The Justice Department’s wide-ranging investigation of short sellers had a starring role in what was billed as a debate about Columbia Law School professor Josh Mitts’ “short and distort” research.
Although the short-seller probe has gone silent for months now, its existence was raised several times Monday during a debate between Muddy Waters Capital founder Carson Block — who last October received a search warrant as part of the investigation — and Robert Jackson, a former commissioner at the Securities and Exchange Commission.
The debate, part of a day-long Berkeley Center for Law conference on fraud, coincidentally happened on the same day that Justin Weitz — the top prosecutor in the short selling probe — announced on LinkedIn that he had left the department. Institutional Investor previously reported on Weitz’s ties to Mitts, who has worked as a consultant for the DOJ on the probe.
Frank Partnoy, a law and finance professor at the UC Berkeley School of Law who put the conference together, originally planned to host a debate between Block and Mitts in a reprise of a similar debate they had in 2019. But instead Mitts was interviewed by Partnoy to address Block’s critique of his research.
Mitts’ “short and distort” paper, which analyzed companies subject to short reports published by pseudonymous bloggers on Seeking Alpha, concluded the shares of those companies crashed, then recovered quickly in a V-shape pattern — which Mitts argued is evidence of manipulation. Block, who calls the professor “the tip of the spear” in the “war against shorts,” says the research has created a perception that abuse by activist short sellers is widespread.
Earlier this year, the Muddy Waters founder released a white paper showing that Mitts’s conclusions are flawed, in part because after looking at the data set, Block found that only about 20 percent of the authors whose reports Mitts analyzed were actually short the stocks they wrote about.
Mitts didn’t deny the notion that the vast majority of the authors were likely not short the stocks they were writing about. “I will concede it might be 30 percent, but it’s probably more than 20 percent,” Mitts told Partnoy in his interview Monday. In his defense, Mitts argued that some of the Seeking Alpha posts he included in his dataset “were written by people who did not publicly disclose that they had a short position,” or else they might have tipped off others about an upcoming report or have received compensation from a short seller to espouse their views.
“Where’s the evidence?” asked Block, when he spoke after the Mitts interview, adding, “I get why Josh wouldn’t go head-to-head with me.”
Shortly after his research on short sellers was published in 2018, Mitts became a consultant to companies targeted by short sellers, and after that, a paid consultant to the DOJ. Block said Mitts also submitted an SEC rulemaking petition in 2020 based on the research “which claimed that manipulation was widespread.”
Mitts told Partnoy that he has been dong “less and less” consulting for companies, but acknowledged that he did “advise the DOJ on securities fraud and market manipulation.”
In his debate with Jackson after Mitts’ interview, Block argued that the professor was “making shit up.”
“He did not study short sellers and he came to these conclusions,” the short seller said.
In Mitts’ defense, Jackson responded that Block was “not offering an academic critique of an academic paper.” Noting that the short seller was under investigation, he said, “If I thought I was in receipt of a search warrant that had anything to do with an academic paper, ‘I’d sound like that’” — referring to Block’s impassioned comments.
“I think his beef might be with the DOJ or magistrate or judge that signed off on the search warrant. I don’t think his beef is with Josh Mitts,” added Jackson, a professor at New York University School of Law.
While Block acknowledged that he might not have dug into Mitts’ research in the absence of the investigation, he said it doesn’t change the results. And he has been critical of Mitts’ research for years, including when they debated previously.
“I could have 10 search warrants, but it doesn’t change that [Mitts] knew that only a small minority are short the stock,” Block said.
Jackson brought up the short-seller probe at least six times during their half-hour debate. It is not yet known what Weitz’s exit from the DOJ means for the status of that investigation.
In announcing his resignation, Weitz wrote, “It’s been an honor to serve alongside many incredible friends and colleagues, and to contribute to the department’s mission fighting white collar crime.” He said that Friday was his last day at the DOJ. Another post said he had been “admitted to practice” in New York. “Looking forward to new challenges ahead!” he wrote.
Weitz’s departure follows that of another one of the probe’s key prosecutors, Alex Wyman, who was an assistant U.S. attorney for the Central District of California. As II previously reported, Wyman left last December to join law firm Latham & Watkins, which has represented clients targeted by short sellers. Wyman now defends clients in white collar litigation.