Hindenburg Research to Hedge fundwhose profits are financed by investors. Hindenburg is not a business intelligence agency, nor is it a vehicle carrying out the mission of providing information to the public, but a hedge fund whose business model is to create panic in the stock market by surprise and profit from investors’ losses.
On Friday, March 15, Hindenburg said in a report that it had taken a short position on LPP shares. Following this information, LPP shares fell significantly, and the declines even exceeded 20%.
Making money from short selling (i.e. falling stock price) combined with spreading negative information about the company has been met with mixed opinions by commentators in Poland.
This is not just a matter of ethics and the fight against greed
This is for him,” Piotr Kuczynski said The problem of an ethical rather than a legal nature is taking a short position, i.e. playing for the dip, in the shares of a company that you will later be ashamed to report. — Doesn’t look good. However, I believe that from a legal point of view, only the Polish Financial Supervision Authority can comment and determine whether this action constitutes market manipulation. This is punishable. I didn’t like it, even if it wasn’t punishable — Comment.
There were also conflicting opinions, suggesting that the opportunity to make money from falling stock prices constitutes an additional motivation for whistleblowing for the benefit of the entire market. For example, Rafal Zorski says in the report, any new risks, why is the activity of companies like Henderberg beneficial? If such a company had published a report on GetBack before it went bankrupt, it would have saved thousands of Poles from commissioning this company? With money, and at the same time it was possible to make money from the bankruptcy of the company, the market must work. If we want to regulate “greed,” let us regulate it with another counter-greed. Just like in nature. For a pack to be strong, wolves must eliminate weak individuals.
EU law protects the fair rules of investing in the stock market
However, it is difficult to agree with Zorski’s assessment. Regardless of whether or not Hindenburg wrote the truth, which the Polish Financial Supervision Authority is investigating, it is worth taking a look at the fund’s business model in the context of EU regulations. This is true regardless of who the report relates to and assuming the information provided is correct
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European Union decree No. 596/2014 regarding market abuse, hereinafter referred to as the Regulations MAR prohibits the use of confidential information in stock exchange transactions and manipulation of stock prices. It is about protecting the fair rules of investing on the stock market. Insider trading and manipulation are strictly combated in the EU. In the Hindeburg business model, we are dealing either with insider trading (if the information is correct) or with manipulation of stock prices (if the information is not correct or could be misleading). MAR protects investors from both. MAR is not the law of natural selection in the world of wolves. For a legal evaluation of the Hindenburg Model, the disclaimer included at the end of its reports is of fundamental importance. This disclaimer has been deleted in comments about Operation Hindenburg. And here is his Contents:
You should assume that as of the date of publication of any report or short position letter, Hindenburg Research (possibly with or through our members, partners, affiliates, employees and/or advisors) together with our clients and/or investors has A short position in all of the stocks (and/or stock options) covered by this policy and therefore may realize significant profits if the price of any of the stocks covered by this policy declines. […] Hindenburg Research makes no representations, express or implied, as to the accuracy, timeliness or completeness of this information or as to the results that may be obtained from its use.
Important disclaimer. It serves to waive legal responsibility for the content of the information generated and transmitted. Hindenburg says it intends to generate significant profits for itself, its clients and in consultation with its cooperating investors (“Partners”) by creating the impression that the information provided corresponds to reality, but states that it does not guarantee that this is the case. Hindenburg says it accepts it provided false or misleading information. Therefore, it intends to make a large profit (at the expense of investors) also from spreading false and misleading information. MAR does not allow powerful wolves to eliminate weaker individuals, who are supposedly investors selling stocks in panic.
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Hindenburg acts by surprise to make money
The Hindenburg model is based on three elements. The first is to surprise the issuer and its shareholders to reduce the risk of taking a short investment position. The second is to spread assumptions/speculation that the issuer has misled investors. The third element is to take a short position, i.e. bet that the stock price will fall, thus making a profit from shareholders’ losses. The game is about a lot of money made by Hindenburg and his “accomplices” in a short period of time, as the LPP case showed.
The purpose of the Hindenburg action is not to warn investors about the dishonesty of the information provided by the issuer in order to protect the principles of fair play in the stock market, but to take advantage of the panic of investors who have no way to verify the reliability of the information provided by the Hindenburg.
