Hedge fund to pay Avis $650mn in settlement after wild stock swings
Pentwater Capital rapidly sold shares in US car rental group as price soared then plummeted
Avis Budget reached a settlement with hedge fund Pentwater Capital after the US car rental group accused the investor of wrongly profiting from wild swings in the company’s shares earlier this year.
Pentwater will pay the company $650mn in cash, according to a regulatory filing on Monday, ending a dramatic period during which Avis’s chief executive publicly blamed one of its biggest shareholders for a precipitous drop in its share price.
“We have entered into a settlement agreement, subject to court approval, with Pentwater to settle our pending lawsuit for the recovery of short-swing profits,” Avis said, referring to a US securities law that prevents insiders or large shareholders from making quick gains from stock trades.
The car rental company had filed a lawsuit against the hedge fund last week under seal.
Shares in the car rental group surged more than 300 per cent over three weeks in April before crashing.
Avis chief executive Brian Choi said during an earnings call in April that Pentwater’s rapid selling of stock was likely to have contributed to the company’s 38 per cent drop in a single day. The fund had recently disclosed it sold millions of shares, and Choi vowed to “aggressively pursue” any ill-gotten profits.
“Given the quantum of shares sold in such a short span of time, our stock price experienced a significant decline,” Choi said at the time. “It seems the only insider active during this period of excess volatility was Pentwater Capital.”
The hedge fund said in a regulatory filing around the time of the earnings call that it was in discussions with Avis about voluntarily handing back gains made from selling shares that triggered the short-swing profits rule.
Pentwater did not immediately respond to requests for comment on Monday.
Avis’s volatile April was driven by Pentwater’s control of the relatively small number of shares available for other investors to buy and sell, analysts said.
In late March, Pentwater began adding to its already large Avis position, buying millions of the company’s shares, filings show. The net effect was a huge reduction in the number of the car rental group’s shares available to the public.
Avis ended the first quarter of this year with revenues of $2.5bn and a net loss of $234mn. Its stock was heavily shorted before April’s rally began.
The share price was pushed higher as Pentwater added to its stake and short sellers covered their positions by buying back stock in a process known as a short squeeze.
Shares in Avis jumped more than 10 per cent in after-market trading following Pentwater’s agreement to pay the $650mn settlement.
“Avis was a multibillion-dollar company behaving like a microcap stock because of its tiny float,” said David Capablanca, head of short seller Fugazi Research.