Freedom Holding Investors Didn’t Buy the Attack on the Company’s Shares by “the Bears”

While global markets have gradually declined, driven downwards by the Federal Reserve’s signals that a further increase of the base rate is very likely, let’s look at one interesting case that occurred last week. Well-known speculators attacked the brokerage company Freedom Finance (officially headquartered in Kazakhstan since leaving the Russian market in February 2023), or more precisely its parent company Freedom Holding Corp., whose shares have been listed on NASDAQ since 2019. 

What happened?

Hindenburg Research, a group well-known on the stock market for its investigation, showed its interest in a company with Kazakh and Russian roots for the first time. A unique feature of reports by Hindenburg Research is that they often blame publicly traded companies from various industries for misleading reports, fraud or hiding information from shareholders. Usually, these reports largely consist of statements from unnamed individuals and hit the reputation of a victim company. These reports are aimed at only one goal: to provoke panic among investors and make the share price fall. Hindenburg Research doesn’t hide that it belongs to the “bears” who obtain profit when the market value of an object of their attack goes down after its “investigations” were published. This is kind of a genre of “analytics.”

Companies are often forced to deal with very serious consequences when investors unload stocks that were attacked (at least 20 cases), while U.S. regulators launch investigations against companies mentioned in such reports. The most recent case, for example, was the business of the Indian billionaire Gautam Adani. In January 2023, his holding company Adani Enterprises Limited (ADANIENT) was accused of tax evasion and market manipulation. Even though the holding denied all these accusations, the Central Bank of India requested local banks to detail their exposure to the group’s companies. This is how the panic started to spread across the market. The company lost almost 40% of its market cap a week after the attack. A month later, this figure exceeded 60%. The stock has been slowly regaining ground since April, but it is still cheaper than it was before the report was released. This is a vivid example of how devastating Hindenburg Research could be for the market. 

On August 15 (before the opening of trading in the U.S.), Hindenburg Research published its new report in which it said that the CEO of Freedom Holding Corp. (FRHC) Timur Turlov allegedly still controls Russian assets, although he officially sold them, that the company was violating inteational sanctions and manipulating the price of its shares, and that FRHC used false information in its financial reports, citing an unnamed former employee of Freedom. Moreover, Hindenburg accused the Belizean company Freedom Securities Trading Inc. (FST Belize) of rendering services to individuals on the sanction list. And on top of that, the report said that Turlov himself was on the Ukrainian sanction list. 

Interestingly, this was not the first attack on Turlov and his Freedom Holding Corp. with the help of so-called “revelations” both in Russian and English that aim to damage the holding’s share price. For instance, in 2020, the Foundation for Financial Joualism published on its website the article “Freedom Holding: After Borat, the Silliest Kazakh Import of the Century,” authors of which, well-known for belonging to the “bears” (short sellers) and issuing negative materials about public companies, urged investors to be more critical toward FRHC shares and criticized the company's auditors. At the time, no serious evidence behind these accusations was found.

Despite these attacks, Freedom is continuing to grow, even in a very difficult time and in one of the most challenging regions in terms of sanctions and control. It’s not a secret that the financial market is one of the most competitive markets full of speculators and speculations. 

The key thing

The reaction of the market is the most important thing for any investor, so let's look at this argument. On the day the report was released, the Freedom Holding Corp. securities (traded under the ticker FRHC) declined by 8%, although the share price started to rebound immediately after the holding quickly made its official statement. As a result, the decline was only about 3% with no big profit for “the bears” last week. The dynamic of the securities was the same as for the entire market, which was predominantly declining last week. This was the instant and main response to the Hindenburg Research’s attack — investors weren’t unloading Freedom's shares as they trusted in the company, its financial reports and official statements. 

It’s quite safe to say that Hindenburg Research’s bet on (and those short sellers who did buy the group’s investigation) the fall of the FRHC securities price, has failed. They have to close short positions en masse. Apparently, the volume of short delivery of shares was going through the roof as it was no longer possible to keep short positions. The trading volume of the holding stock exceeded $110 million a day. On Friday, Freedom’s share price grew by 25%. This situation is known as a short squeeze which is likely to continue this week.

