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Valeant Pharmaceuticals: The Great Wellbutrin Channel Mystery

With Valeant Pharmaceuticals’ evolution from battleground stock to full-bore Wall Street circus, it is easy to forget that underneath the competing valuation narratives and regulatory drama is a real operating company.

The odd thing is that down at the operating level — where drugs are made, shipped to market and sold — things don’t get very much clearer.

One of Valeant’s more enduring riddles is the continued vitality of Wellbutrin XL, a drug that has been off patent since 2006. A January Bloomberg News article ably laid out Valeant’s strategy of constantly raising prices on the drug — 11 times since 2014 — that underscores how revenue jumped.

But looking at Wellbutrin XL’s prescription count data from the second and third quarters last year — specifically the reported revenues — some unanswered questions remain.

For instance, the third-quarter Wellbutrin XL prescription data captured by Symphony (and available via a Bloomberg terminal) indicated that the count declined by 2,743 prescriptions, to 67,312 from 70,055.

The decline in Wellbutrin XL’s prescription count makes plenty of sense since there are numerous factors working against the brand — the aforementioned price increases and additional generic competitors hitting the market after the Food and Drug Administration put to rest bioequivalency concerns.

What doesn’t make sense is how revenues increased 37.3 percent sequentially, jumping to $92 million from $67 million. It seems we can rule out Direct Success, the Farmingdale, New Jersey-based specialty pharmacy that fills Wellbutrin XL prescriptions for low (or no) patient co-pays and then works to secure reimbursement, as the channel for the difference.

While Direct Success is the obvious candidate to explain any discrepancies since data reporting services don’t capture specialty pharmacy prescription activity, Valeant itself ruled this possibility out when spokeswoman Laurie Little told Bloomberg News, “[Direct Success] accounted for less than 5 percent of Wellbutrin XL sales.” She also remarked that there were other channels where the drug is sold, including “Medicare, Medicaid and the Department of Defense.”

It is very unlikely that these channels factor into the Wellbutrin XL issue. Centers for Medicare & Medicaid Service contract awards are heavily contingent on price and the Department of Defense even more so; many Medicare Part D plans don’t even cover the brand. Here is a DoD contract out for bid, for example, and here is the (generic manufacturing) winner.

(As the Southern Investigative Reporting Foundation was finalizing reporting on this article, Wells Fargo research analyst David Maris released a report that mentioned Wellbutrin XL’s unusual performance in the third quarter of 2015, among numerous other issues. While ordinarily it would be unusual to be beaten to the punch by a sell-side analyst, Maris is an exception, having — ironically — caught Valeant’s corporate forbear Biovail Pharmaceuticals in a revenue inflation scheme. In full disclosure, I also reported frequently on Biovail, a legendarily clogged corporate toilet.)

One area that merits consideration is some sort of channel stuffing, wherein distributors are sold more drugs than they can presumably sell themselves.

Consider pharmaceutical distributors, who have very narrow operating margins (given the nearly riskless nature of their business) and whose business model benefits mightily from distributing drugs where price increases are regularly announced. This allows them to purchase drugs in advance of the scheduled increase and profitably resell them at a higher price.

For a manufacturer, aggressively moving extra inventory into distribution channels bears little risk: The profit on incremental volume moved is huge and it is effectively zero-interest financing since the company gets cash up front and simply return it to the distributor if product is unsold. The risk is that a manufacturer’s distribution networks have too much of a product and sales decline until inventories clear out. To be sure, there is a long history of pharmaceutical companies improperly handling the accounting related to drug distribution.

Inventory reduction has certainly been on Valeant management’s mind.

At a December analyst meeting in Newark, then-chief executive officer Michael Pearson spoke about “bringing down the inventories in the wholesale channel,” “the continued impact of the reduction in channel inventories” and referenced getting “normalized in 2016.”

Valeant’s days sales outstanding do appear high as the chart below indicates, even adjusting for the inventory that came on balance sheet in April when the Salix purchase closed. (In December, the Southern Investigative Reporting Foundation released an investigation into Valeant’s unusual Eastern European distribution practices.)

Sources: Bloomberg and SEC filings
Sources: Bloomberg and SEC filings

 

On Friday afternoon the Southern Investigative Reporting Foundation submitted questions via email to Valeant outside spokeswoman Renee Soto of Sard Verbinnen & Co. She did not reply by press time.

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Valeant Pharmaceuticals: Howard Schiller, Up in the Air

Shortly before 11 p.m. on Feb. 4, Valeant Pharmaceuticals CEO Howard Schiller took off from Dulles International Airport for home. It had been a long, tiring day of preparation, congressional testimony with plenty of blunt questioning and afterward came the inevitable debriefing with his legal and public relations advisory team.

It was not a lost day, though: Speculators in Valeant’s shares perceived Schiller as having done well and the stock price closed up $3.87, an unexpected development when a CEO is called to account for his company’s business model. He certainly helped his cause when he flatly admitted the company made mistakes and understood the pain its drug pricing policies had caused.

To be sure, it did not go flawlessly — there were several broadsides landed from the likes of U.S. Rep. Elijah Cummings, the head of the House Committee on Government Oversight and Reform panel that subpoenaed him. And a day earlier the Democratic committee staff had posted a letter — culled from discovery in the Committee’s ongoing investigation — with several deeply unflattering references to Valeant’s business practices.

Still, whatever else that day brought Schiller, it can be safely assumed that had the representatives known he flew home on Valeant’s G650, the world’s most expensive private jet, not even sitting next to a smirking Martin Shkreli — whose colleague was castigated for acknowledging Turing Pharmaceuticals threw a $23,000 party for its sales force on a yacht — could have shielded him from some populist outrage. (Congress has a track record of criticizing executive’s private jet flight at companies under investigation.)

This is Valeant’s G650:

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So Schiller’s flight home was good. He did not have to sit on plastic seats waiting to be boarded by zones; he just walked right onto the plane. Nor did he have to shimmy into a closet-sized restroom that smelled like a mashup of Lysol and Mennen Speed Stick. There was plenty of leg room and he was always free to move about the cabin. In case he wanted a snack, the refrigerator has its own IP address that communicated its inventory to the D.C. based ground crew who restocked it prior to takeoff.

Exactly 57 minutes after takeoff Schiller landed at the Morristown, New Jersey, airport, a 20-minute car service ride to his home in Short Hills. Flying home at over 500 miles per hour, Valeant’s newly appointed CEO went from Dulles’ suburban D.C. tarmac to his northern New Jersey house in less time than he would have been inside an airport prior to boarding a commercial flight.

Flight records reviewed by the Southern Investigative Reporting Foundation suggest Schiller has quickly grown fond of the G6, having flown three times in the past month with his family and friends to a small regional airport in Montrose, Colorado, near his Telluride ski house.

Those drug pricing policies that necessitated Schiller’s D.C. interlude have made Valeant a great deal of money, or at least enough to maintain a fleet of three Gulfstream jets: a G4, G5 and G6. The G5 and G6 are owned through a company subsidiary, Audrey Enterprise LLC. It keeps them in Morristown, 23 miles away from its U.S. headquarters in Bridgewater.

Valeant is hardly alone in having a fleet of its own planes but it certainly chose from the high end of the menu. The G6 cost just under $65 million when it was delivered in 2013 and the G5 was about $59 million in 2012. It costs between $2 million and $3 million annually to staff, insure, house and maintain the three jets before variable costs like fuel — a 1,000-nautical mile trip in the G6 uses about 860 gallons — and cabin crew. When under way, the cost per hour is about $4,500 for the G5 and G6 and around $3,400 for the G4, although the recent drop in fuel prices probably puts these figures on the high side.

Under the best of circumstances a company extending its leadership the personal use of a major corporate asset like an aircraft can be fraught with potential headaches. At the top of that list is what happens when that company comes in for some bad publicity; then there is what happened to Valeant, which has become a corporate pariah.

Most chief executives would be hard-pressed to afford regular personal travel aboard a Gulfstream or its equivalent but Schiller’s personal financial situation is not like most chief executives. A Goldman Sachs partner at the time of its 1999 initial public offering — where his 0.375 percent stake became $61.87 million in cash — chartering his own plane isn’t likely beyond his means. His salary is $4.8 million and he currently holds a little over $36 million in Valeant shares.

Valeant’s 2014 proxy statement explicitly permitted Schiller’s predecessor Michael Pearson — who is still on medical leave and recuperating in his New Vernon, New Jersey, home — to use company aircraft as he saw fit. In 2014 it valued this use at $195,614 (although it stopped paying his taxes for these flights.) Schiller’s employment agreement does not mention aircraft use but in the proxy he and Pearson were the only executives with personal use allowances.

On Friday a Valeant spokeswoman, Renee Soto of Sard Verbinnen & Co., was emailed a pair of questions about “the optics” of flying back from the congressional hearing on a G6 as well as Schiller’s personal use of company aircraft. She did not reply.

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Valeant: The End of the Michael Pearson Era

Valeant Pharmaceuticals International, the corporate poster child for price-gouging, tax-inversion and hedge-fund manager wealth destruction quietly severed all ties with J. Michael Pearson, its former chief executive officer and longtime guiding light, in January, according to its annual proxy statement filed this morning.

While Pearson stepped down from Valeant in May 2016, and struck a wide-ranging separation agreement that paid him $83,333 per month for consulting — especially the much-touted and at least temporarily disastrous Walgreens contract — his primary job was to cooperate with the seemingly eternally expanding roster of civil and criminal investigations.

The deal with Pearson was supposed to last through this December and the use of the word “initial” in the contract’s wording was a suggestion it might be renewed. Valeant, in the proxy, says it last paid him in October, and in December its board of directors determined no more payments would be made: “In December 2016, the Board determined that we are not in a position to make any further payments to Mr. Pearson, including in connection with his then-outstanding equity awards with respect to 3,053,014 shares.”

Pearson’s agreement was terminated in January for unspecified reasons.

Assuming that Valeant’s language is not implying that the company simply doesn’t have the cash available to pay Pearson, then a legitimate question becomes whether he did anything to violate the terms of his agreement through noncooperation. Given that it paid him $1 million annually with full benefits, allowing him to have an office, an assistant and legal fees paid for, this does not seem to be in his best interests.

Also of note is the timing of the cessation of payments to Pearson in October given that charges against Philidor Rx Services were filed on Nov. 17. While it is highly unlikely that Valeant’s board would have a sense of when — or even if — additional charges might be brought, their own counsel was assuredly aware that federal prosecutors have a long-standing practice of refusing to negotiate settlements with companies where they are actively pursuing indictments against current leadership.

(Southern Investigative Reporting Foundation readers will recall its investigative work from October 2015 that began an ongoing reexamination of the company’s ethics and business practices that has forced its share price to $10.86 in recent trading, down from over $257 in July 2015.)

A call to Scott Hirsch, Valeant’s communications chief, seeking comment was not returned.

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Valeant’s Eastern Front

Poland seems a most unlikely place for the next chapter of Valeant Pharmaceuticals’ saga to play out. Weighing in with about 3 percent of sales, the Polish operations are seemingly a modest contributor to Valeant’s fast-growing bottom line.

But Valeant’s Eastern European operations have recently been the source of a good deal of message board rumor, which in turn has prompted the company to quickly respond.

So the Southern Investigative Reporting Foundation set out to see whether Valeant’s units in Eastern Europe are as robust as their North American brethren. The foundation chose Poland to start with because it’s the third largest geographic segment and, along with Russia, a core component of the company’s emerging markets unit (which represented 25 percent of sales last year). Just as important, unlike Russia, Poland doesn’t have a rich civic tradition of killing investigative reporters or the people working with them.

There’s a lot more inventory in the corporate supply chain than meets the eye, and that’s rarely a good thing, at least in the long term. Moreover, this is occurring against the backdrop of a flat sales trend in Poland.

Given the complex Valeant Europe organizational chart, sussing this out wasn’t a walk in the park.

Screen Shot 2015-11-28 at 5.20.08 PM

On Nov. 10, Valeant’s chief executive officer, J. Michael Pearson, during a conference call, noted that Polish inventory levels were currently equivalent to four months’ worth of his company’s then average sales rate and were slated to be lowered. The call to discuss Valeant’s business came in the wake of its Philidor-driven controversies stories that the Southern Investigative Reporting Foundation’s readers will recall it was the first to report.

Translated from business speak, what Pearson meant is that Valeant’s Polish operations has sold four months’ worth of inventory to a series of distributors, who, in turn, will deliver the products to retailers. Most CEOs want to avoid having inventory levels spike in distribution channels because over time excess supply reduces demand, which in turn forces production cuts and ultimately lowers the price of the product. (See what Valeant said when the Southern Investigative Reporting Foundation asked it about Polish inventory issues.)

But the full picture is much more complicated than that.

In Poland, three of Valeant’s subsidiaries, ICN Polfa S.A., PF Jelfa and Valeant SP. Z O, account for 98 percent of its revenue. Of the three, Valeant SP is by far the largest, amounting to about 75 percent of the revenue. It’s not, as might be expected, a manufacturer but a wholesaler, buying drugs Valeant produces in Poland and elsewhere, and then selling it to other distributors.

While Valeant’s explosive revenue growth is what made the company so beloved of investors, that hasn’t made it to Poland yet. Through the third-quarter revenue from the three units, as measured by IMS Health data, was just under $187 million and on pace to slightly improve upon last year’s $270.3 million. In turn, 2014’s sales were off relative to $296.4 million in 2013.

According to filings, at the end of last year, the three subsidiaries had 95 days’ worth of sales in inventory on its balance sheet. (There’s not a hard and fast rule for determining how much inventory is too much, but when it’s just sitting on a balance sheet and not moving, it’s a safe bet that the higher the figure goes, the more management and investors should worry.)

Add that to the 120 days of sales that Valeant recently acknowledged having in the channel. That’s 215 days of Valeant’s production chain that hasn’t made it to the retail market. Since the end of 2013, IMS Health data shows Valeant’s inventory in the distribution channel increasing to four months’ worth of sales from under two months.

To answer the question of whether that’s standard or not, take a look at how much inventory other major pharmaceutical wholesalers keep on their balance sheet. The three companies below, Neuca, Pelion and Farmacol, control nearly 70 percent of the Polish wholesale pharmaceutical market:

Screen Shot 2015-11-30 at 6.16.35 PM

 

 

 

 

 

So Valeant in Poland is clearly moving inventory less rapidly than its peers and per above, has put additional product into the channel earlier this year given the increase to four months of sales. To be fair, the comparisons are not exact given that the other three companies are purely wholesalers and Valeant has manufacturing operations.

A spokeswoman for Valeant, Renee Soto of Sard, Verbinnen & Co., said Polish inventory levels as of yesterday were back to three months’ worth of sales.

The supply chain process in Poland for getting a drug to a pharmacy from the plant is fairly described as labyrinth. Evidence the first is an occasional fourth step in the supply chain process called pre-wholesale warehouses, which are owned by the wholesalers but aren’t tracked by IMS Health. This inventory essentially falls “off the grid” and it’s nearly impossible to see how much is in there or how long it stays.

Industry insiders in Poland say that pre-wholesale warehouses hold inventory from manufacturers and charge them between 1.2 percent to 2 percent of the value of the inventory per month as a fee.

Then there is Myslowice, a 138,000-square-foot warehouse located equidistant between Valeant’s two other facilities in Jelenia Gora (546,000 square feet) and Rzeszow (412,000 square feet). One cannot easily find the facility listed on the company’s website because it leases it from DHL, the giant shipping and logistics company whose Exel unit often leases properties to work with key clients.

A recently granted license allows it to operate as a pharmaceutical wholesaler but unlike the other two facilities its permit allows it to sell on consignment. While consignment sales are fully legal, from an accounting perspective they often raise earnings-quality questions. (Bausch & Lomb, then an independent company, was ensnared in a consignment sale scandal in the 1990s.)

Valeant says the facility is currently its main distribution hub for Poland and Eastern Europe and that it does a small amount — about $4 million — of consignment sales there for a hospital unit. Read its full response.

