Enrique Abeyta on CNBC; Stick a fork in Nikola; Short report on Brookfield Property Partners; Carson Block and GSX Techedu; Penumbra's Catheter Fail; Theranos' Holmes May Pursue 'Mental Disease' Defense

By Whitney Tilson

Tuesday, September 15, 2020

1) My colleague Enrique Abeyta was on CNBC last Thursday, where he explained why he’s still bullish on stocks… and special purpose acquisition companies (“SPACs”). Here’s a link to watch the four-minute segment.

2) In Friday’s e-mail, I wrote about the bearish report on electric-vehicle company Nikola (NKLA) published by Nate Anderson of Hindenburg Research.

I followed up in yesterday’s e-mail with the company’s response, Nikola Sets the Record Straight on False and Misleading Short Seller Report, which I characterized as “lame.”

Today saw two new developments…

First, Bloomberg reports that the U.S. Securities and Exchange Commission (“SEC”) “is examining the company to assess the merits of a short-seller’s allegations that the electric-truck maker deceived investors about its business prospects.” This is deliciously ironic in light of Nikola’s calls for the SEC to investigate Hindenburg.

This reminds me of when MBIA (MBI) successfully persuaded the SEC and the New York Attorney General (led by the then-feared Eliot Spitzer at the time) to investigate Bill Ackman and me back in 2003, after Bill released a bearish 55-page report, Is MBIA Triple A? (To this day, the report remains one of the best – and most prescient – pieces of analysis I’ve ever read.)

While the investigations were no fun (to say the least!), they gave us the opportunity to turn the tables on MBIA by walking the regulators through the company’s many nefarious acts. For more on Bill’s multiyear battle with MBIA, I highly recommend the book Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff.

Second, Hindenburg issued its reply this morning – We View Nikola’s Response As a Tacit Admission of Securities Fraud – and it’s devastating. It begins:

Last week, we issued a report that presented extensive evidence of a litany of material false statements made by Nikola’s Founder and Executive Chairman, Trevor Milton.

We included 53 questions at the end of our report that we believe shareholders deserve answers to. The company promised a full point-by-point rebuttal, but then only responded to 10 of our questions.

Of those 10 responses, the company debunked nothing. Instead it either confirmed or sidestepped virtually everything we wrote about, and in some cases raised new unanswered questions.

A friend e-mailed me this summary:

Game, set, and match.

Stick a fork in it.

At this point, I almost feel sorry for Trevor and Nikola. They have nothing standing between themselves and indictments, other than divine (government?) intervention. Is Trevor one of those “geniuses we have to protect” (as Elon Musk appears to be)? Perhaps not.

I agree, and confidently predict that General Motors (GM) will end the partnership with Nikola that it announced last week, Nikola’s stock will collapse, and Milton will end up behind bars for securities fraud.

3) Nate Anderson is one of roughly two dozen short-sellers I’ve followed closely enough over the years to have respect for their work (I know most of them personally as well).

Another is Keith Dalrymple of Dalrymple Finance, who just sent me this 12-page report, The End of the Dividend and Negative Equity, on related real estate entities, Brookfield Property Partners (BPY) and Brookfield Property REIT (BPYU). Excerpt:

The Endgame: Insolvency Is Here

  • Historical substandard cash flows exacerbated by COVID-19
  • BPY’s largest source of cash disintegrates
  • Revenue recognition policy appears to overstate operating metrics
  • Excessive leverage and debt defaults

Brookfield Property Partners (BPY) is not a viable entity as it does not generate enough cash to sustain the enterprise. Further, it has negative real equity after years of asset stripping through a conflict-ridden incentive system by BAM (Brookfield Asset Management). Bankruptcy could be imminent given the defaults of $1.2B of property debt, which could prompt CBMS investors to test the collapse of the SPE structures as happened during GGP’s bankruptcy.

