement in chat.” The employee sent the ticket to Jacob Shafi, among others. In the ticket, the employee described a plan to “Add Fake Users & Fake Chats to All Public Groups with Less than 10 People.”
Yeah, when you’re writing Jira tickets to pump bots into every public group, it’s going to be difficult to keep things a secret when a global investment firm buys in for $150 million. Softbank is not known for doing much due diligence before throwing huge sums of money at startups making bold claims, but given their recent history they’ve clearly hired a few people to go over the books.
I know we keep talking about these types of scams and they show no signs of stopping but, again, what was Shafi’s end game here? Did he think Softbank would let him waltz off with tens of millions and just write off IRL as a failed investment? I mean, to be fair to him, they’ve done it before, but there’s a distinct difference between ‘fluffing’ your numbers and projecting you’ll have meteoric growth, some day, if only Daddy Son gives you a hundred million to make it happen, and simply lying about your existing business to the tune of ninety-five percent. One of those things probably should be illegal but is currently not, and one is definitely illegal and will get you in trouble.
Trump
Speaking of putting your crimes in writing, let’s talk about the ‘big’ (gigantic air quotes) political news of the last couple weeks - Trump’s new indictment for trying to do a coup, and the superseding indictments in the documents case in Florida.
One problem with an actual wide-reaching government conspiracy is there are a lot of people involved who presumably do not want to go to jail so they will keep meticulous records of all the conspiratorial things being asked of them, and document their objections to said schemes:
[Special Counsel Jack] Smith cites examples — many previously known — of those around Trump directly informing him that his claims were false and his schemes dubious. They included Vice President Mike Pence, top Justice Department officials, top White House attorneys and campaign staff members, key state legislators and officials, and state and federal courts.
Typically, a difficult thing to prove in fraud cases is intent - whether the defendant knew what they were doing was wrong or illegal. Trump is a defense attorney’s worst nightmare in that regard:
Trump is also described as acknowledging that claims about voting machines by Co-Conspirator 3 (apparently Sidney Powell), which he would echo repeatedly, were unsupported.
And, again, you’ve got people working for Trump putting that shit in writing:
Smith cites how, on the eve of the Dec. 14 deadline for electors to be declared, Trump aides declined to put out a statement about the move to advance alternate slates because none of them could “stand by it.” One top official called it “a crazy play so I don’t know who wants to put their name on it.” An adviser labeled it “certifying illegal votes.”
Your honor, my client’s ‘certifying illegal votes’ note in the Word document is being taken out of context! A big open question is what’s going to happen to the six un-indicted co-conspirators, who seem to be the handful of people who are not cooperating with authorities. Does the government plan to go after everyone involved in the attempted coup? Would they have a potential defense that they were simply following the President’s instructions? Who knows!
The other case coming out of the Special Counsel’s office has indicted Trump’s co-conspirators, because once again, they put that shit in writing:
On June 27, 2022, De Oliveira walked to Mar-a-Lago's IT department and asked the department's director to come with him, the indictment said. The two allegedly went into an "audio closet" near the White and Gold ballroom, and De Oliveira allegedly told the employee that "the boss" wanted the server deleted, the indictment alleges.
[…]
Later in the day De Oliveira spoke with Nauta over text and in person, and De Oliveira spoke with Trump in person, the indictment said.
Trump is famous for doing most of his scheming in person, perhaps because he’s permanently frozen in 1990s New York, when mobsters communicated that way to avoid wiretaps or whatever. The problem is everyone around Trump was busy texting and emailing his requests, because such forms of communication are ubiquitous to literally everyone else.
One written medium Trump did use profusely for years was Twitter, and it turns out the Special Counsel subpoenaed his Twitter account earlier this year which, uh oh:
The warrant, which was signed by a federal judge in Washington in January after Elon Musk took over Twitter, now called X, is the first known example of prosecutors directly searching Mr. Trump’s communications and adds a new dimension to the scope of the special counsel’s efforts to investigate the former president.
Amusingly, Musk dragged his feet for days and was hit with a $350,000 fine for lack of cooperation. Less amusingly for Trump, the entire thing was kept secret for half a year, so the Counsel’s office had plenty of time to go through all his messages before he had a chance to delete them.
It is very difficult to do any sort of crime these days without putting something in writing, because we’re a tech- and word-based economy. Whether you’re doing a coup or stealing confidential documents, even if you eschew computers and texting, someone in your criminal conspiracy is most definitely taking notes.
Texas Pete’s
If you are a local journalist, ledes like this are your bread and butter:
Looks like the legal battle over Texas Pete's authenticity is just warming up.
