Short Sellers Causing Billions in Damage to Global Markets

Global Markets

Wall Street “short sellers” are often cast as criminals. After all, they make money when legit investors are losing it — hence, when stock prices fall.

In short selling, a position is opened by borrowing shares of a stock the investor believes will decrease in value. The trader then sells the borrowed shares to buyers willing to pay the current market price. If all goes well, before the borrowed shares are to be delivered to the buyers or returned to the original lending broker, the trader who anticipated the price reduction will repurchase the stock at the much lower price.

Short Sellers Causing Billions in Damage to Global Markets

In a rare interview conducted by Jack D. Schwager for the book “Stock Market Wizards”, Michael Lauer outlined his methods for investing and “shorting” stock using publicly traded companies like Dell, Microsoft and Techtronics as examples.  

Lauer stated he typically strategizes the shorting around the time of a company earnings report, claiming “If you sell it too far in advance of the report, you run the risk of the stock going sharply against you before the report is released.” 

Michael went on to elaborate on his strategy by claiming he’s accustomed to “shorting a week or two before the (corporate financial) report is released”.  According to Mr. Lauer, “If you short a stock when there is no news to activate a decline, then it could go against you”.  

Michael Lauer claims his short investments require promotion stating, “As a sell-sider, nearly 80 percent of my time was spent on marketing”.  

Richard Thomas, a Wall Street analyst, explains that professional marketers are often hired by short investors to spread negative headlines with the intent of depreciating corporate stock to reap instant profits. 

According to Thomas, “If a profiting company releases positive financials, but a negative article is released claiming the accounting is suspect, that alone can have serious repercussions on the value of stock.”   

In February 2023, billionaire Horst Julius Pudwill, the cofounder of Techtronic Industries suffered nearly $700 million in losses immediately after short-seller investors similar to Michael Lauer used news outlets and social media platforms to accuse his company of manipulating revenue streams.  

The GameStop Short Caused Hedge Funds Billions

Michael Burry is best known for being one of the few investors who predicted the 2007 subprime mortgage crisis. In mid-2019, Burry’s Scion Asset Management acquired a 3.3-percent stake in the publicly traded video game retailer Gamestop (NYSE:GME).  

By January 2021, major hedge funds began shorting Gamestop. To combat their efforts, a group of investors on the social platform Reddit collaborated to invest large sums of money into the company, thereby driving up the stock value.  

The greedy hedge funds managers who originally procured their short positions of the Gamestop stock at $15 (hoping it would drop so they could reap profits) were forced to buy stocks at nearly $400 per share causing them nearly 10 billion dollars in damage.

Hedge Fund Fraud 

The Bernie Madoff scandal is truly the worst-case scenario for a hedge fund.  Nevertheless, there are many examples of fraud, insider trading, embezzlement, and other types of scams within the industry.  

In March 2020, Bill Hwang, the former CEO of Archegos investment hedge fund lost nearly $20b in a span of 10 days.  Hwang was recently indicted on federal charges of fraud and racketeering. Investopedia lists the top 10 multi-billion-dollar hedge funds involved in criminal fraud, but they are just the tip of the iceberg. 

Despite the prestige of being interviewed and named in a book, Michael Lauer’s market investments and shorting techniques didn’t pay off in the long run for investors. According to Forbes, Lauer’s off-shore hedge-fund company “Lancer” was accused of defrauding more than $1 billion from investors like the Edmond de Rothschild bank in France and Luxembourg ($11 million), Kuwait & Middle East Financial Investment ($25 million), AXA Group ($14.8 million), and a large array of Canadian institutional investors including André Chagnon and the Université de Montréal for over $350m.

Hedge Fund Embezzlement of Funds

The SEC subsequently received a summary judgment against Michael Lauer for what was described in the complaint as a “massive billion-dollar hedge fund fraud”.

The United States District Court for the Southern District of Florida ordered the immediate seizure of Lauer’s personal and corporate assets.    

But these regulatory and judicial steps by the SEC didn’t stop Michael from ridding the fund of its assets. According to motions filed with the courts, “Lauer would often use the girlfriends (specifically naming Heidi Carens) to assist him in violating his duties to the funds by placing valuable assets, including aircraft and cash in their names in an effort to prevent investors and/or the SEC from seizing such assets”.  

One person interviewed claimed Michael would send Heidi and other girlfriends to prominent businessmen for the purpose of obtaining inside information from executives in corporations he planned on shorting.  

According to sources who agreed to speak on condition of anonymity, Michael and Heidi eventually got married, but later divorced for the strategic purpose of embezzling assets. 

To support the embezzlement claim, we received a copy of a contempt motion filed by the SEC which stated Michael Lauer continued siphoning off money and assets from his bankrupted hedge fund after the courts froze his assets via an entity controlled by then wife Heidi Carens (Lauer). 

Unlike in the case of Bernie Madoff’s wife Ruth who got to keep over $5m in assets, Florida District Judge Kenneth A. Marra ordered Michael Lauer’s ex-wife to forfeit all money received from the bankrupted hedge fund.  

Despite asserting her 5th amendment (the right to remain silent) regarding money and assets obtained from the fund, the former spouse doubled down and petitioned the courts to unfreeze Michael’s assets and pay her $10,000 a month.  The court rejected the appeal stating, “Heidi Lauer failed to demonstrate what happened to more than $500,000 worth of cash”, while noting both Heidi and Michael “have been involved in violations of the Court’s equitable Asset Freeze Order”.

In addition to the SEC and other creditors, the IRS also put liens against their multi-million-dollar residential property for unpaid taxes.  The courts ruled years later long after the divorce was finalized that despite Mr. Lauer bank accounts being frozen, his ex-wife Heidi continued to use her own name and personal account to pay off Michael’s mortgage. This prompted the judge to rule in favor of the IRS.

Hedge funds are typically not registered with the government, nor is the industry regulated.  The Lauer’s case is just one of many examples to demonstrate a common fraudulent practice within the financial industry. After all, if an investment goes bad, the remaining funds should be returned to the investors.  Yet even when money is frozen, hedge fund managers along with their family members using slick attorneys prefer to tie up the court system with legal motions to extract the cash and benefit themselves.  

Time to Ban Short Sellers?

As early as 2021, both the Justice Department and the U.S. Securities and Exchange Commission have been conducting investigations into possible manipulative tactics employed by short sellers and hedge funds. This included actions tied to the distribution of negative research reports circulated by hedge funds and other financial entities. 

More recently, federal authorities in Washington have been tasked with investigating the actions of short sellers in relation to the March 2023 downfall of three major American banks holding $532 billion in assets prior to their collapse.

To protect the integrity of the stock market from fake news, the SEC chairman Gary Gensler recently began proactively calling to regulate hedge funds by monitoring their short position activity. Yet according to Elon Musk, regulating the short sellers isn’t the answer, rather the practice needs to be banned entirely by law.


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