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The Pawn Isolated: Valeant, Philidor and the Annals of Fraud

The Southern Investigative Reporting Foundation’s story looking at Valeant Pharmaceuticals’ well-concealed relationship with Philidor Rx Services, struck a nerve.

Briefly, the story explored the ways in which Philidor, a specialty pharmacy whose sole customer is Valeant, used opacity and some misdirection to try and build a national pharmacy network. Additionally, the Southern Investigative Reporting Foundation uncovered how Valeant had sought to conceal its control of Philidor.

A Valeant conference call scheduled for Monday morning, Oct. 26 is designed to explain these previously hidden relationships and, more importantly, calm the very frayed nerves of its battered shareholders.

But recently uncovered documents from a litigation between Philidor and R&O Pharmacy are probably going to have the opposite effect, in that they illuminate what can only be described as a bizarre effort to circumvent California regulations. Moreover, R&O’s allegations have been known to Valeant management for a month.

Additional Southern Investigative Reporting Foundation reporting has revealed that Valeant has been closely involved with Philidor at every stage of its life cycle, controlling it in all but name, since day one.

This pain isn’t being borne for no reason, however.  The foundation’s reporting indicates that Philidor is almost certainly one of the most important parts of Valeant’s business.

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On July 21 Russell Reitz, a 64-year-old pharmacist and the “R” in R & O Pharmacy, was working in his office when a visitor dropped in unannounced. It was Eric Rice, an executive with Isolani, the company that had struck, what he thought, was a deal to buy the small compounding pharmacy back in December.

Rice had flown in from Philadelphia with several of the ranking executives of Philidor Rx Services. This Reitz found odd since when he questioned Rice about it, he insisted he worked for Isolani.

It was a tense but professional meeting and both sides left it unfulfilled.

Eric Rice was unable to come to an agreement over securing $3 million in payments he felt were due his enterprise. Reitz, for his part, had a startlingly basic question that Rice had not satisfactorily answered, both in a series of emails, and in person.

Reitz wanted to clear up once and for all, why despite his insistence that he worked for Isolani, he was always professionally connected to someone from Philidor. What was the difference between the two companies, or were they one and the same?

Rice’s colleagues, Philidor CEO Andy Davenport, general counsel Gretchen Wisehart and controller Jamie Fleming, were to Reitz’s eyes, in the middle of everything Isolani did.

Rice, whose LinkedIn profile left little doubt about where he worked, still couldn’t answer to Reitz’s satisfaction why, if he had agreed to sell his company to Isolani LLC, was Philidor the entity he always had to deal with? And what was Philidor’s real agenda anyway?

Moreover, neither Rice nor his colleagues, whose emails to him were getting increasingly strident, had ever answered another question Reitz had posed: Where was Isolani’s pharmacy permit? That they obtain their own, and not rely on R&O’s was a core component of the sale agreement. (It does not appear they ever applied for one.)

To Reitz, the huge volume of Philidor’s prescription drug sales, using R&O’s National Council for Prescription Drug Programs number, was infuriating; that a good deal of the millions of dollars in volume were in states where R&O had no registration to operate in, with drugs he never had dispensed, and filled by a pharmacy he did not own, was nauseating. To pile insult upon injury, he had refused to sign the pharmacy’s audit only to learn it was signed by Eric Rice.

This dispute had transcended the “he said-she said” realm of most business disputes a few weeks prior and was something Reitz hadn’t supposed existed apart from movies featuring the mafia taking over a business. Apart from Ray Liotta and Joe Pesci’s absence from this drama, it was in every sense a bust out.

Not that there weren’t signs that R&O was more to Isolani than just a platform for compound pharmaceutical sales. Back in mid-December, shortly after the deal was inked, Reitz was surprised to see Jamie Fleming, Isolani’s controller, show up at his office with boxes of inventory. He had a man with him who introduced himself as Gary Tanner, and who was clearly in charge. It all seemed on the up and up, if a bit sudden.

After meeting Tanner, Reitz went back and looked him up. He couldn’t understand what Gary Tanner, a specialty pharmacy expert with Valeant’s Medicis Pharmaceuticals unit was doing involved with R&O. In July, Tanner’s signing of an employment contract was something the company would later find it important enough to disclose to investors.

Reitz couldn’t have possibly known that a few months prior to approaching R&O, Philidor executive Sheri Leon had signed a California State Board of Pharmacy Change of Permit request for West Wilshire Pharmacy, despite providing inaccurate answers to standard questions. Under oath, she answered “no” to questions asking if she had ever worked for an entity that had been denied a California permit, and if any other entity owned more than 10 percent of her company.

That May, Philidor had been denied a nonresident pharmacy permit and like Isolani, it controlled Lucena Holding LLC, the entity used to buy West Wilshire Pharmacy.

On Jan. 7 Eric Rice would sign a similar document seeking transfer of R&O’s license to Isolani.

Something Reitz might have looked into, was the origin of the word Isolani. It comes from the world of chess. To simplify a complex theory, it centers around isolating the pawn, the weakest and least consequential figure in the game.

Given Reitz’s refusal to pay, Isolani sued him in September to obtain a judicial order to preserve what it alleged was at least $15 million out of a total of $19.3 million worth of checks written to it. In response, his lawyer Gary Jay Kaufman filed a 68-page declaration. The next court date is set for the middle of December.

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What Gary Tanner was doing at R&O was his job, which includes being the overseer, for want of a better term, of Philidor and its network of affiliated (or captive) pharmacies.  Tanner’s exact title is unclear but an ex-Medicis executive said that he is Valeant chief executive Michael Pearson’s primary contact about Philidor’s operations.

This source said that Tanner has often worked in conjunction with a lawyer, Michael Dean Griffen, and another (now apparently former) Medicis employee, Bill Pickron, to source these types of pharmacy transactions for Medicis and Valeant.

The Southern Investigative Reporting Foundation’s reporting suggests that there is little to separate Valeant and Philidor beyond corporate wordsmithing. Indeed, former Philidor employees said Valeant’s executives were such a constant presence at the Hatboro, Pennsylvania, headquarters facility, that it was commonly supposed they had a block of rooms permanently reserved at local hotels.

Consider Philidor’s launch in June 2013. It’s a safe bet that Valeant heavily underwrote or otherwise subsidized the company given the long lead times of insurance reimbursement, coupled with the stress on working capital of starting a business with rapid expansion plans.

According to former employees, Philidor places heavy productivity demands on its call-center and data-entry personnel, but pays them decently: SIRF found most employees earned between $20 to $25 per hour, but in return a near 60-hour week was mandatory.

This is where the stress on working capital management factors in, since overtime would add at least $400 extra per employee paycheck. On top of that, from a late 2013 headcount of 250, Philidor added an average of 100 employees per quarter, as well as a 28,000-square-foot lease, utilities, health care, insurance and the frequent “extras,” like free lunches and coffee, to incentivize employees to stay at their workstations.

Eventually, of course, the reimbursements for the thousands of prescriptions roll in, but until then those bills have to be paid. Nothing about the economic profiles of Philidor’s management group suggests they have the ability to personally absorb the millions of dollars it cost each month to get the company off the ground.

For example, Philidor chief executive Andy Davenport, while the owner of a five bedroom, 3,500-square-foot house in nearby Horsham, has had a series of municipal liens placed against him for unpaid county and state property taxes.

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At bottom, pharmacies like R&O were a way for Philidor to surmount the very big hurdle resulting from the California Board of Pharmacy rejection, in May 2014.

(It is quite a read, referring to several “false statements of fact” by Matthew Davenport –the CEO’s brother — including the nondisclosure of Philidor’s true owners and their real equity stakes.)

The headache existed because, as ex-Philidor employee Taylor Geohagan put it when interviewed last week, “Billing from a [pharmacy’s] license in one state, but shipping from a California location, is against the rules.”

He would add, “Pretty much everything we did in the [Philidor] Ajudication department was use the [National Provider Identifier] codes from the pharmacies we bought out to get something [approved] in a pinch.”  He described his Philidor experience in a website posting at PissedConsumer.com that said that paper copies of the NPI numbers of “sister pharmacies” were rarely handed out, and if they were, they were soon taken away and shredded.

Geohagan said that when he left the company in late summer, the practice of using multiple NPI numbers had stopped. (At least part of his animus toward the company, he wrote, resulted from resigning with two weeks of notice and being fired the next day.)

The Philidor billing department manual actually has a page that discusses using the NPIs of these so-called captive pharmacies called “Our Back Door Approaches,” according to another former employee. For example, when attempting to secure approval for a prescription with an insurance company Philidor did not have a relationship with, employees were instructed to use West Wilshire’s NPI.

Two ex-Philidor employees from the adjudication and billing departments told the Southern Investigative Reporting Foundation that the volume of prescriptions flowing into the company was massive, with billing unit workers expected to process at least 100 prescriptions daily. The former adjudication unit employee showed the Southern Investigative Reporting Foundation internal documents from November trumpeting the fact that 22,299 prescriptions were filled in the prior week. Additional documents showed other weeks that came in above 23,000.

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A strategic distancing from the controversial unit does not appear to be an option for Valeant.

The Isolani v. Reitz litigation reveals that Philidor’s use of these captive pharmacies is a vital revenue stream for Valeant. Some digging around in its corporate filings shows that R&O, at least before Russell Reitz began to object in July, was poised to a material contributor to organic growth.

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A brief aside: organic growth, or the increase in sales apart from Valeant’s acquisitions of other companies, is vital to the debate over its future. Short sellers and other critics, for example, have argued that the company’s drug brands are, in the main, declining; without the torrid pace of acquisitions, shrinking revenues and profits are a foregone conclusion.

Thus the importance of looking at what Philidor’s newly exposed captive pharmaceutical network reveals. Here’s what it shows: In the second quarter, Valeant’s 8-K reported “organic” sales growth of 19 percent, with revenue growing $691 million, to $2.73 billion from $2.04 billion.

Of this $691 million, however, at least $392 million was attributable to acquisitions, with the $299 million balance organic revenue.

The Kaufman declaration’s release of the Philidor/Valeant invoices to R&O imply a prospective quarterly sales run rate of about $55 million (an average $4.6 million weekly shipment multiplied by 12 weeks). This would have accounted for 18.5 percent of Valeant’s total organic growth in the second quarter. From there, it’s a sure bet that given the prominence of West Wilshire to Philidor’s billing unit, its sales volume would easily surpass R&O.

Notionally, organic growth equal to 40 percent or more of that $299 million could have come from two pharmacies that even the most gimlet-eyed Valeant sleuth didn’t suspect existed.

It also becomes much easier to understand why Valeant’s management didn’t immediately sever the relationship with Philidor.

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An outside spokeswoman for Valeant, Renee Soto of Sard Verbinen, told the Southern Investigative Reporting Foundation last week the company would not comment.

A message left for Gary Tanner was not returned.

And attempts to contact Eric Rice and other Philidor employees named in the story by placing calls to the company’s management ended up with their being routed to Greg Blaszczynski, the chief financial officer of BQ6 Media. That’s the pharmaceutical marketing effort where both Davenport brothers have served as CEO.

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The King’s Gambit: Valeant’s Big Secret

If the name Valeant Pharmaceuticals International doesn’t ring a bell, its business practices should. The Quebec-based drug manufacturer’s policy of implementing regular price increases that often run north of 100 percent has generated plenty of anger, a congressional investigation, constant press coverage and a subpoena from the U.S. attorneys’ offices in both the Southern District of New York and the District of Massachusetts.

But as strange as it may seem, a slim legal filing in California federal court is poised to make Valeant’s world rockier still.

The story starts 50 miles northwest of Los Angeles in Camarillo, California, with R&O Pharmacy, a modestly sized operation co-owned by veteran compounding pharmacists Russell Reitz and Robert Osbakken.

According to a lawsuit filed by R&O, Russell Reitz received a letter from Robert Chai-Onn, Valeant’s general counsel and director of business development, requesting repayment of $69.8 million for “invoiced amounts.” This apparently struck Reitz as odd since R&O had done no business, at least in any direct fashion, with Valeant. Moreover, he had never received a single invoice from Valeant or its subsidiaries.

Reitz forwarded the letter to Gary Jay Kaufman, his lawyer in Los Angeles, who sent a letter to Chai-Onn on Sept. 8, noting that the lack of invoices from Valeant indicated to him that one of two things was happening: Valeant and R&O were being jointly defrauded by someone, or Valeant was defrauding R&O. He suggested they talk it over by phone.

Chai-Onn never responded, and on Oct. 6 Kaufman filed suit, seeking a determination from the court that R&O owes Valeant nothing.

There is, however, a hook, and as these things go, it’s a big one: The Southern Investigative Reporting Foundation has confirmed that Reitz was indeed doing business of some sort through a company called Philidor Rx Services and a man named Andrew Davenport.

Which makes Valeant’s demand letter very interesting.

To understand why, it’s important to understand what Philidor is. To the public, it describes itself as a “pharmacy administrator” and, according to a call service operator last Thursday, Valeant is its only client. Located in Hatboro, Pennsylvania, about 30 miles outside Philadelphia, Philidor noted in its corporate filings that both companies are independent of each other.

The phrase “pharmacy administrator” appears to be, in Philidor’s case, a term of art.

A better description is a “specialty pharmacy,” that fills, ships and obtains insurance approval for prescriptions of the more complex drugs Valeant makes. During its third-quarter conference call last year, the only instance when Philidor has been publicly mentioned by an analyst, Valeant chief executive Mike Pearson said that perhaps 40 percent of its business flows through specialty pharmacies. In July he reiterated the company’s guidance for up to $11.1 billion in 2015 revenue, suggesting that as much as $4.4 billion in product could move through this Philidor channel.

(Note that specialty pharmacies are exempt from reporting the drugs they sell to IMS Health, the tracking service used by companies and analysts to monitor drug sales and inventory channels.)

As is the case with many private companies, the financials of Philidor are hard to come by, but it is unmistakably an operation of some mass, with about 900 employees and its own legal unit. A Pennsylvania state senator posted an April 6 interview with company CEO Andy Davenport in which he stated the company was on track to process 12,000 to 15,000 prescriptions daily by December. With prescription costs regularly running into the hundreds and even thousands of dollars, the company could potentially handle upward of $1.5 billion in product this year.

Here’s a key cog in Valeant’s “patient access” program: Patients referred to Philidor often receive coupons for reduced or waived co-pay requirements (given to the prescriber by Valeant’s sales representatives). And, in turn, Philidor would appear to attempt to recoup the cost of the drug from private insurers or Medicare. Theoretically, this makes price increases less risky for Valeant, given that a sizable population of a drug’s users frequently don’t have the capability to observe them. Still, the patient access program is central to the company’s distribution program, and one of the issues the U.S. attorneys’ subpoenas specifically sought information about.

Philidor’s business practices have generated mixed reviews (at best) on consumer message boards — including numerous instances of alleged unwanted refills and an allegation of the improper removal of HSA funds. Another message board account alleges that to get reimbursement approvals, prescriptions already denied at larger insurers were “pushed through” their sister pharmacies. (To be sure, comments on these sites can be gamed, both by consumers and the company, and the Southern Investigative Reporting Foundation was unable to verify these accounts.)

Several questions remain unanswered: On the assumption that there is $69.8 million due someone, why wouldn’t Philidor’s two in-house attorneys have issued a demand letter to R&O? Similarly, why wouldn’t Valeant’s high-profile general counsel, when challenged, not provide support for his demand and avoid the risk and expense of litigation? Additionally, if Valeant does have some sort of claim to that nearly $70 million, what then is their real relationship to Philidor?

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The Southern Investigative Reporting Foundation was able to uncover Valeant’s financial connection to Philidor — one that it hasn’t disclosed to investors — as laid out below.

The first task was to establish who owns Philidor. What we discovered was indeed revealing, albeit probably not in the way its owners intended.

