This Short-Seller Is Part Hulk Hogan, Part Peter Lynch
By Jesse Eisinger
12/22/2000
The Wall Street Journal Europe
(Copyright (c) 2000, Dow Jones & Company, Inc.)
Marc Cohodes is a big fan of Abdullah the Butcher, a professional wrestler. That may help explain Mr. Cohodes's investment tactics.
The 40-year-old money manager, a general partner in the New York hedge fund Rocker Partners LP, was the most vocal short -- seller of stock in Lernout & Hauspie Speech Products NV, a Belgian speech-recognition software company. In August, on his Internet radio show, "The Other Side of the Tracks," Mr. Cohodes described L&H's revenue stream as "going from the left pocket to the right pocket." He accused the company's management of exaggerating its prospects, relying on rapid-fire acquisitions and reporting a dubious surge in Asian sales.
But Mr. Cohodes didn't restrict himself to the fundamentals. He called the people who ran L&H "crooked-teethed Belgians." He labeled Gaston Bastiaens, the company's former CEO, a "sloppy-haired, foul-talking Gaston." He even laid into L&H's homeland: "If you're broke and you want a credit card, go over to Belgium because they would probably lend a drunk and a bum money." In return, he endured vilification from L&H's management and its rabid supporters, who often posted anonymously on Yahoo! message boards. He even got what he considered a death threat once.
Now, Mr. Cohodes says, the young Belgian who posted the message - "Normally I kill people for money, but since you are my friend I will kill you for nothing" - has ruefully congratulated the fund manager for his dogged skepticism.
Late last month, L&H filed for bankruptcy protection amid evidence of rampant accounting fraud, some of which Mr. Cohodes had foreseen. Most short sellers - who borrow shares and sell them, hoping to buy them back later at a lower price and pocket the difference - stay anonymous. But the roughly $700 million Rocker Partners hedge fund, where Mr. Cohodes has been working since 1985, thrives on street fighting. It is one of the few short-biased funds to have survived the long bull market. The firm is up only 4.7% this year to date but rose 31.6% last year, net of fees. In the 1990s, as stock prices generally soared, Rocker had only four down years.
The six-foot-one, 210-pound Mr. Cohodes - described by a friend as a cross between Peter Lynch and Hulk Hogan - serves as Rocker's in-house bruiser. But he isn't just comic relief. "If someone wants to make a living by betting against Marc Cohodes consistently, good luck," says Joe Barton, a veteran investor at White Rock Capital Management in Dallas.
Mr. Cohodes and Rocker Partners don't always get it right. Like many shorts, he often has poor timing. The fund took an "eight-figure" loss on L&H earlier this year, according to founding partner David Rocker. When a stock price jumps, those who have sold borrowed shares sometimes have to scramble to "cover" their positions, buying back stock at a higher price in time to repay their lenders.
Mr. Cohodes battled CDW Computer Centers Inc., a Vernon Hills, Illinois, computer retailer, before covering at what he says was a "wash" and a giant waste of time. "I thought "the CEO was an absolute promoter, but he ended up being a much better operator than I thought," says Mr. Cohodes.
Despite occasional setbacks, Mr. Cohodes never mellowed. During a Robertson Stephens technology conference at the Ritz Carlton in San Francisco last year, he grew increasingly exasperated during a presentation by Bill Larson, the CEO of Santa Clara, California.-based Network Associates Inc., a company that Rocker Partners was shorting. Fed up, he jumped to his feet and - yelling "Foul!" - threw into the air a National Football League penalty flag.
"The whole place busted up laughing," recalls M.W. "Monty" Montgomery, who works with Mr. Cohodes in Rocker Partners' Larkspur, California, office. After that, the conference host said, "I don't know if we should adjourn to the hall or the alley." A spokeswoman for Network Associates said Mr. Larson wasn't available to comment.
