France's AMF financial regulator nails Muddy Waters to the wall

The short seller, Muddy Waters, has operated with impunity for some time, but finally it might have overstepped. In the past few years, firm founder and brash short seller activist, Carson Block, focused his voice on decrying the alleged overvaluation of France’s retail giant, Casino. Unfortunately for the short seller, the national markets authority of France, the AMF, was not happy with his conduct, opening an investigation into Muddy Waters wrongdoing in 2016. The investigation is finally rounding off, and it looks like things could be bruising for the American.

Officially, the AMF has been playing it coy: “Since 2015, the Casino case has been the subject of close attention and monitoring by the regulator in all its dimensions and with regard to all parties involved. Investigations were opened, covering both financial and securities market information. Procedures are in progress and the AMF does not comment on the substance or the progress of the files," the regulator said.

According to the French newspaper Le Monde, market regulators are displeased with Muddy Waters for two reasons. The first is that the firm failed to adhere to short selling disclosure requirements by being tardy in the announcement that it had past certain holding thresholds. The second is a far more serious charge: market manipulation.

The AMF believes that Muddy Waters’ publications have the characteristics of investment recommendations, and therefore the firm should be meeting the same standards as financial analysts in terms of moral soundness, impartiality, clarity, and precision. None of these are terms that have come to be associated with the kinds of messages that the firm puts out on social media and through its website, so the complaint appears justified.
Furthermore, regulatory investigators suggested that Muddy Waters was pessimistic without explanation, and chose a tone that was frequently “controversial and oriented”, with figures that were often “approximate”.

Most damningly, it was noted that the firm cleared its short position immediately after publishing a scathing report of Casino. The AMF believes that this was intended to “create a panic effect to impact” the share price “to a maximum”. For the regulator this shows that the firm’s report was “biased or obviously influenced by a significant interest” in that it would have improved the firm’s short profits.

In an interview with Les Echos, Robert Ophèle, chairman of the AMF, was even more direct in his criticism of Muddy Waters. In particular, discussion circled around the polemic of conflicts of interest in financial markets analysis. The chairman was clear that there are obvious problems with individuals being both short sellers and activist critics who can harm a company’s reputation, and by extension, its stock value.

“A person cannot be presented as a "whistleblower" if he is paid for this purpose. Moreover, it cannot be said publicly that the accounts of a listed company are false or that the latter is not entitled to distribute dividends without providing proof in accordance with the applicable rules,” Ophèle said.
The chairman admitted that there was a place for short selling. He pointed to the obvious market benefits, in particular, in the “mechanics of price formation”. Short selling also provides liquidity in certain circumstances. However, Ophèle is not convinced that regular behaviour is what has been going on during the Casino episode, which has seen the company become one of the most shorted stocks in Europe. “In the case of Casino, we can wonder if we are really in a case of normal operation of the market, while nearly 40% of the float is the subject of short sales,” he said.

The final verdict will be released seemingly any day now, and it remains to be seen whether the investigation will lead to significant sanctions or criminal prosecution for anyone at the firm. At present, Muddy Waters seems to be keeping a low profile regarding its commentary on the French market, but that has not stopped it quietly placing short bets on other local companies.

Carson Block, clinging to the illusion that he is a whistle-blower, stated that “In continental Europe, messengers are shot”. Messenger or not, one thing is clear : law must be applied.


By: Sierra Rogers (12.00)

Tags: AMF, SEC, Muddy Waters, Carson Block, Casino, Finance, short-selling,

Location: California