8-K: Freedom Holding Corp. Concludes External Review, Dismisses Short-Seller Allegations

Freedom Holding Corp. announced the completion of an external review that found no evidence to support allegations of illegal or improper business practices made by Hindenburg Research.

Summary

• Freedom Holding Corp. commissioned an external review by Morgan, Lewis & Bockius LLP and Forensic Risk Alliance in response to allegations made by Hindenburg Research in August 2023.
• The review, which took approximately four months, included document and data analysis, site visits, and interviews with management and external advisors.
• The review focused on the company's main operating subsidiaries and affiliate Freedom Securities Trading, Inc. (FST Belize).
• The external review concluded that the allegations in the Hindenburg Report were not supported by evidence and did not account for important facts.
• The review found that the company's growth was primarily due to organic growth, acquisitions, and trading gains, not manipulative practices.
• The company has robust global and local sanctions and anti-money laundering (AML) procedures in place.
• There was no evidence of sanctions evasion or dealings with sanctioned oligarchs, although some non-US subsidiaries had dealings with sanctioned banks and individuals, which were previously disclosed and did not violate sanctions.
• The review found no evidence of client accounts being funded with cryptocurrencies or physical cash, except for standard AML-checked cash deposits at Bank Freedom Finance Kazakhstan JSC.
• There was no evidence of market manipulation of the company's stock or its holdings of Kazakhstan Sustainability Fund bonds.
• The company's holdings of fixed coupon Kazakhstan Sustainability Fund bonds have a negative carry but are part of a legitimate trading strategy.
• The review found no evidence of fake or inflated revenue generated through transactions with FST Belize.
• The sale of the company's former Russian subsidiaries was valid, and there is no evidence of continuing control by the company or its CEO.
• The company's brokerage clients were not required to purchase the company's stock to receive IPO allocations.
• The company has accepted the review's findings and will implement recommended enhancements to its procedures, controls, and policies.

Sentiment

Score: 8

Explanation: The document is largely positive, as it refutes serious allegations and demonstrates the company's commitment to compliance. The successful completion of the external review and the dismissal of the allegations is a positive development for Freedom Holding Corp. and its investors.

Positives

• The external review found no evidence to support the allegations made by Hindenburg Research.
• The company's growth is attributed to legitimate business activities.
• The company has robust AML and sanctions compliance procedures.
• There was no evidence of market manipulation or fake revenue generation.
• The company is taking steps to further enhance its compliance procedures.

Negatives

• Certain non-US subsidiaries had dealings with sanctioned banks and individuals, although these did not violate sanctions.
• The company's holdings of Kazakhstan Sustainability Fund bonds currently have a negative carry.

Risks

• The company's non-US subsidiaries' past dealings with sanctioned entities, while not in violation of sanctions, could pose reputational risks.
• The negative carry on the Kazakhstan Sustainability Fund bonds could impact profitability if interest rate movements do not materialize as expected.
• The company is subject to risks and uncertainties described in its annual report on Form 10-K for the fiscal year ended March 31, 2023.

Future Outlook

The company will continue to develop its compliance and control environment and is subject to risks and uncertainties described in its annual report on Form 10-K for the fiscal year ended March 31, 2023.

Management Comments

• The independent directors have full confidence in the Company and its business model.
• The company has accepted the results of the external review and welcomes the finding that it has robust global and local sanctions and AML procedures, controls and policies in place.
• Senior management of the Company, including the Vice President of Compliance, have already begun to implement the recommended enhancements.

Industry Context

This announcement is significant as it addresses serious allegations made by a short-selling firm, which can have a substantial impact on a company's reputation and stock price. The successful completion of the external review and the dismissal of the allegations is a positive development for Freedom Holding Corp. and its investors.

Comparison to Industry Standards

• The engagement of external legal and forensic accounting firms for an independent review is a standard practice when facing serious allegations, similar to how other publicly traded companies respond to such situations.
• The company's focus on AML and sanctions compliance aligns with global regulatory expectations for financial institutions, comparable to the compliance programs of other international financial services firms.
• The company's disclosure of dealings with sanctioned entities, while not in violation of sanctions, is consistent with the transparency expected of publicly traded companies, similar to how other companies disclose such dealings in their filings.

Corporate Governance

Stakeholder Impact

• Shareholders should view the results of the external review positively, as it addresses concerns raised by the short-seller report.
• Employees can have increased confidence in the company's business practices and compliance.
• Customers can be reassured that the company operates with robust AML and sanctions compliance procedures.
• Creditors and suppliers can have increased confidence in the company's financial stability and integrity.

Next Steps

• The company will implement the recommended enhancements to its compliance procedures.
• The company will continue to monitor and develop its compliance and control environment.

Key Dates

Keywords

external review, Hindenburg Research, allegations, sanctions, anti-money laundering, market manipulation, compliance, organic growth, trading, Kazakhstan Sustainability Fund bonds