Famed short seller Carson Block, the founder of Muddy Waters Research, urged fellow short sellers on Monday to address immoral corporate behavior by calling out individuals on Wall Street for their stock calls and buys.
“I think activists can occasionally take short selling to what I say is another level and that we can short a stock for reasons that have to do purely with the immorality of the company. That hasn’t been expressly done before, and I think it can be done and it should be done,” Block told a room of 150 investors at the Kase Learning Shorting Conference in a presentation entitled “Activism Short Selling: Purely Moral Short Thesis.”
Former hedge fund manager Whitney Tilson, the founder of Kase Learning, told Yahoo Finance that he agrees with Block entirely.
“I think short sellers have this sort of bad reputation because they’re betting stocks go down, it sort of seems un-American. But in fact, short sellers, by and large, are exposing bubbles, but often fraud, companies that are doing nefarious things, harming people,” Tilson said.
Block, who’s made a name for himself by alleging fraud at publicly traded Chinese companies, said the underlying reason behind his message for the short selling crowd is that the private sector has “far more power than it ever has in modern times vis-à-vis the government.” One of the main drivers behind this power imbalance has been the ability for people to innovate and invent at a more rapid rate than people are able to adapt and understand the risk of what’s been created, he said.
He pointed to off-shore drilling, financial derivatives, nuclear power, and the role of the private sector in the opioid crisis as recent examples of rapid innovation outpacing public understanding.
An ‘unabashed appeal to decency’
“Being a little bit of a skeptical guy, I haven’t been totally happy with the conduct we see in corporate America or the rest of the world, especially in healthcare,” Block told Yahoo Finance after his speech.
According to Block, short sellers have taken the wrong approach by delivering the “regulators are coming” message as part of their bear case. Instead, short sellers should make an “unabashed appeal to decency,” Block said.
“When I looked at what the allegations were, I said, these are companies being accused of, and in some cases, pretty much proven to have done horrible things — getting Americans addicted to highly toxic opioids and some of them dying. And so I thought that we as activist short sellers … we should make appeals to investors, ‘Hey, you need to sell these stocks because if you don’t management cashes out.'”
According to Block, numerous players in the capital markets have inadvertently allowed bad behavior.
“Most of America is missing the role American capital markets play in enabling this egregious behavior,” he said.
Many of these executives are incentivized with their compensation in stock, Block noted. They benefit from higher stock prices and when they cash out of their shares.
Long-oriented investors should realize that they “publicly support companies” by providing the bid and contributing to those bad behaviors, he explained. It’s important that they understand their role, Block stressed.
On the sell-side, Block says that analysts who cover these stocks need to be held accountable for the research and calls they make. After presenting their appeals to investors, Block says, short-sellers should resort to calling them out, not by their firm, but by their name.
“I think really the key here for activist short sellers is to name individual names on Wall Street,” Block said. “A lot of activist short sellers in the past would have said ‘Goldman Sachs this or UBS that.’ Nobody has really talked about who is the analyst who put out the buy recommendation? Who is the portfolio manager who decided to upsize their investment in the face of news that the company may have really crossed the line? And I think that’s what we as activist short sellers if we’re going to engage in morality campaigns is that’s what we really have to focus on is individual accountability.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.