Another time, Mr. Cohodes brought his dentist into his office to show him how things worked. But after discovering that the dentist liked to invest in risky penny stocks, Mr. Cohodes says, "I threw him out because I felt the karma was so bad. Then, I switched dentists." Some of the people who initially are put off by Mr. Cohodes's big mouth later become his fans. Elias Moosa was a semiconductor analyst when he first ran across the hedge-fund manager. They had clashing views on C-Cube Microsystems Inc., a Milpitas, Calif., maker of components for DVDs, a company Mr. Cohodes considered a "sham and a fraud," Mr. Moosa says. After a series of nasty phone calls, the hedge-fund manager proposed lunch. Mr. Moosa nervously showed up at the specified restaurant. Suddenly, out of the corner of his eye, Mr. Moosa saw "a blur." Then, recalls Mr. Moosa, Mr. Cohodes was on top of him, "giving me a bear hug and planting a dozen kisses on me. On my face, my eyes, my neck. .... That was how he said hello."
C-Cube wasn't a fraud, but the stock fell and Rocker Partners says it made money on the position. Mr. Cohodes also won a loyalist. "He does phenomenal work." But Mr. Cohodes isn't driven only by money, says Mr. Moosa, now a San Francisco Bay area money manager: "He is the Caped Crusader. His mission in life is to seek out injustice and expose it."
One of Mr. Cohodes's current targets is Cree Inc., a maker of semiconductor materials based in Durham, N.C. He argues that Cree relies on dealings with related parties, such as Charles & Colvard Ltd. That maker of fake diamonds is based close to Cree and until May was run by the brother of Cree's CEO. Mr. Cohodes also says the company has off-balance sheet research and development costs and that the company's revenue is "vastly overstated." He thinks the company shies away from answering the substance of the critics' arguments: "When a company doesn't address the questions and only addresses the messenger, 99 times out of 100 it's a sign of major trouble." Cree's chief financial officer, Cynthia Merrell, responds: "Frankly, I don't believe he knows the Financial Accounting Standards Board definition of what a related party is. We have no related-party transactions." She says Cree's accounting for R&D expenses is proper.
Short-sellers debate the value of going public with their views. One view is that it can alert auditors and regulators, increasing chances that any fraud will be exposed. But others think it's sometimes not worth it to make a fuss in public. Jeff Matthews, a friend and former colleague of Mr. Cohodes who now runs his own hedge fund, Ram Partners, has publicly shorted companies in the past. But he prefers staying underground. "When a short starts to get messy, when it becomes a firefight, it can cause you to miss other opportunities," he says.
Mr. Cohodes defends his in-your-face methods. "I attempt to keep adversaries off-balance. People do not know what to expect." Along with doing his own research, he taps a large network of analysts, fund managers and company executives, often acting as their public mouthpiece. He says he has to speak out because the system is rigged against skeptics. "Shorts have no natural allies" in the investment community, he says. "All they have are reporters or the Feds."
Mr. Cohodes, who grew up on the north side of Chicago and worked in New York early in his career, settled in Marin County, California, in the early 1990s, to be near the therapist who works with his 14-year-old son, Max, who has cerebral palsy. Max helped Mr. Cohodes discover L&H, the biggest battle of his career. While shopping for speech-recognition software for his son, Mr. Cohodes met a salesman who panned L&H's products, saying retailers were flooded with excess merchandise from the company. An investor who tends to obsessively latch onto one stock at a time, Mr. Cohodes has yet to let go of L&H. Rocker Partners has filed a suit against L&H, many of its officers and directors, as well as the company's auditors, KPMG UK and KPMG Belgium, and one of the company's investment banks, SG Cowen.
KPMG and SG Cowen declined to comment on the suit.
Rocker Partners charges that it was forced to cover its L&H position at artificially high prices earlier this year and is seeking damages to compensate for its loss. In September, the night after L&H announced it was being investigated by the Securities and Exchange Commission, Mr. Cohodes tracked down Rob Stone, an analyst at SG Cowen who had been bullish on L&H. In the early hours of the morning, Mr. Cohodes says, he browbeat Mr. Stone over the phone for having been wrong. Mr. Stone didn't return a call seeking comment.
Mr. Cohodes has more insults in store. He notes that his family has dogs named Otis and Redding. "If we get two more dogs," he says, "I'm going to name them Jo and Pol," after L&H founders Jo Lernout and Pol Hauspie. |
