“By then, he’d reinvented himself as an attorney for racists, fascists, rape advocates, propagandists and extremists. He soon became America’s go-to attorney for far-right undesirables who use defamation, harassment and threats to silence others. ” — Huffington Post regarding Kevin Barnes’ attorney Marc Randazza
A recent article in Institutional Investor highlighted the constructive role that activist short sellers can play in policing their own turf within the capital markets. The highly flattering profile gave well deserved credit to much respected activist short sellers Fiat Lux Partners who have been shining a bright light of scrutiny upon low quality short reports being published by less credible short sellers, including Sprucepoint Capital.
Short Short World News has never sought to grandstand or pay for public relations coverage. Instead, for years we have quietly done more to expose low quality impostors – fraudulent short sellers – than any other journalistic effort covering activist short selling.
Today we Zero In upon one Kevin Barnes, a failed one-time aspiring short seller who has recently resorted to running smear campaigns and shakedowns against the upper echelons of short activism. Barnes is unquestionably worthy of public attention and scrutiny.
ABSAROKA CAPITAL AND ALLEGATIONS OF A SHAKEDOWN
In 2011, Barnes attempted to launch a career as an independent short activist under the nom de plume of Absaroka Capital. Although he billed his endeavor as a “hedge fund”, in was in fact just a fly-by-night outfit consisting of little more than a website and an account on Seeking Alpha, the crowd sourced web based platform used heavily by retail financial bloggers of the day. After publishing a flawed short report in 2011 alleging fraud against a tiny Chinese reverse merger, Barnes was sued in federal court.
Rather than stand ground and defend his work, Barnes chose to capitulate and surrender to the tiny Chinese company. He settled with the penny stock operation and quickly took down his flawed report – as well as all of his other short reports previously published.
Barnes’ Absaroka Capital faded into obscurity, yet he continued his determined attempts to enter the ranks of activist short sellers.
ANONYMOUS ATTACKS: BARNES’ BUSINESS MODEL OF “SMEAR AND STEER CLEAR”
In 2011, Barnes approached Muddy Waters Research, a then up-and-coming research platform which had been founded by famed short seller Carson Block just one year earlier. Barnes’ approach to Block made good sense. Over time, Block demonstrated that he possessed a level of staying power that Barnes knew he could not have matched.
Muddy Waters was targeted in a $4 billion frivolous lawsuit after exposing the massive Chinese fraud Sinoforest. But rather than capitulate, Block stood his ground and prevailed in court after the fraudulent company inevitably collapsed. By the end of the year, Block was named by Bloomberg as on of the fifty most influential people in global finance. Attempting to work for – and learn from – Muddy Waters was therefore an obvious goal for the ambitious young Barnes.
As can be gleaned from various mainstream media reports, Block afforded Barnes the opportunity to be a freelance junior participant in a Muddy Waters project to expose Focus Media, another massive Chinese fraud which was then trading on the NYSE. Barnes, who had limited experience as a short researcher and who did not speak Mandarin, was one of five researchers employed by Block on his team and only played a minor role in the final product which was published by Muddy Waters and Barnes played no material role in submitting Block’s whistle blower report to the SEC, according to court filings and media reports.
The report published by Muddy Waters had a ground-shaking impact and the company eventually settled with the SEC for $55.6 million for the fraud which had been publicly exposed. As filer of the whistle-blower report and as sole publisher of the public fraud expose report, which was done under his own brand name, Block was entitled to a whistle-blower award from the SEC of up to 30% of the amount collected by the SEC. In 2022 Block was awarded $14 million, amounting to 25% of what the SEC collected.
Focus Media is not nearly the largest favor that Muddy Waters has done for the US government. In 2015, Block was responsible for the public take-down of Zhongwang Aluminum, a massive Chinese fraud against which the Department of Justice eventually secured a conviction for a scheme to avoid payment on $1.8 billion in duties payable to the US government.
According to media reports, Block lost money on the overall Zhongwang short activist campaign after being targeted with a frivolous lawsuit by Zhongwang’s US affiliate before the eventual fraud collapse.
Justice has long been said to be blind, and it also appears to suffer from memory impairment. In early 2021, the Justice Department launched a probe into the practices of activist short sellers and even went so far as to have armed FBI agents serve a subpoena to Block in front of his children as he was about to take them off to school.
DOJ Short Seller Probe Fails To Silence Activists
Despite his limited involvement in the Focus Media research process, Barnes later filed a lawsuit against block attempting to take a 50% share of the whistle-blower award awarded to Block by the SEC. The SEC roundly rejected Barnes claims against Block and refused to pay Barnes anything at all. The only area where Barnes was successful was in filling the press and various court filings with spurious allegations against Block while also creating a tremendous drain on Block’s time and finances.
