nationalpost.com
Casting a long shadow
on Wall Street
Short-seller Manuel Asensio
makes a lot of people mad
Amanda Lang
Financial Post
As he talks, he
keeps an eye on
his computer
screen where
the numbers
flash in constant
motion, and at
one point cuts
himself off
mid-sentence to
grab the phone
and bark out a
buy order. At
another point, he
kicks the desk.
Manuel
Asensio,
president of
short-selling
investment firm
Asensio & Co.,
is at this
moment
displeased with
the price
movement of
one of his
stocks.
Dialing a
number, he asks
without a
greeting: "Are
you talking to anybody today?" His tone is slightly
menacing. "Who have you spoken to today? Don't
talk to anyone." Then he effortlessly picks up the
conversation where it left off, explaining the role
his firm plays in uncovering what he calls
"fraudulent" companies.
This is Mr. Asensio's business model, in a nutshell:
Isolate what he believes is a fraud, do the detailed
research to try to prove it, take a short position in
the stock, and then tell anybody who will listen
why he thinks the stock is overvalued. He makes a
lot of money doing it, and he makes a lot of people
mad.
Short-sellers are not popular on Wall Street, let
alone with company management. They borrow
stock which they consider highly priced and sell it,
hoping to deliver it at a later date, after its price
has fallen, and pocket the difference.
One might expect a man who makes a living
bringing companies down -- to bankruptcy, if at all
possible -- who is anathema to his peers and sued
as a matter of course, to look a little less refined.
But desk-kicking aside, refined is the word that
springs to mind. Close-cropped hair and
fashionable horned-rim glasses meet designer suit
and Gucci shoes in a combination that is less
underworld than visiting Italian diplomat.
Sometimes portrayed as renegades who deal in
realms just this side of illegal, short-sellers like
Mr. Asensio believe they perform an invaluable
service to investors.
"We aren't saying these things because we are
short. We are short because these things are true."
Perhaps, but some of the companies involved beg
to differ, and are doing so in court. They and others
charge that Mr. Asensio's practice of publishing his
opinions is akin to market manipulation. Although
he's never been successfully sued, some lawsuits
are still before the courts.
Over six years in business, he has "targeted" 20
companies.
On this December day, a computer screen in his
unprepossessing Manhattan office displays a legal
document related to a lawsuit launched against his
company -- and him personally -- by Solv-Ex Corp.
Mr. Asensio targeted the firm more than two years
ago, and has published 27 reports on Solv-Ex. The
New Mexico company says it has technology to
extract oil from tar sands, but detractors say it has
yet to prove it has an economically viable product.
Pressure on Solv-Ex's stock and a volley of
negative reports about the company made it next to
impossible for it to raise additional capital to
finance its project in Fort McMurray, Alta.
Solv-Ex's market valuation plummeted and it was
eventually delisted from the Nasdaq stock market.
Solv-Ex recently raised $807,000 (all figures in
U.S. dollars) privately to fund lawsuits against
short-sellers and Deutsche Bank, and it personally
names Mr. Asensio in one complaint.
Jack Butler, a former president of Solv-Ex, said in
1997 that Mr. Asensio was "misinformed and
trying to discredit the company." He added at the
time that this was a deliberate understatement of his
feelings about the short-seller.
But Mr. Asensio makes no apologies for his role in
bringing Solv-Ex low, and no apologies for trying
to unearth other cases of what he calls fraud.
"These companies need ignorance" on the part of
investors in order to continue to raise capital in the
face of serious questions about their businesses, he
says.
Anyone who tries to show a stock is overvalued "is
always controversial," says John Coffee, a
professor at Columbia University's law school. But
short-sellers should be free to publicize their
claims, he says, if they have come by the
information honestly and believe it to be true.
"That is the only way you are going to get the
market to adequately police and pierce through
overly hyped claims by management."
There is little doubt Mr. Asensio believes his
claims to be true. He says his information is based
on careful and extensive research. At least three of
the companies he has targeted claim otherwise.
"We take an adversarial position against public
companies," Mr. Asensio says. "No matter how
many times we do this, we are always the villain."
And the deals are there, stacked now in boxes in
the file room next door. There are the live files,
including Solv-Ex, Diana Corp., Able Telecom
Holding Corp., Biovail Corp. International, and
Coinmach Laundry Corp.
And there are the boxes labelled "done deals,"
which include names like Alpha Hospitality Corp.
($9 in 1993, about $1 on Thursday), HarCor
Energy Inc. (the stock fell from $6 in March, 1997,
to $1 earlier this year, when it was acquired), and
the list goes on, many of them since obtained by
rivals.
The key question around short-sellers is how they
came by their information, says Prof. Coffee.
"There is nothing in itself wrong with being a
short-seller, and if you are doing it based on a
belief there is fraud going on, it could well be a
public service."
