Wall Street Short Sellers: Hated For Centuries

Wall Street "short sellers" are often cast as villains. They make money when most others are losing it — that is, when stock prices fall.

In recent weeks they were painted as the enemy again, when hedge funds made bets that prices would fall for several so-called "meme stocks" like GameStop and AMC. These bets drew the attention and ire of small investors, setting off a tug of war between the two sides.

This is nothing new. Shares of the very first stock ever created — the Dutch East India Company in the early 1600s — were soon shorted by an investor who didn't like the fundamentals, and who was pilloried for his views.

A great many more public companies and some 300-odd years later, President Herbert Hoover railed against short sellers after the market crash of 1929. In several speeches and public statements, Hoover and his allies denounced "bear raids" by groups of short sellers contributing to national distress "with purpose to profit from depreciation of securities and commodities."

"If everybody's losing money and there's somebody at that time making a lot of money, it's going to be natural to feel a little bit of resentment towards them," says 22-year-old short seller Edwin Dorsey, author of "The Bear Cave" newsletter.

Short seller was even a Bond movie villain

The hate continued and extended into popular lore. A short seller was even cast as the central villain in the James Bond film, Casino Royale. In 1987, short sellers were blamed for their possible role in the "Black Monday" crash. And during the financial crisis of 2008 there was a brief ban on short selling, which officials later regretted.

Dorsey says the haters tend to miss an important role that short sellers can play as watchdogs, researching and exposing overvalued or even fraudulent companies. In his view, short sellers may profit when stocks go down — and their research may trigger it — but they aren't responsible for the poor fundamentals that eventually would have caused the company's stock value to drop anyway.

The Care.com short

Dorsey made his own name in shorts research while still in college. A friend was getting babysitting gigs on the website Care.com, and mentioned that something seemed off about the site. Babysitters weren't being vetted properly, and scammers were approaching her there.

Dorsey began to research the company. He found 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, then filed records requests with state Attorneys General that turned up hundreds of consumer complaints. In addition to the vetting problems, he found onerous cancellation practices that overcharged users.

Finally, Dorsey decided to test the system himself, creating a fake profile using the name and photograph of the disgraced Hollywood serial sexual predator Harvey Weinstein. Dorsey thought it impossible his Weinstein profile would be approved to babysit.

But after adding a fake Facebook profile he'd 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 his findings in a report that went semi-viral in the world of short sellers. He also sent it to several journalists. Months later, The Wall Street Journal published a story on the problems at Care.com, and cited Dorsey's research. Not long after that, the company's CEO, CFO, and general counsel all resigned.

Care.com has since been purchased by IAC, and has made several safety changes. The company declined to comment for this story.

"This is a great example of somebody finding something wrong," Dorsey says. "Being motivated partly by money — I was betting against the stock so I wanted to show people it was bad — but also motivated by saying 'Hey, here's this huge problem that people aren't paying attention to,' and putting out a report that ended up making a difference."

Bad actors vs. researchers

Dorsey recognizes there are bad actors in the shorts world: people who exaggerate problems with a company in order to turn a quick buck. But in those cases, he asserts, the fundamentals of the company quickly right any short-term damage the unsavory shorts may have caused.

But the few bad actors are outweighed for him by the work of those who expose wrongdoing, or simply point out overvalued companies.

Dorsey doesn't mind playing the villain for pointing out flaws, he says. He'll take his compensation in dollars. [Copyright 2021 NPR]