I’ve got a guilty secret: I kind of like it when Aurelius Value issues one of their “research reports” on a bank. I’ll give you two reasons why I like it and then explain why I feel guilty.
For anyone unfamiliar with Aurelius Value, they are, as far as I can tell, an anonymous short seller that periodically issues “research reports” (also known as “blog posts”) regarding banks and other companies whose stock they have shorted. The reports are pretty sensational—I have only looked at the ones involving banks, but I am going to guess that other companies are treated similarly—and generally have the effect of driving down the subject company’s stock price. Once the stock price tanks, presumably, Aurelius Value covers its short positions and, I would guess, makes a quick and substantial profit.
My first reason for (kind of) liking it when Aurelius Value issues a research report is commercial: It is pretty clear from looking at what happened to the stock prices of both Banc of California (NYSE:BANC) and Eagle Bancorp (NASDAQ:EGBN) following Aurelius Value’s first posts on each that their “research” has the desired effect. Obviously, for anyone who has somewhat of a value or contrarian bent, big drops in a stock price can create opportunities.
My second reason, however, is aesthetic: I appreciate the artistry of Aurelius Value’s work. Having given considerable study to two of Aurelius Value’s masterworks (its initial posts on Banc of California and Eagle), I consider Aurelius Value to be the Georges Seurat of short sellers. From up close, each of these posts just seems to be a bunch of relatively random allegations that, even if taken as true, don’t necessarily demonstrate that the bank will, or is reasonably likely to, suffer any losses related to the allegations made in the post. Even after repeated readings, I still can’t quite figure out what bad things were supposed to be going on at Banc of California—I mean “control” by “notorious criminals” sure sounds pretty awful, but I couldn’t actually find any specific accusations of bank fraud or other criminal behavior. Similarly, there don’t seem to be any specific allegations that the loans referenced in the Eagle post will go bad or cause any losses or other actual economic damage to the bank. However, when viewed at a distance, a distinctly negative picture appears from each post, presumably designed to destroy confidence in the subject bank.
More so than any other type of company, banks depend on confidence—they are highly leveraged, their assets are opaque at best to outsiders and the memories of the financial crisis (the massive recapitalization of the sector as a whole since then notwithstanding) are still vivid—and, when investors see a picture that causes them to loose confidence in a bank, they head for the exits post haste. The beauty of this method is that Aurelius Value doesn’t have to present any detailed accusations (which could later be proved false) of specific wrong doing that is or could reasonably be expected to cause material harm to a bank’s results, condition or prospects. Rather, they can just make a bunch of salacious allegations, intimate that bad things could be happening and then let investors conflate the two in their minds, all to the detriment of the bank’s stock price.
Despite liking the commercial opportunities presented by, and the artistry of, Aurelius Value’s work, I feel guilty because what they are doing is, in my mind, wrong and should be stopped. Whether Aurelius Value’s actions should be the subject of investigation by the SEC or the appropriate criminal authorities is beyond me, but the banks that are subject to these attacks should vigorously defend themselves.
I can guess some reasons why a bank might decline to fight back against Aurelius Value—not wanting to dignify or expend time and resources defending frivolous claims, concern over potential shareholder litigation and a desire to avoid providing grist for the plaintiffs’ lawyers’ mill, etc.—but I think that is the wrong approach. I also think it is the wrong approach to imply that investors should be comfortable with negative assurances—i.e., to the extent that there are no disclosures by the company of any adverse event, fact or circumstance related to Aurelius Value’s posts, then there was nothing to disclose—also known as the “dog that didn’t bark in the night” approach. Rather, banks subject to Aurelius Value’s attacks should proactively respond, preferably seeking counsel from advisors whose reaction is to go on the offensive, rather than retreat behind the walls of non-responsiveness.
 According to the Los Angeles Times, Aurelius Value has admitted that they cannot prove the allegations made in the initial Banc of California post, but “believes [they] are possible.”
 Talk about bad timing—right after I wrote this, Banc of California disclosed a significant loss due to a fraudulent loan. However, as far as I can tell, the loss was unrelated to anything in any of Aurelius Value’s reports.