Blame The Shorts?

I was the CFO of a growing public company that had as much of 20% of its float sold short. Never having seen this kind of shorting up close and personal, it certainly gave me pause. Our executive team was conditioned to blame the stock price performance and all our out-of-the money options on Wall Street short sellers.

In reality, the short side of the market had it right: our forecasts were out of touch with reality, and although sales were growing at 50%, the company was hemorrhaging cash. Another dilutive private placement was the only option, and so the short trade had to be the winner. Sitting inside the company blaming the short sellers deflected focus from the real problem, namely a faulty strategy and business model.

There's no asymmetry to the market, that is both longs and shorts have their place. That's not to say that some short sellers, particularly those with "unaffiliated" research efforts and inside funds, don't focus on rumor and innuendo. They do this to create price down drafts with their research for the benefit of their own in-house fund that has the short trade in already. This practice should be outlawed or at a minimum be disclosed.

I believe that analysts on the short side often do more thorough, close to the ground research through good independent sources, and they are often better at putting together an information mosaic than are the rah-rah, dictaphone sell-side analysts who rehash the company's press releases. We are now hearing about David Einhorn and some of his early work ferreting out inconsistencies in Lehman's public disclosures that the Wall Street Journal suggests led to the replacement of the Lehman CFO. Good for Mr. Einhorn. His good, solid work earned its reward. That's the way the market should work. As a CFO, I always wanted to know that the "short story" was on my company. The market is an excellent learning laboratory.

However, I also believe that we need transparency on all sides of the market. Short-selling should be just as visible in real-time as on-exchange and other forms of institutional trading. As Arthur Levitt advocated, the information playing field for all market participants (institutional, retail, domestic, overseas, short and long) should be level.