In a short space of time, Hindenburg Research LLC has gone from a niche activist investment firm to a US$50bn-sized headache for Asia’s richest man Gautam Adani.
A lengthy research piece filled with damning allegations backed up by extensive research into Adani’s Indian business empire has caused massive losses for Adani Group’s seven separate listed industrial companies and thrown a spanner in the works for a pending equity fundraise.
But before we get onto that, let’s ask, who is Hindenburg Research?
The Big Short
Unsurprisingly for a firm named after the 1937 airship disaster, the New York-based, Nathan Anderson-founded Hindenburg Research loves a good short-selling opportunity, i.e. betting on a share or asset class to crash and burn.
Hindenburg doesn’t necessarily use such blunt terminology. In the young firm’s words: “We often look for situations where companies may have any combination of accounting irregularities; bad actors in management or key service provider roles; undisclosed related-party transactions; Illegal/unethical business or financial reporting practices; undisclosed regulatory, product, or financial issues”.
For the uninitiated, short selling works when an investor borrows shares at a certain price, sells them on, waits for the shares to fall, buys them back, then returns them to the original lender for the original borrow price.
It’s a clever trick, but extremely, extremely risky, since the downside potential is theoretically unlimited- if the shares go the other way and skyrocket in value, the short seller will be forced to return them to the original lender at a massive discount.
Some people hate short sellers. It’s not hard to see why; nobody wants an investor to bet on their company falling in value, but John Stepek from Bloomberg UK suggests paying close attention to them.
“If you’re going to go short, you need to have high conviction. It’s a high-risk strategy… If experienced investors are willing to put their money on the line in this way, then it makes sense to pay attention, particularly if you own stock in the target company,” stated Stepek.
Criticise Hindenburg if you must, but lacking in due diligence the firm is not.
In 30,000 words, the firm outlined its two-year investigation into Adani, comprising dozens of interviews including former Adani executives, a review of thousands of documents, and a comprehensive due diligence breakdown of site visits in almost half a dozen countries.
For context, Albert Camus’ classic existential novel The Stranger comes in at around 30,750 pages.
What does the report say?
It would be impossible to summarise everything in this article, but thankfully Hindenburg offered a top-line overview:
“We have uncovered evidence of brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades.
Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities.”
Shell (LON:RDSa) companies, nepotism, diamond-trading scams and tax fraud feature throughout the document.
As a result, “we have taken a short position in Adani Group Companies through US-traded bonds and non-Indian-traded derivative instruments,” Hindenburg stated.
American billionaire and hedge fund manager Bill Ackman has called the report “highly credible” and “extremely well researched”.
"Adani's response to Hindenburg is the same as Herbalife (NYSE:NYSE:HLF)'s response to our original 350-page presentation. Herbalife (NYSE:HLF) remains a pyramid scheme. I found the Hindenburg report highly credible and extremely well researched," Ackman said in a Thursday Tweet.
Pretty damning words, and the market reaction was equally brutal.
Shares plummet
Adani shares witnessed a US$50bn (£40bn) rout this week as investors pulled out while they still could.
Adani Enterprises, the group’s flagship listed company, fell as much as 20%, while Adani Green Energy and Adani Transmission both fell around 25% each.
The plummet comes at a bad time for founder and Asia’s richest man Gautam Adani, who is pushing ahead with a $2.4bn share offer targeted at international investors.
Adani has stated that the sale will still go ahead.
On Hindenburg’s allegations, the company called the report “a malicious combination of selective misinformation and stale, baseless and discredited allegations” intended to “undermine the Adani Group’s reputation”.
Legal action has been threatened, but Hindenburg doesn’t seem phased.
“If Adani is serious, it should also file suit in the US, where we operate,” said Hindenburg, before throwing in a veiled threat for good measure: “We have a long list of documents we would demand in a legal discovery process.”
Whether the market rout is justified, or simply Hindenburg’s self-fulfilling prophecy, remains to be seen.
Hindenburg’s track record
In September 2020, a report by Hindenburg Research accused the EV company Nikola Corporation of being "an intricate fraud built on dozens of lies" and implicated its founder, Trevor Milton, in the fraudulent activities.
The report caused the company's stock to drop by 40% and prompted a Securities and Exchange Commission inquiry.
Milton initially denied the allegations but later resigned as chair. He was found guilty of wire and securities fraud. Nikola “incurred significant expenses as a result of the regulatory and legal matters relating to the Hindenburg Report”, the company stated at the time.
In June 2020, Hindenburg determined that a Chinese subsidiary of WINS Finance, pointing out that a company subsidiary in China was subject to a high-value asset freeze which was not disclosed to US-based investors.
In October 2020, NASDAQ delisted WINS specifically due to the undisclosed asset freeze identified by Hindenburg.
In December 2018, Hindenburg wrote about Yangtze River Port & Logistics, a China-based logistics company with a US$2bn market cap.
The investigation found that the company's key asset did not appear to exist.
The company was delisted from NASDAQ six months later and lost over 99% of its market cap. A lawsuit filed against Hindenburg was subsequently dismissed.
Hindenburg had short orders on all of the above.