Muddy Waters Capital LLC’s Observations on the Parliamentary Mission Report on Activism Submitted by the Finance, General Economy Control Commission of the French Parliament (‘Assemblée Nationale’) on October 2, 2019

Abstract

This paper has been addressed by Muddy Waters Capital LLC, a US short seller activist, to two French members of Parliament, as an answer to the recent parliamentary mission report on activism submitted by the French Finance, General Economy and Budgetary Control Commission on October 2, 2019. It is argued that this report reflects a profound misunderstanding of the French public authorities of the issues underlying the financial regulation of short selling. The author tries, in the interests of the French capital markets and, in fine, the French economy, to bridge the gulf that separates the French authorities and short sellers. For that purpose, it is crossed the most recent academic research on market efficiency, corporate governance and short selling with our practical experience to highlight the report's multiple fallacies, and in particular the idea that short selling can transform into a self-fulfilling prophecy destructive of the operational activity of a company. Part A starts with a reminder of what short selling is and why it exists. Part B then distinguishes short selling in its broadest meaning from short selling activism. Part C focuses on the "presumption of the abnormal functioning of capital markets" that the report proposes to implement when a company is heavily shorted. Part D provides two more illustrations of the conceptual errors made in the report. Finally, we propose four recommendations in Part E whose implementation would, in our view, improve the functioning of French capital markets.