Published on October 11th, 2018 | by Zachary Shahan0
The Rise In Anonymous Online Short Attacks, + Stale & Fresh Attacks On Tesla
October 11th, 2018 by Zachary Shahan
Supplementing this wonderful article by Peter Forman detailing the various ways short sellers are manipulating Tesla stock [TSLA], below is a portion of a superb piece published on the Harvard Law School Forum on Corporate Governance and Financial Regulation last November. Here’s the start of the article:
In recent years, anonymous online hit pieces against public companies have become an increasingly common and effective form of short activism. Given their success in driving down stock prices, anonymous online short campaigns are likely here to stay. Anonymous online short attacks pose unique challenges to public companies. In order to defend successfully against anonymous online short attacks, public companies must have ready-to-execute plans in place—whether or not an online short attack appears imminent.
This post has five main sections: Section I discusses the rise in anonymous online attacks, Section II analyzes the effectiveness of short seller campaigns, Section III discusses how anonymous short attacks are waged, Section IV analyzes the challenges that anonymous online attacks pose for public companies, and Section V discusses different considerations in determining whether and how to respond to anonymous online attacks, and the strategic decisions required to successfully defend against them.
I. A New Breed of Short Activism: The Rise in Anonymous Online Short Attacks
Short seller activism is generally associated with prominent hedge funds and “celebrity” activists, such as David Einhorn and Bill Ackman. These short sellers often launch short attacks capitalizing on their notoriety and name recognition.  In recent years, however, a new breed of short activism has emerged: individuals who anonymously post negative research reports and articles about targeted public companies on widely followed online financial and research platforms, such as Seeking Alpha. According to Activist Insight, “activist short sellers are more often than not anonymous entities and funds.” 
Unlike the typical investor, a short seller seeks to take advantage of bear markets and profit from the decline in a company’s stock price. Short attacks are most effective where long investors lose confidence in their own appraisal of a stock’s value. This most commonly happens when a company’s financial position is complicated, when a new industry or product is being valued, when a government investigation is disclosed to or suspected by the market, or when other forces create ambiguity in the valuation. (emphasis added)
As you can see in the part I put in bold above, shorts are particularly effective when long-term investors (i.e., real investors) lose confidence in their valuation of a stock.
Short sellers can only drive down a stocks long-term price as far as they can shake investor confidence in the company.
With Tesla, they’ve been using a variety of tactics for several years. They are actually often recycled. Here’s a short summary:
Tesla cannot produce the Model S.
No one wants to buy the Model S.
The Model S is going to fall apart and Tesla won’t be able to service it. Service will drive the company bankrupt.
Model S sales will plummet when electric car XYZ comes out from automaker FUD.
Tesla cannot produce the Model X.
No one wants to buy the Model X.
The Model X is going to fall apart and Tesla won’t be able to service it. Service will drive the company bankrupt.
Model X sales will plummet when electric car XYZ comes out from automaker FUD.
Tesla cannot produce the Model 3.
No one wants to buy the Model 3.
The Model 3 is going to fall apart and Tesla won’t be able to service it. Service will drive the company bankrupt.
Model 3 sales will plummet when electric car XYZ comes out from automaker FUD.
Something else has been thrown into the mix more this year than in years past. It’s a thorough attack on Elon Musk himself. After all, if you can portray the critically important CEO in a horrible light, you can shake out weak investors, and if you really do some damage, you can even make stronger investors think that Musk is behaving poorly and that he may have to step down from the company.
That’s what you call shaking investor confidence.
And it is no surprise that such attacks on Musk have come at this point in time. The short sellers have been running out of scary stories to tell. As much as they may get the media to write about cardboard fires and parking lots with and without cars in them, they have not stopped Tesla from plowing forward and crushing records. Below are a series of objective news items followers are well aware of, investors are well aware of, and even the media is beginning to pick up:
One theory is that news like that has TSLA short sellers panicking. What if all of their theories — especially that Tesla can’t produce cars and consumers don’t want Tesla’s cars — were wrong? What if Tesla actually can make
boatloads Falcon Heavy loads of money and is on the verge of crushing their narrative yet again, but this time with the mass-market Model 3? What if that means Tesla can consistently show a profit and people will stop buying the nonsense that Tesla “burns” money?
That’s right — when all of those talking points dissolve and the various tactics explained by Papafox get stale, what is there left to do? Attack the CEO known for achieving the impossible and executing his vision (even a 10 year secret plan almost meticulously).
Tesla shareholders have one obvious task: Understand the fundamentals.
Full disclosure: I am obviously long TSLA and think it’s the only thing to be, but this is not investment advice — not even close to it — and please consult an investment professional or your best brain cells if you are considering putting money into anything other than your wallet, bank account, or a cool product.
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