Gotham City Research, a vulture fund founded by Daniel Yu, a Wall Street analyst of Asian origin, became the hero of the moment in 2014 when it uncovered the Gowex fraud: an Internet company that falsified its accounts by reporting non-existent income. The fund has specialized in making money with this formula: it investigates the accounting of listed companies and reports irregularities to cause the stock market to fall. It is a company that “shortsells”: it goes into debt to sell shares that it does not own, and obtains the benefits by repurchasing them in the market cheaper after the fall caused by its reports.
Beyond Gowex, the firm scored another success, also in 2014, with Quindell, a London company that denounced it and obtained its conviction for libel, but in the end had to admit accounting irregularities to the British regulator. Other of his reports, in companies such as Burford, Ebix, or Medifast, also led to investigations by stock market authorities.
But not everything has been success: its last attempt, this summer, with the French firm SES Imagotag, ended up causing heavy losses for the fund itself. After a first report, in June, which managed to knock down the company’s shares by 60% in one day, they recovered and the fund issued another in July, trying to delve into the alleged irregularities but without providing more data, which led investors to understand that the complaints had no effect so that the shares soared 42% that day on the stock market. SES Imagotag shares, which had soared shortly before the Gotham report, closed 2023 up 2%, but are still 23% below the peak they reached before the Gotham report.
With the French company Criteo, in 2017, he also issued two reports, until the company accused him of publishing false data. Two years after considering that the company had no value and that its directors destroyed evidence of its irregularities, Gotham instead recommended buying it, ensuring that the shares were going to skyrocket,… and effectively managed to almost double their price in a month.
Dan Yu founded his company in 2013, with the name Gotham City, the city of Batman. But he himself could be a character from the comics, somewhere between a villain and a superhero. Educated at the prestigious MIT, before founding Gotham in 2013 he had a turbulent few years, in which he was accused of theft, identity theft and financial manipulation. Yu pleaded guilty to make a plea deal and was sentenced to 3 months in prison in Colorado, from which he emerged with a career change, a new career in the financial markets.
In 2022 Yu joined Cyrus De Weck, founder of Portsea Asset Management, and they jointly formed a new short-selling fund, General Industrial Partners, of which Gotham is now just the market research arm.
Investigation of irregularities and short selling are common practice in international financial markets. A study carried out in the United States by economist Antonis Kartapanis on 159 complaints of irregularities launched by these funds found the stock market regulator (the SEC) initiated investigations in 43% of the cases, and of these investigations in 30% the activities were confirmed. as fraudulent.
According to a study carried out by the Italian business school Bocconi, legal actions for market manipulation or falsehood, which are very often brought by companies that are the target of bearish funds, rarely succeed, even though the accusations have been proven false, if an attempted fraud cannot be proven.
In the United States, critics of these funds have proposed that the SEC force them to maintain open short positions for at least ten days, given that after the initial drop the shares of the affected company often rebound strongly after a few days. However, in the opinion of the US regulator, the idea is “dangerous”, since it would also punish “good” short sellers – who resort to this practice to cover financial risks – and would create significant potential for “short squeezes”: a lack of liquidity that would have the opposite effect and skyrocket the price of the shares.
