Short selling: balancing disclosure obligations and investigative research
Okay, here's an actual thought-provoking question for the HF forum, I hope:
I'm interested in thoughts from fundamental l/s analysts on how you strike the right balance between sharing what you're doing and hiding your objectives. To what extent do you tell people you're talking to in the course of your research that you're a) an investment professional and b) researching a short?
In particular, I'm wondering how other have handled the delicate nature of trying to uncover evidence of fraud/mismanagement from people who may have an incentive to keep it hidden and might try to smear you (I'm thinking Allied and Einhorn, for example), especially when they tend to go out of their way not to talk to investors.
I have friends at other funds who use fake names when doing channel checks, make up non-investing excuses to talk to people in the industry, or simply fail to mention that they are doing investment research when talking to someone who might be put off by it.
Personally I've been uncomfortable with these techniques, although the third seems like it's in a gray area. None of them are illegal, to my knowledge, but they seem like misrepresentation, which in my book crosses an ethical line.
Am I taking the CFA ethics code too seriously when these sorts of things are in service of a greater good (uncovering shenanigans)? Is there a rule you abide by, even if it means some people will attack you or refuse to speak?
Appreciate the thoughts.
You should probably have a discussion about this with your compliance officer about what the law says and what you feel comfortable with. There IS precedent by the SEC that information obtained via deception (even if said information is not inside info) is tainted, so be careful saying none of the behaviors you list are illegal, some regulator might disagree. I think there is a big difference between say calling a physician and saying "I am looking into this drug, what can you tell me about it?" and saying "Hi i am Dr. smith in NY, my patient wants to participate in your study. Doctor to doctor, how are the trials going?".
In neither case are you saying you are a fund analyst, but there are huge differences between the two.
False names does not seem illegal as long as you are not deliberately impersonating someone.
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