An undated photo of President Herbert Hoover, who served as President from 1929 to 1933. After the market crash of 1929, he cursed short sellers
Wall Street “short sellers” are often cast as bad guys. You make money when most others lose it – that is, when stock prices fall.
They have been portrayed as enemies again in recent weeks when hedge funds have been betting that the prices of several so-called “meme stocks” like GameStop and AMC will fall. These bets caught the attention and ire of small investors and sparked a tug of war between the two sides.
This is nothing new. The shares of the very first stock ever created – the Dutch East India Company at the beginning of the 17th century – were soon cut down by an investor who disliked the fundamentals and who was denounced for his views.
Many more public companies, and some 300 years later, President Herbert Hoover cursed short sellers after the market crash of 1929. In several speeches and public statements, Hoover and his allies denounced “bear robberies” by groups of short sellers who contributed to national hardship “with the aim of profiting from the depreciation of securities and goods.”
“If everyone is losing money and someone is making a lot of money at that time, it goes without saying that they’re a little annoyed,” says 22-year-old short seller Edwin Dorsey, author of The Bear Cave newsletter.
Short-seller was even a Bond movie villain
The hatred continued and extended to popular lore. A short seller was even cast as the central villain in the James Bond film Casino Royale. In 1987 Short sellers were accused for their possible role in the Black Monday crash. And during the 2008 financial crisis there was a brief ban on short sellingwhat the officials later regretted.
Dorsey says the haters are overlooking an important role short sellers can play as watchdogs in researching and uncovering overrated or even fraudulent companies. In his view, short sellers can benefit when stocks fall – and their research can trigger it – but they’re not responsible for the poor fundamentals that would ultimately have caused the company’s stock value to fall anyway.
The Care.com in short
Dorsey made a name for himself in short film research while still a student. A friend started babysitting on the Care.com website and mentioned something was wrong with the website. Babysitters weren’t properly screened and scammers approached her there.
Dorsey began researching the company. He found out that Care.com had been sued by parents whose children were injured by babysitters they found on the platform.
From there, Dorsey dug up local news reports with similar problems and then filed inquiries with the attorneys general that revealed hundreds of consumer complaints. In addition to the verification issues, he found onerous cancellation practices that were overwhelming for users.
Eventually Dorsey decided to test the system for himself and create a fake profile with the name and photo of the disgraced sexual predator Harvey Weinstein from Hollywood. Dorsey thought it was impossible for his Weinstein profile to be approved for babysitting.
After Dorsey added a fake Facebook profile he created for the purpose, he said, “I was not only recognized as Harvey Weinstein, but also raised to their ‘CareForce’, which is their highest authenticity.”
Dorsey wrote his findings in a report that went semi-viral in the short selling world. He also sent it to several journalists. Months later the Wall Street Journal published a story on the problems at Care.com, citing Dorsey’s research. Not long afterwards, the company’s CEO, CFO and General Counsel resigned.
Care.com has since been bought by IAC and has made several security changes. The company declined to comment on the story.
“This is a great example of someone finding something wrong,” says Dorsey. “To be motivated in part by money – I bet against the stock to show people it was bad – but also motivated by saying, ‘Hey, this is this big problem that people aren’t looking at pay attention ‘and put out a report that ultimately made a difference. “
Bad actors versus researchers
Dorsey realizes that there are bad actors in the shorts world: people who exaggerate problems with a company in order to make money quickly. In these cases, he claims, the company’s fundamentals quickly correct any short-term damage that the unsavory shorts may have caused.
But for him the few bad actors outweigh the work of those who expose misconduct or simply point out overrated companies.
Dorsey doesn’t mind playing the bad guy to point out mistakes, he says. He will take his compensation in dollars.