The Bourbon-Drinking Short-Seller Who Wants to F--- Up Congress
Dan David is not a politician — which is exactly why the financial flamethrower wants to go to Washington.
People help themselves to stuffed shells and Yuengling lager as Dan David works the room at the Lansdale Holiday Inn northwest of Philadelphia.
It is the April meeting of Lodge No. 14 of the Fraternal Order of Police, and David is charged with a difficult task — convincing a room full of cops that a barrel-chested, short-selling financier like himself should represent them in Congress.
For nearly a decade, David made millions exposing Chinese and other frauds — companies that rope in U.S. investors with dubious businesses and fake financials. The firm he co-founded, GeoInvesting, published reports that unmasked more than a dozen of them, hammering shares and vaporizing what he calculates is $15 billion of market capitalization. He has battled lawsuits, cease-and-desist orders, and threats via chat rooms and emails. “People who lie to the public should die of cancer,” one accusation read. Another shows a picture of David’s home with a Photoshopped missile through it.
Now David is taking a new route to end the frauds that stirred up the trouble. Marshaling his outsider, anticorruption bona fides, David is campaigning as the Republican candidate for Pennsylvania’s 4th congressional district in the midterm election on November 6.
His path to politics was unconventional. Over a three-year stretch beginning in 2014, David traveled to Washington, D.C., to confront senators, representatives, and their staffs, seeking to end the China-based theft. He spent $100,000 of his own money on lobbying expenses.
“I didn’t effect change,” the ex–Michigan state boxing champ says. “I did nothing,”
David, 49, is taking matters into his own hands. At the Holiday Inn he takes the microphone and sidles into the topic. “You’ve all lost money in the China fraud,” he says, pacing back and forth. “This is a fraud in progress, and Congress has done nothing about it.”
A native of beaten-down Flint, Michigan, David says the stock losses his research triggers for investors pains him. “A few people went all in,” he notes.
Still seething about the dismissive treatment he received on Capitol Hill, he warns prospective colleagues: “Since you wouldn’t listen to me for three years coming down here, I’m going to sit next to you and we’re going to fix this thing.”
The midterm race will be part of a larger, momentous struggle that will determine partisan control of Congress — and the fate of the Donald Trump presidency. Democrats have a chance to win both houses of Congress and put the brakes on the Trump administration’s protectionist, America First, antiregulation agenda.
Republicans are eager to gut the Dodd-Frank Wall Street Reform and Consumer Protection Act and defang the Consumer Financial Protection Bureau. The Securities and Exchange Commission is led by Jay Clayton, a former Sullivan & Cromwell partner who worked on the 2014 initial public offering of China-based Alibaba Group Holding, which has been criticized for its allegedly opaque accounting.
David presents himself as an independent-minded, straight-talking reform candidate.
His financial reform platform includes a bilateral investment treaty that prevents the kind of China-based frauds he benefited from. David wants greater scrutiny of so-called reverse mergers, which as they stand are an invitation to shift dubious corporations into the public markets, he argues. He is also wary of IPOs coming to market under Jumpstart Our Business Startups Act provisions that loosen listing rules.
David wants to hold the NYSE and Nasdaq accountable for the listing of fraudulent companies.
Unlike many Republicans, he wants to increase money and resources to the SEC so it can pursue frauds. “I want to ask them, ‘What do you need?’,” David says.
Make no mistake — the odds are stacked against David. Republicans are saddled with a divisive president leading their party — and the candidate echoes some of Donald Trump’s messages on trade, immigration, and foreign policy.
Critically, the Pennsylvania Supreme Court rewrote the state’s congressional map in February. Districts were previously gerrymandered to strongly favor Republicans, who have consistently held 13 of 18 congressional seats — even though there are in excess of 800,000 more registered Democrats in Pennsylvania than Republicans.
The redistricting will likely result in a roughly even split of seats. David’s newly configured 4th district, according to a calculation by The New York Times, would have gone for Democratic presidential candidate Hillary Clinton by 19 percentage points in 2016.
David insists he is undaunted. “With adversity comes opportunity,” he says.
There is hope. With no remaining Republican challengers, David has no Tea Party insurgent to fight off. His two most likely Democratic rivals are seasoned politicians.
Wall Street, at least, has begun paying attention to David. Last June, at the Sohn Hong Kong Investment Conference, he questioned how Hong Kong–listed snack maker Dali Foods Group accounted for promotional expenses, arguing they were kept artificially low ahead of the company’s 2015 IPO. The company’s shares fell 6.5 percent that day. In a statement Dali said: “Our accounting has always been true and accurate.”
