Hindenburg Research’s Response To Clover Health

Updated on

Hindenburg Research’s Response to Clover Health Investments Corp (NASDAQ:CLOV): Regular Investors And Senior Citizens Shouldn’t Be the Last to Know

Get The Full Walter Schloss Series in PDF

Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2020 hedge fund letters, conferences and more

We have reviewed Clover Health’s response to our report this morning and appreciate that the market now has significantly more information about the company than it did yesterday.

The company’s response consistently refers to us as “short sellers” but, as a reminder and as we disclosed in our report yesterday, we have no pecuniary interest in publishing our research on Clover, no short position in Clover stock and/or options, nor have we or will we receive any monetary compensation for this work.

The Key Points From The Clover Health’s Response

We published our report yesterday to further discussion in the investment world about Clover Health, SPAC promotion and to underscore the importance of critical research. In that vein, we have identified key points from the company’s response we think investors should know:

1. The only people who didn’t know about the DOJ investigation into Clover were members of the public.

According to the company’s response to our report, Chamath and Clover Health’s corporate insiders – including counsel, underwriters, executives and Chamath himself – knew the DOJ was probing the company leading up to, and during, the time it went public. The only people who didn’t know, it seems, were the investors buying Clover’s stock and the general public.

2. The idea that a DOJ investigation is non-material when Clover Health derives nearly all its revenue from the government is farcical.

No matter how you want to lawyer-speak it, we believe this just boils down to common sense. If Clover Health was focused on simply doing the “right thing” for investors, the DOJ investigation, as “routine” as the company wants to make it appear, should have been properly disclosed to investors.

3. The company clarified that only a fraction of doctors actually use the Clover Assistant, after making claims in its prospectus that “…onboarded physicians are highly engaged, using the Clover Assistant for 92% of their member visits in 2019.” [Pg. 2]

Up until this morning, investors reading Clover’s SPAC prospectus were likely under the impression that the Clover Assistant was such a helpful tool that doctors were adopting it en masse.

Our research indicated that this was not the case, and that Clover appeared to insert the word “onboarded” (without defining it) into its adoption metrics in order give that impression.

In its response this morning, the company admitted that “onboarded” primary care physicians (PCPs), those actually using the tool, account for only 22% of PCPs that sign up with Clover. That number drops to 4% when specialists in the network are added to the total. Clover further stated that an additional 11% of PCPs are waiting to be onboarded.

Assuming this is accurate, investors are now seeing for the first time that nearly 70% of in-network PCPs are not even using Clover’s “disruptive” software solution.

4. Our report highlighted that a Clover subsidiary called Seek Insurance was misleading seniors by claiming to offer “independent” and “unbiased” advice on selecting Medicare plans. Clover Health’s response calls Seek Insurance an “affiliate” that “operates separately” from Clover, despite SEC filings showing it is, in fact, a “subsidiary”.

In our report, we noted that Seek Medicare, which is listed in Clover’s SEC filings as a subsidiary, operates a website that claims to offer “unbiased” and “independent” advice to help seniors pick Medicare plans. The website further insists that it is “neutral” and doesn’t “work for insurance companies.”


We pointed out the conflict of interest and what appears to be clearly misleading marketing, given that the website is owned by Clover, an insurance company offering Medicare plans, with zero disclosure of the relationship.

In its response this morning, Clover refers to Seek Medicare as “an affiliate” and somewhat ironically states:

“What makes Seek different is its fundamental belief that Medicare consumers are simply not well-informed and that hurts their ability to get affordable, great healthcare.”

We completely agree that consumers are not well-informed, which is precisely why seniors should know about the conflict. Furthermore, we hope that Clover Health spells out its relationship with Seek in the big print (not just the fine print), so that potential members can clearly understand it going forward.

Clover’s response also mentions that Seek’s website is still “version 1.0”, and that it plans to release an updated 2.0 version of the website next week. We hope – and suspect – this “update” will include a disclosure about Seek’s relationship with Clover for the first time.

5. The company admits that its Clover Assistant software “resurfaces” old diagnoses annually, even when doctors try to remove them.

One of the major issues we pointed out in our report was how Clover’s software retained old and often irrelevant diagnoses, making it hard or impossible for doctors to remove them. Doctors we spoke with asked why the simple ability to remove a stale diagnosis had not been added to the software.

