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Last month, Nathan Anderson tried to go unnoticed as he slipped his 6-foot-4-inch frame into the back row of a packed courtroom in Lower Manhattan to catch the opening statements of United States v. Trevor Milton. Mr. Anderson, the 38-year-old whistle-blower turned activist short seller, was there to show support for Paul Lackey, a former Nikola contractor. Two years earlier, the two men had worked closely together to expose the activity that served as the basis for the federal prosecutors’ case — that Mr. Milton had misled investors about the technical abilities of his electric vehicle start-up.
Mr. Anderson did not testify. (Mr. Lackey did.) But Marc Mukasey, Mr. Milton’s lawyer, repeatedly cited Hindenburg Research, the boutique investment research firm that Mr. Anderson founded, during the four-week criminal trial. Sitting in the back of the courtroom, Mr. Anderson grew uncomfortable as Mr. Mukasey told the jury that Mr. Lackey and Hindenburg were not to be trusted, and that their sole motive to impugn Mr. Milton was to make a quick buck.
It was nothing Mr. Anderson hadn’t heard before. Corporate executives tend to portray activist short sellers as vigilantes with nefarious motives, or even as “un-American” for betting against business. Retail traders try to squeeze them into oblivion, and critics have suggested that their ability to move stock prices is a potentially destructive force in capital markets. The Securities and Exchange Commission and the Department of Justice are investigating nearly 30 activist short sellers as part of a sweeping inquiry into potential market trading abuses. In February, the S.E.C. tried to add transparency to this part of the market by proposing new disclosure rules, which some influential academics have pushed for in recent years.
But for Mr. Anderson and other activist short sellers, the Milton trial had potential to reset the narrative. At a time when regulators are stretched and journalists are underfunded, they say, it’s activist short sellers who are sniffing out corporate fraud.
Mr. Anderson’s firm has exposed wrongdoing at dozens of publicly listed companies over the years. In most cases, Mr. Anderson shorted his targets, often turning a profit. None were bigger than his investigation into Nikola.
In September 2020, Hindenburg published a scathing research report calling the E.V. maker “an intricate fraud” and Mr. Milton a liar. The initial response to the report was swift. The stock cratered. Mr. Milton resigned, and federal prosecutors would later charge him with criminal wire and securities fraud.
The S.E.C. was apparently reading Hindenburg’s research, too. It opened a fraud investigation, and the company later settled a civil penalty of $125 million, but declared no wrongdoing.
That whirlwind of events thrust Mr. Anderson, a virtual unknown on Wall Street, into the spotlight. The story of how he took down one of the buzziest E.V. start-ups on the market — within a week of Nikola’s initial public offering in June 2020, investors had pushed its valuation above $34 billion, overtaking Ford Motor — was splashed across the business pages and featured in podcasts.
The Milton case wasn’t the first time Mr. Anderson’s muckracking led to a criminal trial, but the stakes never felt higher for him and Hindenburg. Still, Mr. Anderson had doubted that Mr. Milton’s trial would result in a conviction. Convincing a jury that the director of a publicly listed company committed securities fraud is a much taller task than persuading investors to join your crusade to short that same company, he realized.
“I think it’s often daunting for prosecutors to bring big cases like this,” he said, “because when you get into the courtroom, you need to get a consensus of 12 normal people who might not have familiarity with things like the stock markets or, you know, the kind of corporate legalese that goes into all these sorts of cases.”
When the jury found Mr. Milton guilty last week on three fraud charges, the biggest of which carries a 20-year prison term, Mr. Anderson felt vindicated. “I think it’s a significant victory for white-collar criminal prosecution in America, really,” he said.
On the day the jury read the verdict, Mr. Anderson congratulated those he saw as the “good guys,” including the whistle-blower informants “who worked with us.” For the doubters, he served his tweets cold, suggesting, for example, that an equity analyst who stuck by Nikola after the original Hindenburg report should be entered into “the sell-side research hall of shame.”
