A Conversation with Fahmi Quadir, Wall Street's Fearless Short Seller

Fahmi Quadir once proclaimed that a successful short seller must have a natural skepticism, a knack for investigating what others overlook, and the ability to withstand a lot of pain. Quadir is the Chief Investment Officer of Safkhet Capital, a short-only hedge fund focused on fraud identification and deep forensic research, which she founded in 2017 at the age of 26. After her portrayal in the 2018 Netflix documentary “Dirty Money,” she became a financial industry celebrity. Her track record of uncovering fraud and a string of successful shorts has earned her the name “The Assassin.” 

Quadir came to Stanford Graduate School of Business for a discussion about short selling at an event hosted by the Corporations and Society Initiative (CASI) on February 2.  Thomas Newcomb (JD MBA ’24) moderated the event and began by asking Quadir what led her to become a short seller.

As Quadir explained, her original intent was to pursue a PhD in mathematics. Despite her initial reluctance to explore finance, her interest was sparked through conversations and encounters with hedge fund executives at the National Museum of Mathematics in New York, which was funded by entities like Renaissance Technologies.

“At some point, I realized there's something about capital markets; they have power, investors have power. They have the power to affect change.”

This led her to meetings with portfolio managers who identified her as a natural fit for short selling, despite her lack of prior experience in the field, and propelled Quadir into a career in finance.

Newcomb asked Quadir to explain how short selling works and what traits are important for success in the field. 

“Short selling means you borrow shares from your bank. You sell those shares immediately and the hope is that the price of those shares will go down so you can buy back that share to pay your broker and pocket the gain from high to low.”

“But as you can imagine with stock prices, they can go up infinitely,” she remarked. “The potential losses on a short are also infinite.”

Quadir told the audience that to be a short seller who is specifically focused on finding companies that may be engaged in fraud or predatory practices, one must be willing to withstand losses and to go against prevailing market narratives often promoted by companies and their supporters.  Quadir highlighted the importance of standing with conviction in short selling, noting that it is rare to find people who can do what she does. She said most short selling in the market is done on a systematic basis, using machine algorithms.

“Shorting is important for the functioning of our markets. It provides liquidity and price discovery. But in a tiny corner of the market, there are those of us who are using short selling as a way to expose injustice and correct bad capital market behavior.”

Newcomb outlined four categories of overvalued companies that look like rich targets for short sellers: companies that are fundamentally misunderstood, those affected by mass delusion, companies committing fraud against shareholders, and those that are harming customers.

Quadir stressed that she prefers focusing on companies engaged in fraud or unethical practices because they provide opportunities for a thorough investigation and gaining informational advantages. She emphasized the importance of doing fieldwork to confirm suspicions, underscoring the need to collect enough evidence to justify investment strategies.

“We avoid situations of mass delusion or hype because mass delusion can stay delusional forever,” she said. “As a short seller, you have to consider your longevity.”

Quadir underscored the importance of managing risk and maintaining a healthy risk appetite while advising against making decisions based solely on short-term market movements.

“You need the coolness of mind in those moments where the market's running against you, where the stock is running against you, where the narrative is running against you, and just focus on your work, on your thesis, on reevaluating your thesis, and make sometimes split-second decisions.”

Newcomb then shifted the focus to one of Quadir’s most successful shorts, which involved  Wirecard AG, a German electronic payments processing company that collapsed in 2020 following a series of investigative reports from the Financial Times into accounting irregularities. Wirecard’s bankruptcy led to criminal proceedings in Germany, Singapore, the Philippines, and other jurisdictions. Former CEO Markus Braun is still awaiting a verdict in his fraud trial.

Quadir said short sellers like to think of themselves as storytellers.

“We like to understand the genesis of a company and how that company has evolved either through the evolution of the executives and new executives coming in or through the business decisions they make such as acquisitions. And Wirecard is just one of those really rich stories.”

She revealed a little-known backstory that occurred early in Wirecard’s history.

“In the early days, when it was just Marcus Braun and Jan Marsalek, who is now a confirmed Russian agent, the two of them had developed the patents for Wirecard’s digital wallet, and they were trying to raise money, trying to build the business.”

Quadir told the audience that Wirecard was approached by an Austrian billionaire known for pioneering digital payments in the adult entertainment industry. He wanted to acquire Wirecard, but the founders declined his offer. A week later, Wirecard’s offices were burglarized and ransacked.

