The are all Canadian, and what is emerging from the United States is a new threat to Canadian dually listed companies: The ‘Reverse Pump and Dump’.
Short selling is generally viewed as a necessary market evil as it acts as a barometer of a listed company’s financial health. Arguably, it is the left side of the BS meter, where disbelief in management’s strategy is registered in the most profound way possible. But a disturbing trend has emerged where shot sellers with a following build a short position, then write a scathing negative report designed to scare other shareholders into selling, thus guaranteeing the success of the short seller. It doesn’t matter if the short seller’s got his ‘facts’ straight or not. The flames of negative sentiment are much more easily fanned than those of positive sentiment.
Adding to the problem is the fact that regulators are quick to pounce on exceedingly promotional language by companies and promoters, but when it comes to exceedingly negative press, they do nothing. The three companies in this article have all experienced first hand the value destruction of negative short seller’s campaigns. But the degree of damage, in all three cases, is hugely variable.
The one that faired the best, D+H Corp – a financial technology and services company, (or ‘D and H’ as they are widely referred to), had several advantages over Nobilis and Valeant. First off, the report that disparaged D+H was not widely distributed. In fact, if you search for the report by the company who issued it – Lawton Park Capital Management – you come up empty. The only recipients of the report were premium subscribers to SumZero.com. SumZero describes itself as ‘the world’s largest community of hedge fund, mutual fund, and private equity professionals.’ The site specializes in curating investment research only from institutional money managers and analysts. It is subscriber only content, for research reports.
So D+H was immediately exempt from the very public posting of the damaging reports against Nobilis and Valeant, both of which were freely available on SeekingAlpha.com.
The second aspect of the D+H attack that put them in a better position to fend it off is the fact that they are not listed in the United States, and so the selling was limited to Canada – obviously a much smaller audience. In the case of Nobilis and Valeant, the degree of value destruction was, in Nobilis’ case, about 50:50 US vs Canadian selling, and in Valeant’s case however, the ratio was more like
But most importantly for DH Corp, they went on the offensive almost immediately upon learning of the report. Paul Damp, Chairman of the Board of D+H immediately released third quarter earnings and moved the associated conference call forward as well. He addressed the attack in his opening remarks, stating that ‘Yesterday, our share price came under significant pressure. Late in the morning, the board and management were made aware of a short selling report that appears to have been widely circulated. We were not contacted in advance regarding these assertions. While it is not normal course for me to attend this call, I will tell you that the board of D+H takes assertions of this nature very seriously. We have therefore made the decision to release our financials early, and to hold our investor call a day early as well.”
He then went on to outline his and his Board’s focus on and belief in the business model of the company, and the integrity of the executive team.
CEO Gerrard Schmid and CFRO Karen Weaver then embarked on a point by point refutation of the assertions of the report. Their statements were thoroughly supported by the slide deck that accompanied the presentation. The company paid a quarterly dividend of $0.32 a share and delivered net income of $0.62 per share on revenue of $419 million.
The D+H attack took its shares down from $38.64 a share to as low as $30.31 on October 26, but they have since recovered and closed October 27 at $32.52 So net loss, at this point, is limited to 15 percent. Disappointing, but not the end of the world.
Nobilis Health Got it Way Worse
Nobilis Health’s trouble started on October the 9th when a pseudonymous Seeking Alpha member going by the handle ‘The Emperor Has No Clothes’ accused the company of ‘losing 90% of shareholder value’ in previous corporate incarnations, ‘questionable marketing’, and saying the company was ‘significantly overvalued’.
Nobilis’ shares plummeted that day, losing 27% of their value on 4.6 million shares traded, roughly 4.5 times average daily volume. By Thursday October 22, the shares had traded as low as $2.83 a share, closing that day at $3.28. The trading under its U.S. symbol was equal to that volumetrically with the same outcome.
Nobilis was slower to respond, and only
published a response to the sensationally written and just plain nasty comments on (it reads like a dime store detective novel) on October 12th. They too refuted, point by point, the author’s main allegations, but because of the slower response, and with the added pressure of US trading as well as Canadian, the shares only closed today (October 27) at CA$3.87. So still down a whopping 43.2 percent. Volumes are starting to ease back to normal, suggesting that those who sold in a panic are not coming back.