The neophyte campaigner is getting major help with publicity. A new documentary, The China Hustle, backed by Dallas Mavericks owner Mark Cuban, opened in March, with David, to his great discomfort, as the main protaganist.
The film, directed by Jed Rothstein, chronicles the story of the China frauds. The trailer features a close-up of the goateed short-seller talking directly to the camera. “There are no good guys in this story — including me,” he says. (David’s father insisted he lose the goatee before running for office.)
Fellow short-sellers are rallying. It was over drinks with Rothstein and others following the movie’s Hamptons International Film Festival screening that Carson Block, the founder of short-selling research firm Muddy Waters, who is featured in the movie, persuaded David to run. Block started a super-PAC, We Stand for Better, to help fund David’s campaign.
“This guy cares on an incredibly deep level,” says Block. Unlike Block, David believes he can work within government to stop wrongdoing. “He has faith in the system — something I don’t,” Block adds.
Short-sellers ritually take their place in the political spotlight after blow-ups such as Enron. People like Kynikos Associates founder Jim Chanos and short-seller David Tice are called on to testify before Congress about how they saw things others didn’t. Then everyone forgets until the next crisis.
It’s been rough sledding for short-bias hedge funds lately. On average they have lost money in seven of the past nine years, according to Hedge Fund Research, and their numbers fell to 12 in March, from 54 in 2008. Assets under management dropped to $3.93 billion from $7.77 billion over the same period.
David launched his own short-bias hedge fund in October 2016 — FG Alpha Investments. The fund, which has less than $20 million in assets, posted a return of 11 percent in 2017, according to an investor. That compares with a loss of 9.75 percent for its peers, according to HFR.
David’s short-selling will surely be targeted in the campaign. Last June, NYSE Group president Tom Farley, discussing possible increased short-selling disclosures, told lawmakers that short-selling “almost feels kind of icky and un-American — you’re betting against a company.”
Today, David harrumphs in reply. “I think collecting fees from fraudulent companies is icky,” he says. “ I think collecting fees from foreign frauds isn’t ‘kind of’ un-American, it is un-American.”
He adds: “I think Tom Farley can kiss my ass.”
Back at the Holiday Inn, despite a natty blue suit, it’s David’s blue-collar, protectionist credentials that are on display as he talks up his roots in the American Rust Belt.
“In the 1970s and ’80s, we built all the cars in Flint, Michigan, for General Motors, and you couldn’t drink the water in Mexico,” he tells the crowd. “Now they build the cars in Mexico and you can’t drink the water in Flint. And that’s a national tragedy and a shame.”
David tells the story of his stepfather, a retired cop whose partner was killed during an attempted theft of a 50-gallon drum of paint in Michigan.
As he lectures the room full of cops, David criticizes a proposal to convert police pensions to 401(k) plans, which he says hold corrupt Chinese stocks. He inveighs against the heroin that he says is flowing into the U.S. from Mexico. “I support our president in supporting our southern border,” David declares.
He then laces into the Obama administration’s trade and foreign policies. “I’m for North Korea not having nuclear weapons,” David says. “They made nuclear weapons, and a lot of them, under the Obama administration. China lied, cheated, and stole from us during the Obama administration.”
“But it turns out that you have to be tough and that you have to say no to China, and I think our president has done a good job of that,” he says.
David’s legislative director, Andrew Ferraro, a former Jefferies Group stock trader, judges the event a success. “The FOP is powerful,” he says.
After the meeting, David jumps into a black Chevrolet Tahoe, tears off his patterned tie, and drives to a local strip mall for a pepperoni slice and a double Bulleit bourbon on the rocks — his drink of choice — at Via Marconi’s Pizza Pub. David notes that he doesn’t have the baggage of some his opponents. By the same score he may not have their political skills. “I don’t need to be a politician,” he insists.
The pugnacious short-seller has come a long way from Michigan. Daniel Edward David, the younger of two brothers, was born and raised in Flint, where General Motors was founded in 1908, earning it the nickname “Vehicle City.”
His father, John, an Assyrian Christian immigrant from Baghdad, arrived speaking faulty English after fleeing persecution under King Faisal II. Dan David’s mother, Mary, a Daughter of the American Revolution, worked in restaurants.
His father sold insurance for Allstate. Money was tight, but he indulged his children. David remembers the family’s Chevrolet Monte Carlo, on returning home from a road trip, running out of gasoline as it pulled into the driveway.
