Scorpion Capital Calls a New York Stock Exchange Listed Company a Fraud

By Pam Martens and Russ Martens: April 16, 2021 ~

New York Stock Exchange

New York Stock Exchange

On April 1 we wrote the following about the sorrowful state of the listing standards at the New York Stock Exchange:

“We rarely make predictions but we’re going to make one with confidence today. The New York Stock Exchange’s efforts to capture more market share of the IPO business by listing highly questionable Chinese companies and blank-check companies (SPACs) with no prior business history is going to inevitably blow up and cause long-term reputational damage to an institution that is indelibly linked to U.S. markets.”

Just 15 days later, more evidence is emerging that the New York Stock Exchange is going to experience the kind of reputational damage done to the Nasdaq stock exchange during the pump and dump era, which generated trillions of dollars in losses to investors when it blew up in 2000.

Yesterday, the hedge fund Scorpion Capital, which has a short position in shares of QuantumScape and stands to profit from its decline, released a breathtaking 188-page report in which it calls the company a “fraud,” a “scam,” an “impending pump and dump,” and wrote that it “Makes Theranos Look Like Amateurs.” (Theranos claimed it had created a technology that would revolutionize the blood-testing industry. It was eventually exposed as a fraud. Former Wall Street Journal reporter John Carreyrou wrote the seminal book on the case, Bad Blood: Secrets and Lies in a Silicon Valley Startup.)

QuantumScape is a much-hyped battery developer for electric vehicles. It began trading on the New York Stock Exchange on November 27 of last year. At the time, it had no commercial product and zero revenues.

The report from Scorpion Capital sums up its analysis of the company like this:

“The company claims to have a ‘magic material’ that’s led to a breakthrough solid-state battery for electric vehicles. Even amidst the current mania of retail gambling on vaporous SPAC promotions, QS stands out for its reckless, nosebleed valuation of $15B – or roughly ~ $80MM per employee, a mere 188 per LinkedIn. QuantumScape, across its investor materials, has only released about 7 key ‘data’ slides with a few scraps of information. This leads us to pen a new valuation metric – ‘Market Cap per Powerpoint Slide’ – in this case, about $2B for each tantalizing crumb.”

If QuantumScape actually is a fraud, it’s not only going to put another black mark on the reputation of the New York Stock Exchange but also on one of the world’s largest automakers, Volkswagen AG, which is the largest shareholder in QuantumScape. It is also going to prove incredibly embarrassing to the major media outlets that hyped the potential for this company to revolutionize the battery industry.

According to MarketBeat, one of the largest investment banks on Wall Street, Morgan Stanley, which has approximately 16,000 brokers pushing stocks to retail clients, initiated coverage of QuantumScape on February 11 with an “overweight” rating and a price target of $70. (The stock closed yesterday at $35.85, down from more than $120 a share in December.)

In March of this year, Goldman Sachs and Morgan Stanley acted as joint lead book-running managers for an offering of 10.4 million shares of QuantumScape’s Class A common stock for $40 a share. If the company turns out to be a fraud, that’s not going to help their reputations either.

In a Twitter post, the company responded to the allegations, stating that it “stands by its data, which speaks for itself. We have provided higher transparency than any other solid-state battery effort we are aware of, with details on current density, temp, cycle life, cathode thickness, depth of discharge, cell area, pressure.”

If all of this is starting to sound like a bad rerun of the era frauds and ensuing bust, this might be a good time to remind folks exactly how that was engineered.

First, so-called “analysts” at Wall Street’s biggest investment firms issued knowingly false research reports to the public, placing rosy forecasts on the growth prospects for a new publicly-traded company, while sending internal emails calling the offerings “crap,” and “dogs.” Next, the Wall Street firms lined up large institutional clients and instructed them on when and how to buy the stock in order to create escalating prices. This technique had the official name of “laddering.”

Inside the retail brokerage offices owned by the same Wall Street investment banks, the managers would tell their stockbrokers to keep the retail client in the stock as the price soared. If the stockbroker tried to get his small client out with a profit, he was hit with a so-called “penalty bid,” which took away the commission he had been paid for getting the client to buy the stock. This sent the clear message to other stockbrokers to leave their clients in the dubious deals. Thus, only the wealthy and well-connected were allowed to capture the bulk of profits on these hot deals before they collapsed.

Another practice was called “spinning.” The SEC explained the technique in charges it brought against Sandy Weill’s brokerage firm, Salomon Smith Barney:

“SSB, in a practice known as ‘spinning,’ provided preferential access to hot IPO shares to officers of existing or potential investment banking clients who were in a position to direct their companies’ investment banking business to SSB. The officers sold the shares provided to them for substantial profit. Subsequently, the companies for which the officers worked provided SSB with investment banking business. Executives of five telecom companies made approximately $40 million in profits from approximately 3.4 million IPO shares allocated from 1996-2001, and SSB earned over $404 million in investment banking fees from those companies during the same period.”

Jack Grubman, a stock analyst at Salomon Smith Barney, played a central role in this earlier era of corruption. He was charged by the SEC for ‘fraudulent research.’ He never went to trial or was criminally charged. He paid a $15 million fine, was barred from the industry, and walked away. His haul while at Salomon Smith Barney according to the SEC, “exceeded $67.5 million, including his multi-million dollar severance package.”

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