Hindenburg disaster: Icahn, Jefferies and the ‘Ponzi’ hand grenade
Iconic investor Carl Icahn’s $15 billion conglomerate lost 40 per cent of its value last week following the publication of a damning report by Hindenburg Research.
Icahn made a name for himself as a major corporate raider during the 1980s when he led a hostile takeover of TWA before stripping the airline’s assets and netting a significant windfall. The move made major headlines at the time and inspired a plotline for the 1987 major motion picture Wall Street.
A major Trump supporter, Icahn was a special adviser to the former US President during his first year in the White House. He famously left Trump’s election victory party in November 2016 to put more than a billion dollars to work. He reportedly left the celebrations at 2am after watching the futures market collapse and immediately started buying.
But it was Icahn Enterprises (IEP) shares that were being traded last week as the Nasdaq-listed company lost 40 per cent of its value, close to US$5 billion ($7.4 billion) in three days.
IEP’s share price plunged from around $50 on 1 May to record low of $30 on 4 May.
The sell-off followed the release of a Hindenburg Research report on 2 May.
Titled Icahn Enterprises: The Corporate Raider Throwing Stones From His Own Glass House, it accused Icahn of using money taken in from new investors to pay out dividends to old investors.
“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’,” the report said.
The report also accused global investment bank Jefferies of malpractice.
“Supporting this structure is Jefferies, the only large investment bank with research coverage on IEP,” the report said.
“It has continuously placed a ‘buy’ rating on IEP units. In one of the worst cases of sell-side research malpractice we’ve seen, Jefferies’ research assumes in all cases, even in its bear case, that IEP’s dividend will be safe ‘into perpetuity’, despite providing no support for that assumption,” it said.
“Since 2019, one bank has run all of IEP’s $1.7 billion in ATM offerings: Jefferies. In essence, Jefferies is luring in retail investors through its research arm under the guise of IEP’s ‘safe’ dividend, while also selling billions in IEP units through its investment banking arm to support the very same dividend.”
Icahn fired back at Hindenburg in a trading update on 2 May, accusing the “self-serving short seller report” of its intentions to generate profits on Hindenburg’s short position at the expense of IEP’s long-term unitholders.
“We stand by our public disclosures, and we believe that IEP’s performance will speak for itself over the long term as it always has,” Icahn said.
“Today, IEP operates from a position of strength with approximately $2 billion of cash and cash-equivalents on its balance sheet as of 31 March 2023 to execute on our strategy,” stated Icahn, chairman of the board of Icahn Enterprises.
“We continue to believe that activism is the best paradigm for investing, and my activist investments over the last 25 years have well proved this out. We regularly put our activist principles into effect at our majority-controlled companies as well as the minority positions held in our investment segment, and currently have representatives on 14 public company boards. Additionally, we believe strongly in hedging our positions to mitigate risk, especially in markets that we are living in today.”
However, IEP’s share price continued to decline through the week, causing Icahn to make a second statement two days later, on 4 May.
"We would like to reassure our long-term unitholders that the market disruption caused by the self-serving Hindenburg report does not affect IEP's liquidity,” Icahn said.
“We would normally wait for the earnings call but, due to the many inquiries we have received, we are announcing now our intention to declare a distribution in the amount of $2.00 per depositary unit for the quarter ended 31 March 2023, with the election to receive either cash or additional depositary units. I, as usual, will elect to take the distribution in units,” he said.
“The fundamentals of our business and our belief in the activist paradigm that has served us well for decades remain unchanged. We obviously disagree with the inflammatory assertions in the Hindenburg report and intend to respond at length and to vigorously defend IEP and its unitholders. As we stated previously, we believe that IEP’s performance will speak for itself over the long term as it always has.”
IEP rallied to $38.12 when the market closed on Friday. Futures prices indicate the stock will open stronger on Monday.
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