Short Sellers Are Now Turning on One Another

Short sellers are now turning on one another.

Billionaire investor and activist short seller Carl Icahn is now being targeted by well-known short seller Hindenburg Research, per WSJ.

Icahn Enterprises, the publicly traded firm controlled by Mr. Icahn, was targeted by short seller Hindenburg Research early this month.

Carl Icahn disclosed that his investment company is under investigation by federal prosecutors and went on the attack against the short seller that likely spurred the inquiry, accusing it of “wantonly destroying property and harming innocent civilians.”

“Hindenburg Research, founded by Nathan Anderson, would be more aptly named Blitzkrieg Research given its tactics of wantonly destroying property and harming innocent civilians,” said a quote from Mr. Icahn in the company’s response to Hindenburg’s accusations.

The U.S. Attorney’s Office for the Southern District of New York contacted Icahn Enterprises asking for information about the value of its assets, corporate governance, dividends and other topics, the firm said in a securities filing Wednesday.

Icahn Enterprises said in the filing that it is cooperating with the investigation and doesn’t believe it will have a significant impact on the business. 

The company’s stock (NASDAQ:IEP) fell -15% on Wednesday and nearly -2% on Thursday.

Hindenburg Research alleged that Icahn was highly leveraged and relying on inflated valuations of its assets to trade at several times the value of its held assets.

“Confidence games never last forever,” Hindenburg’s report concluded.

“We expect Icahn Enterprises will be no different.”

Hindenburg Research Spots Short Opportunity in Icahn Enterprises

Hindenburg Research wrote down the value of one of the holdings that Hindenburg highlighted in its report as overvalued.

In its filings, Icahn acknowledged that its auto-parts division filed for Chapter 11 bankruptcy at the end of January.

In March, Icahn reported that the auto-parts division at the end of the year was worth $381 million.

Icahn Enterprises said Wednesday it lost $270 million in the first quarter of 2023, compared with a profit of $323 million over the same period last year.

The company’s own short bets backfired, resulting in a drag on the company’s investment portfolio, which lost $443 million in the quarter.

Icahn reported other potential write-downs in its filing as well. The company marked the value of its real-estate portfolio at the end of the quarter as $457 million.

In a footnote, however, the company said that since the end of the quarter its tenant for a commercial high-rise property worth $218 million had defaulted on its now-terminated lease.

The company said it would consider taking an impairment charge in the second quarter.

On Wednesday, the company said that Icahn’s assets were booked using accepted valuation methodologies.

Hindenburg’s critiques, the company said, were fundamentally flawed and historic investments of the company were sold at a premium to book value.

Icahn reiterated that it would pay its dividend, a major component of the stock’s allure for individual investors who make up most of its public ownership, per WSJ.

Will More Short Sellers Turn on One Another?

For many months now, retail investors have prophesized that short sellers at some point would begin to turn on one another.

It was only a matter of time before the perfect storm brewed as we’re seeing today.

Bad short bets caused Icahn Enterprises to lose hundreds of millions of dollars this year and now it has become a target for other short sellers.

In 2022, hedge funds lost $208 billion with only very few ending the year profitable.

In February of this year, short sellers were down more than $81 billion as we saw a bull rally take off during the first quarter of 2023.

And as we transition from the first quarter to the second quarter of 2023, we are seeing banks face a crisis.

In March, banks lost $55 billion in one single day.

Now we have banks like JPMorgan urging the SEC to call for a ban on short selling of bank stocks.

With liquidity drying out, short sellers will depend on shorting one another to raise capital in today’s volatile economy.

Related: JPMorgan Holds Bigger Short Positions Than Its Total Assets

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