Outlining the “Reverse Pump and Dump”

When short seller Gabriel Grego took aim at Aphria, he had a sophisticated plan in place to put significant and rapid downward pressure on the stock price.

His plan was never to make a long-term bet that Aphria was a worthless stock or a fraud.

He put together an investment report filled with selective disclosure and unconfirmed accusations of fraud to spook investors.

Based on public options activity and the lack of fundamental research contained in his report, the end goal for Grego was always to shake out retail investors, profit, and move on as quickly as possible.

In an audio interview from the week before the report’s release, Grego admits his time horizon is only a day or two and he does not wait around for his thesis to play out. (starts at 4:30 in the audio)

The bias is to get out quickly.Gabriel Grego

For the future benefit of regulators and retail investors, Grizzle has broken down all the components of the Aphria short attack.

We have identified the lack of truth and due diligence in the report, in the hopes that future investors will look more skeptically at lightly researched short reports meant to sow doubt and fear among the investor base.

What is a Pump and Dump?

In a typical pump and dump, insiders buy into a stock and then pay others to spread positive news, sometimes true, most times false about the company.

The positive news causes retail investors to buy the stock, driving its price up significantly.

The masterminds of the scheme then sell their shares, netting big gains while driving the stock down at the same time, causing losses for retail investors.

The stock price often goes to zero, as the company is usually a fraud, causing major losses for everyone but the original insiders who drove the pump and dump.

Enter Quintessential Capital Management

Quintessential Capital Management (QCM), led by Gabriel Grego, released a report arguing Aphria is a fraud and its assets around the globe are effectively worthless.

The research report coupled with public interviews and presentations spooked investors, causing the stock to fall 50% over three days.

Based on public options data Grego and his consortium loaded up on options prior to the release of the report and had largely disposed of their position by Dec. 5, two days later.

Cashing out so early indicates even Grego does not really believe in his allegations of fraud and a $0 stock price and was mostly looking to manipulate the stock price lower for personal gain.

This reverse pump and dump caused significant losses for retail investors who are down between 30%-50% because of unsubstantiated allegations of securities fraud contained in the QCM report.

 

Inconsistencies and Lies in the Short Thesis

Grego’s short thesis looked very compelling at first glance, with photos of abandoned buildings, financial filings, audio interviews and video, however, upon closer inspection holes emerge in almost all of the material.

Below is a sample of some of the most serious accusations that were later proven to be false or highly misleading.

Allegations 

  1. The retail store in Jamaica, “Unit #51” does not exist.
  2. The cultivation facility may not exist.
  3. Dr. Janice Simmons, a local doctor, was listed as a director of Marigold Jamaica without her consent.
  4. ABP in Argentina is composed of only a small convenience store and the $11 million of revenue cited by Scythian and Aphria is a lie. True sales are only $430,000.

Truth 

  1.  Grego alleged the store did not exist based on a conversation with an anonymous landlord. In fact, the Sensei retail store was less than 20 ft. away from where the due diligence picture was taken and was clearly visible. Grego posted a tweet admitting the store is real and that he simply did not look very hard for it.

  1. The address for the grow site is available in public documents via SEDAR and was actively harvesting cannabis by the time Grego visited Jamaica in September/October.
  2. Grego pretended he was looking to hire Dr. Simmons and coerced her under false pretenses into signing a document attesting she has never been a director of a company, implying she wasn’t a director of Marigold. In reality, she is a real director of Marigold, and Sythian (now SOL) released a legal document signed by Dr. Simmons as a director to prove it.
  3. ABP owns the only CBD import license in Argentina and distributes pharmaceuticals to multiple pharmacies through its distribution warehouse. Audited financials, viewed by Aphria, SOL, and authors of both parties’ fairness opinions, attested to the fact that ABP generated $10-$11 million of revenue a year since 2014. Grego uses an unaudited comment by an employee to insinuate ABP financials and Scythian public disclosures were fraudulent.

Where Is the Financial Analysis?

Looking at past short reports by Grego and QCM, they are filled with financial analysis arguing why the stock is worthless or worth less than the current trading price.

Take Grego’s report on Folli Follie for example. The deck includes a full liquidity waterfall plus significant financial due diligence to back up his argument the stock will run out of money and go bankrupt.

