Episode 39: Edwin Dorsey (Founder, The Bear Cave): Wall Street’s Most Trusted Researcher

Gabrielle, I do a lot of podcasts and that was the kindest introduction I've ever been given. So, appreciate that. Thank you so much for that. That is high praise. Yeah. So, I've been passionate about stock markets from a really young age. Second grade, I was all into stocks and researching them. Freshman year of college is when I made the transition to the short side. I started interning at a short only hedge fund called SofoS, where I interned on and off all four years of college. I even did a stint in the SEC enforcement division, which was a lot of fun and got some notoriety for criticizing companies while I was a college student. Then my senior year of college, I started the Bear Cave newsletter really as a way to follow all the activist short sellers and keep up with the news in the short selling space. That newsletter took off during the pandemic and quickly became my full-time job. So, for the last five years, my full-time job has been writing this newsletter where I summarize activist short reports, highlight suspicious executive resignations, and do some investigative work of my own for my paid readers.

You know, there's a quote I love which is you don't choose your passions, your passions choose you. And I don't know what exactly drew me to it. I always liked numbers and money a little. I loved researching and digging in. One of the big lucky breaks I got is when my grandmother saw my passion for investing and this research. She put some real money in an E-Trade account. She didn't give me the money, but she gave me the username and password so I could invest it on her behalf. And being a third grader with access to $10,000, it was insane. I thought I was the smartest kid, coolest kid in the world. So that really helped amplify my passion when I was really young.

Yeah. So shorting is a way of betting against a company. The way it mechanically works is you find somebody who owns shares of a stock. Let's say it's trading at 100. You borrow it from them and then you sell it and now you owe them the stock. So you sell it at 100 and then you're going to buy it back at a later date to return their stock and hopefully it falls. So if it goes from 100 to 80, you sold it at 100, you buy it back a week later at 80 and you pocket the difference. You give him his share back and maybe you give them a little bit of a fee for the inconvenience of borrowing their share. That's kind of mechanically how it works. It's important to note though, even though a lot of short sellers read the Bear Cave newsletter, I don't short the stocks myself. I only make money from reader subscriptions. So, a lot of short sellers want to read my research into companies and my opinions, but I'm not shorting the companies myself.

Yeah, great point. So, FOIA, the Freedom of Information Act is a set of laws that give US citizens the right to get records from government agencies. The way FOIA is traditionally used is journalists use it a ton to get records from the government. You know, you go to some politician and the New York Times says, 'Well, give us all your emails on this date. We want to uncover a scandal or give us your report you've formalized in your office on this topic.' The way I've used FOIA, which is somewhat atypical, is I go to a lot of state level regulators and the FTC and I file FOIA requests for consumer complaints people have filed against businesses with the idea being if consumers are complaining a lot, that can be a leading indicator that your company is not going to do well in the future. So, I'm really good at using the Freedom of Information Act to go to state attorney generals or the FTC and get hundreds and hundreds of consumer complaints people file against businesses. And this is a core part of my research process that lets me get an edge over Wall Street, which tends to be very numbers and quantitative focused.

Absolutely. So great question. For a long time companies in China have listed in the US and then used their stock as a way to cause US investors to lose money. Historically, what happened 10 years ago is Chinese companies would list and they'd say, 'We have this much in revenue and this much in profit,' and then these activists would go and say, 'Look, the factories are empty.' And they'd say, 'Oh, we made up the numbers.' And the stock would collapse after they unloaded a lot of stock. Now, we're in a renaissance of US-listed China stock scams. But the way it operates is a little different where oftentimes there's these really small companies that will list. If you read their SEC filings, they'll be transparent and say, 'We have a small amount of revenue, no profits, eight employees.' But what they'll do is they'll spend a lot of money through Facebook and Instagram ads to reach mom and pop investors. These scammers will then convince these mom and pop investors that they've got some great algorithm or formula for trading stocks. So they'll say, 'Buy Palantir, sell it tomorrow and hopefully it went up.' Buy two or three legitimate stocks, convince you they're legitimate, and then they'll tell you buy a ton of this ultra-low float micro cap China pump and dump, and they'll convince everybody to buy a ton of the stock at the same time. And then they'll unload, the scammers will unload their shares, and they'll have a big stake in the company at an inflated price on these retail investors who don't know better. And then the stocks can collapse 95% in a day. And this is something we've seen over and over and over on the public markets. It's almost always with companies that have their core operations in Asia that are listed on the NASDAQ. Typically, it's a very low share price and you'll see it go up, up, up and then down 90% in a day. I'd estimate it's causing US investors about $10 billion a year in losses.

