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DJ Hindenburg Says Clover Health Stock Is Ripe for Shorting. Here's Why. -- Barrons.com

· 02/04/2021 16:52
By Max A. Cherney

Since Clover Health Investments went public via a blank-check company in January, shares have retreated more than 20% -- not exactly an ideal debut for the maker of health-care software.

On Thursday, Clover Health (ticker: CLOV) gained another headwind. Activist short seller Hindenburg Research published a lengthy report about the business, offering a detailed a list of issues around Clover Health's operations. The report also alleges that billionaire investor Chamath Palihapitiya misled investors when he helped bring the company public through a special purpose acquisition company he was backing.

Clover shares fell 12.3% Thursday, to $12.23. The S&P 500 was up 0.9%.

Clover told Barron's Thursday morning that it would issue a statement addressing Hindenburg's claims "in the next few hours." That statement hadn't been released by 4:30 p.m. ET, and the company didn't immediately respond to a follow-up request for comment Thursday afternoon. Palihapitiya didn't respond to requests for comment.

The report alleges that Clover is the target of an undisclosed Justice Department investigation into its business model and sales practices, which poses the risk that the company could be forced to halt operations.

"This civil investigative demand and the corresponding investigation present a potential existential risk for a company that derives almost all of its revenue from Medicare, a government payer," Hindenburg founder Nate Anderson wrote in the report. "Our research indicates that the investigation has merit."

In its report, Hindenburg shares screenshots from the Justice Department's civil investigative demand, and says the department is conducting a False Claims Act investigation into Clover Health that is focused on determining whether the company "improperly induced patient referrals for services paid for by Federal agencies."

The targets of the investigation allegedly include the company's software offering, called Clover Assistant, and the methods the company used to attract new customers. In the report, Hindenburg notes that Clover generates nearly all of its revenue from Medicare Advantage premiums, a federal program that provides Medicare benefits.

The U.S. attorney's office for the Eastern District of Pennsylvania, where Hindenburg says the investigation was launched, declined to comment to Barron's.

In October, Clover chose to merge with Social Capital Hedosophia Holdings Corp III, a SPAC that was backed by Palihapitiya. The SPAC started trading as Clover on Jan. 8.

In a January interview with Barron's, Clover said that a significant reason the company chose to go public via a SPAC was Palihapitiya, a former Facebook (FB) executive who has used several blank-check vehicles to buy companies. "He's a great investor," Clover co-founder and Chief Technology Officer Andrew Toy said at the time.

The Hindenburg report pinpoints Palihapitiya's Clover holdings at nearly $400 million, before Thursday's decline, and cites Palihapitiya's various efforts in the news media to promote the deal.

Amid the speculative mania surrounding stocks such as GameStop (GME) and AMC Entertainment Holdings (AMC), Palihapitiya has criticized short selling. As some high-profile hedge funds have been damaged by violent upswings, in part driven by retail investors, Palihapitiya has cheered the efforts of individual investors.

While Hindenburg usually takes a short position ahead of releasing its research, the report says that the firm has no long or short trade positions in Clover. Hindenburg founder Anderson cited volatile market conditions as a factor in his decision not to short the stock.

Hindenburg's research was cited widely in September after its critical report of electric-vehicle maker Nikola (NKLA). Following publication, the company's founder, Trevor Milton, resigned and General Motors (GM) terminated an investment in the company. Nikola disputes Hindenburg's claims.

Write to Max A. Cherney at max.cherney@barrons.com

(END) Dow Jones Newswires

February 04, 2021 16:52 ET (21:52 GMT)

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