The fund cum research group Gotham City Research had two share picks in 2014.   The founder of Spanish wifi provider Gowex, Jenaro Garcia Martin, admitted fraud within days of publication of the Gotham City report, and the company filed for bankruptcy.

Quindell, brainchild of Rob Terry, a golf club and firm of ambulance chasing solicitors – took a little longer to unravel.  Gotham City was successfully sued for libel in the UK courts, but did not bother to defend itself:  the history of egregious libel judgments in English courts has led Congress to make their judgments unenforceable in the United States.  But Mr Terry has gone, Quindell accounts have been restated, the Serious Fraud Office is investigating, and most of the rump of the business was sold to an Australian firm of ambulance chasers, Slater and Gordon, itself now struggling to manage its heavy debt burden.

The doyens of  successful activist short sellers are Jim Chanos, who helped bring down Enron, and David Einhorn, who campaigned against Allied Capital for seven years (and survived an SEC enquiry into his own activities) before being finally vindicated in 2009.

But the epic battle over Herbalife continues. The company provides nutritional supplements through a network of distributors; friends, like Carl Icahn, call the company a multi-level marketing organisation and enemies, notably Bill Ackman’s Pershing Square, describe it as a pyramid selling scheme.   Today, with Herbalife stock where it was when Ackman began his campaign and Pershing Square down 20% in 2015, Herbalife seems to have the upper hand.

Lucy Prebble’s musical play Enron opens with a scene in which Jeff Skilling celebrated in champagne SEC agreement that anticipated earnings from long term gas contracts could be with profit and loss straight away.  What was anticipated, of course, depended on a market largely determined by Enron. Later in the play actors take the part of raptors, the special purpose vehicles established to enable the group to take borrowings off its balance sheet and losses out of its consolidation.

Law partnerships traditionally accounted conservatively for work in progress but  Quindell understood that a listed limited company could value unbilled revenues aggressively, especially when these potential revenues were based on contingency fees.  And even Gotham City struggled to penetrate the transactions between the network of companies controlled by Mr Terry and his associates. 

     But managed revenue recognition and complex related company transactions are  widespread practices. Companies whose basic integrity has never been in question have used such devices to generate smooth paths of earnings growth more welcome to their shareholders.

 When contracts extend over many years, the appropriate allocation of  profit  over the years is not a question with a simple answer. That is also true of whether two associated businesses are under the same control and should be consolidated, or are  different entities, in which case transactions should be at arm’s length.  The were major issues in the banking crisis of 2008. 

Regulatory difficulties do not end there. In his book on the Allied Capital affair, Einhorn identifies a central problem:  ‘The authorities really don’t know what to do about fraud when they discover it in progress’.   Official action inevitably damages both the business and its share price, and no agency will be right one hundred per cent of the time.  Short selling hedge funds are not right one hundred per cent of the time either, but when they are wrong they lose their own money (or that of their investors).  The business of trying to take down an active trading company, with consequential losses for foolish investors and innocent employees, is hard to admire:  but it is equally hard to deny that Gotham City performed a necessary and useful public service.

<All these events have been recounted in FT pages, with Dan McCrum in particular having a lengthy series on Quindell in Alphaville>