Spruce Point Capital Management To Issue A Strong Sell Opinion On The Absolute Worst Investment Opportunity It Has Ever Seen
Q2 2020 hedge fund letters, conferences and more
From the Desk of Spruce Point Founder and CIO Ben Axler:
After 20 years in financial markets, I truly thought I'd seen it all. As a young banker starting my career, I was naive to think that investment banking was an honorable and honest profession and that achieving a NYSE stock exchange listing was reserved only for the best and brightest companies that America was proud to showcase.
The Enron And Lehman Brothers Scandal
I witnessed the Enron (NYSE: ENE) scandal firsthand at the epicenter and watched bankers in the thick of the mess incapable of spotting red flags, and the ultimate fraud, that was being perpetuated right in front of their faces before it collapsed. Perhaps they took comfort in the charismatic CEO Ken Lay and his assurances:
"There are absolutely no problems that had anything to do with Jeff's (CFO Skilling) departure. There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues. The company is probably in the strongest and best shape that it has ever been in."
Later, while working at Lehman Brothers (NYSE:LEH) office in 2008 during the great financial crisis and Barclays integration, the same deer in headlight faces emerged as bankers believed it unthinkable that management could engage in accounting shenanigans (aka Repo 105) to plug a hole in a sinking ship. Perhaps they put too much faith in their charismatic CEO Dick Fuld who just a few months earlier provided assurances:
"Our core business and our strategy are sound. "With this franchise's strength and power, we can go it alone. I believe in the model."
Both experiences left me with a profound mistrust of the financial leadership in our banking system, and inherent skepticism when any business executive tells me everything is great. Finally, my assumption now is that an exchange listed security means nothing more than a bunch of boxes have been checked to meet "listing requirements", fees have been extracted to grease the subservient system, and that limited due diligence has been done by all the parties involved in facilitating the listing.
The Absolute Worst Investment Opportunity
With this in mind, tomorrow Spruce Point will profile one of the worst investment opportunities it has ever seen. Headed by a charismatic CEO with bright optimism about his business, we will explore the hidden side of his career and network that is appears the Company has gone through great lengths to obscure. In conducting our due diligence, we found a reference buried deep on the internet suggesting he is "part of organized crime". We will share with you the findings of our multiple month research investigation and let you decide.
In addition, after carefully reviewing the rest of the management team, we uncovered an inconvenient truth that another key executive has buried very close dealings to a company and the executives of a colossal billion dollar business scandal that was dubbed "one of the greatest unprosecuted frauds in -- history". The stock ultimately collapsed and the company filed for bankruptcy. Ironically, the business has many investment characteristics similar to the Company we'll profile tomorrow.
We will illustrate why we believe this Company is understating its debts and capex, inflating its operating and free cash flow, while restating revenues and EBITDA margins without explanation. Somehow, this Company would like investors to think it has no material weaknesses of financial controls. There is nothing we trust about this Company's financials, and have little faith in its "independent directors", tasked with looking out for all shareholders. None of the directors have any operational experience in the company's industry. Our terminal opinion is that the Company's securities are uninvestible and worthless.
