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Turlov’s gam­bit worked: Freedom Finance, the exchange’s busiest trad­er, prof­it­ed hand­some­ly when the stocks it made mar­kets for grad­u­al­ly increased in val­ue. Freedom Holding’s fis­cal 2017 10‑K annu­al report shows a secu­ri­ties trad­ing gain of $23 mil­lion, to $33.74 mil­lion, from $10.8 mil­lion in the pri­or fis­cal year.

Roddy Boyd, The Foundation for Financial Journalism, December 14, 2020,

If one word could describe the U.S. stock mar­ket of 2020, it would be “improb­a­ble.” The S&P 500, for exam­ple, has risen about 14.14 per­cent this year despite a pan­dem­ic that is dead­ly to both peo­ple and cor­po­rate prof­its. Yet even after wit­ness­ing this year’s string of unprece­dent­ed devel­op­ments, investors might be shocked to learn what lies behind the recent mus­cu­lar share price growth of Freedom Holding Corp. This Las Vegas–incorporated bank and secu­ri­ties bro­ker­age has its prin­ci­pal office in Almaty, Kazakhstan, and a major pres­ence in oth­er cities of the for­mer Soviet Union. 

In Freedom Holding’s most recent quar­ter­ly fil­ing of Nov. 19, man­age­ment attrib­uted the company’s earn­ings suc­cess to cus­tomers under­tak­ing a high­er vol­ume of trades as a result of “the unique mar­ket char­ac­ter­is­tics sur­round­ing the COVID 19 pan­dem­ic.” In oth­er words, quar­an­tined or marooned investors are day trad­ing to pass the time as dis­ease spreads across the world. And thus Freedom Holding’s astro­nom­i­cal rev­enue growth has seem­ing­ly made it the fastest-grow­ing finan­cial ser­vices com­pa­ny on Earth.

So why aren’t the big bro­ker­age oper­a­tions of the U.S. and Western Europe repli­cat­ing this mod­el? A clue as to why they are not can be found in Freedom Holding’s Securities and Exchange Commission fil­ings. The Foundation for Financial Journalism has found that Freedom Holding serves up gaudy growth fig­ures with few dis­clo­sures or incon­gru­ous expla­na­tions at best — and accom­pa­nies them with an oper­a­tions struc­ture akin to that of a pen­ny stock company.

Despite the fact that Freedom Holding is incor­po­rat­ed in the States and its shares are trad­ed on Nasdaq, noth­ing about its actu­al U.S. pres­ence should give American investors any con­fi­dence. LinkedIn lists only one U.S.-based Freedom Holdings employ­ee. And the com­pa­ny has sit­u­at­ed its U.S. head­quar­ters inside a Regus cowork­ing space. The company’s audi­tor, Salt Lake City–based WSRP LLC, has just 16 part­ners and only four pub­licly trad­ed clients, accord­ing to a Public Company Accounting Oversight Board fil­ing. Similarly Freedom Holding’s out­side legal advis­er, the law firm Poulton & Yordan, has mere­ly two licensed attor­neys and no web­site. All the while, most of the company’s oper­a­tions — tak­ing place in its trad­ing and retail bro­ker­age divi­sion, Freedom Finance — are car­ried out thou­sands of miles away in numer­ous juris­dic­tions, most­ly in Russia, Ukraine and Kazakhstan, but also Europe, and quite active­ly in Cyprus. 

Although Freedom Holding’s SEC fil­ings do not reveal how it is mak­ing its great for­tune, its sub­sidiaries’ audit­ed finan­cial state­ments do. These fil­ings reveal that the company’s Cyprus unit is stag­ger­ing­ly prof­itable, hav­ing earned more than $33 mil­lion last year fol­low­ing a $30,000 loss in 2017. 