David’s parents separated when Dan was seven, and he moved in with his father at age 12. As General Motors shuttered factories beginning in 1984, Flint staggered — and it bored deeply into the teenager’s psyche.
At 5 foot 8 inches, David has the physique of a fullback. His chest is 50 inches around, and he weighs 215 pounds. At Atherton High School, he was no scholar. “He was full of mischief,” says Bob Kinder, 74, his football coach. David was suspended four times for fighting.
David graduated and headed to Northern Michigan University in Marquette, on the Upper Peninsula. “It was ten miles from the North Pole,” he says. “It was cold.”
What did he study? “Football.”
Well, what was his major? “Football.”
“I had no backup plan,” David says. Suffering a badly torn ligament during his sophomore year, he saw his football dreams dashed, and he dropped out.
Meanwhile, David’s first stabs at employment had fallen short. He strung concertina wire at a local prison, but the inmates didn’t like him. He changed car batteries at Sears, managed a RadioShack store, and sold Chevrolets. “Every once in a while, you need to be humbled,” David says.
Watching him struggle, David’s father took his son aside in 1992. He handed David $200 for a flight to the West Coast plus enough money for one month’s expenses. “You need to take this, get a job in California, and not come home,” David recalls him saying. “I can’t leave. You’re just starting your life; you want to go where business is growing.”
David landed in San Jose. In the burgeoning California economy, a big break came when he joined Finlay Enterprises, which ran the retail jewelry departments at big chains, including Macy’s and Lord & Taylor.
Finlay had a fast-track program to move regional managers through the ranks if they were willing to relocate every six months. David, age 23, signed on. In quick succession, he was moved to more challenging assignments: Hecht’s, Wanamaker’s, and May Department Stores were a few.
David was a star. “When there was an annual awards ceremony, you knew Dan would be there,”says MJ Giordani, a former boss.
At one point, 88 Lord & Taylor stores and hundreds of employees reported to David.
In 2001, living in Harleysville, Pennsylvania, David joined a flag football league run by a local businessman, Maj Soueidan.
Soueidan — a fellow ex-Michigander — ran a collection of businesses: real estate, a long-only hedge fund specializing in microcaps called The Market’s Edge, and venture capital investments, including a money-losing Laundromat. He wanted David to manage the venture portfolio.
David agreed. He disposed of most of the money-losing businesses, while his new partner focused on The Market’s Edge and on microcap research.
Soueidan, 47, a devotee of Fidelity Investments star manager Peter Lynch, was a believer in small companies. “There’s a lot of junk in the space,” he says. “We try and pull out the good ones.”
Like Lynch, he was relentless, sifting through SEC filings. David noticed how investors would call Soueidan for insights. He figured if they could post that information on a website, they could charge for it — and have another business.
The two started GeoInvesting in 2006. The Skippack, Pennsylvania, firm had nothing to do with China or short-selling. It was a long-only website for U.S. microcaps. Today there are only a dozen employees, who range from MBAs to JDs to an ex–restaurant manager.
When the subprime crisis hit, The Market’s Edge lost 70 percent of its value peak to trough, and the question was whether to shutter it or try to earn back its clients’ money. “Maj decided to keep the fund open,“ says David.
David and Soueidan thought China could provide a way to rebound quickly. The country’s GDP growth was clocking in above 10 percent by 2010. The problem was that Chinese companies were largely off-limits to foreigners.
Enter investment banks, including Global Hunter Securities, Rodman & Renshaw, and Roth Capital Partners. They were pitching stocks that utilized a legal twist to sidestep the ownership restrictions.
Here’s how it worked. A China-based company buys a dormant publicly traded shell company on a U.S. or Canadian stock exchange and renames it. This kind of reverse merger skips the IPO process and minimizes SEC vetting.
Because foreigners are often restricted from owning Chinese assets, the Chinese company usually sets up something called a variable interest entity (VIE), through which the ownership interests pass. The VIE has contractual agreements giving it rights to the company’s cash flows.
As U.S.-listed companies, the reverse mergers file financials with the SEC. In China, however, they file often different numbers with the State Administration for Industry and Commerce, or SAIC.
Soueidan scoured the SEC filings for China Media Express Holdings, a Nasdaq-listed reverse merger. The company sold advertising on video screens that were installed on buses traveling between cities like Shanghai, Chongqing, and Beijing. It claimed advertisers including Coca-Cola and Apple. Profits were growing more than 50 percent a year, and the company was installing hundreds of new screens.
