Buyer Beware
The founder of Hindenburg Research, Nate Anderson, is closing his shop. The stock market is losing a valuable, and singular, contributor. While most research shops truck in optimism—Buy into this untapped trillion-dollar market! Buy the next Amazon for $1 per share! Buy, Buy, BUY! — Hindenburg was different. As its name implied, Hindenburg focused on disasters. It went looking for Ponzi schemes and frauds, and it often found them.
Active for about 8 years, Hindenburg would publish an in-depth post almost monthly. Lo to the owners and managers of its targets, as it was not uncommon for a Hindenburg report to tank a stock’s price and ruin a management team’s day. Crucially, Hindenburg chose its targets carefully. According to Anderson’s goodbye post, Hindenburg’s research led to criminal or civil charges against nearly 100 people, “including billionaires and oligarchs.” The vast majority of those targets got what they deserved in my estimation. Good on Hindenburg!
Not everybody agreed with Hindenburg’s methods for publishing and monetizing its research, but as far as I can tell the market’s honorable players only had small quibbles. On the other hand, Hindenburg’s attackers were generally corrupt executives and, sadly, the naive investors who stood up for them because they owned unwisely large stakes in Hindenburg’s targets.
Anderson and Hindenburg faced multiple lawsuits through the years. Anderson writes that he faced eviction at one point and was saved by a sympathetic attorney willing to work cheaply. I don’t know how many lawsuits there were, and I could not possibly speak to whether any were merited. I do know that if you call an honest man a liar he will generally apologize for giving you that impression. If you call a liar a liar he will fight you like his life depends on it. So it goes with companies as well. The worst villains make themselves the most fearsome opponents.
I never had much practical run-in with Hindenburg’s work, but I always found it amusing. If you care about the integrity of the stock market and the overall financial system, then you have to smile whenever the bad guys lose.
They don’t lose often enough for my taste. Here is one story I can share. Way back in 2011 I was given a list of stocks to follow and, potentially, buy for clients someday. One of the names on that list was Ebix, Inc, a provider of software solutions and labor outsourcing to the insurance industry. Ebix reported steady growth, and shares traded at low multiple of earnings. It looked like a screaming opportunity at first glance. If shares had not been quite so cheap I might have been tricked into really liking it.
But something had to be amiss. Indeed, red flags were easy to find once I got motivated to look. The company cycled through auditors. Message boards hinted at cash flow irregularities masked by acquisitions. Press releases carried shameless hype. The CEO showed narcissistic tendencies. Short sellers had accumulated a heavy bet against the company. I booted Ebix off my coverage list.
In truth, the company was playing shell games and reporting financial results that did not square with reality. Nonetheless, the stock continued to muddle along for over ten years, occasionally even spiking higher during frothy markets. However, finally, in mid-2022 during a market downswing Hindenburg came out against Ebix with a report that finally crushed it for good. In 2023 Ebix filed for bankruptcy protection.
The fact is that there is an astonishing amount of fraud in the stock market. It is not just limited to penny stocks or Indian or Chinese companies. It is everywhere. History more or less promises that there are currently some well-known companies, considered reliable blue chip investments, which will eventually be revealed as dishonest. I just cannot tell you for sure which ones they are. I have suspicions, but those could be wrong. Some of the companies I suspect will probably turn out fine. On the other hand, I fully expect to be shocked someday when the gig is suddenly up for a name that almost nobody would have suspected of malfeasance. Look at the history of the stock market. It has always been thus. Enron and WorldCom were blue chip growth companies for years.
As investors, we cannot rely on the regulatory or the judicial apparatus to protect us from all bad actors. People impugn the SEC for being bad at its job, but this is unfair. The truth is that the financial world is simply too big and too complicated to control. Law enforcement punishes criminals rather than preventing crime in the first place. The investor needs to be their own protector and perform their own diligence.
In theory, the big listing exchanges are supposed to provide a certain measure of investor protection. They don’t. I shook my head recently when listening to the true crime podcast The Sit Down. The guest was talking about his experience as a stock manipulator. The host asked him (I paraphrase) whether his fraud was as simple as inventing a company with no real operations and trading its shares back and forth at ever-higher prices to attract retail investors? The guest answered that, yes, it was pretty much that simple. There was a small complication that first you had to get the company listed on the NASDAQ small cap market. He said it as simply as if he were measuring out a cup of flour before baking a loaf of bread. Create the fake company. List the fake company on the NASDAQ. Bake investors for thirty minutes at 375 degrees. Yikes! Capitalism attracts money, and money attracts fraudsters. Professional short sellers make money, in part, by pinpointing fraud. They are part of what makes capitalism and markets work.
I am a little nervous for the market, which has been on a spectacular run over the past two years. Hindenburg closing down seems like the kind of thing you see at the top of a market. It is hard to make money betting against stocks when everyone wants them to go up, and they mostly comply. They say the rally ends when the last bear quits. We could be there. Time will tell.
By the way, Ebix emerged from bankruptcy in late 2024 as a unit of Eraaya Lifespaces, whose shares trade on the Bombay Stock Exchange. The same CEO is still in charge of Ebix. In a press release, the company brags, “Ebix exited Chapter 11 in a record period of less than 9 months.” A record period! I have a terrible feeling that this company could come back to the U.S. market within a record period as well. If it does, then it is sad that Hindenburg won't be around to research it.
Miles Putnam, CFA®