Wednesday, April 9, 2008
Short-Selling Short Sellers
"You would think that by now public companies that monkey with their numbers would get the hint: Suing critics almost always backfires. If nothing else, lawsuits or other attempts to discredit short-sellers, bearish analysts and others--including financial journalists--are often, in an oddly backhanded way, confirmation that the critics will be proved right. ... It didn't matter, apparently, that at the time Biovall was under investigation by the [SEC]. As a result of the publicity surrounding Biovall's claims, the SEC launched a probe of Gradient, which was eventually dropped, leading to the ultimate of ironic twists: In recent days, Biovall was sued by the SEC on charges of accounting fraud based, in part, on the same charges levied by Gradient and David Maris, who had been an analyst at Bank of America. ... After being sued by the SEC, Biovall quickly settled without admitting wrongdoing, by paying $10 million. ... Short sellers ... [are] not just shorting a stock to bring it down, but they're shorting because they think it's a bad company", my emphasis, WSJ, 29 March 2008.
Enough from the SEC. It's ability to close a case with a firm not admitting wrongdoing must end. Now. Either the SEC should walk away from a case with nothing, or make a criminal referral. These nominal settlements reek of being an SEC extortion racket to protect miscreants while appearing to protect the investing public. What's $10 miilion to Biovall? With a current $1.8 billion market cap, down from $9.0 billion 4.5 years ago, not too much. I agree, a short seller will only profit from short selling if the target really is a bad company. Leave us never forget the SEC's actions in the Ray Dirks fiasco, see my 6 October 2007 post.