Backblaze denies 'sham accounting' claims as short sellers circle

Cloud storage and backup provider Backblaze has denied accusations made by financial analysts of "sham accounting" and "insider dumping," as well as claims it inflated cash flow forecasts to hide its real performance. Backblaze is perhaps best known to Reg readers for its quarterly hard drive statistics, tracking the health …

[Anonymous Coward]

:(

I'm a happy Backblaze customer, and I'll be disappointed if the allegation turns out to be true. It is noteworthy that the basic Backblaze product is relatively inexpensive compared to competitors (and compared to their own B3 object store), so perhaps the company is not doing well. Conversely, if they're sitting on a giant pile of investor cash and using it to grow the customer base, one would not expect them to be profitable. My bias is that the short sellers are probably scumbags, but that doesn't mean they're wrong.

[cyberdemon]

Re: :(

+1

In what legal system is it ok to take out a short position against a stock, and then start publicly throwing shit at the company?

Even if the allegations were true, wouldn't this be insider trading if they were aware of dodgy dealings before they took out the short position?

[FILE_ID.DIZ]

Re: :(

Full disclosures - I'm a happy consumer customer of BackBlaze and have been for probably a decade or a tad longer now. I am not a shareholder, at least not directly. (I don't know if any ETFs I have may own shares of them.)

Last question first, generally short sellers are aware of insider trading regulations and honest ones work with qualified counsel to ensure that their sources and methods used to acquire the information that they ultimately publish, don't fall under Insider Trading regs.

And yes - there are scum short sellers. Plenty of examples I'm sure. Unfortunately, I'm not as quick to recall shit hit jobs as fantastic exposes as I note next.

Nikola and Lordstown Motors immediately come to mind as of a short-seller doing the due diligence and knocking it out of the park with their respective reports. Both companies imploded some time after of a short seller's report and the CEO of Nikola was charged and convicted of crimes uncovered as part of a short seller's report. Interestingly he was recently pardoned by the easy peel tangerine.

In short, short sellers have a place in an efficient capital market - to keep the lairs and cheaters on their toes. Honest companies attacked by a misguided or worst short seller should survive an attack. Dishonest companies likely won't.

[0] https://www.ecfr.gov/current/title-17/chapter-II/part-240/subpart-A/subject-group-ECFRbda83517ce4377f/section-240.10b5-1

[Anonymous Coward]

Re: :(

The question is, would they still have imploded without the short seller's report? Nikola, from your description, quite possibly. What about Lordstown, though?

[FILE_ID.DIZ]

Re: :(

Lordstown, while I didn't mention it in my original post, several persons involved were sanctioned by the SEC and paid monies while "not admitting fault" or some such, so it was pretty bad there too.

I believe that both companies would eventually met the same fate. But since we don't have time machines and time is linear, there's really no way to know if there could have been a different outcome.

[cyberdemon]

Re: :(

As I understand it, short-selling works like this:

---

Hello shareholders, may I borrow some of your shares please? I'll give them back to you later, with some nominal interest

Hey I've just sold the shares I borrowed, into some of your open 'buy' orders - thanks for the dosh! But I'll buy some again soon so that I can give them back to you as agreed..

OH BY THE WAY, Did you know that there were all kinds of shenanigans at this company? I knew all along how bad things were, they were cooking the books, and now I've just told the World! Tee hee hee... Those shares that I borrowed from you and sold at yesterday's market value might be completely worthless tomorrow! It won't cost much for me to buy them back again for you..

I've made a tidy profit! Here are your worthless shares back, and some extra worthless shares by way of interest! Sucks to be you, losers

---

In other words, even though as you say, "short-sellers have a place in an efficient capital market", they are still fundamentally predatory, especially where they publicly attack the company to boost their short position.

The problem with the law that you referenced is that there is a very black-and-white definition of "nonpublic information" - If a short-seller takes a piece of information that is technically public but not widely known, but then makes it VERY public by, for example, pulling some strings to get it published on the front page of the Financial Times, then they might evade justice for what is a pretty scummy act

[FILE_ID.DIZ]

Re: :(

As a shareholder, technically you're not obligated to loan your shares to a short seller. If you're so inclined, you can request certificates of your shares of a company. That'll prevent your broker from being able loan your shares. It'll also completely slow down the whole process of selling your shares if you need to do so urgently, so it comes with pitfalls.

