On December 1, 2018, Eagle Bancorp (Nasdaq:EGBN) was the target of a “short and distort” scam run by an anonymous blogger that sent its stock down to $49.95, nearly 25% lower than the previous day’s close of $66.15. Like a proud bird of prey, Eagle responded quickly and firmly, denying the allegations and rebutting the claims made by the anonymous blogger. Pulling no punches, Eagle’s CEO Ronald Paul hit the nail on the head, calling the short and distorters “shrewd scumbags.” After this strong response, Eagle stock rebounded on the next trading day following the anonymous blog posting, rising over 14% to $57.10.
Since then, however, Eagle management has largely refused to publicly address either the anonymous blog post or any of the—in my view—scurrilous allegations contained therein and the stock has failed to get back to its pre-short and distort attack levels, despite any deterioration (as far as I can tell) in Eagle’s financial results, condition or prospects.
Below is a Bloomberg chart comparing Eagle’s stock price to the Nasdaq Bank Index from the day prior to the anonymous blog post to June 18.
Unfortunately, I think that the allegations made by the anonymous blogger have had a lasting impact on Eagle’s stock price—not because they are remotely true or accurate—but because that they have created a shadow of doubt that Eagle and its management have yet to conclusively dispel. In other words, I think that at this point, the prolonged malaise in Eagle’s stock prices is largely due to Eagle’s failure to aggressively defend itself and remove any lingering doubts created by the short and distort attack.
Shortly after the anonymous blog post, I attended an investor lunch with Eagle’s senior management team and the fighting spirit present in their initial reactions seemed to have largely dissipated. Instead of outlining further aggressive responses intent on decisively rebutting the inconsistent and vague allegations made in the anonymous blog post, Eagle management took the position that investors would have to rely on negative assurance. More specifically, Eagle management essentially indicated that, to the extent there were no disclosures any instances of fraud, self-dealing or other illegalities or bad acts relating to the conduct alleged in the anonymous blog posts, that was because there was nothing to disclose. My recollection is that Eagle management provided no time period for these disclosure—to the extent that any were required—to be made and merely said that investors would have to rely on the absence of disclosures as evidence that Eagle had nothing to disclose.
I am not sure what caused Eagle management’s change in tone. Given management’s substantial stock holdings, I would assume they would be as irate as anyone and bent on removing any clouds that might be having a negative impact on the stock price. My guess, however, is that they received some very defensive advice—advice more focused on avoiding providing grist for the plaintiffs’ lawyers mill rather than recapturing the lost value in the stock.
Since then, Eagle has released earnings twice and filed both its 10-K for 2017 and its 10-Q for the first quarter of 2018 and I have yet to find any problematic disclosures reasonably related to the “facts” alleged in the anonymous blog post. Based on Eagle’s construct of negative assurance, the lack of disclosure after that period of time and intervening fillings, should give investors comfort that the anonymous blogger’s claims were baseless and should have no negative impact on Eagle’s stock price.
Negative assurance, however, is cold comfort, particularly when Eagle’s stock continues to tread water. Rather, investors need a more definitive “all clear” signal—it is time for Eagle to stop being a turkey and conclusively and directly lay the anonymous blogger’s claims to rest for once and all.