At 10.30am local time on March 22, Glaucus, a US-based firm launched its strike using tactics honed over more than a dozen similar encounters.

Its key weapon was a 39-page report posted to its website and then forwarded to a mailing list including investors, journalists and analysts.

In it Glaucus took aim at TFS - a listed Australian company which describes itself as the world's largest producer of sustainable Indian sandalwood.

With that opening salvo Glaucus has brought to the fore a new form of high-profile corporate activism focused on highlighting a company's weaknesses in the hope of driving down a share price. This is the new-look short.

It was bad timing for TFS. That same day it was changing its name to Quintis and hosting a fancy function in Melbourne with brand ambassadors cricket legend Adam Gilchrist and Formula 1 driver Daniel Ricciardo.

All this for a company that Glaucus was calling little more than a "Ponzi scheme" which would follow other timber producers into "ignominy and failure".

"We believe that once investors scrutinise TFS's misleading forecasts, dubious marketing materials and questionable customers, TFS will lose the confidence of the capital markets it requires to survive. Thus, we value TFS's shares at AU$ 0.00."

The release had the desired effect. The stock fell 7.4 per cent on the day, though TFS, now Quintis, vigorously denied the "substantial and egregious inaccuracies littered" throughout the "self-serving report".

That didn't work. By Friday the stock was down 26.5 per cent from its price immediately before the report's release and its chief executive has departed.

This style of aggressive short selling is new to Australia but has been on the rise elsewhere.

Outside Australia, high-profile activist short sellers have for years been colourfully honing in on perceived irregularities and flaws, to great success.

Only earlier this month China Huishan Dairy Holdings plummeted more than 90 per cent in Hong Kong losing about $5.5 billion in market capitalisation in a day a few weeks after it was targeted by short-selling outfit Muddy Waters Capital.

"Expect to see more of it," said Chad Slater, joint chief investment officer of Morphic Asset Management, a local firm with a history of high-profile short selling.

Glaucus itself is far from done in Australia - its director Soren Aandahl told Fairfax Media it was researching several other potential shorts here.

Long history

Harvey Norman chairman and founder Gerry Harvey. Photo: Ben Rushton

Short selling has a history almost as long as that of financial markets - the first company to be targeted by short sellers is believed to have been the Dutch East India Company - but it grew in a big way during the global financial crisis when investors tried to find ways to benefit from a falling market. In response, the Australian Securities and Investments Commission (ASIC) temporarily banned short selling of Australia's financial institutions.

To short a stock, a short seller borrows it from someone (paying a small fee). They then sell it, say for $1. They then wait for the price to fall, then buy one back for say 80??, return the original shareholder and pocket the difference.

ASIC collects detailed information on what stocks are being shorted, which has fed into the public commentary on certain stocks.

Harvey Norman chairman and substantial shareholder Gerry Harvey has at numerous occasions lashed out at the hedge funds shorting Harvey Norman.

"It's all been started by a short seller - he's the enemy," Mr Harvey told shareholders at the company's last annual general meeting.

"He's out there and he's trying to disrupt our company. I think short sellers should be banned - when someone sells your shares [short] they have a huge incentive to go out there and demolish the price. If you are here, please get up and piss off."

Short interest in Harvey Norman rose further this week climbing from about 4 per cent to just over 8 per cent of all stock being held short, according to website Shortman.

That saw Mr Harvey, who declined to speak to Fairfax Media for this piece, telling The Australian newspaper that in his opinion short selling was reaching "new levels of criminality".

An ASIC spokesman told Fairfax that while it was following the situation, it couldn't comment on individual cases. Speaking broadly, the spokesman added: "we find that market operators and short sellers are meeting their obligations".

Other highly shorted ASX stocks include Myer, 13.7 per cent of whose stocks are being shorted, Dominos (10.7 per cent), and Rio Tinto (5.2 per cent).

Well-informed

University of Melbourne finance professor Carole Comerton-Forde. Photo: Supplied

In defence of short sellers, they do seem to have a very good track record at identifying weaknesses.

"The literature suggests short sellers are relatively informed - more so than investors that take long positions," said University of Melbourne finance professor Carole Comerton-Forde, an economic adviser to ASIC. Market strategists meanwhile point to the very large successful track record of some of the world's best short sellers - the companies targeted by Glaucus have usually lost half their value in a few months.

