BFYT: Southwell’s Zebra

“accusing this business of robocalling is about the equivalent of accusing me of mistreating my Zebra and I do not have a Zebra”

-Benefytt CEO Gavin Southwell, May 2019 Earnings Call

IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion.  The information set forth in this report does not constitute a recommendation to buy or sell any security. This report represents the opinion of the author as of the date of this report. This report contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This report is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this report and undertakes no duty to update its contents. The author encourages all readers to do their own due diligence.

You should assume that as of the publication date of his reports and research, Marcus Aurelius and possibly any companies affiliated with him and their members, partners, employees, consultants, clients and/or investors (the “Marcus Aurelius Affiliates”) have a short position in the stock (and/or options, swaps, and other derivatives related to the stock) and bonds of Benefytt. They therefore stand to realize significant gains in the event that the prices of either equity or debt securities of Benefytt decline.  Marcus Aurelius and the Marcus Aurelius Affiliates intend to continue transactions in the securities of Benefytt for an indefinite period after his first report on a subject company at any time hereafter regardless of initial position and the views stated in Marcus Aurelius’ research.  Marcus Aurelius will not update any report or information on this website to reflect such positions or changes in such positions.

Please note that Marcus Aurelius, the author of this report, and the “Marcus Aurelius Affiliates” are not in any way associated with Aurelius Capital Management, LP, a private investment firm based in New York, and any affiliates of or funds managed by the latter company.

Note: This report references numerous lawsuits and and you should assume that Benefytt and the referenced defendants or individuals deny all allegations.

We are short Benefytt Technologies (NASDAQ: BFYT), formerly known as Health Insurance Innovations or HII

Last week attorneys general from seven states filed suit against health insurance telemarketers who allegedly made at least 1 billion illegal robocalls using fake numbers that included messages falsely claiming to be affiliated with large insurance companies. The Federal Communication Commission (“FCC”) separately proposed a record $225 million fine against two men and their companies that used names including Rising Eagle and JSquared Telecom to make the alleged robocalls from 2018 through 2020. An FCC Commissioner said in a statement that “These scam artists lied and said they were calling on behalf of well-known health insurance companies on more than a billion calls. That’s fraud on an enormous scale”.

FCC documents lead us to conclude that a significant portion of these robocalls were used to generate “leads” for brokers within BFYT’s network to sell policies to unsuspecting consumers. According to the FCC, Rising Eagle’s largest client was a call center named Health Advisors of America. The FCC’s filing specifically states that “Health Advisors sold health insurance through Health Insurance Innovations, Inc.” and also references a UCC filing showing that HII provided financing (below).

Source: FCC Press Release and Filing

Consumers have already sued BFYT about robocalls they say were initiated by Rising Eagle. BFYT is a co-defendant in a consumer class action filed in Illinois that alleges “HII continued to reap the financial gain from the telemarketing complained of here, even though it knew such conduct was the result of illegal calls”. The complaint states that Rising Eagle made robocalls using fake numbers and transferred millions of leads to an entity affiliated with Health Advisors of America and states that “Health Insurance Innovations is at the center of this telemarketing scheme” as the “facilitator and orchestrator”.  A class action in Florida (here) alleges that BFYT “controls a network of third-party telemarketers and insurance agent lead generators” and states that “Plaintiff has already obtained a gigantic database of millions of call transfers from Rising Eagle”.

Source:  Northern District of Illinois, Case number 1: 18-cv-03083

Yet CEO Southwell declared on BFYT’s May 2019 investor call that “HIIQ does not use robocalls for sales and marketing purposes and prohibits any distributors on the HIIQ platform from perfoming sales and marketing robocalls”.  Southwell touted various technologies that purportedly keep the company’s broker network clean and in compliance with the national Do Not Call Registry although, ironically, the FCC filing says that Rising Eagle purposefully targeted people on this list. Southwell even expressed ignorance why “robodialing has still bizarrely remained a key part and in fact a pretty fundamental part of the short thesis against this business…”.

Source: May 2019 investor call

We have repeatedly expressed our concerns about BFYT and the integrity of various statements made by its management team in a series of previous reports. These new revelations only exacerbate our skepticism, especially since the bull case appears to have become increasingly premised on the “greater fool” or BFYT’s ability to sell itself at a premium to another company. But the problem is that any potential buyer seems likely to conduct extensive due diligence into the true nature of BFYT’s business and financial condition before actually buying it. What if Southwell happens to have Zebras after all?

All investors are encouraged to conduct their own due diligence into these factors.