Gabriel Grego, an acclaimed investigative analyst from Quintessential Capital Management, has claimed another victory for short-sellers around the world. This time around, it was a rather remarkable victory, as the problems with Penumbra have not been his standard fare. Instead of fraud, this time the problem was the company’s Jet7 catheter. The Food and Drug Administration has since recalled the device. However, this far from Grego’s first foray into fraud finding. In fact, he has made a long and profitable career of it.
Grego starts with intense financial analysis when it comes to finding fraud at companies, but he ends up doing quite a bit of legwork in his quest for probing scams.
He sees himself like a police investigator who is trying to find the culprit in a crime. Grego told ValueWalk in an interview that he looks for every possible legal and ethical way to find the information he needs, and it usually requires a lot of out of the box thinking. There is essential information out there and “you need to get off the chair and go get it” since all the information is out there if you look hard enough, he explains.
When I asked Gabriel about why he approaches short selling from such a different perspective than other short-sellers, he said it’s because he has a nontraditional background as a hedge fund manager. Most fund managers work toward their MBA, then get a job at a trading desk, and then finally take a job at another fund and learn various fund manager strategies. Grego has lived in many countries and had a very unique life for someone in the financial field.
“I did many different jobs,” he said. “I have some very peculiar interests and hobbies, so I have an environment that’s very different than the typical hedge fund guy. So when I’m presented with different kinds of problems, what kind of dirt can I uncover? I have a much broader toolkit than someone with a successful, but conventional, career track.”
His hobbies include practicing martial arts. He has had a black belt in karate since he was 16, and he still boxes and practices high kickboxing. Grego even boxed competitively and was a champion in combat sports. He enjoys flying gliders and airplanes and has a license to fly solo. Grego also enjoys theoretical physics and mathematics, his favorite subject. When not shining the light on dubious companies, Grego works on completing a BSE in physics.
Gabriel Grego's Background
Gabriel Grego was born in Rome into a Jewish family and was mostly educated in Jewish schools. He moved to Milan when he was seven and went to a Jewish high school focused primarily on scientific subjects. After graduation, he initially decided not to continue with his studies. However, he later moved to the U.S. and ended up going to Tufts University in Massachusetts.
Grego’s unconventional career track didn’t take him entirely away from hedge funds. He also attended the London School of Economics, and upon graduation, he found a job at a hedge fund. It was a small boutique hedge fund in London, but he was dissatisfied with the work.
“It was one of those shops created in the middle of the dotcom bubble where markets were exuberant,” Grego said. At some point, I said, ‘This is not for me.’ I didn’t want to spend all of my 20s in front of a P.C.”
Time In Israel
Coming from a Jewish Zionist background, he was drawn to Israel.
“I had this ambition or dream to serve in the Israeli army, so I moved to Israel and did that,” Grego said. “I volunteered in a period that looked like there was peace, but by the time I was drafted, it was a challenging period to serve in. I did that for a while and considered pursuing a military career, but decided against that. I was already old relative to the rest of the soldiers.”
He then returned to Italy and got his MBA. After, Grego worked for an Israeli investment bank where he learned the necessary skills of analyzing bank statements and presenting an investment to creditors or investors.
Catching The Value Investing Bug
Although he didn’t like working at the hedge fund, he did start investing for his personal account, and that’s when he began to drift toward value investing. Grego said he caught the “Warren Buffett value investing bug.”
“I was reading everything I could read,” he said. “I went to six Berkshire Hathaway conferences in a row. This was a very good period in my life. Nobody knew me, but I met a lot of interesting people in the industry, and it’s through this path which I witnessed certain presentations. Now we call them ‘campaigns,’ which were the first instances of what I call ‘short activism.'”
Grego attended value investing conferences and learned about how to present a thesis well by watching Bill Ackman and David Einhorn. He also learned about short activism and exposing Chinese frauds from Carson Block of Muddy Waters and Sahm Adrangi of Kerrisdale Capital.
“The wise person tries to avoid the bad and imitate the good in people, and that’s what I try to do,” Grego said. “Imitate or improve upon.”
First Activist Campaign
It wasn’t until the end of 2014 and the middle of 2015 that Grego started working on his first activist short campaign.
“I guess I didn’t have much confidence in the first one,” he said. “If you get lucky, you do the second one with more confidence. Like everything else, this business is a very cumulative business because your knowledge accumulates over time. Your connections accumulate over time. Your quality and brand accumulate over time.”
As he became more confident in his skills, he took on larger and larger targets and had bigger budgets to probe corporate issues.
No Groundbreaking Moments
“It was a slow evolution,” Grego said. “There were no groundbreaking moments. The only fixed things in my activity were certain basic principles, which were never break the law, obviously, and pick targets that are unethical. I never liked shorting a stock and running an activist campaign on a stock because I think it’s overvalued. To me, that never really clicked. To me, the most important thing is that the company that’s the target is doing something very wrong. Deep down, I’m still the same person that I’ve always been, and the most important thing is that I’m doing something useful.”
