The 36-year-old securities law specialist has become an increasingly influential figure in the hot debate over activist short selling since the publication of a 2018 analysis of trading data that suggested some players were manipulating the market.
Interviews with 12 people familiar with his work and career, including Mitts himself and some of his harshest critics, shed light on how an academic who was little known outside his field a few years ago has been at the center of the ugly feud ever since. between short sellers and the companies they target.
That battle has led to an extensive investigation by the United States Department of Justice and the Securities and Exchange Commission (SEC) into suspected trade manipulation by short sellers and hedge funds.
Activist shortsellers like Muddy Waters’ Carson Block bet against public companies they deem overvalued and then publish their investment thesis. They say their work promotes market efficiency and dispute Mitts’ analysis as flawed.
Nevertheless, the interviews, which detail Mitts’ contacts with US authorities, show that the professor and his work played an important role in the federal investigations.
“One of the reasons the work really caught on was that it took a large sample and showed that there was evidence for what companies were saying: that there may have been abuse,” said Peter Molk, a law professor at the University of Florida. .
Mitts declined to comment on his work for the Justice Department, except to point to a statement on his resume that he has “extensive experience supporting” the agency. He defended his research, saying he wanted to be objective and not against short selling.
“Not only is short selling not illegal, it’s important to have bears,” he said.
Spokespersons for the Department of Justice and the SEC, the main stock market regulator, declined to comment.
Mitts’ journey began in August 2018 when he reached out to real estate company Farmland Partners Inc, which was grappling with a sharp drop in its shares after an anonymous online post raised questions about his solvency.
Weeks earlier, between 2010 and 2017, he had published his analysis of 1,720 pseudonymous messages attacking publicly traded stocks on the financial website Seeking Alpha. His investigation found that such messages were preceded by unusual and suspicious stock option trading, in a process he called “short and distorting”.
Before 2018, the battle between US companies and their adversaries was largely centered on the merits of short sellers and the veracity of their claims. Mitts’ work gave companies new ammunition: They could use data to point out potentially manipulative trade tricks and claim fraud.
‘ON A SILVER DISH’
Mitts spoke to Farmland executives about his work, and Farmland subsequently retained him as an expert in late August 2018, the company said. Mitts’ analysis found that investors were buying put options with a short expiration prior to a Seeking Alpha message. They became profitable when Farmland’s stock began to decline, and then acquired additional selling stakes.
Put options are derivative contracts that give holders the right to sell the underlying stock at a fixed price.
In early September, Farmland CEO Paul Pittman and the company’s attorneys took the professor to meet with officials at the SEC’s Denver office, where they refuted the short sellers’ claims and laid out the short and distorted arguments.
Pittman and the attorneys then met with Justice Department officials in October, without Mitts, and again explained their rebuttal and manipulation theories, Farmland said.
“This is not about shorting. This is about securities fraud,” CEO Pittman told Reuters.
Elisabeth de Fontenay, a law professor at Duke University, said it would be a good idea for US prosecutors to scrutinize such trade patterns.
“Josh Mitts handed them some potential indicators of fraud on a silver platter. Once they get that, they’re going to look at it,” she said.
Mitts had more business callers.
After Farmland, several other companies trying to fend off short sellers hired him to consult, including Banc of California Inc, Burford Capital Ltd and Neovasc Inc, according to courts and regulatory documents.
Banc of California and Neovasc did not respond to requests for comment. Burford Capital did not comment on this story.
In 2019, Mitts began working as a consultant to the Justice Department, according to a source familiar with the case who declined to be named because such work is sensitive.
SHORT SELLERS COME BACK
Reuters and other media have reported that the Justice Department has launched a wide-ranging criminal investigation into relationships between hedge funds and companies that publish negative reports about certain companies, often with the aim of driving stocks down.
The department has issued subpoenas to dozens of companies, including requests for trading data from funds, according to the reports, bringing the issue of short selling to the attention of the market.
The debate over the practice has long raged, with activist short sellers saying they act as whistleblowers stamping out fraud or other corporate misconduct, and critics saying they often spread false or misleading information.
Spreading false information with the intent to move a stock price could be market manipulation, but the US protection of free speech means that the bar for bringing such cases is set high.
Mitts said the purpose of his research is simply to shed more light on short selling.
“My goal is to better understand how short reports affect markets. I appreciate industry participants taking the time to engage with academics on these important questions.”
Still, his critics are angry, including big-name investors Block of Muddy Waters and Andrew Left of Citron Research, both of whom are reportedly under investigation as part of the Justice Department’s investigation.
Left said Mitts’ analysis was fundamentally flawed in that it failed to consider all the possible reasons behind trading patterns that may seem suspicious, describing the research as “sloppy.”
Block, who made his name by committing fraud at Chinese companies, first learned about Mitts in January 2019 when the law professor was quoted in a news report about regulators investigating aggressive shortsellers, according to a source with direct knowledge of the situation.
The first interactions between the two men were friendly. Block attended Mitts’ class in Columbia in early 2019. In April, during a public panel discussion with the two men, Mitts told the moderator he thought “Carson is a good American.”
But the relationship has soured.
Last month, Block published a paper, “Disposing the Shorts,” refuting Mitts’ paper, saying the academic’s advice for businesses was a conflict of interest.
Mitts told Reuters he retired from consulting work for targets of activist shortsellers in April 2020.
Block also argued that Mitts’ analysis was misleading, as the authors of most of the posts Mitts reviewed were not actually short of the stock in question, according to the disclosures required by Seeking Alpha. Trading patterns that Mitts cites as key evidence of manipulation can be explained by corporate earnings reports rather than brief reports, the paper said.
“Mitts’ ‘Short and Distort’ misrepresents the underlying data,” it added.
Mitts declined to comment on Block’s paper.
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