On the evening of Nov 8, 2016, President-elect Donald Trump and his supporters were celebrating his election win at the New York Hilton in Midtown Manhattan. As results poured in, stock market futures were in a free fall because investors were nervous about the incoming president’s policies. Among the guests crammed inside the 24,000 sqft ballroom were many of New York’s best-known billionaires including Wall Street legend Carl Icahn.

Around 2am, with the stock futures projecting a market plunge, Icahn, then 81, quietly left the party and went to his nearby penthouse and started buying call options and stocks. His bet: Trump’s tax cuts and deregulation would help spark a big market rally. That daring middle-of-the-night move earned Icahn a cool billion US dollars in profits.

Carl Celian Icahn was once one of the world’s most feared corporate raiders known for daring leveraged buyouts, breaking up firms and selling their pieces. During the “roaring 1980s”, Icahn took on companies like defunct giant Trans World Airlines or TWA whose routes and other assets he sold off piecemeal and the then oil behemoth Texaco (since merged with Chevron) where he demanded asset sales, higher dividends and aggressive share buybacks.

He teamed up with Wall Street trader Ivan Boesky to build a large stake in Gulf & Western which at the time owned Hollywood studio Paramount Pictures. Boesky was later jailed for insider trading. The era was defined by the late 1980s buyout of RJR Nabisco chronicled in Barbarians at the Gate, a book about corporate raiders like Icahn.

In the aftermath of the 2008 Global Financial Crisis, Icahn re-invented himself as a “shareholder activist” with a reputation for taking stakes in undervalued companies and then unlocking shareholder value by accusing corporate executives of mismanagement on CNBC or Bloomberg TV. He targeted firms like iPhone marker Apple, streaming pioneer Netflix, telecom equipment maker Motorola, PC maker Dell, retailer JCPenney, burger chain operator McDonald’s, insurer AIG, and well as tech giant Hewlett-Packard.

In 2013, Icahn crossed swords with another well-known activist billionaire Bill Ackman of Pershing Square Capital Management over Herbalife Nutrition, a weight-loss and nutrition products firm, which Ackman was shorting, alleging it was a Ponzi scheme. Calling Ackman a “liar” and a “crybaby”, Icahn bet that Ackman would fail and accumulated a 13% stake in the nutrition firm. Ackman lost US$1 billion on his Herbalife trade while Icahn earned over a billion for being on the other side of the trade in Herbalife.

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Earlier this month, Icahn got a taste of his own medicine when another short-seller and activist investor Hindenburg Research unveiled a scathing report about the eponymous Icahn Enterprises LP (IEP), a publicly-traded holding company legally based in Florida’s Sunny Isles Beach. Hindenburg took a short position against Icahn’s listed flagship alleging Icahn Enterprises had used inflated asset valuations and “Ponzi-like economic structures” to move money from new investors to older ones. Hindenburg alleged that Icahn Enterprises’ value is inflated by 75% or more.

Hindenburg’s big shorts

Regular readers might recall I wrote about Hindenburg’s short-selling of India’s giant conglomerate Adani Group a few months ago. As a short-seller, Hindenburg makes most of its money by betting against companies and publishing its research in the hope of moving the market against the stock it is focusing on. Hindenburg has also done scathing reports on fintech giant Block Inc (formerly Square) as well as controversial blank cheque special purpose acquisition corporations or Spacs like Clover Health, sports-betting firm DraftKing, electric truck maker Nikola and EV maker Lordstown Motors.

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On the day Hindenburg published its report, IEP’s stock was trading at a premium of more than 218% to its net asset value compared to billionaire Dan Loeb’s listed flagship Third Point which was trading 14% discount and Ackman’s Pershing Square which was trading 35% discount to its net asset value or NAV.

Icahn struck back days later with a stinging response. “Hindenburg Research would be more aptly named Blitzkrieg Research given its tactics of wantonly destroying property and harming innocent civilians. [His] modus operandi is to launch disinformation campaigns to distort companies’ images, damage their reputations and bleed the hard-earned savings of individual investors,” he noted.

“We believe the self-serving short-seller report published by Hindenburg was intended solely to generate profits on Hindenburg’s short position at the expense of IEP’s long-term unitholders.” Icahn, whom The New Yorker once described as “a pugnacious deal machine, all avarice and swagger”, said that he stood by IEP’s public disclosures.

IEP shares tumbled 43% after the report though they have rebounded slightly. It is now down 37% since May 2 when Hindenburg’s report was first published. IEP stock is down 78% from its late 2013 peak and 42% over the last two years. Icahn’s net worth has fallen from nearly US$25 billion at the peak in 2013 to US$10.8 billion ($14.5 billion) currently. Apart from some real estate and other assets, almost all of Icahn’s net worth is tied to his listed flagship IEP.

Over the years, Icahn had quietly gained the financial establishment’s respect. A Time magazine cover story about him in September 2012 was titled Master of the Universe: Why Carl Icahn is the most important investor in America. Unlike his billionaire peers, Icahn doesn’t own, or indeed even build businesses. He is just an astute stock market trader. There are hardly any institutional shareholders in the firm and in recent years just one analyst, from investment bank Jefferies, has covered the stock. Jefferies also has long been Icahn’s preferred investment bank.