Grego said he tried to do that while he was in the military, and he tries to do that now. He noted that managing a hedge fund pays better than being in the military. Plus, he is no longer risking his life now (though he risks retaliation from many companies he has targeted). However, to him the money is secondary, or in his words, “a nice byproduct.” Grego said he would probably still be doing what he’s doing even if it didn’t pay as well.
“I love all of them [his campaigns] in their own little way, and at some point, you even start developing some feelings of… fondness is a big word, but some crazy kind of respect for your targets as well because you get to know them very well,” Grego said. “I guess it’s the same thing that would happen to a police inspector that’s trying to catch a thief and has to follow them everywhere.”
ValueWalk also talked to Grego about some of his short campaigns, and he looks back on each of them with fondness.
“It’s a great job, what I do,” Grego said. “It’s a stressful job. It’s a challenging job. It’s a scary job sometimes. It’s a tough job, but it’s great. Each of these stories is a completely new adventure, and even now, remembering these past adventures from two or three years ago, I almost get emotional thinking about it.”
Akazoo, A "Very Clean And Swift Victory".
He described Akazoo as “the fraudulent equivalent of Spotify.” He started that campaign because he had some previous experience taking down Greek companies, including Folli Follie, the fourth-largest company in the Greek market.
Gabriel Grego said an informant at an investment bank reached out to him with rumours that Akazoo could be a fraud. Grego found it to be a “poorly orchestrated fraud,” marketing itself as the Spotify for emerging countries. Akazoo claimed to have about 50 million subscribers, but the real number was one-thousandth of that! In addition, Grego said they were lying on their balance sheet. He started his investigation by completing a financial analysis.
“It turned out that most of the fraudulent assets were in capital expenditures. They were pretending to spend hundreds of millions of dollars buying music. The second thing I always do and think all investors should do when assessing a company is to try to test the product.”
Trying Out Akazoo
He downloaded the app and tried to use it, but got an error message that it couldn’t play in his country. Akazoo claimed to be active in many emerging countries, so Grego devised a way to access the app in those countries. He found that it wasn’t possible to download the app in most cases, and in other cases, it didn’t work.
Grego also tried to access the app using a VPN. Akazoo claimed to be in about 25 countries, but he could only access the app in three or four. He said there was minimal activity and minimal reviews of the app and those reviews were from family members.
He also looks at the auditors of the companies he targets, and Akazoo changed from a little-known auditor to a completely unknown one with a track record of covering up fraud. The Securities and Exchange Commission even sanctioned the second auditor for its role in the fiasco. Grego also found that many of the people involved in Akazoo had played a role in a previous fraud he had targeted.
“Fraud, like any human behavior, tends to be a habit,” Grego said. “Fraudsters are fraudsters, and they defraud. They go from one fraud to another fraud.”
Finally, he went to see Akazoo’s facilities. It claimed to have locations in seven different countries around the world. However, Grego’s team found that almost all those offices did not exist. One of the offices was, in fact, the headquarters of the company’s legal advisors. Grego is known for taking pictures of himself in front of the places where companies claim to have an office, but don’t. The only place he was able to take a picture of himself as part of the Akazoo campaign was in Greece.
The "Crazy Craziness" Of Folli Follie
Greggo started looking at Folli Follie (which means “crazy craziness”), as a long contrarian position during the Greek financial crisis. In 2010, Gabriel was a value investor scouting for cheap stocks, and one of his guiding principles was to look for equities where the market was overreacting due to the macro environment. This involves looking for stocks that are sold off because of their connection to one troubling trend even though they won’t be affected by that trend. In Folli Follie’s case, it was the beginning of the Greek financial crisis. Greece almost brought down the entire European Union and the Greek stocks were being sold en masse by investors.
Grego came across Folli Follie, which was domiciled in Greece, but got 80% of its revenue from China, Japan, and other countries abroud. He described it as “a Chinese or Asian growth story superficially looking like a Greek stock,” so there was no reason for it to be weak. He ended up selling it at a slight loss after a year because the stock wasn’t going anywhere, and he found that the company’s corporate structure was murky.
Returning To Folli Follie On The Short Side
Years later, Gabriel Grego found that the company had weak cash generation and insisted on having their accounts audited by an unknown auditor that employed only two people in Hong Kong. He told Folli Follie to change, but they refused. In 2016, the Financial Times flagged the company as having too many receivables and inventory.
When asked why the firm insisted on using the unknown auditor on a quarterly conference call in 2015, Folli Follie management stated that the two-person company did a good job, was much cheaper, and even did warehouse checks. Grego couldn’t understand how a two-person firm could do warehouse checks on 1,000 Folli Follie shops.
Gabriel initially believed that the main reasons the company was so undervalued were the questions about cash generation and the auditor. Grego wondered why Folli Follie couldn’t invest shareholder money to hire a well-known auditor like PricewaterhouseCoopers, which would give the firm a much higher multiple.