"There's lots of academic literature that looks at role of short selling, and lots of evidence to suggest that if it is constrained, prices become overvalued," Professor Comerton-Forde said. "Short sellers play an important role in correcting pricing inefficiencies.

"There's no evidence to support the idea that allowing short selling harms the quality of the market. The evidence supports the idea that short sellers identify overpriced stocks, help bring their prices back into line and provide valuable liquidity."

Some executives do take a more sanguine view.

When Morphic Asset Management disclosed its short position in Platinum Asset Management, a listed fund manager, Platinum's founder and CEO Kerr Neilson shrugged it off.

"We have no qualms at all about people shorting our stock. In fact we do it to others, so we shouldn't be surprised," he said.

The long and short

Kerr Neilson, founder and managing director of Platinum Asset Management. Photo: Louie Douvis

Like many local fund managers, Morphic Asset Management operates what's known as a "long-short fund", which contains a mix of traditional share holdings along with short positions, allowing the fund to post returns from both rising and falling stocks.

Two things make a good short market, Mr Slater said: high liquidity to borrow stocks, and the ability to profit from shorts, which is easier when there's a mismatch between "long" and "short" investors.

"Our experience is that the US isn't a great short market," he said.

"Most long-short funds do their shorting in the US. In Australia, quite a few people do it, but it's nowhere near as large as the long market."

Morphic does publicly release its top 10 short positions, but only because it also, as is standard, releases its long positions, said Mr Slater.

"We tell people why we're long, shouldn't we in all good conscience say what we're short? What is so special about shorting that we don't discuss these things? It's an investment thesis," he said.

"One of the things I find ironic is a broker can put a sell note out, can put a $400 price target on a stock, and ASIC won't investigate that. And all he's required to do is provide his reasons for optimism.

"People are quite happy being long on the back of research reports, yet all react in horror and shock if it happens on the other side."

That said, Mr Slater doesn't identify as a supporter of the highly activist style of short selling seen, up till now, overseas.

"I think you should be able to make money by being right. You shouldn't need to go out there and do that," he said.

Predatory positions?

Almost all small shareholders hold 'long' positions in stocks. Photo: AP

In the United States, short sellers have done things like fund class actions by disgruntled employees in order to drive down a share price.

"When you get to that point, I'm not a huge fan of it," he said.

When it comes to non-professional investors, almost all small shareholders hold "long" positions in stocks, which is the opposite process of a "short" and what most people think of when they consider share investing - that is, the buying of an asset on expectations its price will rise, with the buyer selling it later to realise their profit.

The Australian Shareholders Association, which represents small, non-institutional shareholders, fears "predatory" short selling could flow through to mum and dad investors.

It has no official policy on short selling.

But director Geoff Bowd said the body was "concerned about the impact of predatory short selling and the lending of securities to enable covered short selling".

Mr Bowd is referring to how stocks held on behalf of others by institutional wealth managers are often lent out to short sellers, allowing the institution to benefit from the practice even though the shareholder is unlikely to be helped if the price of their investment falls.

"From the perspective of retail investors, predatory short selling distorts the intrinsic value of a company," Mr Bowd said.

"It may well be in trouble, or appear to be in trouble, but short selling activity exacerbates that. At the end of the day - they're reducing the value of retail investors' asset."

Mr Bowd said to his knowledge, few of the organisation's membership engaged in short selling.

Risks aplenty

John Hempton, chief investment officer of Bronte Capital. Photo: Jeremy Piper

Bronte Capital Management's John Hempton, who heads up one of Australia's leading hedge funds, doesn't recommend it, telling Fairfax: "This is in the 'do not do at home' camp - you can lose a lot of money."

It's risky for the professionals too. Because of the higher level of risk, the reporting requirements on shorting stocks are far higher than they are for going long, explains Professor Carole Comerton-Forde.

On a daily basis, brokerages have to report all trades done short to the ASX. And for investors, any short positions worth more than $100,000 or 0.01 per cent of a company, also have to be reported on a daily basis. This information is released in aggregate by ASIC and is, by global standards, among the more rigorous and granular reporting regimes.

Part of the potential problem with short selling, and why the rise of US-style activists is so feared, is because of the highly public way in which they operate.

Short selling of the type that Glaucus as well as other firms like Muddy Water and Gotham excel at relies not on correcting small, unwarranted rises on a stock, but in correcting major misconceptions in the marketplace about how certain companies are being assessed. Some of the most successful implementations of such strategies have caused massive and sudden runs on companies.

