In the last year, two high-flying electric vehicle companies, Nikola Corp. and Lordstown Motors Corp., saw their market value crash and faced probes by federal prosecutors. In each case, their troubles were brought to light by a five-person firm that positioned itself to profit off the company’s plummeting value.
That firm, Hindenburg Research, is a hybrid creature. A muckraking investigator, it seeks out deceptions and fraud at publicly traded companies and publishes what it finds. As an investment house, it positions itself to make money the moment its bad news hits the stock market.
And while Hindenburg dives deep into everything from health care to mining, a primary focus is companies that profess to save the Earth by reducing waste and carbon emissions.
Among the firms that Hindenburg has targeted in the last two years are geothermal-energy firm Ormat Technologies Inc., Chinese EV maker Kandi Technologies Group Inc., plastics-recycling startups PureCycle Technologies and Loop Industries, and fuel-cell maker Bloom Energy. All have blasted Hindenburg’s reports as misrepresentations or lies. But in each case — Bloom being the one exception — the company’s stocks haven’t regained their former luster.
Hindenburg sees “a lot of money flying around,” said Karl Brauer, an auto analyst at iSeeCars.com. “When you’re an investment company, and you see the level of revenue or investment being dumped into these new startups, you rightly start to ask the question, ‘Is this rational? Does this make sense?'”
Hindenburg claims its work is meant to protect small investors, whose numbers have multiplied during the COVID-19 pandemic. If a target company’s stock price drops in response to Hindenburg’s report, however, those investors see their investment shrink in value, while Hindenburg makes money.
For the targeted companies and their executives, the consequences of Hindenburg’s reports can go well beyond the stock price.
Lordstown and Nikola, both startup makers of zero-emissions electric trucks, saw their leaders resign in the wake of the investigations. In July, based on revelations found by Hindenburg, federal prosecutors in New York charged Nikola founder Trevor Milton with securities and mail fraud. That same month, Lordstown revealed that it is the target of a federal probe. And at Ormat, two principals singled out in Hindenburg’s report swiftly left the company.
But to many observers, Hindenburg and other short sellers, as they’re called, serve a valuable market purpose: finding the bad actors that optimistic investors don’t have the skills to find, or don’t really want to find.
“I’m thrilled to see Hindenburg doing due diligence on these EV startups,” Brauer said.
From Tesla to ESG
Hindenburg is popping bubbles at an especially frothy time.
Trends have converged to send billions of dollars into an ill-defined sector called ESG, or environmental, social and corporate governance. Many ESG companies seek to remake older, polluting industries into clean ones.
Big hedge funds like BlackRock Inc. recently have steered more resources into ESG, and smaller investors have followed suit, as the returns can be better than those in the market at large. With federal regulators drafting mandatory climate disclosures for public companies, more investors are plowing money into EV startups and other firms that offer ways to reduce carbon emissions.
At the same time, the stock price of Tesla Inc., the leading EV maker, has soared to the stratosphere. That has investors hunting for the next electric-vehicle CEO who can succeed like Tesla’s Elon Musk.
And the red-hot stock market has spawned a wave of SPACs, or special purpose acquisition companies.
The SPAC is a sort of end run around the traditional initial public offering of stock, or IPO, and gives a hot company access to billions of dollars with a lot less scrutiny from investors and regulators. Nearly every company Hindenburg targets is a SPAC.
In short, ESG is a hot market with little oversight, and has led to what Hindenburg’s website calls “a psychotic flood of speculative capital.”
A company can raise billions on a good story. Often, that story conceals shady deals and shaky financials, or the likelihood that a company could go years without making money. Many investors, hungry for a payoff, are willing to ignore the warning signs. Hindenburg has realized a jackpot can be made by bringing the market’s attention to deceit and fraud.
“If you’re pointing out weaknesses in these companies,” said Anton Wahlman, an investor who follows Hindenburg closely, “this is the golden age to do it.”
A passion for digging
Hindenburg is based in New York City and was founded in 2018 by Nathan Anderson. A graduate of the University of Connecticut, where he was a columnist for the student newspaper, Anderson went on to work as an ambulance medic in Israel before starting a career with several firms researching companies’ financials.
Anderson and Hindenburg did not reply to numerous requests to be interviewed for this story. But in other interviews, Anderson provided details about the company’s inner workings.
