Wall Street’s Most Reviled Investors Worry About Their Fate

“You have this emboldened crowd that won, and I wouldn’t have thought they had the firepower to do that,” said Jason Sippel, who runs stock trading at JPMorgan Chase, which includes lending stocks and cash to short sellers. “That was kind of the shot heard around the world.”

The depiction of short sellers as evil by hobbyist stock traders has troubled professionals such as Mr. Koppikar, a portfolio manager at Orso Partners, a San Francisco fund. “I could probably have more economic success doing something else, but I think that what we do serves a social purpose,” he said.

Short sellers have weeded out corporate wrongdoing.

Two decades ago, Mr. Chanos began poring through regulatory filings and interviewing energy-market participants about the Houston energy trader Enron, which he suspected was using accounting gimmicks to lift revenues and hide losses. His hunch, and accompanying short position, proved prescient. Within a year of his investigation, Enron filed for bankruptcy.

Short sellers also sounded alarms about the impending housing crisis driven by subprime mortgages, shorting the mortgage insurer MBIA and the investment bank Lehman Bros., whose collapse helped set in motion a financial crisis in September 2008 and led to a devastating recession.

And in the mid-2010s, as the opioid crisis was raging, a short seller exposed Insys Therapeutics, which he believed was improperly influencing doctors to prescribe a powerful nasal spray containing fentanyl that played a role in the death of at least two patients. (Multiple former Insys executives have since been sentenced to prison on federal charges that the company bribed doctors to prescribe the spray.)

Short sellers often get into prolonged public battles. For years, many funds have been short on Tesla, the electric carmaker, saying that demand for the vehicles didn’t justify the stock’s price. But Tesla shares have skyrocketed recently, and Tesla’s chief executive, Elon Musk, has gleefully snubbed the shorts by selling red-satin bottoms festooned with the Tesla logo that he called “short shorts.”

Until last month, however, the attacks on short sellers were largely confined to the business and financial community. GameStop changed all that, as small investors found a way to employ a “short squeeze,” a classic Wall Street strategy to counter short-selling by driving up a stock’s price and forcing the short seller to put up more capital to cover losses.