He's right. The shorts (not the minions w/ their e-Trade accounts but the few select hedge funds that accounted for the lion share of the huge short float) had to know SOMETHING.
The MW/Citron pieces didn't offer anything concrete (but they did give large hedge funds an excuse to short if they are ever questioned). Logically, it didn't make sense from the evidence (Starr, GH's DD, Deloitte's 09 audit, all the strong rev/expense #s footed under the assumption CCME had 40% of the inter-cty bus mkt share) vs a bunch of baseless claims, and they were still shorting when CCME was already priced as though it was 80% likely to be a fraud (PE of 4 for a company w/ 30% yoy growth). So the smart short money had to believe it was 85% - 90%+ likely to fail the Deloitte audit for it to make sense to them.
So what did they know? A few possibilities:
1) They had a contact on the Deloitte team that they knew wouldn't sign off (this would be ideal for longs... because it means CCME can still get another auditor and work through it... which is why I think it is unlikely... short would need something more)
2) There was an insignificant level of wrong doing (relative to rev/eps) but it was serious wrongdoing- like spending $1MM to pay off bus operators (more likely)
3) They were doing a few things in mgmt/accounting that were a little off... enough not to pass an audit (doubt it, short wouldn't wager that much $ on a few undotted i's)
4) They cooked the books but it wasn't a complete fraud... as in 30% or so of the revenue was made up... enough for the earnout (quite possible)
5) Serious fraud w/ 40+ people involved... to fool Starr and GH Ping Luo. (doubtful... hard to imagine they made up 20 fake ad agencies, duped GH and Starr and Deloitte on the cash)
