SPAC Superstar Chamath Palihapitiya Faces Some Awkward Questions

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It’s been hard to miss Chamath Palihapitiya lately. The former Facebook Inc. executive has launched six special purpose acquisition companies [SPACs], he’s an evangelist for Bitcoin and last week he became a cheerleader for amateur investors who bought GameStop shares to teach hedge funds a lesson. (Palihapitiya told his 1.2 million Twitter followers that he’d bought GameStop derivatives, but later he closed the position and donated the profits to charity.)

GameStop shares have collapsed 85% from the peak, leaving some Redditors holding the bag. Unlike some of his young admirers, Palihapitiya can afford such risks. He’s a billionaire, thanks in part to the big cut he gets from the SPACs he raises.

On Thursday, however, Palihapitiya’s Twitter account went quiet just when investors needed to hear from him most. Hindenburg Research published a critical report on Clover Health Investments Corp. alleging it misled investors. Clover provides health insurance for the elderly and is one of the companies Palihapitiya has taken public via a SPAC.

It’s not just Palihapitiya with a lot at stake here. The $828 million raised by his vehicle, Social Capital Hedosophia III, was the 10th largest amount raised by any SPAC in the past year, according to Bloomberg data. Chelsea Clinton is on Clover’s board, and Clover’s venture capital backers include Sequoia and Alphabet’s GV. 

Hindenburg’s central claim is that Clover is under investigation by the U.S. Department of Justice over a range of questionable practices and the investigation wasn’t disclosed to investors.

On Friday Clover said it and Palihapitiya were aware of the DoJ inquiry, which was looked at during the due diligence process. Consistent with the views of outside lawyers, they concluded that the DoJ’s request for information wasn’t material and didn’t require disclosure. Such requests from regulatory bodies are frequent in the health-care industry, the company added — although if I were an investor, it’s something I’d have wanted to know about.

Clover said it doesn’t believe it’s in violation of any laws or regulations related to that inquiry. It said it doesn’t provide gift cards to doctors to generate patient leads, as alleged by Hindenburg, and that the report contained other inaccuracies. Since the Hindenburg report was published, Clover has received a letter from the Securities and Exchange Commission informing the company of its own investigation. 

I expect we’ll see much more of this type of thing as SPACs rush to take relatively immature companies public. I also expect the SEC, under new chairman Gary Gensler, will take a harder look at disclosures. SPACs are securing nosebleed valuations that are hard to justify based on current financials. It’s vital that investors get an unvarnished picture and that due diligence is thorough.  

Hindenburg has targeted SPAC listings before. Its report last year questioning truck start-up Nikola Corp.’s technology led to the ouster of Chairman Trevor Milton. This time Hindenburg isn’t motivated by profit: Perhaps fearful that retail investors might rally in support of Palihapitiya and buy Clover stock, Hindenburg hasn’t put on a short position. Instead, the report concludes with a defense of why short sellers and researchers who scrutinize company finances perform an important service for the investing public and aren’t the enemy. (Clover accused it of “posturing as a white knight.”) 

The mission of Palihapitiya and other SPAC promoters is to convince investors that the usual way of joining the stock market, initial public offerings, aren’t well-suited for many companies. However, when you run an IPO you have Wall Street underwriters who sign off on a listing; with a SPAC merger it’s sponsors like Palihapitiya who do due diligence on the target. Clover was preparing for a traditional IPO last year but opted for the SPAC, in part because it made telling the company story easier, its boss Vivek Garipalli told CNBC last year. (Clover says the IPO wouldn’t have required a disclosure about the DOJ inquiry either.) 

Palihapitiya encouraged retail investors to buy Clover and other SPACs using one-page summaries and five-minute sales pitches on CNBC that turn complicated investment cases into easily digested soundbites. He described it as “one of the most straightforward investments I’ve ever made” and said the value could increase 10 times in 10 years.

Retail investors have bid up the shares of Palihapitiya’s SPACs and that loyal following encourages other start-ups hoping to obtain an attractive valuation to turn to him.

In fairness, Palihapitiya risks more of his own capital than is common in many SPAC deals. But his upside is much greater than the retail investors who invest alongside him because he gets free shares and cheap warrants for setting up the SPAC. He and his partners put about $170 million in Clover. He now controls shares worth more than twice that.  

Investors have been more skeptical about Clover than they’ve been with some of Chamath’s other SPACs such as space-travel business Virgin Galactic Holdings Inc. and home-flipping site Opendoor Technologies Inc. Clover has $900 million in accumulated losses and expects to remain unprofitable for at least a couple more years. For now, almost all of its 57,000 members are in New Jersey and its health plan has an average 3-star rating.

Yet even after a 12% tumble on Thursday, the company is valued at more than $5 billion and trades at a more than 20% premium to where the SPAC sold shares to the public. Palihapitiya’s Reddit fans haven’t given up on him but he and other SPAC sponsors are certain to face a lot more scrutiny in future.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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