Put bluntly, Philidor has gone to great lengths to conceal its ownership. Start with a man named Matthew Davenport, the listed principal on most of Philidor’s state registrations; additionally, several states list David Wing, John Carne and Gregory Blaszczynski as officers, and a few more have an End Game Partnership LLP listed as an assistant treasurer.

Given Andy Davenport’s video above, his role as Philidor’s chief executive is clear. Plugging the address of End Game Partnership LLP (which in turn is owned by End Game LLC, a Las Vegas-based entity) from its filings into a search engine turns up a match to a house Andy Davenport owns in Horsham.

A Southern Investigative Reporting Foundation phone call to Philidor’s administration revealed that there is no Matthew Davenport, David Wing, (Edward) John Carne or Gregory Blaszczynski working at Philidor. On the other hand, all four work at BQ6 Media, a pharmaceutical marketing company located about 2.5 miles from the company. At one point, prior to Philidor, Andy Davenport was its CEO. Both BQ6 and Philidor share the same domain registrar, Perfect Privacy LLC. The company’s LinkedIn profile lists 28 employees but the majority are consultants or contract workers, with several listing time spent at Philidor.

The Philidor state registration in North Carolina was particularly helpful in that it listed a broader array of owners than other states.

David Cowen is a former hedge fund manager and Elizabeth Kardos is general counsel for restructuring consultants Zolfo Cooper who are married and own Four Beads LLC; they did not return a message left at their house or reply to an email sent to Kardos. Nick Spuhler is a BQ6 alum who could not be reached, David Ostrow is a physical therapist and golf swing coach who did not return multiple calls to his house and residence, Jeffrey Gottesman is an insurance agent who has a sideline as a competitive poker player; reached on his mobile phone, he declined comment. The address listed for Gina Miller tracked to a code inspection business with no apparent connection to Philidor. Alternatively, a Gina Milner works at BQ6, but it couldn’t be determined if she is involved. Fabien Forrester-Charles of Hatboro, Philadelphia, and Francis Jennings of Naples, Florida, could not be reached, and Michael Ostrow of Bala Cynwyd, Philadelphia, did not return a voice message left at his house. Paula Schuler of Old Greenwich, Connecticut, listed as an owner along with her husband Timothy, said she couldn’t talk at that moment; she never returned two follow-up calls.

It is not readily apparent if there are any specific relationships among group members, beyond the general ties to Matthew and Andy Davenport (according to an online database they appear to be brothers), BQ6 and Philadelphia. One that does jump out is David Cowen and Andy Davenport’s tenure together at hedge fund Quasar Financial between 2004 and 2008; Davenport also donated to the Museum of American Finance, where Cowen is the president.

Not every state looked kindly upon the way Philidor went about securing out-of-state pharmacy operation privileges. California took exception to Matthew Davenport’s attempt to register as Philidor’s principal and rejected the company’s application for a Non-Residency Pharmacy Permit in May 2014. The state’s Department of Consumer Affairs Board of Pharmacy cited a series of disclosure-related problems, specifically his swearing to what was termed “false statement of facts” on the application, several of which involved the failure to disclose Philidor’s ownership group, as well as Andrew’s 27 percent ownership stake.

(A brief aside: Francois-Andre Philidor was an 18th-century French chess master, who wrote a book about it, “The Analysis of Chess.” BQ6 Media is named after the chess shorthand for Bobby Fisher’s legendary move against Russian chess master Boris Spassky in 1972. Another popular chess move is the King’s Gambit Accepted, or as it’s often referred to in chess notation, KGA.)

Establishing the economic connection between Valeant and Philidor was less time-consuming.

As it happens, Valeant has a wholly owned unit named KGA Fulfillment Services Inc., that was formed in Delaware in November 2014. Its only mention in any Valeant filings is that sole line in last year’s annual report. An exhaustive search didn’t turn up any references to it in trade publications, nor state and federal databases. (What the initials stand for, apart from the similarity to the chess strategy, is unknown.)

The Southern Investigative Reporting Foundation found KGA Fulfillment Services listed  as the “secured party” on UCC-1 liens placed this January and February against the members of Philidor’s ownership group. These liens are the public notice that a lending entity may have an interest in the debtor’s personal property. In this case, Valeant/KGA lent money to Philidor’s ownership group, and per the rules is announcing that their equity stakes in Philidor are potentially collateral.

The UCC-1 financing statements for the group are David Cowen and Elizabeth Kardos, Timothy and Paula Schuler, Nick Spuhler, Andrew Davenport Trust, David Ostrow, David Wing, John Carne, Matthew Davenport, Fabien Forrester-Charles, End Game Partnership LLP, End Game LP and Michael Ostrow.

That an important financial relationship exists between Philidor and Valeant’s KGA unit is inarguable; why it exists is much less clear. From the standpoint of rational self-interest, the owner of a rapidly growing business would almost never want to borrow against their equity stake, let alone from the newly launched subsidiary of the enterprise’s sole customer.

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Over several days, since coming across the California lawsuit, the Southern Investigative Reporting Foundation made repeated phone calls to every person or company discussed above. With the exception of Jeffrey Gottesman from the Philidor ownership group and R&O Pharmacy’s lawyer, Gary Jay Kaufman — who both declined to comment — every other person did not return our calls.

Robert Chai-Onn did not reply to a call to his office; a call to a mobile phone registered to his name was answered by his wife, who said she was on the West Coast and was unsure where her husband was at that moment.

Meghan Gavigan of Sard Verbinnen & Co., an outside spokeswoman for Valeant Pharmaceuticals, was unable to secure a response from the company.

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Mr. Schiller’s $9 Million Worth of Reasons to Work Cheaply

Valeant Pharmaceuticals is the type of company that tends to make even the simplest things complex.

The contract of Howard Schiller, its new chief executive officer, is proof of this tendency.

On Jan. 6 Valeant’s board of directors gave Schiller the role of interim CEO; the company previously had an hoc, three-man “office of the chief executive”created on Dec. 28 in the wake of the disclosure that founder and then CEO J. Michael Pearson had taken a medical leave of absence of indefinite duration.

Notwithstanding the fact that Valeant has become the most closely followed company in the capital markets — attributable in part to the Southern Investigative Reporting Foundation’s revelations of its hidden ownership of Philidor — it was reasonable to have expected a filing several days after Schiller’s appointment that disclosed relevant compensation package details.

But that announcement came only on Feb. 1, three weeks after Schiller assumed control.

Schiller’s July 17 separation agreement sheds some light on why he ran a besieged company for over three weeks without an employment agreement in force. Recall that the then CFO resigned in April (after the high-profile Allergen acquisition bid collapsed) to pursue other interests.

The July agreement paid Schiller $2,500 per month for consulting and allowed 100,000 “performance restricted stock units” to vest on Jan. 31, 2016, giving him over $9 million worth of reasons to work (temporarily) for less than the salary of an assistant manager at a fast food restaurant. Each unit converts into one freely tradable share.

Why Valeant would not state that Schiller’s employment agreement would be disclosed after his 100,000 units vested is unclear. An email seeking comment from the company’s public relations adviser, Sard Verbinnen’s Renee Soto, was not responded to.

From a narrow point of view, Schiller’s new contract appears fairly standard; it paid him $400,000 per month for a two-month term ending on March 6. What happens then, however, is unclear. It certainly opens up a Russian nesting doll of questions: Is Michael Pearson seeking to return? If so, will there be disclosure about the root causes of his multi-month absence? If he can’t or won’t return, what criteria is the board of directors using to evaluate Schiller over a 60-day period?

Despite Schiller’s having $9 million in salable stock and a handsome salary on top of that, the money is unlikely to be much comfort for Schiller, given the looming date of his Feb. 4 for his appearance before the House Government Oversight and Reform Committee to answer questions about Valeant’s drug pricing strategy A Feb. 2 memorandum from the committee’s Democrats suggests that Schiller’s welcome will not be a warm one. Containing some unflattering excerpts culled from the more than 75,000 documents Valeant produced in discovery, it shows, among other things, that the company pursued transactions simply for the ability to raise prices. The memorandum did not try to hide the Democrats’ contempt for Pearson, mentioning him eight times in the seven-page document.

Corrections: The initial version of this story misstated the value of Howard Schiller’s restricted stock unit grant and inaccurately connected him to Valeant’s brief-lived office of the chief executive. The story has been corrected and updated. 

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The Curious Case of Mr. Pearson’s 502,996 Shares

On Valeant Pharmaceuticals’ conference call on Nov. 10, embattled chief executive J. Michael Pearson offered several defenses of his company’s internal controls and procedures.

Similarly, in defending both himself and Valeant from the now constant drumbeat of controversy, one of Pearson’s constant refrains has emphasized his commitment to transparency.

A March 11, 2014, Securities and Exchange Commission filing suggests Pearson and Valeant have a long way to go on both of these fronts. Put bluntly, a footnote in a Valeant filing more than 18 months old appears to show how Pearson made a handsome profit through what is referred to as an unspecified “error.”

How handsome? Thanks to a rocketing stock price and corporate opacity, Pearson picked up a block of stock for $20 million less than it was then worth.

(Southern Investigative Reporting Foundation readers will recall its Oct. 19 revelation of the company’s secretive relationship with Philidor, its captive — and soon-to-be shuttered — specialty pharmacy that kicked off this trauma for Valeant. On Oct. 25 a follow-up story was released.)

Let’s start with why this is a truly unusual document for a Form 4, an often ignored class of company filings that disclose corporate insider share purchases and sales. Traditionally, the value of Form 4’s are usually interpreted in connection to a broader context or event, like executives selling into a potential corporate share repurchase or their buying shares because of an improving sales outlook.

In this case, given the unusually heavy weighting Pearson’s compensation plan has toward share price appreciation, a March 2014 Form 4 filing noting his acquisition of 502,996 restricted stock units — shares awarded only when share price appreciation triggers are met — was to be expected given Valeant’s then soaring stock price.

But then take a look at the filing’s footnote No. 2: “On May 24, 2013, the Registrant delivered 502,996 vested performance share units (the ‘2010 PSU Grant’) to Mr. Pearson in error. In connection with Mr. Pearson returning to the Registrant the value of such shares on the date of delivery (plus interest), Mr. Pearson has been credited with 502,996 vested share units to be delivered to him in accordance with the terms of the original 2010 PSU Grant.”

The awarding of 502,996 shares to Pearson “in error” is difficult to imagine for anyone who understands the compartmentalization of a large company.

Valeant is a large, fully-staffed corporation and Pearson’s compensation is closely scrutinized by both its board of directors and lawyers. As such, any clerical error would likely have been immediately caught.

Notwithstanding the error, there is no filing detailing the initial grant. The only mention  of the block prior to March 2014 is found buried in a footnote on page 32 of Valeant’s 2013 Proxy noting that the 502,996 RSUs had met their vesting triggers. Previous RSU grants, especially one for 486,114 shares in 2011, don’t seem to have generated any problems.

What we can say is that this is the kind of mistake that happens all too rarely in the professional lives of most people. On May 24, 2013, the date of the initial–and errant–restricted unit award Valeant’s share price was $84.47; on March 11, 2014, the stock closed at $139.96, a difference of $55.49. According to the footnote, Pearson appears to have rectified the error by writing a check for the “value of such shares on the date of delivery.”

The footnote’s language suggests that “the date of delivery” is May 24, 2013, meaning that sometime before March 13, 2014 — the date of the Form 4’s filing with the SEC –Pearson wrote a check for about $42.48 million (plus an unspecified interest rate) to own a block of Valeant shares that was then worth over $70.39 million, a nearly $28 million differential.

It’s not clear if these shares were part of the block of 1.3 million shares (out of 2 million originally) that Pearson had pledged to Goldman Sachs for a $100 million personal loan. The shares were seized by Goldman last week when he was unable to make an October 30 margin call.

The Southern Investigative Reporting Foundation requested comment from Valeant through Renee Soto at Sard Verbinnen, its outside public relations adviser. She said the company would not comment beyond its previously made disclosures. A follow up phone call was not returned.

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Danny Guy, Derrick Snowdy and the Strange Wars of Confused Men

Derrick Snowdy is probably as close to a celebrity as Canada’s private investigator community has.

Starting in 2010, Snowdy burst into view as a prime mover in the political controversy colloquially known as “the busty hookers’ scandal.”

Snowdy proved to be a quick study at capturing an audience’s attention, ever ready to regale listeners with some of the inside stories from his investigations.

So when Catalyst Capital founder Newton Glassman brought a stemwinder of a defamation litigation in 2017 against a host of hedge fund managers and journalists, it was not surprising to see Snowdy involved.

(Foundation for Financial Journalism readers will recall our two 2018 investigations that looked into the quality of disclosures at Callidus Capital and Catalyst Capital, the two investment vehicles Glassman controlled. In July 2019 Catalyst amended the initial defamation claim to add Bruce Livesey, the article’s co-author, as a defendant.)

After all, given the numerous well-heeled defendants — and their lawyers, many sporting big litigation budgets — the prospects for an investigator with a knack for digging into corporate fraud seemed attractive.

There was just one thing.

A series of filings were unsealed late last week in Catalyst’s litigation revealed that Snowdy had indeed been hard at work on these types of issues for several years. (The filings were made by West Face Capital and the other defendants.)

But it had been for the other side.

So who bankrolled Snowdy’s efforts? A single client: Danny Guy, a veteran Canadian money manager and the general partner of Harrington Global Opportunities Fund.

Meet Danny Guy

Little about the arc of Daniel Gerrison Guy’s career in finance would imply a disposition towards garish conspiracy theories.

After starting in brokerage research in 1993, Guy joined Banfield Investment Management, a then prominent Toronto risk arbitrage fund in the late 1990’s. In 2001, Guy led a buyout of the fund and renamed it Salida Capital. Becoming Salida’s chief investment officer, Guy changed the fund’s investment strategy to a more directional, commodities oriented focus with a heavy emphasis on private equity.

(Salida is Spanish for “exit,” a commonly used term in private equity that means an investment was successfully concluded via a fund either selling an asset at a higher price or to the public through an initial public offering.)

From 2002 through 2007, Salida posted very handsome returns, but in 2008, the one-two punch of the global financial crisis and the collapse of Lehman Brothers, the fund’s prime broker, led to disastrous losses. Though Salida’s performance in 2009 and 2010 was stellar, restoring the fund’s assets under management proved much more difficult, and in 2013 it began to shutter its portfolios.

In 2011 Guy moved to Bermuda, but it is unclear when the Luxembourg-domiciled Harrington Global was formally launched, or if it has limited partners. The fund does not appear to report to hedge fund industry databases.

Snowdy told the Foundation for Financial Journalism that his connection with Guy began when Salida Capital’s then CFO asked him to perform some due diligence on an investment Salida had made that the fund was concerned about.

“It was to look at a company called StarClub. I did some work and determined it was pretty much a fraud,” he said. (StarClub’s product was a software application that purported to help so-called social media influencers track the reach and impact of their endorsements.)

Snowdy continued that he delivered a report and forgot about it until November 2016 when Salida’s CFO called him and said, ” ‘It looks like you were really right on [StarClub] and asked me if I could I help them build a case for a lawsuit.’ ”

Snowdy said in the course of investigating StarClub in 2016 he wore a hidden recording device while posing as a potential investor during a meeting at Goldman Sachs’ headquarters, and he identified and obtained photos of a yacht that StarClub’s founder Bernhard Fritsch allegedly owned. The FBI knew about and approved everything he did, Snowdy said.

In August 2017 federal prosecutors in Los Angeles unsealed an indictment that charged Fritsch with a series of fraud-related counts. The case is scheduled to go to trial in January 2022.

According to the indictment, Guy invested more than $22.4 million of Salida and Harrington Global’s capital in StarClub.

The road to vengeance

Guy’s experience with a pharmaceutical concern called Concordia Healthcare is why he became consumed by the idea of exposing how short sellers operate.

Concordia was a once high-flying company in which Harrington Global had a 2.7 million share stake, at one point amounting to over 5.2 percent of its shares outstanding.