Additionally, Freedom Holding has a high­ly unusu­al rela­tion­ship with a com­pa­ny based in Belize that’s owned by Timur Turlov, Freedom Holding’s founder and CEO. While lit­tle is dis­closed about it in Freedom Holding’s SEC fil­ings, this Belize enti­ty, FFIN Brokerage Services, appears to have access to the funds of Freedom Holding’s clients for as long as 93 days, a major devi­a­tion from typ­i­cal bro­ker­age indus­try prac­tices across the globe. 

Reporting earnings that might be too good to be true

Analysts read­ing Freedom Holding’s most recent quar­ter­ly fil­ing will be hard pressed to explain its earn­ings growth. In the first six months of its finan­cial year that ends on March 30, the com­pa­ny had its net income rise to $47.83 mil­lion, near­ly triple what it report­ed for the same peri­od a year ago — and more than dou­ble the $22.1 mil­lion it earned in all of fis­cal 2019.

How unique is Freedom Holding’s almost 38 per­cent net prof­it mar­gin? Goldman Sachs — long Wall Street’s most prof­itable com­pa­ny — man­aged only a 25.3 per­cent net prof­it mar­gin in 2006, dur­ing the man­ic run-up to the glob­al finan­cial crisis.

Freedom Holding’s fil­ings sug­gest that its man­agers have appar­ent­ly solved an endur­ing mys­tery of the busi­ness world: fig­ur­ing out how to tur­bocharge rev­enue growth with­out trig­ger­ing a con­cur­rent spike in expens­es or risk.

Growing a busi­ness typ­i­cal­ly requires man­agers to invest in new hires, tech­nol­o­gy or plant improve­ments in the hopes that each $1 spent will net $1.50 before tax­es in three to four years. But Freedom Holding’s income state­ments imply that its man­age­ment can spend 75 cents to real­ize a return of $3 in just a few months, all with­out hav­ing to sell stock or take on a moun­tain of debt.

The uni­verse of com­pa­nies that claim to do this is lim­it­ed to Freedom Holding. Even prof­itabil­i­ty and cap­i­tal effi­cien­cy super­stars like Google and Berkshire Hathaway can­not approach that performance.

Another fac­tor that sets Freedom Holding apart is its appar­ent effi­cien­cy and pro­duc­tiv­i­ty. A busi­ness in an aggres­sive expan­sion mode typ­i­cal­ly reg­is­ters a depressed rev­enue-per-employ­ee fig­ure as it assumes front-loaded costs (adding head count, pay­ing for tech­nol­o­gy updates) that do not imme­di­ate­ly result in new revenue.

Not so for Freedom Holding, though. In fis­cal 2019, it gen­er­at­ed $81,649 in rev­enue for each of its 1,343 full- and part-time employ­ees; in 2018 that fig­ure was $65,105 for every one of its 1,141 employ­ees. Adding only 202 employ­ees in fis­cal 2019 led the com­pa­ny to triple its net income.

Promising grand returns on IPO shares 

Marketing mate­ri­als in English on the European ver­sion of Freedom Finance’s web­site present a sim­ple propo­si­tion: Tap Freedom Finance to invest in U.S.-listed ini­tial pub­lic offer­ings for a gold­en tick­et to prof­its. (The website’s Russian text trans­lates into this English prose with Google Translate.)

To whet investors’ appetites, a brochure post­ed on Freedom Finance’s web­site declares that since 2012, a set of 107 seem­ing­ly ran­dom­ly picked U.S.-listed com­pa­nies have reaped returns of 129 per­cent on aver­age fol­low­ing their IPO.

And a YouTube pro­mo­tion­al video for Freedom Holding’s Freedom Finance Europe claims that it secures 50 per­cent returns on IPOs (after a “three-month lock­up” peri­od ends).

Putting aside whether grandiose claims are true or not, Freedom Finance holds no U.S. secu­ri­ties indus­try reg­is­tra­tions or licens­es and can­not under­write U.S.-listed IPOs or par­tic­i­pate in the activ­i­ties of syn­di­cate sell­ing groups. It must rely on oth­er bro­ker­age firms to exe­cute trades on U.S. exchanges for its clients. (In Kazakhstan, Freedom Finance does, how­ev­er, under­write IPOs, accord­ing to a June 2017 Reuters arti­cle.)

