Hindenburg research made big news this past week plying their by-now familiar trade: exposing “fraud” at a major company that they just happen to have placed huge short bets against.

This time it was Jack Dorsey’s Block (formerly known as Square payments).

Stock prices for Block plunged 16 percent on the release by Hindenburg, according to CNBC.

While there’s nothing illegal about digging and releasing dirt on a company while taking short positions against it, Hindenburg has made a name for itself—and grown into a 1.34 billion dollar company since its founding in 2017—off this “expose and profit” model.

MSM fell into line on Hindenburg’s newest “research” release, breathlessly reporting on allegations Block was inflating user base numbers, and how its Cash App was being used to facilitate illegal activities like drugs and sex trafficking.

The report also said Block was using a legal loophole to avoid a cap on its percentage of income derived from interchange fees.

Block rival Paypal reportedly uses the same loophole of routing the revenue in question through a small bank, to avoid the cap imposed on large financial institutions.

“A Freedom of Information Act (FOIA) request we filed with the SEC indicates that Block may be part of a similar investigation,” Hindenburg said in its report, according to CNBC.

Self-Interested Short-Seller vs. Corporate Fraudsters?

If Hindenburg Research truly confined itself to research for the public or clients, and not orchestrating highly publicized releases plainly designed to trigger runs on companies, they might deserve more credit.

A NYMag profile of company founder Nathan Anderson in early January 2022, detailed how the short seller had come up from the cavernous avenues of Wall Street via his “private detective” digging against scammy start-ups and SPACs.

One of Anderson’s more notable take-downs involved Nikola, a truck company which promoted itself based on “innovative” technology it didn’t have. Sort of like what Microsoft did for about a decade in the 1980s with its Windows operating system. 

By 2020 Anderson was doing very well, including scoring “five of the top-ten short calls of 2020, according to the research firm Breakout Point.” 

The NYMag article portrayed Anderson’s main motivation as being the “fun” of outing malfeasance: 

“He has investigated alleged ties between a Colombian drug cartel and the owners of a glass company profiting from Miami’s pandemic building boom. For a report on a dubious biotech firm, he infiltrated a sales meeting by feigning a sports injury. He has delved into old-fashioned pump-and-dumps, COVID profiteers, and a do-it-yourself orthodontics scheme.”

Was the dubious biotech firm Moderna? Unfortunately, no.

Hindenburg’s business model has gone from “profit-exposing” pretty clear-cut start-up and other frauds, to more dubious, grandly executed short-selling assaults against higher profile and exponentially more lucrative targets.  

Hindenburg reached new heights in January 2023 with a high profile operation against Adani Group, an India-based conglomerate owned by Gautam Adani, one of the world’s richest persons.

Adani Group has holdings in mining, energy, airports, food processing, weapons manufacturing, and more.

A report from February detailed questionable practices that Hindenburg employed, surrounding what became a 100 billion devaluation of the Adani Group’s share price:

An initial probe by government agencies has revealed that the bear cartel targeted Adani companies through the use of structured product derivatives (SPDs) – potent stock market instruments, tailor-made by foreign brokers for large clients in offshore jurisdictions. These SPDs are similar to the controversial participatory notes in many ways since the identity of the actual clients stays hidden, unless the regulators lift the veil.

As per India’s tax and SEBI laws, short selling of domestic stocks outside the country’s jurisdiction is illegal unless they are listed on any exchange. But the probe reveals that billions of dollars worth of trading took place in Adani group stocks outside the country, which had a domino effect on India-listed shares as the volatility increased. The biggest clue of the overseas short selling in Adani stocks came from Hindenburg, which claimed to have targeted the group citing fraud and sky-high valuations. 

The article noted that an operation to short sell Adani likely began weeks before the Hindenburg report, which itself was timed for release to capitalize on a monthly derivative market expiry in India, when volatility is usually high. 

According to the article, a huge build-up in positions was necessary to spur a rapid downward spiral at the allotted time.

Hindenburg acknowledged when it released its report that it held short positions in Adani, through bonds and non-Indian-traded derivative instruments.

Is Hindenburg Research Engaged in Illegal or Unethical Activity?

The question isn’t whether Adani or Block or other companies deserve scrutiny over deceptive or corrupt practices.

But the problem is Hindenburg looks as scammy as the corruption it purports to be exposing.

According to Bloomberg, Hindenburg has targeted nearly 30 companies since 2020, and their report releases result in average same-day company stock losses of about 15 percent.

Its calculated attempts to drive down stocks in panic runs, hurts a lot of average people.

What Hindenburg is doing is not dissimilar to “commentators” with connections to hedge funds shorting GameStop, who went on financial news programs in 2021 to talk down that company. 

As the University of Sydney (UNSW) newsroom business law section pointed out in February regarding Hindenburg’s move against Adani:

“What complicates this report is that Hindenburg Research isn’t just a research company. It’s an ‘activist short seller’, with a financial incentive in seeing Adani’s stock price fall.

“Hindenburg makes its profits by identifying ‘man-made disasters floating around in the market’. It bets on the stock falling, then publicises that company’s negatives – including doing so in Adani’s case”

The UNSW Sydney article suggested Hindenburg Research was itself on the edge of illegal manipulation, noting that revealing information not generally known in order to sway markets, could be construed as Insider Trading:

“[I]t would be illegal to bet on a company’s future share price using information that is not generally available, then reveal that information. On this, Hindenburg Research is skating on thin ice with some of its assertions.” 

The article goes on to note:

“Exposing fraud is in the public interest. There must be some financial incentive to do such work. Existing shareholders are losing from Adani’s stock tumble, but that should properly be credited to the alleged fraud, not the report.

“Ultimately, then, companies such as Hindenburg are generally a net positive if they comply with all relevant laws, securities regulations and privacy guidelines.

“If the report is truthful, blaming Hindenburg for Adani’s crash is like blaming an alarm for a fire.”

“Truthful” can be a hard nut to crack. Selective negative facts can certainly be leveraged to paint an inaccurate picture of a company’s overall financial health or position.

And precipitating a run on any stock will hurt a company, however previously solid or solvent.

Despite these kinds of concerns, MSM was happy to jump again to contribute to Hindenburg’s latest bonfire torching Block.

For its part, Block said the new Hindenburg report was “inaccurate and misleading,” according to Bloomberg, and said it was considering taking legal action. 

Influential Financial blogger Seeking Alpha, after pouring through Hindenburg’s report on Block, characterized much of it as “nothingburgers,” and summarized: “Hindenburg points out something Block could do better and a risk, but I don’t see any big red flags.” (In “The Hindenburg Block Short Report Examined In Detail,” 24 Mar 2023.)

And the blog gave this assessment of what short sellers like Hindenburg do:

“When it comes to short reports, you always have to be careful. As I said, they are meant to make money. That means they use language as spectacularly as possible. Short reports make British tabloids sometimes look like choir boys.”

The Trends Journal contacted Hindenburg via email seeking comment, but received no reply.

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