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


    • 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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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.

Though the attacks are speculative, they aren't necessarily always without merit.

The number of short-selling transactions more than doubled from 2013 to 2016, from 6,700 to about 14,500, according to data from Germany’s top financial regulator, the German Federal Financial Supervisory Authority, or BaFin. Ingo Speich, a portfolio manager at Union Investment, says there is no end in sight to the growing trend given, in part, the “high financial inflows from activists and activist hedge funds.”

In Europe, most hedge fund companies are based in London. They are often well networked and exchange information. In the case of Aurelius, Gotham City was not alone in betting on a steep drop in the firm’s stock price. Other companies included Jericho Capital Asset Management, BG Master Fund and CQS.

Founded in 2013, Gotham is well known in England for its attack on the outsourcing company Quindell, an insurance claims outsourcer. Gotham City issued a scathing report on Quindell’s accounting practices, setting off a massive drop in Quindell’s stock price.

Though the attacks are speculative, they aren’t necessarily always without merit. In 2015, Britain’s Serious Fraud Office announced that it was launching a criminal investigation into the business and accounting practices at Quindell. That investigation is ongoing. In 2014, Gotham City caused a sensation with a report about apparently fraudulent practices at the Spanish internet company Let’s Gowex. The Spanish firm later admitted to falsifying its accounts for a period of four years and filed for bankruptcy.

In its own assessment, Germany’s Berenberg Bank said that “most of the accusations in the Gotham report are either unimportant or false.”

Activist short sellers say they are exposing faulty practices that harm investors – Gotham City’s name alone suggests a certain market vigilantism – but their financial interest in taking down companies, say critics, can cause them to exaggerate management problems or fuel negative rumors.

Gotham City does not itself provide the transparency it demands from others. It offers little information on its website, and no telephone number. The firm did not respond to questions from Handelsblatt.

In Germany, Aurelius is far from the only company that has become a target of short sellers. SMA Solar, a maker of solar energy equipment that was once the darling of the German Stock Exchange, has been closely watched by speculators since last August. According to the latest information (see graphic below), over 26 percent of the company’s freely tradable stock are borrowed shares belonging to speculators betting that its stock price will fall.

Activist short sellers are not always successful, at least in the long term. Early last year, a controversial report by the short-seller Muddy Waters Capital about the accounting practices at German advertising firm Ströer caused the company’s stock price to tumble. Ströer’s chief executive, Udo Müller, refuted the report. Today Ströer’s shares have recovered.

31 p7 Playing With Fire 2-01
Short Selling Aurelius

On Wednesday, Gotham founder Daniel Yu said his firm will publish another report about Aurelius within a week. Aurelius, which purchases troubled companies as a turnaround investor and engages in other types of asset management, has strenuously denied the allegations about its accounting practices, calling them “unfounded and distorting reality.”

In its own assessment, Germany’s Berenberg Bank said that “most of the accusations in the Gotham report are either unimportant or false.” Aurelius itself has announced an additional stock buyback program of over €50 million.

During the financial crisis of 2008, the financial regulator BaFin temporarily banned short selling at several financial institutions, including Deutsche Bank, in order to avoid further destabilization of the stock market. Many financial market experts, however, believe a general ban on short-selling would be excessive.

“Short-selling could be an important part of a well-functioning capital market,” said Eric Fellhauer, co-chief of the German investment bank Lazard. “If, however, over-critical reports are published in order to intentionally put pressure on share prices and through this tactic to make a lot of money, then this is morally reprehensible and being conducted in a legal gray area,” Mr. Fellhauer said.

German regulator BaFin wants to find out if this is applies to Aurelius. It announced that it is going “routinely analyze” the trading of its shares.


Peter Köhler covers funds and private equity firms for Handelsblatt and is based in Frankfurt. Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. and

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