The Folli Follie Investigation
Gabriel Grego listened to the company’s conference calls and didn’t like what he heard. According to Gabriel, he thought the “guy seemed like a big mouth,” and it prompted him to investigate further. After management claimed sales were going exceptionally well in the U.S., Grego used the shop locator on Folli Follie’s website to do channel checks; almost all of them had been closed. The only shop he could find was in the World Trade Center, and the workers said business was terrible and that they were the last remaining shop in the U.S.
Globally, Folli Follie claimed to have 1,000 shops, yet it only had 500 listed on its site. Gabriel’s team called all 500 phone numbers and found only 289 that might have existed. Most of those shops were in Europe rather than Asia. He also picked some of the more prestigious locations to visit so he could photograph himself in front of them to show that the shops didn’t exist. The stores that did exist had tiny windows or tables with a handful of watches; in almost every instance, the shops were in liquidation.
The company was claiming to be growing by 20%. Grego got the final piece of the puzzle by following the advice of Carson Block, another famous short-seller. Grego explains Block’s advice as follows:
“Fraudsters have no problem coming up with B.S. numbers for Western numbers,” Grego said. “They don’t lie in China because the repercussions can be severe. We singled out which subsidiary for revenue in Asia and checked the financial filings in China. What I found was staggering.”
He said the company claimed to have $50 million in revenue in China, but $1.5 billion in the rest of the company. Furthermore, it wasn’t generating any interest, which suggested the cash balances were fake.
Arrest At Folli Follie
“All I did was take all this information, put it together in a nice presentation, and put it together, and the impact was immediate and devastating,” Grego states in a modest tone. “The stock went down 30% on day one.”
The Greek market automatically suspends a stock if it falls 30% in a single day. What ensued then was a back-and-forth of press releases between Quintessential Capital and Folli Follie. They threatened legal action, but regulators quickly understood what was going on. Authorities told the company to redo its audit and show its significant cash balances in Asia.
Three weeks later, Folli Follie couldn’t show its cash balances. As a result, the regulators stopped trading on the stock and a forensic investigation started; 90% of the company’s revenue was fake, and authorities took criminal action against the company’s management.
When ValueWalk asked Gabriel Grego about his investing philosophy, he said he only shorts a company if he is confident in the outcome.
“I only go after what I think are catastrophic situations,” he said. “I only do it if I reach an overwhelming degree of confidence in the thesis to prove it beyond reasonable doubt and only short if I can convince the market I’m right.”
Warren Buffett inspires Grego for his investing mindset, but he looks up to Carson Block as a pioneer of his style of investing. He also respects Nate Anderson and Whitney Tilson, among others in the short-selling sphere.
A Unique Short-Seller
We also asked some other members of the short-selling community what they think of Grego, and they only had good things to say. Marc Cohodes, a shrewd fraud investigator, is a big fan of Grego’s work.
“I enjoy watching his mind work,” Cohodes told me. “I enjoy seeing how he thinks things through with various forms of information. The companies he goes after are all flawed, all have huge social ills, all screw people, in Penumbra’s case, kills people. He’s a very impressive, earnest, nasty operator. I think he will fight to the death.”
Cohodes also has the utmost respect for Grego’s work.
“He’s outstanding, and I feel bad for anyone who’s in his way,” Cohodes added. “He’s not like these guys who shorted on a Monday, write a report on Tuesday, and cover Tuesday night. This guy’s in for the fight. I truly admire that tenacity and intensity and getting the job done and doing it right.”
Sending Flowers To A Male Dancer
Nate Anderson of Hindenburg Research has high praise for Grego’s work ethic.
“He’s both highly competent and highly ethical. And a general pleasure to be around. One of my favorite people in the industry.”
Anderson has a particularly fond memory of Gabriel Grego from prior work the two did together.
When Anderson and Grego worked together on a report about the cannabis company Aphria, they suspected a corporate director of the company was inflating his work credentials. In order to investigate this man further, they needed to locate him at his place of residency in the Bronx. However, there was a small problem; a second man with the same name lived there, too. To verify which man was which, they realized they could match the men’s signatures to that of the directors from the company’s corporate filings in order to determine who, in fact, was the man they were looking for.
Anderson stated “One of the two was an exotic male dancer with plenty of fans who lived [there, too], so Gabriel decided to deliver flowers and chocolate to his place in the Bronx on behalf of a secret admirer, having him sign for the delivery. The signatures didn’t match, and we determined [the director] was the other guy.
“Someone in the Bronx still has no idea who their secret admirer is, but the surprise put a big smile on his face, and it helped us figure out who was who. I don’t know a lot of people who will go to that level in their due diligence.”
Any company that finds itself in Grego’s crosshairs has plenty of cause for concern. He’s always on the lookout for new targets.
This article first appeared on ValueWalk Premium.