Long $GCAP – Why Gain Capital could see a “super spike” today


  • “Dinner Table Effect”. Crypto assets spiked sharply after both Thanksgiving and Christmas. Traders expecting crypto assets to again spike very sharply on Jan 2.
  • In anticipation, traders, funds and algos may start aggressively buying crypto assets today. So GCAP may see abnormally strong buying pressure today.
  • “Let it ride”. With GCAP now at steep new highs, all recent investors sitting on large taxable gains. Refusing to sell until Tues defers taxes until 2019.
  • Even at $30 most rational investors would refuse to sell until Tuesday. This allows them to hold for further gains expected from sector on Jan 2 as well as show “window dressing”.
  • These sharp imbalances could cause a year end “super spike” in GCAP. Crypto stocks LFIN and FTFT recently spiked by several hundred percent in just a single day.


This article is the opinion of the author. The author is long Gain Capital (GCAP).

Gain Capital (GCAP) is an established financial services company which has been in business since 1999. The company is consistently profitable and cash flow positive and provides advanced trading services to customers in over 100 countries worldwide.

Yesterday at MoxReports.com I showed why GCAP is already worth $18-23 based on its recent crypto trading launch and it prospects for increased crypto trading revenues. But I also made it clear that GCAP could actually spike much higher due to the current hyper enthusiasm for all things related to crypto. It looks like this second scenario is what is already unfolding.

Yesterday GCAP soared by 26% in the regular trading session on record volume of over 11 million shares. That volume represents nearly 30x the average daily volume and is more shares than GCAP typically trades in a full month. The stock continued 17% higher in the after hours on substantial volume, hitting $11.60.

As I sit typing this during the pre-market, the price has already hit as high as $12.70, with nearly 1 million shares already having traded before the market is even open !

I now see a reasonable chance of a “super spike” hitting GCAP shares today.

As we saw in the trading yesterday, much of the volume and price surge came in the last 90 minutes of the day and then well into the after hours. So today could make for a very interesting day of trading, even right up into those volatile last 15 minutes of the day.


Why are traders expecting a sector spike for crypto on January 2nd ?

Traders are widely expecting a large spike in crypto related assets on January 2nd. This is likely to lead to very strong buying today (Friday December 29th) because it is the last trading day of the year. This is why I expect to see strong buying pressure on GCAP today.

The reason that traders are expecting a sharp spike in all crypto assets on January 2nd is that this is precisely what we saw on the days after Thanksgiving and Christmas. It is called “The dinner table effect”. These large holidays are the few times of the year times when people spend substantial amount of time around their closest and most trusted friends and relatives. When tales of recent crypto riches come up, along with trusted advice urging “buy on the dips” the FOMO becomes too much to resist.

In the two days prior to Christmas this year, there was near panic selling of Bitcoin, with the price plunging by more than 30% from its recent highs. Other crypto assets were similarly affected. Yet on the first day after Christmas, Bitcoin quickly surged by more than 20% due to this dinner table effect. Likewise, immediately after Thanksgiving, Bitcoin began surging to all new highs.

CNN November 27: Bitcoin’s incredible surge hits new heights

These crypto fanatics have now thoroughly learned that any dip in crypto prices is a buying opportunity. After China shut down crypto trading in September, panic selling saw a 30% plunge in Bitcoin to around $3,000. By December it was up by more than 6x from those levels. This lesson of “buy on the dips” was then further reinforced when crypto prices again bounced back after a vicious pre-Christmas selloff.   This past week, South Korea started attempted to curtail trading in crypto currencies.   This is meaningful because South Korea often accounts for as much a 20% of daily volume in cryptos such at Bitcoin. But by now, crypto investors were no longer falling for it. Bitcoin briefly dipped a bit overnight. But by mid-day it had recovered nearly all of its losses.


September 14: Bitcoin Crashes After Chinese Exchange Says It Will Halt Trading

December 28: Reminder: After China Closed Bitcoin Exchanges, Prices Rallied Three-Fold

This weekend is New Years Eve and a three day weekend. People all across the country will be educating their friends and family all about the future of crypto. Some of these people are adamant that Bitcoin is going to $1 million. And even if they don’t necessarily believe the predictions that Bitcoin is going to $1 million, they will still consider current crypto prices a screaming buy following its recent pull back from $20,000. A sharp spike in all crypto related assets is therefore highly likely on Tuesday January 2nd.


Three reasons why investors might simply refuse to sell GCAP until next week

Taxes. GCAP has now risen by as much as 50% since Wednesday. As a result, virtually any investor who has bought GCAP this year is now sitting on very large taxable gains. By simply refusing to sell their shares until next week, they defer these suddenly-large tax payments until 2019.

More near-term upside potential. In addition, as explained above, regardless of where the price of GCAP goes today, many investors are still expecting wide spread across-the-board buying of crypto assets on Tuesday, January 2nd.   So many investors may just choose to “let it ride” until at least late Tuesday or Wednesday. Regardless of price.

Once they have established momentum, recent crypto stocks have quickly traded up by 5-10x within just days. The people with the biggest regrets recently are simply the ones who sold after the stock merely doubled or tripled.

Window dressing. Fund managers like to be able to market themselves as the “smart money”. By refusing to sell GCAP until next week, fund managers who currently own GCAP will get to publicly show in their filings that they held a high profile crypto winner as of the December 31 reporting date. If they sell just one day earlier (ie. today) then they also lose that benefit.


How high could a super spike take GCAP today and/or Tuesday ?

Yesterday I included a list of 17 crypto related stocks, each of which had jumped by at least 100% since November 1st. Five of these stocks had jumped by more than 5x during that those several weeks.

Today I make a different point.

When we see supply and demand imbalances like what we are seeing today with GCAP, it creates to possibility of very large moves in just 1-2 days. The advance clue is when you see a dramatic surge in volume, just like we saw with GCAP yesterday.

With GCAP, such a move could occur either today or on Tuesday. In past similar situations, much of the price spike comes towards the end of the day. This is exactly what we saw with GCAP yesterday.

We previously saw shares of Riot Blockchain (RIOT) go up by more than 6x from $7 to over $45. But this took several weeks. Other stocks literally made this type of move in just 1-2 days.

On December 15th, shares of crypto stock Longfin (LFIN) quadrupled from $5 to over $20. The very next day it again more than tripled to $72. This was a two day spike of 14x.

On December 19th, shares of Future Fintech (FTFT) tripled to a high of $5.79 in a single day.



In many instances, these “super spikes” become self fulfilling prophecies. A few investors start piling in to a stock, but because there are few sellers, the share price starts to spike. This then draws in more momentum traders. At some point in time, the algos kick in and that is when we see super spikes like what we saw with the massive spikes in LFIN and FTFT.





Long $GCAP – Bitcoin rollout could send Gain Capital sharply higher

  • Traders from places like China and Korea are being forced off of their own domestic crypto exchanges but still want to pour money into crypto. GCAP now provides an easy solution.
  • GCAP just added crypto products to its trading platform, BOTH long and short with 4x leverage. Much better spreads, liquidity, fees and reliability vs. crypto exchanges or futures.
  • GCAP is US listed, established and profitable, but crypto trading has not yet been rolled out in US. US investors are not fully aware of the impact and have not yet bid up the stock.
  • Majority of GCAP revenue comes via UK entity, including offshore customers. This allows services to customers including China, Japan and Korea. Again, US investors largely unaware.
  • Global rollout to be announced within weeks, should boost stock sharply. GCAP will make its money off of crypto VOLUME regardless of whether crypto prices rise or fall.


This article is the opinion of the author. The author is LONG Gain Capital (GCAP).



I am currently long Gain Capital (GCAP) because I see multiple near term catalysts that should send the stock to a rational level of at least $18-23. Near term crypto mania could conceivably send it considerably higher.

Expected catalysts include near term progress announcements from GCAP regarding its ongoing global Bitcoin roll out, as well as regulatory catalysts which will benefit GCAP at the expense of its would-be competitors. Announcements for both are expected in coming days or weeks.

Regardless of the direction of specific crypto currencies in the near term, it seems safe to say that we will continue to see elevated trading volumes for at least the next 12-24 months.

For Bitcoin alone, trading volumes are up 10x in the past few months and a staggering 400x since 2016.

GCAP is now setting up to make substantial profits off of crypto currency VOLUME regardless of whether crypto prices go up or down.

GCAP just launched Bitcoin trading for its customers, but only out of its UK entity. As a result, many US investors still do not appreciate its significance.

Most of the customers for GCAPs UK entity are actually offshore customers from Asia or the Middle East.

GCAP has had on the ground offices in each of Tokyo, Beijing, Shanghai, Hong Kong and Singapore since at least 2011. The company has historically partnered with regional financial leaders including Samsung Financial and Fortune Capital among others.

Each time a new government (such as China or Korea) attempts to stifle or over-regulate its domestic crypto exchanges, all this does is send droves of customers looking for an offshore (global) trading solution. This is exactly what GCAP has just launched and which will be substantially expanded in the next few weeks. Based on the most recent press release, further announcements detailing the latest roll outs should be forthcoming shortly.

Last night South Korea announced that it would be imposing new curbs on crypto trading in that country. The price of Bitcoin quickly fell by as much as 8%.

Perhaps some people are forgetting that the entire point of crypto currencies is to create a system that is not controlled by a single government.

South Korea has shown insatiable demand for crypto and has frequently accounted for as much as 20% of all daily Bitcoin volume, often putting South Korea alone in excess of $1 billion per day. The frenzy for Bitcoin often means that Koreans pay a premium of up to 23% vs. what other countries pay.

The latest move by the South Korean government simply accelerates a change that should have already happened for traders.

With Korea, we are now simply seeing a repeat of what we saw when China supposedly “cracked down” on crypto trading a few months ago.

In September, China announced it would be halting exchange trading of crypto currencies in China. Not surprisingly, Bitcoin crashed 28% that week for its worst week in more than two years, plunging to as low as $3,077. Panicked investors feared that the loss of Chinese money would spark “the end of the crypto bubble”

Bloomberg Sep 2017: Bitcoin Crashes Again After China Moves to Halt Exchange

But Bitcoin prices fully recovered within days and have since skyrocketed as much as 6x since those lows, briefly exceeding $20,000. The brief panic selling was entirely unjustified. In fact, Chinese money did not stop flowing into Bitcoin, it just found new ways to get there.

Queston: So are we in a crypto bubble ? Is it set to burst ?

Answer: I have no idea. And neither do you.

Prior to the bursting of the internet bubble in 2000, Fed Chairman Alan Greenspan gave a now-famous speech warning about the “irrational exuberance” in the markets at the time. Following Greenspan’s speech, markets around the world quickly slumped by more than 3% in rapid succession. Many individual tech stocks fell by more than 30%.

But in case you forgot…..Greenspan actually gave that speech on December 5th, 1996 when the NASDAQ was sitting at just 1,300.

Even after this dire warning from the most powerful central banker in the world, the NASDAQ continued to surge higher for more than three straight years. It ultimately peaked out at just over 5,000 – a full triple from where Greenspan had warned about a “bubble”. In 1999 alone, the NASDAQ skyrocketed by 85% in just a single year !

Take a good look at the chart below showing the NASDAQ from 1996 to 2000. And then ask yourself this: How sure are you that we are now currently in December 1999 rather than December 1996 ?





Name: Gain Capital (GCAP)      
Mcap: $340 million   LTM Rev $343 million
Price $7.80   LTM EBITDA $60.6 million
52w L/H $5.56 / $8.95   LTM Net Income $13.3 million
Avg Volume 400,000 shares   LTM Op. Cash Flow $43.9   million
Options Liquid calls and puts   Debt $130.6 million
      Cash $225.6 million


Gain Capital is a global provider of trading services and solutions covering both exchange traded and OTC markets. GCAP uses proprietary trading platforms (web based and mobile) to provide customers with advanced price discovery, trade execution and order management functions.

GCAP is consistently profitable and cash flow positive and has been providing similar trading services since 1999. It is a well established and proven player in this space.




In October, GCAP first made mention of its plans to offer Bitcoin trading to its customers. However, it was a very understated mention. Given the ongoing crypto mania, even that slight mention was enough to generate a few headlines at the time. But without further details there was not enough to get excited about other than general crypto hype and speculation at the time.

In addition, any focus on Bitcoin at the time was also drowned out by stronger than expected financial results from GCAP’s existing business. Following a number of cost cutting measures, GCAP now has significant operating leverage such that even moderate increases in interest rates or market volatility end up having an outsized benefit to its bottom line.

Anyone who expects to see further increases in market volatility or interest rates should also expect to see a significant boost to GCAP even before any benefit from Bitcoin or other crypto trading revenues. The stock should then trade up accordingly.

Article Oct 2017: Gain Capital surges 15% post-earnings

But now in December, GCAP has just formally launched Bitcoin trading for its customers. GCAP is a US listed stock with headquarters in New Jersey. But because the first phase of its roll out has been for UK customers only, the stock price has not yet jumped in the US. The vast majority of GCAPs revenues come through its UK entity, including its offshore customers from around the globe.

In recent weeks the insatiable demand for any equities with crypto exposure has pushed numerous small caps up by hundreds of percent, even when many of their real business prospects can be viewed as quite dubious.

Below is just a partial list of recent share price moves tied to some sort of crypto or block chain news. These share price moves all occurred since November 1st. The average peak move for these stocks is a staggering 475.5% gain in just that seven weeks !

The premises beneath several of the stocks above are just downright silly and yet they have repeatedly quintupled within a few weeks.

By contrast, GCAP is a profitable and established financial services provider, which now offers a very viable and competitive Bitcoin trading platform which has the potential to generate very significant revenues and profits starting immediately.

As shown above, GCAP has been in business since 1999 and provides access to over 12,500 financial products to investors in over 100 countries. Following its UK Bitcoin trading roll out in December, the company announced that it will extend this to a global roll out in the coming quarter and will extend Bitcoin trading via its Forex.com in select additional markets by the end of 2017. In other words, this is already happening and progress results should be announced in the coming days or weeks.

Those near term announcements could have a meaningful impact on the stock.   Given that GCAP already provides access to thousands of financial products, it seems intuitive that the ongoing roll out will go on to include additional crypto currencies such as LiteCoin, Etherium, etc. Any such additional announcements of new crypto currencies would also be expected to have a further positive impact on the stock which could be significant.

It is very important to remember that GCAP will make its money off of crypto volume regardless of whether crypto prices are rising or falling.



It is still early days for crypto trading. As such, many traders around the world may not yet fully appreciate just how truly awful their trading terms are relative to more mature financial instruments.

What GCAP has just rolled out is a vastly superior solution for many crypto traders around the world.

Crypto exchanges suffer from terrible liquidity, enormous spreads and high fees. One journalist recently reported paying $16 in fees to move just $25 in cash. At times of great market volatility, we have seen bid/ask spread on Bitcoin exceed $1,000 on various exchanges. These exchanges/wallets are unreliable and not secure. In December alone, CoinBase suffered two incidents where its users were unable to execute their trades during times of extreme market volatility. Multiple exchanges have been hacked with little recourse to affected crypto holders.

If these exchanges were traditional brokers, they would have gone out of business long ago. Yet due to lack of alternatives, CoinBase now has more users than brokerage giant Charles Schwab.

CNBC November 2017: CoinBase alone had more users than Schwab.

Yes, this situation is absurd. But it is also likely to change quickly.

So I expect that GCAP should very easily be able to convert many of these users away from their existing exchanges and wallets.

Likewise, trading crypto futures is not suitable for the majority of crypto traders around the globe.

First, the minimum contract size is one full Bitcoin. The initial margin requirement is $3,000-$4,000 for just a single Bitcoin, which is far too large for the majorty of Bitcoin investors. Even when the price of Bitcoin was under $3,000 many investors could only participate on platforms that offered small fractional Bitcoin investments.

Futures have an expiration date. Investors are continually forced to “roll over” their expiring futures contracts by buying longer dated ones. Anyone who forgets to do this this ends up getting stuck with physical settlement, which is a clear problem for anyone who has bought on margin and doesn’t have enough money to accept delivery of a full Bitcoin.

In some (but not all) cases, futures providers are allowing investors to go short Bitcoin. But in most of these cases, the margin requirement ends up being as high as 250%. In other words, to short 1 Bitcoin, you would have to post more than $30,000 at current prices. Again, this is prohibitive for the vast majority of small Bitcoin investors around the world.




As we can see below, for many traders GCAPs product offering will be vastly superior over the existing alternatives of using exchanges/wallets or futures.

Benefits of GCAP’s CityIndex include:

  • GCAP customers can go long or short
  • Ability to use 4x leverage with small account sizes.
  • The fees and spreads involved are a small fraction vs. existing exchanges/wallets (spreads as low as $50 with GCAP vs. as high as $1,000 on exchanges)
  • Far lower dollar margin size than for Bitcoin futures






GCAP’s decision to begin its crypto currency roll out in the UK makes perfect sense.

London continues to be the world’s largest international currency trading center. Many customers who sign up through GCAPs UK (London) entity are actually offshore customers. Which means that GCAP can already begin offering services to Bitcoin traders from Japan, China and Korea (which are currently responsible for the vast majority of Bitcoin trading).



Recent news from Siebert Financial (SIEB) saw that stock quintuple from $4 to $20 in just days, even before it realized a penny of additional revenue. Siebert had announced with Overstock.com (OSTK) that the two would enter into a partnership to offer deeply discounted online trading. The financial prospects for GCAP are visibly far more significant than even the best case scenarios for Siebert, which suggests that there should be quite meaningful near term upside in GCAP’s share price.


On the regulatory side, GCAP stands to substantially benefit from potential regulatory changes from Europe’s securities regulatory (the ESMA).

In addition, on December 15th, 2017, the European Securities and Markets Authority put forth its most recent update on proposed regulatory changes to providers of similar financial products in Europe. Following the announcement, competing providers such as IG Group (LSE: IGG), CMC Markets (LSE: CMCX) and (LSE: PLUS) each dropped by 10% or more on the day.

On the same day, GCAP was up by more than 5% after it put out a statement in support of the regulatory changes.

Overall, the ESMA is proposing leverage caps on providers of CFDs and other financial instruments. But the caps are well above the 4x level which GCAP offers on Bitcoin products. As a result, this will have no impact on GCAPs Bticoin offering. Instead, it hinders competitors who would otherwise try to offer much higher leverage to win away customers. Likewise, the ESMA is also discussing an outright prohibition on instruments like binary options. GCAP does not offer any form of binary options, so it would not be affected. But various competitors do offer binary options in an attempt to win customers. As a result, it is those competitors who would be forced out of the market.




There are several near term catalysts which I expect to push GCAP to $18-23 in very short order. However, given the tremendous hype that elevated the other crypto names above, I would not be surprised if the stock spiked substantially higher once a series of announcements starts hitting markets in coming weeks.

GCAP has already begun rolling out a Bitcoin trading platform to its customers which provides tremendous advantages vs. wallets/exchanges or futures. Based on the most recent press release, additional announcements should be coming within days or weeks.

The timing for this roll out is perfect. With South Korea now moving to put restrictions on crypto trading, many traders from this huge market will be actively looking for a new trading platform.

GCAP has already rolled out its Bitcoin platform to customers of its UK entity. But most of these customers are actually offshore (non UK/Europe). In other words, GCAP is already in a position to offer its services to Korean, Chinese and Japanese traders.

South Korea alone often amounts to 20% of daily Bitcoin volume, amounting to over $1 billion per day.

At present, GCAP is established and profitable with just 130,000 customers in total.

During 2017, we saw individual days on which CoinBase added over 100,00 customers in just 24 hours despite its very painful and expensive limitations.

Article: Coinbase adds 100,000 users in 24 hrs, Shows Surging Interest in Crypto

Likewise, despite its blatant inefficiencies and problems, CoinBase now has more users than Charles Schwab. For reference, Charles Schwab is valued at over $60 billion in market cap.

Even the most modest levels of customer uptake for GCAP should quickly deliver very outsized financial results.








Short $SSTI: ShotSpotter is worse than you thought


  • In over 20 years SSTI has never generated profits or meaningful cash. Recent IPO simply allows VCs to finally exit positions. Dec 4th lockup expiration on 8 million shares
  • Reams of independent data and test use confirm that SSTI ‘s technology simply doesn’t work. Period. Customers repeatedly describe overwhelming failure rate.
  • Aggressive tactics by SSTI thwart release of FOIA docs to journalists and researchers. Employee testimony states SSTI provides fabricated data to law enforcement.
  • Multiple recent undisclosed contract losses (just ahead of lockup expiration) and inflated 3Q revenue.
  • Contracts such as Miami and Baltimore (and others) have been repeatedly announced, then quietly cancelled, re-announced, but then quietly cancelled again.

Note: This article is the opinion of the author.  The author is short SSTI.

I suspect that much of the information in this article may actually come as a surprise even to certain board members.  ShotSpotter has historically provided very optimistic reports to its board members, touting the unmitigated success and “proof” of its products, without including information like I have included below.  A copy of one of these reports is included below.


Ticker SSTI LTM Rev $21.8m
FD Shares O/S 11.69m LTM Net Loss -($8.3m)
Mcap ≈$200m Cash per share $1.65
Share price ≈$16
52w Lo/Hi $9.33 / $20.15 Price/Sales 9.1 x

Note: Share count of 11.69 million shares includes 2.05 million shares underlying deep in the money warrants and options with an average strike price of $4.55.  Sell side analysts continue to ignore these 2.05 million shares.

ShotSpotter Inc. (SSTI) offers software and hardware systems which provide locational information on gunshot activity within covered areas. When someone fires a gun, ShotSpotter’s microphones detect the gunshot and send the data to a ShotSpotter center in California.  It is then determined if it is indeed a gunshot. Finally, the location of the gunshot is relayed to law enforcement personnel.



Below I will make clear the following points to show why ShotSpotter will quickly fall by around 80% to $2-4, once the lockup expires on December 4th.

  1. Uninterrupted history of failure. After a 23 year history of uninterrupted commercial and financial failure, ShotSpotter was suddenly publicly hyped in 2017 as an innovative high tech solution to gun violence, so that it could come public in an IPO by Roth Capital. For two decades ShotSpotter has had repeated brushes with outright insolvency.
  2. The IPO was arranged as the only exit for insiders from a business that has been unable to succeed for more than 20 years. The purpose of this IPO was simply to allow insiders and PE investors to exit an otherwise unsellable, money losing investment. On December 4th, 8 million shares will be released from lockup, allowing these investors to finally sell.  Ahead of that lockup expiration, ShotSpotter juiced its revenues by pulling forward nearly$1 million of revenues from a cancelled Puerto Rico contract and then failing to disclose other contract cancellations.
  3. ShotSpotter. Does. Not. Work. Period.  Reams of hard data prove quite conclusively that ShotSpotter simply does not work.   This is why ShotSpotter has repeatedly been unable to maintain customers or generate any profits despite 20 years of trying. Actual documented success rates of less than 2%, with 70-80% of all alerts being unfounded or false alarms.
  4. Customers explicitly state that ShotSpotter does not work and fully confirm the hard data. New customers keep canceling. Following their cancellations, former customers confirm categorically that ShotSpotter simply does not work.  Including major “trophy” contracts such as Baltimore, Miami, San Antonio and Oakland.
  5. ShotSpotter employee testimony (under oath) states that data presented to law enforcement is outright fabricated.
  6. Aggressive tactics to conceal, distort or prevent outright the release of the “damning” data. Internal memos reveal aggressive tactics by ShotSpotter to thwart FOIA requests by journalists and universities seeking transparency into government spending on ShotSpotter. Deliberate steps to legally gag police forces from disclosing the negative data.  The data being withheld is the same data that categorically proves that ShotSpotter simply does not work.
  7. ShotSpotter fails to disclose major contract losses ahead of lockup expiration.  In its November earnings call, ShotSpotter indicated clearly that only one contract had been lost.  Below I show the proof that 3 more contracts have been lost but not disclosed by ShotSpotter ahead of the lockup expiration.
  8. ShotSpotter makes diametrically opposing statements to law enforcement, journalists and university researchers, depending on its financial interest in each situation. ShotSpotter presents one set of facts to law enforcement when selling its product to government payers. It then presents the opposite “facts” to parties trying to investigate spending on ShotSpotter and its effectiveness.  ShotSpotter also presents additional “facts” which contradict its own data when marketing the product. The government payers who buy ShotSpotter are relying on the wrong data.



ShotSpotter’s technology is not new.  Neither is gun violence.

ShotSpotter’s founder, Robert Showen came up with this idea all the way back in 1994 when he kept hearing the sounds of gunfire in neighboring East Palo Alto. Over the years, there have been a few minor improvements to the technology to try to weed out more false positives (from other loud noises). But overall, the technology is still largely the same as it was 23 years ago.

Recent media headlines have been dominated by gun violence. But in fact, the US has had an epidemic problem of gun violence for decades.  Despite this decades of ongoing violence, ShotSpotter has not been able to achieve any real traction, and certainly no profits for more than 20 years.

Here is a list of gun violence incidents that made major US headlines, all in 2015 or earlier.  The point is that high profile gun violence has been a problem in the US for decades, yet it has not allowed ShotSpotter to ever generate a profit.

Date Incident Date Incident
12/2/2015 San Bernardino Attack – 14 killed 11/5/2009 2009 Fort Hood Shooting – 13 killed
10/1/2015 Umpqua Community College Shooting – 9 killed 4/3/2009 Binghamton Shootings – 13 killed
6/17/2015 Charleston Church Shooting – 9 killed 4/16/2007 Virginia Tech Massacre – 32 killed
9/16/2013 Washington Navy Yard Shooting – 12 killed 4/20/1999 Columbine High School Massacre – 13 killed
12/14/2012 Sandy Hook Elementary School Shooting – 27 killed 10/16/1991 Luby’s Shooting – 23 killed
7/20/2012 Aurora Movie Theater Shooting – 12 killed 8/20/1986 Edmond Post Office Shooting – 14 killed
1/8/2011 2011 Tucson Shooting – 6 killed 7/18/1984 San Ysidro McDonald’s Massacre – 21 killed

ShotSpotter has repeatedly been forced to raise new money via private placements in order stave off insolvency, with investors describing the company as “ subsisting on fumes”.  At one point, ShotSpotter decided to change the direction of its business and attempt to create a“big data” play on its detection of gun shots. At the time, “big data” was the hot new thing.

That “big data” plan fizzled entirely.  But the collection and analysis of the “big data” did have one result:  there was now enough data gathered to prove categorically that ShotSpotter’s technology simply does not work.

This was obviously very, very bad. So ShotSpotter quickly adopted a campaign to thwart any release of that data, including blocking access for universities seeking to research it under the Freedom of Information Act.

These points are fully substantiated below. Evidence is provided via internal memos, court documents, investigative journalists and complaints by former customers.


After more than 20 years of providing cash infusions to keep afloat this struggling business, these private investors were finally unwilling to put in any further funds.

In March of 2017, ShotSpotter was once again down to just $2 million in cash but had debt and current liabilities of $25 million.  By this time, ShotSpotter had never turned a profit and had an accumulated deficit of $89 million. As usual, ShotSpotter was again “running on fumes”.

With private equity no longer willing to fund it, in June of 2017, ShotSpotter decided to come public in an IPO led by Roth Capital.

Not surprisingly, the bankers behind the IPO are also the exact same banks who are pumping out bullish research on ShotSpotter. Roth Capital, Imperial Capital and Northland Capital.

When the lockup expires on December 4th, these are the same banks who will make millions of dollars in banking fees by running the secondary offering for the insiders to sell over 8 million shares.

Not surprisingly, each of these banks has been able to ignore the wealth of information that I present in this article.  A large December fee event will no doubt provide a nice bump up in each of their year end bonuses. The support of these analysts therefore comes as no surprise.

Here is what we are hearing from Roth Capital, Imperial Capital and Northland Capital just ahead of this pending lockup expiration. So far they have made no mention of the concerns I raise below.

Imperial Capital sees +30% upside for Shotspotter

Northland Capital Markets Starts ShotSpotter (SSTI) at Outperform

ShotSpotter initiated with a Buy at Roth Capital

PT Raised to $19.75 at Imperial Capital on 3Q Report

Roth Capital Raises ShotSpotter Inc. (SSTI) Price Target to $23.00

ShotSpotter Inc. (SSTI) Given a $20.00 Price Target by Imperial Capital Analysts


The data against shot spotter is absolutely and overwhelmingly conclusive. And it comes in great detail from a wide variety of completely independent sources. Each of these point to the same exact results.

As I will show in a subsequent section, ShotSpotter has undertaken significant efforts to thwart the release of any performance data for its product.  This is because the data is absolutely horrific. It proves conclusively that the product provides no material benefit whatsoever.

But an investigative journalist from Forbes was able to separately obtain and analyze much of the data behind ShotSpotter.  His conclusions were beyond compelling.

The data obtained by Forbes in 2016 showed that ShotSpotter provided huge numbers of alerts to law enforcement, but that more than 98% of these alerts ended in no arrests being made.

Up to 70% of the alerts were described as entirely “unfounded”.

Roughly 90% of the time, no police report was ever even filed following the alert from ShotSpotter.

ArticleShotSpotter Alerts Police To Lots Of Gunfire, But Produces Few Tangible Results


01 - forbes cover

City Total alerts Un-founded % of Total Reports taken % of Total Arrests Total
Brockton 296 152 51.4% 43 14.5% 2 0.68%
East Palo Alto 1,725 1,089 63.1% 237 13.7% 4 0.23%
Kansas City 6,619 2,513 38.0% 714 10.8% 108 1.63%
Milwaukee 10,285 7,201 70.0% 172 1.67%
Omaha 1,181 737 62.4% 92 7.8% 14 1.19%
San Francisco 4,385 1,412 32.2% 76 1.7% 2 0.05%
Wilmington 1,278 399 31.2% 256 20.0% 5 0.39%

And then this gets interesting.

In trying to attract and retain customers, ShotSpotter repeatedly touts the high number of alerts that its system puts out, indicating that the higher the number of alerts, the greater the benefit it is providing

But as we will see below, the high alert rate itself is actually the biggest problem, because the overwhelming majority of ShotSpotter alerts are nothing more than false alarms.

The data above is the quantitative proof which ShotSpotter has been aggressively trying to suppress from public view. It is notable that the data are highly consistent across cities of all sizes and locations within the country.

In fact, additional qualitative proof comes in the form of public statements from municipal officials and law enforcement who went on the record to publicly explain why they were abandoning this system after spending huge sums of tax payer money to have it installed.


Below I present the on-the-record comments made by law enforcement officials and government officials who have actually used and evaluated the ShotSpotter system.

What you should notice is this:

The comments below precisely echo the quantitative data above, even though they come from a wide range of totally different cities.

In addition, (just like the city data above), the verbal comments and complaints below are highly consistent among one another.

Once again, each of these cities says the exact same thing: that ShotSpotter simply doesn’t work.

The list of cities who have cancelled ShotSpotter and then publicly decried its total lack of effectiveness specifically includes cities such as Miami, Baltimore, San Antonio and Oakland. These cities have been repeatedly touted as being on the cusp of providing major revenues to ShotSpotter.  But then the contracts with those cities have been cancelled or discontinued prematurely with little or no revenue at all.

#1 – Miami previously cancelled and said ShotSpotter doesn’t work

Recent headlines have indicated that ShotSpotter is on track to implement a major contract installation in Miami.  ShotSpotter is a brand new IPO, so perhaps investors can be forgiven for not knowing the prior history of major contract announcements (specifically for Miami) which were then repeatedly cancelled with little or no revenue.

Local Miami media is already skeptical of the latest supposed Miami contract, because they have seen this gambit with ShotSpotter before.

ArticleShould Miami-Dade Police Spend $5 Million on a Gunshot Detector They Abandoned Before?

Both the Miami Police Department and the Broward County Sheriffs Department have publicly gone on the record to state that ShotSpotter simply does not work. Worse than that, implementing the system results in a massive diversion of police resources to unfounded calls, taking officers away from actual crimes being committed.

This is why both the city and the county cancelled their previous contract.  (Below we will see in greater detail the mechanics behind the repeated re-announcements of contracts that are then cancelled with little to no revenue).

In Miami, for every one verifiable gunshot, there were at least twenty false alarms.  After more than a year, the system led to just four arrests.