This can be galling for executives who haven't had the time or ability to respond to what they say are false allegations before their company collapses out from under them. The most common defence such companies make to the claims of short sellers is simply that the investment thesis being put out by the short seller is simply not true.

In Australia, releasing disputed information about a company is a risky endeavour. Aside from defamation laws, it is also a crime under the Corporations Act for anyone to release false or misleading information to the market.

This is part of why local short sellers have tended to be more circumspect about their plays than their US counterparts, who are protected by the first amendment and have in legal judgements had their right to put out damaging information confirmed, provided they themselves believe it to be true.

Glaucus isn't the first to raise concerns over Quintis - in 2014, Taylor Collison, an Adelaide-based research house, wrote a critical report into the company titled A Foray into Sandalwood Accounting. The report was never released, but was quietly distributed to a few market participants. Quintis, then called TFS, got wind of it and launched a discovery case to try to identify possible false information. The motion was dismissed, with the judge ruling that while the report was "sceptical", TFS' motion was "entirely speculative" as to what might be in the full report.

Free speech

Glaucus director Soren Aandahl on ABC program The Business. Photo: ABC

Glaucus has a home court advantage when it comes to this type of thing.

American residents are extraordinarily hard to sue from Australia. This is part of the reasoning, local investors speculate, that aggressive short sellers, particularly Americans protected by the free speech provisions in their constitution, could soon be turning their eyes on Australian companies.

Mr Aandahl, who was a corporate lawyer before he co-founded Glaucus, said defamation laws "absolutely matter" to short sellers.

"I think has a negative impact on Australian market - it makes Australian investors fearful of exposing their true opinions," he said.

"Before we spoke out in the market, there was only positive investment opinion in the market about TFS."

Mr Aandahl said Glaucus had been aware of TFS before the case - it started looking at the company in 2015 - but stepped up their efforts after it.

"TFS was so sensitive that they would sue a broker for an unpublished analysts' report. It made them look fragile, weak, and made us think they were hiding something.

"Great companies don't care if you criticise them. They continue doing their own thing."

Glaucus looks at companies all over the world, but is attracted to Australia because, ironically, it's a well-regulated, largely transparent market.

"Australia has a good regulator, it's got solid rule of law, and protections for investors in the market Australia. That's attractive to us.

"One of the reasons Australia is an attractive market is that Australian investors care about corporate governance. There are markets where if you point out shareholders are being abused, there's no normative condemnation. But Australians care. When you find things that fall short of the standard, you know it's going to matter to people."

Banked on

The rising interest in short selling in Australia is a sign of a maturing market. Photo: Peter Morris

Perhaps the most obvious target for foreigners short selling Australian equities has been the big four banks. The tactic is so common, and so spectacularly unsuccessful, that it's come to be called "the widow-maker".

That's not scaring off everyone. Meridian Investment Management, a London-based short seller, is currently targeting Westpac, along with the banking system in general. In a report released in February, it argued that Australian banks should see a 30 to 50 per cent fall in their share prices. Glaucus, for its part, isn't interested - Mr Aandahl said the macroeconomic factors driving bank prices made it too hard to predict.

"We have no interest in that investment - it's a difficult one to get right."

Another shorting "graveyard" is Flight Centre - few have made money off that play.

The rising interest in short selling in Australia is a sign of a maturing market, said Mr Slater. "And that's good and bad. It will require companies to learn from US experience and think a bit more about how they response. And to be comfortable with the guidance they're providing. Ultimately, earnings will drive the stock."

Mr Aandahl said, "Australian investors want a market in which more market participants are free to express their opinion about publicly traded companies."

"The best capital markets in the world are markets in which there's a free flow of ideas. Anything that encourages that free flow will benefit not just specific investors, but the market in general."

As for Quintis, Moody's and S&P have both revised their rating outlook on the timber company's credit from stable to negative this week. That revision came after the ASX asked Quintis to provide the market with information about its largest customers.

Quintis' admission revealed that its largest customer had not placed an order this year. Meanwhile, Quintis' chief executive Frank Wilson, a significant shareholder, resigned to work on a takeover bid for the sandalwood company with an unnamed suitor - an interim replacement was announced on Friday. It has lost around a quarter of its value since the Glaucus report.

If it survives the next few months, it will be one of the few.