(Bloomberg) -- Shares of recently debuted nursing home operator, PACS Group Inc., plunged this week in a sharp reversal that erased around $2.5 billion from its cofounders’ fortunes.
It started on Monday when well-known short-seller, Hindenburg Research, targeted the firm in a report alleging that the company has been “systematically scamming taxpayer-funded health-care programs.” Shares sank 28%, at the time it was the worst one-day rout since PACS Group’s initial public offering in April.
As the firm’s majority holders with close to 55 million shares apiece, cofounders Jason Murray and Mark Hancock, took the brunt of the hit. They’ve incurred paper losses of $1.26 billion each on their stakes in PACS Group through Thursday’s close.
A well-received IPO had initially seen Murray and Hancock’s wealth swell to over $2 billion apiece as the stock doubled from its $21 a share listing price less than seven months out from its debut, but those gains were quickly slipping away.
The short report was only the beginning of their troubles. Two days later, PACS said it received an unspecified number of civil investigative demands on its reimbursement and referral practices that “may or may not” be related to the Hindenburg report. The stock spiraled by another 39%, hitting another grim milestone as shares closed below the IPO price for the first time.
“When that report came out, we felt it was more of a short seller-driven selloff,” Tao Qiu, a research analyst at Macquarie Capital, said. “But then with the company disclosure, there seems to be something else going on, of which we just don’t have a lot of clarity.”
Hindenburg accused PACS of abusing a Covid-era waiver to drive higher reimbursements from the government’s Medicare program as well as of fraudulent staffing practices.
PACS called the claims in the short report “misleading” but said that it’s conducting an internal investigation of the allegations in a statement Wednesday. The company hasn’t responded to Bloomberg News requests for additional comment.
The nursing home firm, which manages about 284 nursing facilities across 16 states and serves more than 27,000 patients daily, also postponed the release of its third quarter results but issued preliminary key operating metrics for the quarter.
So far Wall Street analysts, including Macquarie’s Qiu as well as many of the IPO’s underwriters JPMorgan and Truist and RBC Capital Markets, have stuck by their universally bullish reviews of the firm.
“We are skeptical that any coding or staffing impropriety could be as widespread as the short report suggests,” RBC’s Ben Hendrix wrote in the aftermath of the short report before the internal investigation was revealed. Wednesday’s delay and probe left Hendrix “disappointed” but his outperform rating on the stock has so far remains unchanged.
For PACS Group’s Murray and Hancock the losses could have been worse. Both of the founders sold shares worth $295 million, roughly 13% of their holdings, in September. With the duo still holding roughly 70% of the stock, most of the outstanding shares are not available to trade.
With individual investors owning most of the stock, only about a quarter of the outstanding shares are available to trade.
“Until we get more clarity on what the nature of that investigation is and what’s the finding from their internal investigation, I think the stock is going to trade on sentiment rather than fundamentals,” said Macquarie’s Qiu. “The sooner they put out the numbers, the better it is for the stock.”
PACS expects to release complete third-quarter results, originally scheduled for Thursday, “as soon as practicable.”
--With assistance from Tom Maloney.
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