Clover Health: The King of SPACs Undoing?
By William Beressi, Analyst at the LSESU Trading Society
Clover Health, a company that went public via a SPAC, has come under fire from the DOJ, SEC and famed short-sellers Hindenburg Research. Hindenburg alleges that both Clover Health and Chamath Palihapitiya (the SPAC sponsor) misled investors over certain aspects of Clovers business.
Clover Health is a Medicare Advantage insurance company which operates in 34 counties across seven states in the US; it also offers proprietary software to doctors.
Hindenburg’s analysis revealed several problems.
Firstly, neither Clover nor Mr. Palihapitiya disclosed to the SPAC investors that Clover's business and software are under active DOJ investigation on at least 12 issues. In Clover’s response to Hindenburg’s report, they acknowledged that they had known about the investigation, but had been told by outside council that the investigation was not material and so was not required to be disclosed in the SEC filing. Since Hindenburg’s publication, the SEC has started an investigation into Clover’s SPAC IPO and the practices surrounding it.
What could this mean for the future of SPACs?
According to the Verge, a huge advantage of SPACs is that the SEC requires less due diligence on the merger than is needed for the traditional IPO process. If any party is found guilty, it will likely set a precedent for future SPAC deals and could lead to increased scrutiny surrounding SPACs.
Secondly, the sponsors of SPACs should come under more scrutiny. Hindenburg revealed that Mr. Palihapitiya’s firm, Social Capital, received over 20 million “founders shares” worth $290 million (as of 03/02/2021), in exchange for promoting Clover Health and $25,000; this creates a misalignment of incentives.
Lastly, Mr Palihapitiya has described the founder and CEO of Clover Health, Mr. Garipalli, as an “absolute proven money-maker”. Yet, Hindenburg revealed that Mr. Garipalli used a web of shell companies to siphon off $157 million from his previous company CarePoint Health, resulting in it being left financially crippled, creating layoffs and forcing a liquidation sale process to new owners (Hindenburg Research).
Clover’s response states that Hindenburg’s questions are ‘rife with ad-hominem attacks, sweeping inaccuracies and gross mischaracterisations’ (Medium). Yet the acknowledgement of a DOJ investigation shows that SPACs should come under increasing scrutiny, in order to stop investors being misled.
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