Freedom Holding Corp: Brazen Sanctions Evasion, Hallmarks Of Fabricated Revenue and Risky Bets with Commingled Customer Funds https://hindenburgresearch.com/freedom/ Freedom Holdings is a $4.6 billion market cap online brokerage business, founded in 2008, formerly based in Moscow and later moved to Kazakhstan. Its multi-billionaire Chairman & CEO, Timur Turlov, owns over 70% of the company’s shares and has since inception. Since listing on Nasdaq in 2019, Freedom shares have rocketed over 450%, luring investors in with the image of quickly growing firm led by a young, tech-savvy founder. Our investigation into the company, undertaken over the course of a year, has included a review of extensive international corporate and regulatory records, interviews with former employees and industry analysis. Our research has unveiled a laundry list of red flags including evidence that Freedom (i) brazenly skirts sanctions (ii) shows hallmark signs of fake revenue (iii) commingles customer funds then gambles assets in highly levered, illiquid, risky market bets (iv) and displays signs of market manipulation in both its investments and its publicly traded shares. Prior to Russia’s invasion of Ukraine, Freedom made it clear that both countries, with a combined population of 188 million people, would be key pieces to its growth strategy going forward. Following Russia’s 2022 invasion of Ukraine, Freedom fire-sold its Russian business to a Freedom employee for $140 million in order to avoid sanctions. Turlov still secretly controls the entity, according to a former executive we interviewed. The move didn’t fool Ukrainian authorities: Ukraine suspended Freedom’s brokerage license and froze its assets. Chairman & CEO Timur Turlov was also personally sanctioned by Ukrainian President Volodymyr Zelensky due to his Russian ties. Despite ostensibly losing both markets, Freedom now claims its rapid, uninterrupted revenue growth has been fueled by Kazakhstan, a country of just 19 million people with a GDP per capita of $10,373. We found that Freedom still does business in the Russian market, and that the company has openly flouted sanctions along with anti-money laundering (AML) and know-your-customer (KYC) rules. On August 4, 2023, 11 days ago, the company openly admitted it provided “brokerage services to certain individuals and entities who are subject to sanctions imposed by OFAC, The European Union or the United Kingdom,” in its latest annual report. This admission of sanctions evasion follows a long history. Four months after U.S. sanctions against Russia following its 2014 invasion of Ukrainian Crimea, Freedom Chairman & CEO Turlov established his own private entity in Belize (“FFIN Belize”), admitting in later filings that the entity helps Russians sidestep “restrictions” to access U.S. markets. In 2015, as a newly listed U.S. company, Freedom expanded its business further when it bought a bank from Vladimir Putin’s Former Chief of Staff, a sanctioned Russian oligarch nicknamed “Darth Vader”. Freedom Finance in Russia and Kazakhstan has also helped divert funds from sanctioned banks. For example, in April 2022, the U.S. hit Alfa Bank with the most severe international “full blocking sanctions”, along with an asset freeze. Days later, Freedom openly advertised an easy-to-use service to help clients shift assets out of Alfa Bank. Four of Russia’s “financial elite” tied to Alfa Group, including its founder, were sanctioned by the U.S. Treasury just days ago on August 11, 2023. Despite this, FFIN Belize still advertises the ability to send rubles via Alfa Bank, allowing customers to easily funnel rubles via a sanctioned Russian bank right into the U.S. stock market. Several months after “full blocking” sanctions were imposed on VTB bank, its customers shared tips over a telegram channel on how to transfer money through Freedom Finance in Kazakhstan. Similarly, Tinkoff Bank, on EU, UK and U.S. sanctions lists, also advised its premium customers to open accounts remotely with Freedom Bank Kazakhstan, according to Forbes Russia. Former employees described the open flouting of sanctions, along with AML & KYC rules. “This is violating almost every country’s anti-money and anti-terrorist financing laws…I’ve personally seen suitcases with $2.5 million brought in cash by a client”, a former Freedom executive told us. Another former Freedom executive told us: “I have never seen an organization so unstructured and just blatantly like I’m sorry for my words, but taking a shit on regulations and rules and basically everything as much as this.” The U.S. government has enforced sanctions through an intensive global campaign. Overall, we find it surprising that a publicly-traded company in our own backyard has worked to brazenly undermine those efforts for years. Beyond sanctions evasion, Freedom seems to be engaged in a broad variety of corporate malfeasance involving the same Belizean entity privately owned by its Chairman & CEO. From 2018-2020, in the lead up to Freedom’s 2019 Nasdaq uplisting, unnamed related parties drove Freedom’s revenue growth, accounting for 67.5% of total reported revenue by 2020. The lack of related party disclosures resulted in Freedom’s auditors later being barred and fined by the Public Company Accounting Oversight Board (PCAOB) for violating audit standards. A 2021 exposé first revealed the extent of Freedom’s dealings with its key unnamed related party driving revenue growth, FFIN Belize, resulting in the entity publishing its first and only set of financials. FFIN Belize’s lone set of published financials reported $2.5 billion in both trade receivables and payables, but just $5.4 million in cash, a hallmark of circular or fake revenue transactions. Freedom has reported an increase of 306% in related party revenue from FFIN Belize since 2020. It reported fee and commission revenue of $196.3 million from FFIN Belize in FY 2023. Freedom has directed this money back to FFIN Belize with $289 million in margin loans to the entity. 