Market Manipulation? Kerrisdale's Actions Against C3.ai
C3.ai's CEO Tom Siebel called out short seller Kerrisdale Capital for stock price manipulation in a recent Bloomberg interview.
The C3.ai stock has been caught in a whirlwind of controversy, with Kerrisdale Capital's short position, a critical report, and a letter accusing the company of accounting fraud at the center of it all.
Let's examine the inconsistencies, contradictions, and potential misleading information in Kerrisdale's report and letter, exploring whether these actions could constitute market manipulation under the existing legal framework.
Disclaimer:
Please remember that none of this constitutes legal or financial advice.
Market manipulation is defined as "intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security."
The term encompasses a wide range of activities, including spreading false or misleading information, engaging in fraudulent or manipulative practices, and cornering the market.
In the United States, market manipulation is prohibited under the Securities Exchange Act of 1934 (Section 9(a)(2)) and the Commodity Exchange Act (Section 6(c)(1)). To learn more about the specific laws and regulations governing market manipulation, readers can refer to the following resources:
Securities Exchange Act of 1934: law.cornell.edu/uscode/text/15/78j
Commodity Exchange Act: law.cornell.edu/uscode/text/7/9
SEC Guidelines: sec.gov/files/Market Manipulations and Case Studies.pdf
Market Manipulation in the US Explained: rahmanravelli.co.uk/articles/market-manipulation-in-the-us-explained/
A BIT OF BACKGROUND
C3.ai, a leading enterprise artificial intelligence (AI) software provider, has been at the center of a heated controversy involving Kerrisdale Capital, a prominent investment management firm. C3.ai aims to help businesses unlock the potential of AI and data analytics to drive growth and efficiency.
Kerrisdale Capital entered the scene by taking a short position in C3.ai's stock, effectively betting against the company's success.
In March 2023, Kerrisdale then released a scathing report that cast doubt on C3.ai's prospects, criticizing its growth rates, competitive positioning, and management. This report led to an initial decline in C3.ai's stock price of over 20%. However, the company's stock rebounded and even reached new heights in early April, posing a significant threat to Kerrisdale's short position.
In an attempt to reinforce their bearish stance, Kerrisdale published a follow-up letter in April 2023, addressed to C3.ai's auditor, Deloitte, and CC'd to the Securities and Exchange Commission (SEC). In this letter, Kerrisdale leveled serious allegations of accounting fraud against C3.ai. The publication of the letter sent shockwaves through the market, causing C3.ai's stock price to plummet by nearly 40%.
EXPOSING KERRISDALE'S DECEPTIVE TACTICS IN THEIR C3.AI ASSAULT
Let's dive into the inconsistencies and misleading information found in Kerrisdale's report and letter about C3.ai. By comparing these documents with C3's financial statements and relevant laws and regulations, let's investigate if Kerrisdale's allegations are unfounded and possibly manipulative.
Contradictory Revenue Growth Claims:
Kerrisdale's report acknowledges C3.ai's revenue growth (page 2), but the letter contradicts this by questioning the veracity of the growth figures (paragraph 2 of the letter). It is important to note that C3.ai's financial statements are prepared in accordance with US GAAP, which is subject to strict guidelines and external audits.
Unbilled Receivables Misrepresentation:
The report mentions the long product life cycle on page 13, which could contribute to the rise in unbilled receivables. However, in the letter, Kerrisdale questions the rise in unbilled receivables (paragraph 3 of the letter), seemingly disregarding the fact that they themselves acknowledged the long life cycle. According to ASC 606 (Revenue from Contracts with Customers) in the US GAAP guidelines, the recognition of unbilled receivables is appropriate based on the specific circumstances of a contract.
On page 2 of their letter, Sahm Adrangi writes, "With the company unable to invoice 30% of its reported revenue, which just so happens to come from a related party, how exactly are you as its auditor signing off on these financial statements?"
This statement demonstrates either a lack of understanding or an attempt at manipulation by Kerrisdale. Unbilled receivables do not imply that the company is unable to invoice the revenue. Instead, they represent amounts recognized under the terms of a contract but not yet billed to the customer.
As per the US GAAP guidelines, specifically ASC 606 (Revenue from Contracts with Customers), companies may recognize revenue over time, even if invoices have not been issued. This scenario is common when long-term contracts or projects are involved, and the unbilled amounts are expected to be invoiced in the future as the work progresses or upon meeting certain milestones.
