Hindenburg Targets Brokerage Freedom, Alleging Commingled Customer Assets And Signs Of Fake Revenue

Shares of Freedom Holding Corp. were down as much as 18% in pre-market trading before paring some of their losses after short seller Hindenburg Research announced they were short the company in a new report called “Freedom Holding Corp: Brazen Sanctions Evasion, Hallmarks Of Fabricated Revenue and Risky Bets with Commingled Customer Funds”.

“Our research has unveiled a laundry list of red flags including evidence that Freedom (i) brazenly skirts sanctions (ii) shows hallmark signs of fake revenue (iii) commingles customer funds then gambles assets in highly levered, illiquid, risky market bets (iv) and displays signs of market manipulation in both its investments and its publicly traded shares,” the firm wrote Tuesday morning. 

Taking a page out of the FTX storyline, Hindenburg accused the brokerage of commingling customer assets and then taking on risky leveraged bets with them:

All the while, Freedom has used funds to take on high leverage and market risk. While it claims it has “conservative risk management” and “limits the amount of credit exposure to any one issuer”, SEC filings show Freedom invested 35% of its gross principal trading balance, or $835 million, in the debt of just one Kazakh issuer. The position is larger than Freedom’s shareholder equity balance of $777 million.

It also accused the company of signs of fake revenue, “openly admitting” to providing brokerage services to sanctioned individuals and asked questions about potential market manipulation in the company’s investments and its own publicly traded stock.

“The U.S. government has enforced sanctions through an intensive global campaign. Overall, we find it surprising that a publicly-traded company in our own backyard has worked to brazenly undermine those efforts for years,” the firm wrote. 

“This is violating almost every country’s anti-money and anti-terrorist financing laws…I’ve personally seen suitcases with $2.5 million brought in cash by a client”, Hindenburg says that a former Freedom executive told them.

The report also calls into question a Belize-based related party controlled by the CEO that “seems to be engaged in a broad variety of corporate malfeasance”. 

“FFIN Belize’s lone set of published financials reported $2.5 billion in both trade receivables and payables, but just $5.4 million in cash, a hallmark of circular or fake revenue transactions,” the report says. 

Hindenburg also touched on claims previously reported by Bloomberg about how Freedom allocates shares of popular U.S. IPOs to its clients through a “mystery hedge fund”.

Adding to Bloomberg’s revelations on the topic, Hindenburg writes: “One selling point for Freedom’s customers has been Turlov’s claim that its clients have access to hot IPO allocations through FFIN Belize, which obtains the stakes from an unnamed hedge fund. ‘No one knows’ who the hedge fund is, one former told us. ‘My suspicion is there is no actual IPO [allocation].'”

Finally, the report called into question whether Freedom’s public stock was being manipulated, with Hindenburg writing: “We also uncovered hallmarks of market manipulation in Freedom’s own stock, including inexplicably steady trading volume and price, seemingly impervious to both market-wide events and company specific negative news.”

“All told, Freedom Holding has exhibited a startling array of red flags relating to virtually every category of financial malfeasance worthy of investigation,” the report concludes.