A Story of Short-Selling & Revenge: Isaac Le Maire

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This third installment of my series focusing on individuals that shaped market history we will cover Isaac Le Maire, the world’s first short seller.

THE DUTCH EAST INDIA COMPANY

There are few companies that have had a greater impact on the world than the Dutch East India Company. As the first multinational company in history, the Verenigde Oostindische Compagnie (VOC) set off a chain of events that would shape global politics and economics for centuries to come.

“In its lifetime, the VOC sent almost one million people to Asia and employed on average 30 thousand workers, who mostly worked on one of the 4,700 shipping voyages the company undertook. It sent as many people overseas as all the other European seafaring nations like England, France, Spain, Portugal and the Nordic countries put together, and accounted for 45% of the voyages to Asia between 1500 and 1800…

While the company’s main focus was first and foremost on the spice trade, the company also traded in textiles, gold, silver and even elephants.” (Source)

The VOC’s Impact on Financial Markets

In the early 17th century, Amsterdam was a hub of financial innovation. Most of these innovations were either directly related or tangentially related to the Dutch East India Company. For example…

In 1602, shares of the Dutch East Indies Company (Vereenigde Oostindische Compagnie, or VOC) traded for the first time.

In 1609, the Bank of Amsterdam—considered by many to be the world’s first central bank—was established. The VOC was a heavy borrower from the Bank of Amsterdam.

In 1610, the first bear raid / short-selling campaign was launched. More on that later…

In 1611, the new Amsterdam Stock Exchange building opened for trading.

But no person was more involved with the early VOC years than one Isaac Le Maire, the subject of today’s article.

ISAAC LE MAIRE

Isaac le Maire was born in Tournai, Belgium in 1558. By the late 16th century, however, le Maire had migrated to Holland and settled in Amsterdam.

Most pertinent to this story, Isaac le Maire co-founded the VOC in 1602, and served on its Board of Directors until February 22, 1605. Unfortunately for le Maire, however, this was not a voluntary resignation. The Belgian merchant had been forced out due to claims of fraudulent activity and embezzlement of VOC funds.

As part of his resignation, le Maire was forced to sign an agreement stating that he would not be involved in any companies (Dutch or otherwise) that traded beyond the Cape of Good Hope or the Straits of Magellan (known sea routes from Europe to Asia) (Source).

This humiliating forced resignation left le Maire bitter and wanting revenge.

Le Maire’s Attempt to Found a Competitor

Though Le Maire was thrown out of the VOC, he maintained powerful connections in Amsterdam and Europe.

That said, le Maire spent the first few post-VOC years trying to persuade powerful people like King Henry IV of France to establish a rival trading company (the French East Indian Company). Le Maire hoped to thwart the VOC and extract revenge by founding a superior competitor.

Unfortunately for le Maire, despite King Henry IV’s genuine interest in creating a rival trading company, the French King’s death in 1610 ended such plans.

SHAREHOLDER ACTIVISM & LETTERS TO MANAGEMENT

After failing to start a rival trading company, le Maire tried changing the VOC as an outsider. Like activist investors often do today, in 1609 le Maire wrote a letter to Johan van Oldenbarnevelt (VOC director) outlining his concerns about the VOC, including its management structure and governance.

The Belgian merchant was especially concerned that the VOC’s board was composed entirely of Company employees and shareholders had no say in how the company was run.

Le Maire’s letter was widely circulated, and outlined specific changes like greater transparency with shareholders, improved management of trade routes, and emphasizing profitability. In a thinly veiled threat, Le Maire even suggested the VOC could be replaced by a new company if these changes were not implemented.

Le Maire had three chief criticisms:

1. The company’s rising debt levels reduced shareholders profits to the point that dividends could not be paid.
2. The board was not open to receiving advice, or hearing arguments and complaints from investors.
3. Directors were “enriching themselves to the detriment of shareholders while trying to get the obligation to publish accounts [financial statements] waived.”

To highlight how poorly VOC shareholders were treated by management… in 1610 the VOC’s board tried convincing officials to waive the requirement for publishing financial statements in April 1612. The board had little conviction in the company’s near term prospects, and feared “disclosure would lead to a precipitous withdrawal of capital” (Source). This lack of transparency with shareholders over the company’s financial conditions was one of le Maire’s main complaints.

Unsurprisingly, however, le Maire’s demands were met with resistance from the VOC. The company’s directors had enriched themselves at the expense of shareholders for years, and had little incentive to change their business model.

And so, a month after le Maire penned his letter, Johan van Oldenbarnevelt rejected the early activist investor’s complaints.

This rejection set the stage for history’s first ever bear raid and short-selling campaign.

LE MAIRE’S REVENGE: THE GROOTE COMPAGNIE

After failing to establish a competitor or change VOC management through public letters, le Maire took drastic action. In 1609, he formed the Groote Compagnie (“Large Company”), an investor syndicate fully focused on bringing down the VOC.

