The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds

Chapter 8

The Cynical Sleuth

James Chanos

Kynikos Associates LP

Shorting is not a criminal trial. It doesn’t have to be beyond a reasonable doubt. There just has to be a preponderance of evidence.

—James Chanos, February 2011 interview

There’s a lot about Enron that still hasn’t been fully explained or written about,” Jim Chanos says earnestly one February afternoon in his office. Snow falls on Madison Avenue as Chanos searches his memory for details. He is tanned, having just returned from a conference in Miami. With wavy light brown hair and glasses, Chanos looks at home behind his gargantuan circular chestnut desk in a deep blue suit. The 54-year-old head of Kynikos Associates LP was the first to uncover the shocking accounting scandal after a friend flagged a “Heard in Texas” story in the Wall Street Journal in September 2000. He thought the article was right up Chanos’s alley.

The story by Jonathan Weil was about energy companies using accounting ploys. “Much of these companies’ recent profits constitute unrealized, noncash gains,” Weil found.

“Almost immediately after reading the article I pulled up the financial statements for Dynergy, Enron, Reliant, and Mirant. And it was very clear from them that the biggest and baddest was also the murkiest—Enron,” says Chanos. So he first dug into the quarterly (10Q) and annual (10K) financial statements.

“I remember the numbers had gotten worse over nine months,” says Chanos. “We looked at insider selling, which was a huge pattern ...