Hindenburg's Track Record Should Worry Adani
Given that the short-seller's past findings have spelled disaster for companies across the globe, including Nikola, Lordstown Motors, WINS Finance and Clover Health, among others, Gautam Adani may have to weather a long storm as questions around his empire's corporate governance practices are likely to multiply over the next few months
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In the aftermath of a damning report by Hinderburg Research, which accused the Adani group of "brazen stock manipulation and accounting fraud", the American investment research firm and the Indian conglomerate are caught in a war of words. Consequently, the latter has lost over $70 billion in market value, which may not yet be the total extent of the damages incurred.
If Hindenburg's track record is anything to go by—the short-seller's past findings have spelled disaster for companies across the globe, including Nikola, Lordstown Motors, WINS Finance, Clover Health, etc.—Gautam Adani may have to weather a long storm as questions around his empire's corporate governance practices are likely to multiply over the next few months.
Major Exposés in the Past
In September 2020, Hidenburg published a report against EV startup Nikola Motor, alleging deceptive public statements and representations of its technology and business. Consequently, founder Trevor Milton resigned from the position of chairman and CEO as he failed to deliver any credible rebuttal against the accusations. In the following months, the US Department of Justice and the Securities and Exchange Commission (SEC) investigated Milton for securities fraud, with a grand jury indicting him in July 2021. While Nikola Corporation had already cut ties with him by then, in October last year, Milton was found guilty of three of four counts of fraud in federal court and currently likely faces up to 20 years in prison. Similarly, in March 2021, the shares of another electric automaker, Ohio-based Lordstown Motor Cooperation, fell about 18-20 per cent immediately following Hindenburg taking a short position on the truck maker's stock.
Not only in the US, but companies based out of other countries—China, for instance—have borne the brunt of Hidenburg's investigations into their fraudulent activities: While China Metal Resources Utilization's accounting irregularities and financial problems were revealed in May 2020, WINS Finance's frozen assets in China, undisclosed to US investors, was brought to limelight in June the same year. Following these revelations, the former was delisted from NASDAQ and the latter's shares plummeted over 90 per cent.
In several other cases, Hindenburg reports have caused target companies many a difficulty: falling share prices (Bloom Energy, J2 Global, Loop Industries are just a few instances), regulatory investigations (for e.g., Chamath Palihapitiya-backed Clover Health Investments is under an SEC investigation), failed deals and acquisitions (nearly five years after the announcement, insurance giant Genworth Financial's planned merger with China Oceanwide was cancelled, much as Hindenburg had predicted).
For an activist short-seller like Hindenburg Research, knowledge is indeed power. The firm engages in financial forensic research over several months or even years by examining a target company's public records and internal trade documents, in addition to interviewing employees and conducting site surveys. The resultant reports are used by Hindenburg and its limited partners to together take a short position in the target company and profit from any decline in the latter's shares. On the rare occasion that the firm is unable to access requisite facts to confirm potential frauds in a target company, it even promises hefty financial rewards to those who can fill in the blanks—a case in point being the $1million bounty announced by Hindenburg for details on the world's largest stablecoin, Tether. Evidently, the possible gains from the veracity of its reports are high enough for Hindenburg to root its allegations more in fact than fancy. That may be a cause for great worry for the Adanis, Hinderburg's latest targets.