Yet Freedom Holding’s clients are buy­ing shares of com­pa­nies’ ini­tial pub­lic offer­ings – in large quantities. 

Routing transactions to a Turlov outfit in Belize

The way these trades are appar­ent­ly being accom­plished is through a com­pli­cat­ed maneu­ver: Freedom Holding’s clients send mon­ey to FFIN Brokerage Services Inc., a Belize City–based bro­ker-deal­er whose web­site promis­es “direct access to the U.S. mar­ket.” Yet FFIN Brokerage Services is not a sub­sidiary of Freedom Holding. Instead Freedom Holding CEO Turlov owns it, as clear­ly laid out in Freedom Holding’s July 2018 proxy state­ment.

Turlov’s own­er­ship of FFIN Brokerage Services seems to be a detail that Freedom Holding is not keen to fre­quent­ly share. True, the fine print of a 2017 prospec­tus also allud­ed to this fact, as did a 2019 Cyprus reg­u­la­to­ry dis­clo­sure. And, yes, a June 2019 S&rat­ings note once described FFIN Brokerage Services as Freedom Holding’s “largest coun­ter­par­ty.” But oth­er Freedom Holding doc­u­ments, espe­cial­ly its SEC quar­ter­ly and annu­al fil­ings that more investors would reg­u­lar­ly encounter, do not men­tion FFIN Brokerage Services or Turlov’s own­er­ship of it. 

And FFIN Brokerage Services is like­ly involved with Freedom Holding’s hefty num­ber of relat­ed-par­ty trans­ac­tions. Numerous Freedom Holding’s brochures and con­tracts instruct clients to send their funds to FFIN Brokerage Services. A Freedom Holding mar­ket­ing doc­u­ment in May 2017 appar­ent­ly referred to FFIN Brokerage Services as hav­ing “con­duct­ed a series of [IPO] deals this year,” per a trans­la­tion offered by Google Translate. 

Yet, apart from FFIN Brokerage Services’ hold­ing a license to trade for­eign cur­ren­cies in Belize, the com­pa­ny lacks reg­u­la­to­ry approvals to exe­cute trades in any oth­er coun­tries. Despite this, a dis­clo­sure by Freedom Holding’s Cyprus sub­sidiary about its top bro­kers cit­ed FFIN Brokerage Services as han­dling as much as 9.12 per­cent of its equi­ty orders in 2019. And Freedom Holding’s 2017 prospec­tus referred to FFIN Brokerage Services as “a place­ment agent” for its share offering. 

Perhaps the strangest aspect to FFIN Brokerage Services’ involve­ment is that Freedom Holding’s clients must abide by an unusu­al 93-day lock­up pro­vi­sion, per a FFIN Brokerage Services doc­u­ment. (At oth­er U.S. bro­ker­age com­pa­nies, a client order for buy­ing or sell­ing pub­lic secu­ri­ties, even as part of an IPO, can be can­celed at any point until the order is trans­act­ed — with­out any lock­ups or restrictions.) 

Nothing in Freedom Holding’s doc­u­ments — in English or Russian — explains how clients might ben­e­fit from the 93-day lock­up of their cap­i­tal. This arrange­ment, how­ev­er, could give FFIN Brokerage Services access to plen­ty of cash for three months, with the sole oblig­a­tion of deliv­er­ing the new­ly issued shares at the end of the period.

Blurring the lines

In its 2019 annu­al report, Freedom Holding dis­closed 12 dif­fer­ent types of relat­ed-par­ty trans­ac­tions with Turlov-owned enti­ties. And dur­ing the six months that end­ed Sept. 30, the val­ue of com­mis­sions that Freedom Holding earned from its busi­ness with Turlov enti­ties amount­ed to 57 per­cent of its $126.12 mil­lion in sales — or almost $72 million. 

