In comic books, the masked vigilante carries a double-edged sword as far as the authorities are concerned. The mysterious hero sorts out baddies but operates outside of official control and might even risk breaking the law himself.
The rise of the independent short selling research analyst has created a similar dilemma for regulators and investors. These outfits, often run by anonymous lone wolves, have become in recent years influential voices across geographically diverse stock markets, from London to Hong Kong.
While traditional short sellers — investors who bet against company share prices — have been large hedge funds risking their own capital, the motivations of the research groups can be more diverse.
Some serve as guns for hire, taking on commissions from clients and later publishing their research online. Others invest their own money into their ideas, just on a smaller scale than conventional hedge funds. Others claim a moral imperative for their work, saying they are rooting out corporate fraud conventional investment bank analysts are too conflicted or lazy to seek out.
For traditional fund managers, who have been used to relying on the opinions of investment banks, the ability of a new breed of talented analysts to wipe millions from the value of their holdings armed with only an internet connection and blog has come as a shock.
“This is a new type of risk we need to consider when we invest,” says one UK-based fund manager. “The nature of financial markets is changing and the way information and opinions about a company spread is very different to before.”
One of the most successful and respected of the short selling research groups is Gotham City Research, named with a nod to the home town of the archetypal masked vigilante, Batman. Gotham, which is run by the research analyst Daniel Yu, has quickly built a reputation for uncovering irregularities at the companies it targets.
Few institutional investors had heard of it until it published a strongly worded report questioning the accounts of Quindell, a UK-listed legal and insurance company. Quindell later won an uncontested libel action against Gotham but the impact of the report on its share price was devastating.
Having been one of the UK’s best-performing shares over the previous year, helping Quindell grow to become one of the most valuable companies on the Aim market, the shares slumped as investors took fright at Gotham’s assessment.
While Quindell denied there was any truth to the Gotham report, its founder and chairman Robert Terry later was forced to resign over misreporting a share transaction and Gotham was able claim an element of victory.
Some of the world’s largest hedge funds profited from selling Quindell shares short, while bullish investors, including M&G, the investment arm of the Prudential insurance company, and the hedge fund Algebris, were left embarrassed.
Gotham followed up with an investigation into Gowex, a Spanish wireless internet provider that had grown into the largest company on Madrid’s small company exchange. Less than a week after Gotham questioned Gowex’s accounting, the latter’s founder and executive chairman Jenaro Garcia admitted the company had fabricated its earnings and shares were suspended from trading.
Another group claiming success is Muddy Waters Research, run by Carson Block, which came to fame for alleging accounting fraud at a Canadian-listed Chinese forestry company that filed for bankruptcy protection in 2012.
Some critics argue, however, that such analysts can spread dangerous misinformation. “These guys can say anything they want and destroy the value of companies without facing any consequences,” says one executive from a large hedge fund. “If one of my employees were to do what they do we would be called up by the financial regulator in five minutes.”
Companies that have been targeted by short selling research groups have become more co-ordinated and robust in their responses. This year Noble Group, Asia’s largest commodities trading house, issued a long and detailed rebuttal to allegations about its balance sheet by Iceberg Research, a group that publishes its notes on its blog and on Twitter.
But the vigilantes are unlikely to disappear soon. Company executives and investors may well just have to become accustomed to opinions from a broader range of sources than before.
And anyone contemplating committing financial fraud at a listed company must now be fearful in case the caped crusaders of the financial markets may swing in their