Gotham City Research lists no physical address or telephone number, never signs its reports and does not identify any personnel.
Yet the shadowy research firm, practitioners of a controversial practice known as short selling that places downward bets on stocks, has claimed to be a kind of Batman of finance, fighting lies and fraud.
Its latest victory, which seems to buttress those claims? Successfully weeding out chicanery at former tech highflyer Let’s Gowex of Spain.
Photo: Reuters
Gotham’s 93-page report documenting fraud at Gowex, initially dismissed by the Spanish Wi-Fi company as “defamatory,” was vindicated on Sunday when Gowex unexpectedly declared bankruptcy after its CEO admitted faking results for at least four years.
“Question: Who is to expose the misdeeds of such fraudsters?” Gotham City asks on its Web site. “Answer: Short sellers, as the Gowex case clearly demonstrates.”
“Auditors, regulators, lawyers, investment bankers, and others rarely detect fraud. Insiders and short sellers do,” it said.
Yet an aura of impropriety also invariably surrounds short sellers — avowed mudslingers of the financial world who profit by driving stock prices lower. Critics say the practice can be manipulated.
“They often get a bad reputation as people who spread negative news,” Georgetown University finance professor James Angel said.
Angel and other market watchers regard Gotham City’s rhetoric on the heroism of short selling as fanciful. Yet they concede Gotham and its peers provide a counterpoint to the market’s many voices who tirelessly — and sometimes dishonestly — talk up stocks.
“The short sellers are really our first line of defense against companies that are overhyped, the so-called pump-and-dump artists,” Angel said.
Gotham’s brand of short selling rests on correctly calling instances where stocks have soared on a shaky financial foundation. The short seller borrows the stock, sells it, buys it back at a lower price and then returns the stock to the owner, booking a profit.
“People ask: Are short sellers really informed of what is happening in the future, or are they manipulating the price so they can profit for themselves?” Purdue University finance professor Zhang Xiaoyan (張曉燕) asked. “The truth is a mixture of both.”
A certain amount of suspicion is inevitable for short sellers, but particularly with firms like Gotham that are not transparent.
Gotham was founded by Daniel Yu, a Massachusetts Institute of Technology graduate and a former hedge fund analyst, according to the Wall Street Journal. Gotham’s crusade against Gowex follows campaigns against insurance software company Ebix, specialty stone tile retailer the Tile Shop and British software company Quindell. In each case, Gotham published a damning report that immediately sent shares lower.
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