United Development Funding IV fka UDFI

[56Chevy]

Short Activism: The Rise in Anonymous Online Short Attacks

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In recent years, anonymous online hit pieces against public companies have become an increasingly common and effective form of short activism. Given their success in driving down stock prices, anonymous online short campaigns are likely here to stay.

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This post has five main sections: Section I discusses the rise in anonymous online attacks, Section II analyzes the effectiveness of short seller campaigns, Section III discusses how anonymous short attacks are waged, Section IV analyzes the challenges that anonymous online attacks pose for public companies, and Section V discusses different considerations in determining whether and how to respond to anonymous online attacks, and the strategic decisions required to successfully defend against them.

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1. A New Breed of Short Activism: The Rise in Anonymous Online Short Attacks

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Short seller activism is generally associated with prominent hedge funds and “celebrity” activists, such as David Einhorn and Bill Ackman. These short sellers often launch short attacks capitalizing on their notoriety and name recognition. In recent years, however, a new breed of short activism has emerged: individuals who anonymously post negative research reports and articles about targeted public companies on widely followed online financial and research platforms, such as Seeking Alpha. According to Activist Insight, “activist short sellers are more often than not anonymous entities and funds.”

Unlike the typical investor, a short seller seeks to take advantage of bear markets and profit from the decline in a company’s stock price. Short attacks are most effective where long investors lose confidence in their own appraisal of a stock’s value. This most commonly happens when a company’s financial position is complicated, when a new industry or product is being valued, when a government investigation is disclosed to or suspected by the market, or when other forces create ambiguity in the valuation.

Under current regulations, investors are not required to disclose short positions, making it difficult for companies and the market to track the existence of short sellers and monitor their activity. The inherent anonymity of the internet exacerbates these challenges. As long as online short activists have access to the internet, they can theoretically launch a short attack that reaches millions of investors from anywhere at any time—and with little accountability.

Until recently, the market dismissed anonymous short activists as illegitimate and not credible, as “real” short sellers with legitimate claims do not hide behind fake pseudonyms and aliases.

That premise has been proven wrong. Anonymous short sellers can be, and often are, disguised prominent hedge funds and individuals. For example, in December 2015, a short seller using the pseudonym “Investors for Truth” published an anonymous report about United Development Funding IV (“UDF”) on the investing websites Harvest Exchange and Value Investors Club, causing UDF’s stock price to plummet 35%. After much speculation, Kyle Bass, founder of Hayman Capital Manager, eventually claimed responsibility for the articles posted under the pseudonym Investors for Truth. [6] Such prominent short activists have incentive to post under pseudonyms in order to protect against litigation and reputational risk in the event of public or company backlash, and to protect their bets against premature public exposure.

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Source:

https://corpgov.law.harvard.edu/2017/11/27/short-activism-the-rise-in-anonymous-online-short-attacks/

Marker:
United Development F (UDFI)
$3.33 down -0.17 (-4.86%)
Volume: 14,939

*I suggest clicking the link to read the entire article.

**At this point from doing some study on the percentage of successful lawsuits by company's that were targeted by short-selling campaigns is less than encouraging. Data suggest a 40% or less success rate. That may give a defendant confidence but as my good friend EI pointed out jurors in Texas are anything but the national norm when it comes to lawsuit outcomes if they perceieve unfairness. And that has to keep Bass & Co up nights. He knows this is no slam dunk. Far from it.