QCM Folli Follie Slide

Source: QCM Funds.com

Contrast this with the only slide in the Aphria presentation alleging a $0 stock price. No financial analysis to be found.

Why is a well-seasoned investor trained in financial analysis leaving out audited financial data altogether?

QCM Aphria Slide

 

Source: QCMFunds.com

The reason is that Grego knows Aphria’s Canadian business is well capitalized and legitimate.

He also knows that even rudimentary comparable analysis would have shown that Aphria has similar or better profitability than every other licensed cannabis producer.

Or that Aphria has $300+ million in the bank and operational greenhouses generating revenue and profits in Canada.

This is just another example of selective disclosure meant to avoid any tough questions from investors.

 

Selectively Disclosed Track Record

Quintessential Capital Management highlights an unparalleled track record of exposing malfeasance, highlighting all their short “wins” in a graphic included in the Aphria short report.

However, in reality, the fund has a very mixed track record, with many failed investments to go along with the few short selling successes.

Source: QCMFunds.com

  • We can confirm QCM’s research contributed to the downfall of Folli Follie and Globo, companies with market capitalizations of $1 billion and $200 million respectively. However, it is worthwhile noting that the Financial Times identified the significant accounting red flags at Folli Follie as far back as 2015.
  • QCM also highlight that they reduced the market value of Ability (Ticker: ABIL) and American Addiction Centers (Ticker: ACC) by -92% and -95%, respectively, following the release of their investment case.
  • With respect to ACC we found the research report on Gabriel Grego’s (Managing Partner of QCM) Seeking Alpha, where he explicitly acknowledges the short thesis was originally put forth by Bleecker Street Research, therefore this short -95% ‘win’ simply can’t be attributed to QCM at all.
  • QCM also claims they’ve reduced the market capitalization of a ‘secret’ company by -68%. We simply can’t take that for face value and it’s a curiosity why the company would even bother touting an unconfirmed investment as a ‘win’.

What QCM fails to identify within their track record are their failed longs.

Grego published “IBM: An Island of Value in a Sea of Overpriced Stocks” on March 11, 2014. That call has underperformed the NASDAQ 100 (Ticker: QQQ) by a rather astounding -124% since.

Teva Pharmaceutical Industries is another long thesis that QCM conveniently omits from their track record.

Grego published “Teva: Copaxone and Management Uncertainty May Be Hiding One of The Last Bargains Around” on Oct. 31, 2012; that call has underperformed the SPDR S&P Pharmaceuticals Index (Ticker: XPH) by -101% since.

Based on the small sample of publicly available investments, Grego is an investor with a spotty history of investments who plays fast and loose with information when it suits his narrative.

 

A Presentation Style that Targeted Retail Investors

Grego’s public posturing from the moment he got on stage at the Kase Shorting Conference was to project an image of a ‘Babe Ruth’ type of investor who in his own words only acts when he’s 100% certain of “fraud”.

He touts his near perfect ‘investment track record’ (which isn’t truthful) to support his chest puffing.

This display of bravado wasn’t for the hedge funds in the crowd but rather directed towards Aphria retail investors (who are the majority of the shareholders of the company). Far less sophisticated investors would certainly be intimidated by such lofty claims of perfection.

The Kase conference is a perfect venue for staged presentations. The audience is predominately hedge funds, many of which have already put shorts on the company or have shorted the company while Grego made his opening remarks.

A room filled with genuine inquiring institutional investors would have asked much harder questions about the glaring deficiencies in his thesis — the fact he conveniently avoids any analysis (qualitative or quantitative) of Aphria’s main cash flow generating assets in Canada.

Throughout the presentation Grego clouds investor’s perception between optics and illegal activity.

When information is lacking, insinuating fraud can be enough for investors to assume management is guilty until proven innocent, achieving a short sellers’ objective of a quick, severe fall in share prices.

 

Part of a Larger Network of Shorts

Quintessential Capital Management did not work alone when it bet against the shares of Aphria.

Grego manages far too few assets to drive Aphria’s stock down 25% pre-market on his own, implying there was a concerted effort by hedge funds at the Kase Shorting conference and elsewhere to move the share price and shake out retail holders.

