Exploring shipwrecks may provide fun and adventure, but whether it’s a good business is a different question. Perhaps the most well-known treasure hunter, Odyssey Marine Exploration (OMEX), has made headlines for years, including last year when, as my colleague Susan Berfield reported at the time, Odyssey’s brash chief executive officer led the money-losing company in an (ultimately unsuccessful) battle to claim profit from coins found in a Spanish shipwreck. The company’s now in the limelight again, and not in a flattering way. Late last week, a young activist investor published a 66-page report (pdf) outlining an argument for why Odyssey’s stock “is worth $Zero.” The investor, Ryan Morris, alleged the company used offshore entities to obscure its true value, and the company let executives “live a life of glamor hunting the ocean while disappointed investors foot the bill.”
I profiled Morris a year ago as one of a younger generation of activists who try to take over—and turn around—struggling small companies. Only 27 at the time, he was focused on buying stocks in companies that he thought were undervalued. He had shorted stocks before, but much more passively and never in such a public way as the Odyssey report.
Morris’s new tactic of publicly attacking a company takes a page from other noted short sellers, including Carson Block’s Muddy Waters Research, which Morris praises as “amazing” and “just great detectives.” Morris told me he made such the short public for two main reasons: first, to encourage whistle-blowers to come forward to help build his case, as several did within a day after the report came out. Second, he says, is to “get the truth out there so that investors are making decisions with all of the facts,” and not only with what management tells them.
Morris said he’s looking for companies where management is a weak link—either by depressing shareholder value because the leaders are inept or greedy, or by causing the stock to be overvalued because the they are better salesmen than managers. If the company appears undervalued, Morris takes a long position and tries to create change by ousting management. If the company seems overvalued, he’ll short the stock, thinking, in Odyssey’s case, that there’s nothing of value that could be salvaged, even with new leaders.
Morris says being a long activist “is simpler because you can go in and cause the change. It’s just really between you, the shareholders, and the management team.” In a short play like Odyssey, the success of the effort depends more on outside actors. “I think we would certainly like the regulators to get involved,” he says. “I don’t have the power of subpoena.”
Odyssey issued a statement on Friday saying Morris’s report contained “factual errors, incomplete information, and erroneous conclusions.” It said all the information it has released is accurate, and it had notified “market authorities” that Morris may be pursuing a “short and distort” strategy. The statement said the company will host a conference call with investors this week “to address the false and misleading statements and innuendo.”
When well-known activists such as Muddy Waters release similar reports, the stocks of the companies they target typically plunge immediately. The market took a while to notice Morris’s report. After a few hours, Odyssey’s stock began falling, ultimately dropping as much as 34 percent. Morris takes pride in the slow decline, which he says shows investors responded to his research rather than his limited reputation: “As people started to actually look at the material and look at the facts, they wanted to get out.”