Can you imagine this? This guy routinely shorts stocks for a living... What's the world coming to? <g>
interactive.wsj.com
December 22, 2000
Heard on the Street
Rocker Partners Takes a Hit
On Its Investment in Lernout
By JESSE EISINGER
Staff Reporter of THE WALL STREET JOURNAL
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, 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.
He also called the people who ran L&H
"crooked-teethed Belgians." He labeled Gaston
Bastiaens, the company's former chief executive,
"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 supporters, who often posted
anonymously on Yahoo! message boards. He even
got what he considered a death threat. 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 after admitting to
accounting "irregularities," including $100 million in missing cash.
Most short sellers -- who essentially bet a stock will fall, by borrowing
shares and selling 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, an investment vehicle for institutional investors
and the wealthy, 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, as the stock market overall has struggled, but rose 31.6% last
year, net of fees, as stock prices generally soared. In the 1990s, 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, and that is actually the case with L&H. The
hedge fund began shorting L&H shares in June 1998 and had built up a
substantial position by December 1999. But the shares were rising strongly
at the time, and, facing increased risk, the hedge fund was forced to buy
some of them to close out part of the short position. Amid a continued rise in
the stock price, Rocker Partners purchased more shares in January,
February and March of this year to continue covering its bet, racking up an
"eight-figure" loss, according to founding partner David Rocker.
Despite the occasional setbacks, Mr. Cohodes isn't interested in toning down
his style. During a Robertson Stephens technology conference at the Ritz
Carlton in San Francisco in February 1999, he grew increasingly exasperated
during a presentation by Bill Larson, the CEO of Network Associates, a
Santa Clara, Calif., 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 alongside Mr. Cohodes in Rocker Partners' Larkspur, Calif.,
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
says Mr. Larson wasn't available to comment. Network Associates has
been one of Rocker Partners' winning positions.
Some people who initially are put off by Mr. Cohodes's big mouth later
become his fans. After clashing with Mr. Cohodes in the late 1990s over the
prospects of a maker of DVD components, then-semiconductor analyst Elias
Moosa met him for lunch, at Mr. Cohodes's urging. Arriving at the specified
restaurant, Mr. Moosa saw, out of the corner of his eye, "a blur." Then, he
recalls, Mr. Cohodes was on top of him, "giving me a bear hug and planting a
dozen kisses on me. … That was how he said hello." Mr. Cohodes's
dismal outlook for the equipment maker proved the more correct one, the
stock fell and Mr. Moosa became a part of the fan club.
Short sellers debate the value of going public with their views. 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 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 is among those who believe going public alerts auditors and
regulators, increasing chances that any fraud will be exposed. "I attempt to
keep adversaries off-balance," Mr. Cohodes says. He augments his own
research by tapping a large network of analysts and fund managers, 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.
Among his current targets: Cree Inc., a maker of semiconductor materials
based in Durham, N.C. He alleges Cree has overstated its revenue while
understating its research-and-development costs, among other things. In an
interview, Cree's chief financial officer, Cynthia Merrell, stands by the
revenue figures and Cree's accounting for R&D expenses.
Mr. Cohodes, who grew up on the north side of Chicago, worked as a
portfolio manager at a white-shoe institutional investment firm before joining
Rocker Partners in 1985. He transferred from the New York office to
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 in
federal court in Newark, N.J., against L&H, many of its officers and
directors, as well as the company's auditors, KPMG U.K. and KPMG
Belgium, and one of the company's investment banks, SG Cowen. 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. KPMG and SG Cowen, a unit of Societe Generale, decline to comment
on the suit.
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.
Write to Jesse Eisinger at jesse.eisinger@wsj.com
KJC |
