The insurer was accused by a short-seller of “extensive” fraud.

Globe Life (GL 7.45%) stock plummeted by more than 53% in a single day last week after short-seller Fuzzy Panda Research accused the life insurance company of fraud. The claims piled onto the already struggling stock, which had previously been a longtime holding of Warren Buffett’s conglomerate, Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.83%).

If you’re thinking about buying the dip in the stock, there are some things you’ll want to know.

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Globe Life’s troubles began last year

Globe Life was one of Berkshire Hathaway’s longest-held investments, having been part of the conglomerate’s portfolio for more than two decades. Berkshire held Globe Life through several difficult economic periods, including the COVID-19 pandemic, which put tremendous pressure on life insurers by elevating claims costs.

Buffett examines a management team’s character and trustworthiness when investing. Buffett and his team have an excellent track record of evaluating management, which is a big reason for the conglomerate’s long-term success. When Globe Life became the subject of several lawsuits accusing it of misconduct, Berkshire pulled the plug on its investment.

Last year, two Globe Life subsidiaries, American Income Life Insurance Co. and Arias Agencies, faced a lawsuit accusing them of inappropriate workplace conduct; this included rampant drug use, sexual abuse, and degradation of agents who didn’t hit sales targets.

Globe Life’s struggles continued when a former executive claimed he was fired for blowing the whistle on “potentially illegal” sales practices at the subsidiary. It appears that the accusations were why Berkshire sold its stake in the insurer last year.

Here’s what short seller Fuzzy Panda had to say about the insurer

Fast-forward to this year, and Globe Life’s troubles have gone from bad to worse. On March 6, the U.S. Department of Justice issued subpoenas to Globe Life and American Income Life. The subpoena is part of an investigation into allegations of fraud and misconduct at the (renamed) Arias Organization, now one of American Income Life’s agencies.

Last week, the dam broke after short-seller Fuzzy Panda Research accused Globe Life of “extensive” insurance fraud that was ignored by management. According to Breakout Point and reported by Bloomberg, Fuzzy Panda Research was the best-performing active short-seller in 2023. Although short-sellers — investors who try to profit from falling share prices — suffered deep losses during the long bull market of the 2010s, they can help expose harmful or downright fraudulent business practices.

Fuzzy Panda reviewed hundreds of court documents and interviewed former executives and agents “who showed us where the fraud was hidden.” According to the short-seller, the fraud was ignored by management despite being “obvious and reported hundreds of times.” After the short report was released, Globe Life’s stock plummeted 53% in a single day.

Following the serious accusations from Fuzzy Panda, Globe Life responded by saying:

We reviewed the report and found it to be wildly misleading, mixing anonymous allegations with recycled points pushed by plaintiff law firms to coerce Globe Life into settlements … The short seller analysis by Fuzzy Panda Research mischaracterizes facts and uses unsubstantiated claims and conjecture to present an overall picture of Globe Life that is deliberately false, misleading and defamatory.

Buy the dip?

According to The Fly, analysts believe the stock sell-off is overdone, but big question marks remain. Investment bank and investment firm Piper Sandler said that Globe Life’s response “serves to assuage concerns but does not completely remove the vacuum that remains absent a broader communication about this matter with the investment community.”

Another investment firm, Evercore, meanwhile, sees limited downside from here but says there is still “significant uncertainty for the shares.”

Globe Life faces serious allegations, and the stock price reflects this. After its significant sell-off, aggressive investors may find the stock ripe for the picking. If you’re willing to tolerate this risk, though, don’t bet more than you’re willing to lose.

However, given the uncertainty around the situation and the Department of Justice’s investigation, most investors are better off waiting to see how things shake out; they should avoid the stock for now.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

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