The myriad problems surrounding short sellers — including a surprising rise in the number of lawsuits against them — aren’t dissuading one young upstart from getting into the business.
Chris Drose, a former analyst at short-biased hedge fund Kingsford Capital, is launching a new activist short fund called Bleecker Street Capital this summer, he said in an interview with Institutional Investor.
Drose shot to short-selling fame in 2014 when, as a college student at Furman University, he began to uncover a massive scandal at American Addiction Centers — a scandal that led to second-degree murder charges. While the charges were later dropped, the company eventually filed for bankruptcy, and Drose’s work led to an internship at San Francisco-based Kingsford Capital years before he was hired on as an analyst in January of 2019.
The scandal surrounding the for-profit addiction center, including Drose’s involvement, was reported on by the New York Times in 2017.
However, in 2016, the young short seller would apologize for errors in a short report he published on Seeking Alpha under the auspices of a firm he started, Bleecker Street Research.
After publishing a short report on ChromaDex, which also targeted stock promoter Barry Honig and Pershing Gold, he quickly retracted it.
“After further research we believe that the statements were not supported and the premise of the article was allegedly factually inaccurate. Bleecker Street would like to apologize to ChromaDex, Pershing Gold, and Barry Honig for an allegedly misleading article and to immediately set the record straight for our readers who should not rely on certain aspects upon the withdrawn article or statements of the author therein,” he wrote.
Even with the mea culpa, Honig — who last year settled with the Securities and Exchange Commission over fraud charges in a separate case — sued the young short seller, leading to an undisclosed settlement.
Last week another activist short seller, QKM’s David Quinton Matthews, penned a similar apology to Farmland Partners, as reported by II.
Short sellers fear Farmland’s success will embolden other well-heeled companies and their lawyers to target more short sellers. Over the past 18 months, at least four new lawsuits against activist short sellers have been filed.
“If you are writing short reports, you better be prepared to litigate,” said one short seller. But some small short activist firms simply do not have the money to bankroll expensive litigation, and law firms are coming after them, he added.
None of this seems to be deterring Drose, who isn’t going to have a huge amount of money to start. He said he has $10 million in verbal commitments so far.
But Drose said his prior litigation experience has prepared him “100 percent” for what lies ahead.
"I won’t comment on past litigation, but I always think you are better at something the second time,” he told II.
Moreover, he argued that short selling “is not something that’s going to go away. There’s alpha and there’s profits to be made.”
In going the activist route, Drose is taking a different approach than Kingsford, which maintains a low profile shorting stocks, but is known for providing short activists its research.
Drose believes activism is a better strategy. “If you’re running a short book and sitting there, you’re basically a sitting duck,” he said. He noted that several short funds that aren’t activists — like Kingsford, Sophos Capital Management, and Safkhet Capital — all have hit hard times.
In contrast, “this year has been a fantastic year for activist short selling,” he said.
“There are always things that are working,” Drose added, pointing to the strong performance of many activist shorts plays this year, particularly among electric vehicle companies and special purpose acquisition companies, or SPACs.
On Wednesday, he plans to present his second short idea since leaving Kingsford, and he said it focuses on a SPAC.
At Kingsford, Drose said he managed a portion of the assets focused on shorts of companies between $2 billion and $3 billion in market capitalization.
He said Bleecker will be less diversified than Kingsford, holding between 20 and 30 shorts. Unlike some activist short funds, it won’t just focus on frauds, he added.
Drose worked at Kingsford a little more than two years before leaving earlier this year. Before that that was an analyst at Steamboat Capital Partners, which he joined just after writing the ill-fated research report on ChromaDex.
He’s convinced this is a good time to start a hedge fund focused on shorting. “It’s kind of like launching a long-biased fund in March of 2009,” he said, pointing to the bottom of the bear market following the financial crisis of 2008.