Because Turlov’s relat­ed-par­ty deal­ings with Freedom Holding are so exten­sive, one can ask if this com­pa­ny has a strong future doing any busi­ness uncon­nect­ed to Turlov.

And cash is going out the door to Turlov-linked affil­i­ates as well: Through Sept. 30, more than one-third of Freedom Holding’s com­mis­sion pay­ments, or $10.38 mil­lion, went to enti­ties owned by Turlov.

While relat­ed-par­ty trans­ac­tions are legal, savvy investors often close­ly scru­ti­nize them to ensure that exec­u­tives are not mis­us­ing share­hold­er assets for pri­vate gain. To that end, the SEC requires pub­lic com­pa­nies to dis­close such rela­tion­ships in their annu­al proxy state­ments. And when pub­lic com­pa­nies have not been forth­com­ing in describ­ing their role in han­dling a CEO’s or a board member’s pri­vate invest­ments, the SEC has been aggres­sive in fil­ing claims against such com­pa­nies and their exec­u­tives.

Michelle Leder, the founder of Footnoted, described Freedom Holding’s relat­ed-par­ty deal­ings as “more than a bit dizzy­ing.” Her sub­scrip­tion ser­vice ana­lyzes pub­lic com­pa­ny fil­ings for evi­dence of poten­tial trans­ac­tions or mis­lead­ing data.

I almost felt like I need­ed a flow­chart to fig­ure [the relat­ed-par­ty trans­ac­tions] all out — lots of mon­ey going back and forth between dif­fer­ent enti­ties with Turlov being the com­mon link,” Leder said.

One pos­si­ble expla­na­tion offered by Leder for the high vol­ume of self-deal­ing is that the board of direc­tors of Freedom Holding can’t oper­ate as a coun­ter­weight to Turlov since it is a con­trolled com­pa­ny, accord­ing to New York Stock Exchange guide­lines. More than 50 per­cent of its shares are held by one per­son or enti­ty and thus it’s exempt from SEC require­ments for hav­ing inde­pen­dent directors.

Raking in capital in Cyprus 

Deeply buried in a reg­u­la­to­ry fil­ing of Freedom Holding’s Cyprus sub­sidiary is a curi­ous detail: The sub­sidiary, Freedom Finance Cyprus Limited, does not need much cap­i­tal to gen­er­ate a lot of revenue. 

Put on the green eye­shade briefly: European Union reg­u­la­tions require that finan­cial insti­tu­tions set aside 10.5 per­cent of their tier 1 cap­i­tal (or the sum of their retained earn­ings and estab­lished reserves) as insur­ance against unex­pect­ed loss­es. Freedom Holding’s European oper­a­tions, which con­sist pri­mar­i­ly of its Cyprus sub­sidiary, report­ed $42.6 mil­lion in tier 1 cap­i­tal at the end of last year. Thus, as of the end of December, the amount of cap­i­tal that the company’s European oper­a­tions (known as Freedom Finance Europe) need­ed to hold in reserve was a lit­tle more than $4.47 mil­lion. As a result, the Cyrus sub­sidiary end­ed up with $38.13 mil­lion in ready cap­i­tal in its coffers.

To be sure, hold­ing addi­tion­al cash in reserve for var­i­ous con­tin­gen­cies is pru­dent for a com­pa­ny. And giv­en stock mar­kets’ volatil­i­ty, extra liq­uid­i­ty could mean the dif­fer­ence between life and death for a finan­cial ser­vices com­pa­ny like Freedom Holding.

The Cyprus subsidiary’s reg­u­la­to­ry fil­ings also reveal a rather remark­able prof­itabil­i­ty. For fis­cal 2019, the sub­sidiary earned $33.80 mil­lion, more than fis­cal 2018’s $11.9 mil­lion and a con­sid­er­able improve­ment over its $30,000 loss in fis­cal 2017. As the chart below shows, Freedom Finance Cyprus Limited’s total 2019 income was far greater than the com­bined incomes of Freedom Holding’s oth­er subsidiaries.

