A Terrible, Horrible, No Good, Very Bad Day

That’s what a short attack feels like.  I know.  I’ve been there. (To read about my terrible, horrible, no good, very bad day, see my case study here.)

By way of background, a short attack is when short seller(s) actively seek to profit by driving a stock price down.  Just about any company can become a target of a short attack, but those with complicated corporate structures, in regulated industries or with low liquidity or low float are most vulnerable.

Short attacks can be launched by well-known activists or anonymous bloggers operating out of their basement.  Such an attack can come swiftly in the mainstream business media and/or private investor forums like Value Investor Club.  One thing for sure is the market reacts before ascertaining the facts, so during a short attack a company is immediately forced into a defensive position regardless of the merits or accuracy of the short’s thesis.

What is particularly frustrating is the SEC historically has been skeptical of allegations against short sellers. When complaining about shorts, companies are often viewed as whiners and are rarely successful litigating claims against them.  Still there’s a glimmer of hope this may be changing. For the first time in recent memory, the SEC prosecuted a hedge fund last fall for its part in making demonstrably false and misleading statements during a short attack according to a Vinson & Elkins insight post.  This action will hopefully serve as a deterrent to the more egregious attacks.

Still, short attackers are not likely to go away anytime soon, so its best to be prepared.  Begin by assessing your company’s vulnerabilities.  A good resource to help you develop a short attack defense strategy is a primer put out by Ropes & Gray in late 2017.  In addition to this primer, here are some thoughts based on my experience:

  • Keep your ears to the ground. Be alert when seemingly tangential or even inconsequential questions begin to crop-up. Engage with investors, especially hedge funds, as they may catch wind of something before you do.
  • Assess your company’s risks and vulnerabilities and be familiar with common short seller tactics. This will help you be better prepared because once an attack begins, you may not have time to analyze the attacker’s playbook.
  • Aggressively monitor changes in short interest via your stock surveillance firm or retain a market structure analytics provider for timely updates. Know what’s normal for your company.
  • Don’t assume a short seller’s blog reaches a limited audience. If your stock is reacting and investors are calling, the game is afoot.  Focus on the best way to respond based on the merits of the short seller’s thesis and company vulnerabilities.  Regain control of the narrative and don’t engage in a public tit-for-tat.

My top recommendation is don’t get angry or distracted – focus your energies on defending and protecting the company.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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