FOIAengine: EARLY WARNINGS ABOUT ACTIVIST SHORT SELLERS
Hindenburg Research takes its name from an infamous event that happened 86 years ago when a German airship crashed and burned in New Jersey as it completed a transatlantic crossing.
The company’s founder, financial analyst Nathan Anderson, left the hedge-fund world in 2018 for an even bigger high-wire act as an activist short-seller: a trader who looks for looming disasters among public companies, exposes it, and then profits when investors dump the stock.
Short selling is a legal trading strategy. The short seller identifies an overvalued target, borrows shares in that company, and then sells them at the current market price. Later on, the short seller “covers the short” by buying back the stock at a hoped-for lower price, pocketing the difference. The goal is to profit from the future decline in the stock price. Activist short sellers take that one step further, typically publishing a research report that makes their case against the company, and then widely disseminating it across online platforms like Twitter in the hope that others will join the selling and drive the stock price down even more.
The best-known short sellers have cult followings on social media and websites devoted to ranking their successes – and, often, their noteworthy failures. They’re reviled by the companies they target and the shareholders who suffer losses. But Hindenburg’s Anderson is unapologetic. He lets his reports do the talking. Case in point: In 2020, Hindenburg published a report that revealed fraud at Nikola, the electric truck maker. The stock plummeted, billions of dollars in shareholder value were wiped out, and the company’s founding CEO, Trevor Milton, was criminally charged and convicted of securities and wire fraud. Short sellers made a killing. Nikola, once seen as a Tesla rival, saw its stock price fall from a pandemic high of $65.90. When we last checked a few days ago, it was $1.48.
“We view the Hindenburg as the epitome of a totally man-made, totally avoidable disaster,” Hindenburg’s website says. “Almost 100 people were loaded onto a balloon filled with the most flammable element in the universe. This was despite dozens of earlier hydrogen-based aircraft meeting with similar fates. Nonetheless, the operators of the Hindenburg forged ahead, adopting the oft-cited Wall Street maxim of ‘this time is different’. We look for similar man-made disasters floating around in the market and aim to shed light on them before they lure in more unsuspecting victims.”
Last Thursday, March 23, Hindenburg made a move against its latest target: Block, Inc., the payments processor formerly known as Square. The company is helmed by Twitter co-founder Jack Dorsey and has been in high-growth mode through its Cash App platform. Hindenburg accused Block of a “Wild West” approach that wildly inflated user counts by as much as 75 percent and enabled fraud and prolific criminal activity, including payments for illegal drug sales and sex trafficking.
Block issued an immediate denial, but Hindenburg’s report was taken seriously by traders. Block shares immediately fell by 20 percent, and closed the day down more than 15 percent, wiping out almost $7 billion in share value.
Hindenburg said its research spanned two years and “involved dozens of interviews with former employees, partners, and industry experts; extensive review of regulatory and litigation records; and FOIA and public records requests.”
That last comment caught our attention, because FOIA requests can be an important early warning of bad publicity or litigation to come. That is why PoliScio Analytics’ competitive-intelligence database FOIAengine tracks FOIA requests in as close to real-time as their availability allows. Of particular interest are requests that may significantly affect stocks and markets once the stories hit.
So we checked our database to see what requests Hindenburg or its founder, Anderson, might have made. It was a longshot, because there’s not a lot on the public record about him. Like most everyone in his line of work, he avoids sending signals before his reports drop. He reportedly has a nine-person operation with an office somewhere in Manhattan — he won’t say where, and his website doesn’t list anyone else on his team.
FOIAengine didn’t have any requests in its database from Anderson or Hindenburg about Block. But earlier this year, on January 10, Anderson did, indeed, make an FOIA request to the Securities and Exchange Commission about a different matter. He wanted documents relating to the social-media influencer and WWE wrestler Logan Paul, and Paul’s NFT project called CryptoZoo. CryptoZoo was a game in which players could hatch and breed hybrid NFT animals that could gain in value over time. The game has since been shut down. Investors lost money. Paul has apologized. Litigation is pending. Anderson didn’t respond to questions sent to the email address that Hindenburg publicizes for tips and questions.
We wondered if anyone else had recently asked about Block. As to that, we found some things of interest. Last November, and then again last month, on February 3, a researcher made very specific requests to the SEC for investigative records about Block and its Cash App, as well as “any documentation and internal/external correspondence related to any investigation of Block” – requests seemingly on point with the bombshell that Hindenburg released seven weeks later.
The requester, Christine Richard, is an independent corporate investigator with a company called Orion Research. She has done investigative work for short sellers. She’s also a former Bloomberg reporter who, according to a 2017 profile in the New Yorker, was the catalyst for a notorious short-sale campaign that went terribly wrong. The short-sale play was against Herbalife, the nutritional-supplement company. The New Yorker reported that, based on evidence gathered by Richard, billionaire hedge-fund manager Bill Ackman put Richard under contract to his Pershing Square Capital Management and massively shorted the company’s stock, calling it a fraud. Another billionaire, Carl Ichan, took the other side, eventually becoming Herbalife’s largest shareholder. According to Docket Alarm, there was a lot of litigation.
It made for compelling theater on CNBC as the two billionaires fought it out. Ichan called Ackman a “crybaby,” and “a liar.”Later, they reconciled. Although the FTC subsequently fined Herbalife, its share price didn’t suffer. Seven years after Richard brought the idea to Ackman, he finally unwound his position, a $1 billion bet gone wrong. Richard didn’t respond to our questions about her FOIA requests and current clients.
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John A. Jenkins, co-creator of FOIAengine, is a Washington journalist and publisher whose work has appeared in The New York Times Magazine, GQ, and elsewhere. He is a four-time recipient of the American Bar Association’s Gavel Award Certificate of Merit for his legal reporting and analysis. His most recent book is The Partisan: The Life of William Rehnquist. Jenkins founded Law Street Media in 2013. Prior to that, he was President of CQ Press, the textbook and reference publishing enterprise of Congressional Quarterly. FOIAengine is a product of PoliScio Analytics (PoliScio.com), a new venture specializing in U.S. political and governmental research, co-founded by Jenkins and Washington lawyer Randy Miller. Learn more about FOIAengine here. To review FOIA requests mentioned in this article, subscribe to FOIAengine.