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Jim Chanos uses this 7-point checklist for companies he's going to short

Prominent short-seller Jim Chanos, the founder of Kynikos Associates, says there are seven things he looks at when making a short bet.

His checklist comes from a book called “The Seven Signs of Ethical Collapse” by Marianne Jennings. He uses this book for a course he teaches at Yale entitled A History of Financial Market Fraud: A Forensic Approach.

The seven signs include: “pressure to maintain those numbers”; “fear and silence”; “young’uns and bigger-than-life CEO”; “weak board”; “conflicts”; “innovation like no other”; and “goodness in some areas atones for evil in others.”

Chanos achieved legendary status for his bet against Enron as it was later revealed to be a fraud. More recently, he has targeted Canadian pharmaceutical company Valeant (VRX) and Elon Musk’s Telsa (TSLA) and Solar City (SCTY).

“At Valeant and Enron, the CEOs in the situation fit six or seven — innovation like no other, larger-than-life CEO, and complaint board… We keep an eye on these kinds of things,” Chanos said at the Vanity Fair New Establishment Summit in San Francisco on Wednesday.

Later in the panel, moderator Bethany McLean asked Chanos about Musk, who has found fame and fortune in the products he has introduced.

“Yeah I remember a company you and I had something to do with,” he said, referring to McLean’s book that chronicled the collapse of Enron. “Jeff Skilling was called the ‘smartest guy in the room’ as I recall.”

“There’s a difference between being smart and being clever.”

Julia La Roche is a finance reporter at Yahoo Finance.

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