The common belief that Hindenburg works for the benefit of shareholders is a myth. Of course, for the Hindenburg investment model to succeed, the issuer must also be surprised. The content and date of publication of the Hindenburg Report were hidden from the issuer. The windfall effect for the Issuer and its shareholders is intended to mitigate the risk of significant losses to Hindenburg and its “associates”. The report must therefore cause a significant drop in the stock price so that Hindenburg and its “associates,” according to the disclaimer, can make significant profits. Therefore, the element of surprise is an essential element in Hindenburg’s strategy. The fund must strive to ensure that the message creates fear among investors, otherwise it and its “partners” will lose. It is the shareholders of the issuer who will lose. This is not a win-win situation.
The Hindenburg model violates MAR because it preys on investors
The Hindenburg model is parasitic on shareholders. The payers of the large profits for Hindenburg and his “partners” are the investors. Regardless of whether the information in the Hindenburg Report is correct (Hindenberg states that it is not responsible for this), Hindenburg’s making an investment decision based on it constitutes a violation of the MAR, because This regulation protects investors from insider trading and manipulation. Hindenburg no In reality By taking a short position, he assumes that with a probability approaching certainty, his report will lead to panic selling of the stock by investors. This is exactly what happened on March 15 of this year. On LPP shares. Hindenburg reduces its risks in this way.
If the information published as part of the report turns out to be correct, it would be an unlawful use of confidential information within the meaning of Art. March 14 Contrary to the content of the disclaimer, the information contained in the report is based solely on publicly available sources (internal presentations and interviews with former senior managers of the company are quoted). Another thing is that Hindenburg’s disclaimer means that its business model is based on manipulation, as Hindenburg does not want to take legal responsibility for the information published and warns that it may be incorrect. However, this is not enough to free oneself from legal liability under the MAR.
What did Hindenburg not do that he should have done?
EU law does not prohibit the publication of relevant information about issuers, for example as part of investigative journalism. Exception z serves this purpose art. 21 MAR, which allows the disclosure of confidential information about the source if it is consistent with journalistic standards (See for example the ruling of the Court of Justice of the European Union of 15 March 2022, reference no. C-302/20, as well as the Recital 77 March). MAR does not violate the fundamental human rights contained in Art. 11 of the European Union Charter of Fundamental Rights, which includes freedom of the press and freedom of expression.
Hindenburg’s action may have been legal (Assuming that the journalist adheres to journalistic skills in gathering and disseminating information and that the information provided was not false or misleading), If Hindenburg fulfills several conditions. First of all, if he had asked direct questions to the LPP Board to verify the accuracy of the information obtained, he would have included the position of the LPP Board of Directors in the report and provided the LPP with a draft and date of the report. Publish it so that the LPP has an opportunity to provide a current report on it. Moreover, if he and his “partners” did not benefit from taking a short position, if he did not include the quoted disclaimer, and if the purpose of the report was to implement the fundamental rights of the shareholders of the issuer (here: LPP) specified in Art. 11 of the European Union Charter of Fundamental Rights. None of these conditions were met.
If Hindenburg does so, LPP investors’ losses on March 15 of this year will likely be much smaller if that happens. The next trading day, shares rose more than 20%. Regarding LPP’s comments. Hindenburg did not do so because it would undermine its business model.
Acting by design without giving the source an opportunity to comment, because it means the risk of reduced profits due to investor panic, is not investigative journalism according to the article. 11 of the European Union Charter of Fundamental Rights and Art. 10 of the European Convention on Human Rights.
The business model does not comply with MAR
The Hindenburg business model assumes that you can make money legally at the expense of investors when you are smarter and more diligent.To obtain various types of information about the issuer (including insiders quoted in the report) it is sufficient to rely on hypotheses without verifying them with the board of directors of the issuer. Hindenburg should have realized that the obligation to disclose confidential information in advance rested solely with the issuer. He missed that MAR assumes that confidential information can be generated outside the source and can be used without the source’s knowledge.
Hindenburg is not obligated to disclose confidential information created by you, but is prohibited from using itBecause MAR protects the decision-making process of investors in conditions of information symmetry. MAR is not the law of natural selection in the world of wolves. Hindenburg cannot act in Europe like the hero of the movie “The Wolf of Wall Street.”
This is a very serious legal problem, not only in Poland, but also in the European Union and the USA. However, if companies like Hindenburg are right, they should give the issuer a chance to take a stand and publish their report with them. That would be fair.
Authors: Prof. Dr. Mikhail Romanowski, lawyer, partner at the law firm Romanowski i Wspólnicy, professor of law at the University of Warsaw. Piotr Hajduk, lawyer and partner at Romanowski i Wspólnicy. The law firm is accepting applications from LPP.
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