The Golden Rule of Professional Shorting: Never Short a Company Without an Inside Rat
Sanity Check via Wayback, 9 March 2006
There is one genuinely “Golden Rule” for professional short seller/raiders.
You never short a stock without an insider to leak manageable information to you. That insider might be an officer, director, control person, investor, analyst, inside legal counsel, outside legal counsel, or even a lowly disgruntled non-executive employee.
In working on some hundred plus companies directly since 1995, I have never once seen this rule broken. Many times the CEO’s of these companies have resisted this idea, but in NO INSTANCE have I seen even one exception to this rule when they were finally forced to look in on their own operations.
There is a process for looking for raider attacks on companies, but many are flawed strategically, because they are only looking out, and not in. I have been challenged by a number of clients on this, but when they would spend the money to use competent investigators, they always found the connection of an insider to the raiders. Moreover, they found the miscreant in ways admissable in Court, in phone records, emails, and more. This is not dissimilar to what Overstock’s investigator found outside the Company.
If you want a broadly known example, simply look at the Nabisco deal and KKR. The number three operating guy at RJR/Nabisco told them where all the bodies were buried, and ended up running the operations of the Company for them when they won the takeover battle.
Officers and Directors have a duty to insure that sensitive inside information about their company is not being leaked to anyone, unless it is someone doing so for ethical reasons. I have seen more than once the use of such informants by the SEC, NASD, and others. This is a more complex issue if discovered. No matter what, such a person must be quarantined until appropriate third party investigation can determine the foundation for such actions. Many times it is based on weak premises, but not always. You only have to look at Enron, Worldcomm, Global Crossing and more to see good outcomes from such behavior.
For your consideration.
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