In fact, the treatment of short-sellers in the market
-- such as the rule they can sell only on a rising
share price -- provides a kind of legal buffer for
companies, Prof. Coffee said, the merit of which is
debatable. John Dorfman, vice-president at Dreman
Asset Management, also defends the role of
short-sellers. Though they may be unpopular,
short-sellers tend to do better research than most
other market players, he says.
This is the kind of talk Mr. Asensio likes to hear.
"This is a fine point that gets lost. Market
participants are taking a gamble on the future of a
company when they buy its shares," he says. "When
we take an adversarial position, it is a similar
gamble. If we are wrong, we lose money."
Glaring at his computer screen, he grabs the phone
and dials a number, still unhappy with this stock.
"Don't tell me a story," he says to someone named
Elliott. "Just tell me a price and an amount."
Short-sellers don't often publicize their positions,
since companies can and do try to squeeze them out
by driving the share price up temporarily. But
valuable service or not, firms such as Asensio can
get rich by playing the short end of the market.
The lion's share of Asensio's assets are in short
positions, and it is there the firm gets most of its
investment return. The company does not disclose
how its $100-million performs, but Mr. Asensio
says the performance of his brokerage account is a
good indicator. It turned $1-million of equity into a
$2-million trading profit in 1998.
To prove fraud involves a team of six full-time
research analysts who can earn up to $250,000
each. Nothing is published by the company that Mr.
Asensio does not personally approve. "It's a
painful process," he says. "When you see how the
sausage is made, you see it's not easy."
His attempts to "prove that Diana was a fraud" cost
Asensio $1-million. But at the end of the day,
Asensio made between $20-million and
$30-million on the position. There is no general
rule on when to take profit from a position. When
Able Telecom fell as low as $1, thanks in part to
Asensio's research, the firm didn't cover the
position, and the stock is back at $6.
"That was a mistake," Mr. Asensio allows, but "the
degree of certainty on this one is so high. Able is
bankrupt," so the stock should ultimately go to zero.
These kinds of statements help explain why
lawsuits fly like donut crumbs around Mr.
Asensio's office. Able has not filed for bankruptcy.
Diana was never proved to be a fraud, although
Mr. Asensio claims its technology didn't work, and
a promised contract didn't materialize.
The first lawsuit came from Hemispherx
Biopharma Inc. Mr. Asensio says in that case the
stock promotion was obvious, in part because of
the involvement of individuals who have a long
career of promoting penny stocks. "This was the
most fraudulent company we've ever gone after,
and they sued us first."
He believes that lawsuit was prompted by a
television report on his firm that singled out
Hemispherx. But within a short period, others had
followed suit, including Solv-Ex, Biogen Inc., and
Turbodyne Technologies Inc. These suits are
without merit, Mr. Asensio says, and while they are
a nuisance, are part of the cost of doing business.
The investment firm does buy some stock long, but
it looks for companies that are undervalued, Mr.
Asensio says. In a market like this one, that means
companies that are in some distress.
As if in evidence, Mr. Asensio's phone rings, and
with barely a greeting he issues a volley of advice
to a company chairman on the other end of the line.
"Forget about raising money, you need to team up
with [Internet service providers]. Don't take calls
from Wall Street. You're good at building things, so
build something. In three months you'll have
something you can feel satisfied with."
That business dispensed with, he turns back and
continues his thought: "We have influence with
management or we don't go long."
Contrarian positions are nothing new to the
44-year-old. After graduating from the Wharton
School of Business at the University of
Pennsylvania in the 1970s, he moved to Venezuela
at a time when the economy of the oil-producing
country was doing incredibly well.
Within two years he was a chief financial officer,
living well and married into a prominent family.
But he spotted corruption and fraud among the elite
of the country, and worried about long-term
fundamentals.
When he left, it was at great cost -- personal and
financial -- but history has proved that gamble to be
right, too.
"Many things can change in a man or woman over
time. But certain character traits are always there,"
he says of the pattern of his life that favours
difficult calls.
There is little question that Mr. Asensio is intent on
his work. The accusations of wrongdoing bother
him, but is something he has learned to accept. "I
have no ambitions or expectation that our track
record will ever be respected," he says.
He has been called "abrasive" and "brusque" by
those who know him, and at one point hands a file
to a staffer who probably has at least one college
degree, asking for "those little tabs" to be put on it.
The office, which houses just three on-site staff (the
analysts are elsewhere), is about 100 square feet,
but many brokers would like to get a glimpse of the
stocks he is watching (which include Yahoo! and
America Online Inc.).
The telephone doesn't stop ringing, and even in the
midst of a long conversation, he has his eye on that
computer screen -- and no doubt on his next short
position.
"Windstar is the next project," he tells someone on
the line. For the sake of Windstar Energy and
Windstar Resources, let's hope he's talking about a
minivan.
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