ArticleMiami Politicians Push ShotSpotter Even Though Some Local Cops Say It Doesn’t Work


02 - new times miami




Actually this was the second time that ShotSpotter had been tried and then quickly rejected in Miami (Broward Sherriff’s Office).

Here was the first time they ditched ShotSpotter:

Article: BSO Pulling Plug On Gun Shot Spotter

According to the sheriff’s office:

They could chalk up only four arrests to the system compared to the many man hours wasted by deputies checking out false alarms.” Apparently, ShotSpotter could not distinguish between “gunshots, firecrackers, vehicle backfires or big trucks downshifting on nearby I-95.

#2 – Baltimore cancelled and said ShotSpotter doesn’t work

Just like Miami, we have seen multiple public announcements trumpeting a ShotSpotter contract for Baltimore.  These reports were actually entirely wrong, but few people ever saw the quiet corrections down the road.

As with Miami, despite some flashy news in 2017, Baltimore had already tried, evaluated and then cancelled ShotSpotter on two separate prior occasions.

In February of 2014, SSTI posted to its web site a very prominent post highlighting that the Baltimore police department would be implementing ShotSpotter. This announcement was exceptionally high profile because by this time the gun violence crisis in Baltimore had already surpassed Chicago in severity.

ShotSpotter websiteBaltimore Police to Invest in Gunshot Detection System

03 - balt yes




It took until a full year later, but we finally found out that this post was not only grossly premature, but it also turned out to be completely wrong.In fact, a full year later we found that this contract never went in to place at all in 2014 and that it would not be doing so going forward. In other words, in 2014 this information was so preliminary that it should have never been posted by the company at all. And in the end it turned out to be just flat out wrong. The contract had never even happened in the first place a full year earlier.


04 - balt no




ArticleBaltimore won’t buy gunshot detection system

05 - balt no 2 small



We can see from Baltimore the consistent complaint from law enforcement. Not only does ShotSpotter not work, but implementing it actually causes even larger problems. As shown above, Baltimore stated that:

the fight against crime would be adversely affected by proceeding with the system.

In 2017, Fake News announces a Fake Contract for Baltimore. SSTI shares spike higher.


And yet despite this obvious past conclusion, investors quickly fell for the same old gag when it was announced (yet again) in 2017 that Baltimore would once again adopt the system.


ArticleAs murder rate soars, Baltimore Mayor Pugh seeks help from Gov. Hogan


06 - balt yes 2017

The share price of ShotSpotter immediately spiked by 10%. Few investors noticed when that “news” was quietly retracted a few days later in a tiny note at the bottom of that same article.


RetractionBaltimore police will expand gunshot detection, get more laptops for police cars – Technical.ly Baltimore

07 - balt no 2017




#3 – Charlotte cancelled and said ShotSpotter doesn’t work

In 2016, Charlotte refused to renew its contract with ShotSpotter, after having used the system for four years. More important were the comments that Charlotte police made at the time, noting that:

the gunshot detection system didn’t help them makes arrests or identify crime victims.


ArticleCharlotte ends contract with ShotSpotter gunshot detection system

08 - charlotte ends





08 - charlotte ends 2

From the above:  

Police were only able to find evidence of a gun being fired in one out of 41 reports.


#4 – Oakland cancelled its expansion and has said ShotSpotter doesn’t work

The city of Oakland has been described as the “third most dangerous city in America”.

But in a review of ShotSpotter, Oakland police were quoted as calling the “ technology as not only ineffective, but also counterproductive.”


ArticleOakland cops aim to scrap gunfire-detecting ShotSpotter


Oakland police have also called the system:

expensive and redundant…They say residents already call to alert police when they hear gunfire, and the money could be better used to fund other technology, such as the police helicopter.

Keep in mind, that Oakland is right in the backyard of ShotSpotter and its founders.

As of recent quarters, Oakland was still a partial customer of ShotSpotter.

On the recent conference call on November 7th, ShotSpotter indicated clearly that aside from Puerto Rico/Virgin Islands, there had been no other contract losses.

But as far back as April 28, 2017 the city of Oakland had already publicly disclosed that it was discontinuing its expansion of ShotSpotter.  Phase I had already been implemented, but Phases 2 and 3 have now been cancelled. As is always the case, the part actually implemented was small, while the majority of the previously announced contracts were actually cancelled without providing the “expected” revenue to ShotSpotter.

In fact, given the public statements to the press by Oakland police, these cancellations really should have come as no surprise whatsoever.


10 - oakland budget

Link: Oakland Budget – Apr 2017

Clearly someone in the Oakland municipal government has a favorable opinion of ShotSpotter.  But in fact, the police have actually been trying to scrap the program for years – since 2014In its attempts to keep Oakland from cancelling their entire program, ShotSpotter then slashed its fees dramatically.

11 - oakland cancel 2014



#5 – San Antonio cuts ShotSpotter and said it doesn’t work

As shown below, although ShotSpotter has publicly indicated that it hasn’t lost any major contracts other than Puerto Rico/Virgin Islands, the company’s San Antonio contract has already been lost in recent months.

In October 2016, SSTI announced that ShotSpotter was expanding into eight new areas, San Antonio being one of them.

12 - san antone 8 new cities





ShotSpotter IRNew York City, Chicago, Birmingham and Miami-Dade Among Eight Areas Expanding Gunfire Detection System

Just 10 months later, however, San Antonio cut funding for ShotSpotter citing the high cost against the fact that there were only 4 arrests made.


13 - san antone cuts funding Link: S.A. cuts funding to $550K gunshot detection program that resulted in 4 arrests

According to the assistant to the SAPD Police Chief:

about 80 percent of the times when ShotSpotter was activated, police could find no evidence of a shooting at the scene…

The San Antonio Police made it very clear why they were cutting ShotSpotter.The system simply didn’t’ work.

Over the course of 15 months, the system only resulted in a mere 4 arrests – at a cost over $136,500 per arrest !

In their own words, San Antonio Police summarized the system well:

  • “It doesn’t make the community feel safer”
  • “It doesn’t reduce the number of gunshots in our community”
  • “It doesn’t prevent you from being shot.”

In other words, the only party to benefit from the massive tax dollars spent on ShotSpotter is….well….ShotSpotter itself.

Article: San Antonio police cut pricey gunshot detection system

14 - san antone long w quotes






#6 – Fall River cancelled and said ShotSpotter doesn’t work

Fall River is another interesting example.

The question is this:  Did ShotSpotter lose the Fall River contract or not ?

On the one hand…it is true that Fall River continues to use the ShotSpotter product.

But on the other hand…after Fall River recently canceled their contract, ShotSpotter just now started providing Fall River with the service for FREE.

Clearly the contract that ShotSpotter had signed with Fall River required payment for the service and clearly those payments are no longer being made.  In other words, “Yes”, the contract has been cancelled.  But “No” the loss of this contract has not been announced by ShotSpotter. In fact, the data provided by ShotSpotter on November 7 th clearly indicated that aside from Puerto Rico/Virgin Islands, no other contracts had been lost.

For now, ShotSpotter has offered to continue to provide free service to Fall River such that it feels that it does not need to disclose the contract loss until after the lockup. Very convenient !

But here’s the rub:  once the lockup expires on December 4 th SSTI will have no more reason to lose money by proving free service to non paying customers. I expect that at that time the cancellation of the contract will finally be announced.

15 - fall river ditch




Article:‘False alarms’ lead Fall River to ditch ShotSpotter system

Along with a 41 percent false alarm rate and an expensive price tag, Fall River police have reported that there have even instances where ShotSpotter failed to report gunshots in locations where the sensors were located.


16 - fall river free

ArticleFall River to keep ShotSpotter program for free


#7 – Troy,MI cancelled and said ShotSpotter doesn’t work

Yet another former customer who discontinued its contract with ShotSpotter is the city of Troy, who discontinued its contract in 2012.

16 -troy turn off

ArticleTroy will turn off ShotSpotter

According to the Troy police department, “The system was suppose to become attuned to the way sounds were heard in Troy’s streets and differentiate among the brakes of a truck climbing the Hoosic Street hill, from a firecracker, actual shots and any other noise.” These attributes were “never completely achieved.”



SSTI employee Paul Greene is a “Manager of Forensic Services at SST Inc.,” according to his LinkedIn page.


18 -linked in

Testifying under oath in the Reed trial, which was brought about after a man (“Reed”) shot at a car full of people in 2016, Paul Greene was questioned about the accuracy of the ShotSpotter system.

19 -paul g text 1



20 -paul g text 2


In addition, in a prior deposition, Greene revealed that ShotSpotter has faced at least five separate court challenges to the validity of the science behind it.

Why was Paul questioned in the first place ? The ShotSpotter system alerted police to a location that was a full city block away from the actual shooting.

Article: Courtroom testimony reveals accuracy of SF gunshot sensors a ‘marketing’ ploy

Some members of law enforcement are already catching on to ShotSpotter’s “marketing” ruses.

Last year, Memphis police deputy chief Jim Harvey posted on his LinkedIn page a request for feedback on ShotSpotter. Instead, he was inundated with feedback from various people with various direct and indirect ties to ShotSpotter itself

According to Forbes, here is what happened:

21 -memphis sherriff article

ArticleShotSpotter struggles to prove impact as silicon valley answer to gun violence 



In order to attract new customers, ShotSpotter has implemented an aggressive campaign to suppress and conceal all of the negative information about the product.

At the same time, ShotSpotter aggressively supplies these officials with a deeply misleading sub-section of statistics to allow them to tout how it is in fact tremendously effective!

The Freedom of Information Act (“FOIA”) was passed in 1967 to provide transparency into the workings and decisions of government so as to avoid fraud and waste.

From the website FOIA.gov

22 -what is foia


Internal memos from ShotSpotter reveal the aggressive tactics that ShotSpotter is using to thwart the release of data under FOIA

FOIA allows for several exceptions including for law enforcement, public safety, and trade secrets.  In fact, the only “secret” that ShotSpotter is trying to protect is the fact that its product simply doesn’t work and that it is a waste of federal and local tax dollars.

In internal memos, ShotSpotter is not shy about saying that the purpose of withholding this information is to protect its own business from “harm” that would be caused by releasing the data.

ShotSpotter instructs recipients to:

#1 – simply refuse to release, or

#2 – release data that is heavily redacted to not show the terminal flaws shown above

#3 – “ Obscure” the most important information

And then even when any information is actually released, ShotSpotter has specifically instructed its recipients to deliberately provide only paper copies of the heavily redacted information so as to further thwart dissemination online by anyone.

The screenshot below is a “ Customer Success Training Bulletin” circulated by ShotSpotter.

23 -sst internal memo

Notably, ShotSpotter is more than happy to release data which simply shows the huge number of raw alerts.  This information is then used for marketing purposes.

The grand irony here is that it is precisely this excessive number of false alerts that is precisely the reason why ShotSpotter is so ineffective and wasteful of public resources. But because ShotSpotter deliberately stymies the release of the full data set, this large number of alerts actually looks like a net positive for the system. As a result, no one is the wiser.

Below I show repeated examples where ShotSpotter actively promotes itself based on the notion that “a high number of alerts equals a higher level of public safety”.

Some of the data below has been released directly from ShotSpotter’s web site. Other material has then been re-disseminated through third party sites which quote the original data being put out by ShotSpotter.

Selling the board of directors:

These are the exact type of stats that ShotSpotter management feeds to its board members in periodic “progress reports”. The reports contain very brief “news” articles which read more like press releases and contain heavy amounts of data supplied directly by ShotSpotter itself. They also contain lengthy “ case studies” which were written by management to tout success stories.  But in reading the “case studies” more closely, it becomes interesting to observe the large number of “satisfied customers” who then canceled their contracts subsequent to the date of the report.


Screen Shot 2017-11-21 at 5.52.12 AM

Link: Full document

The point is this: ShotSpotter actively promotes its product on the basis that “more alerts equates to greater public safety”.  In fact, as we can see from the data and the customer complaints, the exact opposite is true.  The biggest problem is that ShotSpotter results in false alerts as much as 70-90% of the time.  But because ShotSpotter has largely concealed the data, the public and the government payers may not know until after they use and then cancel the system.


News of each of these contract cancellations occurred in time to be included in ShotSpotter’s November 2017 earnings release.

Despite this, ShotSpotter has not disclosed any of these cancellations.

In some cases, in response to cancellation, ShotSpotter has taken to “giving the service for free” to delay reporting the cancellation until after the lockup expires. But the fact is that such customers already announced their cancellation and are no longer paying ShotSpotter.

Also, keep in mind that these are just the ones I have already found.  There may be additional undisclosed contract losses that I have not yet found. But I will continue looking, of course.

On the earnings call on November 7th, the comments made by CEO Ralph Clark made it very clear that aside from Puerto Rico/Virgin Islands, the company had not lost any other contracts.

Puerto Rico was important because it was ShotSpotter’s 2 nd largest customer accounting for 10% of revenues.  It was a big loss, but at least it was (according to the CEO) the only loss.

We can see this from the Q2 transcript.

CEO Clark stated that net new miles gone live in the quarter was only 17.  The total gross new miles was 50. But Clark stated clearly that the number of square miles lost in Puerto Rico/Virgin Islands was exactly 33.

In other words, ahead of this key lockup, Mr. Clark has made it very clear that aside from Puerto Rico/Virgin Islands, ShotSpotter has not lost any other customers.  This information has clearly provided strong support to the stock price just ahead of the lockup expiration where insiders can finally sell their shares.

Cancellation #1 – San Antonio. Newspaper articles from as far back as August 2017 were already noting that San Antonio was cancelling its contract. They were quite clear in stating their reasons why:

Specific quotes from San Antonio Police include:

  • about 80 percent of the times when ShotSpotter was activated, police could find no evidence of a shooting at the scene
  • the system only resulted in a mere 4 arrests – at a cost over $136,500 per arrest
  • “It doesn’t make the community feel safer”
  • “It doesn’t reduce the number of gunshots in our community”
  • “It doesn’t prevent you from being shot.”

Article: San Antonio police cut pricey gunshot detection system (Aug 2017)

Even though this cancellation (and the reasons why) could be found as early as 6 months ago, ShotSpotter has recently continued to insist that the only lost contract was Puerto Rico.

Cancellation #2 – Fall River. As we also saw above, Fall River, MA is no longer paying for the service, but ShotSpotter is continuing to provide the service for free so as to not disclose the loss of the contract ahead of the lockup expiration.

ArticleFall River to keep ShotSpotter program for free (September 2017)

ShotSpotter has agreed to let the city of Fall River continue to use the system for free, Mayor Jasiel Correia announced Thursday.


Cancellation #3 –  Oakland, CA

As far back as April 28, 2017 the city of Oakland had already publicly disclosed that it was discontinuing its expansion of ShotSpotter.  Phase I had already been implemented, but Phases 2 and 3 have now been cancelled. As is always the case, the part actually implemented was small, while the majority of the previously announced contracts were actually cancelled without providing the “expected” revenue to ShotSpotter.

In fact, given the public statements to the press by Oakland police, these cancellations really should have come as no surprise whatsoever.

24 -oakland budget 2





In fact, beyond this deliberate distortion of the data above, ShotSpotter goes much further in disseminating information that is flat out incorrect.

We can see repeated examples where ShotSpotter gives one set of facts to law enforcement customers but then gives contradicting “facts” to researchers and journalists who are investigating the use of ShotSpotter.

Here are 3 examples:

Example #1 – “Alternative facts” on crime data

Jennifer Doleac is an assistant professor of public policy and economics at the University of Virginia who attempted to get her hands on the data underlying ShotSpotter to assess whether it actually works and if it is a sensible use of tax dollars.

ShotSpotter adamantly rebuffed any and all efforts to obtain the data for analysis. When Ms. Doleac requested the information citing that the data was a matter of public interest – crime data – Mr. Clark sent her a strongly worded letter insisting that ShotSpotter was now a “Cloud based services model” and specifically that SST’s ShotSpotter data is NOT crime data”.

Obviously this statement from Clark defies common sense. We know that any data related to urban gunfire is going to be crime data.

This statement by ShotSpotter CEO was a convenient excuse for the company to suddenly refuse to release the data which would prove that the product is a waste of taxpayer dollars.

As shown in the examples below, ShotSpotter has consistently described its data as crime data when that served a useful marketing purpose.  But when the release of “crime data” became a threat to ShotSpotter became a threat, the CEO simply changed his story.

From ShotSpotter’s website:

Law enforcement is no longer dependent on 911 calls with ShotSpotter because it instantly notifies officers of gunshot crimes in progress with real-time data.

25 -gun crime data 1

From ShotSpotter’s brochure: “ Key Benefits: … Proactive gun crime pattern analysis & strategic deterrence.”

25 -gun crime data 2

The point is this:  In trying to sell its product to government payers, ShotSpotter repeatedly highlights the value of its crime data. But as soon as it fears it will have to turn the data over to independent investigators in FOIA requests, ShotSpotter simply claims that this data is no longer “crime data”.  ShotSpotter will say anything (even contradicting its own earlier statements) to prevent the release of the reams of data which prove that the product does not work.

Example #2 – Because ShotSpotter doesn’t work, the company invents new metrics in order to sell the product to new cities.

ShotSpotter clearly doesn’t work in even remotely the way it is marketed.  We can see that from the raw data as well as the detailed comments from law enforcement across the country.  We can also see it in various court documents and investigative articles.

We know from the data and complaints above that ShotSpotter doesn’t improve public safety or reduce gun violence.  In the vast majority of cases, the system can’t even determine if any shot was fired at all.

So instead, ShotSpotter has taken to inventing new “success objectives” for the use of its product.

Even if there are no arrests or other public safety benefits, ShotSpotter tries to convince the public that there is some benefit to things like:

finding shell casings well after the fact“sending a powerful message to law abiding citizens”“ better community relations”“ enhanced situational awareness


ShotSpotter IR: Dozens of Shell Casings Found in Two Separate Shootings

Clark] said he wondered if the department was defining success in the wrong way.

ShotSpotter allows police to make a quick response to gunfire…which sends a powerful message to law-abiding citizens and shooters that police take gunfire seriously.

There’s a few things that are problematic,’ said Monroe County Assistant Public Defender Katie Higgins…‘[ ShotSpotter] was not designed to be used as actual primary evidence (in a trial),’ she said.


ShotSpotter IR: ShotSpotter alert leads police to shell casings near vacant Peoria house


According to Forbes, ShotSpotter claims that there is a longer term benefit which (of course) is much harder to verify or quantify.  As an example, SSTI frequent cites the fact that even when there are no arrests, apprehensions or even suspects, there is often crucial evidence that is gathered which can result in convictions even years down the road.

Forbes describes the value of this supposed benefit as “overstated”, which I believe is a considerable understatement.

For example, a ShotSpotter audio recording was used in the prosecution of a shooting that occurred in Mahoning County, Ohio. However, the expert witness provided by ShotSpotter could not provide details on key findings that would have corroborated other testimony.

According to the Assistant county prosecutor, “We still would have been able to secure conviction [without ShotSpotter].”

Effectively, ShotSpotter is just coming up with creative excuses for why law enforcement should continued spending tax payer money on a system that has been thoroughly and repeatedly debunked.

Example #3 – Vocally pretending that ShotSpotter causes visible drops in gun violence

Regardless of whatever any data says and regardless of the complaints from past disgruntled customers, if ShotSpotter could actually be seen to deliver a visible drop in gun violence then it would certainly be able to win over more potential new customers.

It is therefore not surprising that ShotSpotter is out there making aggressive “ cause-effect” claims about how SS directly reduces the incidence of violence.

Each of the following links come from ShotSpotter’s investor relations department. They show that ShotSpotter is marketing itself on the basis that “using ShotSpotter leads to lower gun violence”.

ShotSpotter claim: Springfield, Mass. topped the nation with the largest reduction in New Year’s Eve celebratory gunfire, down 60 percent from 2013 to 2014, according to ShotSpotter data

ShotSpotter claim:’We are extremely pleased with the dramatic decline in gunshots Fall River has seen over the last few years…While the 57.4% decrease in shootings is substantial, there is still much more to do…”

ShotSpotter claim:“ Among U.S. cities using SST’s ShotSpotter technology, three of the top five with largest reduction in gunfire incidents from 2014 to 2015 were: New Haven, Conn. (-38.5 percent, Atlantic City, NJ (-35.4 percent), and San Francisco, CA (-34.6 percent).”

ShotSpotter claim:“ Other top cities using ShotSpotter and with significant reductions in celebratory gunfire on New Year’s Eve include: Stockton, Calif., with 38.2 percent decline (from 136 to 84 incidents); Miami Gardens, Fla., with 37.5 percent decline (from 48 to 30 incidents); and Rocky Mount, NC, with a 19.3 percent decline (from 57 to 46 incidents).”

ShotSpotter claim:“ In addition to Fall River’s gunfire incidents declining 57.4 percent, the following cities experienced impressive reductions and are willing to share their successful approaches for gun violence reductions: Springfield, MA – 51.2%, Camden, NJ – 48.0%, Plainfield, NJ – 39.8%, East Palo Alto, CA – 29.1%, Oakland, CA – 26.1%.”]

Here is the truth:

Despite the alarming headlines over high profile mass shootings in places like Vegas and Texas, gun violence has actually been on a steady and consistent decline across the entire US.

The tables below show that gun violence has been steadily deceasing across the US for the past 10 years. This includes for the country as a whole as well as for wide range of individual cities which have never used ShotSpotter at all.  Yet ShotSpotter continues to claim the its system is responsible for these declines.

Quite obviously this assessment stands in stark contrast to the data presented above  and the detailed experiences of law enforcement.


26 -gun violence natl decline


Link: Pew Research – Gun Violence

26 -gun violence natl decline 2


Article: The Economist

As can be seen clearly in the table above, cities across America have seen a very steady decline in gun violence, whether or not they had any use of ShotSpotter at any time ever.

The implementation of ShotSpotter technology is not what is “causing” the reduction in gun violence any more than SS is “causing” the sun to shine in those cities.  But ShotSpotter is more than happy to claim credit for “causing” this reduction which is in reality just part of a decade long macro trend.

ShotSpotter’s claims that it somehow results in a reduction in gun violence are entirely bogus and unsubstantiated.

Disclosure: This article is the opinion of the author.The author is short SSTI.  The author may trade one or more securities mentioned within the next 72 hours.


Long $RH – $RH Will Spike Much, Much Higher Very, Very Soon


  • In May, RH quietly awarded its CEO a massive nine figure incentive package to achieve a $150 share price by any means. Two days later RH announced a $700m buyback.
  • In 2017, RH already bought back half of all outstanding shares at prices below $50. Stock then doubled. Further financial engineering can easily attain $150 quickly.
  • In October, tiny debt repayment sent stock up 20 points. Now $650m of converts nearing conversion price. But RH previously bought “bond hedges” which neutralize any convert dilution.
  • Despite much higher share price, short interest now falling as some shorts realize the financial engineering trap. But short interest still near 50% of float.
  • RH suddenly announced its first “investor day” after more than two years. Past events saw announcements move the stock big. Only eight trading days away.


Note:  This article is the opinion of the author.  The author is long RH and HTZ.

Key statistics

Name:                         RH (formerly “Restoration Hardware”)

Ticker:                        (RH)

Market cap:                $1.8 billion

Current price:             $89.24

52w Lo/Hi:                 $24.41  / $91.81

Shares out:                21.2 million (float of 18.6 million)

Shares short:             8.8 million (48% of float,  9 days trading volume)

Avg. Volume:             1.1 million shares



***   Section 1: Summary investment thesis

Shares of RH are being driven sharply higher as a result of financial engineering being conducted by RH’s CEO Gary Friedman.  Throughout this article, please understand that the described reductions in share count have nothing to do with any type of meaningless “reverse split”. Instead, with RH these are actual and permanent reductions in share count which are having a very predictable effect on the price of each remaining individual share.

Right now some shorts appear to be taking the view that “if RH was a good short at $30, then it must be an even better short at $90”.  But in fact, the share count has been reduced so aggressively (via share buy backs) that the market cap of RH is only up by 30-40% since April.  Moreover, this moderate rise in valuation is arguably not far out of line with the recent improvements in financial results (and outlook) as announced in September.  The September announcement alone saw the share price spike 45% in single day. The shares repurchased by RH were bought at far lower levels and much of these purchases were conducted with cash (not just debt), such that even the comparable rise in enterprise value is also far much lower that this sharp rise in the share price.  In other words, comparing the price of a single share between one period and the next is no longer a consistent picture of the valuation of RH as a whole.

So here is what is happening:

In May of 2017, RH’s CEO Gary Friedman was quietly awarded a staggering nine figure incentive package if he can somehow engineer the share price to $150 or higher.  Precisely how he achieves this goal is entirely irrelevant.

If Friedman is successful, the value of the total awards to him will exceed $500 million.  At least $25 million of this will come to him within just the next few months. All that is necessary for Friedman to receive this payout is the financial engineering and ongoing reduction of share count coupled with even just very slight improvements in RHs business (in fact, whether real or perceived).

Mr. Friedman did not waste any time in putting his plan into action.

Within just two days of that award (on May 4th, 2017) RH quickly announced a $700 million share buyback to sharply reduce the share float.  Some were surprised at the buyback because RH’s stock price had already been rising towards the highest prices of the year (then closing in on $50).

Even more surprising (to some) was that within just 50 trading days, RH had announced that it had already completed the entire $700 million share repurchase, accounting for a significant portion of the daily volume during that time.

What I will describe below is how Friedman is now using a combination of positive cash flow and new debt to further reduce the share count. Friedman is effectively conducting a “stealth/quasi/creeping” going private in order to drastically reduce share count.  Ultimately, for Friedman to take home his nine figure package, the equity float must go lower. And this is what is happening.  The impact on the share price is entirely predictable.

Throughout 2017, RH has already repurchased half of its outstanding float at an average price of $49.45. The share price has already nearly doubled since those purchases.

But what about the all of that debt ?

Because of its increased leverage, the market has been very focused on RHs “capital structure”.  But changes in leverage can now cut both ways. As a result, when RH suddenly announced three weeks ago that it was already paying down its $100 million second lien term loan (within just 3 months of it being issued), the stock quickly shot up 20 points from the $70s to the $90s, quickly hitting new 52 week highs.  And yet clearly that was a just relatively small deleveraging.

Of RHs remaining debt, the majority ($650 million) is in the form of convertible debt with strike prices of $116 and $118. And now suddenly these conversion prices are quite squarely within range.

But….did you also know that in 2014 and 2015, RH had already purchased complete “bond hedges” from underwriter BofA-ML to fully neutralize dilutiononce those convertibles convert at prices over $116 and $118.  There is therefore no dilution until the share price exceeds well over $170.

In 2014 and 2015, RH paid BofA-ML over $130 million for the long legs of these bond hedges to neutralize dilution.

(Terms, details and dilution tables for the bond hedges are included below).

Yet the market has missed the details of these convertibles and bond hedges because just a few months ago, the share price was still below $50, making conversion seem highly unlikely.

(And quite frankly, I am very skeptical that many investors ever even knew about these massive bond hedges in the first place.)

Even aside from earnings announcements, Friedman has made use of other ongoing announcements to propel the share price higher over the past 5 months.  There was the announcement of the share repurchase, the announcement of Friedman’s own open market purchases of $2 million in RH stock in the $70s and then the announcement of the early repayment of RH’s second lien notes in October.  Each time, these separate announcements have driven the share price sharply higher.  This is how we have gotten from the $40s to the $90s in just 8 weeks.

The next catalyst for a sharp spike higher

And now in just 8 trading days from today, RH has suddenly decided to conduct its first “investor day” after more than two years.  In the past, RH has made very visible use of such events to make announcements which then sent the stock sharply higher.

There are a variety of announcements that Friedman could be expected to make at (or in advance of) this “investor day”.

The most obvious announcement would be that RH would announce the simple approval of the next leg of its ongoing share buyback.

Or RH could announce a subsequent reduction of leverage.

Or Mr. Friedman could simply reiterate his recent very bullish views on RH’s near term prospects, both in the US and in Europe.

Given the 48% short interest in RH and the moderate trading volume, any of these announcements could easily fuel an immediate and very sharp spike in the share price.

In the event that RH announces yet another shift in the capital structure (i.e. the next leg of the stock buyback or the next debt pay down), such a spike would most likely be permanent rather than temporary.

In the near term, if the share price stays above $100 (up just 11% from current levels) in the next few months, Mr. Friedman will receive an extra $4 million under the recently awarded incentive package.

But if the share price goes North of $150 then just that first near term incentive award swells to $25 million to be doled out to Mr. Friedman in just the next few months.

So ask yourself this:  in its first investor day in more than two years, and with $25 million looming in near term incentives, do you think Mr. Friedman will say something positive or something negative  

Link:  RH to Host Investor Day on November 16, 2017

***   Section 2: Financial engineering works again and again.

Back in August, I published my long thesis on Hertz Inc. (HTZ) when the stock was at just under $14.  Many people thought (and said) that I must have lost my mind.  The share price (they said) was clearly wildly higher than what Hertz’s troubled fundamentals could justify.  And Hertz’s “capital structure” (they said) would only serve to turbo charge a decline in the share price.  Just before I published my article, a SELL recommendation from Barclay’s raised the specter of bankruptcy, sending Hertz’s stock plunging by 40% in 2 days.

Hertz shares plunge 21 percent after Barclays downgrade

Against that, all it took was for the slightest of ongoing results to be “less awful than expected” and Hertz was set to skyrocket.  And this is exactly what happened.  With short interest at greater than 50% of the float, a modest rise in the share price turned into a sharp spike and Hertz’s share price jumped 40% within days. The share price then quickly went on to double to around $28.  Hertz is now up by around 75% since where I wrote about it. I am currently long a moderate amount of Hertz.

As I was with Hertz, I am totally aware of the short thesis on RH.  In fact, just as with Hertz, I even agree with many of the FUNDAMENTAL observations of the short thesis on RH.

But I will show what the market has missed and why shares of RH are set to very quickly spike sharply higher from here (and then stay much higher going forward).    And just as with Hertz, it is the “capital structure” (and changes to the capital structure) which will now turbo charge the share price much HIGHER rather than lower.

Important:  Once we saw what Carl Icahn was doing with Herbalife (HLF), it then became very easy to see what Icahn was doing with Hertz.  It became very obvious that the price for any single share for each of those companies would have to rise, even despite very visible challenges with their underlying fundamentals. Changes in the share price between one period and the next were no longer comparable for valuing the company as a whole.  

With HLF, I tend to agree strongly with Ackman (bearish) about the business, but even more strongly with Icahn (bullish) on the expected direction of the share price.

01 - HLF











02 - HTZ

We can now see similar tactics being used by RH CEO Gary Friedman to “engineer” the RH share price to much higher levels. It has worked with HLF. It worked with HTZ and now it will quickly work with RH.


***   Section 3:  Looking at the RH short thesis

By now, the short thesis on RH is quite well known and has been widely disseminated for over two years in a variety of media outlets including Grants, The Wall Street Journal and Baron’s.

In fact, on a strictly fundamental basis, I actually agree with many of these obvious concerns raised by the financial media.  But it just doesn’t matter. The share price is headed sharply higher.  These media outlets had all raised similar concerns about names like Hertz and Herbalife as well, even as those stocks went on to soar dramatically in price.  Notice the prices of RH at the time of these articles (as well as their titles).

Date Source RH


Aug 2017 WSJ $53 Restoration Hardware’s Wild Ride to Nowhere
March 2017 WSJ $33 RH’s Hard to Believe Restoration
Dec 2016 Barrons $34 Restoration Hardware: Fears Turn to Reality
Jun 2016 Barrons $31 Restoration Hardware Tough to Handle

So here is the (widely known) RH short thesis in a nutshell:

RH sells very high end (i.e. “over-priced”) furniture to a small demographic of upper income customers. The overall size of that demographic is already quite small and their continued purchasing power is heavily dependent upon ongoing appreciation in real estate and stock market assets.   Revenues at RH have steadily increased, and have been driven by a significant expansion effort into a) more stores and b) larger and larger store formats.  Once the economy slows (and with it the real estate and stock market values), purchases from these customers will slow sharply.  That store expansion (which has so far helped RH) will then become a weight on the business.    Many shorts also assume that any decline in RH will then be turbo charged by recent changes in its “capital structure”.  This is because RH has been aggressively been buying back its own shares and financing those purchases by issuing debt.  Leverage has therefore increased sharply.

But against this short thesis, there is a very visible wild card which has been a significant head scratcher for anyone who has been short the stock.

