OpEd: The Answer To Spotting a Short Attack Is InPlainSight

Bringing short sellers out of the shadows

The following article was written by Dan McDermott, a Senior Vice President in ICR’s Special Situations group. McDermott is an adjunct professor of Shareholder Activism at the University of Pennsylvania Carey Law School.

For too long, short sellers have operated with an unfair advantage—the element of surprise. Short firms conduct months of research before striking without warning and can be extremely damaging. A hidden pattern in public records may give companies their first fighting chance against short sellers.

Over the course of 2024, there were 96 short attacks in the U.S. with an average one-week market loss of 8.1%. Hindenburg Research’s attack on iLearningEngines Inc. was 2024’s most damaging, erasing 68.3% of the company’s market value in one week. Companies and investors barely see it coming.

As short attack firms develop their research, they use U.S. Securities and Exchange Commission FOIA requests as a tool to identify targets and develop their theses. A SEC FOIA request is a formal written request for records from the SEC made under the federal Freedom of Information Act. FOIA gives the public the right to request and receive most non-public federal agency records, including certain SEC investigative records.

Short attackers frequently file FOIA requests as they prepare research on their targets. With the help of AI, strategic communications advisory firm ICR has analyzed tens of thousands of SEC FOIA requests, surfacing patterns and linking some serial FOIA requestors with known short attack firms. Of those 96 short attacks in 2024, roughly one third had received an SEC FOIA request prior to the short attack.

It’s historically difficult to predict which companies a short research firm will target and when they will attack. However, SEC FOIA requests provide the breadcrumbs that one may be coming. The timing is striking. For example, the SEC received a FOIA request on Icahn Enterprises LP (IEP) 253 days prior to Hindenburg Research’s attack on Carl Icahn’s publicly traded firm. Icahn Enterprises shares dropped 40.3% in two days following the attack. Similarly, the SEC received a FOIA request on Maison Solutions Inc. (MSS) 20 days prior to Hindenburg Research’s May, 2023 attack on the company, decreasing their shares by 82.6% in two days following Hindenburg’s attack. The tragedy is that this research activity was detectable. No one was looking.

Short attacks are historically difficult to anticipate. Once an attack is published, the damage is done and can often take a year to fully recover. Fortunately, the same tools that short research firms use to target companies also leave signals that an attack could be imminent.

Moreover, most short attacks fall into three broad themes: 1) overvaluation; 2) unorthodox or fraudulent accounting; and/or 3) defective product. Given that we can better predict when a short attack may be coming and what the likely criticisms would be, it’s imperative to proactively and effectively communicate with the investor community to clear up any lingering misconceptions before a short attacker weaponizes them.

The companies that will thrive in this environment are those that recognize the changed landscape and adapt accordingly. Identifying patterns in public records may give companies their first fighting chance against short sellers. Just as cybersecurity evolved from an IT concern to a board-level priority, short attack preparedness must become a fundamental component of modern corporate risk management.

The tools exist today to pierce the veil of short-seller secrecy. The methodologies have been developed and tested. The only question remaining is whether corporate leadership will embrace this new capability or continue operating blindly to one of the most significant threats to shareholder value in today’s market.

PEOPLE Carl C. Icahn Dan McDermott