Short seller takes one for the team
17 February 2021 US
Image: freshidea/adobe.stock.com
A US hedge fund鈥檚 report on the allegedly shady activities of a healthcare company under investigation by the US Securities and Exchange Commission (SEC) offers a timely reminder for the positive market force that activist short sellers provide.
Following the public spat between retail investors, politicians and short sellers regarding their role in the market amid the GameStop saga, Hindenburg Research has released its findings from a four-month investigation into apparent misconduct by Clover Health but is not taking a position in order to highlight the role activist short sellers play in uncovering fraud and malpractice.
Explaining its decision, Hindenburg states: 鈥淪hort selling is always high risk, these are unprecedented times; many people are angry and right now we believe it is important to demonstrate the role short sellers play in a healthy, functioning market.鈥�
Short selling reports are often dismissed by the subject of the investigation and its long investors by highlighting the financial incentive a hedge fund has to apply downward pressure on prices, which may lead it to exaggerate a company鈥檚 flaws.
鈥淲e are taking that off the table for this one report so the investing public can more clearly see the work for what it is; deep-dive investigative research,鈥� the fund states.
The report, , claims that the 鈥渃orporate world is rife with fraud, and investors have little protection鈥�.
And in a vacuum of regulatory, moral and journalistic oversight, Hindenburg states, 鈥渟hort sellers, like us, have stepped further into the role鈥�.
Among the fund's numerous claims, it suggests that Clover neglected to inform investors it is under investigation by the US Department of Justice (DoJ) and that high-profile venture capitalist and Clover promoter Chamath Palihapitiya did not perform adequate due diligence and misled investors regarding Clover鈥檚 鈥渄eceptive sales practices鈥� to drive growth.
According to a Civil Investigative Demand, similar to a subpoena, uncovered by Hindenburg and not disclosed by Clover to investors, the DoJ is investigating at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals.
Elsewhere, Hindenburg argues that Clover claims that its best-in-class technology fuels its sales growth, but in fact sales are driven by a major undisclosed related party deal and misleading marketing targeting the elderly.
In 2016, Clover was fined for misleading marketing practices by the Centers for Medicare and Medicaid Services.
Man of the people?
In addition to the healthcare provider's alleged malfeasance, Hindenburg argues that Clover鈥檚 鈥淲all Street celebrity promoter鈥�, Palihapitiya, misled investors about critical aspects of Clover鈥檚 business in the run-up to the company鈥檚 special purpose acquisition company (SPAC) initial public offering in January.
Palihapitiya went on a major promotional campaign for Clover in the months leading up to the company going public, presenting it as a panacea to complaints of price gouging and up-selling that are common in the established US healthcare sector.
鈥淲e think Chamath has done a masterful job marketing himself, capitalising on the recent chaos with GameStop and WallStreetBets to align himself with everyday investors 鈥� but his public persona strikes us as the sugar that helps the poison go down,鈥� Hinderburg says.
Ordinarily, Hindenburg funds 鈥渂ets against wrongdoing鈥�, aligning its research with its capital, publishing the reasons why it is shorting a company, with proceeds funding future investigations and research.
Since Hindenburg released its report on 5 February, the number of shares on loan spiked, with utilisation remaining maxed-out ever since, according to Ortex Analytics. Cost-to-borrow has also strayed just above the threshold for a 鈥榟ot stock鈥� of 500bps.
Clover鈥檚 (NASDAQ: CLOV) share price is at a year-to-date low of $11.5 as of 16 February, although it has been in decline since hitting an all-time high of $16.77 on 31 December.
鈥淪hort sellers have exposed almost every major market fraud in the past several decades, yet there have been recent questions about whether short-sellers and critical researchers play an important role in a healthy, functioning market. We hope our research serves as a timely reminder that they do.鈥�
Despite the 鈥渆pic upheaval鈥� of recent weeks, many average investors have 鈥渞ealised their strength鈥� in an environment long dominated by large institutions and corporate insiders, the report states.
Short selling has 鈥渆xisted for hundreds of years鈥�, the fund concludes, and the practice has been instrumental in exposing 鈥渕ost major market frauds鈥� in recent history, including Lehman Brothers, Wirecard 鈥� in which German financial regulators were 鈥渘egligent鈥� in reacting to accusations of illegal activities made by short sellers against the company 鈥� and US zero-emission vehicle company Nikola.
