How Activist Short Sellers Try To Manipulate Stock Prices

Institutional Investor published a very interesting article on activist short sellers. The article mentions several activist shorts such as Muddy Waters, Wolfpack Research, Citron, Hindenburg, and Aurelius Value.

One of the points made in the article was that hedge funds use these activist short funds to shield themselves. “Market participants say that short-sellers at hedge funds skilled in the strategy, like Eminence Capital, Valiant Capital Partners, Sophos Capital Management, and Kingsford Capital Management, also pass along research to activists — but they aren’t believed to have offered to finance them,” the article said.

The article used Dialectic Capital’s John Fichthorn as source. Fichthorn alleges that there was a hedge fund that offered to pay these activist shorts to publish its short thesis on Health Insurance Innovations (HIIQ). In early 2020 when HIIQ shares were trading at $19, I recommended a short position in January 2021 HIIQ put options with a strike price of $25 in our monthly newsletter. I also personally sold these put options for $10.80 in my personal trading account. At the time I knew that HIIQ was targeted by short sellers left and right, and I was patient enough to wait them out. If HIIQ shares declined significantly my put position will force me to buy HIIQ shares effectively for $14.20 a share (I thought that would have been a steal). I told our subscribers that HIIQ should trade at $30 per share in a year. If I was right about HIIQ, the put options I sold would expire worthless, and I will make 100% from my investment. HIIQ was sold to a private equity firm this summer for $31 and our subscribers and I made 100% from this investment at the expense of short sellers like Aurelius Value. Here is an excerpt from Institutional Investor’s article regarding HIIQ:

“Fichthorn declined to give the name of the short-seller who alleged a hedge fund was offering to pay activists to publish its short thesis on Health Insurance Innovations. But for the next year and a half, short-sellers battered the company on Twitter and elsewhere. One anonymous short activist, Marcus Aurelius Value, wrote five reports on Health Insurance Innovations, starting in November 2018 and ending in June of this year.

…At one point, the options action made Health Insurance Innovations the biggest short in the market, with more than 100 percent of the shares shorted, says Fichthorn. “It was kind of ironic that I, as a professional short-seller, was on the board of the company that was the most shorted stock in the market.”

…“The reality is if enough of them pile on and write enough bad stuff, they can destroy companies. I watched it from the inside. They called our customers and they were making shit up,” bemoans Fichthorn, pointing specifically to a short-seller rumor that the FBI was at the company’s headquarters. It wasn’t.”

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