RH CEO Gary Friedman has also been using his personal funds to aggressively acquire millions of dollars worth of RH shares in the open market. His earlier purchase of nearly $1 million in July of 2016 could arguably be justified by the low price of $27.50 at the time.

But then in September of 2017 (just 6 weeks ago) Friedman again used his personal funds to purchase an additional $2 million of stock at an average price of $70.28. Friedman’s latest purchases occurred at the highest share prices for RH since late 2015. Friedman’s most recent purchases at $70.28 in September marked the beginning of the subsequent rise in the stock from the $70s to the $90s, a further 30% rise in just those 6 weeks.


03 - Friedman buys




04- RH price

So let’s look at what the larger market is missing here.

***  Section 4:  Smarter shorts have been very QUIETLY reversing their views on RH

(Hint: No short seller is going to tell you that they are desperately looking to get out of their position in RH.  Duh.  Given the information below, I would be rightfully be quite skeptical if anyone who was short RH started aggressively trying to convince me to sell my shares of RH.)

A few months back, short interest in RH had exceeded 60% of float.  This is what we call a “suicide short”.    With the stock having doubled since this time, it has certainly lived up to the name “suicide short”.

Since that time, the short interest has fallen to 48% of float. It is still basically a “suicide short”, but clearly some of the smarter shorts have started to comprehend the implications of the ongoing financial engineering by RH’s CEO, which will continue to send the share price ever higher.

And note that even this small level of short covering over the past two months has contributed to the sharp rise in RH’s share price.  From September through October, short interest fell only modestly from 58% of float to 48% of float but the share price rose by more than 20 points during that time (and this continued rise was already AFTER earnings had been released).   So if there is a larger unwinding of short positions, then we should expect a much larger upward move in the stock from here.

05 - short int graph

Also remember that on September 7th RH shot up by 45% in just a single day, from $49 to $71, following the release of better than expected earnings and guidance. So that is the level of short term price volatility we have come to expect from RH when it puts forth a meaningful new announcement.


06 - HCP















At nearly 50% of float, the remaining short interest is still absolutely massive. Even attempting to slowly get out of small positions is noticeably pushing up the price of RH.  The current short position amounts to fully nine days of trading volume.

This is why existing shorts are trying to be very QUIET about getting out of their positions in order to minimize a potentially significant short squeeze from here.

But as we have often seen in the past, there will inevitably be some “dumb money” that gets badly burned.

The dumb money is staying short on the simple view that  “if RH was a good short at $30, then it must be a great short at $90”.

***   Section 5: The Bull Thesis for RH (on the share price, not the business)

Share price vs. valuation

Yes, during 2017 shares have more than tripled off of their sub $30 lows. And yes, anyone who has been long or short during this time has participated 1:1 in this 60 point move.

But it is very important to understand that this categorically DOES NOT mean that the VALUATION of RH has tripled.   In other words, despite the share price move, RH has not necessarily become equally expensive as a company.

The all time high for RH was just over $100 in 2015. So as we now approach that level again, some people are tempted to try to call the top in the stock.

But because of the changes to the capital structure since 2015, the market cap of RH is less than half of what it was back then, while the enterprise value (“EV”) is actually half a billion dollars LOWER – EVEN at the same share price of around $100.

Conclusion: Because of continuing changes in the capital structure, comparing the share price from period to period is no longer an accurate reflection of changes in the value of RH as a company.  

Just during 2017, RH has been making use of very aggressive share repurchases to cause a PERMANENT reduction in the outstanding share count.  As a result, despite the “triple” in the share price, the market cap has only risen by less than 50% since the end of Q1.

In addition, aside from the debt funding much of the share repurchase were conducted with cash and the average purchase price was at just $49.45.  As a result, the rise in EV has also been far less than what would be surmised by looking at the share price.

Think of it this way:  RH borrowed around $600 million to buy back $1 billion of stock at the time.  The balance was paid for with cash. The value of that debt stayed constant at around $600 but the value of those shares repurchased has since nearly doubled to nearly $2 billion.

And remember that the 50% rise in market cap that we have seen this year was actually coming off of a very low base.  The share price had been sitting at deep multi year lows.

In addition, some amount of bounce from those levels is arguably quite justifiable given that in September:

  • GAAP revenues increased by 13% (relative to single digit growth at competitors).
  • Earnings came in at 65 cents per share vs. 44 cents in the year prior (an increase of 48%)
  • RH boosted guidance on 2017 revenues to $2.42-2.46 billion
  • RH boosted 2017 net income guidance to $70-77 million

Analysts have also upped their outlook for RH substantially.  Consensus wall street expectations for earnings this year has increased by 43% over the last 6 months to $2.60 currently from a low of $1.82. 

The recently improved outlook is actually quite significant.

In fact, we can see that RH currently trades at around 26 times consensus earnings estimates. This is actually slightly LOWER than where RH has traded vs. estimates in the past.  It is also steeply lower than the 30-40x multiple where RH traded two years ago (when the stock was also near $100).  So the stock price comparison of today is truly no longer comparable.  It is apples to oranges.

RH share price multiple vs. consensus earnings estimates__ historical mult



My only point is that some level of valuation increase is certainly merited vs. 6-9 months ago.  And once we factor in changes to the capital structure, the moderate rise in RH’s overall valuation is not excessive.


Question…  So are these share repurchases just “financial engineering” to artificially make the price of each share higher ?

Answer…   YES, YES, YES. These repurchases are absolutely financial engineering.

But…. It simply doesn’t matter. The share price will continue to go much higher as the actual share count continues to decrease. In addition, even very small improvements in earnings (or even just in guidance, Mr. Friedman ! ) will start to have a disproportionately larger impact on the price per individual share.

Anyone who has been long or short the stock during 2017 has participated 1:1 in the share price rise.  And they will continue to participate 1:1 as the share price moves up towards its next level of $150. Because that is the level to which CEO Gary Friedman needs to “engineer” the stock price.

***   Section 6:  In 2017, Friedman was given a NINE FIGURE incentive to engineer a $150 share price for RH

On exactly May 2nd of 2017, RH quietly awarded CEO Gary Friedman a massive nine figure contingent equity compensation package which aggressively incentivizes him to increase RH’s share price.  The precise method of HOW he achieves this price is entirely irrelevant.

The incentives to Friedman have an “exercise price” of $50 per share but are “restricted” until the share price reaches prices of $100, $125 and $150.  If he does not meet these share price targets, then the options are restricted for a period of 20 years. Mr. Friedman is currently 60 years old.

From the Form 8K dated May 2, 2017.

08 - Friedman award 8k

As noted, the options contain time restrictions and are awarded over a four year period. But under certain conditions, the options all get awarded immediately AND they then vest immediately too.  We will see this below.

On the date of that award in May 2017, RH closed at $48.62 such that the large award size seemed not-so-relevant vs. their restriction prices of $100-150.  (Obviously they are suddenly looking much more relevant now that RH has doubled in just 6 months.)

And here is where it gets interesting.

On May 4th 2017 (just two days after Friedman received his incentive) RH suddenly announced that that it had authorized a $700 million share repurchase program.

09 - May 4th $700m



With his massive incentive package in place, Friedman didn’t waste any time in aggressively reducing the outstanding share count.  Within just 50 trading days (on July 14th) RH announced that it had already completed the entire $700 million repurchase. Wow, that was fast.

09a - $700m complete


In fact, this $700 million buyback followed on the heels of a $300 million buyback in Q1 (just a few weeks earlier) which had been effected in the run up to Friedman’s incentive package being awarded to him.

Together this means that in just a six month period, RH bought back 20.22 million shares, cutting the outstanding share count by half (49.6%) from where it stood in early 2017.  Against the total outlay of $1 billion, we can see that RH bought those shares for $49.45 (and they are now trading at around $90).

So yes, the share price has tripled since Q1 from below $30 to over $90.  But because the share count has been cut in half, the market cap has only increased by 50% from those deep multi year lows.

And again, since that time we have seen sharp improvements in revenues, earnings and cash flow, such that a higher valuation is certainly justifiable.

As a result, against all expectations, the first of Friedman’s trigger levels (the $100 mark) is suddenly squarely in sight.  As we will see below, from here it will be very easy to for Friedman to get the price per share to $150 using the exact same technique.  And the massive short interest is only going to help Friedman make this happen even sooner.

From the RH Proxy Statement (dated later in May 2017) we can see the breakdown of how these options are awarded.



The takeaway from the table above is that if Friedman can keep the stock above $100 (just 11% above current levels) by the 1st anniversary of his award (i.e. in May 2018) he will be awarded an extra 83,333 shares which would be worth an additional $4.2 million. (Remember, the strike price is $50 such that the intrinsic value of the awards would be $100 minus $50=$50.)

11 - 83,333But….

If Friedman can get the stock a bit higher, to above $150, by May 2018 then two things will happen.

First, the intrinsic value goes up by 100% (not by a mere 33.3%).  At a share price of $150, intrinsic value goes from $50 to $100 per option (i.e. $150 stock price minus $50 strike price = $100 intrinsic value).

More importantly, under the schedule above, Friedman would also get three times as many underlying shares.

In other words, if CEO Gary Friedman can get the share price over $150 by May 2018, just his FIRST brand new additional award will suddenly be worth a cool $25 million just a few months from now.  It’s a pretty nice incentive package.

So ask yourself this:  what do you think Mr. Friedman has in mind to announce at his first “investor day” after more than two years ?!  We will find out in just 8 trading days.

Identical awards are to be given to Friedman over each of the four upcoming years, such that in addition to his paid salary and bonus, and in addition to the shares that he already owns, this single incremental incentive piece then pays Friedman an additional $100 million over four years

Looking back to that $2 million purchase of RH stock that Friedman made in September.  Friedman bought those shares at $71. So if the stock price does rise to $150, he would make a profit just over $4 million.  But his incentive awards would end up being worth over $100 million.

It is very clear to me that these ongoing purchase of stock by Friedman have more to do with “signaling” so as to help him get the stock price to $150. They have less to do with the actual economics of those newly purchased shares.  Signaling or not, these purchases will most likely have the desired effect and will continue to boost the share price higher.

As a result, I fully expect to see Mr. Friedman continue to make more open market purchases even at prices well over $100.  It only makes sense.  And when the CEO starts announcing his open market purchases at all time high prices of over $100 per share, I fully expect that this will have the exact effect that Mr. Friedman desires (in other words, more buys by Friedman will again drive the even stock higher).

Either way, after 40 years in the retail business and at the age of 60, Mr. Friedman is getting within pistol shot of locking in a near term nine figure payout.


***   Section 7:  OK…but what about all of that debt ?

One thing keeping many shorts in place on RH is the fact that these massive share repurchases have been largely financed with debt.  Because of the share repurchases in 2017, RH’s total debt load went from $532 million in July of 2016 to $1.15 billion by the end of the July 2017 quarter (announced in September 2017).

So basically an extra $600 million in debt to take out $1 billion in stock.

(The $1.15 billion debt figure is the number disclosed in July by RH.  RH also has $233 million in “capital leases” associated with its properties which some analysts treat as debt).

Beyond that debt, the balance of the funds used to buy back stock were obtained from operating cash flow as well as from cash on hand.  The cash on hand was largely the result of previous bond offerings.

We can see quite clearly that RH’s share price is indeed very, very sensitive to any changes in its capital structure.  But this knife cuts both ways.  Any REDUCTION in leverage can also send the share price spiking sharply higher.

On October 10th RH announced the early repayment of its $100 million 9.5% second lien term loan.  At the time, RH was still trading at just $72.  In the three weeks that followed, RH then quickly soared by more than 20 points as investors started to recalibrate their assessment of RH’s “Capital Structure”.

Much of that $100 million repayment was actually more of a refi, with RH using a 2.75% asset backed facility to make the payment.  Even though only a portion of that term loan was actually repaid with cash, the share price still spiked sharply higher.

12 - repay $100m


My point is that when we (very soon) see even larger reductions in leverage, we should expect to see much greater upward spikes in the share price. 

In fact, that tiny refi / pay down was very small potatoes compared to what is coming next.

Just a few months ago, when RH’s share price was below $50, no one seemed to focus on the fact that $650 million of RH’s debt is actually convertible into stock.

The conversion feature may have seemed largely irrelevant at the time because the conversion prices on those convertible bonds are set at $116.09 and $118.13 which was more than 100% above the prevailing share price just few months ago.  It seemed safe to assume that if there was to be any eventual conversion than it would be far into the future.

But as recently as September (after the share price had spiked above $70), RH was already telegraphing it investors how it viewed this “debt”.

For some reason, RH began “carving out” the calculating of those convertibles. In the September earnings release, RH suddenly described its total indebtedness as follows. (Note the carve out of the converts, as well as the advance disclosureof the bridge loan repayment which then happened 4 weeks later).

Outside of the convertible notes that are due in June 2019 and June 2020, we had aggregate debt of approximately $504 million at the end of the second quarter, including a $100 million second lien bridge loan that we expect to repay in full by year end.

Here are the terms of those two convertibles.

Convertible terms:  $116.09 strike zero coupon convertibles

Convertible terms:  $118.13 strike zero coupon convertibles

But now with the stock closing in on $100, those conversion prices become much more relevant because that “debt” can be extinguished if the share price stays above the $116-118 levels.  It is now becoming clear why RH was alerting us to this back in September.

And then it gets even better. The “bond hedges”.

Even fewer people are aware that back in 2014 and 2015 when RH issued those convertibles, the company simultaneously entered into “call spread” transactions (AKA “bond hedges”) with BofA-ML (the convert underwriter).    The purpose of these call spread transactions was to neutralize any eventual dilution which would occur when these bonds eventually converted into stock.

Under the terms of those call spreads, RH completely neutralizes any dilutionthat would occur when the stock prices exceeds $116 and $118.  This was a separate contract with BofA-ML such that even many of the convertible investors are likely unaware of it.

So instead of having dilution at $116 and $118, there is no dilution under the convertibles until the share price exceeds well over $170, even when they are converted.

This type of an option package is certainly not free.  RH paid a huge sum of money to BofA-ML for the massive benefit of incurring no dilution under the convertibles until North of $170. 

But those large payments were made by RH back in 2014 and 2015, such that all of the cost is in the past, while all of the benefit is in the present.   

The full details of these option purchases by RH can be found in the SEC filings.  For example, on the “long” leg of the call spread (“bond hedge”) purchases, the terms are disclosed as follows:13 - 2019 bond hedge





14 - 2020 bond hedge

The documents below were from 2014 and 2015. As such I currently believe that most current investors are fully unaware of them.


NO DILUTION. WHAT TO LOOK FOR:  In the tables below, look to the column on the far right to see the net impact of the convertible vs. the call spread which was purchased by RH. In each case you will see that “total expected dilution” is zero until share prices well in excess of $170.



15 - dilution table #1







15 - dilution table #2




Re-evaluating RH’s total debt picture

In a Form 8K released in July 2017, RH included a table showing its total indebtedness following the $700 million repurchase.

Total debt was listed as $1.15 billion, including the $100 million term loan and $650 million of converts.

Some portion of that $100 million term loan has already been paid down. And if Friedman can engineer even a slightly further rise in the share price from here, then the converts will get extinguished (with no dilution until North of $170).

From the Form 8K in July of 2017.

17 - total debt table 

Note:  From the multiple disclosures above, we should assume that the information on total indebtedness in this table above will be subject to significant change in the very near future.



***   Section 8:  Accelerated vesting. The end game for RH and Friedman.

OK. In this section, your initial reaction is likely going to be one of heated disagreement.  But please hear me out. I have occasionally done some decent work in the past.

In addition to the equity incentive awards above, totaling $100 million, Friedman also has numerous other past incentive awards.  These are also subject to vesting periods and trigger prices at over $100.

After 40 years of working in the retail business, and at the age of 60, Mr. Friedman is now within striking distance of getting all of these option awards to be exercisable and immediately vested.  If this happens, Mr. Friedman then gets to quickly retire with a very solid and immediate nine figure payout.

Keep in mind that just a few months ago that no one would have thought that RH’s share price could possibly by closing in on $100. And yet here we are.

So how does Friedman turn these equity incentives into a nine figure reality in the very near term ?

Again.  Just hear me out.

Step one.  Reduce the share count to a level where the price per individual share is well over $150.  The aggregate value of the company is now increasingly being shifted onto bond holders, and across a smaller and smaller number of common shares.  Again, just use common sense.  As the SHARE COUNT declines, the proportionate SHARE PRICE increases for each individual share.  Duh !

Step two. Conduct this process in a way that minimizes further increases in the enterprise value. Use as much operating cash flow as possible and maximize the impact of prior share repurchases at much lower levels. For example, RH borrowed $600 million to repurchase $1 billion of stock. The stock price then nearly doubled. As such, a very slight increase in debt (ie. EV) was accompanied by a share price that jumped nearly 100%.

In the recent earnings announcement, Mr. Friedman has very explicitly told investors that this is exactly what he is doing and exactly what he will continue doing. Note, this is now turning into a huge pile of cash flow which can be used to buy back more stock or pay down debt.  Here is what Friedman told investors in September:

Our efforts to optimize inventory and reduce capital spending generated $282 million of free cash flow in the first six months of 2017, and we now expect to generate approximately $400 million of free cash flow for the year, which should address any concerns about our balance sheet and debt ratios. We have reinvested the $282 million of free cash flow generated in the first half, and the $263 million of cash and investments on our balance sheet at the beginning of the year towards the repurchase of our stock, which we believe is an excellent allocation of capital for the long-term benefit of our shareholders.

And again, this happened to be the same announcement in which Friedman told investors 4 weeks in advance about the upcoming “repayment in full”of the $100 million in second lien notes.  When that repayment did happen 4 weeks later, the stock quickly shot up 20 points.

Step three.  Even though the price for a single share is now much higher, the enterprise value is actually NOT much higher.  In other words, depending on the eventual share count (and the split between equity vs. debt) a potential acquirer would have no problem paying $100 per share, $200 per share or $1,000 per share, or whatever.  All they care about is the overall valuation of RH.

This is why I referred to Friedman’s approach as being a “stealth/quasi/creeping” going private.  He is shifting the value of the company onto debt holders (and out of the equity markets) with the equity portion being spread across fewer and fewer shares.  When the share count gets small enough (and the share price high enough), he can then sell the entire company if the overall enterprise value merits such a sale.

Again, even when the stock hits $150, the company will certainly be nowhere near 5x as expensive as it was at $30 just 6 months ago.  With the changes in the capital structure, those numbers are no longer comparable.

Remember that RH’s enterprise value is now substantially lower than it was in 2015, even as its performance is on a strong upswing.   RH is also now trading below where it has historically traded vs. forward PE estimates.

So how does Mr. Friedman sell all of RH for an enterprise value North of $3 billion.  (Again, forget about the share price. With a flexible cap structure, the share price  could be engineered to end up $50 or $500 and it wouldn’t matter to an acquirer.)

There are two obvious potential acquirers both of whom could easily afford to snap up RH.  And for each of these parties, their motivation is strategic such that a swing in valuation of even 20-30% in one direction or their other would not be the deciding issue.

A sale to Amazon

I know. I know. It is getting cliché for people to keep speculating that Amazon (AMZN) is going to buy every public company in sight.  But with RH, it actually makes very good sense.

Amazon’s recent purchase of Whole Foods surprised many people. It communicated to all of us a very significant strategic focus for Amazon.  First, Amazon is now actively looking to expand into businesses with bricks and mortar operations. Second, Amazon is focused on acquiring brands and customers in at the high end of the price/quality spectrum.

In both of these respects, RH is identical in furniture to what Whole Foods is in groceries. Amazon’s visible push to the higher end is also why Amazon did not buy Kroger and it is exactly why Amazon would never want to buy Wayfair (W).

I am certainly not alone in sizing up Amazon’s ambitions in expanding into the high end bricks and mortar furniture business.

In May 2017 (just 6 months ago), Fortune Magazine made a great pitch for why Amazon will do exactly that.


18 - fortune AMZN

And the Wall Street Journal said the exact same thing in May 2017:

WSJ:  Amazon Makes Major Push Into Furniture



19 - WSJ Amzon





A sale to Williams Sonoma

A potential sale of RH to Williams Sonoma is potentially easier and more interesting, yet many investors are likely tempted to dismiss the idea unfairly.

Williams Sonoma already has an enterprise value of nearly $5 billion, but it has almost zero debt.  As a result, levering up to acquire RH would certainly be quite achievable.

Williams Sonoma owns competitors to RH including Pottery Barn and West Elm.  But sales growth has been consistently stagnant.  While Williams Sonoma has been growing only in the low single digits, RH has been killing it in the low to mid teens in terms of revenue growth (including in the most recent quarter).  The reason why is that RH has built a sustainable brand and a loyal customer base.

As a result, Williams Sonoma would not need to penny pinch and try to lock in a low end valuation in acquiring RH. It could justify paying a premium price simply due to the very obvious synergies that the acquisition would bring.   Both of the companies are headquartered in Northern California, making integration very easy. Both companies distribute fairly similar product lines, which would then allow for the consolidation of third party manufactures, shipping and distribution.  There would be instant cost savings from day one.

As we know, RH CEO Gary Friedman used to be president and COO of Williams Sonoma. When he was passed up for the CEO spot 16 years ago, he then came on as CEO of RH.  And RH has since done quite well in creating a brand and capturing market share.

The one argument I have heard against such an acquisition is that Friedman may now insist on getting that CEO spot for the combined entity post acquisition.   But Friedman is now 60 years old. After 40 years in the business, I think he would be willing to let that honor pass by if it involved him getting immediate vesting on over $100 million in payouts.

Again, I understand that many people are still stuck thinking that RH was “expensive” when it was at $30.  As a result, trying to get comfortable with the notion of a buy out at $150 is going to be tough.

But when we factor in the changes to the capital structure, the improvements in the business and then look at the overall valuation, the specific share price becomes irrelevant.

Either Amazon or Williams Sonoma could easily justify the purchase of RH at current or higher levels.  And (as we have already seen) further financial engineering by Friedman could easily get the share price to over $150 without a commensurate rise in the valuation (“EV”) of the company.



***   Section 9:  Conclusion. RH is going much, much higher. Very, very soon.

(Note: The short interest of nearly 50% of float is not really part of my bull thesis on RH. But the unwinding of short positions will certainly cause the stock to rise much sooner (and much higher) than it would do otherwise based on just the financial engineering.)

RH’s CEO Gary Friedman began his career in the stock room of The Gap (GPS) in 1977 following a short stint in community college where he reportedly received fairly low grades. Against those humble beginnings, Friedman has been singularly ambitious.

From increasingly senior roles leading Gap, then Williams Sonoma (WSM) and now RH, Friedman keeps climbing the retail ladder.  And when one ladder has no more rungs, he simply switches ladders.

Friedman is now 60 years old and just 6 months ago was given a nine figure incentive package which can be entirely obtained if Friedman can simply financially engineer RH’s share price to over $150.  Within just 2 days of Friedman receiving that award, RH suddenly announced a $700 million share repurchase, which was then fully executed in just a few weeks.

The financial engineering (along with some positive announcement from Friedman) have seen the stock triple in 2017. But the deeply reduced share count means that the valuation is not all that much higher than where it was in April.   At the same time, RHs financial performance has undeniably shown visible improvements which do merit a higher valuation.

There are a variety of levers that Friedman can pull in order to get the share price to $150.

As we saw following a small (and only partial) pay down of the $100 million term loan, RH’s share price is now extremely sensitive to and changes in leverage.  The stock quickly jumped 20 points. As the share price now nears the $116 and $118 conversion prices of RHs two convertible bond issues (totaling $650 million), investors will rightfully begin to recalibrate their view on RH’s share price vs. perceived leverage.  I very strongly suspect that most investors have been totally unaware of the massive “bond hedges” that RH purchased back in 2014 and 2015, which fully neutralize any dilution from the conversion of those bonds into shares until the share price reaches over $170.

As we saw, in the most recent earnings announcement, RH is already “carving out” the calculation of that convertible debt when it describes its total indebtedness.  That was the same earnings announcement that disclosed the intention of paying down the $100 term loan fully 4 weeks before it actually happened.

Disclosure: I am/we are long RH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is long RH and HTZ. The author may transact in various securities mentioned within this article within 72 hours.


Short $HIIQ: Fraud penalties to exceed $100 million and undisclosed “domino effect”


  • New data points: Fraud penalties expected to reach $100 million or more. Other insurers required to cease doing business with HIIQ as part of their fraud settlements.
  • June 2017: HIIQ rejected for key insurance license in home state of Florida as regulator uncovers undisclosed legal actions against HIIQ insiders.
  • HIIQ privately warns of disastrous “domino effect” spreading to other states, causing additional loss of licenses. HIIQ makes no disclosure to investors.
  • Regulatory catalysts now approaching in October 2017.  Insiders have been publicly hyping the stock while simultaneously dumping $50 million in shares.
  • HIIQ is nearly identical to five of my past trades where Craig Hallum was on the other side.  They each plunged by 80-100%. SEC investigations, fraud suits and delistings.

Disclosure:  This article represents the opinion of the author.  The author is short HIIQ.


Name:                         Health Insurance Innovations “HII” or “HPIH”

Ticker:                         (HIIQ)

Location:                    Hollywood, Florida

MCap:                         $500 million

Current Price:           $29.90

52w Low:                   $4.00

Avg. Daily Vol:          650k shares ($20 million)

LTM Rev:                    $215 million

LTM Net Inc:              $12 milion

Cash balance:           $27.5 million (≈$2.00 cash per share)


Health Insurance Innovations (HIIQ) develops, distributes and administers individual health and family insurance plans (“IFP”), including short-term medical (“STM”) insurance plans and guaranteed-issue and underwritten Health Benefit Insurance Plans (also known as “hospital indemnity” plans).

HIIQ designs these plans on behalf of insurance carriers and discount benefit providers and then markets them primarily through its internal distribution network and an external distribution network of independently owned call centers.




The theme I will show repeatedly below is one of “delay, downplay, dismiss, deny” which then allows insiders to aggressively dump their shares.

Over the past 7 months, shares of HIIQ rose from below $5.00 to over $35.00 – a seven bagger – despite only marginal apparent improvements in its business.

During this time, revenue has increased slightly, and HIIQ has successfully managed to lower its heavy dependence upon STM plans. But this does nothing to absolve HIIQ of its massive undetermined liabilities stemming from fraud investigations which now span fully 42 states.  And the problems then get worse from there.

HIIQ is now set to quickly plunge by at least 80% to $6.00 or below. Such a decline would really just put HIIQ back to where it was right at the time of the 2016 US election.  (see chart above)  In reality, I strongly expect that there is a high likelihood that HIIQ ultimately plunges to below $1.00 and faces delisting.   No, this is not an exaggeration. Keep reading.

Consider the following:

HIIQ is now facing fraud investigations or cease and desist orders from 42 different states.

Recently emerged data points now indicate that legal liability will be in the range of $100 million or more (as opposed to the mere $1 million number which has been published by certain authors who recently spoke to HIIQ management).

On the heels of these mounting state fraud investigations, in June of 2017 HIIQ was just rejected for licensure in its home state of Florida. In its appeal to the regulator (also from June of 2017), HIIQ then PRIVATELY cited to the regulator the specter of a disastrous “domino effect” from this rejection by which licensing denials will then spread to the other states in which HIIQ does business.

These were the actual very alarming words used by HIIQ to the regulator in June of 2017, yet this impact was not disclosed to investors in the most recent 10Qor anywhere else for that matter.

The scathing letter from the regulator cited multiple reasons for the denial of the license, in direct contradiction with disclosure to investors by HIIQ. For example, as part of its independent background check, the regulator uncovered multiple undisclosed legal actions against multiple HIIQ insiders. When confronted with this by the regulator, HIIQ refused to respond.   Again, HIIQ disclosed something very different to investors.

Delay, downplay, dismiss, deny

HIIQ has retained an expensive law firm and has now submitted, re-submitted and appealed for this license at least 4 times over the course of 2016 and 2017. Now that the final rejection is imminent, HIIQ has somehow tried to suggest that it doesn’t even need such a license in the first place.

As of the most recent disclosure, the Florida regulator is set to publish its final determination in October 2017 (a few weeks from now).  For the sake of completeness, I have already sent a copy of this entire article to the Florida regulator.

The slew of massive legal and regulatory problems facing HIIQ is set to unravel in the very near term. There are multiple near term catalysts. The most visible catalyst is coming in just a few weeks in October 2017.

HIIQ has repeatedly attempted to suggest that it is actually some other party (such as HCC) that is being investigated or is at fault. Yet anyone who reads the actual legal filings can immediately see otherwise. In the fraud complaints from 42 state governments, the repeated theme is that HIIQ has engaged in fraudulent sales practices while operating without a license.  And now HIIQ has brazenly attempted to suggest to investors that maybe it just doesn’t need such licenses at all.

And here is where it gets really interesting:

Even as HIIQ passionately encourages investors to buy, the insiders have been aggressively dumping their own shares.  So far in 2017, HIIQ insiders have dumped millions of shares taking in over $50 million.  Keep in mind that just a few months ago, the market cap of the entire company was less than $200 million.  In November off 2016, the market cap was just $70 million.

Notice that insiders were aggressively dumping a huge volume of shares even when the price was more than 50% lower than the current level, at just $14.   Selling has come from all corners, including the founder, the CFO, CTO and the CEO of its Healthpocket division.

History of insider sales:

Delay, downplay, dismiss, deny

In fact, now that the legal consequences are rapidly closing in, management’s actions are becoming downright blatant. Last week (on Tuesday September 5th), after the stock had suddenly dropped from $37 to below $30, Craig Hallum put together a hastily arranged conference call for management to reassure investors.  As expected, the stock briefly rebounded.  Just hours after this impromptu call encouraging investors to buy, multiple members of management began disclosing additional large share sales by insiders, quickly amounting to $1.5 million over just two days.


New SEC filings were then released in the after hours beginning on September 5th, which continued to the end of the week:

(Sheldon Wang is HIIQ’s CTO. The full list of Form 4 sales by HIIQ insiders can be found on Edgar)


As you read the magnitude of the problems below, keep in mind that HIIQ has a cash balance of just $27.5 million with which to run its entire business and then deal with all of these impending liabilities.

The recently revealed data points indicate liability of $100 million or more.

So you do the math !!

It will quickly become clear why I am saying that HIIQ has the potential to drop to below $1.00 and face ultimate delisting.  Either way, given the unfolding of the events above, a $6.00 share price will likely prove generous by the time Florida makes public its decision in just a few weeks.

This dire prediction for HIIQ is pretty much in line with what I had predicted on five prior Craig Hallum trades. For reference, the five companies were Unipixel (UNXL), Neonode (NEON), Erickson Air Crane (EAC), TearLab (TEAR) and Plug Power (PLUG).

Just like HIIQ, each of these past stocks had quickly spiked by 200-800% following gushing support from Craig Hallum. As the share prices spiked, large share sales or equity offerings then followed. As soon as I exposed their terminal underlying business problems, each of these stocks immediately plunged by 30% or more. Each of the stocks then went on to by implode 80-100%, just as I predicted.  Among these five companies, we then saw various combinations of SEC investigations, fraud lawsuits, bankruptcy and/or delisting.  I am specifically including below my five past articles which were specifically focused on past Craig Hallum trades on similar toxic companies. I would strongly encourage readers to have a look. The similarities to what we see with HIIQ should become 100% obvious.


Delay, downplay, dismiss, deny.

HIIQ is currently facing a tidal wave of fraud investigations, lawsuits and cease and and desist orders which now already extend to at least 42 states (that we know about so far).

In March of 2016, here was the initial action taken by the state of Arkansas Insurance Department following a sting operation which revealed unlicensed insurance sales in Arkansas. During additional calls,  “several” company representatives misrepresented the insurance products in an attempt to sell insurance plans, not realizing that the person calling was actually The Arkansas Insurance Department.

Read this screenshot closely.

Within 60 days, in May of 2016, HIIQ had already received another cease and desist from the State of Montana, requiring the company to immediately cease and desist from selling insurance in the State of Montana.

Delay, downplay, dismiss, deny.