Now read: Hedge funds are reinventing themselves as the fact-checkers of capitalism
Following the public spat between retail investors, politicians and short sellers regarding their role in the market amid the GameStop saga, Hindenburg Research has released its findings from a four-month investigation into apparent misconduct by Clover Health but is not taking a position in order to highlight the role activist short sellers play in uncovering fraud and malpractice.
Explaining its decision, Hindenburg states: 鈥淪hort selling is always high risk, these are unprecedented times; many people are angry and right now we believe it is important to demonstrate the role short sellers play in a healthy, functioning market.鈥�
Short selling reports are often dismissed by the subject of the investigation and its long investors by highlighting the financial incentive a hedge fund has to apply downward pressure on prices, which may lead it to exaggerate a company鈥檚 flaws.
鈥淲e are taking that off the table for this one report so the investing public can more clearly see the work for what it is; deep-dive investigative research,鈥� the fund states.
The report, , claims that the 鈥渃orporate world is rife with fraud, and investors have little protection鈥�.
And in a vacuum of regulatory, moral and journalistic oversight, Hindenburg states, 鈥渟hort sellers, like us, have stepped further into the role鈥�.
Among the fund's numerous claims, it suggests that Clover neglected to inform investors it is under investigation by the US Department of Justice (DoJ) and that high-profile venture capitalist and Clover promoter Chamath Palihapitiya did not perform adequate due diligence and misled investors regarding Clover鈥檚 鈥渄eceptive sales practices鈥� to drive growth.
According to a Civil Investigative Demand, similar to a subpoena, uncovered by Hindenburg and not disclosed by Clover to investors, the DoJ is investigating at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals.
Elsewhere, Hindenburg argues that Clover claims that its best-in-class technology fuels its sales growth, but in fact sales are driven by a major undisclosed related party deal and misleading marketing targeting the elderly.
In 2016, Clover was fined for misleading marketing practices by the Centers for Medicare and Medicaid Services.
Man of the people?
In addition to the healthcare provider's alleged malfeasance, Hindenburg argues that Clover鈥檚 鈥淲all Street celebrity promoter鈥�, Palihapitiya, misled investors about critical aspects of Clover鈥檚 business in the run-up to the company鈥檚 special purpose acquisition company (SPAC) initial public offering in January.
Palihapitiya went on a major promotional campaign for Clover in the months leading up to the company going public, presenting it as a panacea to complaints of price gouging and up-selling that are common in the established US healthcare sector.
鈥淲e think Chamath has done a masterful job marketing himself, capitalising on the recent chaos with GameStop and WallStreetBets to align himself with everyday investors 鈥� but his public persona strikes us as the sugar that helps the poison go down,鈥� Hinderburg says.
Ordinarily, Hindenburg funds 鈥渂ets against wrongdoing鈥�, aligning its research with its capital, publishing the reasons why it is shorting a company, with proceeds funding future investigations and research.
Since Hindenburg released its report on 5 February, the number of shares on loan spiked, with utilisation remaining maxed-out ever since, according to Ortex Analytics. Cost-to-borrow has also strayed just above the threshold for a 鈥榟ot stock鈥� of 500bps.
Clover鈥檚 (NASDAQ: CLOV) share price is at a year-to-date low of $11.5 as of 16 February, although it has been in decline since hitting an all-time high of $16.77 on 31 December.
鈥淪hort sellers have exposed almost every major market fraud in the past several decades, yet there have been recent questions about whether short-sellers and critical researchers play an important role in a healthy, functioning market. We hope our research serves as a timely reminder that they do.鈥�
Despite the 鈥渆pic upheaval鈥� of recent weeks, many average investors have 鈥渞ealised their strength鈥� in an environment long dominated by large institutions and corporate insiders, the report states.
Short selling has 鈥渆xisted for hundreds of years鈥�, the fund concludes, and the practice has been instrumental in exposing 鈥渕ost major market frauds鈥� in recent history, including Lehman Brothers, Wirecard 鈥� in which German financial regulators were 鈥渘egligent鈥� in reacting to accusations of illegal activities made by short sellers against the company 鈥� and US zero-emission vehicle company Nikola.
Now read: Hedge funds are reinventing themselves as the fact-checkers of capitalism
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