On the 4th of February Hindenburg Research published their latest report on Clover Health How the “King of SPACs” Lured Retail Investors Into a Broken Business Facing an Active, Undisclosed DOJ Investigation.
Research uncovering stories of potential fraud and business mismanagement is common. Firms such as Muddy Waters and Hindenburg Research are specialists known for their skill and focus looking into these issues with determination. Often with the commercial goal to uncover wrongdoings, and as such benefit from a collapse in a public share price, which is why the research into Clover Health is breaking new ground – Hindenburg have disclosed they have no position.
The second reason why has story has spread like virtual wildfire is due to Clover Health’s “celebrity” backer, Chamath Palihapitiya. Chamath has risen to the public domain through a combination of his past role as a senior member of Facebook’s team from 2007, secondly due to his financial clout, having launched 6 SPACs (Special Purpose Acquisition Companies), and thirdly due to his statements on how business – mainly the conduct of institutions and ethics – should be done.
It has led to a celebrity level of media attention for Chamath, appearing on the majority of mainstream business shows, and with that has probably provided him an increased ability to finance the ventures he is involved in. He also has clout, which does affect positive and negative sentiment in the market, as shown by the prospectus for the Clover Health which went onto be a part of the SPAC:
Clover “has been diligenced and validated not just by me and my team at Social Capital, but by some of the most respected blue chip technology investors in the world.”– Chamath Palihapitiya, October 6, 2020, Investor Presentation
Chamath’s SPACs are the following, and they have invested in Virgin Galactic, and Clover Health, to name but two of the most notable names:
- Social Capital Hedosophia Holdings I (IPOA).
- Social Capital Hedosophia Holdings II (IPOB).
- Social Capital Hedosophia Holdings III (IPOC).
- Social Capital Hedosophia Holdings IV (IPOD).
- Social Capital Hedosophia Holdings V (IPOE).
- Social Capital Hedosophia Holdings VI (IPOF).
From the research conducted by Hindenburg, they have disclosed the following which comes direct from their report:
- “Today, we reveal how Clover Health and its Wall Street celebrity promoter, Chamath Palihapitiya, misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction last month.
- Our investigation into Clover Health has spanned almost 4 months and has included more than a dozen interviews with former employees, competitors, and industry experts, dozens of calls to doctor’s offices, and a review of thousands of pages of government reports, insurance filings, regulatory filings, and company marketing materials.
- Critically, Clover has not disclosed that its business model and its software offering, called the Clover Assistant, are under active investigation by the Department of Justice (DOJ), which is investigating at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals, according to a Civil Investigative Demand (similar to a subpoena) we obtained.
- This Civil Investigative Demand and the corresponding investigation present a potential existential risk for a company that derives almost all of its revenue from Medicare, a government payor. Our research indicates that the investigation has merit.
- Clover claims that its best-in-class technology fuels its sales growth. We found that much of Clover’s sales are driven by a major undisclosed related party deal and misleading marketing targeting the elderly.
- These practices should not come as a surprise, given that in 2016, Clover was fined for misleading marketing practices by the Centers for Medicare & Medicaid Services (CMS). The fine was issued after Clover’s repeated failure to amend misleading statements about its plan offerings. A former employee told us the fine was so small it just emboldened Clover to push the envelope further.
- Clover has a thinly-disclosed subsidiary called “Seek Insurance”. Seek makes no mention of its relationship with Clover on its website yet misleadingly advertises to seniors that it offers “independent” and “unbiased” advice on selecting Medicare plans. It claims, “We don’t work for insurance companies. We work for you”, despite literally being owned by Clover, an insurance company. Its activities are also under investigation by the DOJ.
- Multiple former employees explained that much of Clover’s sales are fueled by a major undisclosed relationship between Clover and an outside brokerage firm controlled by Clover’s Head of Sales, Hiram Bermudez. One former employee estimated Bermudez drove ~68% of Clover’s total sales, though was unclear on the amount coming from the undisclosed relationship.
- One of the former employees explained that Clover’s Head of Sales took efforts to conceal the relationship by putting it in his wife’s name “for compliance purposes”. Insurance filings confirm this. The Clover contract was quietly put into his wife’s name in the weeks after Clover’s go-public announcement.
- In a CNBC interview announcing the Clover transaction, Chamath proclaimed, unprompted, “they create transparency…they don’t motivate doctors to upcode or do all kinds of things to get paid”. A former employee explained to us that the DOJ is specifically asking about upcoding, or the practice of overbilling Medicare.
- Multiple former employees explained that Clover’s software is primarily a tool to help the company increase coding reimbursement. We provide detail on how the software captures and retains irrelevant diagnoses, which we believe deceives the healthcare system, and poses a significant regulatory risk.
- Clover claims its software “delights” physicians, but according to doctors and former employees we interviewed, they use it because Clover pays them extra to use it. Physicians are paid $200 per visit to use the software, twice the normal reimbursement rate for a Medicare visit.
- Doctors at key Clover providers described the software as “embarrassingly rudimentary”, “a waste of my time” and as just another administrative hassle to deal with.
- Clover’s CTO left 6 months before the first release of the supposed “disruptive” Clover Assistant software in July 2018 (likely a sign that development wasn’t going great.) Clover’s executive team has been in turmoil, with 3 CFOs, 3 COOs, and 2 General Counsels in the last 4 years.
- Prior to founding Clover, CEO Vivek Garipalli owned 3 New Jersey hospitals through a company called CarePoint Health. CarePoint was publicly lambasted for price-gouging; its hospital charged the highest prices for emergency room treatment in the entire country.
- For example, local media reported that Garipalli’s hospitals charged a teacher $9,000 for a bandaged finger and a tetanus shot, and another patient $17,000 for 5-6 stiches on a cut hand.
- In 2015, as it came under increasing regulatory scrutiny, Garipalli made a secret $1 million donation to the Jersey City Mayor through a shell entity. Garipalli was only revealed as the donor after a non-profit sued to expose the mystery backer.
- CarePoint’s predatory price-gouging was lucrative. But in 2020, New Jersey legislators accused Garipalli – now a public company CEO – of siphoning over $157 million from his hospital network through a byzantine web of LLC shell entities. The transactions left the hospitals financially crippled, leading to layoffs and a liquidating sale process to new owners.
- Meanwhile, Chamath has described Garipalli as “an absolute proven moneymaker”.
- That could be because Chamath’s firm received over 20 million “founders shares” (worth ~$290 million at current prices) in exchange for $25,000 and for promoting the Clover Health SPAC.
- Given that investors are paying over a quarter billion dollars for Chamath’s due diligence, we think they deserve to know whether Chamath knew of these issues and concealed them, or whether he simply failed to notice them at all.
- Short sellers have exposed almost every major market fraud in the past several decades, yet there have been recent questions about whether short-sellers and critical researchers play an important role in a healthy, functioning market. We hope our research today serves as a timely reminder that they do. For more on this, see our conclusion.”
Time will tell how Clover responds, but one thing is for certain, short sellers and institutions who are focussed on uncovering companies who muddy the water of market reputation, will continue to dig to provide confidence to the public and wider market. In a time where short sellers have been targeted by the Reddit crowd, Hindenburg are attempting to show why short selling keeps the market honest.
Hindenburg Research: https://hindenburgresearch.com/clover/