In July of 2016, HIIQ filed a very lengthy 8K announcing the appointment of Gavin Southwell as President and Josef Denother to serve as COO.  Within the 8K, HIIQ spent 4 pages elaborating in deep detail the most minute details of the terms of employment for these two.  And then buried in the 8K, 4 pages in, HIIQ included a single small paragraph disclosing the commencement of a multi-state investigation being headed by the State of Indiana.  And now finally the company disclosed the Arkansas and Montana legal actions from months earlier. But by this time, anyone who actually made it through to page 4 of this 8K could see that the investigations had expanded to include Arkansas, Florida, Kansas, Montana, Ohio, South Dakota, and Massachusetts.

When HIIQ ultimately chose to provide more detail on these investigations in March of 2017, it attempted to portray its own role as being just one target among many players. Here is how HIIQ described the Montana fraud complaint. Keep reading and decide for yourself if this is an accurate representation or if it is wildly misleading.

HIIQ specifically emphasized that it was “among more than two dozen separate parties named”.  But the reality is that the other parties being named in this Montana action were largely being named as a result of the fact that they were doing business with HIIQ.

According to Montana:

These policies are routinely sold though misinformation and deception at the point of sale by individuals not properly licensed or appointed in Montana to conduct this insurance business.

“The HII scheme”

In fact, throughout this Montana action, the Montana State Auditor refers to the fraud directly as “the HII scheme”.  The Montana fraud complaint includes only two graphics throughout its 25 pages. Both of these graphics specifically map out HIIQ’s role in the scheme, without any mention whatsoever of the “two dozen” other players emphasized by HIIQ.

Here are the ONLY TWO GRAPHICS from the Montana fraud complaint, both of which focus ONLY on HIIQ.

Delay, downplay, dismiss, deny.


As various settlements from involved parties start to dribble out, we can begin to find data points to help us either confirm or contradict the disclosures from HIIQ.

For example, from recent settlement agreements for other insurers named in the investigations, it was specific term of the Consent Order was that it was “contingent upon Unified ceasing to sell through HII”.

From the Kansas Consent Agreement with Unified Life Insurance:

In a recent article on Value Investors Club, the author had stated that HIIQ has also ceased doing business with HCC Life Insurance.  He seemed to think that this was a good thing.  But it now strikes me that this termination was more likely result of the multi-state investigation being headed by the State of Indiana naming HCC for its involvement with HIIQ.

 This is really, really bad.

And then it gets even worse.

Multiple new data points relating to multiple states have recently emerged (including using HIIQ’s own disclosure).  These now indicate that legal liability could be in excess of $100 million (and potentially much more).

In the recent 10K, HIIQ noted that a penalty of $100,000 to $315,000 was “probable” in the state of Montana. Such a low penalty caused the VIC author above to be optimistic that total penalties would only be around $1 million.

Here is the disclosure from HIIQ:

But in the Montana complaint filed by the Commissioner of Securities and Insurance (“CSI”), we can see that during the investigation period, HII is only said to have brought in revenues of $503,800.

In other words, in its own estimation, it is “probable” that HIIQ will be forced to pay in the area of 20-60% of its revenues that were generated in Montana. 

Based on the past disclosure patterns from HIIQ, I believe I have a right to be suspicious that the estimate provided by HIIQ is still too low.

This suspicion is entirely borne out by looking at the next settlement (which HIIQ is obviously well aware of).

In the recent 10Q, HIIQ made reference to a recent settlement by a carrier for “the same set of allegations” by the Massachusetts Attorney General (“MAG”).  HIIQ did not name the party by name and it stated that it was too early to predict any loss as it might apply to HIIQ.

In fact, HIIQ suggested that there may not be any loss at all !!


Delay, downplay, dismiss, deny.

Actually, a quick legal search reveals that the party who settled was Unified Life, which has been named alongside HIIQ in fraud complaints in other states.  In fact, as part of Unified’s fraud settlement in Kansas (“KID”), an explicit term of the consent agreement was that it was “contingent upon Unified ceasing to sell through HII”.

Once we know this information, we can see from Unified’s settlement with the MAG that it actually paid more than 100% of all revenues it generated in the state of Massachusetts.

This settlement of nearly identical charges included Unified directly reimbursing residents for 70% of all premiums paid plus 5% interest per annum !!

From Unified’s settlement with the Massachusetts AG:

Over the various time periods in question, HIIQ has generated over $300 million in total revenues. Feel free to make your own calculation on how to apportion these revenues across the 42 states that are currently investigating HIIQ and according to what portion of the revenues are applicable to the various investigations.

What you will find is that even by stretching one’s optimism and creativity, it is very difficult to come up with a liability that is less than $100 million, even using very conservative estimates.

As of Q2, HIIQ had just $27.5 million in cash.  I expect that HIIQ will need to conduct a large equity offering in order to meet these liabilities.  Even with its lofty current market cap of $500 million, this would present a meaningful challenge.  At much lower market caps (such as the $200 million where HIIQ was just a few months ago) an adequate equity offering becomes almost impossible.

But clearly HIIQ has the full support of Craig Hallum who continues to enthusiastically recommend the stock despite the obvious problems.


Just recently, in June of 2017, HIIQ was rejected by the Florida state insurance regulator over its application for a license to conduct business as a 3rd party administrator in Florida.  HIIQ then filed an appeal, also in June of 2017.

Below is a screenshot showing how HIIQ chose to disclose this event to investors in the recent 10Q. In short, we are supposed to believe from the disclosure that it is just “no big deal”.

Apparently, after the notification of fraud investigations by 42 states claiming unlicensed selling, HIIQ now tells us that it is taking a “prudent” approach and seeking a license in Florida.  HIIQ states that it was only rejected because “the company had not yet provided all information required”.  HIIQ notes that the denial is under appeal, set to be finalized in October.  In fact, maybe the Florida OIR won’t even require a license at all !!

With such muted and understated disclosure, it is no surprise that seemingly no one has even noticed this event.

Delay, downplay, dismiss, deny.

But actually, the rejection letter from the Florida OIR paints a dramatically different picture.

From the Florida OIR:

The references above to “material errors and omissions” refers to something bad.  In fact, it is really, REALLY bad.

On its application to act as a 3rd party administrator, Florida asks the applicants if they have been a party to any civil actions over the past 10 years involving dishonesty, breach of trust, etc.

The HIIQ insiders repeatedly answered “no” to those questions.  But then an independent background checkby the Florida regulator uncovered multiple such undisclosed legal actions against multiple HIIQ insiders. This includes both the CFO of HIIQ (Michael Hershberger) as well as its founder (Michael Kosloske).  Even when pushed by the regulator, HIIQ refused to supply information over these undisclosed legal actions.

Note that together, Mr. Hershberger and Mr. Kosloske have sold over $40 million in HIIQ stock over the past few months.

Againfrom the Florida OIR:

As per the above rejection letter from the Florida regulator, even when confronted with the undisclosed legal actions against multiple insidersHIIQ refused to respond or provide the information required.


As we can see in that rejection letter above, HIIQ has applied, re-applied, and then filed extended appeals at least 4 times over the course of 2016 and 2017 in order to obtain this license.  HIIQ has also hired an expensive law firm in order to try to boost its cause.  Yet as the rejection date is now just weeks away, HIIQ has attempted to change its story, suggesting that maybe it just doesn’t need this license at all.

By reading the above rejection letter in full, you will almost certainly come to the conclusion that there is effectively a zero percent chance of HIIQ getting this license in Florida. (Separately, for the sake of completeness, I have sent a copy of this article to the listed email address of the Florida regulator at Carolyn.Morgan@FLOIR.COM).

As we saw above, HIIQ’s disclosure of the Florida rejection was so muted and understated in the 10Q that most investors probably never even saw it.  Those that did would have understandably come to the conclusion that it was just no big deal.

Delay, downplay, dismiss, deny.

But the private communications between HIIQ and the Florida regulator were not disclosed to investors.  Those statements, IN HIIQ’s OWN WORDS, paint a picture which is absolutely catastrophic.

Below is a screenshot showing HIIQ’s own language (filed by their law firm) describing the dire consequences that HIIQ faces if it is rejected by Florida.

As shown, following its rejection for licensure as a 3rd party administrator in Florida, HIIQ / HPIH wrote a letter of appeal to the Florida regulator dated  June 16, 2017.  In that letter, HIIQ warned that a rejection in Florida would comprise a “reporting event”, obligating HIIQ to inform the other states in which it does business.  In HIIQ’s own words, this would then trigger a “domino effect” which could result in its losing licenses in the other states where it does business.  In other words, according to HIIQ itself, the consequences of a regulatory rejection in Florida will be catastrophic.

(Note that in HIIQ’s SEC filings, the name of HIIQ and its VIE “HPIH” (“Health Plan Intermediaries Holdings”) are used interchangeably.)

In HIIQ’s own words: 

To say that the interests of HPIH as an entity would be substantially affected is a radical understatement.

Clearly all of this is extremely material information that investors should have been made aware of. But rather than disclose this information to investors, management has dumped over $50 million in stock this year, including just last week.


By now you should start to see what I mean by delay, downplay, dismiss, deny.

Just last week, HIIQ conducted an impromptu conference call to investors, arranged by Craig Hallum. Over the prior two trading days, the stock had dropped from $37 to below $30. But because of this investor call, the stock price quickly rebounded.

As shown earlier in this article, almost immediately after the investor call boosted the stock last week, insiders began quickly disclosing more sales, amounting to $1.5 million across just two days. Sellers included the CFO, the CTO and the CEO of HIIQs Healthpocket subsidiary.

Below is a table showing the insider sales that have occurred just during 2017. A full list of Form 4 filings can be found on Edgar.

During 2017 alone, insiders have raked in $50 million from selling stock.  Earlier this year, the entire company a valued at just $200 million.  In November of 2016, the entire company was worth just $70 million.


Realistically, no one needed any legal databases or Bloomberg to figure out what was going on with HIIQ.

Here is a great hint for those of you looking for compelling short ideas.  Google the name of a company along with the word “fraud”. Any time you get more than 40,000 immediate hits, you likely have a very safe short.  Feel free to try this test with HIIQ before proceeding.

Keep in mind that when parties are accused fraud, they very seldom raise their hand and admit it.  The most common response is to put forth repeated denials for as long as possible.

Even before we look at the explicit fraud investigations by 42 different state governments, we can see thousands of very explicit complaints by individual consumers from all across the country.

Regardless of location, consumers across the US repeatedly use words like “fraud”, “scam” and “lies”.

Based on this overwhelming consensus from consumers, HIIQ has actually managed to obtain the ultra-rare “F rating” from the better business bureau.

On the recent investor call, Craig Hallum posed a layup question to HIIQ management, effectively stating, “tell us how bogus and erroneous the BBB complaints are”.  HIIQ responded by attempted to convince investors that the BBB is a corrupt entity which has falsely listed more than 80% of the complaints on its site.  HIIQ also tried to state that the huge volume of online fraud complaints are simply the result of the fact that HIIQ does a high volume of business, such that a large number of complaints should also be expected.

Here are the links so that you can check their claims for yourself.

From the BBB page on HIIQ:

At just this one site alone, HIIQ has received 651 complaints.  Out of the 93 total customer reviews, 90 are negative.  This is quite obviously not simply a question of  “high volume”.

Yet even aside from the “corrupt” BBB site, every other site I could find also contains very similar fraud complaints from different consumers in different states across the country. The reviews are again overwhelmingly negative, regardless of which site is reporting.

This includes:





Here is a recent screenshot of multiple consecutive reviews from qn entirely different site called ComplaintBoard.com.

Next, here is the rating page and customer review profile for PeopleClaim.com, which is also separate from the BBB. Again HIIQ receives the ultra-rare “F rating” along with across-the-board ratings of 1 star out of 5 (the lowest rating possible).

Before proceeding further, take a few moments to click on the links above and judge for yourself.  When it comes to HIIQ, the caustic consensus among consumers from all across the country appears to be entirely similar regardless of their location.



We are currently living through one of the biggest bull markets in history.  Stocks of all shapes and sizes continue to surge higher, even on bad news.

Yet somehow I have been able to repeatedly identify dozens of stocks which then quickly imploded by 80-100%.  SEC investigations, fraud suits and de-listings followed soon after.

One of my better sources of compelling short ideas (impending implosions) has been stocks which are being aggressively recommended by Craig Hallum despite the presence of very obvious problems.

Each of the stocks below soared by 200-800% following aggressive and repeated recommendations by Craig Hallum.

In each case, the underlying business problems were not only terminal, but they should have been entirely transparent.  Not surprisingly, these companies often needed money and Hallum ended up making millions of dollars in investment banking fees across these companies.

For precisely all five of the Hallum trades below, they quickly imploded by at least 30% as soon as I exposed them.  They then went on to implode by 80-100%, just as I had predicted.

The repeated theme was that even as the share prices soared ever higher, Hallum would just ratchet up the share price target again and again.  After insiders or the companies sold shares, the share price then began its inevitable implosion.

For example, Hallum’s escalating series of buy recommendations helped to take fraudulent Unipixel (UNXL) from $5.00 to over $40. Hallum’s final target before the implosion had been raised to $58.00. After I exposed the fraudulentcompany, the stock ended up getting de-listed and now trades for just pennies.  But not before Hallum made millions by helping Unipixel sell shares to investors.

Craig-Hallum Raises PT on Uni-Pixel (UNXL) to $58

Uni-Pixel Announces Pricing of $38.2 Million Public Offering of

Common Stock

Ex-CFO Charged With Deceiving Uni-Pixel Investors

At the time when I wrote about Neonode (NEON), Hallum’s repeated target hikes had seen the stock go from $2.00 to over $8.00. Hallum’s final target was $10.00 before Neonode imploded to $1.00 when Hallum’s predicted business developments failed to materialize.  I wrote Neonode when the stock was at $7.00. As I highlighted in my article, prior to the implosion Neonode conducted a huge secondary offering in which nearly all proceeds went to selling insiders.


When I wrote about Erickson Air Crane (formerly EAC), Hallum’s support had seen the stock quadruple to as high as $28.00.  EAC was visibly defunct and was being stripped by insiders. On the day of my article, the stock plunged by more than 30%.  It quickly went on to implode to zero once it filed for bankruptcy.  But not before various insiders unloaded at very beneficial prices.

Mystery silence at Erickson Inc. ends with bankruptcy filing

Plug Power was a very obvious promotion when I exposed it at $8.00.  Craig Hallum was again a strong supporter.  The company was also in dire need of cash.  Following my article, the stock plunged to $1.00, but not before it had already raised $22.4 million from investors.


TearLab (TEAR) was another defunct business in dire need of cash which was being aggressively and repeatedly recommended by Craig Hallum.  With the benefit of Hallum’s support, TearLab’s share price eventually reached $18.00.  When I last wrote about TearLab, the stock was still at a pre-split price of $13.00. Since that time, the stock has fallen by 99.9% as its nonsensical business predictably failed to materialize.  Even after a large reverse split, the stock sits at just $1.00. But as always, TearLab was able to raise large sums of cash from equity sales before imploding.

TearLab prices $35.1 mil public offering of common stock

Please note:  There is a very good reason why I have taken the trouble to include these links to my precedent experiences with “Craig Hallum specials”.  Please take just a few minutes to read my analysis of these situations, which predicted their obvious impending implosions.

*** 11 –   CONCLUSION  

I will sum up my thesis on HIIQ as follows:

Delay, downplay, dismiss, deny, then dump millions of stock.

As soon as this latest fluff trade falls into the single digits, you should expect to hear me publicly say “I told you so”.




Disclosure: I am/we are short HIIQ.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

$HTZ Shares Of Hertz Could Still Double (Or More) From Here


  • Quite suddenly industry insiders, analysts and media are recasting beleaguered “car rental” plays into lucrative “fleet management” plays, CRUCIAL to the futures of Uber/Lyft.
  • Icahn owns 35% of HTZ and is major Lyft investor. Icahn paying huge premiums to acquire additional targets across rental, ride share, service and parts.  “Vehicles As A Service”.
  • Short interest at HTZ just hit 61.9% of float. Short interest now EXCEEDS effective float by millions of shares. Not enough shares for shorts to readily cover.
  • As we saw with RH and WTW, shares of highly levered and heavily shorted stocks can quickly triple when even a very mediocre improvement changes the bear thesis.
  • With Herbalife, Icahn has shown that he iswilling and able to play and benefit from a short squeeze.  Icahn is now showing a paper profit onHerbalife of $500 million.

Note:  This article is the opinion of the author.  The author is long HTZ.

Recent developments

On Tuesday, Hertz Inc (HTZ) released Q2 results. As expected, the numbers were grim as ride hailing services continue to steal customers and revenues from traditional car rental companies.  On the conference call, newly installed CEO Kathryn Marinello was making an obvious effort to “under promise, then over deliver”, in sharp contrast to multiple years of unfulfilled hype from her predecessors.

Here is what I suggest.  First, read my analysis below. Then go back and re-listen to the Q2 conference call, keeping an ear open for a number of very subtle (and under hyped) clues. Most of these were not even mentioned until the Q&A at the very end:

  • fleet management, fleet management, fleet management
  • huge surge in rentals to ride hailing drivers
  • autonomous vehicles
  • artificial intelligence
  • “telematics and car sharing technology”
  • large increases in ownership by 5% holders

Also on Tuesday, Uber announced that it would be terminating its car leasing program which was providing cars to Uber drivers with poor credit.

Report: Uber Getting Out Of The Car Leasing Business After Losing $9K Per Car

The announcement highlights the need for “transport tech” leaders (including ride hailing and autonomous tech) to focus on what they are good at (i.e. the technology, not the vehicle management).   It’s not just that Uber was losing tons of money on this program. The real crisis was the Uber actually had no idea how much money they were actually losing. Uber was originally estimating that losses were running about $500 per car. Instead, the real number was roughly $9,000 per car!

This is why Uber, Lyft, and Apple are already scaling up their programs to use Hertz vehicles and let Hertz handle the fleet management.

Investment summary

Apple, Google, Uber and Lyft have been pouring billions into their quest for ride hailing and autonomous vehicles.  Uber alone is on track to lose $3 billion just in 2017 alone. Multi billion dollar losses are just the price of admission into this burgeoning market.

Yet none of these players has any appetite to undertake the ownership, management, repair and logistics of fleet management.

As these giants jockey for position in this transportation gold rush, Carl Icahn is aggressively pursuing the strategy of “selling shovels to the gold miners”.

In various public statements, Icahn has made it very clear that there is a new paradigm shift in how people are getting from one place to another.  Icahn is clearly NOT betting that the current car rental model is going to rebound in its current form.

Instead, Icahn is building a nationwide “Vehicles as a Service”  (“VaaS”) platform with Hertz (HTZ) at its core. The purpose is to provide fleets and fleet management to the new transportation providers in ride hailing and autonomous vehicles.

Even as Hertz’s share price was plunging to new lows, Icahn more than doubled his stake, buying 16 million more shares at an average of $23.78 in November.  Icahn now owns 35% of Hertz.

Over the past 3 years, Icahn has been spending billions, paying huge premiums to snap up numerous other companies from all parts of the fleet management spectrum, including:  car rental (fleet management), ride hailing, auto parts and auto servicing.

The headlines over the past 3 years illustrate Icahn’s “Vehicles as a Service” strategy centered around Hertz .

Date Sector Title
Aug 20, 2014 Fleet mgmt Carl Icahn Takes 8.5% Stake in Hertz
Feb 10, 2015 Auto parts Carl Icahn Adds To Quiet Empire With $340 Million Auto Deal (Beck/Arnley Worldparts)
May 15, 2015 Ride share Carl Icahn Calls His $100M Lyft Investment a ‘Bargain’
May 18, 2015 Multiple What’s up with Carl Icahn’s sudden car obsession?
Oct 8, 2015 Ride share Lyft partners with Hertz to offer its drivers affordable rental rates
Dec 30, 2015 Auto parts Pep Boys agrees to be bought by Icahn for $1 billion
Jan 25, 2016 Autonomous GM invests $500 million in Uber rival Lyft
Sep 12, 2016 Various Carl Icahn’s Federal-Mogul bid likely part of bigger plan
Nov 8, 2016 Fleet mgmt. Carl Icahn doubles his stake in Hertz as stock plunges
Jan 23, 2017 Auto parts Carl Icahn Will Pay Nearly $300 million for Federal Mogul
June 2, 2017 Service Leesburg-based Precision Auto Care jumps 90 percent on Icahn deal
Jun 4, 2017 Service Carl Icahn plans to acquire thousands of auto-repair shops
Jun 27, 2017 Autonomous Apple Autonomous Car: Hertz To Manage The Self-Driving Fleet

Ultimately, Icahn’s VaaS strategy means that whichever emerging technology wins out in the next few years, Ichan (and Hertz) will be poised to be the most comprehensive and integrated provider of fleets and fleet management.

So rather than being defeated by ride hailing apps such as Uber and Lyft, Icahn is positioning Hertz to be the key service provider to BENEFIT from the rise of Uber and Lyft.

In just the past two weeks we have started seeing industry journals, sell side reports and mainstream media articles which are doing a 180 degree pivot on the outlook for car rental (now known as “fleet management”) providers.  Details of these reports and articles are included below.

This new (and more forward looking) thesis is a radical reversal from the draconian extinction thesis which has led Wall Street to place massive short bets against Hertz.

But the extended negative sentiment has already pushed Hertz’s share price down by 90% in 3 years. The most recent “Sell” rating (from Barclays) sent Hertz tumbling by 30% in two days on massive volume. Short interest currently sits at 61.9%.

But in fact it is actually much worse than this.

Beyond the stated short interest on Bloomberg, the true effective float has shrunk to just 22.3 million shares vs. a current 33.4 million shares short. There are simply not enough shares to allow shorts to readily cover.  This math and its components are illustrated below.

So how is the bear thesis suddenly changing?

The severe bear thesis has two components, both of which are quite obvious. First, it is assumed that ride hailing companies (Uber/Lyft) will simply put the rental companies out of business by stealing passengers and revenues. Second, it is assumed that rental companies will be severely impacted by a glutted used car market when they attempt to sell their car inventory. This has been a very visible phenomenon over each of the past few quarters (including the just announced Q2).

But now Hertz is gradually being transformed. Rather than being a competitor to Uber and Lyft, Hertz will be a SUPPLIER to Uber and Lyft and will benefit along with their rising dominance.  (If you re-listen to the Q2 conference call, this should become apparent.)

Passengers will still be using Uber and Lyft to book rides which are fast, flexible and convenient.  But they will be increasingly riding in a Hertz car.

Following his initial investment in Hertz, Icahn invested $100 million in Lyft.  Shortly thereafter, Lyft began a program where Lyft now pays up to 90% of the cost for its drivers to rent cars from Hertz, rather than driving their own cars. This allows drivers flexible use of a vehicle whenever they want at almost no cost and with zero responsibility for depreciation or maintenance as long as their rider targets are met.  Shortly thereafter, Hertz began a different program to rent cars to Uber drivers as well.  Now that Uber has terminated its own leasing program, it will need to figure out a quick and easy substitute (such as Hertz).

When you re-listen to the Q2 conference call, you will hear that there has been a very steep increase in ride hailing rentals, up from nearly nothing a year ago. Virtually no attention was given to this development on the call.

Furthermore, as Apple, Google, Uber and Lyft seek to eventually eliminate drivers completely by using autonomous vehicles, their need for fleet management becomes even more critical (because there will be no more drivers to supply their own cars).  Autonomous vehicles are still a few years away. But even as these programs develop in the test phase, they will need fleets of thousands of vehicles across the country.

For Hertz, this new “fleet management” paradigm destroys both legs of the current short thesis. Here is why:

By providing the cars to Uber and Lyft, Hertz will increasingly be able to claw back a substantial portion of the revenues which would otherwise be lostas passengers shift towards Uber/Lyft rather than renting their own cars. Yes, these revenues are lower margin that corporate customers. But they allow Hertz to get marginal revenue from cars which would otherwise be sitting idle.

Second, it also means that Hertz can greatly extend the useable life of its car inventory rather than being forced to dump its inventory at distressed prices into a glutted used car market.  “Car rental” customers typically expect a car that is brand new or perhaps one to two years old.  But both Uber and Lyft allow their drivers to use cars in good condition which are more than 10 years old.  Hertz is already in the late stages of “right sizing” its fleet. Once this is done, the pain from inventory sales should get significant relief going forward.

And as we will see, the Hertz programs with Lyft and Uber are just one element of Icahn’s much wider assembly of fleet management via his VaaS acquisitions.

With Hertz trading down by more than 90% in 3 years, Ichan is now conceivably in a position to acquire the remainder of Hertz outright. The remaining 65% of Hertz’s equity is now valued at just $700 million.

Alternatively, each of Apple, Google, Uber and Lyft are now so enormous that they could easily take a $300+ million stake in Hertz just to secure their future access to the fleet management. Such an investment would be tiny for any of them.

In the past, Icahn has repeatedly taken large stakes in out-of-favor companies which were highly levered and heavily shorted.  When his investment reduces the outstanding float of the heavily shorted stock, the supply and demand imbalance causes the shares to rise almost automatically.

As Icahn repeatedly increased his stakes in embattled (and heavily shorted) Herbalife (HLF), that stock rose by 70-100% from the time of his initial investment.

As with Herbalife, Icahn started small and then made a large increase in his stake.  Also like Herbalife, Icahn obtained substantial influence over Hertz via multiple board seats.

Hertz is highly levered. Even just a mediocre re-rate of its business prospects (just a slight boost to enterprise value) will result in a massive spike in the equity value. The high short interest will then further turbo charge that rise.

But, in fact, judging by the significant shift among sell side and mainstream media sources, we could be due for a re-rate that is much larger than just “mediocre”.

During 1H 2017, shares of Restoration Hardware and Weight Watchers (WTW) each tripled and quadrupled despite very “mediocre” improvements in their business outlooks and results.  The reason for the meteoric share price spikes was that both companies were highly levered and heavily shorted. Again, even just a very mediocre re-rate of their business prospects caused their share prices to triple and quadruple.

Given the significant shift in the business prospects for Hertz, seeing the share price triple or quadruple should come as no surprise in the near future. 

This is why Icahn was more than happy to double down at $23.


Shares of Hertz are now down by 90% in three years. The entire market cap of Hertz is now down to just $1.2 billion.  Icahn already owns 35%.

On July 31, Barclays put out an extremely bearish sell note on Hertz. But in reality, all the Barclays note did was simply amplify the bear thesis that had already been widely disseminated in the market for the past year.   Barclays predicted that Hertz’s stock was due to fall by a further 50% from its then level of just under $18. In just two days, Hertz stock fell by 30% on 40 million shares of volume. Short interest now stands at a staggering 62.0% of float.

Here are the short interest data:


But suddenly, in just the past week, other sell side analysts began waking up to a new paradigm for the former “car rental” companies.  These “rental companies” are now being re-cast as “fleet management” plays which are actually CRUCIALto the future ambitions of ride hailing (Uber/Lyft) and autonomous vehicles (Apple/Google).

Hertz share price has been battered due to poor financial performance and negative sentiment towards the future.  But this share price outlook could change sharply.

As we have already seen, private companies like Uber and Lyft are being awarded PREMIUM valuations despite continued large financial losses.  The only thing that matters is securing market dominance in this transportation gold rush.  Once investors realize Hertz’s emerging positioning in this new market, its distressed valuation could easily flip to a premium valuation.

The only thing that is really necessary is just a change of popular sentiment.

Following the bullish report by JP Morgan last week, mainstream media outletsare now jumping on the bandwagon to hype the prospects of this new distributed transportation paradigm.

A few weeks ago, this sort of positive attention on “car rental” companies was unthinkable. But now such attention is becoming popular.

Aug 4th – Motley Fool – Why Hertz Global Holdings, Inc. Stock Jumped on Friday

Aug 6th – Street.com – Hertz and Avis can expect a boost from autonomous vehicles

Aug 7th – Seeking Alpha – Hertz: Reversing My Opinion Going Into Q2

Aug 9th – InvestorPlace – Surprise! Hertz Global Holdings, Inc (HTZ) Might Survive Uber

As Hertz transforms itself into a “fleet management” company, it will let other players (such as Uber, Lyft, Apple, Google) interact with the end passenger.  Regardless who is booking the ride for the passenger, the passenger will still end up in a car that is ultimately supplied by Hertz. The transition into autonomous vehicles will only accelerate this trend.

Not only will Hertz get to claw back revenues which would otherwise be lost, but it can also make drastically longer use of its car inventory.  Since Uber and Lyft allow the use of much older cars, Hertz can greatly extend the life of its car inventory rather than repeatedly dumping 1-2 year old cars into a distressed used car market.

Requirements for Lyft vehicles vary by state, but range from as old as 2002-2007.

On August 4th,  JP Morgan revealed the first hint of the new investment paradigm from a sell side analyst.  Despite his neutral rating on Hertz, the stock jumped 10% that day.

Analyst Samik Chatterjee pointed out that incumbent car rental players would have a distinct advantage over potential new entrants into the fleet management business and that the overlap between rental and ride shares is set to expand:

But actually it was a few days earlier, on August 2nd , that the lead story Auto Rental News was titled: “Own the Fleet, Own the Future”. This article noted that:

In these conversations surrounding new transportation paradigms, fleets have been off the public radar until recently. What those in fleet know, the rest of the world is finally understanding: If you own the fleet, you own the future.

Why? First, a future with fewer personally-owned vehicles means someone will have to own and manage this new ecosystem.

Fleets are playing a part in shared-use scenarios, which were at one time only found in traditional consumer carsharing applications. Using telematics and carsharing technology, these new systems are forming to serve residential and business complexes, downtown offices, universities, municipalities, and whatever type of community needs personal mobility for their members and workers.

JP Morgan notes that the gap between rental cars, ride share and autonomous vehicles is now shrinking, “making them one and the same”.

Hertz already has in place programs to provide rental cars to both Uber and Lyft drivers.  In fact, Icahn’s Lyft is now paying Hertz up to 90% of the cost of a rental for Lyft drivers when they meet minimum ride requirements.

What this means is that a Lyft driver can use a Hertz car (rather than his own) at almost no cost. He gets unlimited miles, the insurance is included and he bears no cost of depreciation or maintenance.

Here is the current offer being made to Lyft drivers. Keep in mind that Lyft is the one paying the fully agreed price to Hertz.

Again, remember, Hertz is receiving the fully agreed price for the rentals above. The subsidy is being provided to the driver from Lyft.



Ride hailing platforms are undeniably faster, easier, cheaper, more convenient and more flexible than renting a car. So until now, Icahn’s decision to double down on an imploding car rental chain was puzzling.  After all, the consensus view on heavily shorted Hertz was that “car rental” is quickly going the way of the Yellow Pages and the printed newspaper. Ultimate failure was certainly viewed as a question of “when” not a question “if”.

So why is Icahn so content with his current paper loss of $1 billion on Hertz?

The answer is that $1 billion is actually a tiny price to pay for a controlling position in the new transportation paradigm.  In just 2017 alone, Uber is on track to lose a staggering $3 billion.  Eventual profitability for Uber is nowhere in sight.

There are now many players vying for the future of how to transport people around. Giants like Apple, Google, Uber and Lyft have each been competing to throw BILLIONS of dollars into their transportation efforts with absolutely no need to make near term profits.

Regardless of who eventually wins this transportation gold rush, Carl Icahn will be “selling shovels” to them all, winners and losers alike. 

Once you review the timeline of Icahn’s involvement in this space, this strategy becomes entirely obvious.

Icahn began investing in Hertz in 2014, when the share price was still over $100. In 3Q 2016, a steep earnings miss sent Hertz’s share price into a tailspin, plunging by 35% from its then level of $35.  Icahn immediately bought 16 millionmore shares at an average of $23.78, more than doubling his total stake to 29.3 million shares.  Icahn is now the largest shareholder of Hertz with a 35% stake.

Both of Hertz’s bonds and shares have been under tremendous pressure for the past 3 years. Yet Icahn chose to double his stake in the EQUITY, while NOTbuying the BONDS.

If Icahn had any concerns about bankruptcy he would quite obviously be moving up the cap structure away from the common stock and into the bonds. A search of bond holders on Bloomberg shows that Icahn is not a bond holder.

In 2015 (after Icahn had already begun investing in Hertz), Icahn quickly invested $100 million into the ride hailing service Lyft.  Icahn chose to take down fully 2/3 of that $150 million financing round in Lyft.

The fact that Icahn chose to invest in privately held Lyft was quite notable. The New York Times observed of Icahn’s investment in Lyft that:

More surprising is Mr. Icahn’s involvement…Mr. Icahn rarely invests in closely held start-ups

Icahn demonstrated that he understands the new ride share dynamic completely.

