When Short Selling Is Abused

Short selling has real value. It enables useful market hedging. It provides valuable price discovery. Its mere existence encourages transparency. And all of those things make markets more efficient.

But when short selling is abused – as it can be when information is manipulated — it can be one of the worst things for the proper functioning of a market. Short sellers have, for generations, functioned as sleuths protecting investors from fraud and overvalued companies. And that certainly has value. Indeed, we can look to the Global Financial Crisis as a textbook case of when shorts got it right, and when we all would have been better off paying them closer attention.

Of course, sometimes, shorts get it wrong. That’s not news: everyone in the markets gets things wrong at least some of the time. And, when they do, they should pay a price for that.

The problem, however, is when they distort the markets in order to encourage failure.

When they do that, they aren’t the ones paying the price. In fact, they can benefit, even if they are wrong. It’s the broader market that suffers. And since the “market” is just all of us together, that means we – you, me, pension funds, 401(k)s and IRAs — pay the price for their manipulation.

Put another way: they get rich while you pay the price.

It is sort of the opposite of pump-and-dump schemes, where a person who owns (is “long” as opposed to “short”) buys the stock and then pushes inaccurate positive information about that stock in order to drive up the price. Once that happens, the person sells the stock. It is recognized as fraud – and illegal – by the SEC.

None of this might be noteworthy if it was just a one-off. But it isn’t. Indeed, talking down stocks using questionable information – spread through extensive quasi-journalistic avenues – while holding large short positions (and thus benefiting from the decline) has now become an industry. Firms such as Muddy Waters, Spruce Point, Viceroy, Kerrisdale, Blue Orca and a dozen others publish long-form reports styled as investigations, timed for maximum market impact and amplified through social media and cable television bookings. Hindenburg Research, before it closed its doors last year, moved billions in market value with single posts.

Some short sellers have taken it one step further, pairing their market positions with their own newsroom. Instead of waiting for the market to come around to their positions, they have become the news themselves. Take, for instance, the website Sharesleuth. Investors hired a newspaper reporter to run the site while they shorted the companies before negative stories ran. The first target, an ethanol company, dropped roughly 20 percent the week the piece was posted.

To be clear: research that you do, based on publicly available information, and that you then trade on, is absolutely not insider trading. Indeed, good research should rightly yield good returns.

The question arises when that research might not be entirely accurate.

Consider Hunterbrook’s 2024 campaign against telehealth company Hims and Hers. A central pillar of the argument was a pair of Reddit posts, one of which had six upvotes and has since been deleted; the other cited a patient who had taken double their dosage. From those two data points, Hunterbrook pronounced the company party to “the largest uncontrolled, unconsented human experiment of our lifetime.” What it did not tell readers is that one of its own seed backers is a major investor in a direct competitor of the company it was attacking. Its short position was disclosed.

The pattern repeats. When Hunterbrook went after the restaurant chain CAVA, its thesis rested on health-inspection grades from New York City, the one market where its founders happen to live, while ignoring the more than 350 locations the chain operated across 26 states. 

To be clear: what these folks do isn’t illegal.

The question is: should it be?

Jeff Duncan represented South Carolina's 3rd congressional district in the U.S. House of Representatives as a Republican from 2011 to 2025.

Editor’s Note: Do you enjoy Townhall’s conservative reporting that takes on the radical Left and woke media? Support our work so that we can continue to bring you the truth.

Join Townhall VIP and use promo code FIGHT to receive 60% off your membership.