TechniqueCase studyFraud and forensicsInvestingMarkets
A short seller does fieldwork because the filings are the thing in doubt
The China Hustle · 2017
The idea
Most analysis starts from a company's filings and asks what they imply. A short seller investigating a possible fraud cannot do that, because the filings are the hypothesis under test. So the work moves into the world: visiting the factory, counting trucks, reading local registries, talking to customers who should exist. The China Hustle shows this on reverse-merger companies whose reported businesses were far larger than anything that could be found on the ground. The method is the point: when the document might be false, evidence has to come from somewhere the document does not control.
When the filings are what is in doubt, the evidence has to come from outside them.
When it works
Building a short thesis, or any diligence where the reported numbers seem too good for the business described.
When it may fail
Fieldwork is expensive and can be wrong: a quiet factory may have a night shift. A short thesis built on one observation is as fragile as a long thesis built on one spreadsheet.
How to use it
For a short pitch, name one piece of evidence that does not come from the company: a site visit, a supplier, a regulator's filing, a count of something physical. The Muddy Waters report on Sino-Forest is the model of that method written up.
Where it came from
Documentary The China Hustle · 2017
What the source says. Reverse mergers, auditor incentives and how a listed company can have almost no business behind it, told through the short sellers who went to look.
Connected ideas
Puts it to work
The modern short report is built from local records, site visits and the filingsA short thesis is a public claim set against a fact the company does not control, with the arithmetic that joins them shown.
Says something similar
Returns too smooth to be real are themselves the evidenceA track record with no bad months is a question, not a credential.
Says something similar
A board that accepts a narrative has stopped doing diligenceA compelling story is a claim to test, and the test for a technology is watching it work.
Concepts
Put it to work on L3VLUP
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