Why a Secretive Short Seller Is Challenging Reports Made by Peers

Is Fiat Lux Partners trying to clean up the industry or just eliminate its competition?

Illustration by II

Illustration by II

When Fiat Lux Partners burst onto the short selling scene in January with a scathing critique of an activist short seller report, rumors surged regarding the identity of the new outfit. Was it being financed by the companies targeted by short sellers? Was veteran short seller Marc Cohodes, a virulent critic of several activist short sellers and their tactics, behind it? Or was it, as one short seller suggested, simply “a bitter troll,” possibly a former employee at a short selling fund?

It didn’t seem to matter that Fiat Lux — a Latin phrase from the Bible that means let there be light — had offered its own disclosure. On its website, Fiat Lux stated that “We are independent activist short-sellers, past and present.”

Call it short vs. short.

Cohodes, for one, told Institutional Investor he had never heard of Fiat Lux and was certainly not behind it. “It’s an honor to think that people think I’m so powerful,” he said.

But he applauded what it is trying to do. Cohodes is one of many short sellers who’ve complained — some of them privately — that the large number of often anonymous short activist reports has created an information overload that risks commoditizing the research and has also raised red flags about its originality, accuracy, and depth. Such activist short sellers “give someone like me a bad name. Their work is so shoddy and their work is so fly by night,” Cohodes said.

As it turns out, Fiat Lux feels pretty much the same way, even though it has no connection to Cohodes. II has confirmed that Fiat Lux, which has now published three reports, is run by an employee of a well-regarded activist short selling fund whose founder supports its mission. The person behind Fiat Lux declined to say whether he had other financial backers.

In an interview with II, he said that there is “an extremely crowded space of short sellers” and while many are smart and thoughtful, “there are some who are consciously being exceptionally careless.”

“They are very fast and loose in their research and frankly publishing reports which are of exceptionally low quality,” he said. “We see a lot of poor short sellers free riding on this massive credibility that high quality short sellers have built.” He made a point of saying that he isn’t targeting the individual short sellers, some of whom are occasionally “publishing bad material.”

As Fiat Lux’s founder pointed out, activist short selling is a “model to have people highly incentivized to sniff out bad actors.” He has simply taken that model and turned it on its head, sniffing out what he considers bad reports.

But Fiat Lux’s incentive is a lot less clear cut than that of most short sellers.

So far, Fiat Lux’s success rate is three for three, in terms of market reaction. The stocks of all of the companies Fiat Lux has focused on have risen since the Fiat Lux reports — and all but one are up since the initial short activist report as well. (To be fair, Fiat Lux has had a stock market rebound as a tailwind.)

However, Fiat Lux has not taken a long position in any of the stocks, though the individual behind Fiat Lux said that the reception from other investors has been so positive that it may do so in the future. On its website, Fiat Lux offers the voluminous, but standard, disclosure, saying it may have a long position in any of the stocks it covers and, in the event of a short-biased report, may have a short position in that stock. As with most short activist disclaimers, it says it may change its position in the stock at any time, regardless of the initial opinion.

Fiat Lux’s lack of a direct financial interest in the stocks it writes about has left some short sellers — a naturally critical group — skeptical.

“I would be highly dubious of some guy doing this out of the benevolence of his own heart to put out this research to create a higher bar for short selling excellence,” said one short seller.

But could Fiat Lux shame short sellers into doing better work?

“There now exists a policeman in this world,” said Fiat Lux’s founder, who said that Fiat Lux sees itself as an “independent third-party adjudicator” between the activist short sellers and the companies they target.

And while the Fiat Lux founder said his intent is not to get rid of the competition — the activists he is calling out — he admitted “that might be a byproduct.”

Fiat Lux’s most recent takedown, which was released on Twitter on March 23, took on Grizzly Research’s short activist report on Sigma Lithium, which Fiat Lux said was “so full of errors, oversights, elementary accounting mistakes and general faults that we have no choice but to see the report as utterly non-credible.”

Two days later, Grizzly Research issued a partial retraction, calling one error an “honest mistake.”

Grizzly’s retraction did little to appease Fiat Lux, which asked about several other “mistakes” that Grizzly Research did not address. Then on April 3, Fiat Lux tweeted “Just when you thought it couldn’t get any worse: it appears, from metadata left in the report, that Grizzly simply copied & pasted whole sections of its report from an email from its financial backer,” which it believes is Anson Funds, a Canadian hedge fund known for working with activist short sellers.

