Preventing a direct hit from activist short seller attacks

Author: Emmanuel Vignal

September-30 2016

Emmanuel Vignal is the Greater China Leader and Partner, Fraud and Investigation Dispute Services at EY. For more information on FIDS, visit

Over the last year, short selling has never been far from the global media spotlight and some regulators have taken steps to impose order on the practice. Locally, however we have witnessed the emergence of a trend of activist short sellers, specifically targeting companies in Asia, often with allegations of corporate fraud, but always seemingly aimed at negatively impacting share prices for personal gain.

Today’s activist short sellers comprise individuals, analyst companies and even anonymous research groups. They come with multiple agendas, ranging from those just out to make money for themselves to those claiming a moral high ground by denouncing potential corporate fraud that they believe investors should be aware of.

However, whether these activist short sellers are individuals, companies or groups, what they have in common is that they make allegations of financial impropriety at listed companies and these allegations have an immediate negative impact on the share price. Our connected world, largely by virtue of the internet and the speed at which the reports become readily available to the public, amplifies the speed and scale of the negative impact of such attacks.

While the allegations may generally be refuted just as quickly as they are released, companies are often seemingly so stunned and unprepared that they have little time to respond in sufficient detail to quell rising concerns amongst shareholders and regulators. Without a timely and persuasive response from the companies, the damage soon becomes entrenched, causing a prolonged drop in the share price, applications for share trading to be halted, calls for independent investigations, lengthy delays in resumption applications and ultimately loss of investor confidence.

This new breed of short seller certainly appears to be more active in Asia. Activist Shorts, an independent database dedicated to tracking activist short-seller campaigns found that in 2014, short sellers, both named and unnamed, had 146 public campaigns, up from 121 in 2013. While in Asia, during the second half of 2015, research reports from groups including Iceberg Research and Anonymous have had a big impact on certain companies trading on Asia’s share markets.

So is it avoidable? There may be no panacea, however as with most things, prevention is always better than cure. Avoiding becoming a target to begin is the best prevention technique. And the key to this technique is transparency. Companies need to be transparent about the ethical leadership they have in place, the accounting methods and financial results. A lack of transparency is often a red flag for activist short sellers looking to take aim. Experience tells us that companies that can demonstrate and communicate a zero tolerance to fraud, bribery and corruption, together with strong and visible ethical policies and procedures, are at less risk of becoming the target of an activist short seller attack. If the company is too hard to crack, an activist short seller will move on to an easier target.

If despite having the best compliance programs in place a company still faces an activist short seller attack, it is essential that the company has an action plan to deal with the attack, anticipating the concerns of stakeholders and how best to address such concerns.

It has been proven time and time again that bare denials of the claims by an activist short seller are not enough. Companies need to demonstrate concrete proof to refute the claims and this often comes down to solid compliance procedures that can be demonstrated, embedded tone from the top on ethics, supported by sustainable reviews and the use of tools, such as whistleblower hotlines and forensic data analytics to detect unethical behaviour.

To attain solid compliance procedures, companies also need to avoid addressing compliance in silos, undertaking holistic fraud risk assessments to cover the risks of all types of fraud, whether by employees or management, and ensuring policies and procedures include all aspects of the business. In Asia, this would also necessitate a focus on fraud risks contained within third party relationships (such as joint venture partners, distributors, agents and vendors) due to the reliance many companies in this market have on such parties. To reduce the risk of these relationships being called into question as part of an activist short seller attack, especially where the allegations impute undisclosed third party relationships, these third parties need to be continually monitored and assessed. This may include updating existing due diligence procedures, providing regular training, conducting compliance health checks and risk assessments, and exercising audit rights.

Companies in Asia can no longer ignore activist short seller analyst reports and simply hope they don’t become the next target. Instead they need to take proactive steps to remove the potential bulls-eye from the company, so that should an activist short seller take aim, they will miss their target.

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