What happened

For much of his nearly half-century career on Wall Street, Carl Icahn has been known as an activist investor. But in May, the tables were turned when a prominent short-seller released a report critical of his Icahn Enterprises (IEP 1.98%). Shares of Icahn Enterprises fell by 55.6% in May, according to data provided by S&P Global Market Intelligence, in the wake of that report and other commentary that followed.

So what

Icahn is one of the best-known activist investors, with a strong track record dating back to the early 1980s of agitating corporate boards to make changes that he feels will boost share prices. But in early May, activist Hindenburg Research released a report calling Icahn Enterprises "substantially overvalued," accusing the company of overstating the value of its portfolio and relying on a "Ponzi-like" structure to fund its dividend.

Hindenburg has a decent reputation, and its reports are usually taken seriously. Icahn Enterprises responded by calling the report "self-serving," and vowed to fight back against the accusations, but the company also disclosed that the U.S. Attorney's office for the Southern District of New York had contacted it seeking information about corporate governance, dividends, valuations, and other topics.

Bill Ackman, another famous activist who has feuded with Icahn in the past, said on Twitter that Icahn Enterprises "reminds me somewhat of Archegos," the massive family office that collapsed in 2021 amid allegations of fraud.

Now what

Icahn Enterprises has always been an odd collection of assets, with investments in energy, automotive, consumer goods, metals, and real estate. For years, the stock's price has been sustained by its large dividend, which -- as Hindenburg notes -- cannot be supported by the company's operating cash flows.

None of this is a smoking gun, but if nothing else, Hindenburg has shined a spotlight on practices that were perhaps not well understood by investors. And now that they know, there might be less willingness to buy in. That could be a problem for Icahn Enterprises even if there is nothing nefarious going on.

Given the risk, there is no reason for investors to rush in here following the drop.