Fiat Lux found six instances of links coming from an employee of Anson Funds. That metadata has been scrubbed from the report since it was called out by Fiat Lux. Anson did not respond to a request for comment.

“For an activist short-seller who claims to do ‘in-depth due diligence’ to simply copy work fed to him by someone else is, to us, a cardinal sin,” Fiat Lux tweeted.

Grizzly pushed back. “Our reports are developed from a variety of sources which are based off publicly available information,” CEO Siegfried Eggert told II.

“We wrote every word ourselves, from the first iteration to the final report. All of our analysts work exclusively for us. We conducted tons of expert interviews, found local mining experts, spoke with the most knowledgeable experts close to the matter, etc,” Eggert wrote in a Twitter direct message in response to a question from II. “We also have multiple private investigators on the team. We talked with many sources for this report and occasionally cross-check information and diligence with analysts that we respect.”

He admitted that there was a mistake “that Fiat Lux and others have rightfully pointed out. This happens, so we proactively made the one change we felt appropriate after reviewing all the points made.”

Grizzly’s track record is nothing to sneeze at. The research outfit put out four activist reports in 2022, and the stocks they covered were down an average of 47 percent from the date of the report to year-end, according to Breakout Point, which found Grizzly to be the second-best performing activist short seller of the year, based on the market performance of the stocks it wrote about.

Whatever the errors of Grizzly’s Sigma Lithium report, and regardless of who contributed to it, another short seller told II that he mostly agrees with the conclusions. And while the stock went back up shortly after the Fiat Lux report came out, gaining 3 percent since that date, it is still down 4 percent from the date of Grizzly’s original report.

Fiat Lux has had a better record with its other two short report critiques.

Its first report, published on Jan. 6, was a rebuttal of Spruce Point Capital’s takedown of Saputo, a Canadian dairy company, arguing that “Spruce Point’s report contains numerous critical errors which mischaracterize the financial state and outlook of the company.”

Spruce Point, a short activist hedge fund founded by Ben Axler, “offers neither novel nor unique insights,” which are “entirely speculative and without substantive factual support,” according to Fiat Lux.

As for Spruce Point’s 60 percent downside target? So far, at least, that seems optimistic. The stock is up around 5 percent since Fiat Lux’s report and has gained more than 3 percent since the original Spruce Point report.

In a statement, Spruce Point said it “stands behind the accuracy and integrity of our work. Since our report has been published, Saputo has not directly rebutted a single detail, rather, has released information that only serves to validate our concerns about its financial problems.” It noted that the stock price of Saputo “continues its multiyear underperformance and languishes well below analyst consensus price targets.” Saputo did not respond to a request by press time.

Like Grizzly, Spruce Point, a hedge fund with about $274 million in regulatory assets under management, also gets high marks from outside observers. It was ranked second among the top five activist short sellers for 2022, according to Insightia, another data provider that follows short selling.

Fiat Lux’s second report was a critique of GlassHouse Research’s report on Catalent, a biotech firm.

GlassHouse Research, an anonymous short activist that identifies itself as a “team of forensic accountants/analysts on the lookout for fraudulent companies,” published a 30-page report on Catalent, calling it a “deteriorating company propped up with accounting gimmicks” on Dec. 8.

Since that report, the stock had fallen about 10 percent by year-end, but by the time of Fiat Lux’s takedown on Jan. 19, it was flat from the date of the initial report.

Fiat Lux argued that “GlassHouse’s report represents a one-dimensional application of a boilerplate ‘forensic accounting’ checklist which, in many cases, ignores or fails to address important contextual information, financial or otherwise.“

It argued “the financial “turmoil” described by GlassHouse is “overblown.”

It seems that others may have also found the GlassHouse report less than compelling. On Feb. 3, Bloomberg reported that Danaher Corporation was considering a bid for Catalent, citing people familiar with the matter. That news sent the stock soaring. Since Glass House’s report, that stock is now up 29 percent, while it gained around 36 percent since Fiat Lux’s critique.

GlassHouse did not respond to a request for comment, nor has it responded to Fiat Lux.