Hindenburg Research Shuts: Short-Sellers In India, US Under Pressure From Regulatory Heat

Infamous short-selling firm Hindenburg Research will disband, founder Nate Anderson announced on Thursday. The New York-based company has been in Indian market regulator's radar after its scathing report against the Adani Group, which failed to hold water in the Supreme Court.

The US markets regulator has also cracked down on another short-seller, alleging fraud.

Short-selling is a trading strategy where investors speculate on a stock's decline, thereby creating volatility. Profits through the strategy can be minimal, even if a well-researched report significantly impacts the market. Moreover, these modest gains can quickly be offset by the expenses associated with lawsuits and, more recently, government investigations.

Hindenburg Researh for example, claimed that it earned only $4.1 million through the Adani short.

In 2023, renowned short-seller Jim Chanos, famous for his bets against energy trader Enron prior to its December 2001 bankruptcy amid an accounting scandal, shut down his hedge fund, citing pressure on its business model, according to a Reuters report.

SEBI Pulls Up Hindenburg

The Securities and Exchange Board of India last year issued a show cause notice to Hindenburg Research, Nathan Anderson and the entities of Mauritius-based foreign portfolio investor Mark Kingdon for trading violations in the scrip of Adani Enterprises Ltd. leading up to Hindenburg Report.

The regulator alleged that Hindenburg and Anderson violated regulations related to fraudulent and unfair trade practices, and the code of conduct for research analyst.

SEBI pointed out the Hindenburg and the FPI entities undertook misleading disclaimer that the report was solely for the valuation of securities traded outside India when it clearly pertained to listed entities in India. The regulator said Kingdon aided Hindenburg to indirectly participate in Adani Enterprises by collaborating with the short seller to trade in the company's futures in the Indian derivatives market and shared profits with the research firm.

According to the show cause notice, SEBI alleged that prior to report release, short-selling activity was witnessed in the futures of Adani Enterprises and after the report the share lost 59% between Jan. 24, 2023 and Feb. 22, 2023.

The SEBI investigation revealed that K-India Opportunities Fund – Class F opened a trading account and started trading in the scrip of Adani Enterprises before the release of report. The FPI then squared off the positions in February making a profit of $22.25 million or Rs 183.24 crore.

Hindenburg continued to defend its January 2023 report. The Adani Group has denied allegations levelled by the short seller.

The Supreme Court in July dismissed a review petition that was filed against its Jan. 3 judgement in the Adani Group-Hindenburg Research case, wherein the court reposed confidence in SEBI's regulatory powers and ruled that petitioners could not provide enough material to transfer the probe to a special investigation team.

SEC Probe Into Andrew Left

In July, US authorities charged renowned short-seller Andrew Left with committing fraud through his stock trades, social media activity, and research reports. It marked a significant escalation in the ongoing crackdown on traders who promote negative stock positions in the US.

The Securities and Exchange Commission alleged that Left, operating through his firm Citron, illegally generated approximately $20 million in profits from trading activities involving nearly two dozen companies. Additionally, the Justice Department brought criminal charges against Left, accusing him of securities fraud and of allegedly misleading investigators about his compensation from hedge funds.

Prosecutors claim that Left would rapidly close his positions after publishing a research report or making public comments. This strategy allowed him to capitalize on short-term price fluctuations.

"The SEC reminds investors to be skeptical and never make investment decisions based solely on information from social media or other unverified platforms," the regulator said.

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