25% of Freedom’s reported revenue comes from this related party in Belize, as of Freedom’s most recent annual financials. FFIN Belize has not provided financials of its own since 2020, despite being run by Freedom’s Chairman & CEO. Beyond sanctions evasion & signs of fake revenue, FFIN Belize also commingles customer assets, placing them at extreme risk. Buried in FFIN Belize’s risk disclosures is mention of a “special brokerage account” saying it can commingle client funds and essentially do whatever it wants with them for its “own interests”. One selling point for Freedom’s customers has been Turlov’s claim that its clients have access to hot IPO allocations through FFIN Belize, which obtains the stakes from an unnamed hedge fund. “No one knows” who the hedge fund is, one former told us. “My suspicion is there is no actual IPO [allocation].” The entity has also offered high ‘guaranteed’ return products to lure in customers. In October 2021, Kazakhstan’s financial market regulator blacklisted FFIN Belize for ‘signs of illegal activity’ relating to such products. “…we found out that they don’t actually execute trades. So where the money goes, nobody knows,” a former Freedom executive told us, explaining that FFIN Belize received funds through offices in Russia but wasn’t actually trading the securities as promised. “I wouldn’t even be surprised if all of this was all manipulated and they weren’t even investing in stocks,” another former told us. All the while, Freedom has used funds to take on high leverage and market risk. While it claims it has “conservative risk management” and “limits the amount of credit exposure to any one issuer”, SEC filings show Freedom invested 35% of its gross principal trading balance, or $835 million, in the debt of just one Kazakh issuer. The position is larger than Freedom’s shareholder equity balance of $777 million. Freedom also disclosed that as of March 2023 its $2.4 billion in trading securities were financed with ~$1.5 billion in short term liabilities with maturities under 30 days. Meanwhile, the bonds are extremely illiquid with a 30-day average volume of just $16.6 million. Freedom’s position represents a full 50 days of trading volume. Those same Kazakh bond investments yield lower returns than the short-term rates used to finance them. We estimate Freedom loses $0.5 million to $33 million per year on this concentrated, leveraged, negative carry trade. Freedom aggressively increased its position in the bond issuer from $297 million in December 2021 to $720 million in December 2022, during a period of seemingly artificially inflated prices. In January 2023, Kazakhstan’s financial regulator reported that the issuer’s bonds were being manipulated. In brief, Freedom seems to be relying on short term, expensive leverage to hold a massive, illiquid, money losing position in bonds that have likely been propped up by Freedom’s own purchases. This poses an existential risk for Freedom and any commingled customer assets. We also uncovered hallmarks of market manipulation in Freedom’s own stock, including inexplicably steady trading volume and price, seemingly impervious to both market-wide events and company specific negative news. Over the last 1.5 years, over 59% of trading in Freedom’s stock has been driven by two tiny brokerage firms with ties to Freedom: (1) Lek Securities, accounting for over 59% of trading volume in 2022 despite accounting for just 0.06% of trading volume on NASDAQ and (2) Vision Financial Markets, accounting for ~17% of YTD 2023 reported trading volume in Freedom despite comprising only 0.03% of NASDAQ volume. Both Lek and Vision have clearing arrangements with Freedom, indicating a close relationship. Lek was charged with manipulative trading by the SEC in 2017 alongside a Ukrainian brokerage firm. Its founder was barred from the securities industry in 2019. Vision was barred by the National Futures Association in 2014 but relaunched. Subsequently, it has accumulated a rap sheet of 26 regulatory sanctions over issues including a lack of effective AML procedures and a “failure to prevent and detect potentially manipulative trading activity”, according to FINRA and Nasdaq enforcement actions. A former Vision executive summed up the brokerage’s business model: “the takeaway—and I talked about ‘dodgy’—is that Vision’s operating in areas that other firms don’t want to operate in.” He described Vision’s business as “a little bit dangerous” and confirmed Freedom is its “biggest customer”. Finally, Freedom itself has been subject to multiple regulatory sanctions. Four Freedom entities in Kazakhstan have accrued 244 penalties, resulting in 121 sanctions, over allegations ranging from money laundering to terrorism financing. Freedom has also failed to disclose an ongoing SEC investigation since at least October 2021, according to reporting by Disclosure Insight. All told, Freedom Holding has exhibited a startling array of red flags relating to virtually every category of financial malfeasance worthy of investigation.