In an interview with the New York Times, Icahn specifically said of his Lyft investment that:

What I’m saying is there is a secular change going on with the way people are getting around, and with urbanization, it means more people living in urban areas.

So as Icahn continues to ramp up his stake in Hertz, he is certainly NOT doing so because he is oblivious to the emerging dominance of ride hailing platforms. In fact, Icahn is investing in Hertz as a way to benefit from the rise of ride hailing platforms such as Uber and Lyft !

Shortly after Icahn invested in Lyft, Hertz and Lyft began teaming up, creating the above mentioned Express Drive program where Lyft pays to Hertz the cost for drivers to rent cars from Hertz rather than use their own cars. Hertz later began a program for renting to Uber drivers.

Just two months ago (June 2017), Icahn acquired car-service chain Precision Auto. That deal added 250 locations to Icahn’s existing network of 1,000 car servicing shops.

Fox Business noted that:

Carl Icahn is raising his bet that Americans won’t fix their own cars, and that eventually many might not even own one.

And then just after that, Icahn announced that he was acquiring additional THOUSANDS of auto repair shops across the country.

Jun 4, 2017 – NY Post – Carl Icahn plans to acquire thousands of auto-repair shops

In fact, over the past 3 years, Icahn has been paying top dollar across the board to assemble together an interlocking network of automotive companies which will provide rental, ride share, parts, servicing and fleet management.

Pep Boys – Icahn acquired up 130% for over $1 billion

In early 2015, auto parts chain Pep Boys was trading at $8.00.  The company was highly leveraged, heavily shorted and financially shaky. (It was quite similar in these respects to Hertz in 2017).

In December 2015, Icahn announced that he had acquired a 12% stake in Pep Boys. Just days later he made a bid for the entire company at $15.50 per share (up nearly 100%).  A bidding war ensued with Icahn bidding against Japan tire company Bridgestone.  Icahn was more than willing to outbid Bridgestone at $18.50 per share, valuing the company at over $1 billion (up 130% from just a few months earlier).  On a standalone basis, most outside observers agreed (at the time) that Icahn significantly overpaid for Pep Boys.

Here was the run-up in the stock leading into the eventual buyout by Icahn.

It took a few months, but finally the media took a completely different view of Icahn’s purchase of Pep Boys.

Why Carl Icahn’s Pep Boys Purchase Is Brilliant


In 1H 2017, we saw shares of Restoration Hardware and Weight Watchers triple and quadruple from their lows to their highs.  Both stocks were highly levered, heavily shorted and faced very visible challenges in terms of business prospects and valuation.  In other words, in January 2017, each of Restoration Hardware and Weight Watchers was very similar to where Hertz is today.

For each of Restoration Hardware and Weight Watchers, all it took was a very MEDIOCRE re-rating of their business prospects to see them triple and quadruple in just a few months.

The meteoric rises of Restoration Hardware and Weight Watchers took everyone (especially short sellers) by complete surprise.

The reason for these wildly disproportionate share price spikes lies in the leverage and the short interest.

High leverage cuts both ways. It amplifies share price moves on the upside as well as the downside.  When a mediocre re-rating of the business causes the enterprise value to rise by even just a moderate amount, the high leverage means that the equity value vaults higher by multiples.  That is why we call it “leverage”.

Based on the information above, Hertz is due for a truly transformational re-rating of its business prospects.  While it was recently dismissed as a dinosaur business on its way to extinction, it is now being viewed as an absolutely critical component of the future of transportation.  This certainly merits a more-than-mediocre rise in enterprise value.

Hertz has a total of $16.8 billion in debt. But of this, $11.2 billion is debt secured by vehicles.  The debt that really matters to us is the $5.6 billion of non-vehicle debt.

As of June 30th, 2017 (from the Q2 Form 10Q):

Against this, Hertz’s current market cap is just $1.2 billion, giving Hertz an enterprise value of $6.1 billion

What this means is that as investors re-rate Hertz business prospects, a mere 25% rise in enterprise value translates to a 127% rise in the share price to around $32.  If investors decide that the new paradigm makes the business (enterprise value) worth double what the dinosaur was worth, then the share price should go up by 510% to $87.

Clearly this is why Icahn is completely unperturbed showing a tiny little paper loss of just $1 billion .

Against these tremendous upside prospects, it is now the case that there are more shares short than there are available shares to cover in the effective float.

As the share price has fallen lower and lower, more and more bears have piled on at the bottom. The result is that short interest now stands at 33 million shares, which is 62.0% of the stated float (according to Bloomberg).



But it actually gets worse than that. Much worse !

The already staggering 62.0% is the number reported by Bloomberg. But in reality, this number ignores the fact that several funds have initiated, maintained or increased their 5%+ positions and are unlikely to sell in the near term.  As a result, these shares are unavailable when shorts are looking for shares to cover.

Furthermore, index funds which own around 18% of Hertz are also unable to sell simply because the share price spikes. They must continue to hold in proportion to their benchmark index weights, regardless of where the share price goes.

As a result, the effective float at Hertz is around 22.3 million shares vs. the short interest which now sits at 33 million shares. There are simply not enough readily available shares for shorts to cover.

Here is the math behind the effective float.


(For a further discussion of the effective float, read my recent article on infinity squeezes.)

Icahn owns 35% of Hertz, which is already being factored in by Bloomberg.

Key funds which each own 5% or more of Hertz include:

  • GAMCO. Recently increased its stake by 765,100 shares to a total position of 6.6 million shares.
  • Par Capital. Just initiated a position of 5.9 million shares.
  • Glenview. Maintained a position of 4.4 million shares.

In total, these 3 funds own 16. 8 million shares that are not being sold, reducing the effective float, making it more difficult for shorts to cover. 

Index funds include Vanguard, Blackrock Dimensional and multiple others.  In total, index funds own 14.7 million shares. Because they cannot readily sell, they further reduce the effective float, also making it more difficult to cover.

Once we exclude the additional long term funds and index funds, there are only 22.3 million shares in the effective float which is well short of the 33.4 million shares which shorts need to cover.

Here is the HDS screenshot from Bloomberg.


Icahn’s play on Hertz is nearly identical to the play that Icahn is making on Herbalife (HLF), in which he is currently showing a profit of over half a billon dollars.

Following significant negative exposure, Herbalife’s short interest spiked, even as the share price briefly plunged below $30.

After multiple purchases starting from around $40, Icahn then began seeking permission for larger and larger stakes.  In July 2016, Herbalife agreed to allow Icahn to go up to 34.99%. And then in October 2016, Icahn received approval from the FTC to take his stake up to 50%.  In February of 2017, as the float was getting tighter and the stock was rising higher, Herbalife announced that it had authorized a share buyback of up to $1.5 billion.

As it applies to Hertz, it is very clear that Icahn is well aware of the short vs. effective float dynamic. And as we saw in Herbalife, he is more than happy to use it to his advantage.

Hertz currently appears quite levered, which has been of concern to investors.  But remember that most of that is “vehicle debt” which is secured by the vehicles.

Based on Icahn’s playbook with Herbalife, Icahn could conceivably buy more Hertz stock or use his meaningful presence on the board to encourage the company to authorize additional large share repurchase programs.

Looking back to Hertz…

In June 2016, Hertz announced a new share buyback authorization of $395 million. And then in November 2016, Icahn acquired over 16 million shares of Hertz at an average price of $23.79 for a total cost of over $388 million. This increased his total stake to over 29 million shares (i.e., 126% increase in his holdings).

Disclosure: I am/we are long HTZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is long HTZ. The author made make additional trades in the next 72 hours.

LONG $DDS Long Dillard’s on potential “infinity squeeze”


  • Dillard’s appears set up for “infinity squeeze” like VW in 2008, which sent stock up 5x. Einhorn was short VW in 2008, but is now largest outside holder of DDS.
  • Bloomberg shows short interest at 69.9% of float. But it’s worse. Index funds can’t sell. Einhorn won’t. Short interest now over 100% of effective float.
  • Aggressive share buybacks (ever after Q1) further reducing float without being noticed. Extent of any further buybacks will be announced in 2 weeks.
  • Excluding Einhorn and index funds, as few as 4.38million shares in effective float vs. 9 million shares short. I expect further Q2 buybacks of 1-2 million shares.
  • The math: shorts have now sold millions more shares than they can readily buy back from obvious sellers. Einhorn (or different 3rd party) could recall borrow and trigger massive squeeze immediately.

This article is the opinion of the author.  The author is long DDS.

Note: In general I try to link to free data sources so that all readers can evaluate for themselves without data subscriptions. But this article is very numbers-driven, so I have mostly used Bloomberg data. I have included screenshots to show the data where practicable. Other links can be clicked on from various sources, including Edgar.  In making my investment decision, I have done my own math and made my own decision.  Do your own math and make your own decision.

***   Key Statistics

Company:                 Dillard’s Inc. (DDS)

Market cap:              $2 billion

Debt:                         $820 million

Cash flow:                 ≈ $400 million per year free cash flow

Book value:               $1.7 billion (at cost, decades old prices)

Real estate:               $3-4 billion (est. current market value)

Shares short:            9 million shares (69.9% of stated float)

Free float:                 12.88 million shares

Effective float:          ≈ 4 million shares (excl. key holders / index funds)

Buyback:                   3 million YTD. Plus 1-2 million more by Aug 10th.

This trade is about the potential for a massive short squeeze due to a mathematical imbalance.  Shorts have sold millions more shares than are readily available for them to buy back.  Someone (the last to cover) will be stuck paying an astronomical price.

I am less focused on the fundamentals at Dillard’s. But it is important to at least differentiate Dillard’s from the financially shaky players like Sears (SHLD) or JC Penny (JCP).

The short thesis is simple.  Online shopping from places like Amazon (AMZN) is replacing “brick and mortar” shopping at places like Wal Mart (WMT).

But unlike many of the other department stores, Dillard’s has strong free cash flow and little debt.  Dillard’s is trading at just over book value. However, book value only values assets at historical cost, which is decades out of date.  Market value of Dillard’s real estate has been estimated at $3-4 billion.  Even with a generous haircut to those numbers, Dillard’s is still trading at a discount to its real estate value. There is effectively zero visible bankruptcy risk for Dillard’s and significant incentive for the company to go private.

Again, I am not really focused on the fundamentals at Dillard’s. This thesis is about the math that says there are millions more shares short than are in the effective float.

In any event, the numbers above arguably make Dillard’s a better long pick than Macy’s (M), Target (TGT) or Kohl’s (KSS).

But again, this is not a thesis about the fundamentals at Dillard’s. It is a mathematical trade based on the short interest exceeding the effective float.

Below we will see how the short interest somehow became the highest in the retail space. 

***   Investment thesis – set up for “Infinity Squeeze”

For those in a rush, I briefly summarize my thesis here.  In the section that follows, I include Bloomberg screenshots and additional links to SEC filings so that readers can do their own math.

Dillard’s now appears perfectly set up for an “infinity squeeze” which could be triggered at any time.

The most famous example of an infinity squeeze was that of Volkswagen AG in 2008.  When Porsche suddenly upped its stake without prior notice, shares of VW quickly rose by a stunning 5x (more than 400%) within days, making it (briefly) the world’s most valuable company by market cap at €300 billion.  Hedge funds suffered estimated losses of as much as €30 billion that week, while Porsche reportedly made a profit of €6 billion.

Clearly size is not a limiting factor with infinity squeezes.  (That’s why they are called infinity squeezes….)

As we saw with the VW squeeze, the only thing that matters in an infinity squeeze is when shorts have sold more shares than they can readily buy back in the effective float.  

At Dillard’s, short interest stood at just 20% in January 2017.  No big deal. But then several things happened.

During 1H 2017, shares sold short rose to 9 million shares. At the same time, accelerated share buybacks by Dillard’s simultaneously reduced the float to just 12.88 million shares.  As a result, Bloomberg now reports that short interest has suddenly risen to 69.9% of float. It seems that this “double whammy” of rising short against falling float had escaped the attention of short sellers who should have been paying attention. (Note that many other financial sites have also missed the buybacks. Their numbers for shares outstanding and float at Dillard’s are inaccurate and have not been updated since the 10K was filed. This is another reason why some investors are only now figuring out what has happened.)

Oh but it gets much, MUCH worse than that.

The third leg of this “triple whammy” is this:

Of the 12.88 million share float, as much as 6 million shares are in the hands of index funds (including Blackrock, Vanguard and others) who are typically unable to sell in meaningful size, even when the share price rises sharply. They must generally hold in proportion to their benchmark indices.  As I will show below, the inability of index funds to sell their shares was a key contributor to that massive infinity squeeze of Volkswagen in 2008. 

A further 2.5 million shares are held by David Einhorn’s Greenlight Capital, amounting to 9.99% of the company. As it so happens, Einhorn was on the painful side of that VW squeeze in 2008. So he can certainly appreciate the short vs. float dynamic that is suddenly unfolding at Dillard’s. (In other words, even if the stock spikes by more than 50-100%, don’t be surprised if Einhorn still isn’t selling.)

With index funds largely unable to sell much of their up to 6 million shares and with Einhorn unlikely to sell his 2.5 million shares, the true “effective float” is really as low as 4.38 million shares of readily and likely available shares for shorts to cover their 9 million shares short.

Wow. That’s really, REALLY bad.  But wait, there’s more.

In fact, to the extent that Einhorn has been lending out his shares, he could presumably recall those shares at will. This could force shorts to buy up to 2.5 million shares regardless of price – IMMEDIATELY.  And just when shorts are forced to scramble to buy shares, there are simply not enough shares in the effective float to facilitate easy covering. Anyone who is long could simply hold out for astronomical prices and the shorts would be forced to pay. This is what happened with VW and was why Porsche made a €6 billion profit in a single week.

Alternatively, the effective float at Dillard’s is now so tiny that any 3rd party investor could swoop in, buy a block of stock and recall the underlying borrow.  Given how tiny the effective float has become, such a strategy would NOT require a huge outlay of capital.  Any takers ?

This is just what “Pharma Bro” Martin Shkreli did with KaloBios  (KBIO) in 2015, causing those shares to rise by 100x (yes, 10,000%) from their lows to a high of over $44.  As a reminder, if a tiny 1% position rises by 100x then your entire fund goes to zero.

With both VW and KaloBios all it took was a single press release or Tweet from the 3rd party investor to spark the infinity squeeze which soared by hundreds or thousands of percent within just days.

As we will see below, prior to their gargantuan infinity squeezes, media sources reported that short interest was at less than 15% for both Volskwagen and KaloBios. By comparison, reported short interest at Dillard’s now stands at 69.9% according to Bloomberg.  This shows how vulnerable Dillard’s share price is to such a massive squeeze.

Ok. So it couldn’t possibly get any worse, right ?!  Wrong.

It is the ongoing share buybacks by Dillard’s that caused this precarious situation to develop without notice. And with the stock hovering near 5 years lows during Q2, those buybacks have recently been accelerating. A lot.

Dillard’s announced Q1 (ended April) results on May 11, 2017.  In that press release, Dillard’s announced that it had repurchased 1.7 million shares. This would leave Dillard’s with 26.49 million Class A shares outstanding as of April 29th.

But in the Form 10Q which was released 3 weeks later on June 6th, the share count on the cover page was only 25.178 million dated as of May 27th. This means that 1.3 million more shares were bought back in May (the first month of Q2, which will not be fully disclosed until August 10th).

This 25.178 million share count number was updated on Bloomberg, but it seems that few people noticed the impact that this would have on the float, especially vs. the rising short interest.  There was NOT a press release announcing the repurchase of the additional 1.3 million shares.

So during just a 3 week period, investors who had been paying attention should have realized that the float had shrunk by 3 million shares.  During this same few weeks, shares short rose by 3 million shares.

This is how we quietly got to a staggering short interest of 69.9% apparently without many people noticing.

In fact, Dillard’s has the cash and the approvals to have been conducting even more buybacks in June and July.

On August 10th, (about 2 weeks from now) Dillard’s will release Q2 results and will reveal how many shares were bought back in June and July.

As a reminder, Dillard’s generated over $400 million in free cash flow last year and has aggressively repurchased shares in each of the past 6 quarters.  These buybacks have visibly become more aggressive as the share price has fallen.  During Q2, the share price continued to hover near 5 year lows.

I expect that on or about August 10th, we will see that Dillard’s repurchased 1-2 million additional shares in June and July.

If this turns out to be this case, it would further reduce the effective float to as little as 2-3 million shares which would be likely and readily available for shorts to cover their 9 million share short position.

Here’s the rub:

The conceptual risk here is that Einhorn or any third party investor decides to recall stock borrow and force a squeeze when so few shares are readily available.

Einhorn has been gradually acquiring over several years, but his stake is still just under 10%, meaning that he his not an affiliate.  So simply deciding to stop lending shares should not be controversial in my view.  Likewise, an outsider could end up triggering a squeeze even by acquiring less than 5% of outstanding shares. This would be far less aggressive that what Shkreli did with KaloBios in 2015. Shkreli has come under tremendous scrutiny from regulators and the media for a variety of his past actions. But so far I have not found any mention of the KaloBios squeeze amongst his current regulatory problems.

Either way, even in the absence of such a trigger, I expect shorts to rush to exit their positions in Dillard’s well before the new share count is revealed on or around August 10th.  At the same time, I cannot imagine why any longer term holders would be selling prior to August 10th, when the extent of share repurchases is revealed.

***   The math – potential infinity squeeze at Dillard’s

There are 9 million shares short at Dillard’s but there are only around 4 million shares which are likely and readily able to be bought back. 

Dillard’s Shares in the effective float
Float: 12.88 million Stated float as per Bloomberg
less:    6.0 million Shares held by index funds (cannot readily sell significantly)
less:    2.5 million Shares held by Greenlight Capital (very unlikely to sell)
Total:  4.38 million Effective float = shares readily and likely to be buyable

(Potential for further float reduction of 1-2 million shares due to possible buy backs in June-July could leave as few as roughly 2-3 million shares in the “effective float”. Q2 results and buyback size to be released on or around August 10th.)

At Dillard’s there are 25 million shares outstanding.  But 12.297 million shares are “stagnant” in the hands of various insiders (including Dillard family members) and Evercore (which manages the Dillard’s 401K plan).

This leaves only 12.88 million in the public float, as per Bloomberg.

Also as per Bloomberg, there are currently 9.0 million shares short in Dillard’s, which already amounts to 69.9% of this stated float.   Number of shares short is up from 3.6 million in January 2017.

Below is the list of holders of Dillard’s stock from Bloomberg.  As I see it, the obvious index funds include Blackrock and Vanguard. Dimensional also takes a hybrid index approach.  Even funds such as BNY Mellon and State Street have funds that allocate via indexing.  Collectively index funds own as much as 6 million shares. A screenshot of the Bloomberg HDS table is also included below.

Note that as of the last reporting dates, 18 out of 20 of these holders INCREASED their positions in Dillard’s as shown on Bloomberg.

But also note that because some of these holdings are reported as of March and some as of June, we there will be some overlap in the holdings across these periods. This will obviously change over time.

As you can see from the HDS table from Bloomberg, Einhorn’s Greenlight Capital increased its stake in Dillard’s by a net 623,675 shares in the past quarter.

(Note: SEC filings show that Greenlight did sell a mere 35,125 shares in June so as to keeps its stake at just under 10% of Dillard’s. When Dillard’s Form 10Qrevealed in June that the share count had shrunk by 1.3 million shares in May, it resulted in Greenlight’s stake briefly exceeding 10%.  Greenlight’s tiny sale occurred immediately after that disclosure and took their stake back down to 9.99%.  Note that Einhorn’s stake did INCREASE by a net 623,675 shares in 1H 2017.)

The reason I assume that index funds cannot for the most part sell meaningful amounts of stock at will is partly just common sense.  They are index funds. But also, we saw in the 2008 infinity squeeze of VW, it was the inability of index funds to sell their shares that contributed to the height of that squeeze that saw the shares rise by 5x within just days.

We know this because as the squeeze was in full effect, German officials quickly stepped in and conducted an emergency de-weighting of VW within the DAX index, allowing these index funds to sell.

From the New York Times on October 30th, 2008:

By Tuesday night, the establishment was fighting back. Germany’s premier stock index, the DAX, was changed to cut VW’s proportion in it. That allowed index funds to sell stock, adding to the supply of shares, and VW’s shares lost part of their gains.

Greenlight’s average cost basis on Dillard’s is listed on Bloomberg at  $78.47. And they have been increasing the position in recent periods. Knowing that, in combination with Einhorn’s experience in VW, I do not expect David Einhorn to be selling just to alleviate an obvious short squeeze (unless we see the share price at much, much higher levels).

After all…why would he ?

So if we decide that index funds either can’t or won’t sell in meaningful size and that Einhorn is also unlikely to sell, there are really as few as 4.38 million shares readily available and likely to be sold for shorts to cover their 9 million shares short.

Next let’s look at the share buybacks by Dillard’s which are rapidly shrinking the float.

Dillard’s has been aggressively buying back stock for (at least) the past 6 quarters in a row.

As shown, in the past 6 quarters, Dillard’s bought back shares as follows:

Date (EoQ) Value repurchased Shares repurchased
1/30/2016 $117.5 million 1.6 million
4/30/2016 $58.4 million 0.7 million
7/30/2016 $54.1 million 0.9 million
10/29/2016 $53.1 million 0.9 million
01/28/2017 $80.6 million 1.3 million
04/29/2017 $91.1 million 1.7 million

NOTICE how those buybacks have been getting more aggressive each quarter as the share price was falling.

Also NOTICE that the share price during Q2 continued to hover near 5 year lows. This is why I expect that another 1-2 million shares were repurchased in June-July.

These ongoing buybacks (and the reductions in share count / float) were a major contributor to the short interest rising from 20% in January to 69.9% at present.

Just from May through June, short interest rose from around 40% to 69.9%.

Just look at the steep trajectory of the short interest vs. float in the chart below, which took off in January and then accelerated from May through June.

When Dillard’s announced Q1 results (ended April), they also announced that the company had bought back 1.7 million shares in that Q1.

But many people failed to notice that by the time the Form 10Q was actually released in June (3 weeks later), that the share count had fallen by an ADDITIONAL 1.3 million shares, even AFTER Q1 had been fully reported.

In other words, just in the month of May, Dillard’s accelerated its buyback, buying 1.3 million shares in a single month, reducing the Class A share count to just 25.178 million.

Realize that there was no paragraph in the 10Q explicitly spelling out further buybacks during May. It was just a change on the cover page to the number of shares outstanding.  That change was quickly reflected on Bloomberg but it seems many people either missed the change or failed to appreciate its significance.

Here is a screenshot from the cover page of the Form 10Q released in June 2017.

(Note: Dillard’s has 4.01 million shares of Class B stock which gives Dillard family members voting control of the company. The Class B shares do not trade. The number of Class B shares outstanding and the ownership by the family members has remained constant going back to at least 2008. The Class B shares have nothing to do with the tradeable float or short interest.)

With the stock price hovering mostly near 5 year lows for much of June and July, I feel that it is safe to assume that across June and July, Dillard’s likely bought back an additional 1-2 million shares, further reducing the effective float.  They certainly have the cash flow to do just that.

Further repurchases would also be consistent with their behavior over the past 6 consecutive quarters.

Here is the annual free cash flow for Dillard’s over the past few years.  Notice that for the year ended January 2017, Dillard’s generated over $400 million in free cash flow.

Date (FY) Free Cash Flow
1/28/2012 $385.5 million
02/02/2013 $386.1 million
02/01/2014 $406.8 million
01/31/2015 $459.7 million
01/30/2016 $284.4 million
01/28/2017 $412.2 million

And remember that Dillard’s ended the April Q1 with over $300 million in cash.

In fact, we can see that this pattern of aggressive share buybacks has been going on for years.  Ten years ago, Dillard’s had roughly 60 million shares in the float. That has since fallen by nearly 80% to 12.88 million.

So given the chart above, choose which of the following scenarios would surprise you more:

Scenario A.  After more than 10 years of aggressively buying back billions of dollars worth of its own shares, Dillard’s finally acquired all shares and took the company private when the stock was near 5 year lows.


Scenario B.   After more than 10 years of aggressively buying back billions of dollars worth of its own shares, Dillard’s suddenly stopped buying when the stock was near 5 year lows.

You can decide for yourself.  But while you’re thinking about it, also consider this.

Whatever Dillard’s is theoretically “worth” as an entity, that value is increasing sharply on a per share basis as a result of those buybacks.

Some investors may look at “free cash flow per share” others may want to look at “book value per share” to approximate the estimated $3-4 billions of dollars in real estate that Dillard’s owns.  Either way, on a per share basis, any per share number is increasing sharply due to the buybacks.

Obviously reported “book value” will be very out of date because it only reflects the cost at the time the real estate was acquired in past decades.  The market value of the real estate should certainly be much higher than book value. But just to get an idea of the impact of the buybacks on book value per shares, here is the chart from Bloomberg.

Anyone who is short Dillard’s need to factor this rising value per share into their target prices.

Here is one presentation that valued Dillard’s real estate at as much as $6 billion.  I am not really trying to take a guess at that number.  Instead, I am satisfied that even with a substantial haircut to that number, the current value of Dillard’s real estate ALONE is still well above Dillard’s market cap. (And that ignores the ≈$400 million in free cash flow.)

***  What could actually spark an infinity squeeze at Dillard’s  (like, as in RIGHT NOW) ?

Just prior to the 2008 infinity squeeze on VW, short interest at VW had been reported at just 12.9% of outstanding, which did not seem alarming.  For Dillard’s, the reported short interest on Bloomberg was only 20% in January, but it has already risen to 69.9% as of now. That is absolutely alarming.

In the Volkswagen squeeze of 2008, the trigger was when Porsche AG suddenly increased its stake without notice.

Remember that Einhorn was on the painful side of the 2008 infinity squeeze on Volkswagen. Shortly after the VW squeeze, Einhorn’s subsequent investor letter revealed some valuable lessons for those caught in such a squeeze on how they can live to fight another day rather than going down with the ship.

Here is a screen shot from that investor letter which discusses how Greenlight handled the infinity squeeze on Volkswagen (“VOW”).

I strongly suggest that anyone who is currently short Dillard’s read that quote from above.  And then go back and read it again.

Focus on this part:

The worst trade is the one you don’t want to make, but the one you have to make…..we are unwilling to risk the entire portfolio on a single investment….Though VOW was not a large position on Friday, it became one by Tuesday.

The now-tiny effective float means that even aside from Einhorn there is now a very real possibility that a different 3rd party could swoop in and ignite a similar squeeze by simply buying a small chunk (less than 5%) of the stock and then recalling the borrow underneath it. Such a strategy would NOT require a huge outlay of capital.

This is exactly what Martin Shkreli did in 2015 when he bought shares of KaloBios and recalled the borrow.  Shares of KBIO quickly skyrocketed by 100x (yes, nearly 10,000%) from their lows.

The table below shows the 100x rise in KaloBios’ share price following the announcement of  Shkreli’s purchase on November 18th.

Note carefully that the share price had been rising sharply in the days leading up to that announcement.  And that KaloBios’ share price quickly soared by 10,000% to a high of more than $44.

LOOK at the dates. and then LOOK at what the prices did in percentage terms.  When these squeezes happen, they are sparked immediately overnight and then continue squeezing for many days.

This is what Einhorn meant about “unwilling to risk the entire portfolio on a single investment” and “not a large position on Friday, it became one by Tuesday”.

As you can see above, the squeeze unfolded over multiple days as certain investors tried to “wait it out”, thinking that the stock would have to come back down once the “weak shorts” were flushed out.  It turns out that the ones who covered early were actually the ones who made it out with the least damage from this 10,000% rise in just 7 days.

The infinity squeeze on KaloBios was made more memorable by retail trader Joe Campbell who started a GoFundMe account to seeking contributions after his $37,000 account lost nearly 400% of its value overnight, leaving him over $100,000 in debt to Etrade. Campbell had been short the stock at around $2.00 at the close on November 18th, prior to the announcement on Shkreli’s purchase.

Trader Begs for Help to Pay E-Trade $106,000 After Biotech Blow-Up

But Shkreli wasn’t content with the rise from $2.00 to the $20s.  He wanted more. And any time we see a mathematical imbalance of shares short vs. effective float, this goal becomes very easy to obtain.

On Thanksgiving day, Shkreli put out the following tweets, sending the stock as high as $45 (up another 73% in a day) when markets reopened on Friday.  KaloBios’ stock had been at just 44 cents 10 days earlier.

Notably, short interest at KaloBios just prior to the squeeze had been reported at less than 10%. Obviously this is far lower than the 69.9% we see reported at Dillard’s.

Regardless of what anyone thinks about Dillard’s current share price, it is hard to deny the fact that the stock is now extremely vulnerable to a potential squeeze play by an outside investor, similar to what Shkreli did with KaloBios.

So again, here is the math as I see it with Dillard’s: 

There are as few as 4.38 million shares which are readily able and likely to be sold by existing holders.  But there are 9 million shares short which need to be bought.  This situation is already very bad, but it could get dramatically worse in just an instant in a single day if anyone chooses to recall borrow or acquire any meaningful new stake.

I expect this aleady-bad situation to get much worse on August 10th when we learn just how many shares Dillard’s bought back in June and July.

Again, I am expecting to see additional repurchases of up to 1-2 million shares, which would reduce the effective float to as low as roughly 2-3 million shares even as the number of shares short sits at 9 million which must be covered.

Given the cash flow, the real estate and the aggressive buybacks at Dillard’s, a short bet on the stock was already not a particularly bright one in the first place.  But given the rate at which the float is disappearing and the potential for an ignited infinity squeeze, staying short Dillard’s now is just plain lunacy. 

Do your own math. Conduct your own analysis.  Make your own decision.

***   The shorts aren’t dumb – so how did we get here ?

Here is the way I see it.

A major contributor to this infinity squeeze setup is just the fact that Dillard’s does not appear to be a “conviction short” for anyone. As far as I see, no one is shorting Dillard’s simply because of a view on Dillard’s. Instead, there are many funds taking small positions of 50-100 bps in each of multiple department stores as part of a vey generic sector short on retail.

As recently as January, the short interest in Dillard’s still sat below 20%. It wasn’t really that bad.   Yes, the number of shares short at Dillard’s steadily increased. But so did the number of shares short for most department stores. Hedge funds were just spreading their bets around.

With Dillard’s, there has been a “triple whammy” which caused a sharp change in the short interest relative to the effective float changed. The sharp change happened fairly quickly without anyone noticing until it was too late.

Here again is the triple whammy.

The float was already quite low at Dillard’s.  This meant that the stock buybacks by Dillard’s had a disproportionate impact on the remaining float. As the float continued to shrink, the significance of the position held by Einhorn and the index funds grew quickly and exponentially.  But because Dillard’s was just part of a larger generic sector short for hedge funds, this dynamic was missed by those who were going short. For most investors, their short positions were just too small to merit significant individual attention.  Since January 2017, hedge funds steadily increased their short bets against a wide variety of department stores. But with Dillard’s specifically, they were increasing a short bet against a disappearing float and against an effective float that was shrinking even faster (due to the impact of the buybacks).

And now there there are millions more shares short than are in the effective float which can readily be bought back.

Disclosure: I am/we are long DDS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is the opinion of the author. The author is long DDS. The author may make subsequent trades in various securities mentioned in this article within the next 72 hours.

$ARA American Renal: JV partners rushing to sell equity stakes. But why ?


  • ARA’s JV partners are suddenly exercising their put options nearly as fast as they vest, requiring ARA to buy out their equity stakes. The reasons are becoming clear.
  • Post Q1 news: insurers now rejecting charitable assist on BOTH ACA AND non-ACA plans. Fraud lawsuit against ARA spurred federal investigations into “charities”, now from three separate federal agencies.
  • Hypersensitivity of ARA to several very small variables such as put exercises and commercial mix. Tiny changes are suddenly wreaking havoc on ARA.
  • ARA is merely an “also covered” stock. Analysts only focused on much larger competitors DVA and FMS, and have completely missed problems at much smaller ARA, which are very unique and very deep.
  • Base case decline of 60% to $7.  But with $500 million debt + $132 million put liability, also a strong case for later insolvency (ala Adeptus).


The information below represents the opinion of the author.  The author is short ARA.

