Allegations Of "Shell Game" Fraud Involving Gerova Financial Group (GFC)

Our recent reports by third parties on alleged Chinese fraud companies, even if conflicted, appear to have hit the nail on the proverbial head. And after all, how different is it to have anyone present a position paper with a bearish bias, compared to what managers such as Ackman, Einhorn and Tilson do on a periodic basis when they talk their book, online or on financial TV channels? At the end of the day, it is the market that decides if the investment thesis of any bullish or bearish report is viable, and if not it merely provides a better, and lower cost entry point (long or short) for those who end up being proven correct about a given company. That said, RINO is now trading on the pink sheets, while our most recent disclosure on China Green Agiculture has pushed the stock down 20% in a few days. But who says frauds are only foreign in origin. Our latest report, courtesy of Dalrymple Finance (and yes, we were correct that a plethora of micro-funds focused on ferreting out alleged frauds would soon appear), focuses on a company that has nothing at all with China, and a lot to do with Bermuda, and the US hedge fund industry. Presenting Gerova Financial Group (NYSE:GFC), which per the authors is a "NYSE-listed shellgame, in our opinion."

From the report, below are the key allegations as to why GFC should trade far, far lower per Dalrymple:

  • Complete lack of financial disclosure. GFC has not filed financial statements since becoming public a year ago. Consequently, there is no publicly available information available to shareholders. We believe this is intentional.
  • Impaired and overvalued assets. The acquired assets were likely impaired and overvalued at purchase; quality has eroded in 2010. In our opinion, critical information on asset quality, performance and a long history of audit problems has been kept from GFC shareholders.
  • Undisclosed related-party transactions and affiliations. An examination of numerous transactions indicates self-dealing to us. Moreover, we believe these relationships have been carefully edited from GFC documentation to give the illusion of arms length transactions.
  • Strong ties to the investment underworld. GFC insiders exhibit strong ties to individuals and entities that have been sanctioned, sued or shut-down by regulators, including Jason Galanis, Matthew Jennings and Westmoore Capital.
  • A deeply troubled company. GFC has many hallmarks of a classic fraud. In our opinion, GFC exhibits: a lack of financial disclosure, insider dealing, and obfuscation of both relationships and transactions. When this information is widely disseminated, we expect the stock to trade at a fraction of the current price.

There is much more in the report, and while we have not verified the claims independently, there does appear the risk that these shares will trade materially lower as investors digest all the presented allegations. The report's conclusion on valuation is not favorable: "To us, GFC looks like a pink-sheet stock scam writ large. It has a market value of almost $1 billion and an NYSE listing to give the cover of respectability, but we do not believe the story...At some point we believe that the light of day will shine on GFC’s activities and the story  will unwind in a spectacular fashion and the stock will collapse."

With a float of 25 million shares and short interest of just 180k, a bearish bet on this stock may just make a delayed Christmas present for someone...

Full report from Dalrymple Finance (pdf), and as always buyer (and shorter) beware.