In the spring of 2022, the irascible Wall Street short seller Marc Cohodes was in a particularly foul mood. The 62-year-old’s second marriage was on the rocks. He was recuperating from shoulder surgery after his horse rammed him. He couldn’t do much of anything besides fume and tweet about the financial markets.
On April 29, 2022, Cohodes found himself seething about offshore crypto exchange FTX and its CEO, Sam Bankman-Fried, who was said to be worth billions of dollars. “Just who is this SBF guy anyway?” he thought to himself before sending out one of his brusque, exasperated tweets. “I can’t understand how crypto collapses, interest rates go up, Coinbase is losing money, yet this guy claims he’s making a billion dollars and throwing money around like it’s going out of style,” Cohodes recounted to me this spring from his 22-acre farm in Sonoma County. The chickens roaming idyllically in the field seemed incongruous with his tough Chicago accent.
Short sellers like Cohodes—who typically borrow shares of companies they think will decline in price, then sell those shares and hope to buy them back at a lower price and pocket the difference—are natural-born skeptics. And over the past eventful year, Cohodes’ BS detector has been on overdrive. While Bankman-Fried was still nabbing glossy profiles through the summer, Cohodes was one of a few bloggers and short sellers broadcasting their doubts about the crypto boy wonder. Right up through Bankman-Fried’s outing as an alleged fraud in November, Cohodes was among the loudest FTX critics, speaking up on one widely viewed podcast a month before the firm filed for bankruptcy.
Cohodes finally figured out a way to profit from his FTX doubts last November when Porter Collins, a co-founder of Seawolf Capital, told him, “You should look at Silvergate,” a small California bank that catered to the crypto industry. The bank even had a testimonial from Bankman-Fried on its website, which it took down after the CEO was indicted. Collins, one of the protagonists of Michael Lewis’ book “The Big Short,” began shorting Silvergate after several crypto exchanges and hedge funds went bust in the spring and early summer of 2022. Weeks before FTX filed for bankruptcy, Cohodes also shorted Silvergate’s stock.
Silvergate’s stock fell 40% in early January after it disclosed that more than $8 billion in deposits had fled the bank in the wake of the FTX disaster. By then, Cohodes—with the help of a third short seller, James Gibson, who runs the Castalian Partners hedge fund—had put together a list of Silvergate’s crypto exchange customers, including Binance, Bittrex, Bitso and Huobi, that had business relationships with known and suspected money launderers and other criminals.
He then detailed those allegations in letters—some of them 20 pages long and containing 80 exhibits—to a number of federal banking regulators, the Securities and Exchange Commission and the Justice Department, as well as politicians like Sen. Elizabeth Warren. On Dec. 15, along with two Republican senators, Warren introduced legislation to curb money laundering by crypto firms in the wake of the FTX disaster.
A few weeks later, Cohodes turned his attention to Signature Bank, a much bigger institution that also had significant exposure to risky crypto players. More than a trillion dollars’ worth of crypto transactions had moved through the internal blockchain trading networks of Signature and Silvergate. Cohodes sent his and Gibson’s research on Signature’s ties to suspect players to the Federal Deposit Insurance Corp., as first reported by the Financial Times.
By early March, federal authorities were investigating both banks on suspicions of facilitating money laundering amid a lack of proper oversight, and Silvergate was winding down its operations. The FDIC seized Signature in March, two days after the federal agency did the same to Silicon Valley Bank.
“Marc was ahead of the curve on this stuff,” said Robert Hanson, a retired SEC enforcement investigator who has known the short seller for 15 years. “He was very vocal in his opposition to those companies, and he was correct.” According to Hanson, who would often receive tips from Cohodes when he was working at the SEC, “this is the biggest thing he has ever done. It seemed like he was hitting grand slam after grand slam. When a bank collapses and you’ve told people for months it’s a problem bank, it’s pretty big.”
Cohodes’ bank shorts have catapulted him into one of the most important conversations in the markets these days– the regulation of crypto. “It’s the sweet spot of what regulators have been thinking and worrying about for a while,” said Hanson. Cohodes showed that the two banks were engaged in crypto transactions “that no other banks would do. Some of the stuff was on the edge,” he said.
The heightened relevance of short sellers and their critiques of any number of companies—including profitless venture capital–backed startups whose shares tanked after they went public—is part of a huge change in market sentiment. Until last year’s downturn, short sellers had been on the defensive for more than a decade as stocks continued to soar in what legendary short seller Jim Chanos has called “the golden age of fraud.”
The number of hedge funds focused on short selling shrank from 54 in 2008 to just 14 this year, according to Hedge Fund Research, while assets under management at such funds dropped from $7.8 billion to $5.4 billion during the same period. As the market buckled last year, the shorts regained some mojo, with several funds posting double-digit returns. These days, a number of the best-known short sellers, including Chanos, Hindenburg Research’s Nate Anderson and Orso Partners’ Nate Koppikar, are aggressively sounding alarms amid a turbulent market—and their warnings are resonating with a spectrum of easily spooked investors.
Unsurprisingly, the wily and relentlessly self-promoting Cohodes ranks himself as the top sleuth and enforcer among his fellow shorts. “I cracked FTX, Silvergate and Signature within a four-month period,” he said. “You may go another 50 or 60 years, and not one single person will be responsible for as much destruction as I’ve been responsible for.”
You can read my entire profile of Marc Cohodes at The Information:
https://www.theinformation.com/articles/the-master-of-destruction-rides-again
Michelle Celarier 