A walk on the short side

Cautionary tales of fraud, fear, and fundamental value in short reports

It’s happened again. Sound the alarm. There is another short report out.

On June 16, Jehoshaphat Research released a short report on Gildan Activewear (TSX: GIL), yes the massive apparel manufacturer behind every tournament, conference, and concert t-shirt you’ve ever owned. Look at your own closet. You’re probably a Gildan stakeholder without knowing it.

The stock dropped roughly 19% in a single day, erasing approximately $3 billion in market cap. Jehoshaphat alleged “channel stuffing” – incentivizing distributors to order more product than demand warrants – and claimed Gildan used off-balance sheet receivables factoring to obscure rising days sales outstanding, in order to mask a weaker organic revenue profile.

Gildan management responded by stating their public disclosure is accurate and comprehensive, while simultaneously reiterating fiscal 2026 guidance. Analysts have largely defended the company as well. By mid-July the stock had already recovered about 9%.

But it got me thinking about the broader history of short reports in the Canadian equity landscape, and what, if anything, they actually tell us.

The anatomy of the modern short report

For context, a quick refresh on short-selling mechanics. Essentially, an investor borrows shares, sells them, then repays the loan by returning shares, ideally purchased at a lower price after the thesis plays out.

Now the short report is the public-facing weapon of choice for many short-selling market participants. The short report is a research document designed to move the stock, often on the same day of release. It is based on expensive research, not simply “vibes,” and when done right can cause absolute market mayhem.

Looking to today’s most recent examples, the same author is responsible for Gildan’s not so good very bad week as well as goeasy’s closer to catastrophic year.

In case you missed it: Jehoshaphat released a report on goeasy Ltd. (TSX: GSY) in the fall of 2025. For those blessed to have not been following the company (see stock chart below), goeasy is a non-prime lender specializing in loans and lease-to-own products for borrowers who can’t access traditional banks. The report alleged that the company was using “workout tools” excessively to suppress reported arrears, and that a build-up in interest receivables masked a far worse underlying credit profile than management was disclosing.

goeasy initially called the report “false and malicious.” But in March 2026 the company issued a material update acknowledging substantial writedowns in its LendCare unit and restating financial results for 2024 and 2025. The stock is now down approximately 75% over the past year. When a non-prime lender with management turnover at both the CFO and CEO level faces a forensic credit report, the ground is sometimes not as solid as the press release suggests…

The gold standard: Sino-Forest

If goeasy illustrates a complicated outcome, Sino-Forest Corp. is the textbook case.

In June 2011, Muddy Waters Research published a report alleging that Sino-Forest, then a TSX-listed commercial forest plantation operator in China with a market cap north of $5 billion, had been fraudulently inflating its assets and earnings for years. Carson Block called it a “multibillion-dollar Ponzi scheme” with “substantial theft.” Shares collapsed 82%. Investor John Paulson sold his entire stake at a $720 million loss.

Then, Sino-Forest launched an independent PricewaterhouseCoopers investigation, which…didn’t help the situation. What happened next? Well…the RCMP opened a criminal inquiry. The Ontario Securities Commission followed. And to make matters even worse, in March 2012, the company filed for bankruptcy.

By 2017, the OSC found that Sino-Forest and four individuals, including former CEO Allen Chan, had committed fraud. Yikes.

Muddy Waters got it exactly right. The short thesis was the story.

When short sellers get it wrong

Keep in mind however, not every short report is a Sino-Forest.

Nuvei Corp. is one I have a soft spot for. It was a favourite during my time in equity sales. The company is a global fintech providing payment processing, merchant services, and acquiring for businesses of all sizes; essentially the engine behind the scenes that allows merchants to accept payments from customers.

In late 2021, Spruce Point Capital Management published a report on Nuvei, at the time the largest tech IPO in TSX history, alleging a cover-up of business failures, lack of organic growth, and connections to individuals linked to alleged fraud and Ponzi schemes. The stock fell as much as 55%.

Interestingly, Spruce Point had just successfully shorted Lightspeed Commerce months earlier, which (alas) gave the report immediate credibility.

Nuvei’s board called it “a self-serving attempt to inflict damage on the company.” They weren’t wrong. The fundamental thesis didn’t hold. In November 2024, Nuvei completed a go-private transaction at US$34 per share, a 56% premium to its unaffected pre-deal price. Still a significant discount to its all-time high around US$170, but not the fraud story Spruce Point implied.

Shopify Inc. (TSX: SHOP)  is an even cleaner example. In 2017, Citron Research’s Andrew Left argued that most of Shopify’s 500,000 merchants weren’t real businesses, just people sold “get rich quick” schemes, and that Shopify was an $11 billion fraud waiting to be exposed by the FTC. Shares fell roughly 11%. If you covered that short the same day, you made a nice trade. If you held the thesis, you were eventually short one of the greatest wealth-creation stories in Canadian tech history.

A framework for reading short reports

So, what can we learn from all of this? Other than a fascinating history lesson? After you’ve lived through enough of these, the outcomes tend to sort into three buckets:

1. Fraud was real – the Sino-Forest case. The short thesis was accurate, the losses were permanent, and the report served a genuine market function. These are rare, but they matter enormously.

2. Problems existed, but the outcome was overstated – the goeasy case. Real credit deterioration, real restatements, but a company that still exists and may yet recover. The short correctly identified a wound; whether it was fatal is yet to be seen.

3. Short thesis largely failed – the Nuvei case, Shopify. The report created a temporary dislocation between price and value. For long-term investors paying attention, that’s not a cautionary tale, it’s an opportunity.

Category three is where things gets interesting. Aggressive short reports can exploit valuation anxiety, governance imperfections, guilt-by-association, and investors’ instinctive fear of loss, without actually impairing the long-term value of the business. When the market temporarily confuses noise for signal, fundamental investors who’ve done the work get to buy better companies at better prices.

More information is always better than less. Even bad short reports make the market smarter, forcing management to defend their disclosures and analysts to sharpen their models. The trick is learning to sort the signal from the noise before the dust settles.

Short reports aren’t going anywhere, especially in frothy markets. We’ll be watching.

Laura Baker is Associate Client Portfolio Manager, Equities at PenderFund Capital Management. She writes in Pender Pulse Substack. Used with permission.

Notes and Disclaimer

© Copyright 2026 by PenderFund Capital Management Ltd. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/Pakin Jarerndee