By making such a statement, Kerrisdale misrepresents the concept of unbilled receivables and creates confusion among readers, potentially leading them to believe that C3.ai has questionable accounting practices. This misrepresentation supports the argument that Kerrisdale may have intended to manipulate the market perception of C3.ai negatively, ultimately benefiting their short position.
Flawed Competitor Comparison:
In the report (page 7), Kerrisdale compares C3.ai AI to Palantir and Snowflake, asserting that C3.ai's growth rates and valuation multiples are inferior.
However, these companies operate in different niches within the AI and data analytics market, with varying business models and target customers. This misleading comparison fails to provide a fair assessment of C3.ai's market position.
C3.ai, Palantir, and Snowflake each operate within the broader artificial intelligence (AI) and data analytics market but target different niches and offer distinct solutions.
When doing a simple Google search for Palantir and its competitors, C3.ai is, in fact, nowhere to be found. Here are some short summaries of the three companies.
C3.ai:
Niche: Enterprise AI and IoT applications
C3.ai focuses on providing AI-based software solutions for enterprise clients, with an emphasis on IoT (Internet of Things) applications. Their platform, C3 AI Suite, enables organizations to develop, deploy, and manage large-scale AI applications for a wide range of industries, including energy, healthcare, manufacturing, and financial services. C3.ai aims to help businesses accelerate their digital transformation and improve decision-making processes using AI and machine learning.
Palantir:
Niche: Data integration and analytics for government and commercial organizations
Palantir specializes in data integration, analytics, and visualization software for government agencies and large commercial organizations. Their two primary products, Palantir Gotham and Palantir Foundry, are designed to help organizations integrate, manage, and analyze vast amounts of data from disparate sources. Palantir's solutions are particularly popular in sectors like defense, intelligence, law enforcement, and cybersecurity, where the company has a strong track record.
Snowflake:
Niche: Cloud-based data warehousing and analytics
Snowflake offers a cloud-based data warehousing platform that enables organizations to store, manage, and analyze structured and semi-structured data. Snowflake's unique architecture allows for easy scalability, high performance, and seamless integration with various data sources and third-party services. The platform is particularly well-suited for businesses looking to transition their data infrastructure to the cloud and take advantage of modern data analytics tools.
In summary, while all three companies operate within the AI and data analytics market, they target different niches and offer distinct solutions. C3.ai focuses on enterprise AI and IoT applications, Palantir specializes in data integration and analytics for government and commercial organizations, and Snowflake provides a cloud-based data warehousing and analytics platform.
MISLEASING MARKET PENETRATION ASSERTION:
On page 11 of their report, Kerrisdale directly mentions C3.ai company's age when referring to their alleged sub-par customer base: "...after being in business for over twelve years."
This statement could be construed as manipulative or misleading. Kerrisdale's focus on C3.ai's age and customer count in comparison to Palantir and Snowflake, while intentionally not mentioning that Palantir has been in business for 20 years and Snowflake for a comparable 12 years, might give readers a false impression that C3.ai has underperformed relative to its competitors.
The actual differences in customer counts are not as substantial as the comparison suggests, considering the age of the companies. By not providing a complete context, Kerrisdale may intentionally mislead readers into forming a negative perception of C3.ai's performance and growth potential, which can be seen as manipulative.
The aforementioned inconsistencies and misleading information, when combined, paint a picture of either incompetence or deliberate manipulation on Kerrisdale's part. By misrepresenting facts, Kerrisdale may have intended to influence market perception of C3.ai negatively, thus benefiting their short position.
Market manipulation is illegal under the Securities Exchange Act of 1934 (Section 9) and related SEC rules. Specifically, Rule 10b-5 states that it is unlawful to make untrue statements or omissions of material facts in connection with the purchase or sale of any security.
A CLOSER LOOK AT INTENT
Let's analyze the intent behind Kerrisdale's actions when they published the report and letter about C3.ai.
Unsupported Allegations and Cherry-Picking:
The letter contains allegations of accounting fraud without providing concrete evidence or a thorough analysis. Instead, it selectively highlights specific data points and aspects, potentially ignoring or downplaying counterarguments or positive aspects of C3.ai's financials.
The Use of Strong Language and Rhetoric:
The language used in the letter, such as terms like "accounting fraud," might be interpreted as an attempt to evoke strong emotions and reactions from readers, potentially causing them to sell their shares and further drive down C3.ai's stock price.
