On a muggy Thursday in the dog days of August 2011, the news broke that the American technology giant Hewlett-Packard was about to acquire British software maker Autonomy Corp. The offer price represented a 64 percent premium on the previous day’s close. At his office in mid-Manhattan, hedge fund manager Jim Chanos ’80 did not rejoice.
Only a few weeks earlier, his firm, Kynikos Associates, had put together a report on Autonomy, calling its chief operating officer unqualified, its customers unenthusiastic, its market share and growth numbers questionable, its financial disclosures “very poor,” and its margin profile “suspiciously high.”
“We thought this was one of the great shorts of all time,” says Chanos, who specializes in ferreting out corporate bad behavior and then short-selling the companies that indulge in it. (That is, he borrows shares in a company and sells them at the current price, in the expectation that he will be able to pay back the loan, or “cover the short,” with shares purchased at a much lower price when the truth comes out. See boxes, pages 41 and 43.) Autonomy was the firm’s largest short position in Europe. So Hewlett-Packard’s decision to more than double the value of the company was—and here Chanos laughs—“very painful.”
Chanos passed along a copy of his Autonomy analysis to a friend who had friends on the board at HP, saying, “You should look at this. This is going to be a disaster.” The deal closed anyway, and Chanos was soon shorting HP as enthusiastically as he had shorted Autonomy. Thirteen months later, in November last year, HP management woke up, said there were “serious accounting improprieties” at Autonomy—and handed shareholders an $8.8 billion loss on the deal. (Autonomy’s ex-CEO denied the charge.) By then, Chanos had already covered most of his short, pocketed the profits, and moved on.
You would think that by now financial types would stop to listen when Chanos says “Uh-oh.” He has been raising the red flag on companies—from the merely troubled to the outright fraudulent—for more than 30 years, often while corporate executives and Wall Street analysts were still eagerly flogging those companies to gullible buyers. “He’s been pretty much right about everything,” says Nell Minow, a leading advocate for responsible corporate governance. “He’s a smart guy.” The investments he has shorted constitute a nearly complete chronicle of bad business behavior in our time. The most famous among them landed Chanos on the cover of Barron’s in 2002 as “The Guy Who Called Enron.” But the list of his targets stretches from Michael Milken’s junk bond empire through the real estate boom of the late 1980s, the telecom bubble of the late 1990s, Dennis Kozlowski’s Tyco and Bernie Ebbers’s WorldCom at the turn of the century, subprime mortgage lenders and homebuilders in 2007, and most recently an entire nation. (China, he says, is “on an economic treadmill to hell.”)
Chanos has inevitably also been wrong about some companies—or right, but too soon, as with his first go-round on Autonomy. He has taken losses, sometimes for years on end, that, according to a longtime friend, would make an average man “go out and shoot himself.” Even so, he has managed not only to survive but to prosper and put an exuberant face on a notoriously treacherous line of work. “Jim Chanos,” International Business Times declared in 2011, “is the best short-seller in the world.” In certain circles, this is a bit like saying he is the world’s best agent of Satan. But Chanos turns out to be a more complex character than the labels “hedge fund manager” and “short-seller” might suggest.
“I hope you are here,” Chanos tells a packed classroom at the Yale School of Management, on a Monday afternoon in March, “for ‘Financial Fraud through History: A Forensic Approach’ and not for ‘How to Run a Hedge Fund 101.’” He’s just flown up from a weekend in Florida. His hair, still sand-colored at 55, sweeps down over his forehead. He wears thick-lensed rimless eyeglasses and a blue blazer over a purple cashmere sweater, which make him look at first like an Episcopalian minister gone astray. But he quickly shows himself a confident guide to the topic he will be covering for three hours once a week over the next eight weeks—“the rogues and charlatans” who have cheated investors through history.
Chanos has been teaching this class for three years, starting soon after he mentioned to then–Yale president Richard Levin ’74PhD that his fantasy was to come back to New Haven to earn a graduate degree in history. As an undergraduate, Chanos had been a student of Levin’s. (“He says the only reason I uncovered Enron was because of what I learned” in his class.) Levin countered that Yale’s fantasy was to have Chanos teach. Then, says Chanos, Levin heard the course description and joked that he’d had second thoughts: “He said, ‘You’re not going to teach them how to commit fraud, are you?’”
That’s not the plan, Chanos tells the class. But it is “almost inevitable that you will come across fraud in the course of your careers.” It has already happened to a former student, whose first job confronted him with a discrepancy that ended up in the corporation counsel’s office. Corruption is everywhere in the business world, he warns, citing a survey in which 45 percent of chief financial officers said their CEOs had asked them to falsify financial results.
The point of the class, Chanos says, is always to look beyond face value and to spot the fudging and the fraud in time to protect their employers, as well as their own wallets and reputations. Just such a moment of recognition, early in his own career, set him on a thin line between finding his calling and getting fired.
Chanos grew up in a Milwaukee suburb, in a Greek immigrant family that operated a chain of dry-cleaning shops. He helped pay his way through college with a summer job as a union steel worker. At Yale, he majored in economics and political science. His non-academic credentials included lightweight crew and two years as social chairman at Davenport College, where his roommate, Keith Allain ’80, now coach of the Yale hockey team, once inadvertently slapped a puck through the window of the master’s house. (Allain has described his former roommate as “one of those special guys who could light the candle at both ends and never get burned.” He had Chanos go inside to explain the puck.)
After college, Chanos got his start as a bottom-rung analyst for Blyth Eastman Dillon in Chicago, working 80-hour weeks at $12,500 a year. It began to dawn on him, he says, that “I could’ve made more money shoveling snow in Milwaukee.” But when a group of partners split off to start their own firm, Gilford Securities, they took Chanos along. And there Baldwin-United Corp. entered his life.
Continue reading here.