Chris Prentice

WASHINGTON (Reuters] – Joshua Mitts, a Columbia University graduate student and sworn enemy of Wall Street may be new to you.

Since publishing 2018’s analysis of trading data, which suggested that some traders were manipulating markets, the 36-year old securities lawyer specialist has been a prominent figure in activist short selling.

12 interviews with people with knowledge of Mitts’ work and career revealed the shocking truth about how Mitts is now the center of the ugly conflict between short-sellers and companies they want to target.

The U.S. Department of Justice and Securities and Exchange Commission (SEC), have launched a vast investigation into trading manipulations by short sellers and hedge-fund managers.

Short sellers such as Muddy Waters (NYSE)’ Carson Block have bet against publicly traded companies that they consider overvalued. Then, they publish their investment thesis. Their work is said to aid market efficiency, and they dispute Mitts’ analysis.

However, the interviews that detail Mitts’ contacts with U.S. officials show Mitts and his work played an important role in federal investigations.

Peter Molk from the University of Florida, said that one reason this work resonated is because it used a large sampling and found evidence to support what the companies claimed: there was possible abuse.

Mitts did not comment beyond his statement that he had “extensive experience supporting the Justice Department” on his resume. He said he was objective about his research, and he isn’t opposed to short selling.

He said that short-selling is not illegal and it was important to keep bears.

Spokespeople of the Justice Department, and the SEC, which is the principal stock market regulator, did not respond to requests for comment.

Mitts journey started in August 2018. He reached out to Farmland Partners Inc in real-estate after a anonymous post online raised concerns about its solvency.

He published his analysis on 1,720 posts that attacked publicly traded stocks between 2010-2017, weeks earlier. The study revealed that these posts were preceded in part by unorthodox and suspect trading using stock options. He called this “shorty and distortion”.

Before 2018, US companies had fought a long battle with their opponents over the merits and veracity claims of short sellers. Mitts’s research gave companies ammunition. Companies could use data and claim fraud to show that they were using manipulative trading tactics.

“ON A SILVER PLATTER”

Mitts talked with Farmland executives and Farmland hired him to be an expert in the latter part of August 2018. Mitts’ analysis showed investors bought put options https://www.reuters.com/article/us-usa-stocks-shorts-insight-idINKCN1R20AW with a short expiration window ahead of a Seeking Alpha posting. After Farmland shares started to fall, they became financially viable and then ginned additional selling interest.

Put options, also known as derivative contracts, allow holders to purchase the stock at a fixed price.

Short-selling graphic: https://tmsnrt.rs/2HyuFCE

Paul Pittman, Farmland’s CEO, and his attorneys met with the Denver SEC officials in September to refute the claims of the short seller and lay out their short and distort arguments.

Pittman and his attorneys met with officials from the Justice Department in October without Mitts and laid out their arguments and manipulation theories again, Farmland stated.

This isn’t about shorting. “This is about securities Fraud,” said CEO Pittman to Reuters.

Elisabeth de Fontenay a Duke University professor of law, stated that U.S. prosecutors would be able to easily examine these types trading patterns.

Josh Mitts presented them with potential signs of fraud. They will examine it once they’re given that,” she stated.

Mitts has more corporate callers

Farmland was not the only company that hired him as a consultant. Banc of California (NYSE) Inc, Burford Capital Ltd Neovasc (NASDAQ:) Inc according to court- and regulatory filings.

Neovasc and Banc of California did not reply to our requests for comment. Burford Capital declined to comment on this story.

According to one person familiar with the matter, Mitts started working for the Justice Department in 2019 as a consultant. This is because sensitive work like this can be difficult to identify.

SHORT SELLERS HIT BACKS

Reuters, along with other media outlets, reported that the Justice Department launched a broad criminal investigation into hedge fund relationships and companies that published negative reports about certain companies. This was often in the hope of sending stock prices lower.

According to reports by the department, subpoenas were issued to numerous companies. These included requests for trade records of funds.

The controversy over this practice continues to rage. Activism short sellers say that they act as whistleblowers, rooting out fraud and other corporate misconduct. Critics claim they frequently spread inaccurate or misleading information.

False information spreading with an intent to manipulate a stock market price is considered market manipulation. But, U.S. Freedom of Speech Protections make such claims very difficult.

Mitts explained that his goal in researching short selling is to simply shed more light.

My goal is to understand the impact of short reports on markets. It is a pleasure to see industry professionals take time to discuss these critical questions with academics.

According to media reports, his critics include big-name investors Block Of Muddy Waters, and Citron Research’s Andrew Left. Both of them are under investigation as part of the Justice Department probe.

Left stated that Mitts analysis was flawed in its ability to account for trading patterns which may seem suspicious. He called the study “sloppy.”

Block was a fraudster at Chinese companies and first heard about Mitts when a law professor was mentioned in a report on regulators investigating aggressive short-sellers. This source who has direct knowledge of the matter said that Block learned about Mitts from a January 2019 news article.

They made friendly initial encounters. Block was a student in Mitts’ class at Columbia University in the early part of 2019. In April 2019, Mitts said to the moderator, “Carson is a good American,” during a panel discussion.

However, the relationship is now strained.

Block published last month a paper entitled “Distorting Shorts”, in refuting Mitts’ paper. In it, he stated that Mitts was guilty of a conflict by consulting for corporations as an academic.

Mitts said to Reuters he would no longer consult for activists short sellers targets and had ceased all consulting work in April 2020.

Block also suggested that Mitts’ analysis is misleading, as Mitts did not review posts that were actually short of the stock. Seeking Alpha required disclosures. The paper stated that trading patterns Mitts refers to as evidence of manipulation could be explained by short reports and corporate earnings reports.

It added that Mitts’ “Short and Distort” misrepresents the data.

Block’s paper was not discussed by Mitts.

Writer and Additional Reporting: Michelle Price. Megan Davies, Lawrence Delevingne. Editing: Paritosh and Pravin Char.