The proliferation of short activist research in recent years has raised red flags about some of the originality, accuracy, and depth of these works — especially when combined with put options that are timed to coincide with the publication of reports that might send the stocks into a tailspin.
Now one of those activists, David Quinton Matthews, who wrote under the pseudonym Rota Fortunae, has admitted making false statements and profiting from short-dated put options ahead of his report’s publication. David Quinton Matthews' admissions were made as part of a settlement of a defamation lawsuit that was billed as a “short and distort” case brought in federal court by the subject of the report — Farmland Partners, a Colorado real estate investment trust.
“I regret any harm the articles and its [sic] inaccuracies caused to Farmland Partners and any negative impact on Farmland Partners’ stock price at the time,” Matthews, a Dallas-based registered investment advisor, wrote in a carefully worded “press release” blogpost released on Seeking Alpha late Sunday night.
Fending off lawsuits is a cost of doing business for activist short sellers, who typically win those battles. But Matthews’ stunning confession in this case sets it apart and sheds light on the relationship between anonymous short research firms and their hedge fund clients in an era when short selling has become less profitable and the costs of litigation are staggering.
Last month, Matthews lost a bid for a summary judgment, with U.S. District Judge R. Brooke Jackson issuing a scorching order. “The Court finds that several pieces of evidence, when viewed in the light most favorable to plaintiff, support a reasonable inference that defendants acted with actual malice,” Judge Jackson wrote. Because the facts were wrong, Matthews was not protected by the First Amendment, the judge said.
Instead of going to trial, Matthews reached a settlement with Farmland for an undisclosed sum that included his trading profits, as well as the profits earned by his partner, and those of his clients (including his father), according to a statement from Farmland.
“On July 11, 2018, I published an article on Seeking Alpha that led to a 39 percent decline in Farmland Partners’ share price that day. …Many of the key statements in that article were incorrect,” Matthews wrote in his release.
The short seller admitted that he had never heard of Farmland before hedge fund Sabrepoint Capital Management asked his firm, QKM LLC, to research the company and allegedly told him the fund had already taken a short position in the company’s stock. Both QKM and Sabrepoint are located in Dallas, Texas.
Sabrepoint was Matthews’ biggest client at the time the article was published. He received more than $100,000 in fees from the hedge fund in 2018, the short seller claimed in his release. Matthews acknowledged having researched several companies for Sabrepoint and written about them on Seeking Alpha. He also claims to have never written a Seeking Alpha article that was contrary to positions he knew the hedge fund had taken.
"I worked with Sabrepoint on my [Farmland] research, exchanging language, information and ideas,” the short seller wrote, saying he also purchased short-dated put options on Farmland that would only be profitable if the stock fell “significantly” shortly after the publication of his report.
Institutional Investor has previously written about the case and the issues it raised. Now Matthews’ admission of errors in conjunction with the timing of options trading and his relationship with Sabrepoint has raised more concerns.
Buying short-dated put options before the research was completed gives the appearance of bias and may also have led Matthews to rush his research in order to publish before those options expired, said one short seller.
The inaccuracies were also shocking.
“While not knowing the facts, it is disappointing to a see a short activist produce such shoddy research when the standard should be obsessive attention to detail and accuracy,” Carson Block, founder of Muddy Waters Capital, told II. (Matthews and Block are co-defendants — along with several other individuals and firms — in a case brought by Banc of California founder and former CEO Steven Sugarman that is slowly making its way through the federal court system.)
In his press release, Matthews detailed seven factual inaccuracies in his report, saying the evidence did not support his accusations that the company manipulated its earnings and was involved in related party transactions, for example.
Finally, Matthews admitted that his article’s headline claiming Farmland Partners faced a threat of insolvency was inaccurate.
Separately, Farmland has sued Sabrepoint in a Texas federal court. In a release accompanying the settlement with Matthews, Farmland said that the hedge fund “collaborated with Mathews for months prior to the release of the hit piece.”
Sabrepoint has denied having anything to do with Matthews' Seeking Alpha blogpost, and the Colorado judge said, “there is no evidence tending to show that Sabrepoint had any control over Matthews or the article he wrote.” Founder George Baxter told II that “Sabrepoint intends to defend itself and its employees vigorously against [Farmland's] frivolous claims.”