Activist Short Sellers Are the SEC’s Biggest Whistleblowers

Despite their success, this law professor argues short sellers are “double dipping.”


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The Securities and Exchange Commission’s whistleblower bounty program has paid nearly $300 million to activist short sellers and other “outsider” tipsters since its creation in 2010, according to a new report by a University of Kansas Law School professor.

The failure of the SEC to uncover the massive Madoff ponzi scheme before the global financial crisis of 2008 led to the creation of the whistleblower program. Around the same time, activist short selling took off.

Both are “socially valuable innovations” that have “enhanced the detection and deterrence of corporate fraud,” said Alexander Platt, an associate professor at the University of Kansas School of Law in a recent draft paper published on SSRN. Platt said his analysis is based on both Freedom of Information Act requests to the SEC as well as annual reports on the whistleblower program.

As he acknowledged, the program is widely considered a success. According to Platt, “enforcement actions relying on information provided under the program have resulted in orders for more than $6.3 billion in total monetary sanctions, including $1.5 billion returned to harmed investors.”

Platt said that more than a third of all the awards have gone to activist short sellers, or about 40 percent of the funds disbursed by the SEC.

The largest known award went to Carson Block’s Muddy Waters, a $14 million bounty for bringing the fraud of Focus Media to light in 2011.

Block declined to comment.

Yet despite the overwhelming success of this program with the help of activist short sellers, Platt has argued that it has become a “covert outsourcing program” for SEC enforcement that accounts for roughly 12 percent of the agency’s total enforcement budget. That money, he argued, should instead be going to beef up the SEC’s own enforcement.

The program’s “reliance on private professional outsiders seems to be the worst of both worlds – sacrificing both the efficiency and accountability of SEC enforcement,” he said.

That’s because, he argued, that the payment is a “windfall, not any kind of forward-looking incentive.” (Platt accused the short sellers of “double dipping” and titled his paper “The Shortseller Enrichment Commission?”)

When the WBP rewards insider tipsters, he argued in the paper, “the SEC is paying for information that it would not have been able to obtain any other way. Where a fraud is held closely by a few corporate insiders, no amount of expert surveillance or investigation by an outsider may be able to uncover the truth.”

An award from the SEC is the only financial incentive they have, since insiders are barred from trading on material non-public information, he noted.

But he argued that “a private professional outsider who spots a fraud through sophisticated market surveillance and diligent investigation is doing the same sort of work that is done by thousands of civil servants employed directly by the SEC every day.”

In what appears to be a nod to the much-hyped investigation of short sellers by the SEC and the Department of Justice that has gone nowhere, he also claimed that the awards lend credibility to short sellers and may even “help insulate activist shorts from regulatory and legal attacks of various types going forward.”

For their part, short sellers have long claimed that their work is necessary precisely because the SEC isn’t often doing that work and would not be able to deter as many frauds without them.

It can take years for whistleblower awards to be given. For example, Block only received his award more than 10 years after his short of Focus Media. The only other known short activist award mentioned in the report was to Greenlight Capital’s David Einhorn, for his 2010 short of The St. Joe Company. Einhorn told investors in a 2020 investor letter that he had received the award that year, but he did not disclose the size.

“It is so rare for short sellers to receive a whistleblower award that the author has to go back more than a decade to highlight our success with St. Joe, which we received upon appeal after the SEC improperly denied us a rightful award,” a Greenlight spokesman said. “The much bigger problem is that the SEC has in recent years substantially abandoned its efforts to police corporate fraud based on the flawed philosophy that the shareholders who are the victim of the fraud would be punished should the SEC act.”

Long before the whistleblower program was enacted, short sellers were providing information to the SEC that helped bring scofflaws to justice.

For example, short seller Marc Cohodes told Institutional Investor that he has never received a whistleblower award from the SEC. Many of the frauds uncovered by Rocker Partners, where he was a partner until it was renamed Copper River in 2007, resulted in enforcement actions. But there was no award at the time. He said has recently submitted whistleblower awards for Silvergate Capital and Signature Bank, both of which collapsed last year and are under investigation by authorities.

Platt’s argument is that short sellers would be doing their work regardless, which would free up the SEC to “pay insider whistleblowers or hire additional investigatory and enforcement staff.”

And while he believes short sellers’ trading profits should be reward enough for their hard work, short sellers point out that despite the publicity around their shorts, and even the collapse of the stocks, it’s not that easy to profit as a short seller.

“It’s very hard to make money with these trades,” said one short seller mentioned in Platt’s report who requested anonymity. “It’s risky and it’s dangerous.”

He said that short selling has become even riskier since the GameStop short squeeze of 2021. “Even assuming you do make money, you have a lot of constraints. One of them is the cost of borrowing the stock.” Other times, an expensive investigation may not turn up any evidence of wrongdoing, he noted.

“Only about 10 people make money at it,” he said. “How idiotic would it be that you would think of removing the biggest single source of whistleblowing?”