Timing and Market Impact:
Kerrisdale published the letter to C3.ai's auditor, Deloitte, CC'ing the SEC, shortly after C3.ai's stock had regained its value following the initial report. The stock lost over 20% after the release of the report on March 6th but quickly regained value and was reaching new heights (and therefore endangering Kerrisdale's short position in the stock) when Kerrisdale published the letter.
This publication led to an almost 40% drop in the stock's value, significantly benefiting Kerrisdale's short position. The timing of these publications hints at a calculated effort to manipulate the market and profit from the resulting panic.
Misrepresentation of Competitors and Customer Growth:
Kerrisdale's misleading comparison between C3.ai, Palantir, and Snowflake can be seen as an attempt to create a false impression of C3.ai's performance.
By emphasizing the differences in customer counts without providing proper context or acknowledging the distinct niches of each company, Kerrisdale intentionally leads readers to form a negative perception of C3.ai's growth potential.
These companies have different focuses within the AI and data analytics market, making the comparison potentially misleading.
This manipulative tactic could be intended to drive down the stock price and benefit their short position.
Inconsistencies in Understanding and Presenting Financial Data:
Kerrisdale's misinterpretation of unbilled receivables, and their contradictory statements in the report and letter, can be perceived as either incompetence or a deliberate attempt to mislead readers.
Raising concerns about unbilled receivables in the letter while providing a possible explanation in their own report, might be interpreted as an attempt to manipulate and mislead readers.
This could be seen as incompetence or a deliberate effort to confuse readers who may not be familiar with US GAAP, leading them to believe that something unusual is happening with C3.ai's financials.
CONCLUSION
The inconsistencies, errors, and misinformation found in their publications, coupled with the timing and market impact, make it certainly not seem impossible that Kerrisdale's intent in publishing the report and letter about C3.ai may have been to manipulate the market, capitalizing on the resulting stock price fluctuations and protecting their short position.
Sources:
C3 Financial Data:
ir.c3.ai/static-files/0923dd61-7186-4880-b44c-dc7c155fdfad
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-third-quarter-2023-financial-results
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-second-quarter-2023-financial-results
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-first-quarter-2023-financial-results
Kerrisdale Capital's report and letter:
kerrisdalecap.com/wp-content/uploads/2023/03/C3.ai-AI.pdf
kerrisdalecap.com/wp-content/uploads/2023/04/C3.ai-Auditor-Note.pdf
The C3.ai stock has been caught in a whirlwind of controversy, with Kerrisdale Capital's short position, a critical report, and a letter accusing the company of accounting fraud at the center of it all.
Let's examine the inconsistencies, contradictions, and potential misleading information in Kerrisdale's report and letter, exploring whether these actions could constitute market manipulation under the existing legal framework.
Disclaimer:
Please remember that none of this constitutes legal or financial advice.
Market manipulation is defined as "intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security."
The term encompasses a wide range of activities, including spreading false or misleading information, engaging in fraudulent or manipulative practices, and cornering the market.
In the United States, market manipulation is prohibited under the Securities Exchange Act of 1934 (Section 9(a)(2)) and the Commodity Exchange Act (Section 6(c)(1)). To learn more about the specific laws and regulations governing market manipulation, readers can refer to the following resources:
Securities Exchange Act of 1934: law.cornell.edu/uscode/text/15/78j
Commodity Exchange Act: law.cornell.edu/uscode/text/7/9
SEC Guidelines: sec.gov/files/Market Manipulations and Case Studies.pdf
Market Manipulation in the US Explained: rahmanravelli.co.uk/articles/market-manipulation-in-the-us-explained/
A BIT OF BACKGROUND
C3.ai, a leading enterprise artificial intelligence (AI) software provider, has been at the center of a heated controversy involving Kerrisdale Capital, a prominent investment management firm. C3.ai aims to help businesses unlock the potential of AI and data analytics to drive growth and efficiency.
Kerrisdale Capital entered the scene by taking a short position in C3.ai's stock, effectively betting against the company's success.
In March 2023, Kerrisdale then released a scathing report that cast doubt on C3.ai's prospects, criticizing its growth rates, competitive positioning, and management. This report led to an initial decline in C3.ai's stock price of over 20%. However, the company's stock rebounded and even reached new heights in early April, posing a significant threat to Kerrisdale's short position.
In an attempt to reinforce their bearish stance, Kerrisdale published a follow-up letter in April 2023, addressed to C3.ai's auditor, Deloitte, and CC'd to the Securities and Exchange Commission (SEC). In this letter, Kerrisdale leveled serious allegations of accounting fraud against C3.ai. The publication of the letter sent shockwaves through the market, causing C3.ai's stock price to plummet by nearly 40%.
