On Friday, Italian e-scooter firm Helbiz (NASDAQ:HLBZ) joined Genius Group (NYSEMKT:GNS) in cracking down on short sellers.

“The recent underperformance of our shares compared to the market is a clear indication of the illegal short selling activities that have taken place,” said CEO Salvatore Palella in his strongly worded press release. “We will not tolerate these illegal activities that artificially depress the value of our stock.”

Shares of Helbiz spiked 37% the following Monday. And given Genius Group’s recent performance, shares of HLBZ could easily rise to $1 or more… at least in the near term. Retail investors love a good David-versus-Goliath story, especially if Goliath is a Wall Street short-seller.

Yet, behind the drama lies an inconvenient truth:

Management teams at Helbiz and Genius are also to blame.

Together, the two firms have burned through almost $100 million of cash since 2019 while generating only around $70 million in total revenue. Helbiz itself is facing a problem of declining ridership as the novelty of e-scooters wears off. And Genius Group has a monetization problem that’s several times worse than Twitter’s.

Larger firms have faced short-selling issues before. AMC Entertainment (NYSE:AMC) and Bed Bath & Beyond (NASDAQ:BBBY) both found themselves in the crosshairs of short sellers after taking on more debt than they could handle. (I, on the other hand, need no sales pitch from persuasive investment bankers to go into debt). Meanwhile, firms like GameStop (NYSE:GME) and Redbox were shorted because of their dying business models.

But smaller-cap firms like Helbiz, Genius, Verb Technology (NASDAQ:VERB) and others are different because of their tiny market caps. A single week of investor trading can send these shares up tenfold or more, obscuring any underlying business issues.

So, while Mr. Palella’s efforts might pay off in the short run, the real fight will be in turning these struggling businesses around.

What Is Naked Short Selling?

Naked short selling is a process of selling shares that 1) you do not own, and 2) do not actually exist. It’s a practice that federal regulators banned in 2008 in the wake of the financial crisis.

Yet, loopholes continue to exist.

First, the antiquated U.S. stock trading system runs on a “T+2” system, where shares are usually settled two days after their transaction date. Such arrangements mean that sellers could theoretically sell securities without owning them… and then seek out the shares during the settlement period.

Second, the SEC has carved out legitimate reasons for naked short selling. Market makers, for instance, can use naked short selling to create markets during temporary shortages of shares. Here’s the SEC’s reasoning:

“Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.”

Finally, illegal naked short selling is often difficult to prove. SEC lawsuits against traders tend to focus on “spoofing” (flooding the markets with fraudulent orders) and “scalping” (selling positions without disclosures) precisely because so much naked short-selling can happen legally.

None of that, of course, has kept investors and managers from crying foul.

Helbiz (HLBZ) Stock: From $20 to 20 Cents

The Helbiz controversy starts long before short sellers became involved.

In 2020, investors in Helbiz’s crypto coin offering sued the “flamboyant” Mr. Palella over a botched initial coin offering in 2018.

“Defendants ran a racket,” the complaint alleged. “They set up Internet websites and published a whitepaper (swaths of which were plagiarized) laying out the pitch for a new cryptocurrency they called HelbizCoin.” All to fund the entrepreneur’s supposedly lavish lifestyle.

The firm would follow up with an overhyped SPAC merger with GreenVision Acquisition in 2021, where management forecast $165 million in revenue in 2022 and $449 million by 2025, thanks to its “formula for regulatory success.” They would also promise to focus on profitable markets with less competition.

Fast forward to today, and Helbiz’s recent short-seller fight seems more of a distraction from its underlying problems. The e-mobility firm will probably generate only $15 million in revenue this year — 91% lower than its initial SPAC forecasts. And last week, the scooter company announced a “discontinuation of operations in non-profitable markets” that were “characterized by a lack of robust regulatory frameworks, high levels of competition, an oversupply of vehicles, and overcrowded streets.”

So much for promises of focusing on profitable markets.

Yet, Mr. Palella has decided that naked short sellers, not his own actions, are the root cause of his company’s issues.

Genius Group: How to 10X Your Stock in 10 Days

Corporate mismanagement, however, cuts both ways. By running a firm so poorly, management can turn their business into a short squeeze.

And it’s how Genius Group turned its $8 million stock into $100 million in less than a fortnight.

Two weeks ago, the Singaporean-based firm looked much like any other sleepy small-cap stock. The firm had generated only $14.4 million in organic revenue for the year, a very low figure given its 3.01 million user base, excluding acquisitions. (By comparison, Twitter reportedly generates around 7X more revenue per user). And organic growth seemed anemic at best for a tech company. From a financial perspective, Genius Group seemed better at acquiring its way to growth.

GNS shares eventually became too cheap for their own good. By January, markets were valuing the firm at less than the $9 million cash value. And all it took was for the company to announce it was targeting naked short sellers to turn into the next meme stock.

It’s worked.

Since then, the market cap of Genius Group has ballooned to over $120 million, despite no change in the company’s growth trajectory.

Should Investors Buy GNS Stock or HLBZ Stock?

This isn’t the first time naked short-selling has made the news. Since 2003, the SEC has settled multiple instances involving the practice. One notable case in 2009 involved a settlement with HCM, an options market maker. The trading firm had created a “series of sham reset transactions” which “enabled HCM to circumvent its close out obligations.” And in 2013, the SEC put together 320 exhibits and 19 witnesses to prove that traders at broker-dealer optionsXpress made illegal buy-writes (essentially selling shares they did not hold).

But the effect of naked short selling is tenuous at best. Academic studies have found that share declines from the practice generally reverse themselves within weeks. And it’s hard to pinpoint any firm that went bankrupt solely because of short sellers; bad businesses attract short sellers, not the other way around.

That’s all worrying news for managers at Helbiz and Genius Group. Though speculators will certainly make money in the short run, long-term investors will only win if these firms recapitalize and turn around their businesses. Managers should make sure they’re fighting the right battle.

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On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.