Straining for cash in other parts of the organization

Yet while a pile of cash sits at its Cyprus sub­sidiary, Freedom Holding is show­ing signs of being des­per­ate for cash in vir­tu­al­ly all oth­er cor­ners of its orga­ni­za­tion. Freedom Finance Europe is offer­ing mon­ey mar­ket inter­est rates that are four to six times high­er than what U.S. insti­tu­tions are promis­ing. Banks usu­al­ly attract depos­i­tors for their mon­ey mar­ket funds by pay­ing a few extra basis points in inter­est — but not mul­ti­ples of what a rival does. U.S. reg­u­la­tors often scru­ti­nize banks whose mon­ey mar­ket inter­est rates are out­liers with­in the mar­ket­place on the view that man­age­ment may want to quick­ly inject cash to con­ceal pre­vi­ous loss­es. In fact, the par­ent company’s main divi­sion, Freedom Finance, is pay­ing its bro­kers a 15 per­cent com­mis­sion if their clients deposit 1,000 euros in cash, accord­ing to an “agent agree­ment” post­ed on its website. 

Furthermore, the way Freedom Holding funds its oper­a­tions is not con­gru­ent with the typ­i­cal prac­tices of a com­pa­ny that can read­i­ly access $38 mil­lion in cash. The company’s bank­ing and bro­ker­age sub­sidiaries in Russia and Kazakhstan, oper­at­ing under the Freedom Finance umbrel­la, are fund­ing them­selves through sales of short-term bonds with high inter­est rates — ones even as steep as 12 per­cent. Unless they have no oth­er option, most cor­po­rate man­age­ment teams would try to use avail­able resources to reduce a drag on earn­ings from inter­est expense. 

Exactly what is Freedom Holding doing in Cyprus to make that kind of mon­ey? The Cyprus subsidiary’s pri­ma­ry oper­a­tion is offer­ing Freedom24, an online trad­ing plat­form it touts as “an online stocks store.” Until ear­li­er this year, Freedom 24 used fraud­u­lent cred­it card proces­sor Wirecard for pay­ments. Cyprus is also where Freedom Holding has based its nascent Freedom Finance Europe divi­sion that’s aimed at cap­tur­ing busi­ness from day traders and indi­vid­ual investors in the Western European market.

Even though the cus­tomers tar­get­ed are indi­vid­u­als who are new to trad­ing or invest­ing, Freedom24 and Freedom Finance Europe are bare bones offer­ings in com­par­i­son with the mobile appli­ca­tions offered by, say, InteractiveBrokers or TD Ameritrade

Partnering with a troubled company to execute trades

Furthermore, Freedom Finance Cyprus Limited is enlist­ing a bro­ker­age that recent­ly land­ed in reg­u­la­to­ry hot water to car­ry out its trades: New York–based bro­ker­age firm Lek Securities. The SEC alleged in 2017 that Lek Securities had improp­er­ly trad­ed options for Ukrainian clients.

(In October 2019, Lek Securities’ co-founder Samuel Lek agreed to pay a $420,000 penal­ty and admit­ted to the SEC that he had bro­ken fed­er­al secu­ri­ties laws. Lek Securities paid $1.52 mil­lion in penal­ties and dis­gorge­ment and also acknowl­edged a series of vio­la­tions. FINRA, in con­junc­tion with oth­er U.S. exchanges, gave Lek a life­time ban from the secu­ri­ties indus­try and fined Lek Securities an addi­tion­al $900,000 for its super­vi­so­ry failures.)

And Freedom Finance’s tight rela­tion­ship with Lek Securities goes back years. SEC cor­re­spon­dence shows that in 2015 Lek Securities sought to act as a prime bro­ker for a planned Freedom Finance bro­ker­age in the U.S. named FFIN Securities Inc., for which it would process and match up its trades, as well as serve as a cus­to­di­an for its secu­ri­ties. (Freedom Finance dropped the project the fol­low­ing year.)