Concordia’s business model was similar to that of Valeant Pharmaceuticals International, in that it used aggressive borrowing to fund purchases of established drugs. The goal was to simultaneously raise drug prices while avoiding costly (and recurring) research and development expenses.

It was a model that worked for a little while.

Unfortunately for both Concordia and Guy, when presidential candidate Hillary Clinton sent out a 21 word tweet on September 21, 2015, everything changed.

Clinton’s retweet of a New York Times article about a series of astronomical price hikes in a drug called Daraprim brought the issue of drug prices front and center in the 2016 presidential race.

And much of that ensuing dialogue centered on how constant drug price increases were forcing brutal sacrifices and trade-offs for many American families.

Congressional hearings soon followed.

A month later Valeant Pharmaceuticals came in for its own reckoning: On October 15 the Foundation for Financial Journalism exposed how the company’s Philidor subsidiary helped it keep certain drug prices artificially high, as well as evade pharmacy ownership regulations.

Concordia, with about $4 billion in debt and reliant on acquisitions to fund the revenue growth investors were demanding, was suddenly hamstrung in its ability to boost prices.

With a business model whose future had suddenly become an open question, Concordia’s share price soon began to slide. Moreover, it attracted numerous short sellers, including Marc Cohodes, an ex-hedge fund manager who uses his twitter account to offer unfiltered, often profane takes on companies he is short.

Starting in October 2015 Cohodes began building a short position in Concordia’s shares. In June 2016 company CEO Mark Thompson sued Cohodes for defamation; Cohodes happily fired back with lengthy letters to U.S. and Canadian regulators in July and August enumerating several ways he thought the company was misleading investors.

In August, six weeks after suing Cohodes, Thompson was subject to a humiliating  margin call, and two months later he quietly resigned. He withdrew his suit against Cohodes soon after.

Cohodes, asked for comment about Concordia, said he was happy to have shorted it, “in the $70 range,” but declined to elaborate more on the experience, beyond noting tersely, “[Concordia] was a piece of shit.”

(A word of disclosure: In 2017 Cohodes made a donation of $344,593.20 to the  Foundation for Financial Journalism. He is discussed further below.)

Guy approached Canadian securities regulators in 2016 to allege that short sellers were depressing Concordia’s share price through illegal trading tactics such as “spoofing” in order to trigger a wave of algorithmic selling. No regulatory action was taken.

Concordia sought protection from creditors in October 2017, and Harrington Global liquidated its Concordia position at an approximately $150 million loss. (After reorganization, the company is now known as Advanz Pharma Corp.)

Sustaining such brutal losses galvanized Guy’s thinking about Concordia’s demise: A cabal of short sellers spread disinformation about the company’s prospects while using illegal trading tactics to pressure its share price.

Central to proving this claim, Guy felt, was obtaining the identities of those responsible for perpetrating the “short-and-distort” campaign on Concordia. His attempts to get the information through hearings with regulators failed because of concerns over privacy.

To that end, Harrington Global petitioned for a Norwich Order — a motion delivered on a third-party in possession of material information — that would have compelled Canada’s brokerage regulator, the Investment Regulatory Organization of Canada, to disclose those names.

But Harrington Global’s request was denied in a 2018 Ontario Superior Court ruling.

In January Harrington Global sued a series of U.S. and Canadian banks in the U.S. District Court for the Southern District of New York. The claim primarily alleges that traders at large banks used illegal tactics that served to manipulate Concordia’s price downward.

Asked about Guy’s views on Concordia’s collapse, Snowdy assessment was blunt.

“I told Danny that [Concordia CEO] Mark Thompson was a lying sack of shit,” Snowdy said.

But, Snowdy continued, “Danny defended Mark Thompson. And then [Guy] would start screaming about naked short sales, Marc Cohodes’ role in all this, and that crap. I told him that [Cohodes] was right about Concordia.”

In a long, rambling letter to West Face’s lawyers in which Snowdy discusses his role in the Catalyst case, he said that his take on Concordia’s collapse antagonized Guy a great deal. On one occasion, when Snowdy was vacationing with his kids in the Bahamas, Guy accused him of being there to only to make secret financial arrangements — the implication being that Snowdy would only have said that because short sellers paid him off.

This darker turn in Guy’s worldview was on display in an April 2018 email to the Ontario Securities Commission. After Guy saw that Greg Boland, West Face Capital’s general partner, looked at his LinkedIn profile, Guy wrote an a threatening email to several OSC attorneys that promised “a fucking war” if short sellers targeted other companies he was invested in, or if anything happened to his family.

[Guy was not the only one being paranoid. In a phone interview, Snowdy related how in 2018, en route to a meeting with Nate Anderson — also a defendant in the Catalyst case — he detected two people following him. This led him to believe that perhaps Anderson’s office had been somehow compromised. Anderson said that in that period his office was at a WeWork, and he didn’t think that being infiltrated by private investigators was a very big risk.]

The Foundation for Financial Journalism repeatedly sought to interview Guy. His conditions — fly to Bermuda and interview him — proved unworkable. In a response to a text message about his opposition to short selling, Guy said, “I have no problem with shorting when it’s done right.”

Penetrating the wolfpack

There was nothing terribly complex about what Snowdy did.

Starting in 2017, Snowdy began posing as a sympathetic, knowledgeable fraud-fighting ally to many of the reporters and short sellers named in the Catalyst claim. More importantly, Snowdy leveraged this nascent rapport to obtain introductions to other investors and forensic analysts who were researching and shorting publicly traded companies.

A big part of Snowdy’s operating methodology was taping phone calls, according to emails he sent; one of his two phone numbers was set to automatically record and was stored on his home computer. That may pose a prospectively large legal headache for him since he described recording California resident Marc Cohodes, and the state’s  laws require both parties to consent to having a call recorded. (Cohodes strongly denied having given his consent for recording.)

The unsealed documents, however, do not specify what information he got from taping Cohodes. When asked about taping Cohodes and the absence of his consent, Snowdy did not reply.

In a recently unsealed, multi-month WhatsApp message exchange between Guy and Glassman, Guy called this strategy “penetrating the wolfpack.” This echoes the theme Guy began enunciating with his angry email to the OSC: Short sellers are dangerous people.

Simultaneously, Snowdy was providing what he overheard — the gossip, the sources, targets and methods – to a small group of corporate executives who felt short sellers were unfairly (or illegally) attacking their companies.

The pay for doing these infiltrations was at least decent.

According to a memorandum of an August 2017 meeting between Snowdy and private investigators working for Catalyst and its lawyers, Guy paid Snowdy $25,000 per month and covered his expenses.

What Snowdy found

What Snowdy told people he uncovered, according to the court filings, looks very much like a version of a common short selling conspiracy trope. It usually follows along these lines: A loose network of short sellers — taking their cue from one individual leader — manipulate the press with misleading information, and then game the greedy or incompetent prime brokerage units at investment banks to allow them to flood the market with improperly borrowed stock. The result is a rapidly sinking share price for any company targeted.

Elements of this idea have been around for decades, but it was not until former Overstock.com CEO Patrick Byrne, during a 2005 presentation he called “The Miscreant’s Ball,” that these disparate complaints about reportorial malfeasance and short selling perfidy were housed in a unified theory.

Byrne claimed a Sith Lord — later revealed to be former Drexel Burnham Lambert executive Michael Milken — was then orchestrating (somehow) much of the dubious short selling activity to his benefit. He also argued that a large group of business journalists were merely transcriptionists for short sellers, and that the miscreants preferred to wage their campaigns in groups.

Snowdy, during a September 2017 meeting where he presented his findings to Jim Riley, former Catalyst COO and general counsel and others, leveled allegations that seemed to check many of the same boxes Byrne had complained about.

There are “puppet masters” that control the network and their connections to shadowy foreign capital, as well as a slew of seemingly nefarious linkages between everyone he named. And for good measure, Snowdy touched upon regulatory capture, a favorite theory of Byrne’s, when he appeared to suggest short sellers had somehow neutralized the Ontario Securities Commission.

For his part, Guy seems to agree with Deep Capture.

Guy sent Glassman a link, and told him that the article will “make your head spin.” (Snowdy, speaking about Guy’s support for Deep Capture in a meeting with Catalyst’s lawyers in September 2017, said that he felt that 25 percent of it was so untrue it calls into question the balance of the work.)

And it ought to be recalled that making these types of allegations can have consequences, especially in Canada, where libel and defamation laws favor the plaintiff.

In 2008, Overstock.com’s Byrne and his then colleague Mark Mitchell published “Deep Capture,” a conspiratorially virulent expansion upon Byrne’s “Miscreant’s Ball” thesis. Altaf Nazerali, an occasional small cap stock promoter depicted in Deep Capture as an international terror finance operative, sued for libel in British Columbia’s Supreme Court. After a lengthy and expensive trial, Byrne, Mitchell and the other defendants lost the case, and in a scathing judgment, were ordered to pay $1.2 million dollars in damages.

Wearing a wire 

One company that appears to have placed great stock in Snowdy’s information is MiMedx Group, an Alpharetta, Georgia-based manufacturer of skin graft and wound care products.

MiMedx filed suit in October 2017 against a series of short sellers, claiming the company had been libeled and that its business prospects were interfered with. A month later, Parker “Pete” Petit, MiMedx’s outspoken founder and CEO, began making public remarks about short selling that were nearly identical to Guy’s.

Petit focused particular ire on Marc Cohodes, accusing him in an October 13, 2017, post on the company’s website of being the ringleader of a short seller “circus” and spreading misinformation. This was baffling in that, as Cohodes put it, “I had never heard of the company until that moment.” (Cohodes also won the fight against MiMedx’s management: On February 23, Petit was sentenced to one year in prison; the COO received the same sentence.)

To get more information on Cohodes and other short sellers, MiMedx’s outside law firm, Wargo French, hired Snowdy. (David Pernini, the firm’s Atlanta-based partner that directed Snowdy’s engagement, did not return a phone call seeking comment.)

Snowdy confirmed that he had worked in 2018 for MiMedx, but that it was not a standard engagement for him. He said that he was doing so within the context of “working undercover” for an unspecified federal agency.

“Any email or report I wrote for [Wargo French] was scripted” by this federal agency, said Snowdy.

Pressed on the identity of this purported agency over several weeks, Snowdy would only say this organization’s mission is, “criminal justice, with the power to arrest people.”

Asked how much MiMedx paid him to report on Marc Cohodes and other investors critical of the company, Snowdy said he didn’t get a dime. When Snowdy was asked why he would work for free, and if that triggered any suspicions at MiMedx, he declined to comment.

Incredibly, this story gets even more unusual, with Snowdy alluding to “settlement terms” in the U.S. and Canada that prevented him from discussing his MiMedx activities.

A call to the FBI seeking comment was not returned.

Vincent Hanna dials in

Guy initiated contact with Glassman on August 11, 2017, via email, and using the pseudonym “Vincent Hanna,” a character portrayed by Al Pacino in the 1995 movie “Heat.”

(In a strange aside, Snowdy, in his letter to West Face’s lawyers, recounted meeting a pair of individuals in a New York office lobby in early 2018 who introduced themselves as “Vincent Hanna” and “Neil McCauley,” the name of the movie’s Robert DeNiro character.)

While Guy used a pseudonym for an additional 12 days, he wasted little time in telling Glassman the names of short sellers he suspected were involved with Callidus Capital’s stock. Ironically, given Snowdy’s role, as well as Catalyst’s extensive use of Black Cube, Guy warned Glassman that private investigators were likely tailing him and that Russian hackers could be trying to disrupt his fund’s operations.

(There has been no suggestion Guy or Snowdy had anything to do with Black Cube’s operations; Snowdy, in remarks to the Foundation for Financial Journalism, said that he believed he was a target of Black Cube too.)

In notes from an August 23, 2017, conference call with Catalyst executives and lawyer’s, Guy — still using the “Vincent Hanna” moniker — continued to frame his objection to short selling along familiar lines: Arguing Concordia was “a dry run” for taking down the much larger Valeant Pharmaceuticals, making allegations of possible Russian and Hong Kong money laundering, speculating about organized crime money at work shorting stocks, and Marc Cohodes.

Glassman was not a fan of Snowdy

The unsealed documents show Catalyst executives and lawyers eagerly anticipating Snowdy’s research, and they afforded him three separate opportunities to present his findings.

But when Snowdy could not — or would not — produce the desired recordings and emails that Guy had assured them his investigator possessed, Glassman became a vehement critic.

Glassman, quoting his lawyer after one meeting with Snowdy, said he provided, “Two and a half hours of interesting but unusable bullshit — and two and a half minutes of food for thought.”

And Glassman appeared especially angry at Guy’s inability to force Snowdy to produce them since any of his work product would belong to Guy as the client.

“Right now [Snowdy] is using u and hurting u badly. U clearly r too stupid or blind to see it,” wrote Glassman.

Snowdy’s evidence, “was less valuable than what my dog’s left for me on my lawn this [morning.]”

All those documents? None of them are real

For six weeks the Foundation for Financial Journalism has been in frequent contact with Snowdy about his work for Danny Guy. Questions begat more questions and Snowdy’s response has never wavered.

He insists that almost none of it happened.

In other words, Snowdy did not work on behalf of Danny Guy to infiltrate any networks, and has not spoken to Danny Guy since “sometime in 2016.”

The Foundation for Financial Journalism showed Snowdy emails between himself and Guy discussing his assignment in April 2018, naming certain reporters and short sellers of interest to Guy and Catalyst.

“Forgeries,” he speculated in a phone interview. “But I can’t really be sure. You would be amazed at the shit I’ve seen go down up here in terms of corruption.” (He was entirely indifferent to a reporter’s speculation that no one would believe a word of what he said.)

What about Snowdy’s prominence in numerous documents written by Glassman’s own lawyers, which a judge – as part of a broader 55 page rulingordered submitted into discovery? Snowdy told the Foundation for Financial Journalism that he did not care to speculate “who got what wrong, or why.”

Snowdy did admit being at the meetings with Catalyst’s Jim Riley and the firm’s outside lawyers, but said he primarily discussed whether Catalyst had a role in some hacking attempts he had discerned on his own smartphone and computers.

Not so strong on the facts

There is a chasm between what Snowdy reported to Guy, Catalyst’s lawyers and investigators, and what can be objectively verified.

Snowdy said that he had worked with Carson Block on his Sino-Forest short and was an attendee at a Christmas party he threw. Block, however, said Snowdy had nothing to do with Sino-Forest — which he shorted in 2011, and which filed for bankruptcy protection in 2012 — and that apart from one breakfast with him in 2015 in San Francisco, he has never met him again.

[In disclosure: In 2020 Carson Block donated $5,000 to the Foundation for Financial Journalism.]

“Over the years, maybe from 2016 to 2018, we used [Snowdy] to help us track down documents on a handful of Canadian marijuana companies [Muddy Waters Capital] was considering shorting. I’m confident that we didn’t pay him over $10,000,” said Block. “And it’s been awhile since the fund worked with him, I can tell you that.”

Snowdy claimed Cohodes asked him to short stocks along side him, that he was invited to stay at his house, and, as “a loyalty test,” that he had been left alone with his son Max, Cohodes’ 33-year-old son with cerebral palsy. Nothing close to that happened.

“My God what bullshit,” said Cohodes.

“None of that happened. The part with Max is maybe the most insulting,” he said.

More stuff that Cohodes said didn’t happen: Having offshore bank accounts — something he denies in full throat — and using Anson Funds (a Canadian money manager named in the litigation) to manage his money.

“I don’t need help from [Anson] to make money,” Cohodes said.

The truth of the matter, according to Cohodes, is that Snowdy came to his house once for lunch. When he traveled to Toronto for business on several occasions, Cohodes said Snowdy drove him around.

For all that, Cohodes said he had been dragged into this controversy despite never having shorted a share of Callidus’ stock.

