Short sellers are often the only sheriff on Wall Street, playing a crucial role in a fraudulent stock market – easy to forget after the uproar over the ‘shortest stocks’.
By Wolf Richter for WOLFSTRAAT.
Luckin Coffee, an imitator of Starbucks and one of the many Chinese companies with no operations in the US, which has its stock exchange in the US and raises funds in the US, today filed Chapter 15 bankruptcy in New York. The downfall of Luckin was caused by the short seller Carson Block of Muddy Waters who on January 31, 2020 published detailed allegations of massive fraud at the company, which was committed at the highest levels.
By the time the Muddy Waters report came out, the company’s share – well, the US Deposit Receipt (ADR) – had skyrocketed from the stock market price of $ 17 per share in May 2019 to $ 50 per share in January 2020. , which gave the company a market. capitalization (share price times outstanding shares) of $ 12.6 billion.
The short seller’s report dropped the shares. On April 2, 2020, the company finally admitted that it had generated $ 310 million (2.2 billion RMB) in revenue for 2019, which nearly doubled its actual revenue. It is said that ‘Mr. Jian Liu, the chief operating officer and a director of the company, and several employees who reported to him, were involved in certain misconduct in the second quarter of 2019, including the manufacture of certain transactions. ‘
The fraud, which took place in China, was aimed at raising the share price in the US, and it worked and was instrumental in a nearly 200% gain on the shares in eight months.
On the day the company acknowledged the false income, shares fell another 82%. Over the next few days, the stock fell further. Then the trade was stopped. Eventually, the Nasdaq removed the ADR.
The accusations of short sellers, which forced the company to admit at least part of its violation, finally woke up the SEC, whose role is to protect investors from this kind of thing, but he mostly sleeps. As long as the shares rise, there is nothing to protect. It is only after they collapse that the SEC wakes up.
So the SEC started crawling around and on December 16, 2020, announcing that it had accused Luckin of defrauding investors by materially misleading the company’s revenue, expenses and net operating loss in an attempt to look false to rapid growth and increased profitability. and to achieve the company’s earnings estimates. ”
The details of the charges confirm the allegations of the short seller. But without the short seller, no levies would be levied by the SEC. And the fraud would have continued and expanded. And Wall Street would have been on board and happily made money on this thing.
In a pre-packaged agreement, the SEC also announced in the same breath that Luckin had agreed to pay the costs by paying a $ 180 million fine.
Carson Block did not do the research on Luckin himself. Someone else did the bone work and compiled a detailed 89-page report and sent the report to a number of well-known US short sellers. Block takes his short positions and publishes the report. The other short sellers who received the report did not jump on it.
Block said in an interview with the Wall Street Journal in June last June that this was the first time he had published someone else’s research to support his short position.
“It was nothing amazing what we did here. We just had confidence that the report was directionally correct, and therefore we decided that we would be a good platform for it, ”he said. He also said that he had known the author of the report for several years, but that he did not want to reveal the identity of the author.
So now Luckin has filed Chapter 15 bankruptcy in New York. In China, Luckin’s stores will remain open, the press release reads, and operations will continue as normal.
But U.S. investors who believed in the Wall Street hype and the company’s statements before and after the stock market, and who financed the company in the IPO, or bought the shares after the IPO, got stuck.
Credit Suisse, Morgan Stanley, Chinese investment bank CICC and Haitong International were the joint bookmakers on the IPO of this fraudulent company. And Wall Street Analysts, including an analyst at book winner Morgan Stanley, listed the shares.
On June 11, 2019, a few weeks after the IPO, Barron issued to name the stocks and indicate three analysts who started covering the ADR on that day, all with prices that were higher than the then price. One of the analysts was Lillian Lou of Morgan Stanley.
Can investors expect real analyzes to be dished out by Wall Street when Wall Street earns so much money from fees that come and go from those investors?
Nope. All they will get is hype and lies that generate fees.
And the SEC will not protect investors either. If it jumps in at all, it will be late and after the crash.
In these kinds of cases, a short seller is the only sheriff left on Wall Street. Everyone hates them. They take great risks and can be easily overwhelmed by an organized short press. And they are not paid by taxpayers; they are paid from the profits of their short positions, unless they are crushed.
In the uproar over the wonderfully designed and historical short print of the “most shortened stocks”, including GameStop and AMC, when the crowd on social media insulted the short sellers and made them their target, it is easy to see the important role that short sellers play, to forget. in a turbulent market.
This historic short print, designed by a bunch of deeply cynical retailers, exposed how fraudulent the market was. Read … The stock market is broken, now for all to see
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