Last week, Nobilis Healthcare (NHC.TO) announced that it planned to sue for 300 million dollars the short seller at the origin of the big drop of NHC stock price in october.
The amount of 300 million dollars is equivalent to the drop in market valuation after the negative article was written on seekingalpha.
Nobilis Healthcare affirms that numerous statements in the article were untrue and damaged Nobilis Healthcare reputation. For example, the article said that Nobilis bought crappy hospitals and assets and that there was a lot of turmoil inside the business.
Which brings me to te question that a lot of people are asking these days. Should short selling be illegal?
I agree that when false allegations are made and damage a company reputation, the company should react with vigor, and even more if the quality of the products sold is attacked. For example, if I'm the CEO of McDonald's and some blogger is writing that the BigMac is made of human flesh instead of beef and the article convince million of investors to sell the stock, I'd probably be angry. And if the sales of McDonald's are impacted a lot, I'd probably want to sue this guy.
But if the guy is writing that the management of McDonald's is selling all their stocks and McDonald's is poorly managed, it looks minor to me. Almost nobody will stop eating that tasty BigMac for such reason.
In the case of Nobilis, it looks to me that both the management and the product were attacked ("inappropriate success rate for it's medical procedures"). But I wonder if the sales of Nobilis will be hurt by such an article.
Which brings another question. How does the market react in the presence or absence of a legal action? Will the market believe that the short seller is right if the company doesn't sue him? Will the market believe that the company is just trying to preserve it's image and will have time to build a solid argument before the process take place (in a couple of years)? Is the company only trying to scare all the others short sellers out there with a massive suing?
I don't know if I'm pro or against short selling. I believe that most of the opinions (or articles) about companies are generally biased (it may be too positive or too negative). If we sue the short sellers, why wouldn't we sue the longs too? Both may say a lot of lies that may result in a loss of many thousands of dollars for us.
Actually, I realize that we should sue maybe 10% of the people who are writing or saying things about stocks because there's probably more opinion than facts out there. The problem is not the analysts, the shorts or the longs. Like I've written a couple of times before, the problem is the individual investor.
Let's not forget one thing: individual responsability. If you're on the stock market, you have to know (otherwise you're stupid) that you'll surely lose some money on some investments. Whatever analysts or bloggers are saying, you're the one who pushes the ENTER button after a purchase or a sell order.
I may be wrong, but did it ever happen that a great company was really hurt (and even went bankrupt) because of false allegations? My opinion is that a great company shows to the market how great it is by continuing to deliver solid results. So, all the people who sold their Nobilis shares after that negative article are naive. They should have wait for the next results which are coming. Judge a company on it's results. Not on the opinion of some bloggers who are writing articles on a keyboard full of chips crumbs.