Cash flow deficits have plagued BPY since its inception (see below). We are now at the point in the cycle where declining cash flows and asset values are bringing financial mismanagement to the fore. In our analysis, BPY is teetering on the edge of insolvency.

Unlike Nikola, I don’t have a strong opinion on Dalrymple’s report as I haven’t analyzed these two Brookfield companies personally, but I thought it was worth passing along.

4) While Nikola’s stock has plunged in the aftermath of the Hindenburg report, this doesn’t always happen. Just ask one of the best known activist short-sellers, Carson Block of Muddy Waters Research, who issued a report back in May calling Chinese online education provider, GSX Techedu (GSX), a “near-total fraud.” Here’s his summary:

  • We are short GSX because we conclude that it is a near-total fraud.
  • We conclude that at least ~70% of its users are fake, and we think it’s quite likely that at least ~80% of its users are fake.
  • Our conclusions are based on GSX’s own user and attendance data files (i.e., this is not from “scraping” data). We downloaded GSX’s data from more than 200 paid K-12 classes covering 54,065 unique users.
  • In addition, a former GSX manager corroborated our analysis, and explained various details of GSX’s extensive bot operation.
  • Based on the near total faking of users, we assume that the fraudulent portion of GSX’s revenue is at least equal to the percentage of fraudulent users, although it would not surprise us if the ASP on the real portion of GSX’s business is fraudulently inflated too. 
  • We conclude that GSX is a massive loss-making business. Without users, there is no revenue. We also conclude that GSX greatly understates expenses. Regardless of how one cuts it though, GSX is an almost completely empty box.
  • Amazingly, Chairman Chen has found a way to make GSX shares even more dangerous for long holders – he has pledged at least $318 million of stock. Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price.

At the time, GSX shares were trading around $33 – and then proceeded to soar to more than $130 in early August before settling back to today’s level around $100 this morning.

The pullback is no doubt due in part to the stock’s preposterous valuation – it’s still trading at nearly 35 times trailing 12-month revenue – but also because the company disclosed (buried deep in its latest quarterly earnings report) an investigation by the SEC’s Division of Enforcement as well as an “an internal independent review” led by the Audit Committee of the Board of Directors.

While Carson has taken a lot of pain on this short, he still thinks he’ll be proven right – and I agree. Mark my words: he will have the last laugh here…

5) My friend Roddy Boyd of the Foundation for Financial Journalism isn’t an activist short-seller, but he does the same thing as an insightful and courageous journalist.

He has an incredible long-term track record of exposing numerous corporate frauds and scandals, so I suggest signing up here to receive an e-mail when the Foundation posts something new.

Yesterday, Roddy published his latest report on high-flying medical-devices manufacturer, Penumbra (PEN): Penumbra Inc.’s Catheter Fail: Broken Tips and Lost Lives. Excerpt:

Some surgeons have alleged that while they attempted to remove blood clots from patients’ brains, Penumbra’s newest catheter would occasionally break or fray, resulting in precious minutes spent addressing the fracture.

Penumbra’s answer baffled them: The company did not acknowledge the problem in any meaningful way; yet it did not fully deny it either.

On July 27, the company released a “Notification to Healthcare Providers,” reiterating its previous instructions for using the catheter, along with a warning against deploying it with non-Penumbra products.

But voluntary reports submitted to a Food and Drug Administration database, including entries from surgeons who have used the new catheter, paint a picture of a device whose safety problems Penumbra may be forced to address in more substantial terms than the July 27 release.

6) I almost fell out of my chair when I read this Bloomberg headline last week about Theranos’ disgraced former CEO, Elizabeth Holmes: Theranos’ Holmes May Pursue ‘Mental Disease’ in Her Defense.

Fortunately, the judge doesn’t seem to be buying this nonsense, but if Holmes gets away with it, it will be her ultimate con – and Exhibit A of white privilege!

I wonder if Trevor Milton will try a similar defense when his time comes?

Best regards,


Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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