The moment of vindication arrived as activist short sellers are facing more scrutiny than ever before.
Hindenburg is on the list of activist short sellers being investigated by the S.E.C. and the Department of Justice, Bloomberg reported in February. Mr. Anderson said he was still in the dark about what investigators were seeking.
“We haven’t received anything,” Mr. Anderson said. He added that he was confident investigators wouldn’t find any smoking gun: “The industry is far more mundane than most people realize. It’s really a lot of reading filings, speaking to former employees and industry sources, and long-form research.”
In addition to the inquiry, some critics have pushed for new rules to rein in activist short sellers’ activities. In 2018, Joshua Mitts, an associate professor at Columbia Law School, wrote a research paper, “Short and Distort,” in which he found that short sellers, including activist shorts, who routinely cloak their identity helped wipe billions of dollars in value off publicly listed companies with their attacks.
Since then, Mr. Mitts has spearheaded efforts to introduce regulatory changes designed to bring further transparency to activist short sellers’ trades, and reduce market volatility. The S.E.C. incorporated some of his ideas in its proposals from February, including that short sellers holding outsize bets against listed companies file monthly disclosures on their positions.
Asked to comment this week about Hindenburg’s role in the Milton case, Mr. Mitts declined to speak with DealBook.
Luigi Zingales, a professor of entrepreneurship and finance at the University of Chicago’s Booth School of Business, thinks any efforts to muzzle whistle-blowers and activist short sellers would be bad for markets, and for democracy.
“In a free society, one of the most valuable sources of news is negative news. Everyone’s happy to give you good news,” Mr. Zingales told DealBook. “We need more incentives in society to report that bad news.”
Bad news can be a risky business. In one of the most famous short campaigns gone wrong, the hedge fund manager Bill Ackman put up a $1 billion bet against the nutritional supplements company Herbalife, calling it a pyramid scheme and saying its shares would fall to zero. Carl C. Icahn, another billionaire investor, took the other side of the bet, eventually becoming the company’s largest shareholder. While Herbalife was eventually fined by the Federal Trade Commission for deceiving buyers and sellers of its products, it continued to operate, and its share price never tanked.
Despite the risks, Mr. Anderson deadpanned that he was “grateful to have found a business model that supports my fraud-research addiction.” He opened a new short position against Nikola just before the trial started, assuming more bad news would hammer the stock price. That bet seems to be paying off; Nikola shares have fallen roughly 40 percent since Day 1 of the trial.
But Mr. Anderson isn’t exactly living large.
He declined to say how much he had made on the Nikola short, though he said Hindenburg had expanded in the two years since — from five people to a nine-person operation with an office somewhere in Manhattan. (He won’t say where.)
He’s still living in a rental, and his car’s a lease. New boat? “No.” Season tickets to the New York Knicks? “No, I haven’t watched a game in quite a while.”
The markets aren’t quite the fertile ground they once were for fraud hunters. A popular target of activist shorts in recent years were special purpose acquisition companies, or SPACs, which sped into the public markets with relatively little scrutiny.
“That was just an entire dumpster filled with garbage being taken onto the public markets,” Mr. Anderson marveled. Nikola came to market via a SPAC merger.
Overall, the number of SPAC I.P.O.s has slowed to a trickle, and you can see the effects of that on the Hindenburg docket. At the moment, just three research reports for publicly traded firms are in the pipeline, Mr. Anderson said. He and his researchers have branched into what he calls Ponzi schemes in the private sector. But because you cannot short such firms, the payoff (the hope of a whistle-blower bounty) is almost not worth the effort.
Mr. Anderson reckons that he and his team will be busy for a while: “There’s still plenty of fraud out there. If there’s ever a time that I feel that most of the corporate fraud in America has been eliminated, then I’ll probably announce that I’ll go grow tomatoes, or something.”
What do you think? Let us know: dealbook@nytimes.com.