Company snapshot

Name:           American Renal Associates (ARA)

Business:      Dialysis provider

Share price:  $17.36

Market cap:   ≈$550 million

Debt:             ≈$500 million plus $132 million in put liabilities to JV doctors

Borrow:        At least400-600k shares (up to $10 million)

Borrow fee:  0.90%

Options:       Calls and puts


Right now shares of American Renal Associates (ARA) are trading for around $17.  If things go “better” than expected, then I expect that the shares may “only” fall to around $7 (down 60%).

But in reality, a more likely scenario in the foreseeable future is actual insolvency for this troubled dialysis provider.  If that view sounds extreme to you, then just read on. I think you will see clearly what I mean below.

As I will repeat throughout this article: Do not believe me. Do not believe the sell side.  Instead, look to ARA’s JV partners (insiders) who are now exercising their put options nearly as fast as they can possibly vest them.

Below I will spell out clearly:

  • why things are so bad for ARA
  • why they are much, MUCH worse for ARA than at DaVita  (DVA)
  • how we KNOW with certainty that things are so bad at ARA
  • how we know things are unraveling NOW
  • WHY analysts and investors have missed all of this at ARA

In the past, my articles on multiple private equity backed IPO’s ended up quickly presaging declines of 70-100% for stocks like IRG and Erickson Air Crane (among others).   With Erickson, the stock fell as much as 30% on the day of my article. But the pain was actually just beginning. The stock went on to be a true zero and quickly ended in bankruptcy.

My articleMassive Insider Deal Threatens Erickson Air-Crane

Later news:  Mystery silence at Erickson Inc. ends with bankruptcy filing

But as I will show towards the end of this article, an even better template for ARA is the bankruptcy and implosion of Adeptus Health (ADPTQ).

** Parallels between ARA and Adeptus too obvious to ignore **  

Here are just nine obvious ways in which ARA looks like an identical replay of bankrupt Adeptus which quickly fell from $120 down to $1. 

Just to make things simple, I will number the most obvious similarities.

Adeptus was 1) a private equity backed 2) healthcare services IPO which 3) surged after it came public only to see 4) its results falter amid 5) overpayment issues which were 6) exposed in news reports over its 7) problematic business model. 8) Despite the emergence of obvious problems, the sell side banks were more than eager to hype the stock (and at Adeptus were then more than willing to accept the banking fees from the huge share sales by Adeptus’ private equity backer).  9) Numerous hedge funds naïvely piled into the stock.  Just like ARA, Adeptus’ public problems began with a simple newscast revealing the problems with overcharging. Even until the bitter end, and despite the increasingly obvious problems, analysts were telling investors that Adeptus was a “buy buy buy”.

Adeptus soon filed for bankruptcy and the stock now trades for around $1.00 with the dreaded “Q” added to its ticker.  Down more than 99%.

From FT.com:  Rise and fall of Adeptus is perfect parable of Wall St hype

** A detailed look at American Renal **

The key to understanding the short thesis on ARA is understanding why the nephrologists (ARA’s joint venture partners) are suddenly rushing to exercise their put options on the business, requiring ARA to buy them out of predetermined equity stakes.

As part of the JV structure, ARA grants to the clinic operators (nephrologists) put options allowing them to force ARA to repurchase a predetermined portion of their equity stakes.  The total size of this put liability for ARA is currently $132 million, however most of these options are not currently vested or able to be exercised.  There are a total of $36 million of “event based” puts which are not exercisable until  the occurrence of certain future events. The other $94 million of these puts are “time-based” put options which become only exercisable after certain specified dates. For example, over full year 2017, $23 million of these time based puts will become exercisable by the end of the full year.

These nephrologist partners are the ones who actually operate the dialysis clinics on the ground, such that they understand the business better than anyone.

Better than ARA, better than investors, better than sell side analysts.

In fact, these JV partners have now suddenly begun exercising these puts and selling their equity in ARA nearly as fast as they can, cashing out as much as 50-80% of all vested time-based put options in a given quarter.  This is a very recent and sudden development and is unprecedented in the history of ARA.  As new troubles have begun to hit ARA.

These JV partners recently exercised more puts in a single quarter than had been exercised in the entire cumulative history of ARA.

But in conveying their optimism for ARA, sell side analysts have completely ignored this surge of JV partners suddenly cashing out as fast as they can.

What investors need to see is this:  not all of the put options are currently vested. Only a small portion can currently be exercised.  Of that small portion where they actually CAN exercise, the JV partners ARE exercising nearly everything they can as fast as they can. 

In other words, it is not the SIZE of the total exercises, but rather it is the RATEthat these puts are being exercised as soon as they vest.

So the question is WHY are these JV partners rushing to cash out as fast as they can ?

My short answer to “why” doctors are cashing out is this:  Following the slow unraveling of the “charitable assist” model towards Medicaid patients in 2016 and the ongoing “patient steering” fraud lawsuit, ARA’s commercial revenue mix is falling much faster than expected. This is important because commercial payors have historically reimbursed at roughly 4x the rate of Medicare/Medicaid (or even more). The JV partners can clearly see this sea change in reimbursement on the ground, in complete contrast to the continued “hopes” expressed by  analysts. In addition, ARA’s commercial mix has historically been elevated to a much higher level than competitors such as DaVita.  As the practice of “premium assist” continues to come under ever greater pressure, ARA has much further to fall than DaVita.  Because more than 100% of ARA’s profits / EBITDA come from just the 14% of commercial mix, ARA is truly hyper sensitive to even a tiny drop in the commercial mix. ARA’s remaining 86% of revenues are deeply unprofitable.  On a recent conference call, ARA quietly mentioned that going forward it would only be disclosing commercial mix on an annual (not quarterly) basis.  Investors will therefore now have a 1 year lag behind what the JV partners know regarding the commercial mix.  Furthermore, compared to DaVita, ARA is heavily and uniquely over-exposed to the JV/Put model, such that individual doctors will end up competing with one another to be the first to get their money out of heavily indebted ARA. So this is why the doctor / JV partners have been rushing to exercise their puts as fast as they can. More details below.


** The big question for investors **

As we will see below, the overall size of the put liability and exercises is NOTcurrently enough to sink ARA by itself.  Instead, the sudden and rapid exercise of the puts by the JV partners is just signal of what these on the ground participants know that the rest of us do not.

The biggest question investors should ask themselves is this:  If ARA’s JV partners are rushing to SELL their puttable equity stakes nearly as fast as they can, then who on Earth would be foolish enough to BUY ARA stock at the same time ?!?!

As investors start to figure this out, this is why I expect significant near term downside to the stock.  Simply no one should be foolish enough to step up and buy ARA at anywhere near current prices.

** JV put exercises – how sudden ?  how steep ? **

Looking more closely at this surge in put exercises, as of ARA’s IPO prospectus in April 2016, the company disclosed that:

Since our inception, only $5.8 million of time-based puts have been exercised by our nephrologist partners.

(Note that this equates to just $0.96 million per year since inception.)

Then starting at the beginning of 2H 2016, ARA was hit by a wave of negative articles from the New York Times along with a fraud lawsuit by United Health describing “fraud” and “patient steering”. The fraud lawsuit was then followed by even more negative actions in August from the Department of Health and Human Services which explicitly sought to curtail such “steering”.

By September of 2016 (immediately after these problems became public), we saw that the nephrologist partners very suddenly began exercising their put options almost as fast as they could even vest them.  Anyone watching this should have viewed is as a very drastic about-face vs. the prior 6 year history of ARA. It was unprecedented.

As of Q1, these nephrologists have already exercised more than $12 million of these puts just since Q3. This more than double what had been exercised in the entire prior 6 year cumulative history of the entire company !

The point is this: on the surface $12 million doesn’t sound like a massive number by itself.  And this is why analysts and investors have ignored the significance of it.

But more important than the SIZE of the liability is actually the RATE at which these doctors are exercising their puts. Not all of the equity is actually subject to put provisions.  The point is this: for the portion which IS subject to put provisions, doctors are now exercising as much as 50-80% of all vested options in any given quarter. This has continued into Q1 more recent events now suggest that it will accelerate into Q2.

The JV partners are rushing for the exits nearly as fast as they can. The only thing slowing them down from taking out more of their money is the vesting schedule which is staggered over time.

Obviously this is a very stark contrast to what was disclosed by ARA in the IPO prospectus.

For example, as of the end of Q2 2016, only $15.5 million of these time-based options were exercisable for the entire remainder of 2016 (two more quarters). But, as shown in “purchase of non controlling interests”, the nephrologist partners immediately exercised $8.1 million in Q3 alone, immediately after the bad news began to hit (more than 50% of vested options for 2016 exercised in just a single quarter).

For all of 2017, there are only $23 million in time-based puts which become exercisable over the course of the entire year. Yet in Q1 alone, the JV partners had already exercised $4.5 million in just that first available quarter, as shown in “purchase of non controlling interests”. This is therefore on track for nearly 80% exercise of all vested options once they actually become vested over the course of 2017.

And also keep in mind that there are also an additional $36 million of “event-based” puts which are triggered by separate events and which are not part of this “time based” vesting schedule.  Once these become triggered and vested, JV partners can then start selling those equity stakes as well.

This sudden urgency to exercise vested puts tells us that the problems facing ARA are very real. And it is being conveyed to us by the local nephrologists who know the business even better than ARA itself.  (Certainly far better than analysts and investors.)

** And then there’s that $500 million in debt  **

The insolvency case for ARA is all the more likely due to the $500 million in debtthat ARA has taken on. ARA recently extended the maturities of its debt, so any insolvency is not going to happen overnight.  But the purpose of this huge levering up, of course, was largely for the simple purpose of just handing out large cash dividends to its private equity backer / shareholder.

Here is just one past headline from before the IPO

Centerbridge Partners-backed American Renal Associates is planning to pay $200m in debt-financed dividends.”

As we saw with Adeptus, once PE firms get their first payouts via debt financed dividends, I frequently see them start banging out equity offerings regardless of price.  By the time they are playing with “house money” it matters much less if they sell at $10 or $20, (or even $5). In all scenarios, life is good.


** Negative developments that spurred put exercise (2016- 2017) **

The first wave of negative developments for ARA began in mid 2016. By now these first wave developments have been widely disseminated and are well understood.  These developments from 2016 are not, not, NOT part of my short thesis on ARA !  But they do need to be understood for context. After that, we can look at newer (2nd wave) developments in 2017 over just the last few weeks which have been missed by the market.

Developments from 2016 included a series of scathing articles in the New York Times specifically naming ARA and a lawsuit against ARA by United Health (alleging millions of dollars in fraudulent “patient steering”).

It appears that the lawsuit filed by United Health may have been deliberately overly broad. Although the suit was filed in Florida, it included United Health Ohio as a plaintiff in addition to United Health Florida.  The suit also named an ARA holding company in Massachusetts which has no presence in Florida.

In fact, the strategy by United Health appears to have been pure genius.  Not surprisingly, the subclaims including United Health Ohio and the ARA holding company were both dropped or dismissed.  Those outcomes should have been entirely obvious in advance. The remaining fraud suit of United Health Florida vs. ARA continues to be ongoing.

The genius part is that United Health achieved a near immediate launch of multiple federal investigations into the allegations of fraudulent patient steering.

I STRONGLY encourage readers to view the entire fraud complaint by United Health against ARA. It contains a detailed explanation of the “patient steering” allegations along with a wealth of detailed numbers and data regarding Medicare, Medicaid and commercial reimbursements and other data which are otherwise very difficult to find. 

Link:  Legal complaint – United Health Vs. ARA – Fraud

The New York Times began covering the allegations of steering immediately after the lawsuit was announced. And within weeks, the US department of Health and Human Services initiated a ruling to stop the patient steering which it said had been evidenced by “social workers, health plans, patients, and other stakeholders”.

HHS Publishes a New Rule to Protect Dialysis Patients From Being “Steered” into Private Coverage for the Benefit of Dialysis Centers

In December 2016, the New York Times then published a detailed expose on the American Kidney Fund, which had been the conduit for the patient steering fraud by ARA according to the United Health suit.

NY Times: Kidney Fund Seen Insisting on Donations, Contrary to Government Deal 

The government deal cited by the New York Times refers to the promises that AKF had made in order to avoid violating federal anti-kickback laws.

In January 2017, the HHS ruling was stayed by a Texas judge (on procedural grounds only, not on its merits). Some analysts and investors then hoped that ongoing damage to the dialysis players could be mitigated.

In January 2017, federal scrutiny intensified further, into a second federal agency when the US Attorney’s Office sent out subpoenas to numerous dialysis and drug companies as part of its investigation into “charitable” premium assist. This included ARA.

Article: Dialysis Chains Receive Subpoenas Related to Premium Assistance

The subpoenas certainly have not been lost on the JV partners.  This too has been disclosed and is well known. But the surge in put exercises that followed the subpoenas into Q1 2017 has been totally ignored by analysts and investors.

** Brand new developments in past several weeks (May-Jul 2017) **

More recent developments (which came to light only AFTER Q1 was reported by ARA in May) have been either totally missed by analysts and investors or not fully understood in the context of ARA.

The first wave of developments in 2016 already led to unprecedented cash outs by ARA JA partners via their put options.  And now, recent news over just the past few days and weeks appears to be far worse for ARA.  When Q2 is announced in a few weeks, we will then be able to see the impact on ARA’s financials and additional put exercises.

These newest negative developments for ARA include newly revealed  policies by national commercial insurers to outright refuse premium assist payments from “charities” such as the American Kidney Fund (“AKF”).

For ARA, the impact of this will be a shift in patient mix, which is in fact a double whammy.  There will be a decrease in lucrative commercial patients who will be switched to money losing Medicare patients and an increase in loss making Medicare patients.  Rather than receiving around $1,000 from commercial insurers, ARA would instead receive $200-250 per treatment from Medicare.  The cost to treat patients ranges from $300-400.

Although the shift in reimbursement practices has not been widely reported, ARA’s JV partners would have seen this in practice long before anything would appear in the media.

Notice of these new insurance developments just began in May 2017 (after ARA announced Q1), but was initially limited to specialist dialysis industry journals. Until just the last few weeks, there had been no mainstream coverage that I can find, so this has not been widely known.

But in just the last few days, new headlines have begun to emerge showing that insurers in multiple states are now refusing to accept premium paymentsto insure dialysis patients who already qualify for Medicare/Medicaid and should not be on private insurance.

July 1, 2017 – South Carolina

Article: Kidney patients in SC being forced off of private insurance

June 16, 2017 – Bloomberg

Article: Healthcare investors are in denial

In addition, by looking at the following quote from DaVita to a specialist dialysis industry journal, we can see that the insurance crackdown is now a) stemming from multiple insurers and is b) affecting multiple types of policies (both ACA and non ACA).

So far, most insurers engaged in this activity are only targeting patients on individual (or ACA) plans,” DaVita said. “Recently, however, we have seen the first example of an insurance company trying to use the same tactics to push patients out of their Medigap plans.

In June 29th  (just 2 weeks ago), we then saw an escalation of the federal investigations into “premium assistance charities” reported on Bloomberg. These charities are the ones operating the model that drug makers and dialysis providers have been using to receive vastly elevated vastly commercial reimbursement.  The various investigations and actions by the federal government into this “charitable” activity have now extended into their 3rd federal agency: now including the US Attorney’s Office, the Department of Health and Human Services and (most recently) the Internal Revenue Service.  

The recent IRS case focuses on the Chronic Disease Fund, an industry funded “charity” which channels payments from drug makers to support co-pays. This model is effectively an iteration of the same model used by the American Kidney Fund, which is supported by the dialysis industry, including ARA.

In fact, all of this comes on top of new and onerous advances in state legislationin May 2017 to regulate dialysis providers, imposing mandatory staffing (labor) levels for techs and nurses in dialysis clinics.  ARA is not overly exposed in California, but just like the minimum wage hikes that started only in California, this legislation has the potential to spread more broadly to other states.

**  The future of “charitable assistance” and its impact on ARA **

After all of the drama and exposure over “patient steering” in 2016, in Q1 ARA suddenly disclosed that it had stopped “assisting” Medicaid eligible patients in securing private commercial insurance via AKF.

Following the ballooning accusations of “patient steering” fraud in 2016, the reason for this change by ARA is quite obvious.

Medicaid pays for 100% of a patient’s costs and requires virtually zero out of pocket to the patient.  When a provider such as ARA “assists” these patients into commercial insurance policies, it clearly provides zero benefit to the patient and serves only to quadruple the reimbursement to ARA (or more). This switching of Medicaid eligible patients is visibly indefensible.  And that is why ARA had to stop doing it. As a result of this factor alone, ARA’s commercial mix immediately fellby more than 2%.

But dialysis providers, including ARA, continued to assist Medicare (as opposed to Medicaid) eligible patients in getting into commercial policies.  Commercial (non Obamacare) patients accounted for 13% of revenues is 2016, but ARA recently disclosed that even this would now drop by a full percentage point in 2017.

Up until recently, industry-funded “charities” have spun a great story about how they help patients. But with three separate federal investigations / actions underway, everyone should start to realize that this “charitable” (industry funded) premium assist racket is likely going to be greatly curtailed or could even go away completely.  The mechanics of this scheme are simply becoming too transparent.

Here is how the “charity” racket has worked to date:

As I look at the IRS and other cases, “charitable” assistance allows the providers to channel small amounts of money, using certain “charities” as a “conduit”, to just pay the small premiums and co-pays for patients in order to obtain full insurance reimbursement.

Yes, this certainly appears to be giving support to poor and vulnerable patients.  And that all sounds great. These companies and the charities publicly remind us of their public service in every chance they get via press releases and public statements.

But in fact the tiny payments of premiums and copays, sourced from the providers themselves, yields tremendous profits when insurers or CMS are forced to foot the bills for their drugs or services.  After the “charity” pays these small co-pays and premiums, the massive reimbursement ultimately flows right back to the providers who made the “charitable donations” in the first place.

Got it ?!

(As an illustration: In the case of dialysis, Medicare/Medicaid only pay the clinics around $200-250 per treatment. But with private commercial insurance, these clinics can get reimbursed up to $1,000 for in network and up to $4,000 for out of network. In other words, the dialysis providers can get from 4-20x the reimbursement rate for providing the same exact services to the same exact patients. Many very poor dialysis patients can’t afford private insurance, so the American Kidney Fund pays their premiums for them.  The AKF is overwhelmingly funded directly by the dialysis providers, such as ARA, who then receive the 4-20x reimbursement.  Hence the tremendous incentive to “steer” or “assist” these patients into private insurance.)

In fact, the real beneficiaries of these “charitable” activities are actually the drug makers and dialysis providers themselves as a result of the tremendous payments they rake in from private and government payors who are on the hook for these elevated treatment costs.

But now, as we are seeing in recent weeks, the jig is up. Insurance companies and the federal government are now pushing back aggressively against this nonsense in all directions and all at the same time.

Given that many of ARA’s remaining commercial patients are still receiving premium assistance, there is still plenty of further damage to be done to ARA’s financials once these patients get transitioned to Medicare.

** Impact on ARA – why JV partners are suddenly freaking out **

Even into Q1, JV partners were rightfully exercising their puts largely as fast as they could, to get whatever money is obtainable as soon as they can. Given the new developments in May-July, I can only expect the put exercises to accelerate into Q2.

Media coverage of new problems has been building in recent weeks, but has still been relatively limited.  Although investors and analysts are still in the dark, the on the ground JV doctors have had full visibility from the clinic level. JV partners have first hand knowledge which is far greater and earlier than any media coverage.  This should become even more evident when ARA releases Q2 results in a few weeks.

Shareholders who figure this out will certainly follow the example of the nephrologist JV partners and sell sooner rather than later.

It all comes down to ARA’s hypersensitivity to commercial revenue mix.  This is what the JV doctors know far better than anyone else.

First look at this:

For Q1 of 2017, ARA’s revenue increased by 3% and the number of treatments performed increased by 10%.  That sounds good right ?

But ARA’s reported adjusted EBITDA figure DECREASED by 22% from $27 million to $21 million.  How is this possible ?

Prior to Q1, 17% of ARA’s patients were on commercial insurance vs. 83% on government paid reimbursement plans such as Medicare / Medicaid. (13% were commercial non ACA, while 4% were commercial ACA patients).

In fact, for every patient who uses government insurance (the 83%), ARA actually loses substantial money. But no worry, the rate charged to private insurers (just 17% of patients) is so high that it makes up for all of the losses on the 83% and then provides ALL of the additional profits to the entire business (more than $100 million in EBITDA).

Following the exposure of ARA in the New York Times articles, the United Health lawsuit and the HHS actions, something interesting then happened at ARA between year end and Q1.

By Q1, ARA’s commercial mix dropped to 14% from 17%. This was largely due to the company’s stated “decision” to stop “assisting” patients into private insurance and out of government programs.  Most of the drop was due to the cessation of “assisting” Medicaid patients into private insurance.

But a mere 3% drop is no big deal, right ?!  Wrong !


Note that even though total revenues and total treatments increased during Q1, this tiny 3% drop in “commercial mix” caused ARA to lower EBITDA guidance by $25 million for 2017 – a 20% drop from previous guidance.

Because of the hypersensitivity to very small changes in these variables, analysts and investors have completely missed the going forward impact on ARA.

(But clearly the JV partners have not missed this at all.)

**  So why is ARA so much worse off than DaVita ?  **

It is worth observing that somehow ARA had historically been able to secure a commercial mix that was as much as 7 percentage points (more than 40%) above where DaVita has historically been, providing a dramatically higher slug of that super profitable commercial revenue.  But as a reminder, ARA has publicly denied that it was not engaged in any fraudulent steering of patients into commercial policies.

While ARA was able to hit a 17% commercial mix in 2016, DaVita has historically averaged around 10-11%, only once hitting as high as 12%. So to the extent that ARA’s 17% number “normalizes” along with further changes to the “charitable” assist model, I expect to see at least a further 3-6 point DECLINE in this commercial mix for ARA going forward. And that is certainly at a minimum.

So you do the math.  As we saw above, a 3 point change immediately shaved 20% off of EBITDA.  Next we can expect a full impact that is double to triplethe original amount.

And keep in mind, as DaVita and other industry players see further declines in commercial mix due to new policies and practices from insurance and the government, ARA should also experience further additional declines in commercial mix as well (even below the 10% level).  Investors should therefore not be surprised if EBITDA is cut in half.

A statement from DaVita’s recent conference call was then picked up by the StateOfReform website, highlighting the multiple headwinds and risks that are now affronting dialysis players from all sides.

[T]he concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number of patients under such plans, which may result in the loss of revenues or patients, and the extent to which the ongoing implementation of healthcare exchanges or changes in regulationsor enforcement of regulations, including but not limited to those regarding the exchanges, results in a reduction in reimbursement rates for our services from and/or the number of patients enrolled in higher-paying commercial plans[.]

In describing the “patient steering” scheme, StateOfReform said this:

The scheme that led to activity at multiple federal agencies is more problematic than improper 3rd party payments. It included enrolling people eligible for Medicaid and/or Medicare onto private insurance — at no cost to the patient thanks to the 3rd party payment — because private insurance, including in the individual market, reimburses at significantly higher rates than government programs. Same patient, same treatment, much higher reimbursement to the dialysis provider.

But again, please keep in mind that my opinion on this really doesn’t matter. Nor does the opinion of the sell side.

It is the opinion of the JV partners that matters. And their opinion is being loudly expressed by their sudden and ongoing rush to exercise their puts as fast as they can.

After multiple quarters of record put exercises, the further put exercises in Q2 should make this clear beyond any doubt.

**  So why haven’t investors and analysts figured this out ?  **

There are several reasons why analysts and investors have completely missed what is going on here and just how bad it is.

First, the JV/Put model is somewhat complicated.  There is JV equity that is owned by ARA corporate (and therefore ARA shareholders), there is separate equity owned by the JV partners (local doctors). Some of the doctors’ equity is subject to puts, while some of it is not subject to puts.

The point is that for the equity which is subject to put provisions, the JV partners are exercising nearly as fast as they possibly can.  With the remaining equity, there is just nothing they can do about it.

In ARA’s filings, there is certainly no disclosure which describes anything bluntly as “put exercise by the JV partners who are rushing for the exits”. And again, this is why the sell side can conveniently ignore it.

Instead, the ongoing filings just include an item called “purchase of non controlling interest” which does not sound particularly ominous.  Fuller disclosure of the put liability was originally included in the IPO prospectus, but that was in April 2016prior to any meaningful exercises by the JV partners.

The IPO prospectus stated that:

If the put obligations are exercised by a physician partner, we are required to purchase, at fair market value, a previously agreed upon percentage of such physician partner’s ownership interest.

Along with

We may be required to purchase the ownership interests of our physician partners, which may require additional debt or equity financing

The second reason that analysts have ignored this surging put exercise is that the nominal size of the put exercises appears relatively small relative to ARA.  But again, this is a question of hypersensitivity which they have missed.

Our complacent analysts may just view this $12 million as not being big enough by itself to have its own meaningful financial impact.

But it is not the financial impact of these puts that matters.  What matters is that it shows that the JV doctors are cashing in whatever vested equity they can nearly as fast as they are possibly permitted to do so.

With 50-80% of all vested options suddenly being exercised in any given quarter, and when that percentage is going straight up over time, this truly reflects a rush for the exits by the JV nephrologists on the ground.

Again, in the 6 years prior we had seen a cumulative total of $5.8 million in puts exercised.  Since the September quarter alone we have already seen double that, and the exercise rate vs. vesting appears to be accelerating.

It is these JV partners who know that business better than anyone else.  And they seem to be selling as fast as they can.

** What do the analysts say ?  **

Are these analysts actually even trying with ARA ?  No, they are not.  Here’s how we know.

So far there has been no notice from the sell side that these JV partners are suddenly exercising their puts as fast as they can, or that in a single quarterrecent put exercises exceed the cumulative total exercised since the inceptionof the company !!

Instead sell side analysts are doing the same thing with ARA that they did with Adeptus.  They are simply pitching hope that the worst impacts on commercial mix are now hopefully “behind the company”.

Because of ARA’s exclusive JV model, the accounting is moderately complex.  It involves accounting for a minority interest which fluctuates every quarter along with JV liabilities valued according to opaque “Level 3 Inputs”.   More than 40 entries are included in the equity table to reconcile the NCI’s.  There is even more, but you get the point.

If the analysts actually wanted to provide proper coverage on ARA, it would require a substantial amount of work each and every quarter.  The complexity means that we would expect to see a wide spread in their various price targets and assumptions between different analysts.

But in reality, ARA is just an “also covered” stock.  These analysts have every incentive to provide full coverage to giants like DaVita and Fresenius due to their market caps of over $10 billion.  But their coverage of ARA is just a perfunctory effort which is required to be part of the DaVita and Fresenius coverage universe.  With ARA, the research goal is simply to refrain from pissing off a company that may later pay some banking fees. Anyone who has worked on Wall Street should recognize this phenomenon.

For anyone who doubts this, you can observe the following:

Since the IPO, the analysts repeatedly place their targets at a safe level which is consistently in accordance with the pricing model known as “slightly above the current price”.  For even greater safety, all of these analysts then put price targets on the stock clustered in the same narrow price range vs. one another.

Despite the recent volatility in the industry and the complex accounting, all four analysts with recent updates placed targets within a very tight range of $22-23. That way no one needs to go out on a limb.

With ARA the analysts are just not paying attention to any of the details whatsoever. Not the imploding commercial mix. Not the surging put exercises by JV partners. Not the increasing litigation.

So now let’s look at a nearly identical situation where analysts covered a similar “high growth” health care stock which was backed and owned by one of the same banks’ large private equity clients.

**  Adeptus – a preview for ARA shareholders  **

If you want a clear preview of where ARA is headed, just look to the implosion of Adeptus Health (ADPTQ).  The parallels between ARA and Adeptus are really just too direct and obvious to ignore.  Just to make things simple, I will number the most obvious similarities.

Shares of Adeptus plunged from $120 in 2015 to near zero as the company began a rapid bankruptcy death spiral in 2016.

Adeptus was 1) a private equity backed 2) healthcare services IPO which 3) surged after it came public only to see 4) its results falter amid 5) overpayment issues which were 6) exposed in news reports over its 7) problematic business model. 8) Despite the emergence of obvious problems, the sell side banks were more than eager to hype the stock (and at Adeptus were then more than willing to accept the banking fees from the huge share sales by Adeptus’ private equity backer).  9) Numerous hedge funds naïvely piled into the stock.  Just like ARA, Adeptus’ public problems began with a simple newscast revealing the problems with overcharging. Even until the bitter end, and despite the increasingly obvious problems, analysts were telling investors that Adeptus was a “buy buy buy”.

Adeptus soon filed for bankruptcy and the stock now trades for around $1.00.

As highlighted in the Financial Times:

Adeptus Health, the largest operator of freestanding emergency rooms in the US, ended the day down 58 per cent to another record low, after it said there was “substantial doubt” over its ability to continue as a going concern. Its rise and fall is a parable of Wall Street: a perfect illustration of how banks like to crank and crank that hype machine.

Note that Adeptus had a full slate of investment banks running the company’s private equity backed IPO, ensuring broad research coverage going forward.  These same banks were quick to rake in millions in fees when the soaring share price allowed this same private equity backer to cash out of millions in stock at prices near the $120 peak.

As with ARA, the trouble started with a simple news story involving overcharging for procedures.

NBC news affiliate in Denver ran a documentary on what it claimed was a pattern of Adeptus patients being duped into paying huge sums for minor procedures

In retrospect, this news coverage signaled the “beginning of the end” for Adeptus.  This can be clearly seen from the stock chart which began an inexorable decline. When Adeptus delayed its (weak) financial results by a day and then announced emergency measures, the stock quickly fell 70% in a single day.

Also like ARA, despite the onset of obvious problems, the FT showed how analysts refused to relent, overhyping Adeptus shares to investors, even as it plunged all the way down into bankruptcy.

Seven analysts covered Adeptus at the time. Every one of them had a “buy” recommendation….

…The CEO left soon after. Then came the lawsuits. This week Goldman said it had been named as a defendant in “several” putative class actions alleging misstatements and omissions in offering documents. Other banks have been named in suits too, including Morgan Stanley, BofA, RBC and Evercore, according to court filings….

Then came the disclosures on Thursday, as Adeptus said it could not file its annual report until it fixed “material weaknesses” in controls and reporting. It also flagged a long list of charges — including up to $67m for uncollectible receivables.

And then the very best part !!!!

The stock closed at $2.79, down 98 per cent from the top.  Among the seven analysts still covering it, there were four “holds” and two “buys.”

If the parallels between Adeptus and ARA are not completely obvious to you then you should go back and read it again.

But again, don’t take my opinion for any of this.  And while you’re at it, don’t listen to the sell side either.

The most compelling indication of ARA’s problems is that of the nephrologist JV partners who are now rushing to exercise their puts as fast as they can for the first time in ARA’s history.


Disclosure: I am/we are short ARA.

Additional disclosure: This article represents the opinion of the author. The author is short ARA. The author may choose to conduct additional transactions long or short in one or more of the stocks or related securities mentioned within this article within the next 72 hours.

$OSIR After Criminal Investigation, Osiris Is Finally Delisted


  • In over 100 articles I have seldom used the word fraud to describe concerns. I reserve that word for the very worst situations where I have the highest confidence.
  • Within a few months after I expressed my fraud concerns on Osiris, we saw a CEO resignation, sweeping restatement of inaccurate financials and a criminal investigation.
  • Last Friday (after market close) Osiris announced that it would finally be delisted to the pink sheets.
  • I am short Osiris.
  • Lessons from Osiris can help people avoid catastrophic losses elsewhere.

Note: This article represents the opinion of the author. Nothing herein comprises a recommendation to buy or sell any security. The author is short OSIR.

Over the past few years, I have written at least 100 articles in various places online which have voiced my concerns over problems I have observed at publicly traded companies. Even when these problems are very significant, I almost never come out and explicitly use the word “fraud”. I reserve the use of that word for the true “worst of the worst” situations and where I also hold the very highest confidence. I generally only use the word “fraud” prominently once or twice a year.

Osiris Therapeutics (NASDAQ:OSIR) was clearly one of those situations. Here is the article I wrote on Osiris.

