WASHINGTON, March 18 (Reuters) - You may not have heard of Joshua
Mitts, a young Columbia University professor who is making some powerful
enemies on Wall Street. The 36-year-old securities law specialist has
become an increasingly influential figure in the hot debate over
activist short selling since publishing a 2018 analysis of trading data
that suggested some players were manipulating the market. Interviews
with 12 people familiar with his work and career, including Mitts
himself and some of his toughest critics, shed light on how an academic
little known outside his field just a few years ago has since taken
center stage in the ugly feud between short sellers and the companies
struggle has sparked a sprawling probe by the U.S. Department of
Justice and the Securities and Exchange Commission (SEC) into suspected
trading manipulation by short sellers and hedge funds. Activist short
sellers like Muddy Waters' Carson Block bet against public companies
they deem over-valued and then publish their investment thesis. They say
their work aids market efficiency and dispute Mitts' analysis as
flawed. Nonetheless the interviews, which detail Mitts' contacts with
U.S. authorities, show the professor and his work have played a
significant role in the federal probes.
reason the work really resonated was it took a large sample and showed
there was evidence for what companies were saying: that there was
potential abuse," said Peter Molk, a law professor at the University of
Florida. Mitts declined to comment on his work for the Justice
Department beyond pointing to a statement on his resume that he has
"extensive experience supporting" the agency. He defended his research
and said he wanted to be objective and is not opposed to short selling.
only is short selling not illegal, it's important to have bears," he
said. Spokespeople for the Justice Department and the SEC, the main
stock market regulator, declined to comment.
Mitts' journey began in August 2018 when he reached out to real-estate company Farmland Partners Inc (FPI.N),
which was grappling with a steep fall in its shares after an anonymous
online post raised questions about its solvency. Weeks earlier, he had
published his analysis of 1,720 pseudonymous posts attacking publicly
listed stocks on financial website Seeking Alpha between 2010 and 2017.
His study found such posts were preceded by unusual and suspicious
trading through stock options, in a process he called "short and
distort". Prior to 2018, the battle between U.S. companies and their
detractors focused largely on the merits of short sellers and the
veracity of their claims. Mitts' work gave companies new ammunition:
they could use data to point to potentially manipulative trading tricks
and allege fraud.
'ON A SILVER PLATTER'
spoke with Farmland executives about his work and Farmland then
retained him as an expert in late August 2018, the company said. Mitts'
analysis showed investors bought put options
with a short expiration window ahead of a Seeking Alpha posting. They
became profitable once Farmland's shares began to tumble, and
subsequently ginned up additional selling interest. Put options are
derivative contracts that give holders the right to sell the underlying
stock at a set price.
Short-selling graphic: https://tmsnrt.rs/2HyuFCE
early September, Farmland CEO Paul Pittman and the company's attorneys
took the professor to meet with officials at the SEC's Denver office,
where they rebutted the short seller's claims and laid out the short and
distort arguments. Pittman and the attorneys subsequently met officials
at the Justice Department in October, without Mitts, and again laid out
their rebuttal and manipulation theories, Farmland said. "This is not
about shorting. This is about securities fraud," CEO Pittman told
de Fontenay, a law professor at Duke University, said scrutinizing such
types of trading patterns would have been a no-brainer for U.S.
Mitts handed them some potential indicators of fraud on a silver
platter. Once they get handed that, they are going to look into it," she
said.Mitts had more corporate callers. After Farmland, several other
companies trying to repel short sellers hired him to consult, including
Banc of California Inc (BANC.N), Burford Capital Ltd (BURF.L) and Neovasc Inc (NVCN.TO), according to court and regulatory filings.
of California and Neovasc did not respond to requests for comment.
Burford Capital did not provide a comment for this story. In 2019, Mitts
began working as a consultant for the Justice Department, according to
one source familiar with the matter who declined to be named because
such work is sensitive.
SHORT SELLERS HIT BACK
and other media outlets have reported that the Justice Department had
launched an expansive criminal investigation into the relationships
among hedge funds and firms that publish negative reports on certain
companies, often with the aim of sending the stock lower. The department
has issued subpoenas to dozens of companies, which included requests
for funds' trading records, according to the reports, bringing the issue
of short selling to the forefront of market attention.
debate over the practice has long raged, with activist short sellers
saying they act as whistleblowers rooting out fraud or other corporate
misconduct, and critics saying they often spread false or misleading
information. Spreading false information with the intent to move a stock
price could constitute market manipulation, but U.S. free speech
protections mean the bar for bringing such cases is high.
said the aim of his research is simply to shed more light on short
selling. "My goal is to better understand how short reports affect the
markets. I appreciate when industry participants take the time to engage
with academics on these important questions." Yet his critics are
angry, including big-name investors Block of Muddy Waters and Citron
Research's Andrew Left, both of whom are being scrutinized as part of
the Justice Department probe, according to the media reports.
said Mitts' analysis was fundamentally flawed because it did not
account for all the potential reasons behind trading patterns that may
appear to be suspicious, describing the study as "sloppy". Block, who
made his name outing fraud at Chinese companies, first learned about
Mitts in January 2019 when the law professor was quoted in a news report
about regulators looking into aggressive short sellers, a source with
direct knowledge of the situation said.
interactions between the two men were friendly. Block attended Mitts'
class at Columbia in early 2019. That April, during a public panel
discussion featuring the two men, Mitts told the moderator that he
thought "Carson's a good American." But the relationship has soured.
Last month, Block published a paper, "Distorting the Shorts," refuting
Mitts' paper, in which he said the academic's work consulting for
companies was a conflict of interest.
told Reuters he stopped consulting work for targets of activist short
sellers in April 2020. Block also argued that Mitts' analysis was
misleading as the authors of the majority of posts Mitts reviewed were
not actually short the stock concerned, according to disclosures
required by Seeking Alpha. Trading patterns Mitts cites as key evidence
of manipulation may be accounted for by corporate earnings reports
rather than short reports, the paper said.
"Mitts' 'Short and Distort' badly misrepresents the underlying data," it added.
Mitts declined to comment on Block's paper.
Writing and additional reporting by Michelle Price;