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Last month, Nathan Anderson tried to go unnoticed by slipping his 6-foot-4 frame into the back row of a packed courtroom in Lower Manhattan to hear the opening statement for U.S. v. Trevor Milton. Anderson, a 38-year-old whistleblower turned activist short-seller, was in attendance to voice his support for former Nikola contractor Paul Lackey. Two years ago, the two worked closely together to expose the activities that formed the basis of a federal prosecutor’s lawsuit alleging that Milton misled investors about the technological capabilities of an electric vehicle start-up. did.
Mr. Anderson did not testify. But Milton’s attorney, Mark Mukathy, repeatedly cited Hindenberg Research, a boutique investment research firm founded by Anderson, during the four-week criminal trial. Anderson, who sat in the back of the court, said Mr. Mukhersey told jurors that Mr. Lucky and Mr. Hindenburg could not be trusted, and that the only motive for accusing Mr. Milton was to make quick money. Made me feel uncomfortable.
It was something Mr. Anderson had never heard of. Corporate executives often use activist short-selling as malicious vigilantes or as “non-american” to bet on business. Retail traders are trying to drive them into oblivion, and critics suggest their ability to move stock prices is a potentially disruptive force in capital markets. , is investigating approximately 30 activist short sellers as part of a thorough investigation into potential market trading abuse. In February, the SEC tried to add transparency to this part of the market. Proposed new disclosure rulespromoted by some influential scholars in recent years.
But for Anderson and other activist short sellers, the Milton trial had the potential to reset the narrative. Activist short sellers, they say, are sniffing out corporate misconduct when regulators are stretched to their limits and journalists are underfunded.
Over the decades, Mr. Anderson’s firm has exposed misconduct in dozens of publicly traded companies. For the most part, Anderson shorted his target and was often profitable. None was greater than his investigation into Nicola.
In September 2020, Hindenburg issued a scathing criticism. investigation report It calls the EV maker a “complicated scam” and calls Milton a liar. Initial response to the report was prompt. The stock was cratered. Milton resigned, and federal prosecutors later charged him with wire fraud and securities fraud.
The SEC apparently also read the Hindenburg study. The company launched a fraud investigation, and the company later declared he did not commit any wrongdoing, although he imposed a civil penalty of $125 million.
This series of events brought Mr. Anderson, who was virtually unknown on Wall Street, into the spotlight. Within a week of Nikola’s June 2020 initial public offering, investors pushed its valuation to more than $34 billion, making him one of the hottest EV startups on the market, overtaking Ford Motor Company. Stories of how I beat them were scattered all over the business page. Featured on a podcast.
The Milton case wasn’t the first time Mr. Anderson’s misconduct led to criminal trials, but the relationship between Mr. Anderson and Mr. Hindenberg has never felt higher. Still, Anderson didn’t believe Milton’s trial would lead to a conviction. Convincing a jury that a director of a publicly traded company has committed securities fraud is a much more difficult task than persuading investors to join a campaign to short the same company, he said. recognized.
“I think it’s often daunting for prosecutors to take big cases like this,” he said. , you know, the kind of corporate legal person who goes into all these kinds of cases. ”
When a jury found Milton guilty of three counts of fraud last week, Anderson felt guilty. “I really think it’s an important win for white-collar criminal prosecution in America,” he said.
On the day the jury read out the verdict, Anderson congratulated those he deemed “good guys,” including the whistleblower’s informant.who worked with us” For those who doubt, he soberly served the tweetfor example, the stock analyst who stuck with Nikola after the first Hindenburg report suggests it needs to go into the “sell-side shame research hall.”
The moment of proof has arrived as activist short sellers face more scrutiny than ever before.
Hindenburg is on a list of activist short sellers being investigated by the SEC and Department of Justice. reported by Bloomberg in February. Anderson said he doesn’t yet know what investigators want.
“I haven’t received anything,” said Anderson. He added that he was confident investigators would never find conclusive evidence. There’s so much reading filings, talking to former employees and industry sources, and doing lengthy research. ”
In addition to the investigation, some critics are calling for new rules to curb activist short-selling activity. In 2018, Joshua Mitts, associate professor at Columbia Law School, wrote a research paper:short and distortionIn it, he found that short sellers, including activist short sellers who regularly hid their identities, helped wipe billions of dollars worth of publicly traded companies in attacks.
Since then, Mitz has spearheaded efforts to introduce regulatory changes aimed at bringing more transparency to activist short-selling trading and reducing market volatility. The SEC incorporated some of his thoughts in his proposal from February. This includes short sellers making outsized bets on listed companies filing monthly disclosures about their positions.
Asked this week to comment on Hindenberg’s role in the Milton case, Mitz declined an interview with Dealbook.
Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, believes attempts by whistleblowers and activists to silence short selling are bad for markets and democracy. increase.
“In a free society, one of the most valuable sources of news is negative news. Everyone is happy to share good news,” Zingales told DealBook. “Society needs more incentives to report this bad news.”
Bad news can be a dangerous business. In one of his most famous failed short campaigns, hedge fund manager Bill Ackman placed a $1 billion bet on the nutritional supplement company Herbalife, calling it a pyramid scheme, Said the stock would go to zero. Another billionaire investor, Carl C. Icahn, stood on the other side of the bet and eventually became the company’s largest shareholder. Herbalife was eventually fined by the Federal Trade Commission for deceiving buyers and sellers of its products, but it continued to operate and its stock price did not crash.
Despite the risks, Mr. Anderson held his breath. He opened a new short position on Nikola shortly before the trial began, assuming that worse news would hit the stock price. Nikola’s stock price has fallen about 40% since the first day of the trial.
But Anderson never lives big.
He wouldn’t say how much he made at Nicola Short, but said Hindenburg had grown from five to nine with an office somewhere in Manhattan over the next two years. (He doesn’t say where.)
He still lives in a rental and his car is on lease. New boat? “No.” A New York Knicks season ticket? “No, I haven’t seen a game in quite some time.”
Markets are no longer the fertile ground for scammers they once were. A common target for activist shorts in recent years has been Special Purpose Acquisition Companies (SPACs), which entered the public market with relatively little scrutiny.
Mr. Anderson was surprised. Nikola entered the market through the merger of SPACs.
Overall, the number of SPAC IPOs has been steadily declining, and we can see the impact in Hindenburg’s proceedings. According to Anderson, only three of his research reports on publicly traded companies are currently public. He and his researchers have branched out into what he calls the private sector Ponzi scheme. But you can’t short a company like that, so the payoff (hoping for a whistleblower bounty) is hardly worth the effort.
Anderson thinks he and his team will be busy for a while. If you ever felt like most of America’s corporate fraud had been removed, you’d announce that you’re going to grow tomatoes or something. ”
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