It's become a key source of corporate fright, even panic, this year: the New York firm Hindenburg Research.
In January, the short-selling investment firm took on the Indian tycoon Gautam Adani, who had enjoyed a phenomenal rise over the past three years. On Jan. 24, Hindenburg Research accused Asia's richest man of fraud.
"We have uncovered evidence of brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades," Hindenburg wrote in a report. The document described a galaxy of shell entities based in tax havens -- the Caribbean, Mauritius and the United Arab Emirates -- controlled by the Adani family.
The Adani Empire has rejected all these accusations.
As a short-seller, Hindenburg bets that stock prices will decline.
Adani Lost Billions After Hindenburg's Accusations
But the consequences of Hindenburg Research's accusations are serious. Adani has seen his wealth drop by tens of billions of dollars. The man, whose fortune was fourth in the world, has now dropped to 21st. His net worth is estimated at $62.4 billion as of May 2, according to the Bloomberg Billionaires Index. That's down $58.1 billion this year.
Beyond his fortune, Adani has also seen the reputation of his empire tarnished by these accusations, which have raised suspicion about the group and its interests in energy, transport and other sectors.
The New York investment firm shorted the stocks of the Adani conglomerate through U.S.-traded bonds and non-Indian-traded derivative instruments.
Hindenburg is also credited with bringing down Trevor Milton, the founder of electric-truck maker Nikola.
A little over three months after the report on Adani, Hindenburg Research is attacking another legend, the activist investor Carl Icahn, one of the investors most feared by business leaders.
For decades, the 87-year-old billionaire has built a reputation as an investor who makes CEOs bend. These include Apple's Tim Cook, whom he forced to redistribute to shareholders part of the cash pile on which the iPhone maker was sitting by implementing a share buyback.
Icahn, who has often played the attacker, must now defend himself.
Hindenburg Research accuses Icahn of using a Ponzi-like scheme in his investment firm, Icahn Enterprises LP, which is a publicly traded limited partnership that operates like a holding company.
"In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one 'holding the bag'," Hindenburg said in a report published on May 2.
As a corporate raider, Icahn knows that you have to react quickly in the event of an attack. That's what he did.
Hindenburg Is a 'Self-Serving Short Seller': Icahn
"We believe the self-serving short seller report published by Hindenburg Research today was intended solely to generate profits on Hindenburg's short position at the expense of IEP's long-term unitholders," Icahn, chairman of IEP, said in a statement. "We stand by our public disclosures and we believe that IEP's performance will speak for itself over the long term as it always has."
"Today, IEP operates from a position of strength with approximately $2 billion of cash and cash-equivalents on its balance sheet as of March 31, 2023 to execute on our strategy," he argued.
For now, Hindenburg Research's accusations are costing him dearly. IEP’s stock slumped almost 20% on Wall Street, its biggest daily drop. This pared Icahn's net worth by some $3.1 billion.
To this must be added a drop of another $7.3 billion according to Bloomberg News. This would come from the fact that according to Hindenburg Research, the investor had a margin loan collateralized by his stake in IEP. In total, Icahn's net worth fell by 41% to $14.6 billion in 24 hours, according to the Bloomberg Billionaires Index.
The billionaire also tumbled more than 69 positions in the highly regarded and watched global ranking of fortunes. He is now the 119th richest person in the world. Before the Hindenburg Research report, he was 58th.
Carl Icahn owns 84.85% of IEP as of Dec. 30. The stake was then valued at $12.1 billion. The valuation of this stake was more than $15 billion on May 1, the day before Hindenburg published its report.
The short-seller said that IEP units are inflated by 75%+ due to the fact that the company trades at a 218% premium to its last reported net asset value. It also accused IEP of inflating the valuation of its less liquid and private assets. IEP has investments in seven primary business segments: investments, energy, automotive, food packaging, real estate, home fashion and pharma.
"Icahn Enterprises’ current dividend yield is ~15.8%, making it the highest dividend yield of any U.S. large cap company by far, with the next closest at ~9.9%," Hindenburg said. "As a result of the company’s elevated unit price, its annual dividend rate equates to an absurd 50.5% of last reported indicative net asset value."
The Dividend and the Margin Loan
The company’s outlier dividend is made possible because, the short-seller asserted, Icahn has been largely taking dividends in units instead of cash, reducing the overall cash outlay required to meet the dividend payment for the remaining unitholders.
"The dividend is entirely unsupported by IEP’s cash flow and investment performance, which has been negative for years. IEP’s investment portfolio has lost ~53% since 2014. The company’s free cash flow figures show IEP has cumulatively burned ~$4.9 billion over the same period," Hindenburg Research said.
Icahn has a margin loan collateralized by his stake in IEP. In February, 181 million of his almost 300 million shares had been pledged, according to the company's 2022 annual report. The 181 million shares were valued at $9.2 billion.
The principle of a margin loan is that if the value of the collateral decreases, the lender asks the borrower to pledge more collateral.
"Icahn has not disclosed basic metrics around his margin loans like loan to value (LTV), maintenance thresholds, principal amount, or interest rates," Hindenburg Research said in the critical report.
"We think unitholders deserve this information in order to understand the risk of margin calls should IEP unit prices revert toward NAV, a reality we see as inevitable."
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