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Activist shareholders are minority stake disruptors who seek to challenge the complacency and complicity of institutional investors for underperforming stock. They are not afraid to spoil the party and shout: ‘the emperor isn’t wearing any clothes’. They hope that by prompting a change of CEO or CFO latent value will be released to the benefit of all shareholders, including themselves.

Market manipulators, in contrast disrupt for a different reason. They seek to gain from exposing flawed governance or incorrect reporting that others have overlooked. This typically destroys value  to the detriment of all shareholders. The market manipulator is complicit in destroying value having hedged their position so that they gain when value falls. Regulators don’t like this but many hedge funds are prepared to risk investigation for the potential gain in shorting the company.

The recent case of Burford Capital is a good example of this. The Californian hedge fund Muddy Waters (great name) raised a number of questions about the governance of Burford, not least the fact that the Chairman and CFO were married. Patrick Hosking in The Times on Tuesday 13 August 2019 expanded on this in ‘Bear Raiders – dung beetles that expose the stock market’s mess’.

The ’emperor’s clothes’ call wiped ¬£1bn off the company value within days according to a Guardian piece on Friday 16 August 2019 , waters had bet on a price fall, Burford has subsequently accused the hedge fund of market manipulation. Nevertheless this same news piece revealed that the chair would step down and a new CFO be appointed, so the governance issue was pertinent to the wider audience of all shareholders in Burford Capital.

The accusation of market manipulation is serious and will be investigated by financial regulators, however poor governance is often over-looked  and it is the ‘bear raiders’ who carry out more thorough due diligence than other investors. Their analysis is costly and how better to recover this than in shorting the share price? It becomes an ethical question of cause and effect:  it is one thing to bet on a fall in share value, but quite another if you are the instigator of it.

Most activist shareholders seek to change the CEO or CFO to unlock company value for the benefit of all shareholders, however the manipulator seeks to drive down value having gambled on this outcome and  is often the sole beneficiary.  It remains to be seen whether the financial regulators will consider this hedge fund a market manipulator or simply a legitimate bear raider.  Either way shareholder activism continues its relentless rise.

I leave the final words to Patrick Hosking: The system is lopsided. An army of investor relations officials, brokers, investment bankers and long-only investors is there to puff up share valuations and take the sunny view. The handful of bear raiders are a much-needed counterweight. They help to puncture stock bubbles and prevent even bigger losses later.

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