Following my article on Osiris, the company’s problems became evident quite quickly. Within 4 months, we saw a CEO resignation, a sweeping restatement of inaccurate financial statements and a criminal investigation. Obviously that was all quite bad. But it wasn’t until last Friday (March 10, 2017) that we finally got full closure. Last Friday, Osiris announced that it would be formally delisted from that Nasdaq and begin trading on the Pink Sheets as of this coming Tuesday. (As is often the case, when companies choose to release bad news, Osiris released this news well after market close on a Friday when most investors were already gone for the day.)

Yes, I am short Osiris.

Here are a few lessons we can learn from Osiris to help avoid catastrophic losses elsewhere in the market.

Lesson #1 – The cover up is often worse than the original problem. Don’t expect them to admit it.

As my regular readers know, I refuse to be rushed to publish anything I write. After I publish an article, companies will frequently put out aggressive public statements “refuting” my research and trying to discredit me. Rather than engage in back and forth banter, I typically remain mostly silent.

I act this way according to two very deliberate strategies.

Strategy #1: “The best way to expose a liar is to just let them keep talking”.

Strategy #2: “Make sure to give the guilty party enough rope to hang themselves”.

Osiris’ response to my article

As expected, Osiris did put out a press release to purportedly address my concerns and tout their supposed recent accomplishments.

Osiris Responds to Statements about the Company Recently Posted to Several Websites

In addition, I also received some angry correspondence from the company which included denials of what I had said along with veiled threats of legal action against me.

Yawn. I was happy to say nothing and just let the waiting game begin.

That glowing and bullish press release was dated January 19th, 2016.

On February 4th, 2016, just two weeks after the glowing and bullish press release, Osiris CEO Lode Debrabandere abruptly resigned from the company citing unspecified “personal reasons”. Please note that he had been with Osiris for 10 years and then suddenly resigned just two weeks after issuing a press release to assure investors of Osiris’ bright future and recent “transformational” developments.

On March 14th, 2016 (just 55 days after our glowing press release), the audit committee then came to the conclusion that Osiris’ previously issued financial statements should no longer be relied upon. This is completely consistent with the concerns I had raised in my article.

On May 24th, 2016 (just 126 days after the glowing press release), Osiris finally announced that it was the subject of a criminal investigation by the US Attorney’s Office. The criminal investigation was regarding Osiris’ accounting practices, which again was exactly the focus of my article.

[Osiris is currently delinquent in filing its ongoing financial statements with the SEC. Since the time of the announcement of the criminal investigation, Osiris has not filed any 10Q or 10K filings and has not otherwise provided any update on the criminal investigation that I could find. So the current status of that criminal investigation remains unclear.]

So there you have it. In my view, 3-4 months seems like a pretty sensible amount of time to wait between the glowing press release from Osiris and the formal criminal investigation. It’s all about being patient.

In general, it has been my extremely consistent experience that “the louder they protest, the guiltier they are”.

Once their actions come under public scrutiny, many troubled companies will often try their best to divert attention away from themselves and onto their critics. For example, many companies will often say that shorting stocks or writing short articles is somehow illegal. They will invent conspiracies to distract investors citing things like “illegal naked short selling” or invent various “organized conspiracy plots” which are supposedly acting to drive down their share prices. They will often claim that they are initiating legal actions either through the courts or through the regulators such as the SEC.

Forcefield Energy’s response to my article

With Osiris, it took around 4 months for the Feds to launch their criminal investigation. To some people, that might seem pretty fast.

But with Forcefield Energy (NASDAQ:FNRG), it only took a few days for the Chairman to be arrested and the stock to be halted and then delisted. Now that was really fast.

As with Osiris, my article on Forcefield was one of the extremely rare instances where I felt comfortable using the explicit word “fraud” in my article.

My article was published on April 15th.

The company put out its aggressive response, denials and threats of legal action against me on April 17th (just two days later).

And on April 20th (just 5 days after my article), the Justice Departmentannounced that it had arrested Chairman Richard St. Julien as he was about to board a plane in an attempt to flee to Central America. On that same day, Forcefield stock was halted and then eventually delisted.

It was subsequently disclosed by the Justice Department that 9 individuals were indicted on sweeping fraud charges totaling $130 million.

Sadly, the depth and extent of the fraud at Forcefield are pretty much identical with what we see at other stock promotions and frauds.

According to the DOJ:

They took a company with essentially no business operations and little revenue and deceived the market and their clients into believing it was worth hundreds of millions of dollars through a dizzying round of unauthorized trades and deceptive promotions. In the end, the deceived investors were left holding the empty bag,”

Again, the implosion happened in just 5 days and Forcefield went from $7.50 to zero.

I knew that Forcefield was going to be a homerun short trade as soon as I saw the public statements being issued by the Chairman. Again, “the louder they protest, the guiltier they are”.

The “rebuttals” to my article from Forcefield are worth looking at in more detail. The press release reads like a boiler plate script which has been repeated over and over again by numerous fraudulent companies as they seek to divert attention from their own impending calamities.

While the specific wording varies from case to case, the elements are always the same in these public denials.

First, highlight that the author is short. Imply that this is somehow bad or even illegal. (It is not). State clearly that the company is acting to protect its shareholders from short sellers. Standard stuff.

Second, flatly deny, deny and deny all content of any negative and say that it is inaccurate. Don’t worry about refuting specific evidence in the article. Occasionally provide a few clever obfuscations which, in reality, don’t directly address the actual original concerns raised.

Third, make high profile and scary sounding threats of legal action through the courts or the SEC. Clearly if the company were guilty, they wouldn’t deliberately seek to involve the courts or the regulators, right ? (Wrong. By this point, these companies have nothing to lose. I have observed that in most cases any threats of supposed SEC complaints or lawsuits by these fraudulent companies turn out to be either sham efforts or outright lies.)

The quote from the DOJ above shows just how empty and utterly fraudulent Forcefield really was. Yet here are a few very sincere sounding quotes from Forcefield which came just 3 days before the Chairman was arrested. You will often see nearly verbatim quotes from other fraudulent companies once they come under public scrutiny.

From Forcefield’s press release:

[Here is the standard part about blaming shorts and claiming information is wrong]

The opinion was written by an individual investor, not a registered financial advisor, who has disclosed owning a short position in the Company’s common stock… The Company maintains that the article contains material inaccuracies about its management, business and prospects.

[Here is the standard part about “protecting investors” and pursuing legal remedies]

Richard St. Julien, Forcefield’s Chairman stated, “We are not going to stand by and allow our Company, officers and directors, employees and shareholders to continue to suffer through what appears to be an orchestrated short selling attack based on misinformation. We intend to defend ourselves and pursue all possible remedies against the allegations asserted in the opinion. Further, we will provide our shareholders and investment community a business update in a release pre- market on Monday April 20, 2015.

[Here is the standard part blaming some supposed conspiracy or short sellers and the part about “initiating legal action”.]

In addition, Forcefield stated that it had requested that a regulatory agency review the trading activity in its common stock in addition to any relationships, arrangements and commonalities between short sellers and others.

Again, within 72 hours of making those strong and reassuring statements to the public, Chairman Richard St. Julien was sitting in the custody of the FBI and DOJ.

A response from Galena Biopharm

In February of 2014, Adam Feuerstein of TheStreet.com published a scathing article on Galena Biopharma (NASDAQ:GALE) describing undisclosed paid stock touting scheme which Galena insiders used to dump their shares at inflated prices. The authors behind these paid articles were assuming false identifies, often pretending to be doctors, biotech experts or hedge fund managers. Their supposed “expertise” always predicted in various articles that Galena would soar to new heights. This in turn did cause the stock to rise.

After Feuerstein’s article, the share price plunged and Galena was quick to issue a letter to shareholders which it said was being done (of course) “as a service to our shareholders”.

In Feuerstein’s article, he had cited online evidence of paid promotion behind Galena. But once highlighted, much of this evidence began to disappear from online locations.

Once the evidence disappeared, Galena then felt confident to describe Feuerstein’s writing as “tabloid like”, “accusatory” and “negative”.

Galena stated

The only facts in Mr. Feuerstein’s most recent article that are remotely accurate are that Galena previously engaged the DreamTeamGroup and that insiders at the company, including me, divested shares in mid January. All other accusations in this article – as with his prior reporting on Galena – are specious and conveniently arranged to create controversy.

As soon as I saw this public statement from Galena, I literally laughed out loud. I cackled. I guffawed. I chortled.

Once again, “the best way to expose a liar is to just let them keep talking”.

Unbeknownst to Galena or Feuerstein, at this very time, I was already elbow deep into my own investigation into the paid promotion behind Galena.

Shortly thereafter, I released the smoking gun documents obtained directly from the guilty promoters which described in detail the intimate involvement of Galena management in actually coordinating and even editing the undisclosed paid articles which were being published during an ongoing paid campaign using the Dream Team Group.

Behind The Scenes With Dream Team, CytRx And Galena


Following my article, Galena quickly became the subject of an SEC investigation. CEO Mark Ahn was fired following the scandal. A wide range of civil lawsuits ensued.

[In December of 2016, Galena announced that it had reached “an agreement in principle” to settle with the SEC. However, just a few weeks later in January of 2017, Galena then announced that it was now under criminal investigation by the US Attorney’s Office and the Department of Justice for separate issues related to the marketing and promotion of fentanyl.]

Prior to the scandal (and as a result of the paid promotion), Galena had traded as high as $8.00. Galena now trades for around 58 cents.

The aggregate lesson from these examples above should be simple. Once there are indications that a company has misled investors in the past, it should come as no surprise that they are willing to mislead investors in ongoing press releases. History has shown that fraudulent companies are more than willing to put forth massive and outlandish statements that are absolutely and utterly false. Oftentimes, they will literally say anything regardless of how ludicrous or unsubstantiated it might be.

Lesson #2 – Markets are rational in the long term but irrational in the short term

As much as I like to take credit for exposing Osiris, the fact is that I was not the first one to publish concerns about the company.

Prior to my article on Osiris, author Edward Vranic, CFA had published no less than 3 very concerning articles highlighting his own concerns about Osiris. I felt that his concerns were extremely valid and were very well articulated.

Despite the concerns raised by Vranic, the stock barely budged, sticking closely to a price of around $10. The market simply didn’t care. For the market to ignore such significant information was truly irrational.

Once I observed that the market didn’t care about Vranic’s concerns, I naturally assumed that it would also not care about any subsequent concerns that I might have just a few weeks later. But for the good of the market, I chose to publish my research anyway.

I was quite surprised to see the stock quickly drop by as much as 40% following my article. The concerns that I raised were entirely different than those raised by Vranic, but I felt that they were largely of the same magnitude.

The fact that the market reacted so strongly to one set of concerns while virtually ignoring the other again shows how irrational and unpredictable that markets for these small cap controversial stocks can be.

And then the mystery deepens even further.

Following the announcement of the financial restatement in March, Osiris plunged to a new low of $3.55. That seems pretty rational so far, although I would have possibly expected a bit of a deeper decline.

But then for some reason the stock steadily rebounded to prices well above $6.00. This was true even after the criminal investigation was announced.

Ultimately we can see that Osiris is now being delisted to the pink sheets. The stock will now grind down to well below $1.00 where it belongs.

The lesson to be learned here is this:

In the short term stock prices can remain irrationally elevated even in the face of bad news.

In the long term stock prices will eventually converge to their fair value.

The problem is that the demarcation point between “short term” and “long term” often happens in just an instant, leaving those who own the stock subject to immediate and unavoidable losses.

The lesson here is that holding on to shares of problematic and controversial small caps is demonstrably a very bad idea. Even if they seemed immune to their problems yesterday, they will often plunge suddenly and without any advance notice, leaving investors no opportunity to get out.

Lesson #3 – Sell side research is generally worthless

At the time of my article on Osiris, numerous concerns were already starting to leak out into the public domain. Ed Vranic had already been quite vocal and the concerns I had raised were all based on publicly available information. Clearly the stock was headed dramatically lower from its then level of around $10.00.

But for some reason Piper Jaffray continued to support the stock with a whopping $28 price target. Even without the baggage of obvious malfeasance, Osiris’ underlying business simply couldn’t justify such a lofty price target.

Piper continued to maintain bullish targets even after my article, and as the stock hit $5.00. Piper continued to maintain its bullish targets even after the CEO resigned. And somehow Piper continued to stay bullish even after the audit committee recanted the company’s historical financials as being inaccurate.

Only in June of 2016 (just days after the announcement of the criminal investigation) did Piper finally “suspend” its rating of Osiris. At the time, it had still maintained a $12 target on Osiris.

It continues to puzzle me how sell side analysts continue to have any impact on share prices at all. I really don’t know why anyone continues to listen to them. It is widely known that as much as 95% of sell side targets are with Strong Buy, Buy or Hold recommendations. The occasional Sell rating is hard to find and inevitably comes well after the share price has already plunged, making such a “recommendation” completely useless to investors. There is simply no incentive for sell side analysts to ever put a Sell rating on a stock. As a result, they just don’t do it, regardless of how horrific the stock has become.

And yet for some reason we can still see share prices often pop when some sell side analyst initiates coverage or raises his target.

Despite my general disdain for sell side analysts, there is one guy who deserves a special positive shout out.

Very early in the game, when the stock was around $15, Brean Capital analyst Jason Wittes downgraded Osiris to a Sell with a target of $8.00. He also cautioned investors that emerging concerns could send the stock to below $5.00.

Wittes deserves strong kudos for being right, for being early and for accurately predicting quite closely the near term impact on the share price. He also deserves extra kudos for demonstrating very rare courage in moving against the herd by actually putting out a Sell rating at all.

Sadly, coverage and analysis like that from Witte is the vast exception to the rule.


When looking at fraudulent companies, share price implosions often occur in stages.

With Osiris, the first phase only took a few weeks after my article to begin, starting with the resignation of the CEO. This intensified once we saw restatements of inaccurate financials and a criminal investigation a few months later.

All of this fallout occurred not long after Osiris put out a press release designed to reassure investors and “refute” critics like me. I hope that investors will learn the lesson that such press releases and the statements they contain should be viewed with a very large grain of salt. The lesson I have consistently observed is that “the louder they protest, the guiltier they are“.

In many cases, companies which demonstrate clear underlying problems will be headed for ultimate delisting and implosion. But in many cases their stocks will take a pause on the way down, typically after initial plunges of around 50%. The final plunge to the pennies will then come with little notice when the company is ultimately delisted.

Sell side research is generally not worth the paper it is printed on. In most cases, I ignore it completely. Although there are a few exceptions.

In the article above I only cited a few examples to support these lessons. Each of these were based on articles written by me.

But aside from Osiris, Forcefield and Galena, I have had similar experiences following many others of my past articles. After my articles are published, we have frequently seen some form of aggressive response and then some moderate level of share price decline. Yet ultimately we have consistently seen these stocks eventually plunge by 80-95% from their promotional highs and also become the subject of either SEC investigations, class action lawsuits or forced resignations of senior management.

Disclosure: I am/we are short OSIR.

$CETX Cemtrex: Documents and Photos, All Signs Point to Fraud


  • On Tuesday, Cemtrex fell 13% on huge volume. On the preceding trading day, Cemtrex’s banker Source Capital quietly had its SEC and FINRA registrations terminated following multiple violations.
  • Over $1 million has been paid to notorious stock promoters sending CETX soaring from below $2. Heavy undisclosed selling by CETX insiders during paid promotion.
  • DOCUMENTS: Founder Aron Govil is secretly paying promoters via an undisclosed entity with little or no other activity. Using same promoters behind imploded frauds Forcefield Energy and Code Rebel.
  • PHOTOS: CETX’s supposed audit firm traced to vacant strip mall in Texas, no operations. Controlling partner was banned by SEC for multiple fraudulent audits, under multiple firm names.
  • Nearly $100 million in revenues, from 4 countries on 3 continents. Cemtrex pays auditor just $20,000 per year in audit fees to sign off on financials. Non-sense.

Note: This article represents the opinion of the author. Nothing herein comprises a recommendation to buy or sell any security. Following exposure of the problems listed below, I expect that many of the links cited may be changed or removed by the parties implicated. I have made various efforts to retain pdf copes and screen shots where possible. The author is short shares of CETX. 

Note: The short interest in Cemtrex (NASDAQ:CETX) is extremely low at just 400,000 shares (just a single day’s trading volume) such that this has created a very interesting situation.

Recent trading

Yesterday we saw shares of Cemtrex fall by 13% on nearly 1 million shares of volume with no apparent news. But in fact, on the previous trading day (Monday was a holiday), Cemtrex’s investment bank, Source Capital, had its SEC and FINRA registrations terminated nationally and in all states.

There was no announcement and no press release that I could find. The only way to find out was by checking FINRA’s Broker Check website. FINRA has still not uploaded the details of the latest violations, but we can see from a Florida lawsuit that Source was forced to pay a massive settlement to retirees who were sold risky and unsuitable investments that quickly went bankrupt.

To me, this looks like the end of Source Capital. And it followed past violations by Source brokers including forgery, selling unregistered securitieswithholding material information from investors and dealing at unfair prices.

The fraud

As my regular readers know, I often express significant concerns about problems I find with publicly traded companies. But these readers know that I will seldom come out and actually use the word “fraud”.

But I feel comfortable that the extensive use of the word “fraud” is entirely appropriate in this article for the reasons below. The points I will make below are supported by on the ground photographs as well as official government documents from various agencies.

1. Cemtrex is being heavily promoted by a promotion firm known as “Small Cap Specialists” (AKA “SCS”). Past SCS promotions have been repeatedly halted or delisted due to financial irregularities or outright fraud. (Examples include delisted frauds Forcefield Energy and Code Rebel, among others). On its website, the SEC has gone so far as to specifically warn investors about these exact type of promoters as an indication of micro cap fraud.

2. Documents indicate that Aron Govil is paying this same promoter SCS to promote Cemtrex via wire transfers from an undisclosed entity in New York. The paid promotion by Cemtrex insiders has not been disclosed to Cemtrex investors. In the past, I have seen numerous examples of other companies engaged in similar undisclosed paid promotions that resulted in Federal charges or lawsuits for securities fraud.

3. As the share price has soared due to promotion, documents show that shares held by Cemtrex insiders (Aaron Govil, Saagar Govil and CFO Dela Rama) have been decreasing substantially during 2016, yet Cemtrex insiders have failed to disclose any sales on Form 4’s during 2016. On places like Twitter, the Govils continue to tout the stock, encouraging retail investors to buy.

4. The controlling partner behind Cemtrex’s auditor was banned by the SEC and PCAOB for conducting fraudulent audits or reviews of public companies while performing little or no work and without even being licensed. Cemtrex’s auditor continues to claim that the firm is run from an office in Texas. But photos show that this address traces to a long-since vacant strip mall. The audit firm is not even licensed to practice in Texas. The only listed phone number in the US has been disconnected. That partner has repeatedly audited public companies under the guise of differently named audit firms which have then been shut down. When one audit firm gets shut down, he has repeatedly created new ones and then audits the same clients, using the same personnel, reporting the exact same address in Texas. Cemtrex’s prior auditor was shut down by the PCAOB and is now classified as a “prohibited service provider“. Despite having revenues of nearly $100 million and operations in 4 countries across 3 continents, Cemtrex has only paid these auditors a mere $15,000-$20,000 per year to “audit” its complex financials.

5. The investment banks and IR firms hired by Cemtrex (including Source Capital) have repeatedly represented other heavily promoted companies that have been promoted by SCS or other promoters. There has been long running and significant involvement with companies, individuals or activities implicated in securities fraud.


Over the past few years, I have exposed dozens of stock promotions, pump and dumps and outright frauds. The result tends to be the same in each case. After these stocks are exposed, their share prices fall by at least 80% to just pennies. In some cases, after I have exposed these companies, we have seen SEC investigations, criminal indictments, management and auditor resignations and other fallouts. In some cases, this has happened within just days of my article being published. In other cases, the stocks have simply imploded without further fanfare.

With Cemtrex, there is a reason why the numbers appear to be “too good to be true”. There is a reason why there has been a surge of glowing media articles touting Cemtrex and its management. And there is a reason why the stock keeps selling off even when supposedly good news is released.

There are clear reasons why hundreds of small retail investors have been duped into buying the stock and these are all thoroughly debunked and exposed below.

Company overview

Cemtrex has two business segments:

Electronics Manufacturing Services (“EMS”) provides electronic manufacturing services, including product design and sustaining engineering services, printed circuit board assembly and production, etc.

Industrial Products and Services (“IP”) offers services for in plant equipment erection, relocation, and maintenance; air filtration and environmental control products; and monitoring instruments, for measurement of emissions of Greenhouse gases, hazardous gases, etc.

Cemtrex was founded 15 years ago by Aron Govil. Govil also runs Ducon Technologies which operates out of the same address as Cemtrex and which owns Cemtrex shares. Through his personal and Ducon holdings, Aron Govil is the largest shareholder in Cemtrex.

In 2008, Govil appointed his 23 year old son, Saagar Govil, into various executive and board positions at Cemtrex. Young Saagar had just graduated from undergrad that same year in 2008, with no prior reported work experience.

Just 2 years later, at the age of 25, Saagar was appointed CEO of Cemtrex and father Aron took the role of executive director and board member.

Following the appointment of Saagar Govil as CEO, Cemtrex quickly embarked upon a slew of acquisitions, primarily of obscure companies in foreign countries well outside of the US.

Cemtrex has employed an aggressive IR and media relations firm to obtain an avalanche of positive media coverage around the Govils and Cemtrex.

Saagar has recently been the subject of a flood of glowing media attention due to his young age and the apparent rapid growth of Cemtrex’s revenues.

Between 2012 and 2016, reported revenues grew from $12 million to $94 million, largely driven by acquisitions of insolvent companies in overseas markets, which then contributed heavily to Cemtrex’s results as soon as they were acquired.

Key points underlying fraud thesis

Again, based on my past experiences and observations, I believe that there is a very strong chance that Cemtrex gets delisted outright and will go to zero.

The key points I will address are as follows:

Point #1 – The massive paid by promotion, secretly paid by Cemtrex management

Point #2 – Cemtrex insiders make undisclosed sales while pushing retail investors to buy

Point #3 – Cemtrex’s defunct auditor gone missing, history of fraud

Point #4 – The 3rd party service providers

Point #5 – Financial and disclosure “irregularities” and inconsistencies

Point #1 – The massive paid by promotion, secretly paid by Cemtrex management

In 2016, the SEC put out an Investor Alert Bulletin entitled: Fraudulent Stock Promotions.

In this, it warned that:

Be especially cautious regarding stock promotions if there are any warning signs of microcap fraud including:

· The SEC suspended public trading of the security or other securities promoted by the same promoter.

· Increase in stock price or trading volume linked to promotional activity. …

This is precisely what we see with Cemtrex and the promotions being run by a firm known as Small Cap Specialists (AKA “SCS”). SCS has been behind dozens of imploded stock promotions including a number of high profile frauds which were halted and / or delisted by the SEC.

SCS happens to be the exact same promotion firm that Aron Govil is paying under an undisclosed entity name to run a pump campaign on Cemtrex. SCS has now been promoting Cemtrex for over 1 year. During that time, the share price quadrupled.

(click to enlarge)

First I will show how SCS repeatedly runs paid promotions on fraudulent companies which are then halted and/or delisted.

Second I will show the documents which show that Aron Govil is paying SCS to promote Cemtrex, using an undisclosed entity name.

And in the next section I will then show how Cemtrex insiders are secretly selling shares during the paid promotion campaign, without disclosing the sales to investors.

Evidence of various paid promotions on Cemtrex along with the payments involved can be found at promotion tracking sites such as Hotstocked.comand Stock promoters.com. But these sites typically only capture a fraction of the promotions under way.

As we can see from these sites, a well oiled stock promotion machine began aggressively pumping Cemtrex through a wide variety of online channels. So far, over $1 million has been paid to stock promoters.

I include a partial screen shot showing various paid promotions on Cemtrex at the bottom of this section, or just click the links above. Here are just a few of the examples. There are dozens and dozens more, each of which tend to cost from $10,000 to $50,000 a pop.

I will demonstrate below that Aron Govil is behind Southern Steel & Construction which is paying SCS. SCS has been responsible for numerous paid promotions on Cemtrex.

This aggressive paid promotion is what took the stock from below $1.70 to over $7.00 in 2016.

(For more details on the past frauds or promotions by SCS which were halted, delisted or imploded, see Appendix A)

Aron Govil’s hidden paid promotion using SCS promoters

Here is just one example of an SCS promotion of Cemtrex which was paid for by an entity called “Southern Steel and Construction”. This promotion was dated October 2016, but it notes that SCS had been covering Cemtrex for a full year prior.

We can see below that just two or three days coverage cost “Southern Steel” $30,000, which was paid via bank wire.

(Note: This single payment to SCS for just 2-3 days of stock promotion is more than all the audit fees paid to its auditor Bharat Parikh for the full year for any of the last 3 years !)

The SCS promotion begins with:

Good morning everyone, This week’s featured profile is one of our favorite small cap’s since our initial coverage in October 2015. Cemtrex, Inc. (NASDAQ: CETXCETX has been an amazing growth story through organic and acquisitions since our initial coverage last year. We are excited about what may be in store for this company going forward.

Here is a screenshot noting payment of $30,000 by Southern Steel for just 2-3 days coverage:

(click to enlarge)

So just who is Southern Steel ?

The only individual identified on a search from the New York Department of State is Aron Govil at 19 Engineers Lane (which is Cemtrex’s address).

(click to enlarge)

First off….so New York’s corporate records for Southern Steel, which is paying for Cemtrex promotions by SCS, lists only Aron Govil at the same address as Cemtrex.

And then second….Southern Steel’s entity status is listed as “inactive,” meaning that since August 2016 it has engaged in little or no other business activity other than paying SCS to promote Cemtrex.

In fact, this information is a bit difficult to find. By default, the NY State database only shows “active” corporations. So when searching for this, one must opt to explicitly search for “all” corporations, both Active and Inactive.

Again, this is just a single example of a paid SCS promotion.

(For a screenshot of additional Cemtrex promotions please look in Appendix B)

Point #2 – Cemtrex Insiders make undisclosed sales while pushing retail investors to buy

When a corporate insider makes sales of their own stock, this is very material information to outside shareholders because presumably insiders know much more than the rest of us.

When an insider (management figure, director, or 10% holder) makes an initial purchase, that insider is REQUIRED to report the transaction on SEC Form 3.

Subsequent transactions by such insiders (either buys or sells) are then REQUIRED to be reported on SEC Form 4.

The Form 4’s are very important because they REQUIRE the insider to disclose:

· the date of transaction

· the number of shares transacted

· the share price received

Retail investors in Cemtrex have tried to remain confident under the assumption that management is holding strong and not dumping shares.

Precisely during the time of the paid promotion campaign, and along with the soaring share price, the number of shares held by Aron Govil, Saagar Govil and CFO Renato Dela Rama have all decreased significantly. The total decrease in their shares amounts to nearly 1 million shares, amounting to as much as $7 million in proceeds in 2016. You can do the math yourself: During 2016, Cemtrex’s share price ranged from $1.65 to $7.38.

Yet no form 4’s have been filed to disclose any share sales from any Cemtrex insiders whatsoever. Here is a link to all of Cemtrex’s SEC filings.

It truly defies all common sense that ALL members of managementhad their shareholdings decline substantially while precisely NONE of them has filed a single Form 4 to disclose it.

For those who wish to double check for themselves, here are the reference SEC filings.

Ducon Tech Form 4 filed 2015

Cemtrex Proxy filed 2016

Cemtrex Proxy filed in 2017

The table below shows the number of shares held as of each of those dates. We can see that for each of Ducon, Aron Govil, Saagar Govil and Renato Dela Rama, the number of shares has declined substantially.For the directors, we do not know, because they never filed the required Form 3’s to disclose their ownership.

(click to enlarge)(click to enlarge)

Ducon Technologies

In November of 2015 (exactly when the paid promotion from SCS began), Ducon Technologies disclosed a purchase of 65,732 shares at a price of $2.55 for a total amount of $167,617. As disclosed, this took Ducon’s holding of Cemtrex common stock to a total of 433,219 shares. Ducon Technologies is controlled by Aron Govil, who is behind the entity paying for the undisclosed stock promotion.

But according to the most recent Proxy filed in January of 2017, Aron Govil’s Ducon Technology now only has 102,951 shares. It therefore got rid of 330,268 shares during 2016. Because there were no Form 4’s filed, we don’t know the dates or the amounts of any sales. But we can see that the share price ranged from below $2 to above $7 in 2016. Therefore, depending on when its shares were sold, Ducon Technology could have sold up to $2.3 million.

Aron Govil

By comparing the Proxy’s issued in 2016 and then 2017, we can also see that shares held under Aron Govil’s own name declined by 222,049 shares in 2016. Again, depending on when these were sold, they could have been worth up to $1.8 million.

Saagar Govil

As we will see, Saagar Govil’s share holdings increased by 100,000 during 2016. But during the year he also awarded himself 400,000 new shares via option grants, such that his position should have increased by 400,000. So clearly his net position actually declined by 300,000 shares.

For Saagar Govil, the 300,000 decline amounts to up to $2.1 million in 2016 assuming the sale of stock at share prices up to $7.00.

In September 2016 (with the stock having just hit new highs for the year), Saagar Govil also purchased an upscale condo in New York valued at precisely $2.25 million.

(The timing, the prices and the disclosure omissions around Saagar’s 400,000 option grants also leads me to the question of if these were backdated to occur at artificially low prices. I will show the detailed documentation of in a section below).

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CFO Renato Dela Rama

Moving on, we can also see that the number of shares held by the CFO also declined by 19,833, again with no Form 4’s being filed. Depending on when the sale was made, this would have a value of up to $138,831 (or more than triple his reported salary).

The Directors

With directors Sunny Patel and Shamik Shah, we can see that both directors report owning a few thousand shares worth up to $30,000-$40,000. But no initial Form 3’s were ever filed to disclose when they received these shares or at what price. We also don’t know how many shares they initially received in total, such that there may have been substantial selling here as well. Typically, new directors are awarded shares as of the date they join the board. For both of these directors, that would have been the Spring of 2015. New shareholdings by directors are ALWAYS required to be filed to the SEC, but NONE were ever filed by these directors.

The use of Twitter, StockTwits and online message boards to promote Cemtrex

In my past articles I have exposed clearly how paid stock promoters will also infiltrate online message boards, social media (Twitter) and online financial blogs. They then pose as independent individuals who rally the enthusiasm behind their promoted stocks. Once you know what to look for, these paid promoters often become obvious online. They suddenly appear out of nowhere and begin aggressively cheering on a certain stock. At some point (when the promotion is ending) they disappear just as quickly and this is when we see the stock start falling apart.

In addition, all throughout the paid promotion campaign, both Aron Govil and Saagar Govil have been actively cheerleading Cemtrex’s stock price on places like Twitter, encouraging retail investors to BUY BUY BUY. Obviously, this is highly unusual for any executive of any publicly traded company. They are supposed to be running a company, not sitting in front of their computers, Tweeting to promote the stock price. It also raises the potential for Reg FD violations. This is why we almost never see CEOs publicly touting their own stock on Twitter.

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Point #3 – Cemtrex’s defunct auditor gone missing, history of fraud

Up through 2014, Cemtrex was using a defunct auditor called Li & Co. But Li & Co. was shut down by the PCAOB. During the investigation, Li & Co. simply refused to provide subpoenaed information to the investigators. That defunct audit firm is now listed as a “Prohibited Service Provider” and is no longer allowed to provide audit services.

Following that, Cemtrex began using Bharat Parikh & Assoc as an auditor. Bharat Parikh is a small audit firm based in India, not the US, but with a supposed office in the US for auditing US clients. Even in recent weeks on Cemtrex’s just issued 10K filing, it continues to list Bharat Parikh’s office address in the US as 4940 McDermott Rd., Plano, TX.

Here is a screenshot of Bharat Parikh’s signature from Cemtrex’s form 10K filed with the SEC just a few weeks ago, dated December 28, 2016.

In fact, this corresponds to a vacant strip mall office in Dallas. Here are some photos of that vacant office space at 4940 McDermott Road. The photos were taken just a few days after that SEC filing came out.

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Clearly even though these offices appear to have been vacant for quite some time, Bharat Parikh continues to claim to the SEC that he is running a team that is performing audits out of this office.

In addition, the US phone number listed on the auditor’s website has been disconnected.