EXPOSING KERRISDALE'S DECEPTIVE TACTICS IN THEIR C3.AI ASSAULT
Let's dive into the inconsistencies and misleading information found in Kerrisdale's report and letter about C3.ai. By comparing these documents with C3's financial statements and relevant laws and regulations, let's investigate if Kerrisdale's allegations are unfounded and possibly manipulative.
Contradictory Revenue Growth Claims:
Kerrisdale's report acknowledges C3.ai's revenue growth (page 2), but the letter contradicts this by questioning the veracity of the growth figures (paragraph 2 of the letter). It is important to note that C3.ai's financial statements are prepared in accordance with US GAAP, which is subject to strict guidelines and external audits.
Unbilled Receivables Misrepresentation:
The report mentions the long product life cycle on page 13, which could contribute to the rise in unbilled receivables. However, in the letter, Kerrisdale questions the rise in unbilled receivables (paragraph 3 of the letter), seemingly disregarding the fact that they themselves acknowledged the long life cycle. According to ASC 606 (Revenue from Contracts with Customers) in the US GAAP guidelines, the recognition of unbilled receivables is appropriate based on the specific circumstances of a contract.
On page 2 of their letter, Sahm Adrangi writes, "With the company unable to invoice 30% of its reported revenue, which just so happens to come from a related party, how exactly are you as its auditor signing off on these financial statements?"
This statement demonstrates either a lack of understanding or an attempt at manipulation by Kerrisdale. Unbilled receivables do not imply that the company is unable to invoice the revenue. Instead, they represent amounts recognized under the terms of a contract but not yet billed to the customer.
As per the US GAAP guidelines, specifically ASC 606 (Revenue from Contracts with Customers), companies may recognize revenue over time, even if invoices have not been issued. This scenario is common when long-term contracts or projects are involved, and the unbilled amounts are expected to be invoiced in the future as the work progresses or upon meeting certain milestones.
By making such a statement, Kerrisdale misrepresents the concept of unbilled receivables and creates confusion among readers, potentially leading them to believe that C3.ai has questionable accounting practices. This misrepresentation supports the argument that Kerrisdale may have intended to manipulate the market perception of C3.ai negatively, ultimately benefiting their short position.
Flawed Competitor Comparison:
In the report (page 7), Kerrisdale compares C3.ai AI to Palantir and Snowflake, asserting that C3.ai's growth rates and valuation multiples are inferior.
However, these companies operate in different niches within the AI and data analytics market, with varying business models and target customers. This misleading comparison fails to provide a fair assessment of C3.ai's market position.
C3.ai, Palantir, and Snowflake each operate within the broader artificial intelligence (AI) and data analytics market but target different niches and offer distinct solutions.
When doing a simple Google search for Palantir and its competitors, C3.ai is, in fact, nowhere to be found. Here are some short summaries of the three companies.
C3.ai:
Niche: Enterprise AI and IoT applications
C3.ai focuses on providing AI-based software solutions for enterprise clients, with an emphasis on IoT (Internet of Things) applications. Their platform, C3 AI Suite, enables organizations to develop, deploy, and manage large-scale AI applications for a wide range of industries, including energy, healthcare, manufacturing, and financial services. C3.ai aims to help businesses accelerate their digital transformation and improve decision-making processes using AI and machine learning.
Palantir:
Niche: Data integration and analytics for government and commercial organizations
Palantir specializes in data integration, analytics, and visualization software for government agencies and large commercial organizations. Their two primary products, Palantir Gotham and Palantir Foundry, are designed to help organizations integrate, manage, and analyze vast amounts of data from disparate sources. Palantir's solutions are particularly popular in sectors like defense, intelligence, law enforcement, and cybersecurity, where the company has a strong track record.
Snowflake:
Niche: Cloud-based data warehousing and analytics
Snowflake offers a cloud-based data warehousing platform that enables organizations to store, manage, and analyze structured and semi-structured data. Snowflake's unique architecture allows for easy scalability, high performance, and seamless integration with various data sources and third-party services. The platform is particularly well-suited for businesses looking to transition their data infrastructure to the cloud and take advantage of modern data analytics tools.
In summary, while all three companies operate within the AI and data analytics market, they target different niches and offer distinct solutions. C3.ai focuses on enterprise AI and IoT applications, Palantir specializes in data integration and analytics for government and commercial organizations, and Snowflake provides a cloud-based data warehousing and analytics platform.