IEP’s main attraction to hordes of retail investors isn’t just piggybacking on Icahn’s flagship but its huge dividend yield. The day the Hindenburg report was published, IEP had a dividend yield of 15.8% — the highest dividend yield of any large company in America with a market value of over US$10 billion. Because Icahn owns 85% of IEP, he receives 85% of the dividend payout.

But here’s the catch: Instead of cash, he receives all of his dividends in units which means the company only needs to pay out only 15% of its total dividend in cash. Why doesn’t he collect cash? Well, for one thing, IEP just doesn’t have much cash lying around to pay for anything, let alone dividends. “The dividend is entirely unsupported by IEP’s cash flow and investment performance which has been negative for years,” Hindenburg alleged in its report.

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IEP’s investment portfolio has lost 53% since 2014, the short-seller noted. “The company’s free cash flow figures show IEP has cumulatively burned US$4.9 billion over the same period,” it said in the report.

Despite its negative financial performance, IEP has raised its dividend three times since 2014. IEP’s most recent dividend increase was in 2019 when it raised its quarterly dividend payout from US$1.75 per unit to US$2 per unit. Ironically, its free cash flow that year was a negative US$1.7 billion. Because it has been burning billions in capital, Hindenburg alleges IEP has been forced to support its dividend using regular open market sales of its units through At-the-market (or ATM) offerings totalling US$1.7 billion since 2019.

Allegations against Icahn

Among other red flags: Overly aggressive valuation marks on less liquid as well as private investments. For example, IEP owns 90% of a publicly-traded meat packaging business Viskase Companies that it valued at US$243 million at the end of last year. Unfortunately, the listed company had a market capitalisation of just US$89 million. IEP’s 90% stake would actually be worth just US$81 million or US$162 million less than what IEP claimed.

Hindenburg alleges IEP’s current NAV was closer to US$4.4 billion or 22% lower than its disclosed NAV  in December last year. Moreover, Hindenburg alleges that IEP has US$5.3 billion in debts at the holding company level while interest rates have risen from near-zero just 15 months ago to over 5% currently. Two-thirds of the debt is coming due over the next three years. IEP’s debt covenants prohibit it from raising new debt but allow refinancing. If IEP does roll over debt as it comes due, it will be at much higher rates.

Hindenburg also alleges that Icahn had pledged more than 65% of his stake as collateral for margin loans for “unspecified purposes”. With the stock down 37% over the past two weeks, Icahn faces margin calls and it is unclear whether he has spare cash to pay back his loans. If the banks sell some of the IEP shares they hold as collateral, the stock will lose even more ground. “We think Icahn, a legend of Wall Street, has made the classic mistake of taking on too much leverage in the face of sustained losses,” Hindenburg noted.

Icahn’s failure to disclose basic details about the margin loans represents a “near-term critical threat to IEP unitholders”, Hindenburg alleged. Icahn “has made a classic mistake of taking too much leverage in the face of sustained losses: a combination that rarely ends well,” the short-seller noted.

Right now Icahn’s biggest concern is whether he could be facing serious criminal charges. The day after Hindenburg unveiled its short position in IEP, the US Attorney’s office for the Southern District of New York began examining the allegations made about Icahn and his firm. For its part, Icahn Enterprises says that it is complying with a request for information on its corporate governance, securities offerings, dividends and due diligence, among other materials, and noted that prosecutors had made no allegations against Icahn or the firm.

Even though he has been investigated over the years for various things including his ties to the infamous Wall Street trader Boesky, Icahn has never been charged with a financial crime. He was last investigated in 2017 after he briefly served as “special advisor” to President Trump on regulatory reforms. Icahn was accused of potential conflicts of interest and questions were raised whether he had acted legally while lobbying Environmental Protection Agency to change rules for refiner CVR Energy in which he had a stake.

These days, Icahn’s reputation as an astute investor is looking a little rusty as well. Icahn claims he made over US$2 billion from his Apple investments. But the legendary stock trader may have sold far too early. Apple shares are up a whopping 650% since April 2016 when Icahn announced he had sold all of the shares he owned in the iPhone maker. Had he held on, his Apple stake would be worth nearly US$30 billion and he would be sitting on US$28 billion in profits.

At 87, Icahn is no longer as nimble as billionaire activist investors like Loeb, Ackman, Elliott Management’s Paul Singer, Trian Fund Management’s Nelson Peltz or indeed newcomers like Ryan Cohen who was involved in popular meme stock GameStop and more recently Bed Bath & Beyond.

For his part, Icahn has said he is not about to retire anytime soon and has vowed to clear his name. “We continue to believe that activism is the best paradigm for investing and my activist investments over the last 25 years have well proved this out”.

A journalist once asked Wall Street’s best-known trader why he was still obsessed with making money when he doesn’t know what to do with what he has already accumulated so far. “It’s just a way of keeping score,” he shrugged.

Assif Shameen is a technology and business writer based in North America

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