Less than one month after SmileDirectClub’s IPO, an 8,000-word short-report was published about the company. The report was damning: it included analysis of the company’s financials, alleged that the company had a significant number of Better Business Bureau complaints, published screenshots of negative social media comments and suggested that the CEO had personally profited by selling the company his private plane. The publisher, Hindenburg Research, acknowledged in a disclaimer at the start of the report that it had taken a short position in the company.
SmileDirectClub’s share price fell by more than 4 percent on the day the report was published, although it recovered before market close. That day, the firm put out a 1,200-word press release responding to the short-report and a class-action lawsuit that had recently been filed. Alison Sternberg, vice president of IR at SmileDirectClub, says responding to the short-report required restraint and a focus on the business.
‘To engage and refute what it’s saying is in some ways a capitulation to what it wants,’ she says. ‘Even though you have an instinct to respond – because some of the stuff is nasty and personal – you have to focus on executing your business plan over time and keeping your head down. Then the claims lose power.’
By the next working day, the 10 underwriters of SmileDirectClub had all rallied behind the company, issuing ‘buy’ ratings. Hindenburg Research’s response was to use Twitter to question the credibility of sell-side research and draw a parallel between SmileDirectClub and WeWork. The short-seller, which didn’t respond to a request for comment, continued to tweet about the company, and – seven working days after the report was first released – the share price had fallen by 36 percent. In January 2020, three months after the report was published, the stock price finally returned to pre-Hindenburg Research levels.
Fine art or dark arts?
In the last 15 years, short-sellers have been emboldened by new tools at their disposal. In 2006 there were 69 short-seller campaigns in the US, compared with 758 in 2015, according to a report from Reuters. For short-sellers, the ability to publish research on their own websites and build social media campaigns around them has proven to be effective and beguiling. The popularity of websites like Seeking Alpha has also helped them disseminate information.
‘Social media is the business,’ says Andrew Left, founder and executive editor at Citron Research, a notorious short-seller. As of late January 2020, Citron Research’s Twitter account had more than 120,000 followers. ‘Twitter has created a seamless way of getting information out there.’ Left also has a knack for making headlines: in his most recent short-report on Shopify, he says if the company’s stock is trading at more than $200 one year after the publication date, he will donate $200,000 to the Robin Hood Foundation.
All of this makes for an uneven playing ground between the public company, which is constrained by what it can disclose publicly, and the short-seller, which can target a company with a co-ordinated online attack and face few consequences for inaccuracies.
Short-sellers also have the freedom to decide when they publish their research: when Hindenburg Research published its research about SmileDirectClub, it was during the company’s post-IPO, pre-earnings quiet period. When Citron Research published the first of its three research reports about Shopify, it did so on Canadian Thanksgiving, confirms Katie Keita, Shopify’s director of IR. Depending on which side of the fence you sit on, it’s a toss-up between seeing short-selling as a fine art or short-sellers as masters of the dark arts.
Leaning on the sell side
One way to contain the impact of a short-report is to speak to your covering analysts, says Jonathan Pinto, senior vice president at DF King Canada, who was targeted by short reports while in corporate IR roles at Genworth and Manulife. ‘The sell side has a tremendous influence and outreach, and if it says it doesn’t agree with a short report or it’s contrary to its thesis, that will have a positive impact,’ he says.
Frank Louthan, managing director of equity research at Raymond James, agrees and emphasizes the urgency of speaking to the sell side. ‘Companies need to talk immediately. Even if you can’t say anything yet, take the call from the sell side,’ he suggests. ‘Tell us that you’ve seen the report and you’re going to respond. You can’t underestimate the credibility boost to a management team when an investor asks me what’s going on and I say I’ve already talked to the company.’
Louthan acknowledges that this can be a challenge, given that short-sellers are so intentional about when they publish their research. If a report is published at 8.00 am, Louthan says, it leaves the company with very little time to put together a response before the markets open. But ‘the longer the silence goes on, the more credibility it adds to the short-report, and the Street will think there’s something to it,’ he adds.
Crafting a response
Coming up with a response can also be challenging. Companies need to strike a balance between dampening Wall Street concerns about the substance of the short-report and not being seen to respond impulsively or emotionally. They also need to offer substantive reasons why the short-report is wrong, without speaking off-side. All while a clock is ticking loudly in the background.
Walied Soliman, global chair and Canadian chair of Norton Rose Fulbright, says: ‘IR teams need to be ready with a quick and stern response in the face of an abusive short-seller’s report. There’s no time for taking the temperature of the room: your stock price could fall like a brick if you don’t decisively react.’
When Citron Research first published a report about Shopify, Keita says the company learned a lesson about how to respond. ‘We posted a statement to our website, but it was rather bland and left our investors with some questions,’ she details. ‘After that we stayed very close to our investors because we wanted to ensure we could answer any concerns they had.’
Louthan builds on this, saying issuers should focus on putting out substantive statements: ‘Usually companies baulk at the idea of putting out additional information because they think it might be a competitive disadvantage, but my thinking is that disclosing that information isn’t going to take 30 percent off your stock price – whereas the short-report is.’
Good IR is like going to the gym
Perhaps the best form of defense against short-reports is having a robust investor engagement strategy in the first place. Keita says if a company’s IR and management team have a strong relationship with the firm’s investors and analysts, they’re less inclined to have their head turned by a short-report. ‘[Short-reports] are a lot like your stock catching a cold,’ she says. ‘Good IR is like going to the gym and eating healthily – you’re less likely to catch a cold and, if you do, you recover faster.’
Left confirms to IR Magazine that he closely examines a company’s shareholder base before writing a report about it. Each time he looks at who owns the stock, why and what their timeline is. He then speaks to the investors he identifies, looking for cracks he can use. But while he says he doesn’t get in touch with IR teams at targets before publishing a report, this is refuted by several interviewees who asked not to be named. They suggest that short-sellers, including Citron Research, will often get in touch through generic email accounts that aren’t associated with a firm – further reason for IR teams to respond to their IR inbox expediently.
Having a proactive IR program is akin to playing the long game, but in the short term there may be companies that consider legal action against authors of short-reports. While Soliman understands the temptation, he urges companies not to pursue it. ‘It gives the short-seller what it wants: more opportunity to broadcast its thesis,’ he says.
But he believes this is an issue regulators need to look at. ‘In an era where a lie goes around the world before you can get your shoes on in the morning, our regulators need to not only carefully monitor the activities of abusive short-sellers, but also actively prosecute to ensure that this type of behavior is prevented in the future,’ he says.
Getting their smile back
The Hindenburg Research report made for a turbulent post-IPO run for SmileDirectClub. But three months later, Susan Greenspon Rammelt, the company’s chief legal officer, says the management team is as focused on its strategy as it was in the build-up to its IPO. ‘We can’t let short-sellers dictate the focus of the company,’ she says. ‘We haven’t changed how we function as a business. We’ve stayed focused on the investor base and delivering on our long-term goals.’
For Sternberg and the IR team at SmileDirectClub, this means business as usual. ‘We always evaluate ways to stay in front of our investor base,’ she says. ‘We pride ourselves on being available if anyone wants to ramp up on the business. It’s one of the best parts of the job and we love talking to people about our story.’
This article was originally published in the Spring 2020 issue of IR Magazine.