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An Activist Short Seller Gets His Day in Court

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Last month, Nathan Anderson tried to go unnoticed as he slipped his 6-foot-4-inch frame into the back row of a packed courtroom in Lower Manhattan to catch the opening statements of United States v. Trevor Milton. Mr. Anderson, the 38-year-old whistle-blower turned activist short seller, was there to indicate support for Paul Lackey, a former Nikola contractor. Two years earlier, the 2 men had worked closely together to reveal the activity that served as the idea for the federal prosecutors’ case — that Mr. Milton had misled investors concerning the technical abilities of his electric vehicle start-up.

Mr. Anderson didn’t testify. (Mr. Lackey did.) But Marc Mukasey, Mr. Milton’s lawyer, repeatedly cited Hindenburg Research, the boutique investment research firm that Mr. Anderson founded, through the four-week criminal trial. Sitting behind the courtroom, Mr. Anderson grew uncomfortable as Mr. Mukasey told the jury that Mr. Lackey and Hindenburg weren’t to be trusted, and that their sole motive to impugn Mr. Milton was to make a fast buck.

It was nothing Mr. Anderson hadn’t heard before. Corporate executives are inclined to portray activist short sellers as vigilantes with nefarious motives, or at the same time as “un-American” for betting against business. Retail traders attempt to squeeze them into oblivion, and critics have suggested that their ability to maneuver stock prices is a potentially destructive force in capital markets. The Securities and Exchange Commission and the Department of Justice are investigating nearly 30 activist short sellers as a part of a sweeping inquiry into potential market trading abuses. In February, the S.E.C. tried so as to add transparency to this a part of the market by proposing latest disclosure rules, which some influential academics have pushed for in recent times.

But for Mr. Anderson and other activist short sellers, the Milton trial had potential to reset the narrative. At a time when regulators are stretched and journalists are underfunded, they are saying, it’s activist short sellers who’re sniffing out corporate fraud.

Mr. Anderson’s firm has exposed wrongdoing at dozens of publicly listed firms over time. Generally, Mr. Anderson shorted his targets, often turning a profit. None were greater than his investigation into Nikola.

In September 2020, Hindenburg published a scathing research report calling the E.V. maker “an intricate fraud” and Mr. Milton a liar. The initial response to the report was swift. The stock cratered. Mr. Milton resigned, and federal prosecutors would later charge him with criminal wire and securities fraud.

The S.E.C. was apparently reading Hindenburg’s research, too. It opened a fraud investigation, and the corporate later settled a civil penalty of $125 million, but declared no wrongdoing.

That whirlwind of events thrust Mr. Anderson, a virtual unknown on Wall Street, into the highlight. The story of how he took down certainly one of the buzziest E.V. start-ups available on the market — inside per week of Nikola’s initial public offering in June 2020, investors had pushed its valuation above $34 billion, overtaking Ford Motor — was splashed across the business pages and featured in podcasts.

The Milton case wasn’t the primary time Mr. Anderson’s muckraking led to a criminal trial, however the stakes never felt higher for him and Hindenburg. Still, Mr. Anderson had doubted that Mr. Milton’s trial would lead to a conviction. Convincing a jury that the director of a publicly listed company committed securities fraud is a much taller task than persuading investors to hitch your crusade to short that very same company, he realized.

“I feel it’s often daunting for prosecutors to bring big cases like this,” he said, “because while you get into the courtroom, you want to get a consensus of 12 normal individuals who may not have familiarity with things just like the stock markets or, you recognize, the form of corporate legalese that goes into all these types of cases.”

When the jury found Mr. Milton guilty last week on three fraud charges, the largest of which carries a 20-year prison term, Mr. Anderson felt vindicated. “I feel it’s a big victory for white-collar criminal prosecution in America, really,” he said.

On the day the jury read the decision, Mr. Anderson congratulated those he saw because the “good guys,” including the whistle-blower informants “who worked with us.” For the doubters, he served his tweets cold, suggesting, for instance, that an equity analyst who stuck by Nikola after the unique Hindenburg report must be entered into “the sell-side research hall of shame.”

