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— Rules of the Road —
After that appearance, Einhorn repeated his warnings at a number of other public forums. CNBC's Maria Bartiromo noted in a broadcast in May that Lehman Brothers stock dropped 10% after one of his presentations. The investment bank filed for bankruptcy protection on Sept. 15. Lehman executives and other critics have lashed out at Einhorn, complaining that he had been on a mission of speaking half truths and spreading false rumors about the venerable firm. Observers may disagree as to whether Einhorn should be lauded or vilified for his relentless criticism of Lehman in the months before its demise. But one thing is without question: His constant harangues attracted many other short sellers, who piled on each time he issued another Cassandra-like warning.
"Einhorn sees himself as the Woodward and Bernstein of the financial world," says Columbia Law School professor John Coffee. Einhorn's public style exemplifies a new breed of insurgent investor. These investors publicly express concerns about corporations and acknowledge they have heavy bets against the firms' stock. Pershing Square Capital Management LP's William Ackman similarly waged a short-selling insurgency against bond insurers MBIA Inc. and Ambac Financial Group Inc. Both dispensed with the secrecy typical of most hedge funds, which generally keep trading strategies under wraps. The markets are filled with short sellers who don't reveal their actions. In fact, the Securities and Exchange Commission is trying to identify, so far unsuccessfully, whether hedge funds helped bring down Bear Stearns by quietly spreading false rumors about the institution. In addition to discouraging short selling through a recent raft of emergency restrictions, the SEC is also trying to squelch the stream of rumors predicting demise of one firm after another. The SEC's campaign against short selling is highly controversial. Many see the crackdown as unjustified protection for managements that ran companies into the ground. Even the agency acknowledges that short sellers play a critical role by acting as a check on overly rosy management predictions and inflated stock prices. Short sellers also bring liquidity to the market. Consequently, the SEC is likely to let most of its restrictions die when authorizations expire Oct. 2, or shortly thereafter. One restriction, however, is likely to survive. A current requirement forcing fund managers to disclose short positions has significant support. Historically, fund managers haven't reported specific positions, but the temporary rule requires those with $100 million or more invested in securities to disclose their shorts to the SEC, which will make them public after a two-week delay. In addition to making it harder to anonymously hammer a stock, the disclosure rule is partially intended to discourage rumor-driven short sales. Should a variation become permanent, managers will have options for keeping strategies confidential. For instance, some may split investors among several funds, each with less than $100 million under management. Derivatives transactions such as cash-settled equity swaps already are being employed to avoid equity disclosure requirements, and short sellers could copy that tactic too. Some hedge fund investors may cut back on shorting altogether to avoid having to explain why they are betting against particular companies. But others are likely to follow Einhorn's example and simply say out loud why they are sour on a company. Columbia Law School's Coffee says a rule could bring many managers out of the shadows and spawn an activist short-selling movement. Ron Orol covers the Securities and Exchange Commission for The Deal. |
In November 2007, David Einhorn, founder of Greenlight Capital Inc., appeared at an investor conference in New York where he expressed deep concern about how Lehman Brothers Holdings Inc. disclosed its financials. 
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