That’s right, we’re talking hot sauce lawsuits! This story is of particular interest to the Houston Chronicle because a company in North Carolina is being sued for it’s Texas Pete’s hot sauce, which is not made in Texas, and is also apparently Louisiana-style (??) T.W. Garner Food Co, the manufacturer, attempted to have the suit tossed out, and a judge ruled against them:
However, in her 20-page order, [Judge] Frimpong argued that customers who see the bottle's label, which depicts a lone white star and a lasso-wielding cowboy, "could believe—erroneously—that the products originated in Texas."
I mean, yeah! The fact that the bottle says TEXAS on it could also lead someone to believe it was at least peripherally involved with the state. While I am not privy to the creative process behind the hot sauce, the company’s legal defense was, to put it mildly, unconvincing:
Garner Foods also argued that the name "Texas Pete" does not refer to the state of Texas, but could refer to the "coastal town of Texas, North Carolina," which Frimpong called "unavailing."
They can’t even say it with a straight face! Sure, your honor, it ‘could’ also mean this other place. The town of Texas, North Carolina, with which we are all deeply familiar. It took a few tries to even convince Google to show me where Texas, NC is and it wasn’t confident enough to provide a red pin:
I think it’s somewhere northwest of Old Trap? Maybe? Why is there only one photo associated with the town taken at a beauty pageant? Anyhow, if I were a member of Garner’s legal team, I might have spun a tale of how Pete, growing weary of roping cattle in his native Texas, moved to North Carolina and was anointed with the nickname owing to his geographical origins. Oh that’s Texas Pete, people at church would say to one another. Didn’t he also live in Louisiana for awhile? He makes such good hot sauce!
It’s fine to create little bits of lore for fictional characters tied to your brand. It’s probably not fine, legally speaking, to make a hot sauce named after one state, in a different state’s style, made in a third state, and offer up incredible defenses as to why.
MrBeast
Elsewhere in food news, the ghost kitchen company MrBeast was suing is now suing him, saying he violated his contractual obligations and made disparaging remarks. I think it is important to tell both sides of a story, especially when one side is a shoddy ghost kitchen conglomerate and the other is an influencer who likes to give out money to strangers on YouTube.
Short Cons
WaPo - “UPC, the ninth property insurer in Florida to go insolvent since 2021, and the largest to do so in 15 years, left many of its Florida customers in a similar nightmare, facing what is predicted to be a powerful hurricane season with still unfixed, hazardous homes, drained life savings and, in some cases, no insurance to protect them.”
NYT - “In the hours before the posts went live that morning, Ms. Cuomo exchanged dozens of text messages with Ms. Vavare and another leader of the pro-Cuomo group We Decide New York, Inc., pushing the activists to target Ms. Bennett, one of the first women to accuse Mr. Cuomo of sexual harassment. She appeared to invoke her brother’s wishes.”
Axios - “The company claimed that it provided 68% of "less-than-truckload" services to the Defense Department — an unverified figure that Treasury appeared to take as gospel — and launched a lobbying campaign that included talks with Trump White House officials and supportive letters to Treasury Secretary Steven Mnuchin from elected officials of both parties.”
Guardian - “The poorest countries receive just 1% of the global morphine supply, despite having 50% of the world’s people, according to a report published in 2017 by the Lancet’s commission on palliative care and pain relief. In Nigeria, for example, there is only enough morphine available to meet 0.2% of needs. In Canada, by contrast, there is enough to meet more than 3,000% of national needs.”
WSJ - “But most whistleblowers don’t become rich or famous. Many destroy their relationships, lose their jobs, turn disillusioned when their big revelations are greeted with ambivalence. Since the SEC launched its whistleblower program more than a decade ago, the agency has received more than 64,000 tips. By late 2022, 328 of those whistleblowers had received financial awards.”
TechCrunch - “A group of researchers said they have found a way to hack the hardware underpinning Tesla’s infotainment system, allowing them to get what normally would be paid upgrades — such as heated rear seats — for free.”
American Prospect - “A bipartisan group of lawmakers is pushing for a piece of financial reform that would unshackle small businesses and consumers alike from the maw of Visa and Mastercard’s credit card duopoly. Wall Street, in response, is spending millions to thwart the bill’s recent advances by fueling a conservative culture war over gay pride demonstrations and Chinese influence.”
The Verge - “According to the report, response times are erratic, and in some cases, Meta doesn’t react at all or offer any explanation. That allegedly applies even to highly time-sensitive content, like serious threats and calls for violence.”
Forbes - “Reviews by the Pentagon’s inspector general in 2019 and 2021 found that immediately after acquiring a company, TransDigm raised prices on 44 of 46 items, and reaped profit margins as high as 4,436% over the 15% that investigators deemed reasonable.”
Know someone thinking of starting a hot sauce company named after a totally different state? Send them this newsletter!