Wall Street Short Sellers: Hatred for Centuries

An undated picture of President Herbert Hoover, whose term as president ran from 1929 to 1933. He groaned at short sellers after the market crash of 1929.

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An undated picture of President Herbert Hoover, whose term as president ran from 1929 to 1933. He groaned at short sellers after the market crash of 1929.

AP

Wall Street “short selling” is often cast as villains. They make money when most others lose them – that is, when stock prices fall.

In recent weeks, they were painted as the enemy again, as hedge funds bet that prices would fall for more so-called “meme stocks” like GameStop and AMC. These bets attracted the attention and ire of small investors and triggered a tug-of-war between the two sides.

This is nothing new. Shares in the very first stock ever created – the Dutch East India Company in the early 17th century – were soon short-circuited by an investor who disliked the basics and who was powdered for his views.

A large number of more public companies and about 300 years later, President Herbert Hoover fought against short sellers after the market crash of 1929. In several speeches and public statements, Hoover and his allies condemned “bear attacks” from groups of short sellers that contributed to national distress. “for the purpose of taking advantage of amortization of securities and commodities.”

“If everyone loses money and someone at the time makes a lot of money, it’s natural to feel a little angry with them,” said 22-year-old short seller Edwin Dorsey, author of “The Bear Cave.” newsletter.

Short Seller was even a Bond movie villain

The hatred continued and expanded into popular history. A short seller was even cast as the central villain in the James Bond movie, Casino Royale. In 1987 short sellers were accused for their possible role in the crash “Black Monday”. And during the financial crisis of 2008 was there a short ban on short selling, which officials later lamented.

Dorsey says haters tend to miss an important role that short salespeople can play as watchdogs who investigate and expose overvalued or even fraudulent companies. In his view, short sellers can profit when stocks fall – and their research can trigger it – but they are not responsible for the poor fundamentals that would have ultimately caused the company’s stock value to fall anyway.

Care.com card

Dorsey made his own name in shorts research while still in college. A friend was taking child care on the website Care.com and mentioned that something seemed to be working next door. Babysitters were not properly investigated and scammers approached her there.

Dorsey began researching the company. He found out that Care.com had been sued by parents whose children had been harmed by babysitters they found on the platform.

From there, Dorsey dug up local news reports with similar issues and then filed registration requests with state attorneys, showing hundreds of consumer complaints. In addition to the control issues, he found burdensome cancellation methods that overloaded users.

Finally, Dorsey herself decided to test the system by creating a fake profile using the name and photograph of the infamous Hollywood serial sexual predator Harvey Weinstein. Dorsey thought it was impossible that his Weinstein profile would be approved for child care.

But after adding a fake Facebook profile that he had created for the purpose, Dorsey says, “not only was I approved as Harvey Weinstein, I was elevated to their ‘CareForce’, which is like their highest level of authenticity.”

Dorsey wrote up her findings in a report that went semi-viral in a world of short sellers. He also sent it to several journalists. Months later, Wall Street Journal published a story about the issues at Care.com and cited Dorsey’s research. Not long after, the company’s CEO, CFO and Advocate General resigned.

Care.com has since been acquired by IAC and has made several security changes. The company declined to comment on this story.

“This is a great example of someone finding something wrong,” Dorsey says. “Being motivated in part by money – I was playing against the stock so I wanted to show people that it was bad – but also motivated by saying ‘Hey, here’s this huge problem that people are not aware of,’ and posting a report it ended up making a difference. “

Bad actors vs. researchers

Dorsey acknowledges that there are bad actors in the shorts world: people who exaggerate problems with a company to get a quick buck. But in these cases, he claims, the foundation of the company quickly remedies any short-term damage that the tasteless shorts may have caused.

But the few bad actors are offset for him by the work of those who expose misdemeanors or simply point out overrated companies.

Dorsey does not mind playing the villain to point out mistakes, he says. He takes his compensation in dollars.

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