How a short seller became an unlikely due diligence hero

Harry CassinPublisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Bill Steinman Senior Editor

Richard L. Cassin Editor at Large

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauroContributing Editor

Thomas Fox Contributing Editor

Marc Alain BohnContributing Editor

Bill Waite Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor

Eric Carlson Contributing Editor

Hindenburg Research, a forensic research-based short selling outfit, regularly uncovers alleged fraud and gross over-valuations at publicly traded companies, and makes a fortune doing it. What are Hindenburg's due diligence secrets? What can the rest of us learn from its methods?

For those not familiar with Hindenburg, here's a quick highlight reel.

The firm entered mainstream consciousness when it published a report in 2020 alleging massive fraud at white-hot EV startup Nikola. Two years later, Trevor Milton, Nikola's founder, was convicted of fraud and faces up to 20 years in prison. He's free on $100 million bond and will be sentenced later this month.

Hindenburg's January 2023 report accused India's flashiest conglomerate, Adani Group, of stock manipulation, accounting fraud, and corruption. The stock is currently down around 40 percent for the year. Adani has denied all of Hindenburg's allegations.

This week, Hindenburg published a report about African conglomerate Tingo, alleging the whole operation — once valued at $1.5 billion — is a fraud, with phony products, customers, and revenues. Tingo's stock is down 80 percent at our publication time.

How does Hindenburg uncover these companies? Well, it does due diligence basics really well.

Auditing the auditors

Forensic accounting is the heart of due diligence. Hindenburg and its founder Nate Anderson are good at it. They don't accept audit results on their face and instead look behind what the auditors say. They question what the target companies evidently tell their own auditors.

(In Tingo's case, the auditor is an Israeli firm, Brightman Almagor Zohar & Co., part of Deloitte's global network.)

Site visits

Hindenburg does the legwork. It visits places where offices, factories, service centers, and even construction projects are supposed to be and checks if they are really there. Often they aren't.

It obtains incorporation records and cross-references beneficial ownership and common incorporators, officers, and board members. It visits buildings listed as registered offices and checks building directories, noting any related companies in the same locations or supposed customers sharing the same addresses.

It always asks, "Is the company making and selling the stuff they say they are?"

Digging deep for self-dealing

Hindenburg looks for self dealing and related-party transactions. Has a company done deals at unrealistic values with parties it is somehow connected to, perhaps through a common shareholder or relative or close associate of the shareholder? Has it sold assets to related parties at inflated prices or booked revenue from non-arm's length contracts? If so, has it all been disclosed in ways potential investors would understand?

Misleading visuals on published materials

A common theme in Hindenburg's reports is the target company's liberal use of stock imagery on annual reports and promotional materials, or doctored photos that may be misleading.

For example, Hindenburg's latest report says Tingo — the Africa conglomerate — allegedly shows another company's point-of-sale device on its website with the Tingo logo photoshopped on it. Tingo also allegedly photoshopped its logo on pictures of planes and posted them to an Instagram page. And renderings of Tingo's planned food processing plant are allegedly a stock photo of an oil refinery.

Here's what Hindenburg said about a video Nikola posted touting the advanced development of its flagship electric truck. The video showed the truck "driving" at speed down a long stretch of road:

Our investigation of the site and text messages from a former employee reveal that the video was an elaborate ruse—Nikola had the truck towed to the top of a hill on a remote stretch of road and simply filmed it rolling down the hill.

Not relying on others’ due diligence

Some companies Hindenburg examines have partners that claim to have run extensive due diligence. Two days before Hindenburg published its report on Nikola, GM committed to a roughly $2 billion deal to support the EV company. After the Hindenburg report, GM CEO Mary Berra said her company had performed "appropriate diligence."

Following publication of Hindenburg's report, GM scaled back most of its deal with Nikola and scrapped its planned acquisition of an equity stake.

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We’ve written before about "ridiculously visible red flags" overlooked in high-profile disasters like FTX, Theranos, and Madoff. And it keeps happening.

If you’ve never read a Hindenburg report, start with the most recent one, Tingo. You’ll get to the end and say, "Why didn't everyone see this?"

Hindenburg's secret is that it's doing the due diligence basics.

Publisher and editor of the FCPA Blog.

He's the CEO of Recathlon LLC. The firm provides global compliance information and data services and is the owner of the FCPA Blog. He lived and worked in Asia (Singapore and Hong Kong) for many years and joined the FCPA Blog in 2010. He holds an IACA Level 1 anti-corruption expert qualification and an undergraduate degree from Valparaiso University in international economics and Chinese.

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