The moment of vindication arrived as activist short sellers are facing more scrutiny than ever before.

Hindenburg is on the list of activist short sellers being investigated by the S.E.C. and the Department of Justice, Bloomberg reported in February. Mr. Anderson said he was still at midnight about what investigators were in search of.

“We haven’t received anything,” Mr. Anderson said. He added that he was confident investigators wouldn’t find any smoking gun: “The industry is much more mundane than most individuals realize. It’s really quite a lot of reading filings, talking to former employees and industry sources, and long-form research.”

Along with the inquiry, some critics have pushed for brand new rules to rein in activist short sellers’ activities. In 2018, Joshua Mitts, an associate professor at Columbia Law School, wrote a research paper, “Short and Distort,” during which he found that short sellers, including activist shorts, who routinely cloak their identity helped wipe billions of dollars in value off publicly listed firms with their attacks.

Since then, Mr. Mitts has spearheaded efforts to introduce regulatory changes designed to bring further transparency to activist short sellers’ trades, and reduce market volatility. The S.E.C. incorporated a few of his ideas in its proposals from February, including that short sellers holding outsize bets against listed firms file monthly disclosures on their positions.

Asked to comment this week about Hindenburg’s role within the Milton case, Mr. Mitts declined to talk with DealBook.

Luigi Zingales, a professor of entrepreneurship and finance on the University of Chicago’s Booth School of Business, thinks any efforts to muzzle whistle-blowers and activist short sellers can be bad for markets, and for democracy.

“In a free society, certainly one of the most beneficial sources of reports is negative news. Everyone’s glad to provide you excellent news,” Mr. Zingales told DealBook. “We want more incentives in society to report that bad news.”

Bad news could be a dangerous business. In some of the famous short campaigns gone unsuitable, the hedge fund manager Bill Ackman put up a $1 billion bet against the dietary supplements company Herbalife, calling it a pyramid scheme and saying its shares would fall to zero. Carl C. Icahn, one other billionaire investor, took the opposite side of the bet, eventually becoming the corporate’s largest shareholder. While Herbalife was eventually fined by the Federal Trade Commission for deceiving buyers and sellers of its products, it continued to operate, and its share price never tanked.

Despite the risks, Mr. Anderson deadpanned that he was “grateful to have found a business model that supports my fraud-research addiction.” He opened a latest short position against Nikola just before the trial began, assuming more bad news would hammer the stock price. That bet appears to be paying off; Nikola shares have fallen roughly 40 percent since Day 1 of the trial.

But Mr. Anderson isn’t exactly living large.

He declined to say how much he had made on the Nikola short, though he said Hindenburg had expanded within the two years since — from five people to a nine-person operation with an office somewhere in Manhattan. (He won’t say where.)

He’s still living in a rental, and his automotive’s a lease. Latest boat? “No.” Season tickets to the Latest York Knicks? “No, I haven’t watched a game in quite some time.”

The markets aren’t quite the fertile ground they once were for fraud hunters. A preferred goal of activist shorts in recent times were special purpose acquisition firms, or SPACs, which sped into the general public markets with relatively little scrutiny.

“That was just a complete dumpster stuffed with garbage being taken onto the general public markets,” Mr. Anderson marveled. Nikola got here to market via a SPAC merger.

Overall, the variety of SPAC I.P.O.s has slowed to a trickle, and you may see the results of that on the Hindenburg docket. In the mean time, just three research reports for publicly traded firms are within the pipeline, Mr. Anderson said. He and his researchers have branched into what he calls Ponzi schemes within the private sector. But because you can’t short such firms, the payoff (the hope of a whistle-blower bounty) is nearly not definitely worth the effort.

Mr. Anderson reckons that he and his team can be busy for some time: “There’s still loads of fraud on the market. If there’s ever a time that I feel that almost all of the company fraud in America has been eliminated, then I’ll probably announce that I’ll go grow tomatoes, or something.”

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