In 1937, a hydrogen-powered German airship flying into New Jersey caught fire and crashed, killing 35 passengers on board. It was sort of a man-made disaster as some 100 people were loaded on to a balloon filled with the most flammable material in the universe. The airship was named Hindenburg.
Eight decades later, in 2017, a graduate of international business management from the University of Connecticut founded a “forensic financial research” firm to specialise in spotting wrong-doings and frauds, or what it calls “man-made disasters”, at companies around the globe and take market bets against them. Founder Nathan (Nate) Anderson named his firm Hindenburg Research after the doomed airship.
This week, Hindenburg ignited a fierce firestorm that threatens to singe Asia’s richest man, Indian tycoon Gautam Adani, who presides over a sprawling empire that now spans from ports and airports to energy, cement and data centres.
On Wednesday, it released a report that alleged the Adani Group had “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. The disclosure sparked a $ 51-billion sell-off in shares of his group companies over two trading sessions, pushing him four places down on the world billionaire index.
Worse, it came ahead of a Rs 20,000-crore follow-on share sale in Adani Enterprises. The share sale could get subscribed up to a meagre 1 % on the opening day, Friday, when Adani Enterprises shares fell 18.5 %, slipping below the offer price.
Adani group has since rubbished the report as a “malicious combination of selective misinformation and stale, baseless and discredited allegations”. That, however, hasn’t stopped investors from selling off.
On Friday, shares of Adani Group companies continued their loosing streak for the second day with Adani Enterprises dropping a massive 18.5% and Adani Ports & SEZ 1 %, taking the broader benchmark index — the Sensex down by 874.16 points or 1.45%.
What does Hindenburg Research do ?
Hindenburg engages in activist short selling, which involves selling borrowed stocks in hopes of buying at a lower price later. If prices fall expectedly, short sellers make a killing.
Hindenburg, which invests its own capital, takes such bets based on its research, which looks for “man-made disasters” such as accounting irregularities, mismanagement and undisclosed related-party transactions.
It especially looks for “accounting irregularities; bad actors in management or key service provider roles; undisclosed related-party transactions; illegal/unethical business or financial reporting practices; and undisclosed regulatory, product, or financial issues” in companies.
“While we use fundamental analysis to aid our investment decision-making, we believe the most impactful research results from uncovering hard-to-find information from atypical sources,” the company website says.
Hindenburg’s past targets include Lordstown Motors Corp (US), Kandi (China), Nikola Motor Company (US), Clover Health (US) and Tecnoglass (Colombia).
Short sellers, however, aren’t admired by most. Companies targeted by the activists have been pushing regulators to go after these short sellers as they may be indulging in some sort of insider trading. Supporters, however, say that the research actually uncover frauds and do more good than harm to investors.
People behind the scene
Not much is known about the company, besides its 38-year-old founder Anderson, who lived in Jerusalem, Israel before returning to the US where he first took up a consulting job with a financial data company FactSet and then worked at broker dealer firms in Washington DC and New York.
Before he founded Hindenburg, Anderson worked with Harry Markopolos, who had flagged Bernie Madoff’s Ponzi scheme, to investigate Platinum Partners, a hedge fund that was eventually charged with fraud worth USD 1 billion.
While living in Jerusalem, Anderson volunteered for a local ambulance service.
Past targets
Hindenburg is best known for its bet against electric truck maker Nikola Corp in September 2020 for its “alleged lies and deceptions” in years leading up to its proposed partnership with General Motors.
Among dozens of other issues, it challenged a promotional video Nikola produced showing its electric truck cruising at high speed. This it said was nothing more than a truck being rolled down a hill in the Utah desert, a claim the company later admitted and its founder and executive chairman Trevor Milton resigning.
Nikola, which agreed in 2021 to pay USD 125 million to settle a case with the US Securities and Exchange Commission, listed in June 2020 and its valuation touched $34 billion at peak but is now worth $1.34 billion.
Hindenburg’s website lists over a dozen companies where it has flagged alleged wrongdoings. These include WINS Finance, which Hindenburg revealed had failed to disclose to US investors an RMB 350 million asset freeze imposed on one of its subsidiaries in China; the “zombie company” China Metal Resources Utilization which had a “100 % downside” and was “under severe financial distress” with “numerous accounting irregularities”; SC Worx’s “completely bogus” Covid-19 testing deal; “massive undisclosed related party transactions, including a USD 509 million merger” at HF Foods; “billions of dollars in undisclosed off-balance sheet liabilities” of Bloom Energy; and a whistleblower report to the United States Securities and Exchange Commission (SEC) “relating to RD Legal, a hedge fund that was later charged by the commission for allegedly making material misstatements to its investors”.
Almost all of Hindenburg’s work has been followed up by legal or regulatory action, according to its website.
Activist short-selling
To take a short position, investors sell borrowed stock in hopes of buying it back at a lower price later. If prices fall expectedly, they make a killing. If the price rises instead, they would have to buy stock to ‘cover’ what they borrowed.
Short sellers however aren’t admired by most. Companies targeted by the activists have been pushing regulators to go after these short sellers as they may be indulging in some sort of insider trading. Supporters however say that the research actually uncover frauds and do more good than harm to investors.