So, it's actually an exciting time. For the last five years, it seemed like nothing happened. And when you have bad conduct going on that's profitable and there's no oversight, it gets more and more egregious and more people do it. Luckily, over the last six months, we've actually seen a lot of headway under the Trump administration. I do think they deserve a lot of credit for this because it's really under their administration. They've started to seize some of these scammers' accounts. So after the scam unravels and the scammers try to move their cash overseas, they'll seize those bank accounts before the cash can be moved. And more recently, we've seen the SEC halt at least a dozen of these ultra-low float China stocks. So once they're getting pumped up, but before they can be dumped, the SEC is just doing kind of an indefinite trading halt on them. And that kind of warns investors and prevents the dump part of the pump and dump. So, we've actually seen a lot recently and I think the NASDAQ has started to say, look, we're not going to let these list as easily. We're not going to let so many reverse splits happen. We're going to start having some oversight. So, I think we've turned the curve towards these types of scams being in their end stage now.

I think it's more that the NYSE really cares about their brand and they think it's bad for their brand to have very small, I don't want to say illegitimate companies, but pump and dump companies always occurring on the NYSE. So, the NASDAQ has, I think, been more open towards listing these and NASDAQ is willing to list these because they make money. They make money off listing fees. They make money off annual compliance fees and they make money off the volume. So, I think the better question is why does NASDAQ even allow it? And the answer, as with many things in life, is it's profitable for them. It causes lots of losses, but it's profitable for them. And I think Facebook deserves a good deal of scrutiny, too, because what's really allowed these things to scale is these scammers can spend a ton of money on Facebook to reach millions of people. It's not just in the US, it's internationally, too. And then they'll almost always be communicating with them in these really big WhatsApp groups.

One thing I want to show you, Gabrielle, if it's okay, is these scams have actually gotten kind of sophisticated. I joined a lot of these scam groups and they'd sometimes ask for you to send confirmations when you make a trade. So I make a trade in a legitimate stock, send them a confirmation. And they said, 'You're doing such a great job, Edwin. We want to send you a gift. We want to reward you.' And I'm smart. I'm like, I know you're a scammer. There's no way I'm going to get a gift. So they ask my address and I give them a real address because I know they're not going to send me the gift. And they said, 'Look, we sent you a premium mug in the mail. Let us know when you get it.' It didn't arrive in a week. So, I was like, 'It's a scam.' And literally, to my amazement, a week and a half after I joined the scam group chat, I literally get a real mug. So, this is a scam group. They are impersonating a real financial firm. They have the fake website and logo and everything. And they're sending me a real mug to try to build legitimacy and make them seem like they're giving good stock advice just to scam people into following an ultimate pump and dump stock.

I've been extremely unimpressed with everything that you know. One of the metrics they say that I'm more familiar with is they say we ban a lot of bad actors. And it's true. Sometimes I'll be talking to the scammers maybe one out of every 10 times and out of nowhere their account is going to be banned. But literally a minute later, they just message me with the same photo from a different number and say, 'Oh, I lost my phone. This is my new number.' And I see the metric Facebook advertises, and then I see how completely ineffective it is. And these ads I've seen, I mean, they are comically. I could just tell right away it's scammy. You're telling me I'm going to make 100% in a stock group? I think they need more human oversight. And I think there is an element of look, we're saying we're doing something, but it financially benefits us and we don't want to actually solve the problem.