A series of successful “bear” attacks made Hindenburg Research imprudent. They were a little “unlucky” with the timing of their report as they published it almost immediately after the Freedom Holding report for the fiscal year 2023 (the calendar period from April 1, 2022, to March 31, 2023), and now this attempt to profit from the share price fall will be remembered as the most unsuccessful. So far, estimates show that short sellers lost more than $20 million in just one week. They should have released their “revelations” before the annual report by FRHC or at least have a fallback scenario for a situation when there was no panic on the market.

Now as for arguments and facts. The broker wasn’t rushing with the annual report – of course, the stock exchange, regulators and investors were notified about this in advance – because FRHC was switching to a new audit company which together with lawyers carried out a rigorous audit of the holding statements. By the way, Freedom's auditor is now one of the Big Four. When a company runs a very complex business in different countries and operates in the most regulated space (apart from U.S. sanctions against clients of Russian origin, the U.S. regulator is well-known for its strict requirements for publicly traded companies), it should stick to maximum transparency and be ready to double-check its every step.

Unfounded accusations as the basis of the attack

A central allegation in the Hindenburg report was that Freedom has “openly flouted” sanctions, Anti-Money Laundering (AML) and Know Your Customer (KYC) rules. Freedom Holding's annual report provides answers to many questions. Moreover, an unqualified audit opinion is an integral part of this report. Revenues, balances and customers were fully confirmed and client transactions were verified, while the authors of the Hindenburg report, which was a speculative attack as a matter of fact, demonstrated a lack of understanding of how sanctions regimes work and how financial institutions are dealing with them. 

Timur Turlov, CEO of the holding, also immediately commented on the main points of the report by Hindenburg Research in an interview with joualists. If you are an investor or a client of Freedom, please read this interview or check his detailed statement on social media and a live broadcast on the topic of the 2023 annual report. This information provides clear and decisive answers to many questions.

In particular, he explained that the Russian business was sold to Maxim Povalishin in a transaction approved by the Bank of Russia and reflected in the FRHC annual report. (The business now operates in Russia under the Tsifra brand.) With the business divided, neither Turlov himself nor other shareholders or FRHC top managers control it. “An unnamed individual, who was a key source for Hindenburg’s report and the entire campaign around it, is a person who worked for us for a short time. This person didn’t have enough professional knowledge, but accumulated a lot of resentment,” Turlov wrote on Instagram. The report was also citing the fact that Freedom was a Russian company that moved to Kazakhstan. This argument doesn’t hold water because the company has actually been headquartered in Kazakhstan for more than 10 years. Turlov and his family live here as well. (The businessman became a Kazakhstan national in 2022.)

The report by Hindenburg Research also points out the fact that Turlov is on the Ukrainian sanction list. However, there is no news for investors as this fact is well-known. According to the businessman, this is a mechanical feature of the sanctions. At the time, Ukraine imposed sanctions on all people from the Russian Forbes list and heads of all financial organizations in Russia including foreigners who served as executive managers for subsidiaries of the foreign financial companies in Russia.

Freedom operated in that country but lost both Russian and Ukrainian markets in 2022. The company doesn’t hide that it tried to move a part of its clients to Kazakhstan. This move was made under strict control and sanction compliance (including verification of the legitimacy of client funds). The holding’s asset in Belize applies the same sanctions compliance procedures as the entire holding itself, which was verified by regulators and independent auditors multiple times. It is also worth noting that not all actions with Russian clients are subject to restrictions, although the company stopped rendering services to those clients who have been put on the SDN list to meet the rules.

As a result, it’s safe to say that the information in Hindenburg’s report isn’t new for regulators and investors because either Freedom has already reported about it itself, or an auditor published it in its audit opinion. According to Turlov, the company won’t retaliate against the “bears” as Freedom is focused on business and improving its services.