Yes, Speech is Free for Short Sellers, Too

judge_shortsellU.S. District Court Judge William H. Orrick, shown here, has adopted the role of free speech hero.

On December 16th, Orrick, presiding at the San Francisco courthouse, dismissed a lawsuit against short-seller James Chanos. Orrick said that Chanos, the founder of short-seller Kynikos Associates, had engaged in fair comment about plaintiff Stephen Wynn and the Foreign Corrupt Practices Act, making statements that “do not constitute slander per se and were protected opinions, not assertions of fact.”

Thus, Wynn loses, censorship loses, and free speech (in the service of alpha) wins.

So: What Happened Exactly?

Chanos participated in a symposium regarding investigative journalism in the gambling industry, especially as it exists in China. The University of California at Berkeley hosted this event, in April 2014.

Plaintiffs – Wynn individually and his corporate vessel – asserted that Chanos said that in 2009 he went short in “U.S. casino operators Mr. Adelman and Mr. Wynn” because they were in violation of the FCPA, and they quoted Chanos at the symposium specifically using the phrase “across the legal line” in describing Wynn and Adelman.

This was, as the defendants accurately observed, a cut-and-paste job on the actual transcript of the discussion of the panel in which Chanos participated. Chanos actually said, “And, although, they hide behind the façade of the junket companies, increasingly, from a – if not across the legal line, to use my friend Bethany McLean’s term, it was ‘legal fraud.’ While they might be adhering to every aspect of legal requirements in what they were doing, there was still an attempt to mislead and an attempt to obfuscate and I just couldn’t get comfortable with that.”

As a general rule, folks, when you find yourself using an expression from a transcript that, in the actual transcript, is immediately preceded by the word “not,” you’re doing something chancy. Chanos was pretty clearly asserting his agnosticism on whether Wynn had crossed the “legal line,” allowing for the possibility that his obfuscations had been legal.

Further, the use of a touchy-feely subjective expression like “I just couldn’t get comfortable with that” pretty clearly indicates that Chanos was staying within the realm of opinion, rather than fact.

Wynn’s friend Bethany McLean, by the way, is the author of the article “Is Enron Overpriced?” which appeared in Fortune in March 2001 and constituted a landmark in the dawning of skepticism about that still-highflying stock. Wynn made a lot of money that year, and secured his own reputation, by betting that the answer to McLean’s question would turn out to be “yes.”

Opinions and the Absence of Malice

But … back to the April 2014 symposium. Chanos also said, “I got a little nervous the deeper we dug into Macau and the more I got concerned that although I was long, the U.S. casino operators, like Mr. Adelman and Mr. Wynn, I began to really get concerned about the risk I was taking with Foreign Corrupt Practices Act and a variety of other, you know, aspects of exactly how business is done there.”

That too, falls well short of saying that Wynn (or Adelman, not a party to this lawsuit) violated the FCPA. He only says that knowledge of the FCPA, along with his knowledge of other aspects of “how business is done” in Macau, had the cumulative effect of making him “nervous.”

As Judge Orrick wrote, given existing constitutional and statutory law, in order to survive a motion to dismiss on a defamation claim a plaintiff has to be able to establish that the assertions of the plaintiff are not “mere comment.” Chanos was only stating here, as the judge paraphrases this, a “general uncertainty about the questionable business methods in Macau” which does not equal a factual assertion that Wynn violated FCPA.

Further, the judge observes that Steve Wynn is without doubt a “public figure” in the sense in which that term is meaningful in the jurisprudence of the first amendment. It has been the law for decades that a defamation complaint against a public figure must allege that the defendant published the key statements with “actual malice;” that is, the defamatory statements must have been made public either by someone aware of their falsity or by someone acting in reckless disregard of the truth.

The judge couldn’t find in the complaint any “specific allegations that would support a finding that Chanos harbored serious subjective doubts as to the validity of his assertions.”

The Big Picture

From the point of view of those who speculate on the short side, this fits into a bigger picture.

Yes, short sellers talk their book. Investors on the long side talk their book too, all the time, and the fact is not considered controversial.

Yet there has been an effort underway since soon after the collapse of Enron to stigmatize virtually anything short sellers might say about why they are betting against particular companies. Any explanation they may offer is condemned as the “short and distort” tactic.

The speed with which this particular lawsuit has been disposed of may (if the alternative investment world and the concerned portions thereof are lucky) prove to be a straw in a favorable wind. It is possible that the campaign to stigmatize what they do, and public discussion of why they do it, is running out of fuel.




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