A personal disclosure and a mea culpa

One thing Snowdy was at least partially correct on: The introduction to Cohodes, an obvious ticket into the broader short seller community — came from me.

So some first person disclosure is called for.

First off: How did I get introduced to Snowdy? Carson Block.

According to Block, in early 2015 Snowdy contacted him out of the blue and pitched him on a story on Canadian Rail. He passed on it but suggested to Snowdy I might find aspects of the story compelling from a journalism standpoint. Block and I spoke briefly about why he passed on the story at the time and have never again discussed the issue.

I shelved the story for months. Later in the year I re-examined the parts of it that I found interesting, and in 2016 I began to report it. As part of that I reached out to Snowdy — there had been no contact between us since the year before — and he agreed to put me in contact with a man he said was his client. The client had a large cache of Canadian Rail documents that emerged from a litigation he was then involved in.

His client wanted to interact in person so I flew to Toronto. Snowdy picked me up and drove me to his client. We had a few meals in transit, and on two of the four days I was in the area, Snowdy gave me a lift to his client, and he discussed with amusement a judge’s attempt to prevent him from speaking about Canadian Rail. The story I wrote in December 2016 was almost entirely informed by my work in those documents.

It turns out Snowdy lied to me about his legal trouble in that case, having received a restraining order in 2014, according to the recently unsealed documents. (I recall looking for a mention of him in the court record and not finding any, but the ruling may have been sealed at the time or attached to a motion I overlooked.)

While driving with Snowdy, he repeatedly discussed his skepticism of Concordia and Home Capital Group, a then troubled mortgage issuer Cohodes was publicly critical of. Snowdy asked me for an introduction to Cohodes. I agreed, sent an email introducing them, and never thought of it again.

What emerged afterwards is personally and professionally horrifying: Cohodes took my word that Snowdy seemed like a regular, well intentioned guy; he proved to be the very opposite of that. Over the course of a few years Snowdy used Cohodes’s name to come into his own house, meet numerous investors and it is a fair bet that any number of the people Snowdy met through Cohodes were surveilled, recorded, and through no fault of their own, may yet have some legal headaches.

Worse, with a connection to Cohodes established, Snowdy eventually got work surveilling him from MiMedx, a company that took fighting short sellers to a new level. The campaign initiated by the company’s ex-CEO was so ugly that even baseless money laundering accusations became forgettable after he leveraged his political connections to a Senator who requested that the FBI visit Cohodes’ house and warn him about a threatening tweet.

And all from my brief email introduction. It is a mistake I deeply regret.

 

 

 

 

 

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Fraser Perring: Chronicles of Deceit, Part I

A high-profile research analyst who identifies and bets on troubled companies has acquired an unusual and perhaps unwarranted amount of influence in the brief period of time he’s been in this line of work.

Forty-six-year-old Fraser Perring, a resident of Lincoln, England, founded and runs Viceroy Research with two other analysts. Their investigations of what they claim are misleading corporate disclosures or flawed business models have regularly sent the stock prices of their targets spiraling downward.

Perring is a short seller who appears to relish the attention that comes from being publicly bearish on companies in a marketplace that seems largely designed to push stock prices higher. And with no client funds to manage (Perring trades only for his own account) and thus few regulatory disclosures to make, he is free to discuss his globe-trotting lifestyle with a reporter or use his Twitter account to launch broadsides against anything that irks him. His Viceroy Research Twitter account has more than 17,100 followers and his personal account has 4,471.

His brash, unapologetic approach to the traditionally closemouthed, insular business of short selling drew significant attention, with Perring snagging an endorsement from the well-known former fund manager Marc Cohodes in a 2018 Bloomberg News profile and striking up dialogues with influential hedge fund managers like Bronte Capital’s John Hempton and Valiant Capital’s Eduardo Marques.

Short sellers rarely pass up an opportunity to critique an executive’s duplicity or accuse brokerage analysts and auditors of compromising their ethics for money. Of course, short sellers need not be saints, but someone who makes his money pointing out the market’s con artists shouldn’t be one himself.

But as revealed by a seven-month investigation by the Southern Investigative Reporting Foundation, Perring is a charlatan of the first order, with a brazen multiyear record of personal and professional deceit. It makes one wonder, If Perring is fudging the truth to reporters about houses and cars, what else is he not on the level about? A lot, it turns out.

Take Perring’s globe-trotting lifestyle. In January, Mail on Sunday reported that he owned houses in London, New York City and Oregon, liked to race supercars and has a Mercedes-AMG valued at 200,000 pounds. It’s certainly a remarkable picture of what Perring had achieved since mid-2012 on Wall Street. But property records and asset searches for both the houses and the car came up empty. Jamie Nimmo, the Mail on Sunday reporter who wrote the article, told the Southern Investigative Reporting Foundation that Perring had been the source of those details.

The first part of this investigation lays out Perring’s erratic and troubling conduct, including some dubious methods to generate interest for his research on stock message boards and his impersonating a well-known hedge fund manager. Part two will examine the real forces backing and benefiting the business model of Perring and many other activist short sellers.

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Born August 5, 1973, in Canterbury, England, Fraser John Perring spent his early years on his parents’ pig farm in Cornwall before heading off to boarding school. He has told people that he attended Nottingham Trent University and studied a prelaw curriculum; the university declined to confirm this, citing privacy concerns.

What Perring did from age 21 to 38 is not particularly well-known, although it included stints as a pub worker and a chef. When asked to provide a copy of his résumé covering this period, Perring refused. And in an October interview with the Southern Investigative Reporting Foundation, his wife Jeannette also declined to discuss his background “out of respect.” She and Perring, who have been separated for years, are “going through the process” of obtaining a divorce, she said.

His parsimony with dispensing the truth can be traced to the summer of 2012 when Perring turned his day-trading hobby into a career.

See more detail in “A Short Foray Into Social Service” on how Perring’s conduct as a social worker gives a hint about his later Wall Street behavior.

Perring focused his efforts on deep-dive research and trading of the many problem-ridden companies listed on the London Stock Exchange’s Alternative Investment Market, or AIM. Launched in 1995 as a way for embryonic companies to access public capital (reminiscent of Nasdaq in the 1980s), AIM by 2012 was less a showroom for promising startups than a lightly regulated twilight zone for penny stocks.

The exchange’s relaxed listing requirements have often attracted companies whose weaker asset bases and modest finances have prevented them from qualifying for more established exchanges. The managements of numerous AIM-listed companies have developed a reputation for being aggressively promotional as they strive to boost their stocks’ share prices. This has frequently presented attractive opportunities for short sellers to await the expected decline in stock prices after companies fail to live up to their promises.

That Perring (or any short seller) would be attracted to AIM-listed stocks is perhaps not surprising. But the way he went about things was.

Ian Hollins, childhood friend

In 2008 Perring created an account with ADVFN, a London-based message board that is popular with day traders. Starting in 2010 he began to frequently post there using the name FJP73 and gradually built up a following through posts that were alternately informal and deeply researched. Then Perring’s posts started to receive comments from someone with the handle Ian Hollins — supposedly his childhood friend and a trader.

Ian Hollins’ posts initially promoted Perring’s ADVFN posts. Sometimes Hollins’ support was subtle and at other points it was downright sappy, like when a Hollins post said about Perring, “I am surprised you waste your valuable time coming on this thread.”

Eventually the posts of Hollins (described in his own comments as a London trader of 18 years who moved to Jakarta, Indonesia, for tax reasons) began to disclose how a good friend (presumably Perring) had provided him valuable advice to “de-risk”  investments.

In April 2013 Perring launched a no-frills stock commentary website Erratic Market Coverage, with Hollins listed as a contributor. While Perring wrote nearly every post, one of the few posts attributed to Hollins touted Perring’s work: Hollins’ April 17, 2013, post referred to Perring’s valuations of gold mining stocks as “excellent” and called him “a far better trader than I.”

(Perring has since reassessed his own trading skills: In the January Bloomberg News profile cited above, he claimed he was not a very good trader. Perring also stated as much in several 2017 and 2018 conversations with the Southern Investigative Reporting Foundation, noting that his poor trading skills led him to work harder as an analyst.)

In June 2015 Perring archived documents on the open publishing platform Scribd that were related to litigation between Churchill Mining PLC and Indonesia (a favorite message board topic for Perring) as well as 23 pages of Hollins’ message board posts on the subject.

A casual ADVFN visitor might not have heavily scrutinized Hollins’ posts but they had an odd timing to them. Hollins’ first posts appeared in August 2010, with only a dozen more added from January 2011 to June 19, 2012. And comments from the FJP73 moniker (of Perring) stopped on Dec. 19, 2010, until 2013. It certainly looks like the hands behind the FJP73 and Ian Hollins accounts were busy doing something else for almost 19 months. Indeed, Perring was busy working as a social worker from Jan. 1, 2011, to June 27, 2012.

But why would the Hollins personage — someone supposedly rich enough to be in tax exile — spend countless hours writing and responding to message board posts about the fate of penny stocks and the machinations of nearly bankrupt companies?

At first Hollins’ message board posts provided support to Perring (by citing virtually identical investments and research views, all while using a writing style like his). But as Perring’s research career began to gain steam and members of his professional circle went from just day traders to including professional money managers on both sides of the Atlantic, Ian Hollins’ presence also changed. This Hollins persona began to surface as a frequent reference point in Perring’s real-life conversations with his colleagues and investors interested in his research.

In this way Ian Hollins’ public profile grew into one of a brilliant commodities trader who had followed the investment counsel of his close friend Fraser Perring and thus reaped a fortune in London only to now live regally in Indonesia. The implication was clear enough: Unlike Perring, mere ordinary day traders lacked a tight working relationship with an ultrarich friend like Hollins.

This past summer London-based hedge fund manager Matthew Earl shared with the Southern Investigative Reporting Foundation how Perring had described a lucrative deal that Hollins had supposedly struck with an Asian mining company — to pay him a 100 million-pound royalty each year. (In interviews, eight investment bankers who specialize in advising energy and natural resources companies said they had not heard of such a transaction, and several of them expressed skepticism that an established mining company would forge this type of a deal.)

“Fraser told me [that Hollins] was a superrich former RBS commodities trader,” Earl said during a London interview in July.

“Hollins was a sort of omnipresent background figure [in Perring’s relationship with me] and Fraser was always discussing how Ian might put some of his own money to work with us,” Earl added.

Fahmi Quadir, a New York–based short seller who had at one point dated Perring, said in an August interview that Perring repeatedly mentioned Hollins and even said he would make an investment in her then-nascent fund Safkhet Capital. Both Quadir and Earl told the Southern Investigative Reporting Foundation that no investment from Hollins ever materialized. (Point of disclosure: In December 2016 Quadir donated $2,000 to the Southern Investigative Reporting Foundation; in August this donation was returned.)

Quadir found that Perring’s persistence in mentioning Ian Hollins started to veer into the absurd. She described in detail to the Southern Investigative Reporting Foundation the following London episode: Perring suggested that she stay in his apartment on a London trip to meet with Eli Gabso, the manager of Sage Global Capital, and Perring.

But after arriving in London, Quadir discovered “Fraser’s apartment” was simply an Airbnb rental that Perring had arranged for her. “Someone’s name was on the mail on the counter and they had their clothes in a closet,” Quadir recalled.

In the morning Perring asked Quadir to tell Gabso that she was staying in Hollins’ place. Quadir said nothing in reply, but resolved that if she was asked, she would tell Gabso the truth. Perring then told her that Gabso was suspicious about whether Hollins existed. (And Perring insisted that he did not want Gabso to know the number of Perring’s properties.)

“It was obvious Fraser didn’t own it; he didn’t know his way around that neighborhood,” Quadir later recalled. “And he couldn’t even help me with the [apartment’s] Wi-Fi or heating. When Eli [Gabso] asked me where I was staying, before I could say anything, Fraser said, ‘at Ian’s place.’”

After searching British property records, the Southern Investigative Reporting Foundation could not find any indication that Perring owned a property in London. In April Perring sold his house in Lincoln, England, for 187,500 pounds and moved to another residence in the same community.

Sage’s Gabso told the Southern Investigative Reporting Foundation in October that Perring had often mentioned Ian Hollins when discussing investments. When Gabso tried to investigate Hollins’ background but found nothing, Gabso asked Perring to provide proof that Hollins was real, only to have Perring change the subject, Gabso recalled.

In response to pointed questions from the Southern Investigative Reporting about Ian Hollins in late September, Perring said that name is an alias he invented to refer to a real friend. Quadir says Perring told her in January 2019 that Hollins died from complications from an enlarged heart. Yet, the Southern Investigative Reporting Foundation found no mention on the internet of an English commodities investor in his mid-40s who passed away that month.

Indeed, Hollins’ posts were what’s popularly called “sock puppeting,” whereby someone posts comments from a fake persona on an internet forum to boost his (or her) own views.

Perring also invoked Hollins in a January 2019 encrypted Signal message conversation with Safkhet’s Quadir. In the exchange, reviewed by the Southern Investigative Reporting Foundation, Perring told Quadir that analyst Kuldip Ambastha of Los Angeles-based wealth adviser Aspiriant LLC, with almost $11.7 billion under management, had recently emailed him asking for his assessment of her money management skills. The message read as follows: “We have looked from afar for a few months but rate your opinion on the basis you have turned us down many times and suspect Fahmi will or charge us a lot. We would be happy with the latter.”

Perring told Quadir that Ambastha had known Hollins well and Aspiriant had made “14x” off Hollins. But the Ambastha email had so many flaws that it’s difficult to imagine that Ambastha, with a decade of experience in the investment management field, could have written it.

Aspiriant, an advisory firm for high-net-worth clients, charges set fees for its services, so it’s unclear what sort of compensation scheme Perring was referring to. And why would Aspiriant, a prospective limited partner in Quadir’s fund, say the fund’s fee structure did not matter? Plus, the claim that Perring had turned down numerous investments from Aspiriant seems highly improbable. If Aspirant (or any financial adviser) allocated client capital to a small research firm with no money management capabilities, this would be a large legal and regulatory risk. And Ambastha’s discussing Aspiriant’s desire to invest in Safkhet in January would be odd since he had left Aspiriant 10 months earlier.

In a September email exchange with the Southern Investigative Reporting Foundation, Ambastha alleged that Perring had fabricated the email query from him about Quadir; he said he and Aspiriant had never sought to invest with Perring or Safkhet.

Ambastha said he had emailed Perring a brief complimentary note in January wishing him good luck after he read his Bloomberg News profile. He said he had once casually corresponded with Quadir two years earlier after he saw her mentioned in a February 2017 Bloomberg News article about short seller Marc Cohodes. (Point of disclosure: In 2017 Marc Cohodes contributed $344,593.20 to the Southern Investigative Reporting Foundation.)

Quadir confirmed that she had received from Ambastha only a February 2017 email. And Ambastha provided to the Southern Investigative Reporting Foundation copies of the actual emails he sent to Perring and Quadir.

Replying to a question about Ambastha’s alleged email to him, Perring wrote in September, “I am unsure of the Aspiriant’s reference but have been contacted by them in the past via [my company Viceroy’s] general email address.”

Misleading a business contact about the amount of property one owns would be childish; deceiving a friend about prospective sources of capital for her newly launched business is a uniquely cruel sort of lie. Both actions speak volumes about a person’s private life. But after Perring became involved with money managers, lying became central to how he operated professionally.

A strained research partnership

In the fall of 2015 Perring secured a big break: Through a mutual acquaintance, he managed to arrange a phone call with Matthew Earl, whose reputation had been made five years earlier as a brokerage analyst who recommended selling the shares of outsourcing providers Connaught PLC and Xchanging.

The purpose of Perring’s call to Earl was to explore a mutual interest in Wirecard AG, a German payments company. Perring had told the mutual acquaintance he felt Wirecard’s shares were sharply overvalued and Earl had just released a report on the company on his fund’s blog, Lordship Trading, and had already shorted its shares. (The Southern Investigative Reporting Foundation reported in 2018 and 2019 on Wirecard’s dubious Asian transactions but without tapping Earl as a source.)