David bought thousands of warrants on the shell company China Media Express, acquired in 2009, at 17 cents each. He sold them in early 2010 after the reverse merger, at prices ranging from $5 to $7.
GeoInvesting was also bullish on other China-based reverse mergers. The pair made money on those too. And The Market’s Edge had earned back its losses by the end of 2009.
“They were good deals on paper,” David says. “We exited them because they hit our price targets, not because we thought they were frauds.”
Soon, David and Soueidan were fielding phone calls from short-sellers, including Andrew Left of Citron Research and Jon Carnes of Alfredlittle.com. They wanted to know what due diligence GeoInvesting had done on China Media Express.
On January 30, 2011, Citron Research issued a report that asked, among other things, how China Media Express could generate three times the revenue per screen as rivals. Days later, Muddy Waters issued a strong sell, saying China Media Express had fewer than half the buses it told advertisers it did and estimating that 2009 revenue was less than a quarter of what the company had posted.
GeoInvesting called the reports “hit pieces.” Says David: “I thought they were wholesale bullshit. Maj did not.”
The firm dispatched four analysts to Asia to investigate not just China Media Express, but also other China-based reverse mergers. After six weeks the team reported that Muddy Waters and Citron were probably understating the problem.
GeoInvesting suspended coverage of China-based reverse mergers. On March 11, 2011, Deloitte Touche Tohmatsu resigned as auditor for China Media Express, and the company’s CFO followed two days later. Nasdaq delisted the shares soon after.
Congress isn’t the only institution that shrugged off David’s entreaties. David and Soueidan offered to sell their due diligence services to banks that sold the reverse merger stocks so they wouldn’t be tainted.
“They would essentially be paying us not to collect fees,” David says. “It was the same thing with the NYSE and Nasdaq.”
The NYSE declined to comment on the record for this article. Nasdaq spokesman Joseph Christinat says that beginning in 2010, the exchange tightened listing standards and formed its own investigation team.
Soon after China Media Express began to unravel, GeoInvesting published a report on China Redstone Group, a cemetery operator. The company claimed to own a cemetery that the Chinese department overseeing the industry said it didn’t.
“It appears that the only ‘land’ [China Redstone] owns is a lake,” the report read. GeoInvesting had researchers pay $1,000 to $5,000 for burial plots as part of its due diligence, which also raised questions of improper government licensing. China Redstone, which had been seeking to list on Nasdaq, was never able to do so, David says.
Later that year, GeoInvesting issued a report alleging that Puda Coal, a mining company, had effectively pledged its principal assets to state-owned Citic Trust before selling a slug of its stock, purportedly backed by those same assets, to U.S. investors in an add-on offering.
“The chairman of the company basically took ownership himself,” says Soueidan. “He was raising money in the U.S. and giving the assets away as collateral.” Puda Coal shares, which traded on the NYSE Amex exchange, were delisted that year.
And in early 2013, GeoInvesting issued a research report on Longwei Petroleum Investment Holding, a storage and distribution company, determining that “the company’s purported business operations are massively overstated and a brazen fraud.” Using 24/7 time-lapse video from researchers, they discovered there was no tanker traffic at some of the company’s newest facilities and found rail spurs that were overgrown with vegetation because of extended disuse. Again, shares were delisted from the NYSE Amex later that year. Attempts to contact China Media Express, China Redstone, Puda Coal, and Longwei Petroleum were unsuccessful.
“Dan’s Chinese fraud investigations were always the most thorough and fair, with their goal being to find the truth and protect American investors, not just to profit from short-selling,” wrote fellow short-seller Carnes in an email to Institutional Investor.
Back at the lodge meeting, David is getting used to campaign life. That evening, for example, he had addressed the Montgomery County Council of Republican Women. “Lots of hugging and kissing,” he gripes. “Wiping off lipstick.”
He deftly sidesteps hot-button issues like special counsel Robert Mueller’s investigation into the Trump campaign’s alleged ties to Russia.
“Director Mueller is doing his job, and I’m going to do mine,” he says.
David has paid plenty for his outspokeness. A bodyguard, “Pork Chop” Carl, now accompanies him at some public events. (David won’t divulge Carl’s real full name.) He bought two Rhodesian ridgebacks, weighing 120 pounds apiece, and named them Kelba and Bruney, Aramaic for “dog” and “male child,” respectively.
It’s worth it, David argues.
“In the end a cleaner market is better for everyone,” he says. Whether that sits well with Wall Street enablers or not, he doesn’t care. As he says in The China Hustle: “Fuck ’em. They’re lying.”