Hindenburg’s Report Spells Trouble for IPOE and Palihapitiya's Other SPACs

Hindenburg Research has gained popularity with its reports highlighting fraud at listed companies. Its latest salvo is directed at Clover Health, which went public through a reverse merger with Social Capital Hedosophia Holdings Corp. III (IPOC).

Clover Health (CLOV) stock fell over 12 percent on Feb. 4 after Hindenburg made the allegations. Could the allegations have an impact on Chamath Palihapitiya's other SPACs including Social Capital Hedosophia Holdings Corp V (IPOE), which is set to merge with Social Finance or SoFi?

Hindenburg Research has accused Clover Health of fraud. It has claimed that Clover hid the fact that it was under a Department of Justice investigation. Hindenburg has also said that Seek Insurance, one of Clover Health's subsidiaries, “misleadingly advertises to seniors that it offers 'independent' and 'unbiased' advice on selecting Medicare plans.”

When Hindenburg accused Nikola in 2020, it specifically targeted the company's founder, Trevor Milton, of fraud and fooling investors as well as big companies with his false claims. Eventually, Milton left Nikola. General Motors scaled down its proposed partnership with Nikola after Hindenburg’s allegations.

Meanwhile, Hindenburg hasn't accused Palihapitiya of fraud or misconduct. However, it does ask pointed questions from him including whether he was aware of the Department of Justice investigation against Clover Health. In a jibe at Palihapitiya, who's also known as the “King of SPACs,” Hindenburg questioned his due diligence in identifying Clover Health as a merger target.

Three of Palihapitiya’s SPACs have already merged with target companies, including Clover Health. While Clover Health stock fell after the allegations, there's some selling pressure on Palihapitiya's other SPACs including IPOE, which was down 2.5 percent in pre-market trading on Feb. 5.

Social Capital Hedosophia Holdings Corp IV (IPOD) and Social Capital Hedosophia Holdings Corp VI (IPOF) were trading at 3.5 percent and 2.1 percent, respectively, in pre-market trading on Feb. 5. The fall in Palihapitiya’s SPACs looks like a reaction to Hindenburg’s allegations against Clover Health. Going through Hindenburg’s report, it accuses Palihapitiya of incompetence at best and misconduct at worst. 

The fall in Palihapitiya’s SPACs is understandable. As we have noted many times in the past, sponsors' track record is important when it comes to investing in a SPAC, especially before it finds a merger target.

Hindenburg’s allegations against Palihapitiya are serious enough to raise concerns. Markets will be waiting for a response from Palihapitiya. One of his recent tweets looks apt to quote right now. He tweeted, “SPACs may be easy to raise...but they are hard to execute and success isn't guaranteed.”