Such a “feature” creates a painful user experience, according to doctors we spoke with. But the key underlying concern is that the software can facilitate upcoding, leading to unnecessary billing costs and a burden on both the government and ultimately taxpayers.

Clover Health responded by confirming our contention about its software: “We may also resurface a diagnosis the following calendar year for reconfirmation.”

We strongly believe the company needs to publicly commit to allowing doctors to permanently remove old and irrelevant diagnoses.

6. The company admits it “directly” paid approximately $160,000 to B&H Assurance but has not clarified any “indirect” payments and/or payments to Hiram Bermudez’s spouse.

Our report noted that Clover Health had an undisclosed outside relationship with a brokerage company called B&H Assurance run by its head of sales, Hiram Bermudez.

We appreciate the company being forthcoming about the amount of money it has paid to B&H Assurance, and now disclosing that 8,200 members (or roughly 14% of Clover’s total members) were referred by B&H, a clearly material number. We also appreciate the company noting that Hiram does not receive any compensation, direct or indirect, from B&H for any work related to Clover.

However, we note that the company’s response raises additional questions. Specifically, as worded, the company has not clarified whether there have been any historical indirect payments to B&H (i.e. through Ritter Insurance Marketing or other entities). And while we recognize that Bermudez is now a Clover employee, the company has still not clarified whether any payments related to this relationship have been made to Bermudez or his, spouse directly or indirectly, from Clover. To the extent that there are or were any, we would expect this to be disclosed.

7. Clover’s response suggests that its CEO’s previous business, CarePoint, had nothing to do with Clover. This is contradicted by CEO Vivek Garipalli’s own testimony to New Jersey regulators in 2019.

In its response, Clover Health says, “It is important to note that CarePoint is a separate and independent business entity, with different management teams, investor structures, and boards of directors.”

While CarePoint is now separate, the statement conflicts with earlier testimony given by Garipalli himself to the New Jersey State Commission of Investigations as it was investigating allegations of what it termed “significant and questionable management fees paid to related entities” by the CarePoint hospitals.

That investigation revealed that on the very same day Clover was incorporated, one of the majority Garipalli-owned entities that operated the CarePoint hospitals, Sequoia Healthcare Management, took out a $60 million loan connected to the founding of Clover Health:

“Clover Health Investments Corp. was incorporated in the State of Delaware on July 17, 2014 ie. the date the $60 million loan closed. Garipalli confirmed in his testimony that there is a connection between the loan closing and the incorporation of Clover Health Investments. He explained: “We needed to raise outside capital. You cannot raise outside capital as long as the insurance company owed money, so we had to pay off that loan before anyone would invest capital into what became Clover.”

Such ties are the reason NJ legislators, in a letter to the governor in February 2020, called on the state’s Department of Health, Department of Banking and Insurance, and Attorney General to investigate Clover Health.

8. Clover accused us of “posturing as a white knight” by releasing a public interest report.

We found it amusing that the company accused us of posturing as “white knight” altruists for publishing a public interest piece, especially given the comprehensive media tour Chamath has undertaken over the last 3 weeks.

Clover is also, after all, the same company that released an investor presentation calling an investment in Clover’s SPAC a “once in a generation opportunity to do the right thing”.

9. Our report highlighted that Clover Health’s CEO’s previously ran a hospital that charged the highest emergency room rates in the country. Clover responded by calling this fact an “ad hominem attack”.

Our report referenced a New York Times article (and other media reports) that highlighted out how Garipalli’s CarePoint owned a hospital (Bayonne Medical Center) that charged the highest emergency room rates in the country under his leadership.


Quizzically, Clover Health referred to this as an “ad hominem attack” in their response. They do not appear to disagree with the underlying point however, that Garipalli’s hospital network was notorious for price-gouging practices.

We highlighted numerous issues with CarePoint, including how New Jersey legislators accused Garipalli and associates of siphoning $158 million from the hospital network.

Finally, we did not start the discussion about character, though we do think understanding character is important. In fact, Chamath seems to agree. In a podcast just this week, Chamath was asked what common traits are shared by founders of companies he takes public, such as Garipalli. His response:

“I think their moral and ethical starting point, I deeply resonate with. I think that to a one, all of these guys are just incredible human beings. We’ve all had our own struggles, but I see them just live with integrity.” [45:25 mark]