Chamath Palihapitiya-backed Clover Health gets notice of SEC investigation

Chamath Palihapitiya-backed Clover Health Investments said Friday it received a notice of investigation from the Securities and Exchange Commission and that it intends to cooperate.

Clover, however, pushed back against a critical report from short-selling specialist Hindenburg Research, saying some claims in the report were “completely untrue.”

On Thursday, Hindenburg published a scathing report that called Clover Health a “broken business,” sending the insurance firm’s shares down more than 12%, their biggest daily percentage drop in four months. Shares of Clover rose more than 3.5% in premarket trading Friday after the company published its response. Hindenburg, which has a history of publishing short-selling research, said Thursday it does not hold a position in Clover.

Hindenburg also said Clover was under investigation from the Department of Justice and that the investigation was not disclosed to investors. In its response to the Hindenburg report, Clover said it has received inquiries from the DOJ but did not believe the inquiries were material to its investors. The company characterized the DOJ inquiries as standard practice since Clover works with the Medicare system.

Clover said it decided it did not need to disclose the DOJ inquiries after consultation with its lawyers. The company did not say what the DOJ’s inquiries were about. On the SEC side, Clover said it received the letter from the agency on Thursday following the publication of Hindenburg’s report. The company said it was unware of any investigations outside of the letter from the SEC it received Thursday.

The DOJ on Thursday declined to comment on any potential investigations or inquiries related to Clover. The SEC declined to comment on Friday.

Clover responded to Hindenburg’s critique of a separate company, Seek Insurance, that shares investors and governance with Clover. Hindenburg alleged Seek Insurance, a site designed to help people find Medicare plans, doesn’t disclose its relationship to Clover even though its website characterizes itself as an unbiased platform for choosing a health plan. Clover said in its response that Seek Insurance is an affiliate of Clover but is still independent start-up.

Clover also said Seek’s website would be updated soon with more information, and it published a breakdown of the plans Seek customers choose. According to Clover, 13.5% of Seek customers chose a Clover plan, behind CVS/Aetna (17%), Humana (20%) and Cigna (20%).

Finally, Clover addressed Hindenburg’s allegations that the company’s software prompts doctors to charge the Medicare system more than necessary, a practice called “upcoding.” Hindenburg said Clover’s software encourages upcoding with “irrelevant diagnoses” to “deceive” and charge the Medicare system more. Clover denied those allegations in its response, and said doctors receive a flat payment for office visit, and that it’s up to the doctor to choose the diagnosis.

Hindenburg has a reputation for its short-selling research. Notably, it published a report last year on the electric-car company Nikola, just days after General Motors announced an investment in the company.

Among the claims against the company, Hindenburg said Nikola staged a demo video of its electric truck, which wasn’t operating under its own power, but rolling down a hill instead. Nikola disputed many of Hindenburg’s claims, but not the one about the demo video of the truck. GM ultimately abandoned its equity investment in Nikola.

Palihapitiya’s involvement in Clover is notable too. The VC has gained a reputation for backing several high-profile SPAC deals, including Clover and Virgin Galactic. But Hindenburg’s report raised questions about whether or not Palihapitiya knew about the DOJ’s inquiries into Clover and whether or not that should’ve been disclosed when the company went public through the SPAC deal.

You can read all of Clover’s lengthy, point-by-point response to Hindenburg here.

–Reuters contributed to this report.