Hindenburg is composed of five full-time workers, plus consultants who work on specialized projects. Operatives have been deployed, for example, to Jinhua city, China, to find what Kandi, the Chinese EV maker, calls a customer but Hindenburg alleged is actually a Kandi subsidiary. Or to an office suite in Guatemala, where Hindenburg sought to prove that one of the customers on Ormat’s books is in fact a shell company owned by Ormat.
“I always had this passion for digging and investigating,” Anderson told CNN. “I’m very focused on deep-dive research.”
Hindenburg is a short seller, meaning that it makes money when a stock drops in value. Rather than buying a stock outright, a short seller borrows a number of stock shares from someone else, and then sells them while the price is high. Then, when the stock drops, the short seller buys the same number of shares on the open market and returns them to the buyer. The difference between the high and low price is profit.
Short selling is risky, though, and the short seller can lose big if the market swings the wrong way.
The GameStop craze of last year, when millions of people entered the stock market to snap up a basket of nearly worthless stocks, was in part a way for the regular guy to stick it to big hedge funds that had sold those stocks short. Similarly, short sellers in Tesla lost fortunes last year as Tesla’s stock made a relentless climb.
Hindenburg hasn’t disclosed how much money it makes through short selling.
It is part of a tradition of short-selling investors who are skeptical of rising companies and the human nature behind them. In 2001, investor Jim Chanos made a bundle after he detected problems in the financial disclosures of Enron Corp., the energy trader that became the center of one of the biggest corporate scandals in U.S history. Contemporaries of Hindenburg include Citron Research and Muddy Waters Research, which recently sought to poke holes in a company seeking to electrify vehicle fleets.
How the investigation works
Hindenburg’s report on Nikola put Hindenburg on the map, and revealed the short seller’s strategies for exposing its subjects.
Nikola’s success sprang from the promises of Milton, its founder and executive chairman. In 2016, the company came out of stealth to unveil the Nikola One, which Milton claimed was a functional zero-emissions, hydrogen-powered big-rig truck, an accomplishment that would have put Nikola years ahead of other truck makers. In early 2020, Nikola followed up with a prototype of a pickup truck called the Badger that would run on either hydrogen or batteries. The company planned to build a national network of fueling stations that, Milton claimed, would make hydrogen at a quarter of the going price.
The market cheered Milton’s vision, and news accounts hailed him as the next Elon Musk. Nikola forged partnerships with major industry players, including General Motors Co., America’s biggest automaker.
Last September, GM announced plans to acquire an 11 percent ownership stake in Nikola. In exchange, GM would engineer and build the Badger and would supply Nikola’s vehicles with GM’s Ultium batteries and Hydrotec fuel cells. GM said at the time that the contract would eventually earn it $4 billion.
Two days later, Hindenburg published its 15,000-word report, which was a multimedia stew of embedded tweets, excerpts from legal documents, photos, YouTube videos and secret audio recordings.
Hindenburg interviewed Milton’s former business partners and dug up lawsuits to detail what it called “an intricate fraud built on dozens of lies.” Through a series of businesses, the report claimed, Milton developed a practice of quietly buying others’ technology and claiming it as his own, often exiting his venture with a profit but leaving partners and buyers empty-handed.
Using photos, company emails and confidential text strings, Hindenburg argued that the prototype Nikola One that launched the company to fame in 2016 was a mere mock-up, lacking hydrogen power or a functioning dashboard.
In its most famous discovery, Hindenburg offered evidence that Nikola had faked a road-test video by simply rolling its non-functional truck downhill. Not stopping there, Hindenburg located the exact stretch of road — a lonely highway west of Salt Lake City — and tested a vehicle to compare the rolling results.
Hindenburg used satellite images to refute Milton’s claim that Nikola factory roof was covered in solar panels. By carefully parsing a video, Hindenburg concluded that an inverter that Milton claims to have invented was in fact bought off the shelf. The researchers phoned the companies with which Nikola had contracts and found that Nikola’s fat book of customer orders — a cornerstone of its appeal to investors — was mostly fluff, and that almost no one had committed money to Nikola’s products.
In short, said Walhman, “they completely nailed Nikola to the wall.”
