Short Selling

Business Model: Malicious Gossip

  • Why it matters

    Why it matters

    Can financial markets allow rapacious hedge fund companies to falsify reports just to take advantage when that company’s share prices fall? No, but sometimes these reports turn out to be true. Investors need to use caution.

  • Facts

    Facts

    • Hedge funds have global capital assets of seven trillion dollars (6.5 trillion euros) in equity and debt. And only a fraction of this flows into short-selling.
    • According to data of the German Federal Financial Supervisory Authority (BaFin), the number of short-sell business transactions has more than doubled since 2013.
    • During the financial crisis of 2008, the BaFin prohibited these kinds of transactions with loaned shares at 11 financial institutions like Deutsche Bank. This was done to avoid a destabilization of the stock market and companies.
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    Audio

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Germany, Hesse, Interior of Frankfurt Stock Exchange
Frankfurt's stock exchange is being zeroed in on by some shadowy short-sellers. Source: picture alliance/Westend61

After three days, the rollercoaster ride was over. It began on Tuesday, when Gotham City Research, a shadowy, U.S-based investor, attacked Aurelius Equity with a devastating analysis that questioned the company’s accounting and argued that “Aurelius’ shares are worth no more than €8.56 per share.” It was a particularly harsh assessment, especially considering Aurelius stock price was about 88 percent higher at the time.

In two days, shares of Aurelius lost half their value, erasing €1 billion ($1.07 billion) in market capitalization. Aurelius rejected Gotham City’s analysis and argued that the hedge fund intentionally presented known facts in a misleading way, drawing false conclusions. The pushback didn’t seem to help. Even investment companies that think long-term got rid of their shares in Aurelius.

Gotham City and other short-selling firms like it speculate on falling share prices. Trading borrowed shares, they profit when the price of those shares drop. Parallel to the release of its negative analysis, Gotham City bet that Aurelius shares would plunge, making millions in the process.

Increasingly, short sellers are targeting German companies. The country’s financial regulator is monitoring the situation.

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