Grifols shares have come to lose more than half their value since the vulture fund Gotham City Research published a report on 9 January questioning the Catalan pharmaceutical company’s accounting practices. Are we facing a case of market manipulation?

On 26 January, the multinational pharmaceutical company Grifols filed a lawsuit in the Southern District Court of New York, in the United States, against the entire Gotham City Research network for “publishing and distributing” a report “containing falsehoods about the accounting, communications, finances and integrity” of the pharmaceutical group.

In a statement to the Spanish Securities and Exchange Commission (CNMV), Grifols explained that its complaint alleges that Gotham City Research, in addition to publishing and distributing the report containing falsehoods about the company’s accounting practices, obtained “a substantial short position against Grifols”.

In the report published by Gotham on 9 January, the hedge fund accuses Grifols of falsifying its accounts and criticises the relationships that exist between management directors, family members and the various companies involved: “We are particularly concerned that these management executives and the parties involved are listed at different times as shareholders, directors, creditors, debtors or advisors of Grifols, all at the same time”.

Specifically, the US fund argues that the Catalan multinational “manipulates debt and EBITDA to artificially reduce debt by six times, when, in reality, it is between ten and thirteen times EBITDA”, which is why it argues that its shares are worthless. In addition, he also questions the debt of Scranton Enterprises – one of the companies through which the Grifols family controls the pharmaceutical company – pointing out that it has a leverage of 27 times its EBITDA.

What is Gotham City Research, and how does it operate?

Gotham City Research is a consulting and research firm founded by Dan Yu, a Wall Street analyst who also acts as a hedge fund. Ten years ago it became famous for causing the collapse of Gowex, a Spanish company specialising in the creation of free Wi-Fi networks.

These hedge funds, also known as vulture funds, have a business model, a priori lawful from a legal point of view, based on making profits from the stock market collapse of the companies they are targeting. In other words, they take bearish positions using short selling or derivatives to profit when shares or the market falls.

Their modus operandi involves choosing a company they consider to be overvalued and potentially vulnerable. They then borrow shares in this company – which they have to pay back within an agreed period – and sell them on the market. When these shares lose value on the stock market, they buy them back and then return them to the entity that lent them to them, keeping the difference.

Therefore, the more the share price has fallen, the more profit these funds make. The possible conflict of interest or market manipulation can occur because some of these funds, as in the case of Gotham City Research, are the ones who directly cause the collapse of the company in which they have taken a short position. They do so by publishing reports in which they question the financial state of these companies.

Grifols shares plunge and lose half their value

Since Gotham published its first report, it has not ceased its attacks on the pharmaceutical multinational, to the point that Grifols’ share price could not get back on its feet and has lost more than 50% of its market capitalisation, to the tune of more than 4.5 billion euros. 

When it rains, it pours, so early last week, the credit rating agency Moody’s put Grifols’ debt rating under review, with the risk of a possible downgrade justified by the company’s lower cash generation and the delay in publishing its audited accounts.

This scenario did not change until last Friday, when its shares soared by up to 20% after the pharmaceutical company published its audited accounts, greenlighted “without exceptions” by KPMG, as reported by the company to the CNMV.

There is no denying that Grifols has debt problems, which have led it to make a series of changes at the core of its internal power that have resulted in a whole series of executives leaving the company over the last two years. The pharmaceutical company has senior managers dedicated to managing this debt. But beyond these well-known problems, it remains to be seen whether the information published by Gotham is true or false.

Investigation of possible criminal conduct

The CNMV is analysing whether Gotham complied with the requirements of the regulations on the dissemination of misleading information, at the same time as it is studying the information published by Grifols. Rodrigo Buenaventura, chairman of the supervisory body, said on Tuesday that they had requested further clarifications and additional information from the Catalan company, needing more time to conclude their investigation. “We just received them a few days ago and still need a few more weeks”.

If the allegations in Gotham’s report are ultimately confirmed, Grifols’ conduct could amount to a corporate crime of false accounting and misrepresentation to investors. On the other hand, if the information in the report is false, the hedge fund could be charged with market manipulation.

It would not be the first or the last time that a company has falsified its accounts, and it is certainly true that consultancy and analysis firms play an important role in complementing financial and market supervisory bodies. However, when these analyses come from hedge funds specialised in short-selling, there is a risk that the cure will be worse than the disease.

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