And, as you say, if the short seller does shit on the listed company and expose a truly hollowed out shell of an entity for the world+dog to see, every shareholder who held those shares, including yourself, failed to take the required due diligence before investing and/or failed to continue in said due diligence in that company and that's going to be a reminder of at least three core principals of investing.

1) Never invest what you can't risk losing completely.

2) Understand what you're investing in, continuously.

3) Diversify, diversify, diversify

Let's say the obverse happens, taken to an extreme - not only did the short seller write a fraudulent report, but also violated SEC regs and/or other laws. The company responds with proof against all the questions that short seller wrote and steamroll them with your truthful responses and counterpoints and the short seller report writer is investigated for SEC violations and/or criminal conduct and is exposed for what they are.

The stock may take a little ding while the dust settles out quickly, but if you're in it for the long haul and you have a strong conviction in the traded entity, then you've got nothing to worry about.

At the end of the day, the market's forces correct themselves justly. It may hurt if you're on the wrong side of the ledger and weren't prepared for it.

[Spazturtle]

Re: :(

All of the information in this report was already out in the open, they just put it together into a single report.

It's only insider trading if you use information that would not be accessible to others.

[Mark Hahn]

Re: :(

Aren't there statutes against pump-and-dump? And surely that's all this is (technically shitpost-and-shortsell is the mirror image...)

[Anonymous Coward]

Re: :(

Do you feel the same way about people or go long on a stock and then publish raving reviews about the company. Should they also be charged with insider trading or do you believe that only people who short should.

What I find puzzling about all these short reports is that the info they publish is almost always publicly available. In this information driven world, the information age some would say, why is it that so few people are objective about the info they use to make their decisions and choose to be bandwaggonists instead. So you ride the hot stock because it is hot or post negative comments about shorts without even realizing that your comment is garbage because of what it implies for all stock traders long or short.

I did not see this short report. The last one I read was on Icahn Enterprises L.P. (IEP). It was insane that it took a short report to get investors in this company to come to their senses. It is even more insane that the actions outlined in the IEP report were legal in any modern economic system.

The banwaggonist will continue to knock short sellers. The objective knowledgeable person will know that they play as important a role in the financial system as a trader who goes long.

[cyberdemon]

Re: :(

No, I disagree - It is much easier to spread negative press about something/someone/some company than positive press. Social media has time and again proven that people are more likely to engage with negative posts than positive ones.. Meanwhile, marketing departments are all busy spreading as much positive press about their own companies as possible, and as much as we all hate marketing, it does boost the economy. (and there is not much that someone with a 'long position' could do in the media that a marketing department hasn't already done, that's where I think your comparison is flawed)

Short-sellers on the other hand are parasitic. They can do damage very easily whether their claims about a company they are shorting are true or not. They don't even need to disclose their short position when they are smearing their victims on social media.

Short sellers have their place in the economy in the same way as disease has its place in nature. Without pathogens, we would all have weaker immune systems, suffer allergies etc, and natural selection would no longer work.. But that doesn't mean we should all endeavor to contract gonorrhea

[Anonymous Coward]

Re: :(

It really should be considered illegal market manipulation. (It's not insider trading, as they are apparently not using non-public information.)

But really all you need to know is that these folks took a short position on the stock before badmouthing them; they have a major financial stake in convincing the public that the information is true and as bad as they say. (Whether it is or not.)

I'm fine with people short-selling stock. I'm fine with people badmouthing a company. But to combine the two is just a profit-making strategy, at the expense of anyone who currently has stock. It's a jerk move.

[FILE_ID.DIZ]

Re: :(

If a truthful narration and evidence take down a company, I'm not sure how that's manipulation.

[Anonymous Coward]

Could be true

I was briefly a B3 user and Backblaze absolutely could not scale to the kind of datasets that were claimed. All I did was link a small Synology drive to it for external backups. My account became instant death for any server accessing it. The error messages also revealed deeply embarrassing details about the implementation.

[wolfetone]

If it is true...

Think of all the hard drives that'll come on to eBay for cheap!

[FILE_ID.DIZ]

Re: If it is true...

While I chuckled - those drives will be ridden hard and put away wet.

Unfortunately, it might give a lot of cover to those scammers who keep on unloading "New" Seagate EXO drives that really have upwards of 50K hours on them from that failed crypto Chia.

Read more here: https://www.tomshardware.com/pc-components/hdds/seagates-fraudulent-hard-drives-scandal-deepens-as-clues-point-at-chinese-chia-mining-farms