In addi­tion, with Freedom Finance unable to exe­cute its own trades on U.S. exchanges, London-based Lek Securities U.K. Limited last year han­dled 90 per­cent of Freedom Finance Cyprus Limited’s equi­ty orders, after doing 99.5 per­cent of them in 2018. 

Betting it all

Curious as to how such a sprawl­ing oper­a­tion, with units from Belize to Cyprus and from Almaty to Vegas, emerged? In 2008, while a 20-year-old uni­ver­si­ty stu­dent, the Russian-born Turlov launched Freedom Finance in Moscow, and it catered pri­mar­i­ly to Russian day traders. Turlov bought a small mon­ey man­age­ment firm in 2013. 

In November 2015, Turlov merged Freedom Finance’s assets with those of Salt Lake City–based BMB Munai Inc., a dor­mant oil and gas explo­ration com­pa­ny that had (unsuc­cess­ful­ly) sought to export oil from prop­er­ties in Kazakhstan. BMB Munia had for a while list­ed its shares for pub­lic trad­ing in the United States. Turlov renamed the new­ly merged com­pa­ny Freedom Holding Corporation and incor­po­rat­ed it in Las Vegas. In October 2019, Nasdaq list­ed it on the Nasdaq Capital Market tier of ear­ly-stage com­pa­nies. And just this past August, the company’s Kazakh bro­ker­age unit, Freedom Finance JSC, pur­chased Bank Kassa Nova JSC in Kazakhstan. This joined the Moscow-based retail bank (FFIN Bank) that Freedom Holding had bought in 2017. 

In a September pro­file of Turlov, Bloomberg News not­ed that the finan­cial ser­vices assets he had begun cob­bling togeth­er in 2008 now amount to one of Russia’s 10 largest bro­ker­age firms. A Bloomberg arti­cle from October 2017 is more illu­mi­nat­ing: Turlov is revealed to have a river­boat gambler’s risk man­age­ment practices.

Kazakhstan-based Freedom Finance JSC bor­rowed mon­ey using short-term repur­chase agree­ments, pledg­ing its (large) posi­tions in the stocks of a hand­ful of local com­pa­nies as col­lat­er­al. The Kazakh bro­ker­age then used that mon­ey to expand its mar­ket-mak­ing activ­i­ties (such as post­ing the prices it offers to buy and sell stocks) on the Kazakhstan Stock Exchange. 

This was an incred­i­bly risky strat­e­gy. Emerging mar­ket equi­ties are fre­quent­ly thin­ly trad­ed and volatile. Had the price of Freedom Finance’s pledged stock declined, the firm’s repur­chase-agree­ment coun­ter­par­ties could have either imme­di­ate­ly demand­ed addi­tion­al cash as col­lat­er­al or seized (and sold) the pledged shares, threat­en­ing the company’s solvency.

Yet as a chart of the Kazakhstan Stock Exchange index shows, Turlov’s gam­bit worked: Freedom Finance, the exchange’s busiest trad­er, prof­it­ed hand­some­ly when the stocks it made mar­kets for grad­u­al­ly increased in val­ue. Freedom Holding’s fis­cal 2017 10‑K annu­al report shows a secu­ri­ties trad­ing gain of $23 mil­lion, to $33.74 mil­lion, from $10.8 mil­lion in the pri­or fis­cal year.

– – – – – – – –

In the weeks pri­or to pub­li­ca­tion of this arti­cle, the Foundation for Financial Journalism sought com­ments from Freedom Holding. After Adam Cook, the company’s cor­po­rate sec­re­tary, declined to make Turlov avail­able for a tele­phone inter­view, email ques­tions were sent on Nov. 12 and again on Nov. 13. On Nov. 25, Ron Poulton declined to address them, cit­ing the avail­abil­i­ty of infor­ma­tion in its SEC fil­ings and the company’s website.

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