See why the Southern Investigative Reporting Foundation wrote about Perring in “Editor’s Note on Fraser Perring.

Perring’s first call to Earl, which ran roughly 90 minutes, convinced Earl that Perring did not know much at all about Wirecard, Earl recalled. Perring told Earl he was a private investor with a history of shorting the stocks of troubled companies with large market capitalizations.

Despite Earl’s reservations about Perring’s claims of having an esteemed track record, Earl agreed to keep discussing Wirecard with Perring and compare notes with him on an ongoing basis. (Earl recalled that Perring told him that he had been one of the earliest short sellers of Valeant Pharmaceuticals International stock and had been in touch with the Southern Investigative Reporting Foundation during its reporting on the company. The Southern Investigative Reporting Foundation did not, however, use Perring as a source for its reporting on Valeant.)

An odd dynamic emerged as the two conducted research on Wirecard, Earl said in a September interview: When Earl and Perring talked on the phone, “Fraser was often lost and didn’t understand the [financial concepts] behind what I’d uncovered.” But on their Skype chats, Perring would submit very original and polished research, Earl said. In excitement, Earl would then call Perring to expand on what he’d just posted, only to hear him once again struggle to discuss it.

“What was happening was that Fraser found someone similar to me and [he] would just copy and paste their research into Skype,” Earl said. Apparently, Perring had found an analyst willing to provide him copies of his research notes. About two months after Earl and Perring began their collaboration, Earl confronted him about the strange dynamic. Perring admitted that he had a source providing him research work, Earl recalled. Earl said he eventually made contact with this person but declined to name the individual.

Despite their unequal participation in the research process, Earl structured a 50-50 partnership with Perring in an outfit they called Zatarra Research & Investigations; Earl said in a September interview he had reasoned that Perring was reasonably adept on the internet sleuthing front since he was repeatedly surfacing key documents. Zatarra’s business model involved shorting the shares of companies identified by Earl and Perring as troubled and then publicly releasing their findings. Additionally, the two partners figured that as Zatarra’s track record grew, hedge funds might pay a handsome price for its research services. (Earl said that the name Zatarra came from a moniker bestowed on the protagonist Edmond Dantès in the 2002 movie version of Alexandre Dumas’ “The Count of Monte Christo.”)

When asked about Zatarra’s distribution of labor, Perring in an email reply described Earl’s effort as centered on writing, whereas his activity focused on research. This point, when later shared with Earl, made him laugh. “Fraser did some document retrieval and the Zatarra website; that’s it. Everything else was me,” Earl said.

On Feb. 24, 2016, Zatarra released the first of five reports on Wirecard and attracted positive notice from the likes of the Financial Times and Bronte Capital, hedge fund manager John Hempton’s popular finance blog.

Hedge fund managers were soon reaching out to Zatarra to learn more about its work. One fund manager who reached out in late February 2016 was John Fichthorn, the general partner of Dialectic Capital; his New York-based hedge fund then had about $500 million in assets under management and Fichthorn had shorted Wirecard’s shares several months earlier. In a September interview with the Southern Investigative Reporting Foundation, Fichthorn said he had thought it would be productive for him to connect with someone from another fund to discuss the challenge of researching a very complex company. (Point of disclosure: In February 2014, Fichthorn’s Commeo Fidenter Foundation gave $4,950 to the Southern Investigative Reporting Foundation.)

Fichthorn said that his fund Dialectic had only one contact with Zatarra: a meeting with Perring and a member of Quintel Financial Intelligence, an outside forensic research firm hired by Fichthorn in 2015 to dig up and analyze Wirecard’s European and Asian filings.

Yousef Al-Majali, the co-founder of Quintel (now called Oculus Financial Intelligence), recalled meeting with Perring. In an October interview with the Southern Investigative Reporting Foundation, Al-Majali said he provided Perring the research commissioned by Dialectic but was not very impressed with the depth of Zatarra’s work. “I can tell you that based on what I got from the one meeting, [Quintel’s research] was way ahead of them on documenting what [Wirecard] had done,” Al-Majali said.

And according to Fichthorn, the one meeting with Quintel’s Al-Majali was the extent of Dialectic’s dealings with Zatarra. “We never compared notes with [Zatarra]; that’s for sure,” Fichthorn said. In a September interview, Fichthorn expressed astonishment about Perring’s “strange fantasy” that his one meeting with a Quintel representative amounted to a business relationship with Fichthorn.

Channeling a mysterious Ryan Vaughan

Perring, however, represented matters very differently to Earl, according to Earl’s recollection. In June 2016 Perring told Earl what he thought was very good news: John Fichthorn was willing to pay Zatarra 100,000 pounds annually for its research work. To discuss the deal, Perring proposed a three-way Skype messaging chat between Perring, Earl and Fichthorn. Earl agreed and when the time came, Earl logged on — only to find Perring and a “Ryan Vaughan” waiting for him.

In an October interview, Earl recalled phoning Perring to ask who Ryan Vaughan was, and Perring said it was John Fichthorn. Perring, Earl said, told him how the allegedly secrecy-obsessed Fichthorn would regularly use pseudonyms to conceal his identity when discussing investments with people outside his fund.

Earl also recalled that when he and Perring chatted by Skype or sent email, they often referred to other people by their initials for security purposes. Thus to Earl, Perring’s reply of “J” on the Skype chat meant John Fichthorn, Earl remembered.

Perring and Earl had several perfunctory Skype chats with this “Ryan Vaughan” before “I put down my foot,” Earl recalled. At this point, Earl demanded a phone call with Fichthorn.

And the resulting call was surreal, Earl recalled. “It was a horrid connection and lasted maybe a minute,” Earl said. “The speaker had a sort of John Wayne accent. To me, it was obviously Fraser [Perring] pretending to be American. When I tried to ask a question about what was going on, [the call got] cut off.”

After the call, Earl said, he calmly explained to Perring that Zatarra would have nothing more to do with Fichthorn or the Vaughan character without a call to discuss the parameters of their research relationship — and a contract.

Perring, in an email response to the Southern Investigative Reporting Foundation, denied that this whole set of Vaughan exchanges had occurred but recalled that Earl had accused him of posing as Vaughan. And Perring said he and Earl regularly used pseudonyms when conducting meetings about Wirecard, especially when journalists were involved; he did not respond to a follow-up question about who he thought Ryan Vaughan might have been. (For his part, Earl said the only time he did not reveal his identity during this period was during a Der Spiegel interview, in accordance with agreed-upon conditions.)

In August 2016 Earl became angry after receiving a Skype text message from “Ryan Vaughan,” seeking to discuss Wirecard, Earl recalled. Earl refused to engage with this Skype account unless its identity was revealed. Then “Fraser [Perring] called me and told me that Ian Hollins had made the introduction to Ryan Vaughan, who had explained [to him] it was really John Fichthorn,” Earl said.

“What? That’s hilarious,” said Fichthorn, when the Southern Investigative Reporting Foundation shared Earl’s details of the episode. “It’s insane bullshit, but it’s really very funny.” Fichthorn denied that he had ever used pseudonyms in his business dealings and said Zatarra had never had a consulting relationship with Fichthorn’s Dialectic.

In late August 2016 the “Ryan Vaughan” drama intensified, Earl recalled in an interview last week. Perring claimed to Earl that John Fichthorn had given him permission to use a Twitter account @FollowValue1 that supposedly belonged to Fichthorn to send tweets critical of Wirecard. (Twitter later suspended this account for violations of the company’s terms of service.)

In a series of Aug. 26, 2016, Skype messages with Perring, Earl confronted Perring about tweets that this account had sent the previous evening, disclosing the contents of an upcoming Zatarra research note.

“I really don’t believe any of this,” Earl wrote to Perring. “There’s no way [John Fichthorn is] going to give you his Twitter and if so why would you tweet about contents of [a] forthcoming note?”

By way of explanation, Perring said he had gone to a pub, “got tipsy” and sent “some stupid tweets.”

“Wow,” wrote Fichthorn when reached for comment. “That’s fucking excellent.” Fichthorn unequivocally stated no one, including Perring, had ever had access to his personal Twitter account and that @FollowValue1 was not Fichthorn’s account.

For Earl, the August call and Skype messages became the final straw in a series of what he called “inexplicable events” that led him to end his Zatarra partnership with Perring.

But before that, Earl endured what he referred to as “the Vodafone incident,” when Perring, upon returning in July 2016 from a family holiday on the Turkish coast, related a fantastic tale.

An unusual business proposition

That July Perring recounted to Earl that he had just had a chance encounter at his hotel’s bar with Vodafone’s head of mergers and acquisitions, who made over drinks what Perring described as an astonishing — and unsolicited — proposition: Perring alleged that for a 15,000-pound payment, this British telecom executive would leak to Zatarra details of upcoming acquisitions.

Moreover, according to Perring, this executive claimed to have worked out a foolproof way to arrange for the illegal payment for material nonpublic information: First, Perring would sell his older car to this executive for about 3,000 pounds. After a brief period, Zatarra could buy it back from him for 15,000 pounds. Then the executive would provide Zatarra the relevant information. And Perring would theoretically handle all the details of this operation.

Earl’s response to Perring when he learned of the offer? “No, absolutely not,” Earl recalled. Earl said he told Perring that throughout his career he had been fully compliant with Financial Conduct Authority rules, and insider trading was clearly forbidden.

“Even if I wanted to [engage in insider trading], I don’t know that I’ve heard a more cock-and-bull story in my life,” recalled Earl, who added that he still wondered what had prompted Perring to think he might believe his tale.

Perring, when asked about Earl’s recollection, said, “I don’t comment on anecdotes.”

A Vodafone spokesperson did not respond to an email request for comment. (The Southern Investigative Reporting Foundation found no evidence that a Vodaphone executive engaged in this conduct.)

By August 2016 Earl had quite enough of Perring; Earl had already been planning to open what is now his current business, ShadowFall Capital & Research, without Perring. All that remained was for the two men to settle up accounts: Their agreement called for them to produce their trading records and share 50 percent of the proceeds (less expenses) with each other.

But in October 2016 Perring told Earl that he owed Perring 100,000 pounds for what he termed research expenses. In reply, Earl said the only expenses Perring could have incurred were for the design and launch of Zatarra’s website, and Earl asked for related receipts. Perring said he didn’t have any since he had paid for everything in cash. Earl countered that Zatarra’s website designer might have been paid in cash but Amazon Web Services, Zatarra’s hosting provider, couldn’t have been, and the total expenses should not have amounted to 100,000 pounds.

Perring acknowledged to the Southern Investigative Reporting Foundation that he believed Earl owed him a payment for “research services,” but Perring said he did not remember the specific amount.

After the eruption of the expense reimbursement argument (that the two never resolved), Earl thought he had heard the last of Perring.

One day by the school

Just six weeks later, however, Earl received an alarming phone call from Perring, as he later recounted to the Southern Investigative Reporting Foundation. On Dec. 6, 2016, about an hour after Earl had posted a critical analysis of Wirecard on his blog, Perring phoned, saying he had been held against his will right after dropping off his daughter at school, Earl later alleged. Two large men with Eastern European accents had forced their way into Perring’s car that morning and demanded he tell them everything he knew about Earl and Zatarra’s short selling of Wirecard stock. They also, Perring said, wielded pictures they had recently taken of Perring’s family and threatened that they would return in two days: If he did not cooperate then by telling them everything he knew about Earl, Zatarra and the Wirecard shorting, they would hurt him. If he fully cooperated, however, they would pay him 100,000 pounds.

As Earl later recalled, he was virtually speechless: “I was stunned, and all I could do was think to ask him about the police and what were they doing to protect him and his family.”

Yet the more he thought about it, Earl found the tale profoundly strange — that thugs would threaten Perring to obtain information about a man with a fairly high profile, about whom much information was publicly available. Nor did it escape Earl’s notice that the sum of money allegedly offered Perring was was identical to the amount Earl had refused to pay him.

Later that day, Earl called the Lincolnshire Police Department and spoke to the detective chief inspector who had fielded Perring’s complaint about the purported abduction. That call was brief and dull, with the inspector making it clear to Earl that the matter was not a priority for him and he lacked information because there really wasn’t much information to give out.

Whatever misgivings Earl had about Perring’s account, this was not the police response he expected to a claim that thugs had detained and threatened harm to someone in broad daylight right outside a school zone.

Further attempts to gain more information from the inspector ended the same way — with comments like “there isn’t much to say because not much happened.” And other public safety units contacted by Earl did not have any additional information.

While nothing came of the alleged threats to Perring, Earl said at least one aspect about the whole incident rang true to him: At the time, Wirecard was indeed deploying private investigators to surveil both Perring and Earl, according to Earl. “It wasn’t particularly pleasant — cars parked outside of your house at all hours, photographs being taken, friends asking you why someone was ringing them up about you,” Earl recalled. He added that two men from Kroll had delivered to his home a threatening letter from Wirecard’s lawyers.

Several other hedge fund managers who had shorted Wirecard’s stock in the summer of 2016 told the Southern Investigative Reporting Foundation that they observed similar surveillance operations against them and had received legal threats from Wirecard. They shared documents and provided recollections of this activity to the Southern Investigative Reporting Foundation but asked to not be named.

A Wirecard spokesman, FTI Consulting’s Charles Palmer, wrote in response to Earl’s allegations, “Wirecard strongly denies Mr. Earl’s claims. Wirecard, has not, at any point, instructed any third-party to surveil him.”

In a response to a question from the Southern Investigative Reporting Foundation, Perring maintained that the confrontation had transpired exactly as he had initially described it to Earl: “Your question belittles the very serious nature of the crimes that took place against me and my daughter,” he said. “There were several witnesses who came forward following my abduction and an arrest was made. Equipment was seized from the arrested individual.” Perring continued, “Likewise independent witnesses reported the occupants of the car’s suspicious activity. There are other events I cannot currently disclose.”

The Southern Investigative Reporting Foundation inquired with Lincolnshire Police’s media services office about the alleged assault. Lincoln Police Officer Lisa Porter, in an emailed response, wrote that following Perring’s complaint, police had arrested a man on Dec. 6, 2016, but he had been released without any further action taken and the case was now closed.

In a follow-up email, Officer Porter clarified that “without any further action” meant that no charges were filed against the arrested man. She added that documents about the incident were not publicly available and declined to answer numerous questions about the identity of the arrested man.

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Last summer Perring shared a rather unusual WhatsApp message with Fahmi Quadir. In it, he had a note directing his London-based lawyer Dina Shiloh to issue a press release on July 29 that would declare Perring is giving up his public profile because his “pseudo faux public existence” involved misleading those whom he “cares most about” and he does not wish them to be “criticised or trolled for supporting him.”

In September Quadir told the Southern Investigative Reporting Foundation she had remained close friends with Perring despite their having ended their romantic relationship several months earlier. Quadir said she suspected what had prompted Perring to send the message was her recent confrontations with him in May and June about alleged lies he had told her.

Shiloh never put out the press release and it’s unclear if Perring even sent the note to her. In an email reply, Shiloh said all questions should be addressed to Perring.

When asked to comment on the context of his message to Quadir, Perring wrote that he believed the Southern Investigative Reporting Foundation was acting with “malicious intent” in “disclosing [his] personal messages.”

Perring also said he had never shared any messages “that would have damaged [Quadir’s] business or personal image.”

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The reporting in this article, accomplished with a trip to England, was drawn from interviews with 15 portfolio managers and research analysts who have dealt with Perring over the past four years. Many of those interviewed provided corroborating documentation, including emails, notes, and screen captures of texts and comments on encrypted messaging services.

Given the sensitive nature of Fahmi Quadir’s relationship with Perring, this article selected only the information that was backed up by documents. In Earl’s case, this article used only his statements that were supported by documents and corroborated by another person.

Perring’s responses included a series of ad hominem attacks that were completely outside of the scope of this article, and because of this his full set of responses were not included. He chose to not reply to five final questions, terming this investigation “a charade.”

