September 25, 2021

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A Skeptical Stock Analyst Wins Big by Seeking Out Frauds

7 min read

Last month, federal authorities charged the founder of the electric vehicle manufacturer Nikola, which had gone public in the summer of 2020, with defrauding investors. They were led there partly by the work of a little-known Wall Streeter named Nathan Anderson.

A stock researcher and investor, Mr. Anderson and his upstart firm, Hindenburg Research, are having a moment. In early August, the Securities and Exchange Commission subpoenaed the sports betting firm DraftKings after Hindenburg said in a June report that it had potentially enabled black-market betting. And shares of Lordstown Motors have fallen nearly 70 percent since Hindenburg said in March that the electric truck maker was hyping commercial interest for its vehicle. Federal authorities are investigating Lordstown’s claims.

Mr. Anderson’s five-person firm, which takes its name from the German airship that blew up in 1937, is a newbie in the world of finance. Founded in 2017, Hindenburg specializes in publishing detailed reports about publicly traded companies, poking holes in their stories and alerting investors to potential malfeasance. The boom in special purpose acquisition companies has provided Hindenburg with fertile ground.

It’s not an act of public service. Hindenburg, which has the backing of several investors, also makes financial bets that the stocks of the companies Mr. Anderson is targeting will fall after the firm issues its research. When the stocks do fall, Hindenburg makes its money in what is called a “short” trade.

“He’s become a real giant killer,” said Frank Partnoy, a former derivatives trader who is now a professor of securities law at the University of California, Berkeley, School of Law. He “seems fearless, even when going after some of the biggest corporate targets.”

Mr. Anderson has emerged as the newest face of a small club of investors called activist short sellers — a style of investing popularized by Carson Block of Muddy Waters and Andrew Left of Citron Research. Such investors are often reviled by companies for their pugilistic tactics. Ordinary investors hate them because their investments can suffer. Short sellers see themselves as financial detectives, sniffing out corporate wrongdoing or inflated stock prices. Some, like Mr. Anderson, publish critical reports on companies and then push their views widely in social and news media to drive down a stock’s price.

At the same time, they build a short position in the stock, borrowing shares of a target company from a brokerage firm and then selling them, expecting the stock price will fall on account of their negative research. If the stock does fall, the short seller buys the now-cheaper shares back, returns them to the broker and pockets the difference. But the strategy can be risky because the stock could instead rise.

On July 29, when federal authorities announced they had charged Trevor Milton of Nikola with securities fraud, the company’s shares plunged 15 percent. Mr. Anderson could not resist taking an online victory lap. The government’s actions were a “testament to the role of short sellers and critical researchers” in fostering a well-functioning stock market, he wrote on Twitter.

In a recent interview, Mr. Anderson said he felt vindicated. “But more than that, I’m glad we’re starting to make a real-world dent,” he added. “If the only impact was stock prices moving around, the work would be far less satisfying.”

Mr. Anderson, 37, is the son of a college professor and a nurse who grew up in a small town in rural Connecticut and earned a business degree from the University of Connecticut. During college, he lived for a time in Israel, working as a paramedic while taking classes at Hebrew University.

After college, Mr. Anderson took a job providing sales and technical advice to institutional clients of FactSet, a financial analytics company. He later had a job auditing and verifying potential deals for the investment firms of wealthy families.

But his passion, he said, was to “find scams.” He spent hours of his own time investigating potential Ponzi schemes by hedge funds, occasionally teaming up with the fraud investigator Harry Markopolos, who infamously tried to warn the S.E.C. in 2000 about wrongdoing at Bernard Madoff’s firm. When a small brokerage firm Mr. Anderson had established to provide due diligence services to hedge funds faltered, he sold his brokerage license and started Hindenburg.

“I didn’t plan it this way,” Mr. Anderson said. “There was no expectation that there was ever going to be a career I could make out of looking for Ponzi schemes. It was a side hobby that my employers were sometimes annoyed by.”

Working from a WeWork office in Midtown Manhattan, Mr. Anderson focused on shorting the stocks of lesser-known companies. He desperately needed a win. The debts were piling up, and he was in danger of being evicted from the Manhattan apartment he shared with his girlfriend, now fiancée. His lucky break came in December 2018, when he wrote a report with a hedge fund on the medical cannabis company Aphria. Hindenburg said the company’s insiders were using shell companies to “divert funds away from shareholders into their own pockets.”

Immediately after the report was published, Aphria shares plummeted 30 percent. The profits from the short bet allowed Mr. Anderson to stay in his apartment. Had the bet fallen through, said Mr. Anderson, who has a young daughter, he might have had to get a “real job” with a reliable income.

Today, Hindenburg employs a mix of former journalists, including from Bloomberg and CNN, and analysts, who have all been working remotely during the pandemic. The firm can take six months or more to produce a finished research report, which entails going through public records, talking to company employees and hunting for internal corporate documents. About 10 deep-pocketed investors bankroll some of the firm’s operations, and some of them make their own short bets alongside Hindenburg. Mr. Anderson declined to disclose the names of his investors.

“It has become a successful enterprise,” he said of his firm. “But it was very hard early on to fathom that anything would turn out of it.”

The boom in SPAC deals — such companies have raised nearly $200 billion since the beginning of 2020 — has provided rich material for Hindenburg to investigate. Sometimes called a “blank check” company, a SPAC raises money from investors through a public offering and has two years to find an operating business to merge with. Many companies that go public via this route undergo far less scrutiny than they would in initial public offerings.

Last summer, two whistle-blowers provided Hindenburg with a tip about Nikola, the electric truck maker that had gone public in June 2020 via a $700 million merger with a special purpose acquisition company called VectorIQ.

The whistle-blowers, former business associates of Mr. Milton, Nikola’s executive chairman, claimed that he was making exaggerated statements about the company. A few months later, Hindenburg published its report, calling Nikola an “intricate fraud built on dozens of lies.” According to the report, Nikola put out a promotional video to suggest it had a working prototype for its truck — without disclosing that the truck was moving only because it was rolling down a hill in neutral gear. Mr. Milton resigned a few weeks later, and the authorities began investigating.

Mr. Milton’s lawyers have denied the charges, and the company has said it cooperated with authorities. DraftKings, in disclosing the S.E.C. subpoena, said it would cooperate with the investigation.

“Nate’s killing it right now,” said Mr. Block of Muddy Waters. He added that Hindenburg found issues with Nikola that his own firm had looked for and missed.

“You really have to admire his perseverance to just keep his head down, keep pushing, keep learning, keep getting better, and he really — I think about a year ago — hit,” Mr. Block said. “And he did that with Nikola.”

Mr. Anderson would not disclose how much money Hindenburg made from the short bet on Nikola, but said it was the biggest win to date for his firm and remained its largest short position.

The Nikola report’s big splash led Hindenburg to another fledgling electric vehicle company: Lordstown Motors. Lordstown was also planning to go public through a SPAC and had earlier attracted the attention of former President Donald J. Trump as well as General Motors, which sold the company its assembly plant in Lordstown, Ohio.

Mr. Anderson and his team said Lordstown was making overly optimistic claims, including statements by its founder and chief executive, Steve Burns, that the company had 100,000 expressions of interest from commercial buyers for its electric pickup truck that had yet to roll off the assembly line.

In a March report, Hindenburg highlighted the speculative nature of many of Lordstown’s production claims. In June, Mr. Burns left Lordstown along with other members of his management team. Around the same time, the company said it desperately needed cash to survive and produce its first vehicle.

“There are just so many outrageous companies,” Mr. Anderson said. “Some of these companies we have looked at, they don’t have any revenues at all.”