Short shrift

• British Airways owner IAG posted a surprise quarterly profit due to rebounding tourism demand and falling fuel prices.

• The European Central Bank raised its rate by 25 basis points to 3.25.

• The London Stock Exchange changed its listing rules (more below).

Carl Icahn began this week with a net worth of $24 billion and an unchallenged place in the hall of fame of great American investors. He ends it $11 billion poorer, struggling to contain the damage from a devastating attack on his business model, ethics and good name.

So what? Icahn’s is the third big scalp claimed so far in what’s turning out to be a banner year for Hindenburg Research, the New York short-seller and David in a field of lumbering Goliaths.

Hindenburg is run by Nathan Anderson, whose success has simple but important lessons for CEOs, CFOs, board directors and investors in tough times. Among them:

• Don’t be a herd investor if it means you’ll be drawn towards what Anderson calls “pockets of mass irrationality” – because firms like his will find you out.
• Don’t try to hide discrepancies between optimistic forecasts and reality, especially if you’re in a position of corporate responsibility.
• If caught inflating the value of your assets, fess up. Markets will take a dim view of anything that looks like bluster, and compound the damage.

There’s another lesson to be drawn from the Icahn story in particular: don’t take out margin loans against your own holdings in a time of macroeconomic uncertainty and high or rising rates. If you’re overleveraged, so is your company.

Bubbles. Hindenburg is thriving – even if Icahn isn’t – in a business landscape bloated and distorted by 14 years of monetary indulgence. “Central banks have unleashed [a] fire hose of cash and propped up markets and inflated markets across the board,” Anderson told Tortoise last year. That helped create the “massive financial bubbles” that short-sellers exist to pop.

Pyramids. Many are little more than Ponzi schemes, Anderson says, and a Hindenburg report released this week says Icahn Enterprises (IEP) was no exception. It claims IEP 

• has lost 54 per cent of its value since 2014 but still raised its dividend three times to nearly 16 per cent, by far the  largest of any large-cap US company;
• overvalued one of its key assets, a meat-packing company, by 204 per cent; and
• “has been using money taken in from new investors to pay out dividends to old investors” – the hallmark of a Ponzi scheme.

Hunter. How does Anderson choose his targets? “We scour the globe for entity records and financial filings to see whether the documentation matches up,” he said. “We look for material lies or misrepresentations by the people in charge. We want to see if their claims hold up to reality.” Translation: we read a lot of annual and regulatory reports. We compare and contrast.

Prey. Anderson set up Hindenburg in 2017 after a stint as an ambulance driver in Israel. His first big short was of the Nikola electric truck maker, whose founder was later convicted of securities fraud. Hindenburg later offered $1 million which it hasn’t paid out for information on how Tether, the so-called stablecoin, is pegged to the dollar. This year it has targeted

• India’s Adani Group, which has lost $125 billion of value despite coordinated moves to shore up its stock price since Hindenburg accused it of accounting fraud in January;
• the Twitter founder Jack Dorsey, accusing him of exaggerating user numbers at Block Inc., his online payment group; and
• IEP, which grew out of Icahn’s asset-stripping of TWA in the 1990s and a $1.3 billion profit from a long-held stake in the Herbalife nutrition supplements business – itself often called a pyramid scheme. 

Price. IEP lost 20 per cent of its value when the Hindenburg report came out on Tuesday. Icahn rejected its claims as self-serving for the purposes of turning a profit – and IEP lost another 20 per cent. One analyst said Icahn deserved the second slump for being condescending and glib in his response to the first. Other telltale traits Anderson looks out for in business leaders are aggression, mendacity and “sociopathic tendencies”.

Time for Icahn – and his rivals and admirers – to take a long look in the mirror.