[ad_1]
Short sellers are often the only sheriff on Wall Street, a crucial role in a rigged stock market – easy to forget after the fury of “top-selling stocks”.
By Wolf Richter for WOLF STREET.
Luckin Coffee, a Starbucks impersonator and one of several Chinese companies with no US operations that have their IPO in the US and raise funds in the US, has filed for Chapter 15 bankruptcy in New York today. Luckin’s downfall was sparked by short seller Carson Block of Muddy Waters who on January 31, 2020 published detailed allegations of massive fraud at the company, carried out at the highest level.
At the time of the release of the Muddy Waters report, the company’s stock – well, American Depositary Receipt (ADR) – had skyrocketed from the IPO price of $ 17 per share in May 2019 to $ 50. per share in January 2020, giving the company a market. capitalization (share price multiplied by outstanding shares) of $ 12.6 billion.
The short seller report sent stocks down in a zigzag way. On April 2, 2020, the company finally admitted that it had made $ 310 million (RMB 2.2 billion) in revenue for 2019, nearly doubling its actual revenue. He said that “as of the second quarter of 2019, Mr. Jian Liu, the chief operating officer and director of the company, and several employees reporting to him, had engaged in certain faults, including the manufacture of certain transactions.
The fraud, carried out in China, was aimed at driving up the share price in the United States, and it had worked, contributing to a nearly 200% gain in shares in eight months.
On the day the company admitted the bogus earnings, shares fell 82%. Over the next few days, stocks fell further. Then the trade was interrupted. Eventually, the Nasdaq struck off ADR.
Allegations of short sellers, which had forced the company to admit at least some of its wrongdoing, finally woke up the SEC, whose role is to protect investors from this stuff, but it sleeps most of the time. . As long as stocks go up, there is nothing to protect. It is only after their collapse that the SEC wakes up.
So the SEC began to dig, and on December 16, 2020, announced that it had accused Luckin “of defrauding investors by significantly reporting the company’s income, expenses and net operating loss in the goal of falsely appearing to achieve rapid growth and increased profitability and to meet the company’s profit estimates. “
Details of the charges confirmed the short seller’s claims. But without the short seller, there would have been no charge from the SEC. And the fraud would have continued and spread. And Wall Street would have been on board, happily making money on that thing.
In a prepackaged deal, the SEC also announced in the same breath that Luckin had agreed to settle the charges by paying a fine of $ 180 million.
Carson Block did not research Luckin himself. Someone else had done the legwork, wrote a detailed 89-page report and sent the report to a number of well-known short sellers in the United States. Block took his short positions and then released the report. The other short sellers who received the report did not jump on it.
Block, in an interview last June, told the Wall Street Journal that this was the first time he has published someone else’s research to support his short position.
“We haven’t done anything glorious here. We were just convinced that the report was oriented correctly, so we decided that we would be a good platform for that, ”he said. He also said he had known the author of the report for several years, but refused to disclose the identity of the author.
So now Luckin has filed for Chapter 15 bankruptcy in New York. In China, Luckin’s stores would remain open, he said in the press release, and operations would continue as normal.
But U.S. investors who believed in the Wall Street hype and the company’s statements before and after the IPO, and who funded the company during the IPO, or bought the shares after the IPO IPO, saw each other.
Credit Suisse, Morgan Stanley, Chinese investment bank CICC and Haitong International were joint bookkeepers in the IPO of the fraudulent company. And Wall Street analysts, including an analyst at bookrunner Morgan Stanley, have been touting the stocks.
On June 11, 2019, a few weeks after the IPO, Barron’s came out touting stocks and citing three analysts who initiated ADR coverage that day, all with target prices much higher than the price of the time. One of those analysts was Lillian Lou of Morgan Stanley.
Can investors expect to receive real analysis from Wall Street as Wall Street is making so much money in fees that come and go from these investors?
Nope. All they’ll get is hype generating fees and lies.
And the SEC won’t protect investors either. If it intervenes at all, it will be late and after the collapse.
In this type of case, a short seller is the only sheriff left on Wall Street. Everyone hates them. They take huge risks and can easily get crushed by a short organized squeeze. And they are not paid by taxpayers; they are paid on the earnings of their short positions, unless they are overwritten.
In the fury of the superbly crafted and historic short-squeeze of “best-selling stocks,” including GameStop and AMC, when the social media crowd has vilified short sellers and made them their target, it’s easy to tell. ‘forget the essential role short sellers play in a rigged market.
This historic short squeeze, devised by a group of deeply cynical small traders, revealed just how rigged the market was. Lily… The stock market is broken, now for all
Do you like reading WOLF STREET and want to support it? You use ad blockers – I fully understand why – but want to support the site? You can make a donation. I really appreciate it. Click on the beer and iced tea mug to find out how:
Would you like to be notified by email when WOLF STREET publishes a new article? Register here.
[ad_2]
Source link