Groote Compagnie’s objective was simple:

“Le Maire hoped that, if the [VOC] share prices would fall below par value, the investors would ask their money back in 1612. This would require the VOC to be liquidated and would give Le Maire himself the opportunity to set up new trading companies.” (Source)

Accordingly, le Maire and the nine other Groote Compagnie founders sold VOC shares for future delivery (shares they did not own), which placed downward pressure on the VOC’s share price.

Thus, Isaac Le Maire had begun shorting the most powerful company in the world, and initiated the first “bear raid”. In addition to shorting the company’s shares through forward contracts, Le Maire and his syndicate spread bad news and false rumors about the company. For example, this group of short-sellers circulated rumors of VOC ships sinking on their journeys home from the East Indies, which depressed VOC share prices.

Initially, the Groote Compagnie’s bear raid was successful. VOC share prices declined from a high of 212% premium in 1607 down to 126% in 1609.

The First Short-Selling Ban in History

Of course, it did not take long for the VOC to determine who was behind this short-selling campaign. To counter Le Maire’s short-selling tactics, the VOC did two things…

First, the VOC paid out its first dividend to shareholders in 1610. The lack of dividends paid out by the VOC was a major criticism of Le Maire, but also other shareholders more broadly. So, to appease shareholders and counter Le Maire’s short-selling, the company paid out its first dividend in 1610.

“The directors agree on a 75 per cent mace dividend, with a dividend of 50 per cent in pepper and yet another of 71⁄2 per cent in silver to follow yet again in the autumn. (Source)

Second, the VOC petitioned government officials to place a ban on short-selling. The VOC directors argued that Le Maire’s short-selling campaign was a “dirty scheme” that hurt the company’s ability to compete with Dutch rivals. Additionally, the VOC pulled at regulator’s heartstrings by emphasizing how innocent investors in VOC shares, specifically “widows and orphans”, were negatively impacted by Le Maire’s bear raid.

The VOC’s efforts paid off. On February 27, 1610 Dutch officials announced an official ban on selling shares that one did not own (i.e., naked short selling).

As expected, this government ban proved ruinous for Le Maire and his band of short-selling speculators. By 1611, Isaac Le Maire had fled Amsterdam to another Dutch city in efforts to avoid creditors and government officials. Many of Le Maire’s colleagues at the Groote Compagnie were not so fortunate, with several members plunged into bankruptcy by the unsuccessful bear raid.

LE MAIRE’S LEGACY & THE DISSENTING PARTICIPANTS

Isaac Le Maire was the world’s first short-seller, but also arguably the first activist investor. While Le Maire undoubtedly had a questionable background, his criticisms of VOC management were warranted. In fact, the legacy of Le Maire’s advocacy for VOC shareholders’ rights lasted long after Le Maire had fled Amsterdam.

In 1623, during a heated controversy surrounding shareholder rights and the renewals of the VOC’s charter, a group of dissatisfied shareholders wrote letters similar to Le Maire’s 1609 memo that outlined their criticism of VOC management. Known as “The Dissenting Participants”, their complaints against VOC directors were scathing:

“The dissenting participants [shareholders] are not slaves, but free people in free countries. They only ask to be allowed to appoint administrators of their goods themselves, to whom they entrust such administration.

That this request is not unfair is evident from the fact that even the King of Spain gives merchants who sail to the East Indies and Spanish merchants who trade with the West Indies the opportunity to appoint the agents or bookkeepers of their goods to whom they themselves entrust such management. In England as well, one sees that the participants in the EIC have the most to say: they remain masters of their own goods and each year appoint and dismiss from their midst as they see fit a Governor, his deputy and the Court of 24 Committees, as well as an auditor. And each shareholder is entitled to inspect the books and merchandise and see how the goods are converted to cash. This is evident from a certificate from the English East Indies Board, of which the dissenting participants have obtained an authentic copy.

Does this not turn you pale, oh shameless directors! Or does no red blood flow through your veins? But neither law nor reason can make you change your minds. Other countries set the standard and you remain stuck in your old ways. You do not follow any good examples. It appears that although greed has not blinded you, it has indeed made you insensitive and leprous.”

Unlike Le Maire’s attempt in 1609, the dissenting participants public campaign against VOC management worked.

“Theoretically, the activism of the “dissenting participants” was successful. The 1623 Charter granted certain rights to large investors, including the right to nominate new candidates for appointment as director. The 1623 Charter further regulated insider trading by the directors and encouraged the directors to pay a yearly dividend to the shareholders. In addition, a committee of nine shareholders was entrusted with the supervision of the VOC directors.” (Source)

 

Missed Part II of the “Legends of Market History” series? Click here to learn about the world’s first mutual fund

 

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