MISLEASING MARKET PENETRATION ASSERTION:
On page 11 of their report, Kerrisdale directly mentions C3.ai company's age when referring to their alleged sub-par customer base: "...after being in business for over twelve years."
This statement could be construed as manipulative or misleading. Kerrisdale's focus on C3.ai's age and customer count in comparison to Palantir and Snowflake, while intentionally not mentioning that Palantir has been in business for 20 years and Snowflake for a comparable 12 years, might give readers a false impression that C3.ai has underperformed relative to its competitors.
The actual differences in customer counts are not as substantial as the comparison suggests, considering the age of the companies. By not providing a complete context, Kerrisdale may intentionally mislead readers into forming a negative perception of C3.ai's performance and growth potential, which can be seen as manipulative.
The aforementioned inconsistencies and misleading information, when combined, paint a picture of either incompetence or deliberate manipulation on Kerrisdale's part. By misrepresenting facts, Kerrisdale may have intended to influence market perception of C3.ai negatively, thus benefiting their short position.
Market manipulation is illegal under the Securities Exchange Act of 1934 (Section 9) and related SEC rules. Specifically, Rule 10b-5 states that it is unlawful to make untrue statements or omissions of material facts in connection with the purchase or sale of any security.
A CLOSER LOOK AT INTENT
Let's analyze the intent behind Kerrisdale's actions when they published the report and letter about C3.ai.
Unsupported Allegations and Cherry-Picking:
The letter contains allegations of accounting fraud without providing concrete evidence or a thorough analysis. Instead, it selectively highlights specific data points and aspects, potentially ignoring or downplaying counterarguments or positive aspects of C3.ai's financials.
The Use of Strong Language and Rhetoric:
The language used in the letter, such as terms like "accounting fraud," might be interpreted as an attempt to evoke strong emotions and reactions from readers, potentially causing them to sell their shares and further drive down C3.ai's stock price.
Timing and Market Impact:
Kerrisdale published the letter to C3.ai's auditor, Deloitte, CC'ing the SEC, shortly after C3.ai's stock had regained its value following the initial report. The stock lost over 20% after the release of the report on March 6th but quickly regained value and was reaching new heights (and therefore endangering Kerrisdale's short position in the stock) when Kerrisdale published the letter.
This publication led to an almost 40% drop in the stock's value, significantly benefiting Kerrisdale's short position. The timing of these publications hints at a calculated effort to manipulate the market and profit from the resulting panic.
Misrepresentation of Competitors and Customer Growth:
Kerrisdale's misleading comparison between C3.ai, Palantir, and Snowflake can be seen as an attempt to create a false impression of C3.ai's performance.
By emphasizing the differences in customer counts without providing proper context or acknowledging the distinct niches of each company, Kerrisdale intentionally leads readers to form a negative perception of C3.ai's growth potential.
These companies have different focuses within the AI and data analytics market, making the comparison potentially misleading.
This manipulative tactic could be intended to drive down the stock price and benefit their short position.
Inconsistencies in Understanding and Presenting Financial Data:
Kerrisdale's misinterpretation of unbilled receivables, and their contradictory statements in the report and letter, can be perceived as either incompetence or a deliberate attempt to mislead readers.
Raising concerns about unbilled receivables in the letter while providing a possible explanation in their own report, might be interpreted as an attempt to manipulate and mislead readers.
This could be seen as incompetence or a deliberate effort to confuse readers who may not be familiar with US GAAP, leading them to believe that something unusual is happening with C3.ai's financials.
CONCLUSION
The inconsistencies, errors, and misinformation found in their publications, coupled with the timing and market impact, make it certainly not seem impossible that Kerrisdale's intent in publishing the report and letter about C3.ai may have been to manipulate the market, capitalizing on the resulting stock price fluctuations and protecting their short position.
Sources:
C3 Financial Data:
ir.c3.ai/static-files/0923dd61-7186-4880-b44c-dc7c155fdfad
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-third-quarter-2023-financial-results
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-second-quarter-2023-financial-results
ir.c3.ai/news-releases/news-release-details/c3-ai-announces-fiscal-first-quarter-2023-financial-results
Kerrisdale Capital's report and letter:
kerrisdalecap.com/wp-content/uploads/2023/03/C3.ai-AI.pdf
kerrisdalecap.com/wp-content/uploads/2023/04/C3.ai-Auditor-Note.pdf
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