Sri Lankan American Investor Palihapitiya Must Face Lawsuit Against Insurance Company he Took Public, Judge Rules

Sri Lankan American businessman and investor Chamath Palihapitiya and executives of Clover Health Investments, which he took public last year, must face a lawsuit that claims that they misled investors. U.S. District Judge Aleta Trauger in Nashville declined to dismiss the case on March 1, “allowing investors to proceed with allegations Clover lied about the source of its growth and the existence of a U.S. Department of Justice probe into the company,” Reuters reported. 

Clover Health was founded by Vivek Garipalli in 2014. According to the company website, it has locations in eight states, including New Jersey, Tennessee, Pennsylvania and Texas. Prior to founding Clover, he founded CarePoint Health in 2008, a fully integrated healthcare system in New Jersey. Last year, Palihapitiya took the insurance company public through his SPAC group Social Capital Hedosophia. Forbes estimated that the SPAC listing brought Garipalli’s net worth to “at least $1billion.”

Investigation of the company began last February after Hindenburg Research, an investment research firm, released a report on Feb. 4 detailing how “Clover Health and its Wall Street celebrity promoter, Chamath Palihapitiya, misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction last month.”

According to the report, Clover Health did not disclose that its business model and its software offering, called the Clover Assistant, are under active investigation by the Department of Justice (DOJ), “which is investigating at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals.”

The report mentions SeekMedicare, calling it Clover’s “thinly-disclosed subsidiary.” Adding that Seek makes no mention of its relationship with Clover on its website, the report says it misleads advertisers that it offers “independent” and “unbiased” advice on selecting Medicare plans. Its activities are also under investigation by the DOJ.

Last month, Palihapitiya stepped down as chairman of Virgin Galactic’s board of directors. His SPAC took the space-tourism company public in October 2019. In a statement announcing the departure in a statement last week, Virgin Galactic CEO Michael Colglazier said he was leaving to “focus on other public company board commitments.” He said the company had “always known the time would come when [Palihapitiya] would shift his focus to new projects and pursuits.”

A former Facebook executive, Palihapitiya is CEO of Social Capital, a Menlo Park-based venture capital firm which he founded in 2011 to invest in companies in fields being ignored by other venture capitalists, like health, financial services, and education. The firm has since expanded to also invest in tech companies like Amazon, Tesla, and Slack. In 2018, Palihapitiya closed his VC funds to new investors.

The 45-year-old, who often describes himself as the Warren Buffett of the new generation, is one of the main proponents of SPAC (Special-Purpose Acquisition Companies), one of the hottest trends among dealmakers in Silicon Valley. Through his SPAC group Social Capital Hedosophia, Palihapitiya has sponsored six such companies, raised a total of $4.34 billion, and acquired businesses across several sectors including space travel, health insurance, financial services and real estate. Through Social Capital Hedosophia Holdings I, he took Virgin Galactic public and made it the first listed human spaceflight company. In January 2021, Social Capital filed for seven new SPACs. His extensive investments in them gained him the nickname of “SPAC king” during the pandemic.

Before founding Social Capital, he served on Facebook’s senior management team in several capacities, most recently as the vice president of User Growth, Mobile & International. During his four years at the company, he is credited with helping orchestrate the social media platform’s massive growth. Before that, he worked at AOL and became the company’s youngest vice president while heading AOL’s Instant Messenger division. Palihapitiya first entered the venture capital world in 2006 as a principal at Mayfield Fund.