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DaVita Inc.: Warren and Charlie’s Excellent Insurance Gambit

Veteran card players pride themselves on their ability to discern what’s known as “the tell,” a series of involuntary mannerisms that can betray a rival’s strategic deceptions and even suggest a possible next move.

On rare occasions a tell metastasizes into a red flag, a clear indication that something is terribly wrong.

An example of the first is buried deep in a transcript of DaVita Inc.’s annual “Analyst/Investor Day” presentation in New York City.

These meetings were once a love fest for Kent Thiry, the kidney care provider’s colorful chief executive officer, with every year a new opportunity to showcase DaVita’s rapidly expanding earnings per share to an audience of brokerage analysts and portfolio managers. In the fall of 2011 Berkshire Hathaway disclosed it had taken a stake in the company, eventually accumulating just under 38.6 million shares, or 20.2 percent of the company’s public float, perhaps the biggest endorsement a management team can receive.

Shareholders, as the chart below indicates, took a cue from Berkshire and began purchasing DaVita stock hand over fist in the autumn of 2011 at its post stock-split prices in the low $30 range.

Source: Nasdaq.com
Source: Nasdaq.com

 

Those meetings are a little less rosy now, however.

At the May meeting, an analyst asked Thiry how much revenue DaVita generates from dialysis patients whose private (more formally known as commercial) health care insurance premiums are paid by the American Kidney Fund’s Health Insurance Payment Program.

Thiry’s response may be studied by future generations of reporters and investors: “We’re not [and] have not and it would not be in your best interest for us to start providing all sorts of detail on that other chunk.”

The Southern Investigative Reporting Foundation, which is attracted to executive prevarication like a large health care corporation is to a dubious insurance billing gambit — and whose interests assuredly lie in exposing undisclosed risk — took Thiry’s non-answer as a challenge.

After all, a limelight-loving CEO suddenly getting cold feet when asked a basic question about revenue breakdown is a pretty clear “tell” that whatever the answer is, it can’t be too good.

The answer looks terrible for DaVita’s investors. The company’s finances, according to a Southern Investigative Reporting Foundation accounting analysis, appear to be massively levered to an opaque nonprofit, the American Kidney Fund, that may provide up to half of its operating profits. They should define HIPP as a “gravy train,” albeit one perhaps soon to be modified by the word “imperiled” as a combination of civil litigation and regulatory shift poses an existential threat to this cozy relationship.

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The definition of HIPP is unusually subjective, depending largely on whether you provide or receive dialysis, or insure those who undergo it.

To the former, the AKF and dialysis clinics — especially the larger chains — it’s an elegant solution to an end-stage renal disease conundrum of longstanding: With the one-two punch of its steep financial costs and the physical exhaustion emerging from treatment, working is often not an option, and many patients exhaust savings or go deeply into debt to maintain their private health care insurance policies. As a function of that, AKF’s HIPP pays its recipients monthly insurance premiums for the duration of their dialysis treatment.

For the latter, mostly insurance companies offering health care to the public, HIPP is a financial headache of a scale eclipsed only by its sheer evil brilliance.

They argue that in the AKF, dialysis providers created a low-risk gambit that exploits a narrow Department of Health and Human Services provision allowing third parties — that is, themselves — to donate hundreds of millions of dollars tax-free to the AKF. The fund then enrolls patients (primarily from its largest donors) who receive the same quality of dialysis care at the same providers alongside Medicare patients. But because a small segment of patients have HIPP, the dialysis providers — two of whom control almost three-fourths of the market — can bill insurers many times the roughly $250 per treatment that Medicare will pay.

Using DaVita’s Securities and Exchange Commission filings, the AKF’s Internal Revenue Service annual Form 990 filings and a little extrapolation, the Southern Investigative Reporting Foundation estimates that at a minimum, AKF’s support helps generate between 40 percent and 45 percent of the Kidney Care unit’s estimated earnings before interest and taxes, or at least $339.4 million through June 30, after a one-time $526.8 million legal settlement with the Veterans Affairs Department is backed out of its results. For 2016, it was more than $728.5 million.

(DaVita has two units: Kidney Care, providing patient dialysis and related lab services, and DaVita Medical Group, which owns physician practices. The Kidney Care unit’s earnings, given DaVita Medical Group’s consistent losses, are thus the company’s profits.)

What makes the AKF’s role so astounding is that those handsome profits come from a base of about 9,000 dialysis patients, barely more than 4 percent of DaVita’s 194,600 patients.

Last October, in response to insurer outrage over skyrocketing dialysis reimbursement levels on commercial policies purchased from the Affordable Care Act’s Health Insurance Marketplace, DaVita announced that it would no longer support patient applications for AKF premium assistance on those policies.

SoSurces: DaVita and AKF public filings and Southern Investigative Reporting Foundation estimates
Sources: DaVita and AKF public filings and Southern Investigative Reporting Foundation estimates

 

Where DaVita’s own figures weren’t available, conservative assumptions were made, like pegging the growth rate of dialysis patients — historically 3.8 percent — at 1.9 percent through June 30. Given that over 78 percent of the AKF’s $309.8 million in donations last year came from either DaVita or Fresenius Medical Care, the German medical conglomerate that is its primary competitor in dialysis services, the Southern Investigative Reporting Foundation estimated that at least 40 percent of the AKF’s HIPP grants went to DaVita patients.

(Both DaVita and the AKF declined to answer the Southern Investigative Reporting Foundation’s on the number of HIPP recipients receiving dialysis in its clinics, but based on interviews with executives at rival dialysis providers the 40 percent figure was deemed “very conservative.”)

DaVita, in its 2016 Capital Markets presentation, disclosed that privately insured patients are between 110 percent and 115 percent of the Kidney Care unit’s earnings before interest and taxes. To obtain the value of the AKF’s premium support to the company’s profitability, the quotient of the AKF’s commercially insured patients and the company’s commercially insured patients was multiplied by 113 percent.

Seen narrowly, given Thiry’s ownership of more than 2.54 million shares, refusing to discuss the question of AKF’s value to DaVita certainly served his “best interests.” Similarly, as an 18-year veteran of these presentations, he is surely aware that portfolio managers, trained to value a company based on a multiple of its future earnings per share, rarely pay 17 times earnings for a company whose profit growth is slowing and where 40 percent of the operating profit is dependent upon a charity and its circular donor scheme.

Another way to read Thiry’s reticence is as a function of the fact that the AKF relationship is — in the parlance of value investors — DaVita’s sole moat, or a sustainable economic advantage separating it from competitors.

DaVita is an unusual addition to Berkshire Hathaway’s portfolio because its moat isn’t a function of managerial acumen, such as GEICO’s efficiencies (which drive its lower-costs), or the pricing power resulting from global recognition of the Coca-Cola brand. The AKF relationship is a loophole, in the purest sense of the word, made fully legal as the result of a 1997 Department of Health and Human Services advisory opinion permitting donations to the AKF from the major dialysis providers.

Ted Wechsler, an investment manager at Berkshire Hathaway overseeing about $10 billion, didn’t discuss the AKF relationship when he elaborated on his thinking about owning DaVita to CNBC in March 2014.

Ironically, one of Berkshire’s leading lights was blunt with his contempt when offering an assessment of a much higher-profile insurance premium payment gambit at Valeant Pharmaceuticals International during a May 2016 Fox Business News interview.

Charlie Munger, Berkshire’s 93-year-old vice chairman, who has long been a student of what he calls the psychology of human misjudgment, said, “The main thing that Valeant did that was unbelievably clever was to pay the consumers part of the deductible for the drugs they were selling. . . . They paid the consumer share of the deductible and tried to pretend that it was a charitable contribution, when really it was the functional equivalent of bribing the other fellow’s purchasing agent.”

It’s not clear if Munger thinks the AKF is “unbelievably clever” also since he didn’t respond to a request for comment at publication time, but the carve out enabling donations to the AKF did two very important things: It appeared to seal off the fund and the so-called large dialysis organizations — then, as now, primarily DaVita and Fresenius — from prospective kickback allegations. It also enabled both companies to reap the fruits of their multiyear roll-up of competitors.

In a nutshell, insurance companies are required to offer dialysis coverage under network adequacy standards. This is no small matter given that the U.S. government annually spends an estimated $34 billion on dialysis suggesting that commercial insurers — often about 12 percent of the dialysis pool — may spend up to another $5 billion.

The consolidation of dialysis providers and the proliferation of commercial health insurance payors means that in most markets, a patient with end-stage renal disease in need of dialysis might only have DaVita and Fresenius to choose from, affording the company an unusually strong negotiating position.

So how favorable were the deals? The 2017 Medicare base payment for one dialysis treatment is $231.55, although a $250 “blended rate” that takes into account the Medicare Advantage program is likely closer to actual payment levels. For 2016, brokerage analysts estimated that DaVita’s received $1,050 per treatment from commercially insured patients. Even with 88 percent of their patients on Medicare or Medicaid, blended revenue of $346.98 (per treatment) through June 30 led to a 27.4 percent EBITDA margin.

Remarks from Thiry in January at the J.P. Morgan health care conference in San Francisco shed light on how some of these commercial contracts came to be so lucrative.

In a word: outlier contracts.

Seemingly unaware the microphone was still running, at about the 23 minutes 20 seconds point Thiry said that a few commercial insurers this year became aware that their dialysis contracts were so far above market that they chose “to do dramatic things” and “crash and burn” rather than quietly renegotiate. Fortunately, he said, “we’ve had those kinds of contracts for 17 years” and that there “are still a few” of these sharply above market contracts in place.

Source: DaVita Inc. filings
Source: DaVita Inc. filings

 

Having a few outlier contracts in force adds up, and quickly: Assuming three dialysis treatments a week for one patient, that $8oo daily differential between commercial and government reimbursement becomes $9,600 in a month and over a year, $115,200.

DaVita’s business imperative thus becomes simplicity itself: obtain as many commercially insured patients as possible, a plan congruent with its insistence that at current Medicare rates they lose money on 88 percent of their patients.

Enter the AKF.

As gambits go, the AKF relationship is tactically a stroke of genius: the donations to the foundation are tax-free and given an estimated break-even threshold of $250 per dialysis treatment, DaVita’s ability to collect over $1,000 per session generates a heroic return on its capital.

The connection between the HIPP program remaining in effect exactly as it is and the happiness of DaVita shareholders is essentially the union of two sets — should HIPP be curtailed, or a hard cap of two or three times the Medicare rate be placed on commercial insurance payments, its investors could see earnings per share cut in half.

What’s remarkable about this daisy chain is that the AKF only has one condition to satisfy. In the 1997 opinion, the HHS stipulated that the AKF had to make the HIPP program available to qualified patients with end-stage renal disease, and as part of the evaluation process, were forbidden from using the level of support given the foundation by the patient’s dialysis provider as a criteria.

A growing chorus of voices, however, are alleging that the AKF has not lived up to this obligation.

A New York Times investigation last December described social workers at independent and smaller dialysis organizations as having difficulty in obtaining AKF grants for their dialysis patients. In several instances, according to the Times, social workers said that their patients weren’t eligible for HIPP because of their clinic’s inability to donate.

Additionally, a St. Louis Post-Dispatch story last October cited internal DaVita emails in which dialysis clinic-based social workers appear to have been prompted to steer dialysis patients to commercial insurance policies, away from Medicare and Medicaid.

The relationship between DaVita and the AKF prompted the U.S. Attorney for the District of Massachusetts to issue a subpoena to the company in January.

Dr. Teri Browne, a professor at the University of South Carolina’s College of Social Work, told the Southern Investigative Reporting Foundation that as a 10-year veteran of clinic-based nephrology social work for Fresenius and Gambro Healthcare (a company DaVita purchased in 2004), that DaVita patients were encouraged to leave government insurance for commercial plans solely to improve dialysis revenues. In her view, she felt that this was distorting the mission of the social workers to deliver the best information for the dialysis patient.

(Last September, in response to a Centers for Medicare & Medicaid Services request for Information from end-stage renal disease stakeholders on whether patients were being inappropriately steered to Marketplace plans, Browne filed this statement alleging that this practice was occurring on a regular basis, especially at large dialysis organizations.)

Referring to the current debate over whether DaVita is using donations to the AKF to boost its revenues, Dr. Browne said that as she interpreted it, “The 1997 [HHS] ruling was originally written to help people with the supplemental charges in Medicare and Medicaid plans.” She noted, “Based on what I from interviewing dialysis patients, and what my email listserv [of nephrology social workers] is discussing daily, steering patients away from Medicare is now a closely tracked part of their business.”

And “no one is saying that the AKF or its policies are all bad,” she said, “but [the fund] is [incentivized] to expand clinic-centered dialysis. The large dialysis organizations, who give the fund most of its money, are the obvious beneficiaries.”

Asked what the biggest concern she has with the state of dialysis today, Browne argued that dialysis patients switching to private plans from Medicare/Medicaid are often put at major financial risk should they get a transplant. (The AKF’s premium assistance doesn’t cover transplants.)

“Higher premiums and co-pays are the patient’s obligation if they get a transplant,” said Dr. Browne, who added “patients can harm their listing eligibility for transplants by switching.”

Both the AKF and DaVita have strongly denied, to the Southern Investigative Reporting Foundation and other press organizations, any linkage whatsoever between donations and HIPP enrollment. The AKF said it has taken a series of steps to clarify its policies rejecting any quid pro quo, and it submitted this statement to the CMS last September in defense of its practices.

DaVita’s Thiry, in a Sept. 17 question-and-answer session at a R.W. Baird conference, defended premium assistance as functioning exactly as intended, with everything “totally above board,” while acknowledging “[HIPP is] precipitating quite a political football.”

Thiry also used the R.W. Baird conference as an opportunity to defend the broader concept of switching to commercial insurance, describing the coverage offered dialysis patients as being “vastly superior” to Medicare/Medicaid. (There is no data to suggest that private payers have any better clinical outcomes with dialysis than those on Medicare or Medicaid.)

DialysisPPO, a Malvern, Pennsylvania, dialysis consultancy that offers insurance plan and third-party administrators guidance in reducing dialysis costs, published a November 2016 white paper that argued a line broadly supportive of dialysis provider practices:

“When you lose money on 75% of your volume, you have to make extraordinary profits on the remaining minority. On average, our clients are charged 2,100% of the Medicare allowable amount for the same services. The average monthly charges for each [end stage renal disease] patient is $67,000 across our client-base. It is not unusual for monthly dialysis charges to exceed $85,000.”

Sarah Summer, associate general counsel and director of state policy for Blue Shield of California, took the opposite tack in this interview, claiming that “inappropriate third party payments” via AKF HIPP grants were part of “fraud gaming abuse” imperiling the health of insurers in the ACA Marketplace. Her arguments were amplified in Blue Shield’s Request for Information filing last September. Elaborating on the massive costs the San Francisco-based insurer alleges are shifted upon them, its statement described dialysis providers as using the AKF for “payment arbitrage” to capture up to $170,000 in payments per patient.

Blue Shield of California also stated that the burden of HIPP costs make it nearly impossible to remain economically vital: “Assuming a one percent operating margin for Blue Shield, it takes 3,800 members enrolled for 12 months to make up for a single dialysis patient enrolled by the American Kidney Fund.”

Notwithstanding the very real complexity of treating kidney failure, the fact of the matter is that DaVita made over $1.8 billion last year and its filings show that it hasn’t seen a sub-25 percent operating margin in ages. Those profits, common sense would suggest, come from its ability to push prices ever northward. The New England Journal of Medicine’s Catalyst blog, in an article in June, referenced a 2012 study from a trio of healthcare economists who, in analyzing the effect of competition on the quality of dialysis care for the National Bureau of Economic Research, found that’s pretty much what’s going on.

According to these economists, “average spending for DaVita and Fresenius patients rose about 50% from 2005 to 2009, to about $120,000 annually. Spending for dialysis patients in Medicare rose about 20% during that time, but reached only about $60,000 a year.”

