Mystery Hedge Fund Bolsters 500% Return on Curious Nasdaq Stock

From far­away Kazakhstan, an obscure bro­ker­age says it scores hot U.S. IPOs.

Six thou­sand miles from Wall Street, in the ancient Silk Road city of Almaty, lies the pri­vate redoubt of a lit­tle-known finan­cial empire.

Inside the mem­bers-only T‑Club, two cock­a­toos, Grisha and Silvia, keep watch. Above a bronze samovar, a flat screen tele­vi­sion shows the proprietor’s cor­po­rate crest: a green “F” on a green shield.

Few can explain exact­ly what’s going on here — how an obscure bro­ker­age in Kazakhstan, of all places, has out­run Wall Street firms.

But out­run them it has, and then some, at least in the stock mar­ket. Over the past cou­ple of years, the share price of Freedom Holding Corp. – the com­pa­ny whose “F” logo is on that green crest — has soared about 500%.

How? The young bil­lion­aire with the answers, Timur Turlov, is sit­ting at the table over there. Wearing a tai­lored blue suit and sip­ping a Red Bull, Turlov, 33, sketch­es out a grand vision for the broker.

“We remain one of the few flood­gates to the Western mar­ket for cus­tomers from our region,” Turlov says in his native Russian, while detail­ing the unique arrange­ment he says has helped secure Freedom access to new­ly list­ed U.S. stocks.

There’s a mys­te­ri­ous hedge fund with deep con­nec­tions across Wall Street; a trad­ing con­duit through Belize that Turlov per­son­al­ly con­trols; an obscure New York bro­ker­age with a trou­bled past.

According to Turlov, founder of Freedom, this set­up has secured access to hot new stocks in America, a pitch that helped make his company’s name. Freedom, he says, is giv­ing Russians, Kazakhs, Uzbeks and Ukrainians a piece of the Wall Street action.

One more twist: the more shares in Freedom his clients buy, the more of those hot U.S. stocks they will get, Bloomberg has pre­vi­ous­ly reported.

According to Freedom mar­ket­ing mate­ri­als, clients have got­ten in on more than 100 U.S. IPOs since 2020, includ­ing Airbnb Inc., Bumble Inc. and South Korean e‑commerce giant Coupang Inc. Such access is vir­tu­al­ly impos­si­ble for small bro­kers and wealth man­agers who are actu­al­ly based in the U.S. to secure.

Turlov says his firm’s way in is an affil­i­ate of a hedge fund that buys the shares from under­writ­ers and pass­es them along. Its iden­ti­ty is con­fi­den­tial, he says, and no men­tion of it appears in U.S. fil­ings. Even inside Freedom, the name is close­ly guard­ed, accord­ing to cur­rent and for­mer employees.

The arrange­ment is unusu­al, to say the least. Reena Aggarwal, direc­tor of Georgetown University’s Center for Financial Markets & Policy, says she’s nev­er seen any­thing like it.

Freedom is doing it all under the gaze of U.S. author­i­ties. The group is based in Almaty but its list­ed enti­ty is reg­is­tered in Las Vegas. Its stock is trad­ed on the Nasdaq, where the com­pa­ny is cur­rent­ly worth about $4 billion.

Inside the T‑Club, Turlov’s smart­phone keeps buzzing. Tall and boy­ish-look­ing, in a pur­ple tie, Turlov turns seri­ous as he out­lines Freedom’s ambi­tions. In January, it acquired New York-based bro­ker Prime Executions Inc., and Turlov says he’s look­ing to expand fur­ther. In June, Standard & Poor’s said it expect­ed Freedom’s “robust earn­ings” to con­tin­ue at least into 2022.

Kazakhstan Economy

To the unini­ti­at­ed, Kazakhstan may be best known for “Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan,” the 2006 Sacha Baron Cohen com­e­dy that so infu­ri­at­ed the Kazakh government.

But this Central Asian nation of 19 mil­lion is one of the most pros­per­ous for­mer Soviet republics. Its min­er­al and oil wealth has added to the region’s afflu­ent elite, many of whom are eager to play the mar­kets. Sensing oppor­tu­ni­ty, Turlov found­ed Freedom in 2008.

Today his firm has around 100 branch­es and offices, from the Kazakh cap­i­tal Nur-Sultan, to the Russian resort city of Sochi, to Kyiv in Ukraine. Freedom is head­quar­tered in the tallest build­ing in Almaty, a glass-and-steel sky­scraper next to a shop­ping mall with lux­u­ry bou­tiques like Louis Vuitton, Gucci and Prada.

A Moscow native and cit­i­zen of Russia — and also St. Kitts and Nevis in the Caribbean — Turlov con­trols almost three quar­ters of Freedom. As the company’s stock price has soared, he’s become a bil­lion­aire sev­er­al times over.

Minting Money

The IPO busi­ness may attract the most atten­tion, but Turlov says it is an increas­ing­ly mar­gin­al part of the busi­ness. He says Freedom doesn’t receive sig­nif­i­cant allo­ca­tions and today the busi­ness makes up only about 10% of Freedom’s revenue.

Freedom Holding has been mint­ing mon­ey nonethe­less, with cus­tomers grav­i­tat­ing to trad­ing stocks and fixed income invest­ments. Its pre-tax prof­it jumped more than six-fold to $173 mil­lion in the fis­cal year end­ed March 31. During the same peri­od, the num­ber of its cus­tomer accounts dou­bled, to 290,000 — a huge fig­ure for the region, albeit a pit­tance next to the 22.5 mil­lion at new­ly pub­lic Robinhood Markets Inc.

Turlov’s own pro­file has also soared. In 2018, he backed “Financier,” a glossy finan­cial dra­ma (think an Almaty-based “Margin Call”). One of the bro­ker­ages in the film, Partner Finance, sports a logo sim­i­lar to Freedom’s.

