Josh Mitts Tries to Prove Short Sellers Profited From War in the Middle East — But He Made a Big Mistake

“Trading on Terror” research paper by Columbia law professor exaggerated profits 100-fold.


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Joshua Mitts, the Columbia University Law professor whose “short and distort” research on short sellers was debunked by Muddy Waters Capital CEO Carson Block in 2022, has issued another research report on short selling with a serious error.

The report, “Trading on Terror,” originally claimed that short sellers knew about the Hamas attack on Israel on October 7 — and profited to the tune of 3.2 billion shekels (about $865 million) by betting against Bank Leumi, Israel’s largest bank. There’s just one problem. The math was wrong — exaggerating profits 100-fold.

The report was “inaccurate and divorced from reality,” Yaniv Pigot, the executive v.p. of trading on the Tel Aviv Stock Exchange told Israel’s Globes news outlet last week.

The problem, according to Pigot, is that the research assumed that shares in Bank Leumi were quoted in shekels, instead of agorots (1 shekel is worth 100 agorots). That means short sellers earned $8.6 million, not $865 million.

The report, which was co-authored by former Securities Exchange Commissioner Robert Jackson, who is now a professor at New York University School of Law, is available on SSRN. It has since been corrected to account for the appropriate currency.

Despite the math error, Mitts and Jackson stand by the rest of the report, which found a sharp and significant rise in short sales of Bank Leumi shares as well as ETFs that track Israeli companies in the days preceding the surprise Hamas attack on October 7.

“Our findings suggest that traders informed about the coming attacks profited from these tragic events,” the authors wrote. “The volume of short selling observed over the days immediately prior to the Hamas attack was extraordinarily high and unlikely to have been explained by bona fide market making, because that should have been accompanied by high volumes of purchases to offset those short sales — if not on the same day, certainly very quickly.”

However, the Israel Securities Authority, Israel’s securities regulator, has said that it has not detected suspicious trading activity on the stock exchange in the days leading up to October 7. It did acknowledge the short selling in Bank Leumi.

In a statement, Mitts acknowledged updating the paper to reflect the currency error and added that “We hope regulators in Israel and around the world will continue to examine these troubling trading patterns.”

The professors’ attempt to link short selling of a particular stock in advance of a terrorist attack is reminiscent of criticisms of short bets made against airlines ahead of the Sept. 11, 2001. U.S. regulators investigated but never found anything untoward in the trading.

Mitts and Jackson admitted they have no idea who placed the shorts on Bank Leumi ahead of the October 7 attack.

But they are adamant that someone knew about the attack and acted accordingly. The Tel Aviv Stock Exchange executive cast doubt that Hamas or its sympathizers could have orchestrated an attack. As the New York Times has reported, Israel had detailed intelligence about Hamas’s plans for the attack, but it dismissed it and did not act on the knowledge.

“Whoever made such a short [sale] would be completely transparent to the local regulator because he has to sign a share lending agreement with a TASE member. So would somebody from Hamas or a straw company acting on their behalf sign a share lending agreement on the TASE?” Pigot told Globes. “It is regrettable that the researchers did not check with Israeli TASE members and they could have asked how these things work in Israel.”

Short sellers also found the report lacking. “The core premise of the ‘research’ presented is that Mitts and Jackson could tell the shorts knew about the attacks because of a spike in FINRA short volume data on October 2,” wrote a pseudonymous short seller who calls himself ESG Hound. “Nearly 100 percent of the FINRA reported volume in an Israeli Stock ETF was sold short just five days before they attacked Israel. This sounds bad, right? Well… FINRA short volume data isn’t comprehensive. In fact, it’s probably a less-than-worthless statistic since most of the required volumes reported are in dark pools, where large credentialed funds trade assets outside of public exchanges,” he wrote in a Substack report.

He added that “the spike in FINRA shorts against the Israeli ETF (which has under $200 million of total assets by the way) was far from unusual as there were several country ETFs with a nearly identical short percentage and dollar value placed against them” at that time.

Short seller Carson Block also took the occasion to go after the short sellers’ nemesis, telling Institutional Investor in an email that the report is another example of how Mitts “chooses his narrative first. Next, he backfills by cherry picking data, drawing unsupported — and often outright illogical — conclusions, which he then camouflages with a bunch of finance and math mumbo jumbo that his legal academy peers can’t see through.”

Block has criticized Mitts in the past. In a white paper written in February 2022, Block argued that Mitts’s much-quoted “Short and Distort” research, which argues that some activist short selling is market manipulation, is “greatly flawed, possibly to the point of being fraudulent.”

Block and other short sellers say that this analysis has been used in the Department of Justice investigation of short sellers, noting that Mitts served as a consultant to the DOJ in its investigation.

The DOJ probe became public knowledge in late December 2021. But two years after it came to light, no charges have been filed, and two of the original prosecutors have left the DOJ.