An interview with Christian Lamarco, founder of Culper Research.

Founded in 2019 and based in New York City, Culper Research is a short seller that seeks to expose companies that have misrepresented their operations, failed to disclose significant risks, misappropriated capital, and otherwise deceived investors.

What makes Culper’s approach to short selling unique?

We reframe predominating narratives about deeply flawed issuers by exposing their misdeeds or misdirection. This is unique when compared to other investors who look to predict the future; we find instead that exposing past lies and deception tends to be compelling to investors. We also find that bad actors tend to remain bad actors, so we place a heavy emphasis on the backgrounds of the key individuals driving a particular business and its bull narrative.

Second, we look at structurally impaired businesses with little to no terminal values. Contrary to what many might think, even though major U.S. indices have tended to produce positive returns, most individual stocks have negative returns over time. We’re looking to pick out losers rather than debate winners.

The result is a track record demonstrating both the immediate impact and long-term staying power of our research as these issuers eventually circle the drain. This focus also allows us to remain confident in our work when short-term factors might work against us. For example, in October 2021 we wrote about DatChat Inc. The day of our report, shares traded up 9% as a popular stock promoter (who has since been charged by both the Securities and Exchange Commission and the Department of Justice) decided to squeeze our position. However, DatChat shares are down over % since that day, as of the end of 2022.

Roughly half of the companies Culper Research has targeted with a short report since its founding belong to the healthcare sector. Why is this?

COVID-19 was a tragedy that many of these bad actors couldn’t let go to waste. Many promised hope through supposed novel therapies, vaccines, or telehealth platforms, yet these promises were largely empty and self-serving. We exposed several of these operations for what they were.

For example, Cytodyn is a 2020 campaign of ours whose former CEO, Nader Pourhassan, was charged by the DOJ and SEC in December 2022. Over the course of 10 years, the ex-CEO and his cronies touted their worthless drug for over a dozen indications while misrepresenting the progress of their discussions with the U.S. Food and Drug Administration (FDA). Pourhassan holds two previous felonies; he now faces his third.

Veru primarily made female condoms before deciding to dust off an old drug to promote it for treating severe COVID-19 patients. After Veru ran what we viewed as a demonstrably flawed Phase 3 trial, we published a report in May 2022. In November 2022, an FDA Advisory Committee recommended against approving the drug for moderate to severe COVID-19.

In general, biotechnology and medical device companies also have a unique combination of factors that attract promoters and grifters. Healthcare businesses often look to solve large problems, which in turn helps attracts large sums of capital, yet commercialization timelines for new products are long, and the investment case can get highly technical, which provides the opportunity for bad actors to mislead investors.

Finally, the healthcare industry has no shortage of business models build on stiffing insurers or patients, and we see plenty of overlap here with our philosophy of focusing on past issuer malfeasance.

What factors do you think could have contributed to low short campaign numbers in 2022?

In 2021, the rising tide lifted all boats – even the boats with tattered sails being captained by pirates dying of scurvy. As such, there were many more opportunities to expose dreck in the markets. 2022, by contrast, was a bloodbath. With valuation compression, activists had fewer opportunities to capitalize on the dislocations we saw in 2021.

Nevertheless, we’ve been pleased with how our campaigns turned out this year. We are particularly proud of one in particular, bitcoin miner Core Scientific (now CORZQ), imploding from a multibillion-dollar valuation to bankruptcy inside of the calendar year. On the other hand, we can count at least three instances when we were close to publishing on an issuer, but its stock price fell apart prior to publication. We consider that a good problem to have.

Do you expect current market volatility to result in an increase in short selling, come 2023?

With markets now down significantly from highs, market participants seem to have warmed to the idea that short selling is worthwhile. We’re also excited by the prospects – for the first time in many years – of rising rates contributing to positive stock loan rebate dynamics. Our guess is that there will continue to be fewer activist short campaigns, but that investors will be more likely to take critical views seriously.

In February 2022, the SEC proposed a rule requiring reporting of short-sale related information on a monthly basis, which would then be made public. What are your views on this policy?

We believe in market transparency for all players, but we think disclosure shouldn’t come at the expense of attacks on free speech or market efficiency. To that end, we applaud the SEC for acknowledging that individualized, public data disclosure would be harmful to investors. However, we believe even anonymized, aggregate reporting might still have the effect of chilling short selling due to the ongoing burden of continuous monitoring and reporting, which is especially demanding for smaller firms.

We also worry about issuer retaliation, even with anonymized data. In recent years, there have been numerous cases in which bad actors or outright fraudulent businesses have retaliated against anyone questioning their business. Some, like Wirecard, almost succeeded in silencing critics through the courts and private investigators. The proposed rule may provide just another tool to silence critics. Allowing ordinary market participants to express their views without worries about reprisals from the issuer strengthens market integrity.

If you could introduce one corporate governance reform, what would it be?

U.S. capital markets already hold relatively strong governance and investor protections. A suitable change that is due to take effect – and one that had long been on our list – is the abolishment of paper Form 144 filings, which have been a loophole for bad actors to avoid honest reporting of stock sales. That said, many bad actors cause damage out in the open for years before being brought to justice, while many more simply ride off into the sunset without ever having been held to account for their lying, cheating, and stealing. For that reason, we think improved enforcement of the rules that already exist is the biggest opportunity for improved governance, one that will further the preeminent position of our capital markets in the world.

Looking ahead, what does Culper have planned for 2023?

We’re excited by the campaigns we currently have in the works, and we’re finding no shortage of new targets. Despite the possibility of a recession, many issuers continue to distort reality, mislead investors, and engage in suspect practices. Fortunately for us, U.S. market participants now seem more receptive to dissenting views than they have been in years, so we anticipate that we will be able to continue to grow our impact.