Muddy Waters’ Carson Block Takes on ‘Short and Distort’ Author Josh Mitts

Famed short seller Carson Block, the founder of Muddy Waters Capital, has a new report out — but it’s not about a public company that he believes is a fraud.

In this instance, Block argues that an individual — Columbia associate professor Josh Mitts — might rise to that level.

Mitts is the author of well-known research about short sellers titled “Short and Distort,” which argues that some short activism is market manipulation. But the work is “greatly flawed, possibly to the point of being fraudulent,” Block wrote in a 22-page white paper, titled “Distorting the Shorts.” 

Block said he has sent his report to the Securities and Exchange Commission, various academics, and online research publisher SSRN. Institutional Investor has also received a copy.

In the white paper, Block “debunked” Mitts’ research, calling it “a non-empirical, conflict-laden polemic based on misrepresentation, selective presentation of data, and lack of academic integrity.”

“If Mitts had written a short report on a company with comparable lack of rigor and misrepresentation, he would likely have significant legal exposure,” Block added.

The prominent short seller noted that Mitts is working as a consultant to the Department of Justice in its current probe of short sellers, and that he has also worked for companies targeted by short sellers. Block said Mitts no longer discloses this fact when writing on the Columbia Law School blog, and obscures it elsewhere by saying only that he consults on litigation and regulatory matters involving short sellers and market manipulation. 

“It appears that Mr. Mitts’ research is being taken seriously by the Department of Justice, when it is clear that (a) Mr. Mitts has had an economic interest that is adverse to activist short selling industry since 2018, and (b) his research is greatly flawed, possibly to the point of being fraudulent,” Block wrote in the white paper.

Mitts declined to comment at this time.

Block, who is one of dozens of individuals and firms under investigation in the probe, added that “businesses and lives are being turned upside down by this investigation, which is seemingly catalyzed by Mitts’ misrepresented, error-filled research.” (He noted that former SEC Chairman Jay Clayton has publicly mentioned “short and distort” as one avenue the investigation could pursue.)

The Muddy Waters founder cautioned that “the ultimate casualty of a misguided investigation will be market accountability and investor protection.”

The original research by Mitts included analysis of 1720 short reports published on popular financial website Seeking Alpha that were written by pseudonymous authors. The Columbia professor found that the stocks fell on the day of the report, but recovered immediately after and for three more days, in a V-shaped pattern. Mitts has argued this is evidence of market manipulation.

But when Block analyzed the data (as this reporter first detailed in the New York Times) he found that almost 80 percent of the pseudonymous authors Mitts studied to reach his conclusions did not disclose being short the stocks they were writing about. (Seeking Alpha requires authors to disclose if they have a position in the stock.)

Moreover, Block found that “substantially all” of the V-shaped returns Mitts recorded could be attributed to reports around earnings releases, which usually trigger substantial trading.

“In other words, Mitts’ research attacks short sellers despite effectively not having analyzed short sellers,” Block wrote in the paper. “In fact, analyzing Mitts’ data for authors who were actually short shows that their research is highly credible. Mitts also grievously errs by not excluding publications around earnings releases, which typically result in elevated volatility. The 507 publications within 10 calendar days of earnings drive substantially all of the ‘V pattern’ that Mitts states evidences widespread stock manipulation.”

As a group, there was no rmeaningful reebound in the stocks of companies whose reports were written by authors who said they were short the stock, according to Block’s analysis of the data. In fact, those stock prices kept trending downward. 

Mitts studied reports on companies with a market cap of $2 billion or more. Had he looked at slightly smaller companies, Block said, there would be no V-shape at all.  Moreover, Block argued that the only anecdote Mitts used in his report to illustrate manipulative trading — that of SkyTides’ short of Insulet — was flawed because Mitts neglected to look at market conditions around the time of the report. (All of the stocks in its industry showed similar price behavior during the time period, he explained.)

“Mitts should consider himself lucky that the statute of limitations for SkyTides to bring a defamation action has lapsed,” Block wrote.

Shortly after Mitts first published the “short and distort” research, he opened a consultancy, M Analytics, and has worked for several clients that were the subject of short research reports by activists.

“Mitts has seemingly weaponized the Columbia moniker and its associated credibility in pursuing his clients’ interests,” wrote Block, who added that the research is being used to attempt to shape the regulation of activist short selling in both the United States and Canada. For instance, it was used as a basis for a rule-making petition to the SEC “that we believe would significantly curtail the industry.”

“While debunked academic research is not a new phenomenon, Mitts’ significant — and often obscured — conflicts of interest raise the prospect that his conduct rises to the level of academic fraud,” Block concluded.