More importantly, statistically speaking it doesn’t seem to matter who pays for treatments since U.S.-based dialysis patients face odds that are measurably slimmer than their peers across the globe. According to the University of California San Francisco’s Schools of Pharmacy and Medicine’s Kidney Project, as many as 25 percent of U.S. dialysis patients die in the first year of treatment, and only 35 percent survive as long as five years. The figures are even more stark when compared to a five year mortality rate of three percent for transplant patients.

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The commercial insurers are not sitting on their hands and have taken to the courts to begin the work of pressing their interests, which mostly center around filling in DaVita’s moat.

The first shots were fired in a lawsuit filed last July when UnitedHealthcare of Florida sued DaVita competitor American Renal Associates.

Given that UnitedHealthcare’s primary line of legal attack is to frame the relationship between American Renal Associates and the AKF’s HIPP as a dubious “pay to play scheme” designed only to drive dialysis provider profits and not improve lives, the possible implications for DaVita and its interests are clear.

UnitedHealthcare alleges that the AKF’s administration of HIPP left little to the imagination about how little the fund adhered to the intent of the 1997 Department of Health and Human Services ruling, pointing to its “HIPP Honor System” whereby in the event dialysis providers were unable to “make fair and equitable contributions [to the AKF], we respectfully request that your organization not refer patients to the HIPP program.”

Through last autumn, UnitedHealthcare alleges in an exhibit attached to a filing made in June, this policy allegedly connecting HIPP grants to dialysis provider contributions was posted on the AKFs website.

Aetna is taking a different approach to addressing its costs from the AKF’s HIPP grants, at least for now. In April, it sued DaVita in Pennsylvania’s Montgomery County Court of Common Pleas to enforce what it claims are provisions in its contract with the company that allow it to examine data related to AKF HIPP grants awarded to Aetna members.

DaVita, naturally, disagreed that the contract has that provision and claimed that Aetna hadn’t followed the proper dispute resolution procedures. On the second-quarter conference call in May, Javier Rodriguez, the DaVita executive who runs its Kidney Care unit, told analysts that Aetna’s request was denied.

This isn’t the full picture of where things stand between Aetna and DaVita, though.

A Montgomery County judge rejected the emergency component of Aetna’s request but the balance of its litigation was left to proceed, a state of affairs Rodriguez termed “working with Aetna.”

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Spokeswomen for both the AKF and DaVita declined to make executives available for phone interviews but provided written replies to emailed questions. DaVita was provided with the model used to determine the connection between AKF HIPP grants and its profitability, as well as the clip of Thiry talking at the J.P. Morgan conference. While dismissive of the Southern Investigative Reporting Foundation’s questions as biased, a spokeswoman declined requests to elaborate on what, if anything, was incorrect.

Corrections: The original version of this story carried an incorrect number for DaVita’s U.S. patients. According to the company’s third-quarter 10-Q, it is 194,600 not 214,700. Additionally, a reference to a published report that provided an inaccurate estimate of the combined Fresenius and DaVita market share was deleted.  

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BofI Federal Bank: Disclosing Little, Saying Less

BofI Federal Bank’s disclosure practices seem baffling at best if the standard it’s judged by is how well it informs investors about developments that could potentially change the risk profile of their capital.

In fairness to BofI, the key word here is “baffling” since the laws governing U.S. corporate disclosures have few bright lines and a great deal of murkiness.

As Steven Davidoff Solomon noted in a New York Times column, the Supreme Court upheld in 2011 a previous ruling that if “disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available,” a public company’s failure to reveal certain information is considered “material” and could potentially subject it to civil and criminal investigation.

Left unsaid is the fact that companies may have their own opinions on who’s a “reasonable investor” and what he or she might consider “significant.” Hint: Companies often find ways to claim news that would prompt probing phone calls from investors and reporters isn’t significant enough to merit disclosure.

So, for example, Valeant Pharmaceuticals International went out of its way to tout its January 2013 hiring for its executive management team a former Medco Health executive Laizer Kornwasser. Valeant listed him on the company’s proxy statement and gave him a wide-ranging mandate, including oversight of its new relationship with a company called Philidor Fulfillment Services. When Kornwasser left in July 2015, however, the company didn’t say a word.

Accountants have long used a rule of thumb that if not the law is widely accepted as a fair guideline for materiality: If a company misreports a metric by more than 5 percent, that’s material and should be disclosed.

These already muddy waters turn pitch black when it comes to a company’s obligation to disclose regulatory investigations, said Tom Sporkin, a former Securities and Exchange Commission supervisory official now in private practice at Buckley Sandler LLP.

“There’s no hard and fast rule about disclosing an SEC investigation,” he said, noting that companies often retain a separate attorney to advise their general counsel on what should be disclosed. “Where materiality comes into play is if the investigation is centered on a key [officer] like the chief executive or the prospective financial liability threatens its operations, but presumably the subject would consider that.”

Sporkin, whose father Stanley Sporkin was a former SEC chief, added that the SEC tends to avoid weighing in on this issue apart from when “the public interest is clearly served,” such as in the case of a breach of a credit card company’s sensitive consumer information databases.

So BofI has a great deal of latitude about what it can tell investors. Some of the issues the bank’s management seems to think investors needn’t be bothered with are at least two regulatory probes.

Multiple former BofI employees told the Southern Investigative Reporting Foundation that within the past six months they had spoken at length to the Department of the Treasury’s Office of the Inspector General about BofI’s loan document preparation and how information about some of this had been presented to regulators. (These individuals refused to speak on the record, citing ongoing contact with the Treasury Department’s inspector general office as well as fear of legal reprisal. They said they had not had any contact with short sellers or lawyers suing BofI.)

An investigation does not suggest that the Treasury’s inspector general’s staff — which often works with the Department of Justice — would conclude any wrongdoing occurred. As of publication, BofI had not responded to a request for comment.

In March the New York Post reported that the Office of the Comptroller of the Currency, BofI’s primary regulator, is investigating whether foreign nationals had the proper tax identification prior to obtaining loans from BofI. The bank’s chief legal officer, Eshel Bar-Adon, referred to the Post report as “silliness” and said the company’s CEO Gregory Garrabrants had previously addressed these allegations. The bank hasn’t been charged with any wrongdoing.

To John Gavin, who runs the Probes Reporter, a Plymouth, Minnesota–based research service that uses Freedom of Information Act requests to detect ongoing SEC investigations, the question of whether BofI is being investigated was settled on May 25. That day Gavin received a notice from the SEC’s Freedom of Information Act officer denying his request “for certain investigative records” involving BofI because “releasing the withheld information might reasonably be expected to interfere with ongoing enforcement proceedings.”

Ordinarily, Gavin said in an interview, he would have been content to leave it at that. But he saw, via another FOIA request, how BofI executives were using FOIA to learn the identities of other individuals seeking information on the bank.

On Aug. 30 Gavin posted an article on Seeking Alpha correcting assertions by BofI CEO Garrabrants and Brad Berning, an analyst with Minneapolis-based brokerage Craig-Hallum, that market chatter about a possible SEC investigation of the bank was groundless. A few months ago, on Feb. 28, Gavin released a report asserting his findings of an ongoing investigation.

(In July 25 Craig-Hallum’s Berning had published a report, citing his Freedom of Information Act work as the basis for dismissing claims of an SEC investigation. Two days later, however, Gavin pointed out that Berning had received a notice from the SEC’s FOIA officer identical to what Gavin had received on May 25. This didn’t prompt Berning to re-evaluate his thesis, though. In a Aug. 31 note, he listed a series of reasons for considering the SEC’s FOIA result a “false positive.” Berning didn’t reply to an email and voice mail seeking comment.)

To be sure, as both Gavin and Berning observed, most SEC enforcement probes are closed without any action being taken.

Asked about Gavin’s work, BofI’s outside public relations counsel, Sitrick & Co’s Stuart Pfeiffer replied, “Due to false allegations made in short seller hit pieces and pending litigation, agencies routinely ask questions to assure themselves that such allegations are without basis. However, there are no material investigations that would require public disclosure and BofI remains in good regulatory standing.”

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BofI’s disclosures about the nuts and bolts of its operations aren’t much more substantial than its sharing of regulatory probes, although the hush is stranger because the bank appears to have excellent financial results.

Consider FICO scores, the ratings system of credit strength for borrowers that’s a standard feature in the discussion and analysis of every bank’s lending operations. If a bank has a sizable amount of loans with lower FICO scores on its balance sheet, smart investors need to closely watch reported delinquencies and loss reserves.

BofI has an unusual FICO disclosure policy. The borrower information available for its small but rapidly growing portfolio of automobile and recreational vehicle loans is a model of clarity, telling investors the average FICO score and how much has been set aside to cover possible losses. As of March 31, BofI had a little more than $131 million of these loans on its balance sheet.

On the other hand, BofI doesn’t break out borrowers’ FICO scores for its $3.8 billion worth of single-family home loans. What the bank does disclose, in a veritable river of impressive-sounding mortgage industry jargon, is only marginally helpful in assessing the risk these loans pose to its balance sheet.

Here is an excerpt of what Garrabrants said on a third-quarter conference call in April: “The details of our third-quarter 2017 originations are as follows; the average FICO for single-family agency eligible production was 753 with an average loan-to-value ratio of 66.5 percent. The average FICO of the single-family jumbo production was 708 with an average loan-to-value ratio of 61.6 percent.”

Make no mistake: The single-family home loans Garrabrants referenced carry fine FICO scores, but the vast majority of them were probably sold off to the giant mortgage guarantors, Fannie Mae and Freddie Mac, generating profit for BofI. It would not be surprising if some of the jumbo loans had been sold off to Freddie and Fannie or another banks. In other words, the FICO scores the bank tells investors about tell them the least about balance sheet risks.

Many of BofI’s direct competitors, EverBank and HomeStreet Bank, for instance, disclose the FICO scores of loans kept on their balance sheet. Even Wells Fargo, a vastly larger competitor that’s recently gotten in truly hot water for other things, spent a whole page of its annual report breaking out its borrowers’ FICO scores.

Tamara Taylor, a BofI spokeswoman from Sitrick & Co., said the bank doesn’t disclose FICO scores on its portfolio of retained loans because its officials “aren’t required to.” She said that BofI’s filings break out loan-to-value bands on its single-family loans.

One of the ironic consequences of BofI’s weak disclosure practices is that this has breathed life into its own worst enemy: a small group of anonymous short sellers who plague the bank on Seeking Alpha and on Twitter. If BofI had been more forthcoming, they wouldn’t have been as likely to spend prodigious amounts of time and money to surface what they argue is material information that the bank didn’t want released.

One of these short sellers, whose pseudonym is “Spotlight Research,” posted a December 2014 Seeking Alpha article claiming that the bank was relaxing its documentation standards in making loans to foreign nationals in red-hot markets like Miami and Southern California. As proof, the author posted a BofI account executive’s presentation to mortgage brokers touting the bank’s lending to foreigners as a specialty. (The “Spotlight” author argued that foreign borrowers, who often lack many forms of documentation that are standard for U.S. borrowers, posed an enhanced risk for money laundering violations.)

Garrabrants briefly alluded to this controversy in an August 2015 New York Times article, arguing the foreign lending business line was “nowhere near the majority” of the company’s loans.

A formal disclosure about these type of loans came only two and a half years later during an April conference call, when Garrabrants said that this program now amounted to “15 percent of its jumbo mortgage production.” BofI didn’t provide a dollar value for this business on the call and refused to answer the Southern Investigative Reporting Foundation’s questions about it.

In August 2015 another short seller “The Friendly Bear” posted an article claiming that BofI was doing business with at least one broker who was pitching loans to residents of U.S. Treasury-sanctioned nations like Ukraine and Russia; the author suggested he had reviewed several loans made to residents of these countries in state filings.

Garrabrants, in the 2015 Times article, said that no regulators had raised concerns despite multiple reviews of his bank’s operations. This past April, he told investors and analysts that the foreign loans were of excellent credit quality and that the bank hadn’t sustained any credit losses from them. BofI declined to answer more specific questions about this business.

The Southern Investigative Reporting Foundation located 40 mortgages from BofI to Russian and Ukrainian nationals for New York City and Miami properties. Another 36 Chinese nationals were identified as BofI borrowers, primarily for properties in Southern California.

One of the more interesting borrowers was Vadim Shulman, a Ukrainian national and alleged billionaire who took out a $12.5 million five-year adjustable rate loan in September 2014 from BofI at a 5.25 percent interest rate to purchase a stunning house in Malibu for $25 million.

For a man who’s that rich, the loan is an odd move, costing Shulman about $237, 324.80 a month, and the rate will rise to 8 percent in September 2019.

The Foundation in the News

The Foundation for Financial Journalism, headquartered in Wilmington, North Carolina, has been breaking news and drawing notice around the country.

Find out what these news outlets and broadcasts had to say about the organization, which was formerly known as the Southern Investigative Reporting Foundation:

Real Vision, “The Wirecard Debacle: Shades of Enron and Worldcom,” featuring Roddy Boyd, June 26, 2020

PBS, “Opioids, Bribery and Wall Street: The Inside Story of a Disgraced Drugmaker,” June 18, 2020, with “Frontline” episode “Opiods, Inc.,” which premiered on June 23, 2020

“PBS NewsHour” video segment and transcript, “Drug company executives face prison time for role in opioid epidemic,” Jan. 24, 2020

ABC, “Truth and Lies: Jeffrey Epstein” podcast series, Episode 4 “Friends in High Places,” Jan. 23, 2020, and Episode 5, “The Lady of the House,” Jan. 30, 2020

Real Vision, “Fraud, the Ever Present Story in Corporate Business” with Roddy Boyd, Sept. 27, 2019  

KSFR Sante Fe Public Radio’s “Here and There With Dave Marash,” with guest Roddy Boyd of the Southern Investigative Reporting Foundation, “Insys Goes Down,” July 25, 2019

Stansberry Investor Hour, “How This One Man Non-Profit Took Down an $80 Billion Company,” July 18, 2018

Netflix’s “Dirty Money,” Season 1’s Episode 3, “Drug Short,” Jan. 26, 2018

Nieman Lab, “This former hedge fund guy is a one-man nonprofit investigating some of America’s shadiest companies,” Sept. 18, 2017

Inside Valeant’s Fall,”

Columbia Journalism Review, “The Shadowy War on the Press: How the Rich Silence Journalists,” June 16, 2016

Bloomberg Businessweek, “The Art of the Smear, The Journalist and the Troll: This Man Spent Two Years Trying to Destroy Me Online,” March 16, 2016

Badcredit.org, “9 Finance Journalists You Can Bank On,” March 8, 2016

Adweek’s Fishbowl, “Roddy Boyd Outlines the Beat of Corporate Malfeasance,” A fascinating interview with the brains behind non-profit journalism website Southern Investigative Reporting Foundation (SIRF),” Dec. 18, 2015

LinkedIn Pulse post by Fast Company contributor Katrina Booker, “This financial fraud reporter says he’s the last of his kind. Should the rest of us be worried?” Dec. 17, 2015

The New York Times, “Is Valeant Pharmaceuticals the Next Enron?Oct. 27, 2015

Financial Times, “Saluting the Southern Investigative Reporting Foundation (and also a certain hedge fund blogger . . .),” Oct. 21 2015

University of North Carolina associate professor Andy Bechtel’s The Editor’s Desk, Thoughts on editing for print and digital media, “Q&A with Roddy Boyd of the Southern Investigative Reporting Foundation,” Feb. 4, 2015

Columbia Journalism Review, “Roddy Boyd finds alleged Ponzi schemer: High-wire reporting on a hedge fund gone awry,” Jan. 23, 2014

Columbia Journalism Review, “Roddy Boyd exposes a hedge-fund fraud: A scam for the social-media age,” July 18, 2013

New York magazine,“Is This the Worst Ponzi Scheme Ever?” July 15, 2013

American Journalism Review, “Short on Ethics?” September 2010