Market Maverick: A Conversation with Short Seller Fahmi Quadir

Short Selling as a Tool to Expose Corporate Scandals

• Short selling involves borrowing shares, selling them, and hoping the price will drop so they can be bought back at a lower price for a profit.
• Short sellers target companies engaged in fraud or predatory practices, believing they are bad for business and can be shorted based on fundamental analysis.
• Short selling requires accepting potentially infinite losses and standing against prevailing narratives.
• Systematic short selling is important for market liquidity and price discovery, but some short sellers use it to expose injustice and correct bad capital market behavior.
• Short sellers often expose corporate scandals because whistleblowers risk their careers, and the media benefits from exposing scandals.

Wirecard Case Study

• Wirecard is used as a case study to illustrate how short sellers identify and research potential short-selling targets.
• The short seller went directly to Germany's Securities regulator, Bafin, to report concerns about Wirecard.
• The short seller attended an investor day for Wirecard and sat behind the unaware CEO, Marcus Braun.
• The short seller's report led to a 19% drop in Wirecard's stock price and a trading halt for over an hour.

Challenges and Considerations in Short Selling

• Maintaining a short position over a long period requires conviction in the thesis.
• Regulators may be hesitant to enforce regulations during economic growth due to potential collateral damage.
• Short sellers are not the cause of companies going bankrupt; fraud is the primary reason for investors losing money.
• Short selling is a volatile strategy, and investors in short-only funds should be long-term oriented and able to withstand market fluctuations.
• Short sellers try to avoid situations where they are the only ones shorting a stock, as this can lead to a margin call if the stock price moves against them.
• Short selling can be an effective tool for price discovery, as high short interest is often an indicator of stock prices that will eventually fall or accounting issues.
• Short selling promotes liquidity because it allows investors to take on additional leverage and buy more stocks.

Short Selling and the Regulatory Landscape

• The UK is moving toward less transparency in short selling, while the US is trying to move toward more transparency.
• The SEC has decided to go with aggregated disclosure of short interest instead of individual disclosure, which is seen as a fair compromise.
• The advocate for short selling has been presenting their case to Congress, Senators, Representatives, the SEC, and other regulatory bodies to argue against individual disclosure of short positions.

Short Sellers' Relationship with Other Market Participants

• Short sellers have a complementary relationship with activists, long owners, and credit investors, as they all do a significant amount of due diligence.
• Short sellers are often seen as cynics and pessimists, but they are actually the most optimistic investors because they believe in market efficiency and the ability of capital markets to correct fraudulent behavior.