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Don’t Give Short Shrift to Short Sellers! | Letter to the Editor

By Sally Greenberg Among some Washington insiders, a conversation’s been brewing that takes short sellers to task for using their investment resources to push Congress to regulate companies they believe are fraudulent. In fact, former Rep. Bob Barr made this claim in this publication (“Congress Should Launch Bipartisan Investigation of ‘Short-Sale’ Market,” Roll Call, April 20, 2015 ). But this misinformed line of thinking ignores the important role short sellers play in exposing companies and industries whose underlying value is specious.  

One has to look no further than Enron — or more recently, Lumber Liquidators — to know short sellers are uniquely equipped to expose fraud when federal regulators either fail to do so or lack resources. After all, short sellers have the financial resources, time and means to undertake extensive research.
As James Chanos, who shorted Enron before the company collapsed, said, “Short-sellers and hedge funds are actually real-time financial detectives in that they are incentivized through profit to ferret out fraud, and I think that’s a very important role that people forget about.” Another fan of short sellers is Ole Miss law professor, consumer advocate and expert in corporate finance Mercer Bullard, who said, “Short sellers provide an invaluable service to the markets by preventing bubbles, disciplining management, unearthing fraud and improving the accuracy of securities prices.”  

One of the most heated debates on this issue is whether Herbalife is a pyramid scheme, as Bill Ackman, an activist investor who has taken a short position in Herbalife, contends, and whether regulators should take action against it in order to protect consumers. The allegations that Herbalife’s business model is a pyramid scheme are serious charges with serious consequences for consumers and those who are recruited to sell Herbalife’s products.
As the nation’s pioneering consumer and worker advocacy organization, the National Consumers League believes this is exactly the right issue for regulators to tackle. Ultimately Ackman won’t be the arbiter of whether Herbalife is a pyramid scheme; that is the role of the Federal Trade Commission. Ackman has simply shone a big enough spotlight on Herbalife’s practices to help focus regulatory attention on the company. If the company is not engaged in deceptive practices, it will be vindicated. But if it is, then aren’t we all better off? In fact, the the NCL asked FTC Chairwoman Edith Ramirez back in 2013 to open an investigation to determine whether Herbalife is a legitimate multi-level marketing company, as the company claims, or an illegal pyramid scheme. We believe that federal agencies should evaluate all the evidence they have in order to protect consumers — whether it comes from a short seller or not — and were pleased that, exactly one year later, the FTC launched an investigation of Herbalife.  

For more than 100 years, the NCL has been working to protect consumers hurt by frauds and fraudulent companies. My life’s work is fighting fraud and championing consumer protection. If short sellers are able to expose fraud, as they have done so notably in the past, then we should by all means welcome them with open arms.  

Sally Greenberg is the executive director of the National Consumers League.

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