Muddy Waters rebukes Japan, French efforts to rein in short sales

(Reuters) – A move by Japan’s $1.47 trillion (1.15 trillion pounds) Government Pension Investment Fund (GPIF) to suspend share lending for short sales adds to a global trend that subverts corporate governance, said prominent short seller Muddy Waters Capital LLC.

GPIF, the world’s largest pension fund, announced the change on Tuesday saying the practice ran counter to its “stewardship responsibilities”, a nod to chief investment officer Hiro Mizuno’s commitment to so-called environmental, social, and governance (ESG) principles.

The pension fund’s policy shift also mirrors recent industry and regulatory trends in France, Turkey, and South Korea, where short-selling has been labeled a destabilising market influence.

“What we do is the most engaged form of ESG there is,” Muddy Waters founder Carson Block said in an e-mail to Reuters.

Block referenced a Dec. 3 letter from his firm to French members of parliament, countering a government report on short selling he said included “major conceptual mistakes” on market efficiency and governance. Muddy Waters came to fame by betting against Chinese companies including Sino-Forest Corp and NQ Mobile Inc. earlier this decade.

Short sellers borrow shares and immediately sell them, betting the price will fall. They then buy the shares back and return them to the lender, pocketing the capital gain from the sale.

Advocates see the practice as a healthy check on investor over-confidence and corporate spin. However, critics argue it destabilise markets because shortsellers have an interest in driving a company’s share price down.

“Europe’s – and in particular, France’s – obsession for more regulation of short selling is thus incomprehensible,” Block wrote in his letter.

GPIF earned 37.58 billion yen in fees from lending shares out of its foreign equity portfolio over three years to the end of its 2018 financial year. The policy change cuts off that income source and reduces the amount of overseas shares that can be used by short sellers.

GPIF is closely watched because changes in its policies and its 160 trillion yen ($1.47 trillion) portfolio can have broader implications for global markets.

Muddy Waters has openly targetted just two companies in Japan, including a bet against biotech firm PeptiDream Inc announced last month. The short seller is known for its brash tactics, including its broadcast on Wednesday of a faux awards show for financial crimes called the Fidouchies, co-hosted by adult-film actress Stormy Daniels.