His larg­er-than-life image con­tin­ues to draw clients — as does hoped-for access to myr­i­ad U.S. list­ings. A sec­tion of Freedom’s web­site lays out the pitch. “Buy stocks at their ini­tial price before trad­ing begins,” it runs. “Prices can grow by tens or even hun­dreds of percent!”

This abil­i­ty to access IPOs “is Freedom’s spe­cial­ty, their absolute advan­tage,” said Daniyar Temirbayev, who heads the Qazaq Association of Minority Shareholders, a lob­by­ing group for investors in the country’s bur­geon­ing stock market.

Four Freedom cus­tomers inter­viewed by Bloomberg, who all asked not to be iden­ti­fied, con­firmed they received allo­ca­tions to U.S. IPOs — and that they bought Freedom shares to increase their allocations.

Oversubscribed IPOs

Exactly how Turlov does all of this remains a puz­zle to out­siders. Most U.S. IPOs are over­sub­scribed. Everyone wants to get in ear­ly in case a stock pops on the first trad­ing day, and Wall Street banks typ­i­cal­ly dole out stocks to favored clients first. Hedge funds and big mutu­al funds typ­i­cal­ly take 90%, accord­ing to Jay Ritter, a finance pro­fes­sor at University of Florida in Gainsville.

What are the odds an obscure play­er like Freedom could get in early?

“Zero,” Ritter says.

But Turlov says this is where his workaround comes in. In the T‑Club, where entry is restrict­ed to Freedom’s employ­ees and high-rolling clients, he reveals key parts of the Freedom system.

Belize Affiliates

One is a Belize-based affil­i­ate of the afore­men­tioned hedge fund, which Turlov says buys the stocks from major under­writ­ers. Another is a Belize-based affil­i­ate of Freedom that Turlov per­son­al­ly owns. Once the hedge fund affil­i­ate gets its hands on a stock, Turlov has that Belize-reg­is­tered enti­ty, FFIN Brokerage Services Inc., buy it and even­tu­al­ly pass it to Freedom for a fee.

Freedom cus­tomers don’t actu­al­ly get their hands on the stocks for three months, an eter­ni­ty in the world of IPOs. During the lock-up peri­od, they can buy a deriv­a­tive from Freedom to fix the share price where they want.

The hedge fund’s affil­i­ate col­lects a com­mis­sion, safe in the knowl­edge that Freedom clients won’t be able to flip the stock quick­ly, Turlov says.

According to Scott Moss, a part­ner at law firm Lowenstein Sandler LLP in New York, hedge funds rarely if ever act as some­one else’s bro­ker because of poten­tial reg­u­la­to­ry hassles.

“As a hedge fund man­ag­er, I would have huge rep­u­ta­tion­al risk,” said Carsten Kotas, pro­fes­sor of busi­ness admin­is­tra­tion at FOM University in Frankfurt and a for­mer trad­er who pre­vi­ous­ly over­saw hedge funds at HSBC Holdings Plc.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority declined to com­ment on Freedom’s busi­ness practices.

Most of the IPOs that Freedom has accessed so far this year have been over­seen by Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. Spokespeople for the firms declined to com­ment on whether they were aware of any rela­tion­ship between their clients and Freedom.

Demand from cus­tomers far out­strips sup­ply, so Freedom has start­ed a $625 mil­lion fund trad­ed in Russia and Kazakhstan, whose hold­ings include some of the IPO secu­ri­ties — and also holds Russian sov­er­eign debt. It was cre­at­ed to enable more clients to get expo­sure to recent­ly list­ed com­pa­nies, accord­ing to Turlov.

Lek Securities

Turlov names anoth­er cog in his oper­a­tion: Lek Securities UK Limited, the U.K. enti­ty of Lek Securities Corp., a New York-based bro­ker­age. The unit tem­porar­i­ly holds the IPO shares pur­chased by the hedge fund, he says. Freedom’s European sub­sidiary routes the vast major­i­ty of its trades to Lek, reg­u­la­to­ry fil­ings show. The New York bro­ker, small by com­par­i­son with Wall Street banks, is also one of the most active traders of many of the IPO stocks that Freedom says it has accessed, Bloomberg data show.

Lek has had run ins with U.S. reg­u­la­tors, includ­ing 2017 alle­ga­tions that the bro­ker­age had enabled manip­u­la­tive trad­ing by a client in Ukraine that result­ed in almost $30 mil­lion of illic­it prof­its. Lek was fined about $3 mil­lion in 2019 and founder Sam Lek was per­ma­nent­ly banned from the secu­ri­ties industry.

More trou­ble emerged in 2018 when FINRA alleged that Lek Securities had allowed cus­tomers with dicey back­grounds to engage in some $100 mil­lion of pen­ny-stock trades despite “numer­ous red flags” of poten­tial fraud. Calling the firm a “recidi­vist vio­la­tor” of rules, Finra fined it $200,000 in 2019.

Samuel Lek’s son Charles, who now runs the busi­ness, declined to comment.

Freedom isn’t linked to the above alle­ga­tions but its own oper­a­tions have drawn ques­tions. The Foundation for Financial Journalism, a non-prof­it sup­port­ing inves­tiga­tive jour­nal­ism, pub­lished a report last week exam­in­ing Freedom’s cor­po­rate arrange­ments includ­ing Lek, var­i­ous relat­ed par­ty trans­ac­tions and the exe­cu­tion process for the trades of its customers.

Turlov says skep­ti­cism about Freedom is inevitable. People envy his success.

“Almost any sit­u­a­tion can become the basis for crit­i­cism,” he says.

— With assis­tance by Marion Dakers

Original source of arti­cle: www.bloomberg.com