Shortly after, Nikola in a statement called Hindenburg’s report “a hit job for short sale profit driven by greed,” and subsequently disputed some, but not all, of Hindenburg’s conclusions.
Ten days after Hindenburg’s report, Milton resigned. The news accelerated a selloff of the company’s stock, which is now trading at just below $10, a sixth of its high in the summer of 2020. The most serious outcome arrived in late July, when the U.S. Attorney’s Office for the Southern District of New York indicted Milton on charges of security and mail fraud, based in large part on Hindenburg’s revelations. The charges carry a maximum sentence of 65 years in prison.
Milton’s lawyers called the federal indictment “a new low in the government’s efforts to criminalize lawful business conduct,” and added, “Every executive in America should be horrified.” (Energywire, July 30).
Meanwhile, Nikola has pressed forward with its business in spite of its lackluster stock. In July, the Department of Energy awarded Nikola a $2 million grant to develop robots that could fuel hydrogen vehicles autonomously.
Questions for Lordstown — and General Motors
Hindenburg’s other big takedown came in March when it issued a report on Lordstown Motors.
Lordstown is an aspiring maker of electric pickup trucks with a convoluted history. Its founder, Steve Burns, used to head Workhorse Group, another EV maker, but left to start his own outfit to make electric pickup trucks for fleets. Lordstown had a big stroke of luck — and adopted its present name — in 2019 when GM essentially gave the startup its cavernous factory in Lordstown, Ohio.
At the time, GM had announced plans to shutter its Lordstown assembly plant and was facing intense criticism from then-President Trump for the loss of jobs. Lordtown, the startup, promised to employ as many people as GM had at the location. GM took an ownership stake in Lordstown Motors in exchange for the factory, and headed off a public relations problem.
The strength of Lordstown, in investors’ eyes, was what Burns claimed were 100,000 pre-orders for its vehicles. Another Hindenburg report tracked down the sources of those orders and found that many were made by small companies that did not have the means to buy thousands of pickup trucks. Others were made by bigger firms that said they had signed contracts as a goodwill gesture, with no hard intention to buy.
As with Nikola, the revelations caused Lordstown’s stock price to tank, and led to difficult questions for the company’s leaders.
In June, Burns and Lordstown’s chief financial officer, Julio Rodriguez, stepped down on the same day that the company’s board issued the results of an internal investigation that confirmed elements of Hindenburg’s report, while disputing others. And last month, the company disclosed in a financial filing that is is under federal investigation for its pre-orders and the circumstances of the SPAC that brought it to market.
Lordstown kept quiet for three months following Hindenburg’s report, then responded with the results of its internal investigation.
It called the short seller’s report “in significant respects, false and misleading,” and made some rebuttals. But it also conceded at least part of Hindenburg’s key point: that pre-orders were false or inflated. Lordstown said it “made periodic disclosures regarding pre-orders which were, in certain respects, inaccurate.”
The investigation is being carried out by the U.S. Attorney’s Office for the Southern District of New York — the same office that charged Nikola’s Milton.
Many observers have noticed that a common denominator in the Lordstown and Nikola stories is General Motors. The company provided a lifeline to both, and Hindenburg’s reports raise questions about whether GM was paying attention to the financials.
“Hindenburg probably saved GM a lot of money and a lot of strife,” said Brauer, the analyst with iSeeCars.com. ‘Why is a random investment company doing a better job at due diligence than a major automaker?”
In comments to E&E News, GM downplayed the scale of its investment in both startups.
“GM never announced plans to invest in Nikola. Under terms of the original agreement, we were to receive equity in the company for in-kind contributions.” said GM spokesperson James Cain. Regarding Lordstown, Cain said, “Our goal in facilitating the sale of the Lordstown Assembly Plant to LMC was to support the Ohio community. ”
What is clear is that other watchdogs who might have probed Nikola’s or Lordstown — regulators, prosecutors, journalists, partners or investors — weren’t delving into the hard questions that got answered by Hindenburg and its small band of investigators.
“Part of it is that there’s a lot of investors that want to believe,” said Sam Abuelsamid, an auto analyst at Guidehouse Insights, a research firm. “Everybody is looking for the next thing that is going to blow up and grow in value and disrupt the market. Nobody wants to scratch below the surface to see what’s really there.”