Valeant Got it the Worst
But the real shocker – and vaporizer of shareholder wealth – was in the case of Valeant Pharmaceuticals International Ltd.
CEO Michael Pearson is known to be an aggressive dealmaker, and the stock has basically doubled every year for the last 5 years, topping out at CA$347 a share in the summer this year.
But then Martin Shkreli, CEO of Turing Pharmaceuticals, a private company that buys patent-expired drugs and marks up the prices drastically. In the case of Daraprim, a drug that has been around for 57 years, and is a standard ingredient in AIDS patient daily drug cocktails, Turing raised the price on a pill that had, up to that point, been available to patients for US$13.50 a pill by 5,000 percent to $750 a pill.
The media went berserk, and Shkreli, being the sneering young Wall Street type who thought he was smarter than everybody else cause he’d made a few ducats, basically flipped the bird to the worldwide web. That prompted Ms. Hilary Clinton, leading presidential candidate, to proclaim that ‘gouging’ by Pharma companies was something that she wasn’t going to stand for, if elected. That capped the chapter of global equity history that some of the biggest run-ups in pharmas in decades, as the perception now widely held is that she will be president, and so the wild upside on all pharmas relying on the business model of jacking up the prices of patent-expired drugs was now capped.
That process, in and of itself took Valeant’s share price down by a third, but then, in a case of Murphy’s Law at work, Citron Research, a former fringe muckraking publication whose publisher, Andrew Left, apparently made a few ducats of his own and wisened up in the process, changing the name of his website from ‘Stocklemon.com’, published a negative report suggesting that Valeant was the Enron of the Pharmaceutical world.
The piece was published just after noon on October 21. The stock lost 28 percent of its value by the end of that day, and thanks to the limp responses from the company since then, the stock has continued to to sell off, despite ultra-investor Bill Ackman’s
statement on CNBC that he had bought an additional 2 million shares that day. The jury is still out on whether or not Citron Research has actually uncovered a genuinely misleading (and possibly illegal) accounting irregularity; Pearson acknowledged that his company is using Specialty Pharma channels to increase distribution of its products. It essentially acquires stakes in small pharmaceutical enterprises to access the multi-state pharmaceutical distribution licenses held by its principles that allows Valeant to sell products into states where it might not otherwise have access.
That whole can of worms is still gnawing at Valeant’s share price, which closed yesterday, in the United States, at US$109.54, down 34% from the close two days before the report was made public.
Did Citron Distribute its Research Selectively Before it Published on Seeking Alpha?
There are two major lessons/questions here for both Canadian companies seeking to list dually in the United States and for their investors.
The first consideration is that, the evidence in these three examples suggests that the dually listed companies suffer at least double the damage of the one listed solely in Canada. In fact, on the day of the Citron Report release, 88 million shares changed hands on the NYSE, while only 3 million changed hands in Canada. So while listing in the US makes it easier for American investors to buy the shares, it also makes it easy for them to run for the exits. Thus, a dual listing is great as long as everything is rosy. But when trouble hits, the effect will be pronounced.
The second consideration is the question currently being asked of Andrew Left, and which he steadfastly denies, which is whether or not he distributed the report selectively the day before its release on Seeking Alpha.
The whole crux of the market manipulation charges that may eventually find their way to Andrew Left could well hinge on this question. The reality is, on October 20 – the day before the report was published on Seeking Alpha -shares in Valeant traded down from the opening price of US$159.02 to close the day at $146.74, on volume of 16.2 million shares. Average daily volume for VRX shares on the NYSE for the last three months is 6.9 million shares. So mysteriously, the shares traded 2.4 times their normal volume on the day before the report was released. So unless Andrew Left bought 10 million shares himself, it suggests he coordinated an attack on the shares by distributing his report to some fellow shareholders.
So while the class action lawsuits against Valeant are already in full swing (you can take your pick of vulture law firms), the ones against Andrew Left have not yet materialized.
But for investors, the lesson is clear: High flying, dually listed Canadian stocks carry an extra level of risk when faced with U.S. originating short seller research.
For public companies, there is also a lesson: Act fast, communicate clearly, and consider carefully before listing in the U.S.