“All of the technology was stolen, everything was ruined. And then after that, they got a fax from that Austrian billionaire and he said, “Are you ready to be acquired now?”

“So when that's [part] of your origin story, whatever comes after is going to be epic.”

Quadir went on to explain that she had been following Wirecard’s tumultuous journey over the years, but in 2017, her company looked at it again with fresh eyes. Wirecard's acquisition of a prepaid card business in the US led to increasing regulatory scrutiny and raised red flags.

She detailed her team's investigation, which involved talking to whistleblowers and collaborating with law enforcement agencies, all of which ultimately led to arrests and Wirecard’s eventual downfall.  She also emphasized the hard work she and her team put in, and how long it took to build the conviction to take the short position.

“We did a 25% short position in Wirecard in the early spring of 2020 just a month or two before the eventual downfall.”

Newcomb sought Quadir’s perspective on how the prevailing emphasis on growth affects regulators’ decisions and the incentives for others to call out problems.

She acknowledged that there are inherent pressures to avoid hampering growth. “No regulators ever want to stand in the way of a boom period, right? They don't want to be the one to take their power of enforcement and bring that hammer down on a company that is in the middle of growth because there's always going to be collateral damage when there is strict enforcement.”

Quadir noted that the task of uncovering weaknesses is often left to other actors in the ecosystem. She mentioned whistleblowers as potential sources of information but acknowledged the significant risks they face. Quadir also highlighted the media's incentive to report on scandals for reputational gain and the positive incentives for short sellers like herself, who stand to profit from correct predictions in the market

Quadir brought up Safkhet’s latest short against Adtalem, a publicly traded, for-profit global education company.  Her firm put out a report, calling it “a toxic byproduct of an imperfect higher education system.”  The report criticized Adtalem for wasting federal tax dollars on ineffective programs and concluded it was completely ‘uninvestable.’

She pointed to Adtalem as an example of her adaptive approach to running a short fund, citing the challenges of sustaining such a business model. She emphasized the power of research and talked about why they decided to go public with their report.

“We realize that we have a powerful tool, which is our research, so we felt in this specific situation [with Adtalem] it made sense for us to utilize it because there was an informational vacuum around this company. The shareholder base was largely passive, so no one was doing the kind of research or analysis that we were doing.”

Newcomb inquired about the outcome of Quadir's strategy.

She responded that feedback from investors indicated ‘perfect execution’, with a 19% drop in Adtalem's stock immediately following her report's release, followed by another 10% drop. Quadir noted the company's attempt to halt trading and discredit her as a ‘short and distort artist’ which ultimately backfired, causing further decline in their stock.

“It was very satisfying after that hold was released for me to see the market validate that.  No, I'm not a short and distort. The company was expecting that whole charade and drama to perhaps pump their shares [and] it had the actual opposite effect. Never have I seen that before.”

The discussion included a lively question and answer session with the audience on topics ranging from meme stocks to the complementary role that short sellers have with shareholder activists.  Quadir emphasized short selling’s value primarily as a tool for price discovery and enhancing liquidity while maintaining that its role in reducing corporate fraud had limits. 

“I don't know if short selling is necessarily going to be the ultimate solution here,” she remarked. “Nothing is going to change if there isn’t enforcement.”

“We need to have some high-profile cases where people go to jail. This is what's been disappointing.  As long as I've been in this business, you have these characters who are so clearly almost making fun of the rest of us. Yet, they continue to get away with it. Or they are given these settlements and what happens? Their stocks go up. So that's not going to change behavior.”

“There needs to be a change in how we actually enforce these situations. Putting people in jail would be a start.”

In his final question, Newcomb challenged the perception of short sellers as cynics, arguing that they must, in fact, be optimistic to believe in market efficiency over the long term. He asked Quadir for her thoughts.

“I think the greatest believers in market efficiency have to be short sellers because otherwise, we're just going to lose all of our money,” she explained. “But I also think we believe that people out there, the regulators, enforcement authorities, they care about fraud, and at some point, it's going to be stopped. And that's part of it, too.”

“I'm driven by the fact that I believe capital markets can actually correct that behavior and put an end to it which I think is a net benefit to all of us.”