Given the amount of trouble it invites, many have asked if activist short selling is even worth the headache. Avaricious wannabe short sellers have at times been a bigger headache than the spiteful, envious regulators. Their low quality reports have often tarnished the credibility of legitimate short activists. Even worse, the aspiring wannabes have often been known to leak confidential trading and publishing information to line their own pockets. Some have also engaged in illegal insider trading, a behavior so egregious that it risks delegitimatizing the efforts of the broader short activist community.
The Kevin Barnes episode was hardly the first time that the famed short seller suffered betrayal from one-time mentees. Past business partners, including very former close friends, had already been known to put their own interests first, seeking to line their own pockets even as Block was known to be performing the majority of the heavy lifting at Muddy Waters. What ends up happening is that Block ends up performing nearly all of the heavy lifing and assuming all of the legal risk while the faux friends make the majority of the profits — sometimes illegally — and then attract unfair scrutiny and reputational damage onto Block.
FERRO FERRUM FACES ALLEGATIONS OF EXTORTION
Even prior to the frivolous lawsuit against Block, Barnes’ true colors were already becoming apparent. His modus operandi has been to hurl spurious smears against established and successful enterprises while demanding compensation to simply go away. Allegations of extortion have – not surprisingly – dogged Barnes’ and his chosen legal counsel for years.
In 2014, Barnes has founded Ferro Ferrum Capital which he once again described as a “hedge fund” but which was really a thinly veiled patent troll outfit intended to target pharmaceutical companies. After launching a campaign against Allergan, Ferro Ferrum was quickly sued in federal court and publicly accused of running an extortion scheme.
From the description given by the American Bar Association Journal, Ferro Ferrum was just another fly-by-night scheme drummed up by Barnes and making claims which were “objectively baseless”. Barnes, a generalist financial analyst by training, made the implausible claim that it was his intention to make a generic version of a drug at the time owned and being manufactured by Allergan. If this sounds utterly far fetched to you, you’re not alone.
From the ABA Journal,
“Ferrum Ferro Capital, a privately held venture fund, lists its address at a mailbox rental store in Wilmington, Delaware. The company’s mostly empty website describes itself as “focused on innovation, application and monetization.”
Four months after the company was formed in 2014, Ferrum Ferro filed for FDA approval of a glaucoma drug. In a letter to pharmaceutical company Allergan, Ferrum Ferro attorney Amir Naini of the Los Angeles firm Russ August & Kabat said it was proposing to make a generic version of Allergan’s glaucoma drug, Combigan.”
Barnes’ lost his bid against Allergan, and then just as soon as his venture faced difficulties, he repeated what he had done with Absaroka and folded up shop, moving on to seek easier money elsewhere.
FROM ALEX JONES TO GAY PORN: KEVIN BARNES’ TIES TO SCANDAL PLAGUED MARC RANDAZZA
Barnes’ choice of attorney in his Allergan lawsuit was telling. Attorney Marc Randazza made a name for himself representing odious clients in their pursuits of odious legal objectives. Examples included conspiracy theorist Alex Jones, various neo Nazi groups and a smattering of web site operators engaged in the distribution of highly aggressive homosexual pornography. His legal representation of Barnes’ patent troll venture – an alleged “extortion scheme” against Allergan – seems almost mild by comparison.
Barnes’ choice of legal counsel speaks volumes about how Barnes’ seeks to conduct his own business. We ask ourselves what legitimate justification Barnes’ could possibly have for enlisting such an unethical and amoral attorney as Marc Randazza to represent his legal interests.
Beyond just the shortcomings of Kevin Barnes, the case of Marc Randazza highlights the failure of the legal profession to police their own and underscores the need for the activist short seller community to set the bar higher for themselves.
As reported by the Huffington Post, “Connecticut Judge: Attorney Marc Randazza Is Too Unethical To Represent Alex Jones”.
“The far-right conspiracy theorist had had a brief professional relationship with the attorney-to-the-trolls. Last spring, Jones, who falsely claimed that the Sandy Hook massacre was a hoax, hired Randazza after being sued in Connecticut Superior Court by six families of children killed in the 2012 school shooting and an FBI agent who responded to the scene. Randazza, a regular guest on Jones’ conspiracy outlet Infowars, came with baggage….
…There was nothing suggestive about Randazza’s misconduct. It happened. And his ethical problems had been on display for almost a decade, ﬂaring into view only a few years after he began his legal career as a copyright enforcer for pornographers.
In 2009, he’d taken a job as in-house counsel for a group of porn companies known as Excelsior/Liberty. But he sold out his employer for side money, according to an arbitrator’s ruling. After getting caught, Randazza waged lawfare against Excelsior/Liberty for years. The dispute only exposed him as a scoundrel. In 2015, he lost decisively in arbitration, then declared bankruptcy to avoid paying $600,000 in damages.
