‘Ponzi-like’: Wall Street titan loses $15b in one day after short-seller attack

Carl Icahn, the famed activist investor who’s made a career out of starting corporate brawls, found himself on the receiving end of criticism after Hindenburg Research disclosed a short call against his investment firm.

Shares of Icahn Enterprises closed 20 per cent lower, its biggest drop on record, after Hindenburg claimed in a lengthy report that the company is overpriced, and said it found evidence of inflated valuations for some of its assets.

Carl Icahn’s investment firm suffered a double-digit drop after a report by short-seller Hindenburg Research. Credit: Bloomberg

The share price wiped more than $US10 billion ($15 billion) from his fortune, according to Bloomberg, All told, Icahn’s fortune sank by an unprecedented 41 per cent to $US14.6 billion, dropping him from the world’s 58th-richest person to the 119th.

“We think Icahn, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well,” Hindenburg said in the report.

In a statement, Icahn called the report “self-serving” and “intended solely to generate profits on Hindenburg’s short position.”

The missive pits Icahn, 87, against Hindenburg’s founder Nathan Anderson, who’s made a name for his research firm in recent years by targeting corporate giants like payments company Block and billionaire Gautam Adani’s business empire.

In Tuesday’s report, Hindenburg claimed Icahn Enterprises’ value is inflated by 75 per cent or more, noting that it trades at a premium of more than 200 per cent to its net asset value. Other closed-end holding companies like Dan Loeb’s Third Point and Bill Ackman’s Pershing Square trade at discounts to their NAV, according to Hindenburg.

The report also raises questions about the size of Icahn Enterprises’ dividend yield and the way in which it has been financed in recent years.

“Icahn has been using money taken in from new investors to pay out dividends to old investors,” Hindenburg said in the report.

“Such Ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one ‘holding the bag.‘”

While Hindenburg has been active since 2018, when Anderson incorporated the company from an apartment in New York, Icahn has been stalking the corporate world for around 50 years.

A decade ago, he and activist hedge-fund manager Bill Ackman went to war over Herbalife, with Ackman calling the nutritional-supplements company’s model a pyramid scheme and going public with a $US1 billion short bet.

Icahn, who at one point owned almost a quarter of Herbalife’s shares, defended the multilevel-marketing model and publicly assailed Ackman for years — on stages and television, in documentaries and online — after an initial CNBC phone-in argument between the two billionaires. Ackman said in a tweet that there was a “karmic quality” to the current situation.

In 2015, a debate at a Delivering Alpha conference between Icahn and BlackRock Inc. Chief Executive Officer Larry Fink quickly devolved into a verbal slugfest. Icahn called an open letter by Fink, which argued that corporate CEOs shouldn’t repurchase shares just to satisfy activists, a “sales pitch for BlackRock” and called the firm “an extremely dangerous company” over its exchange-traded funds.

Hindenburg triggered a sell-off of Indian billionaire Gautam Adani’s conglomerate with a report earlier this year..Credit: Bloomberg

More recently, Icahn has battled with DNA-sequencing company Illumina, saying the board of the company set a “new low” in governance by pursuing its acquisition of Grail over antitrust regulators’ objections. In a meeting with Illumina CEO Francis deSouza and Chairman John Thompson in early March, Icahn was quoted as saying he “would not even support Jesus Christ” as an independent candidate over his board nominees who “answer to me.”

Icahn said later that month that Illumina had “taken out of context certain things that were supposedly said” during discussions meant to be private “in the hopes of achieving peace rather than war.”

On average, companies targeted by Hindenburg fell about 15 per cent the day after a negative report appeared and were down 26 per cent six months later, according to February calculations by Bloomberg News.

Hindenburg’s attacks on the companies of Adani and Dorsey caused drops in their fortunes this year of $US58 billion and $US500 million, respectively.

Bloomberg

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