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. Sources: audited income statements[/caption]
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.