We now encounter a host of problems:

First, (obviously) the fact that Cemtrex’s auditor claims to be running a busy audit firm out of a long-since vacant building in a strip mall is troubling. Likewise, the disconnected phone number is equally troubling.

Second, Texas State Board of Public Accountancy has no record of Bharat Parikh even having a license to provide audits for public companies. Click the link above to search the database. Enter in any combination of Bharat+Parikh and / or BPA, etc. There is nothing.

Third, Bharat Parikh & Associates is actually controlled not by Mr. Parikh, but by Mahesh Thakkar who holds a 51% stake in the auditor. Thakkar was banned by the SEC and the PCAOB due to accepting fees to provide fraudulent audits, and also for operating without a license to even provide audits at all. At the time, he was running an audit firm under a different name (Thakkar CPA / The Hall Group). But it was actually operated out of the same address (4940 McDermott), with the same group of personnel auditing the same clients. It is no coincidence that past clients from that partner then ended up simply switching over to the “new” firm using the “new” name Bharat Parikh (i.e. Cemtrex’s auditor) out of the same exact address. Thakkar has operated audit firms using multiple names, changing the name of the firm each time he gets shut down. Various names used by Thakkar include: The Hall Group, Thakkar CPA, and Bharat Parikh and several others. Most recently he has attempted to use the name TMK LA (in which Mr. Bharat Parikh is listed as his partner).

Fourth, as we will see, Cemtrex pays this absentee auditor a mere $15,000-$20,000 in audit fees per year, despite claiming revenues of nearly $100 million from operations which span 4 countries and 3 continents. As highlighted by CFO.com, smaller firms tend to pay roughly $5,000 in audit fees per million dollars of revenue. That should place Cemtrex at nearly $500,000 in expected audit fees (even without sprawling international operations).

Here is how we know all of this.

If you look closely at the picture of 4940 McDermott, you can make out the glue outline of the words “Perfect Tax and Finance“. Perfect Tax was founded and operated by Mahesh Thakkar, CPA and lists 4940 McDermott as its address. Thakkar partnered with Bharat Parikh out of this same address, which is again the same address that continues to be listed for Bharat Parikh in Cemtrex’s SEC financials even now.

Here we can see that Bharat Parikh and Thakkar listed as General Partners in an LP called “TMK LP” that claims to provide CPA services, again from 4940 McDermott Road.

We can also see below from the Texas Secretary of State that Thakkar was listed as the CONTROLLING PARTNER in Bharat Parikh Associates, with a 51% stake and he uses the same address as Bharat Parikh, both in India and the US. Once again, this is 4940 McDermott Rd.

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HERE we can see where Bharat Parikh controlling partner /predecessor Thakkar was then barred by the SEC from practicing accounting for public companies.

HERE we can see where its registration was revoked by the PCAOB.

We can see then that prior to taking control of Bharat Parikh, Thakkar had previously run his audit shop under a different name in Texas, again covering public companies. This firm was Thakkar CPA d/b/a “The Hall Group CPA’s”.

As with all of the other firms listed here, of course Thakkar CPA’s operated out of 4940 McDermott, the same vacant strip mall. (In the link above, simply type in the firm name of “Thakkar”).

Here we can see that Thakkar has now been officially suspendedfrom practicing accounting due to various violations including “violating auditing standards“, “violation of rules of professional conduct” and “lack of fitness to serve the public as a professional accountant”

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In its previous incarnation, Thakkar had formed Thakkar CPA’s to perform public company audits. But he had two problems. First, he had no PCAOB license to perform audits and second he had no clients.

As a result, he simply bought an existing audit firm called “The Hall Group CPA’s” which had a number of existing public company clients. Thakkar then began signing off on audits for these clients. But according to the SEC, he never became registered with the PCAOB, which is required for auditing public companies.

And here we can see where audit clients such as Pink Sheets traded Inolife simply switched over from the audit firm calling itself “Thakkar/Hall Group” to the one calling itself “Bharat Parikh” to complete their audits by a supposedly “new firm”operating out of the exact same address by the same group of people.

According to the SEC complaint, there were actually a host of deep and concerning violations by Thakkar/Hall. You can click below to read them all, but we will focus on just a few of them below.

According to the SEC:

These proceedings arise out of Thakkar CPA, PLLC d/b/a The Hall Group CPAs (“Thakkar CPA” or “successor firm”) issuance of 15 public company audit reports while it was not registered with the Public Company Accounting Oversight Board (“PCAOB”). Thakkar CPA’s audit reports misrepresented that the firm was properly licensed and registered with the PCAOB and falsely stated that it conducted audits in accordance with PCAOB standards.

The Hall Group, Hall, Helterbran, and Cisneros collectively failed to conduct at least 16 annual audits and 35 quarterly reviews in accordance with PCAOB standards in at least three ways: (1) they repeatedly failed to prepare adequate audit documentation in connection with audit and review engagements; (2) failed to conduct – or failed to obtain – an engagement quality review (“EQR”) of audit and review engagements by a qualified reviewer; and (3) on at least four engagements, The Hall Group and Hall performed audit services while the firm’s independence was impaired. As a result, The Hall Group falsely stated that it conducted its audits in accordance with PCAOB standards in at least 16 annual audit reports for eight issuers. Additionally, Hall, after becoming CFO of DynaResource, Inc., allowed Thakkar CPA to provide audit services to DynaResource, Inc. even though he knew he had a direct financial interest in and a business relationship with the company’s external audit firm.

So Bharat Parikh’s controlling partner / predecessor was banned because on 35 separate occasions it did not prepare audit documentation, it did not have a partner even conducting audits and it falsely attested that it had properly conducted audits.

Basically, Thakkar was getting paid small amounts of money to sign off on these audits without really doing any work at all !

In addition, the firm signed off on audits in a company with which it clearly had a direct financial interest and was therefore not independent.

Here is why this matters. (And this should become quite obvious).

Cemtrex purports to generate revenues of nearly $100 million coming from 4 international subsidiaries spanning 3 continents. Presumably this makes Cemtrex relatively complicated (and expensive) to audit. This audit then gets even more expensive when the company needs to integrate ongoing acquisitions of totally new businesses. Any realistic cost assessment of such audit work for any normal company could run as high as $500,000-$1 million. Easily.

Yet in Cemtrex’s 10K we can see that paid it’s absentee Indian auditor a mere $20,000 to perform its audit work in each of the last two years! And in the previous year, audit fees amounted to just $15,000.

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Even for a small company with operations in just a single city, no auditor can justify even preliminary work for just $15,000-$20,000. For a company operating in 4 countries across 3 continents, this is just patently absurd. And it seems very consistent with the history of Thakkar / Hall etc. signing off on so-called “audits” without actually doing any real work.

In my view, the $15,000-$20,000 looks like little more than a convenience payment for a rubber stamp signature.

The situation on the inside of Cemtrex is no better. Cemtrex’s CFO is Renato Dela Rama. Presumably in this role, he would be responsible for coordinating the audit with Bharat Parikh, if one were actually being done.

But in 2015, Cemtrex reported in SEC filings (see below) that Dela Rama received zero compensation for this role in 2014 as well as in 2015. In fact, on his LinkedIn page Dela Rama does not even disclose that he even works for Cemtrex at all. Instead, he only lists that he is the controller for Ducon Technologies, which is run by Aron Govil.

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So, lets get this straight: Cemtrex’s CFO doesn’t even report that he is the CFO of Cemtrex and for the past several years, Cemtrex also discloses that he wasn’t even getting paid for that role.

In fact, he is actually getting paid by Aron Govil via Ducon. And Aron Govil is the guy who is using an undisclosed entity to pay notorious stock promoters to finance a touting campaign on Cemtrex.

Got it ?

In 2017, Cemtrex’s SEC disclosure suddenly contradicts its 2015 disclosure. The fact that a change was made is never noted and certainly not explained. Years after the fact, Cemtrex began claiming that it had actually paid Dela Rama $40,000 per year in each of those previous years.

In fact, the $40,000 number becomes even more troubling.

Even at $40,000 this is exceptionally low pay for a CFO of a supposed multinational conglomerate. It is also well below what he gets paid by Aron Govil at Ducon, where Dela Rama is not even CFO. No one would be expected to devote full time attention to a multinational company for just $40,000 per year, especially not in New York. My secretary in New York used to make over $60,000.

For reference, here we can see that average salaries for any full time CFO in the US was $315,947 as of December 2014 (about 8x what Dela Rama is supposedly being paid, if he is being paid at all).

And to be clear, over $1 million has been paid to notorious stock promoting firms to pump up the share price while only $15,000-$20,000 has been paid to supposedly “audit” the financials for the entire company. Meanwhile the CFO is only supposedly paid $40,000.

For the reasons above, I have precisely zero confidence in the financials being reported by Cemtrex. This will become especially clear below when we look at the spectacular performance which Cemtrex has reported immediately after acquiring obscure foreign companies which are revealed to be entirely insolvent just before being acquired by Cemtrex.

The Cemtrex financials signed off on by Bharat Parikh and CFO Dela Rama have now shown 20 straight quarters of apparent profitability and soaring revenues. This “success” has then been widely echoed and amplified by the aggressive stock promoters being paid by Aron Govil through an undisclosed entity. And this is exactly the formula which caused the stock to soar from below $2.00 to over $7.00 in 2016.

Point #4 – The 3rd party service providers

Whenever I come across another paid stock promotion, I always, always, ALWAYS know exactly what I will find next. Each of these companies relies on the same 3rd party service providers such as law firms, investment banks and “IR firms“. The world of small cap stock promotion is basically a small country club and all of these guys know each other.

With Cemtrex, we can see that the company has relied heavily upon Chardan Capital and Source Capital as its bankers. For IR, Cemtrex uses Irth Communications. Each of these firms will be detailed below. But it is safe to say that there is very notable overlap between the client lists of all three firms. They all work for many of the same firms and people. From there, we also see that they also service the exact same companies which have been heavily promoted by the exact same stock promoters, including SCS, listed above. In each case, these client companies have then repeatedly imploded or been halted or delisted, due to fraud.

This raises two issues:

First, if the last 20 or so companies represented by these third parties generally skyrocketed due to excessive promotions and then imploded, it seems like a safe assumption for any objective investor to suspect that Cemtrex might do the same thing. This is just common sense.

Second, when this pattern of shareholder destruction is so obvious with their client lists, why on Earth would any company ever select these 3rd parties to represent them (unless they simply had no alternatives, because they too were nothing more than a blatant stock promotion). Again, this is just common sense.

Source Capital and Cemtrex’s recent rights offering

Cemtrex relied upon Source Capital Group to run its recent rights offering which was completed a few weeks ago in January, raising $13 million.

In February, just days after the completion of Cemtrex’s rights offering, we saw the following headline:

Goodman & Nekvasil, P.A. won a FINRA arbitration award against Source Capital Group on Feb. 3 while working on behalf of three retirees, William B. Lashlee and Keith and Joyce A. McCrea. Lashlee is an 88-year-old retired native of St. Simons Island, Georgia, and the McCreas are a retired couple who live in Yorkville, Georgia.

Both groups alleged they were sold unregistered and unsuitable investments in IPG stock by Joseph Hooper, who was working as a representative. Lashlee invested $220,000 and the McCreas invested $590,000 for a combined total of $810,000 in IPG stock.

IPG quickly went bankrupt and Source was found to have been negligent.

As of last week (February 17th, 2017), we can see that Source Group had its FINRA registrations terminated in all states in which it was operating. FINRA notes that Source Group ceased business operations in February 2017.

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From Source’s website we can see that the firm has raised money for a number of other heavily promoted microcaps which then imploded. Like Chardan below, this includes a number of tiny Chinese reverse mergers which were delisted (but only after they raised substantial capital from US investors).

My regular readers will remember back when I previously exposed a massive stock promotion ring run by “The Dream Team Group“, which also operated under the name of Mission IR. Dream Team / Mission IR had recruited numerous authors to write extensive undisclosed paid promotions on dozens of micro cap stocks. These authors would pretend that they were industry experts or hedge fund managers and would write aggressive articles recommending the client stocks. These stocks then soared in price, allowing the companies and their management to sell stock at inflated prices. After my expose, each of the implicated companies ended up plummeting by as much as 95%, and a number of civil suits and SEC investigations ensued.

Dream Team / Mission IR were the architects behind a widespread ring of stock fraud and promotion. I even produced the internal documentation to prove it.

Here we can see that Mission IR lists Source Capital as its “conference partner“. Here we can also see Mission IR promoting Source Capital’s “Disruptive Growth Conference“.

Note that a number of the companies which attend Source’s investor conference also happen to be banked by Chardan and/or are clients of Irth Communications as well. These attendees of Source’s disruptive growth conference also happen to be heavily promoted by the same promoters listed above, including our favorite, SCS. This is easy to see by logging on to either Hotstocked.com or Stockpromoters.com.

At FINRA’s Broker Check website, we can also see where Source was fined by FINRA for having sold investments to investors “without disclosing material facts” and sold investments by making “exaggerated promises in multiple emails” as well as selling securities “at prices which were not fair“.

Either way, following the termination of its FINRA registration in all states, it appears that Source Capital is no more.

Chardan Capital Markets

Cemtrex retained banker Chardan Capital Markets to run its S3 offering in 2016. Cemtrex was then forced to withdraw the offering because Cemtrex did not meet the requirements as a result of failing to file required SEC documents .

Chardan and its management have a long history of run-ins with the SEC and FINRA. This includes various reports of manipulating small cap stocksinsider trading activity, failure to disclose various stock holdings and transactions as well as defrauding the US Small Business association out of $35 million. Chardan then launched into the Chinese Reverse Merger / SPAC game. Geoinvesting subsequently highlighted no less than 17 different examples of Chardan Chinese reverse mergers/SPACs, the majority of which completely imploded following exposure of or allegations of fraud.

Irth Communications – Cemtrex’s “IR” firm

Cemtrex’s IR firm is Irth Communications. As with Source Group above, Irth is listed as an IR partner of Mission IR (AKA the Dream Team Group) which was found to be behind a massive illegal stock promotion ring.

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As shown on its website, Irth has been responsible for various aggressive media placement campaigns for its clients, getting the stocks and their management strong favorable mentions in mainstream media outlets.

But as we can see below, many of these stocks are the same stocks that have been heavily promoted by the promoters listed above, including our favorite, SCS. These stocks have then eventually imploded despite tremendous positive coverage generated by Irth.

Many retail investors have been lured into buying Cemtrex stock solely as the result of seeing these high profile, positive media placements on Cemtrex which have been entirely arranged on their behalf.

As for the glowing media coverage that has suddenly exploded upon Cemtrex and the Govils, this is something that I have seen on many occasions.

For example, in January of 2011, China Media Express (formerly CCME) obtained the following headline from none less than Forbes:

China MediaExpress Holdings, Inc. Ranked #1 in Forbes China List of Small-to-Medium Sized Chinese Companies with the Greatest Potential

Just 60 days later, CCME was delisted when it was uncovered as an abject fraud. Thanks Forbes.

In the US, the micro cap Organovo shot up 3.5x from $4.00 to $14.00 following the publication of this article in Popular Science, which was a full feature on that microcap stock filled with hype and hyperbole.

How 3-D Printing Body Parts Will Revolutionize Medicine

Organovo subsequently fell from $14.00 to its current levels of $2-3 when it became apparent that the “3D printing of body parts” was pure fantasy. Thanks Pop Sci. In these cases above, there is certainly no evidence that this coverage was paid for. However, it has been my observation that anyone can obtain glowing media coverage if enough money is paid to a PR/IR/Media agency. Given that millions of dollars have already been paid to stock promoters, it should come as no surprise that aggressive media placements have proliferated covering Cemtrex and the Govils. Irth was founded by brothers Andrew and Robert Haag. The Haag Brothers had both previously worked for small cap investment bank Auerbach, Pollak & Richardson. Auerbach folded in 2001 after its securities registration was revoked following a variety of regulatory violations. In 2002, Andrew Haag then went to work as CFO and director of microcap reverse merger Quintek Technologies, a former Auerbach client. In 2002, Quintek’s CEO was sanctioned by the SEC for having put out a variety of false and misleading press releases regarding phony purchasing orders, causing the stock to soar dramatically, coincidently just as the company was looking to raise money. Haag stayed on with Quintek until 2008. He notes that as CFO, he “Raised $5 + million in capital, Increased Valuation + Liquidity, Expanded Shareholder Base 10 fold, Responsible for Cash Management, Responsible for Public Filings, Corporate Development”. But we can see that by 2008, the SEC was already hounding Quintek for putting out delayed financials which contained material inaccuracies (ie. Just like Cemtrex). These financials then needed to be publicly restated. As CFO, Hagg stated to the SEC that he would be retaining a PCAOB audit firm to rectify the inaccuracies in the financials. But instead, the members of management simply resigned and Quintek stopped making further SEC filings. Quintek just went dark leaving investors with nothing.

Following the implosion of Quintek, Haag and his brother then founded Hampton Growth Capital which focused on “Investor Relations” and “Capital Formation“. Like Chardan and Source above, Hampton placed a heavy focus on servicing Chinese reverse mergers, helping to promote them so that they could raise money from US investors. By 2011, following the wave of fraud among Chinese reverse mergers, Hampton’s Chinese reverse merger clients had been completely delisted. With Hampton in disgrace, the Haag brothers then ceased using that name began using a new name, “Irth Communications”, and promoting US based micro caps.

Below you can see the stock performances of some clients of Irth Communications. You can see that most of these have imploded by as much as 90% from their highs following the promotion.

For those who wish to check on their own, you can see that most of these Irth clients happen to also have been the subject of heavy paid promotion including via our favorite promoter group SCS. Checking this is easy by simply going back to Hotstocked.com or Stockpromoters.com.

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Point #5 – Financial and disclosure “irregularities” and inconsistencies

Given the state of Cemtrex’s auditors and bankers, seeing blatant errors, “irregularities” and inconsistencies should come as no surprise. But as I have shown repeatedly in past articles, when we see such repeated irregularities in a company’s SEC financials it generally presages an implosion in the share price and/or a delisting of the stock.

Again, here is a link to all of Cemtrex’s SEC filings.

Anyone who has performed a detailed review of Cemtrex’s SEC filings should know that Cemtrex tends to play very fast and loose with its SEC reporting requirements.

The filings that Cemtrex is required to make have been late, they have been inaccurate, there have been blatant inconsistencies between various filings that are never reconciled.

This includes even the most major filings such as the annual 10K and the Proxy. Cemtrex originally filed its previous 10K filing in December of 2015. Almost 9 months later, it was still filing amendments and corrections to correct blatant errors in that filing. The mistakes included very major items, such as the details of its liquidity position, as well as many minor items such as various spelling and grammatical mistakes which should never be found in a 10K.

The delayed and inaccurate filings are the reason why Cemtrex was forced to cancel its S3 equity offering in 2016, which was being run by Chardan Capital. Instead, Cemtrex was then forced to conduct a much more lenient rights offering, which would then be run by Source Capital Group. Rights Offerings can be completed even by those companies who become ineligible to do an S3 offering.

Because of this negligence / omission in SEC filings, Cemtrex was forced to disclose in the most recent 10K that:

We did not timely file with the SEC (NYSE:I) our definitive proxy statement, which includes the information required by Part III of Form 10-K, within 120 days of our fiscal year ended September 30, 2015, (ii) our Form 8-K in relation to our meeting of shareholders held on March 7, 2016, or (NASDAQ:IIIseveral other current reports filed during the preceding 12 calendar months. All of these reports were ultimately filed, but their lateness caused us to become ineligible to use Form S-3, a shorter registration statement that is often used for “shelf” registrations. If we are not able to file our current and periodic reports and other documents with the SEC in the future in the times specified by the Securities Exchange Act, we will continue to lose our eligibility to use Form S-3 for future capital raises, and that could impair our ability to conduct more efficient and expeditious public offerings of our stock off of shelf registrations. Our inability to timely file current and periodic reports in the future could materially and adversely affect our financial condition and results of operations.


As we saw above, Cemtrex originally disclosed that it pays its CFO nothing. Later on, it quietly revises this previous disclosure after the fact and without explanation. The new disclosure indicates that this CFO of a $100 million revenue multinational is paid a mere $40,000.

And then next we saw how the number of shares of each and every member of management has declined substantially over the past year (during a paid stock promotion), even though none of them filed a Form 4 to disclose any sales.

So now let’s explore the issue of possible backdating of option grants by Saagar Govil, just before the paid stock promotion campaign really took off.

As we saw above, the bulk of the promoting campaign began in March of 2016.

In the 10Q released in May of 2016 Cemtrex discloses that:

On February 12, 2016, the Company granted a stock option to purchase 200,000 shares of Common Stock to Saagar Govil, the Company’s Chairman, Chief Executive Officer, President and Secretary. These options have an exercise price of $1.70 per share and expire after six years.

So, apparently by pure coincidence Saagar Govil happened to award himself 200,000 shares worth of options on the exact day of the exact lowest closing share price over the past two years ! So either Mr. Govil was preposterously lucky or else this looks a lot like options back dating. As we know, options backdating is quite illegal, as noted here:

Because publicly traded corporations must properly report the value of options on their financial statements, any backdating could result in a misstatement that can be the basis for a charge of securities fraud.

This becomes more of an issue when we look at the quarterly financials that Cemtrex filed with the SEC AFTER Feb 12, 2016.

In that 10Q filed in May of 2016 (3 months AFTER the options had supposedly been awarded), Cemtrex disclosed no change in “Share Based Compensation” for the quarter despite the 200,000 options which had supposedly been granted to Govil in February. By the time that quarter was reported, the share price had already risen by around 30%.

Upon receiving that options grant, Saagar would have been required to disclose it on Form 4. However, no Form 4’s were filed in all of 2016.

The second grant to Govil is just as curious. In the most recent 10Q filed with the SEC in February 2017, Cemtrex disclosed that it had awarded another 200,000 shares of options to Saagar Govil. It had noted that the options were granted on December 5th 2016, at a price of $4.25 per share.

Looking back from February 14th, 2017, we can see that again the week of December 5th again corresponded to the lowest closes for the stock over the preceding 3 months. Once again, Mr. Govil had impeccable timing.

What gets really curious again is the fact that when Cemtrex released the 10K on December 28th (i.e. AFTER the supposed options grant had already been given) the company only disclosed the earlier 2016 option grant and not the new one, supposedly made on December 5th. Again in January 2017, Cemtrex released its Proxy Statement. And again, the company only disclosed the earlier February stock grant to Govil. No mention was made of the December 5th options grant.

And just as in the past, Saagar Govil never filed the REQUIRED Form 4 to disclose the new shares given to him.

In January, the stock really took off. By the time Cemtrex disclosed the new options grant to Govil, the share price had repeatedly broke through new highs north of $7.00 and had briefly exceeded $8.00, such that backdating the options just before releasing the 10Q could have resulted in as much as $800,000 in instant profits for Saagar.

These discrepancies are particularly notable given what we have seen with the auditor and the CFO.

Cemtrex directors

Separately, we can also see that Cemtrex’s outside board members consist of Shamik Shah and Sunny Patel. Both of these individuals are young hedge fund traders who focus on trading stocks, futures and/or derivatives. They show no experience in anything related to running a public company, engineering or environmental controls or accounting issues. They have no business being directors of Cemtrex, aside from potentially around issues regarding trading the stock.

Just like Saagar Govil, we can see that 30 year old Shamik Shah went to school in New York and graduated with his undergrad degree at exactly the same time as Saagr Govil in 2008.

Diretor Sunny Patel is also now 30 years old also graduated from the same school in New York in 2008 and also worked as a derivatives trader with a hedge fund.

Just like Saagar Govil, these two were brought on as directors for Cemtrex despite having no relevant work experience.

Both Shah and Patel were appointed as directors in April and May of 2015. That happened to be precisely when Cemtrex was applying to uplist from the OTC BB to the NASDAQ. As part of that process, the company is required to have outside board members, which is why Cemtrex appointed these two then 28 year olds with no relevant experience those roles. By fulfilling this simple requirement, Cemtrex was then able to uplist to the NASDAQ just a few weeks later.

Either way, as directors of a public company, these individuals are presumably now fully on the hook for any potential issues which may arise from any potential undisclosed paid stock promotion, auditor misrepresentations and/or selection issues, financial statement irregularities, back dating of options and etc.


Based on the information laid out above, I believe the following:

I believe that it is highly likely that Cemtrex will face delisting and go to effectively zero.

Cemtrex management is paying for an undisclosed stock promotion via an undisclosed entity called Southern Steel & Construction. Aron Govil is behind Southern Steel & Construction, and that entity reports the same address as Cemtrex.

The promoters being paid include SCS, whose past promotions have imploded, been halted or delisted, including due to fraud.

During this undisclosed paid promotion, the Govil’s have actively encouraged investors to buy Cemtrex shares via social media. At the same time, members of management have been making large sales of stock without disclosing those sales on Form 4 as required by the SEC.

Cemtrex’s auditor (Bharat Parikh & Assoc.) is actually controlled by an individual (Mahesh Thakkar) who has been banned by the SEC and PCAOB as a result of multiple past audits, sign off’s or reviews which were fraudulent. Cemtrex’s auditor continues to report to the SEC that it is running its operations out of 4940 McDermott Rd., Plano, TX. Yet that location is actually a completely vacant strip mall. The phone number has been disconnected. According to Texas State records, the auditor is not even licensed to practice in Texas. Thakkar has run multiple different audit operations out of 4940 McDermott under various different names (including Thakkar CPA, The Hall Group CPA, TMK LP and now Bharat Parikh). Each one of the previous ones has been shut down. Thakkar then changes the name of the firm and keeps auditing the same clients, all from the same vacant address.

Cemtrex claims to generate nearly $100 million in revenues from subsidiaries across 4 countries and 3 continents. Such a company would normally expect $500,000-$1 million in audit fees per year. Yet Cemtrex pays Bharat Parikh a mere $15,000-$20,000 per year.

Cemtrex’s 3rd party service providers include Source Capital, Chardan Capital and Irth Communications. Each of these parties has a long and noticeable history of doing business with small cap stock promotions which have been promoted by SCS or the other promoters behind Cemtrex. There have also been past involvements with companies, individuals or activities with have involved imploded stock promotions or securities fraud.

Cemtrex’s filings repeatedly contain information which is either inaccurate or inconsistent between filings. Many filings comes extremely late. Many required filings have not come at all. It is clear that shares owned by members of management have declined substantially during the course of the paid promotion. Yet no Form 4’s have been filed to disclose sales to investors or the SEC. Past disclosure states that the CFO was working for years at zero salary from Cemtrex, while he was being paid by Aron Govil’s Ducon. Option grants to Saagar Govil occurred at times when the share price was hitting deep lows. These grants were not disclosed until after the share price had appreciated substantially. Earlier filings, which should have disclosed the impact of those new shares under the option grant, made no mention of the options until much later, after the share price had already risen.

Again, to me the case for fraud and delisting seems obvious.

Appendix A – past frauds or promotions by SCS which were halted, delisted or imploded

SCS clearly matches the exact type of promoter that the SEC is warning us about in terms of “microcap fraud” because numerous promotions from SCS end up getting quickly halted or delisted by the SEC. Examples of halted or delisted stocks from SCS have included:

– Code Rebel (formerly CDRB)

– Forcefield Energy (formerly FNRG)

– Grow Life

– Fusion Pharm

– Petrotech Oil and Gas

– Among others…

Just like Cemtrex, each of these stocks surged by hundreds of percent following aggressive promotion campaigns by SCS promoters. Just like Cemtrex, each of these stock promotions had a very well crafted investment story specifically designed to lure in retail investors.

Each of these stocks were then halted or delisted outright when the SEC found financial irregularities or outright fraud.

So again, these are the exact promoters that Aron Govil is paying using an undisclosed entity in New York.

Both Hotstocked.com and Stockpromoters.com continue to list the paid promotions of these stocks which were run by SCS.

Just like Cemtrex, Code Rebel was being promoted by SCS as an acquisition play. Paid promotion and press releases around the acquisition hype caused the stock to surge by several hundred percent shortly before it was delisted and went to zero.

Just days after the latest SCS promotion, The SEC noted that it had suspended trading in Code Rebel:

because of questions regarding the accuracy of statements in CDRB’s Forms 10-Q for the quarters ended June 30, 2015 and September 30, 2015, and the Form 10-K for the year ending December31,2015, concerning the company’s assets and financial condition. This order was entered pursuant to Section 12(k) of the Securities Exchange Act of 1934 (Exchange Act).

Similar promotion efforts by SCS caused Forcefield Energy to soar by hundreds of percent. In the case of Forcefield, the stock quickly fell by 60% immediately after my own article exposing the fraud. In fact, within just a few days of my article exposing the fraud, the stock was halted by the SEC and then delisted. It was a zero within just days.

At the time, the SEC noted that it was suspending trading at Forcefield:

due to concerns about the adequacy and accuracy of information available to investors concerning the funding of recent articles and promotions touting FNRG, including for example in articles published on December 9, 2014 and February 26, 2015. Questions have also arisen concerning potential manipulative activity of FNRG’s stock, including transactions between February 25 and April 2, 2015 and the funding of those transactions. This order was entered pursuant to Section 12(k) of the Securities Exchange Act of 1934 (Exchange Act).

For reference, here is my previous article on Forcefield, which I published when the stock was at $7.50 – just a few days before that suspension from the SEC.

Appendix B – Additional Cemtrex promotions

Here is a partial screenshot showing just a few of the recent promotions, click the links above to see dozens and dozens more. I encourage interested readers to go to Hotstocked.com or Stockpromoters.com to read more examples.

(click to enlarge)

These sites show that the promoters and payors behind Cemtrex include:

– Broad Street Alerts, Small Cap IR, and Small Cap Street (under the umbrella of Small Cap Specialists (“SCS”)

– Third Coast Media

– TSX Ventures

– Stock Market Leader

– Micro Cap Research

– Small Cap Leader

– Southern Steel & Construction

Despite the warnings from the SEC, there seems to be a never-ending stream of new retail investors who continue to fall for the well-constructed schemes of stock promoters. And aside from those stocks that have been halted and delisted, these promoters have been behind dozens of additional stock schemes which simply imploded to the pennies without ever being formally halted or delisted.

Appendix C – Looking at the short interest

The Govil’s have repeatedly made it a point to blame “the shorts” for any weakness in the share price and for any criticism that comes to their company or management. This is a very common diversionary tactic with stock promotions. Unfortunately, many naïve retail investors continue to fall for it.

But with Cemtrex, the math simply doesn’t add up. As of January 31st, there were only around 400,000 shares sold short, amounting to just over $2 million in total. This is virtually nothing. Cemtrex typically trades around 500,000 shares every day.

The short interest has also been steady at 100,000-400,000 shares for the past 6 months, such that there has been very little increase relative to the volume. Every share sold short could easily be covered within 1-2 trading days while having minimal impact on the share price. Likewise, the entire short interest of 400,000 shares would have minimal effect of Cemtrex’s share price over this time.

Here is the link to the NASDAQ showing short interest as well as a screen shot for your convenience. Note that the “days to cover” indicates that the entire short interest could be covered in a single day’s trading.

(click to enlarge)

SCS’s promotion of fraudulent Forcefiled Energy was just the same. Despite a very low short interest, Forcefield tried to distract retail investors by blaming its problems on evil short sellers. But this diversionary tactic from management didn’t slow the immediate 60% plunge in the share price of Forcefield. Clearly inside share holders were the ones selling big even as they were trying to persuade retail shareholders not to sell or to even buy more. But this would only be revealed once the subsequent criminal indictments came out against Forcefield Management.

For your reference, here is a press release put out by Forcefield Energy just after my article in which the Chairman accuses “the shorts” of disseminating false and misleading information. He also claims that he was initiating a regulatory investigation with the SEC to supposedly pursue “the shorts” in defense of his shareholders.

Instead, the Chairman was doing no such thing. Right as he was issuing press releases to reassure retail holders, he was actually in the process of attempting to flee the country while he was simultaneously dumping his shares. Within just days, he was arrested by the FBI as he attempted to board a flight to Central America. Forcefield’s stock was halted, going quickly to zero. The Justice Department later announced that 9 individuals were arrested and indicted on massive securities fraud charges behind the promotion of Forcefield.

I have frequently come across many similar examples of stock promotions who try to distract retail investors by diverting attention to “the shorts”. They all typically tend to end the exact same way (with a trading halt, a delisting or a simply share price implosion).