By Pam Martens and Russ Martens: May 20, 2022 ~

Yesterday the Senate Banking Committee held a hearing to consider President Biden’s nominations for two Commissioners at the Securities and Exchange Commission (Jaime E. Lizárraga and Mark Toshiro Uyeda) as well as Michael Barr to be Vice Chairman for Supervision at the Federal Reserve Board of Governors. (For the skinny on Barr’s fitness to supervise megabanks on Wall Street, see our hold-your-nose report here and David Dayen’s eyepopping report here.)

During the hearing, Senator Elizabeth Warren noted the vast amounts of money that investors have lost in crypto coins and cryptocurrency and then moved on to compare the lack of protections that investors have in crypto versus the protections afforded in the stock market. Warren asked Barr the following:

Warren: “If I bought a company’s stock, even the most hyped-up, junkiest one listed on the New York Stock Exchange, could I be reasonably confident that the company is following basic rules that protect against fraud, insider trading and sloppy cyber security protocols?”

Barr: “Thank you Senator Warren. The area of jurisdiction is obviously within the expertise of the SEC but I think that is a reasonable basis for concluding that.”

Senator Warren is one of the most knowledgeable members of the full Senate and the Banking Committee when it comes to Wall Street. If Senator Warren doesn’t know that the New York Stock Exchange has morphed into a snake pit of shady stock deals where investors should have zero confidence in being protected, then there is a really big problem in Congress.

Before we get into present-day conditions at the New York Stock Exchange, it would be well to remember that Enron traded on the New York Stock Exchange while its executives and its auditor, Arthur Andersen, were setting up off-balance-sheet vehicles to hide the true state of its finances. It was considered the seventh largest corporation in the U.S. before it collapsed.

A stock trading currently on the New York Stock Exchange is Gaotu Techedu, previously called GSX Techedu. It trades under the ticker GOTU. On May 18, 2020, short seller Muddy Waters released a 25-page detailed report on the company, concluding as follows:

“We are short GSX because we conclude that it is a near-total fraud.

“We conclude that at least ~70% of its users are fake, and we think it’s quite likely that at least ~80% of its users are fake.”

The company denied that it was operating a fraud. News outlet SupChina reported on March 2 of last year this assessment of GSX Techedu:

“SupChina reviewed interviews with current GSX employees conducted by StrandPoint, a private investment firm. There was one consistent theme: the company was inflating its metrics across a variety of different business operations. One employee outlined a process by which tutors were made to concoct fake parents to present a livelier discussion on WeChat groups. Another employee admitted that online sales sagged last year relative to their competitors, despite the record-breaking top-line numbers presented in their financial reports. One top tutor was especially curt: ‘99% of tutor resumes are fake,’ he said.”

As the chart below shows, people who invested in GSX Techedu/Gaotu Techedu last year have lost almost all of their money. (It is trading this morning at $1.45 on the New York Stock Exchange.)

On April 15 of last year, 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 QuantumScape 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, 2020. 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.”

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.”

In March of 2021, 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. (The stock is trading this morning at $12.66.)

Another problem stock is Chinese vaping company, RLX Technology, an IPO that had its debut on the New York Stock Exchange on Friday, January 22 of last year. Its IPO price was $12 per share.

The prospectus for its IPO is Orwellian in terms of the panoply of risks cited to its future business prospects, including this:

“We have identified a material weakness in our internal control over financial reporting.”

Exactly what is that material weakness? The prospectus tells us this:

“The material weakness identified relates to lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to design and implement formal period-end financial reporting controls and procedures to address complex U.S. GAAP technical accounting issues, and to prepare and review the consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the Securities and Exchange Commission, or the SEC.”

Nonetheless, the New York Stock Exchange listed this company. On its second day of trading, its shares traded at an intraday high of $35, making those who sold at that point a very handsome profit. Yesterday, the shares closed at $1.98 following a year-long slump.

We could go on and on and on but you get the picture.

Dodgy listing standards are not the only problem at the New York Stock Exchange. Bestselling author and Wall Street veteran, Michael Lewis, revealed in his 2014 book, Flash Boys, how the exchange was allowing high frequency traders to co-locate their computers next to the main computers of the exchange to gain a speed advantage over other customers at a monthly cost that only the very rich can afford to pay.

Lewis writes in “Flash Boys” that “both Nasdaq and the New York Stock Exchange announced that they had widened the pipe that carried information between the HFT [high frequency trading] computers and each exchange’s matching engine. The price for the new pipe was $40,000 a month, up from the $25,000 a month the HFT firms had been paying for the old, smaller pipe.”

Instead of the SEC reining in these outrageous abuses, the norm has become a revolving door. Lewis writes in “Flash Boys” that the Royal Bank of Canada conducted a study in which they “found that more than two hundred SEC staffers since 2007 had left government jobs to work for high-frequency trading firms or the firms that lobbied Washington on their behalf.”

President Donald Trump’s SEC Chair, Jay Clayton, had legally represented 8 of the 10 largest Wall Street banks in the three years prior to taking the top post at the SEC. President Obama’s SEC Chair, Mary Jo White, had likewise been outside counsel to Wall Street’s largest firms.

Until millions of Americans actively engage in cleaning up the cesspool of corporate campaign financing and revolving doors, the integrity of the U.S. financial system will continue to erode dramatically.