The Bernard Madoff investigator who this week unleashed a scathing attack on General Electric, backed by a short-seller, has himself come under fire from some of the best-known names in the short-selling industry.
Andrew Left, one of the most vocal activists, said Thursday was “a sad day” for the short-selling community after Harry Markopolos called GE a bigger fraud than Enron. Gotham City’s Daniel Yu and Bronte Capital’s John Hempton were also highly critical of Mr Markopolos’ 170-page report, which caused GE’s shares to drop 12 per cent on Thursday before rebounding sharply on Friday.
Mr Left, who has targeted companies including Tesla, TransDigm and Valeant, attacked Mr Markopolos for accepting payment from a hedge fund to publish the research in exchange for a percentage of profits that the fund makes on its short position.
“No credible hedge fund or short seller would ever do this,” Mr Left’s Citron Research said in a statement on Friday. “Unfortunately, what we have just witnessed with Mr Markopolos is reckless, dishonest, and most importantly secretive — all which gives activist short selling a bad name.”
Mr Left also criticised Mr Markopolos’ research, saying that if there were fraud at GE, “then it has been a grand-scale conspiracy by thousands of accountants, auditors, and division CFOs who have all secretly collaborated over the past 20 years. This is not exactly Madoff’s secret 17th floor.”
Activist short-sellers target companies they often believe are frauds or are using questionable accounting tactics, taking out short positions before publishing research to help back up their thesis. Critics — and often the companies they target — say they are manipulating markets for their own personal gain. Shorting means betting on a lower price of a security.
Mr Markopolos, who gained fame after it was revealed that his claims of fraud at Madoff’s investment fund were correct, issued the report in conjunction with a hedge fund he declined to name. GE chief executive Larry Culp called the report “market manipulation — pure and simple”.
Other fund managers also piled on the criticism. John Hempton, the founder of Bronte Capital, called the report “silly and “utterly misleading,” recommending that the market “ignore it.”
Mr Yu, founder of short-seller Gotham City Research, whose targets in the past have included Green Mountain Coffee Roasters and Quindell, was critical too.
“It’s ‘I think it’s a fraud because I’m Harry Markopolos’,” Mr Yu told the FT. “It really angers me. It’s the same behaviour a scummy company would do.”
Mr Yu said that he, along with Mr Left and Mr Hempton, “are all seeing something that doesn’t smell right in what Harry Markopolos is doing”.
Mr Left said he bought shares in GE after the report. Hedge fund titan Stanley Druckenmiller told CNBC that he had done the same.
“I believe Culp . . . I bought stock today,” said Mr Druckenmiller, who was already a GE shareholder.
By 1pm in New York on Friday GE shares were trading at about $8.70, 9 per cent higher on the day.