By then, he’d reinvented himself as an attorney for racists, fascists, rape advocates, propagandists and extremists. He soon became America’s go-to attorney for far-right undesirables who use defamation, harassment and threats to silence others. Some of his current clients include neo-Nazi publisher Andrew Anglin, Holocaust-denying slanderer Chuck Johnson and Pizzagate peddler Mike Cernovich, who is also Randazza’s close friend and business partner. Another Randazza friend and ― according to him ― former client is the porn actress and right-wing Gamergate troll Mercedes Carrera, who was charged in February with eight counts of sexually abusing a minor under the age of 10. (Carrera has pleaded not guilty.) Randazza’s brush-oﬀ in Connecticut, however, had nothing to do with the sordid company he keeps. It had to do with his ethical problems.
In December, HuﬀPost published an exposé of Randazza’s violations of the rules of professional conduct that govern attorney behavior. He’d made scores of misrepresentations in court, entered into conﬂicts of interest and solicited bribes. “There needs to be a little gravy for me,” he once wrote opposing counsel while seeking extra lucre. “I’m gonna want at least used BMW money.”
For years, Randazza had avoided scrutiny for his wrongdoing, mainly because the legal profession does such a poor job policing its own. Eventually, the State Bar of Nevada, which licenses Randazza, launched an investigation. (He is also licensed in Arizona, California, Florida and Massachusetts.) Randazza pleaded guilty to two ethical violations. The ﬁrst concerned a shady loan he’d made; the second, a bribe he’d solicited from Oron, a ﬁle-sharing company he sued while working for Excelsior/Liberty.”
A CALL FOR RESISTANCE IN THE WAR AGAINST ACTIVIST SHORT SELLERS
The baseless shakedown filed by Kevin Barnes against a member of the short activist community is a bold reminder of the existential challenges being faced by all legitimate short activists. The business model of activist short sellers is perhaps the most difficult path on all of Wall Street. Short sellers such as Kynikos, Muddy Waters and Hindenburg Research face odds which must often seem near impossible. The odds are stacked against short sellers and despite the dire need for the crucial service they perform in exposing frauds, many investors, big and small, choose to rail against them rather than give them support.
YouTube Video: Examining the Business Model of Activist Short Sellers
Adding to the business burden is the constant threat and expense which short activists face due to frivolous and predatory legal actions. Indeed, the lawsuit filed by Kevin Barnes is the just latest in a string of efforts filed by various individuals who refer to themselves as attorneys, professors and PhDs which seek to sabotage and frustrate the efforts of short activists.
For a time, much of the sabotage could be seen to come primarily from a young assistant professor named Joshua Mitts who hurls inaccurate allegations against short sellers from his pulpit at Columbia University. Even when examined in the most generous possible context, Mitts’ work is shoddy and has been widely refuted. The many flaws and inaccuracies have been clearly identified and widely circulated, with much of that effort being led solely by Carson Block.
So far, it appears that Block has been largely fighting the good fight on his own. The famed short seller spent considerable funds and effort to debunk Mitts’ flawed analysis in a lengthy scholarly article published to SSRN laying bare Mitts’ practice of “Distorting the Shorts”.
Block has further attempted to galvanize mainstream media to identify and denounce bad actors and parasites like Mitts and Barnes and he has waged highly expensive legal battles to establish proper boundaries and precedents. However, with very few exceptions, mainstream journalists have demonstrated little appetite for any meaningful level of conflict or controversy and other short activists seem content to sit on the sidelines and enjoy the free ride. Indeed, this simple lack of passion, enthusiasm and commitment could be what spells the death sentence for short activism.
New participants such as Fiat Lux have recently emerged in the effort to self-police the space of activist short selling. While this is a welcome development, it is far short of what is needed. Attacks against short activists continue to come from all sides. And journalists and other short sellers must step up if they want to preserve their way of life and continue their role in protecting investors and markets from fraud.
Years before he began leading the charge against the stuffed shirt PhDs and professors, Block was a trailblazer seeking to develop more realistic models in the evaluation of free speech. One model is very much worth revisiting in the current environment. In a 2018 OpEd in Forbes, Block opined that
“Right now, Alex Jones can publish without having to worry much about any legal consequences. The only present recourse seems to be to hold him liable for defamation, which in practice is extremely hard. His targets are usually politicians and political parties, and they would find pursuing him and his ilk very expensive and consuming of time and energy. (Note the scorched-earth litigation tactics he is currently employing to defend himself against a suit brought by the families of the Sandy Hook victims, including seeking discovery of their current home addresses.). Moreover, pursuing Alex Jones in court risks amplifying his message. Yet, the damage he and others do to our country by spreading misinformation is very real and permeates throughout society.”
Block goes on to elucidate how online commentary sites, such as the one you are reading now, can serve as a robust fora for discussion and debate of matters of public interest, such as the current onslaught of predatory and frivolous attacks against legitimate short activists.
Here at Short Short World News, we feel that Block’s strong advocacy for the activist short community is something to be emulated, not just admired.
We believe it is time for more members of the activist short seller community to take a more “active” role in defending their profession from attack. If they fail to do so then the likely result is that more and more predators and parasites in the general skein of Joshua Mitts and Kevin Barnes will continue to plague the entire short activist community, potentially leading to dire long term consequences for investors.