In North America, there are a group of short-sellers both big and small who follow each other’s ideas and will pile on when a new short thesis is released to maximize the chances of a positive return.

Some in this group coordinate their stock market action while others simply follow the news flow and pile in when new ideas go public.

The end result is a concerted effort by short sellers to drive the stock down, giving the appearance that the allegations are credible even if they all later turn out to be untrue.

As an example, Nate Anderson, of ClaritySpring LLC and Hindenburg Research, is cited as a defendant in two different court cases, (here and here) both alleging he worked with other investors to spread negative information about a company in order to drive down its share price.

In the stock market, sentiment and optics often matter as much or more than the truth, to the detriment of the unsophisticated investor.

 

Utilize Social Media to Sow Doubt with Retail Investors

Grego and Hindenburg were not content to let their report speak for itself.

They also executed a coordinated social media campaign to sow doubt in investors minds.

The day after the release of the original research report Hindenberg (Nate Anderson) stated he had another “installment of research” that would be released in two days.

This tactic kept nervous retail investors on edge and pressure on the share price.

The second installment of research ultimately proved to be nothing of substance and the shares rallied in relief.

Grego from QCM largely went silent soon after some of his allegations were debunked in real time and he admitted to selective due diligence and disclosure in a tweet.

Their allegations were also picked up by other short-biased social media influencers, amplifying it’s spread.

The main objective of their posts was to convince investors there was a high probability of fraud, even though they did not possess conclusive evidence.

Alleging fraud is a much easier and often less time-consuming way to drive down a stock’s price than arguing with investors and analysts over the future cashflow of the company or proving when liquidity may run out.

 

Who are Gabriel Grego and Nate Anderson?

Nate Anderson

Nate Anderson is the founder of hedge fund investment platform Clarity Spring LLC and has a background as a fundraiser for financial firms.

In late 2017 he began publishing articles on the blog Hindenburg Research.

Hindenburg publishes short articles arguing how a stock is overvalued or an outright fraud.

Hindenburg articles do not have an author attached to them so it is possible there are multiple investors publishing research on this platform under the same pseudonym.

According to two ongoing defamation lawsuits (here and here), Anderson has worked together with other short sellers in the past to publish negative news on companies and drive the shares lower.

Looking at Hindenburg’s track record, the blog has had basically no impact on the stocks it targets.

Of the 15 reports published since its founding, the stocks targeted decline only 2% the day of publication and are basically flat more than a month after.

The lack of market impact likely explains why Anderson shopped around his idea on Aphria to other investors with deeper pockets and a larger investor network.

Gabriel Grego

Gabriel Grego, the author of the Aphria short report, has held various roles at financial institutions in Israel and the United States.

He founded Quintessential Capital Management in 2008, according to his Linkedin bio, and is still managing partner today.

He has spoken out publicly on three stocks in his fund’s history, Globo Plc, Folli Follie, and Aphria.

His presentations on Globo and Folli Follie were thorough and backed up with significant financial analysis, pointing to accounting irregularities. These companies were subsequently outed as frauds.

In contrast, the Aphria report contained no financial justification for a $0 target price and relied on insinuations of fraud and insider dealing, none confirmed, to drive the stock price down.

 

A Call to Action for Securities Regulators

We are writing this report as a call to action for both Canadian and U.S. regulators.

Any rational investor would conclude Grego’s strategy is a winning one regardless of how it hurts the average investor.

If pump-and-dump schemes are illegal according to regulators, there is no reason a reverse pump and dump shouldn’t be as well.

Both use the manipulation of information to benefit certain investors at the expense of others.

The Quintessential Capital Management report wiped out C$700 million of investors’ money and so far not one allegation has stood up to scrutiny.

As the regulatory landscape stands today there is minimal downside and significant upside for investors in this manipulative strategy.

Any rational investor would conclude this is a winning strategy regardless of how it hurts the average investor.

At the end of the day, if bad actors do not have to fear prosecution for using deception and false information to move the market, regulators should expect a whole lot more of these campaigns to appear.

In the interest of full disclosure, employees of Grizzle personally purchased and currently own stock in Aphria, Inc. See the Content Disclosure section here on our Terms and Conditions page for more details.