A Biotech Short-Seller Responds to Critics

NEW YORK (TheStreet) -- The war against biotech short sellers is heating up once again. Short selling is never going to be a wildly popular investing practice but it is perfectly legal and essential for the proper function of the capital markets. But recently, a public watchdog group in Washington with no expertise in financial markets took the unprecedented step of demanding a criminal investigation of a New York hedge-fund manager simply for engaging in short selling biotech stocks. A vocal minority among Arena Pharmaceutical (ARNA) shareholders has taken to shouting "criminal market manipulation" to anyone who vaguely disagrees with their bull thesis; while executives from Ampio Pharmaceuticals (AMPE) and Osiris Therapeutics (OSIR) use the fear of short sellers and accusations of stock manipulation as a rallying cry for their shareholders.

I asked a biotech short seller for his thoughts on why long investors seem so hostile to short sellers and whether this animosity will compel short sellers to be even more reluctant to voice their opinions publicly.

Here's what he had to say (although as you might expect, he asked to remain anonymous):

"I am a money manager who runs a heavily short-biased book focused on biotech stocks. I ply my craft in relative anonymity, preferring the conversation of other institutional investors to a public forum. Being a short seller has its challenges, some of which result from the behavior of my long only counterparts. They own stocks and resent short sellers making a case for why the stock they own is overvalued. Smart, experienced long investors, however, value learning from someone on the other side of an investment. Sometimes, the long investor will be convinced that I'm right, sell and move on. Other times, his conviction in a long position will be strengthened because he views the short thesis weak or easily debunked. The back-and-forth exchange works both ways.

"What troubles me, however, is the growing propensity for less confident long-only investors to attack the messenger -- short sellers like me -- instead of rigorously debating the short thesis. This bias is perpetuated by many in the media, as in a recent story about Questcor Pharmaceuticals (QCOR) in Investors Business Daily that was topped with the fear-inducing headline, 'Questcor Stock Plummets After Short Seller Attacks.'

"Short sellers 'attack' and must be stopped while investors (a euphemism for long-only buyers) are almost always characterized as being virtuous and good. No thought is given to the possibility that the short thesis might be correct. Enron, anyone? More alarming is how the vilification of short sellers is being pursued. The Justice Department and the Securities and Exchange Commission are urged to launch investigations into short sellers simply because they short stocks --- legally. Public companies are filing lawsuits (or threatening to do so) because an investor expresses a negative opinion. In fact, in some long-only circles, any negative opinion on a stock aired publicly is automatically considered to be manipulation.

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