2023-06-23 15:37:02
The hedge fund Gotham City Research, which acts as a self-proclaimed vigilante of the markets, chose a new target on Thursday: the French company SES-imagotag, which it overwhelmed in a charging report. An approach that can have a huge impact on the companies thus targeted.
Published on: 06/23/2023 – 17:37Modified on: 06/23/2023 – 18:20
For some, he is a financial predator, while others consider Gotham City Research as a vigilante of the markets tracking down fraudsters. For its targets, this hedge fund is above all a bird of very bad omen.
The French company SES-imagotag has just made the bitter experience of this. Accused of being greatly overvalued on the stock market in an incriminating report published Thursday, June 22 by Gotham City Research, this French nugget worth more than two billion euros on the stock market collapsed within hours until the listing of its shares is suspended.
The cumbersome Chinese friend
After reappearing on the stock market index on Friday morning, the share of SES-imagotag – also the world leader in electronic labeling in supermarkets – continued its free fall and its value was halved in less than 24 hours.
The 48-page report by Gotham City Research targets a very specific aspect of SES-imagotag’s activity: its links with the Chinese company BOE Technology Group, which is its main shareholder. Gotham City Research is surprised that the Chinese giant, world number 1 in flat screen televisions, is also one of the main suppliers of SES-imagotag and an important customer. That’s a lot, and the hedge fund concludes that “the potential for financial malfeasance is high.”
The authors of the report also point out in this respect that the financial and stock market results of the French group made an impressive leap following the entry into the capital of BOE. For Gotham City Research, there would thus be something rotten in the kingdom of SES-imagotag’s accounting and the financial results between 2020 and 2022 “are overvalued”.
None of this is definitive proof. And the French group disputed all the conclusions of Gotham City Research. But nothing worked. “The Gotham City Research attacks aim to undermine the confidence that investors have in the targeted company. And confidence is the main fuel in the stock market,” said Alexandre Baradez, market analyst at IG France, an online trading company.
France is not used to this kind of offensive from a hedge fund with the very particular profile of a self-proclaimed financial “vigilante”. “Few are the French companies listed on the Paris Stock Exchange that have been targeted by Gotham City Research or another fund of the same kind”, underlines Alexandre Baradez.
The most famous – and almost unique – French precedent concerns Casino, which had been targeted by Muddy Waters Research in 2015. The hedge fund claimed in a detailed report that the action of the French brand was not worth nearly 100 euros, but less than 10 euros. “We know the rest. Casino is only worth 8.2 euros on the stock market [aujourd’hui]”, notes Les Echos.
“Not disinterested vigilantes”
“There is a small group of hedge funds – Gotham City Research, Muddy Waters Research or even Hindenburg Research – which all follow the same modus operandi”, notes Alexandre Baradez. They search the market for listed companies whose accounts seem suspect to them, carry out their investigations to find out if there is an eel under the rock, and if they believe that this is the case, they publish long reports in which they are not stingy with terms such as “cheating”, “fraud” or even “manipulation”.
Be careful though, “they are not disinterested vigilantes. They always act out of greed”, underlines the expert from IG France. Before making their findings public, these hedge funds bet on the decline of their target’s stocks. “There are huge gains to be made – when, for example, prices fall by more than 50% – over a very short period of time if their attacks succeed in sowing doubt among investors”, notes Alexandre Baradez. They therefore have every interest in ensuring that their reports circulate as widely as possible.
They also have every interest in having proof of everything they say. Indeed, “if the allegations turn out to be false, these funds risk a lot of legal action where they can be accused of price manipulation”, underlines Alexandre Baradez. Not to mention that their credibility would take a serious hit, which can be economically fatal for structures that rely on the confidence of investors in their work.
A scam detector
Unfortunately for SES-imagotag, the company has been targeted by a fund that can boast a serious hunting record. Founded in the early 2010s by downside speculator Daniel Yu, Gotham City Research is best known for bankrupting Spanish tech star Gowex in 2014. This company had gone from being a successful model to a huge scam in a matter of days because of accusations from Gotham City Research, prompting the CEO of Gowex to issue a national apology.
This speculator has also managed to shake Quindell, a British manufacturer of software for insurance companies, and the South African conglomerate Steinhoff. In 2020, he also participated in one of the most important financial scandals in Germany: the fall of Wirecard, the banking start-up which was worth billions. Gotham City Research was among the first to alert to the possibility of massive fraud within this German company. Wirecard’s collapse has netted speculators such as Gotham City Research, reminds the Financial Times.
The art of impersonating Batman
Moral of these stories: “You never really come out unscathed when you are targeted by Gotham City Research or another fund of the same kind”, underlines Alexandre Baradez. On average, the share price of listed companies thus attacked loses more than 10% of its value in the days following the publication of one of these reports, discovered French economists who have studied the impact of these speculator-fraud trackers for the great French school HEC. The negative effect is still being felt six months following the “accusations” and, in the United States, half of the companies thus targeted ended up going bankrupt.
These economists claim that if the impact is so strong, it is not only because of the “evidence” put forward by these funds. In fact, these speculators are setting up a whole narrative that casts them as vigilantes – from choosing the name Gotham City in reference to the town of Batman to that of “Muddy Waters”, which suggests that the speculators are ready to stir up murky waters to uncover the truth – while portraying their target as a supervillain. And who would want to bet on the villains of the story?
Hedge funds like Gotham City Research wield enormous power over the fate of a listed company. For the authors of the study for HEC, this can be beneficial because they manage to find the chaff in the wheat. But this does not prevent these structures, which are often opaque, from acting all the same as investigators, judges and executioners. All for their own financial interest.
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