Friday, May 22, 2020

When Margin Loans Go Bad: Credit Suisse and Others Try To Recoup US$500 million From Luckin Coffee Family

From Bloomberg via the Straits Times, May 22:

Banks target Luckin Coffee ex-billionaire's family assets to recoup $709m in losses
Lenders led by Credit Suisse Group are targeting the family assets of Luckin Coffee Inc chairman Lu Zhengyao as they try to recoup losses on more than US$500 million (S$709 million) in margin loans that soured after the company became embroiled in an accounting scandal.

Credit Suisse is seeking a court order to appoint liquidators for Haode Investment Inc, according to a notice posted in the BVI Gazette on Thursday (May 21). Haode, controlled by Lu's family trust, defaulted on a loan facility backed by Luckin shares, according to a statement from lenders in early April. Spokespeople for Credit Suisse and Luckin declined to comment.

The liquidation request adds to a long list of challenges facing Lu, who became a billionaire after his fast-growing Chinese coffee chain went public in the US with help from some of the biggest names on Wall Street. Much of Lu's wealth has been wiped out by a 92 per cent plunge in Luckin's stock since April, when the company disclosed that some of its employees may have fabricated billions of yuan in sales.

Luckin's fall from grace has made it a poster child for concerns about Chinese corporate governance, fueling a debate in Washington over the extent to which US money and capital markets should be accessible by firms from a growing geopolitical rival. Nasdaq is moving to delist Luckin from its exchange, while the Senate approved legislation Wednesday that could lead to some Chinese companies being barred from US bourses.

Lu said in a statement on Wednesday that he's "deeply disappointed" Nasdaq is moving to delist the shares before Luckin releases final results of an internal probe into its accounting.

Banks that participated in the loan facility to Lu's investment vehicle signaled in April that they plan to sell Luckin shares that were pledged as collateral, though its unclear whether the banks have started offloading the shares or how much money they'll be able to recoup.

Credit Suisse and Morgan Stanley each put up about US$100 million as part of the loan facility, while China's Haitong International Securities Group lent about US$140 million....

Although not directly comparable I am reminded of a post from 2010:
My Favorite Stock Scam Blowhards
After doing this a while you don't even need to call in the forensic accountants to spot the weird ones. A bit of backround, Equisure Inc. was purportedly a reinsurer based in Belgium that had, in a remarkably short period of time gone from the NASDAQ bulletin board to the American Stock Exchange by way of a reverse merger with a dormant shell company.

The heart of the scam was to hype the stock by way of news releases to a) gun the stock for the early buyers and b) get the stock on the Federal Reserve Board's list of marginable securities.
That step is a bit more sophisticated than your run-of-the-mill pump and dump because it allows the crooks to borrow against the shares rather than having to sell them. The lack of selling pressure makes it easier to maintain the run-up until the plug is pulled.

Of course the scammers also took whatever petty cash was in the company's coffers.
I never saw a complete accounting but a fair estimate of the EQE take was $100 Mil.....
Which led to one of the signature moves of scam artists in all places and at all times: bluster, bluff and bloviation.
From our June 27, 2007 post "Planktos Highlights Real Ocean/Climate Crises & Responds to Recent Misinformation Campaigns":

...But first, one of my favorite examples of a stock scam (I told you, I have a morbid fascination with the underbelly of the markets, it's like watching the lions approach the wildebeest at the watering hole, you don't want to see it but you can't look away):
...Peter Uttley, Equisure's chairman and a former Lloyds of London executive, took control of the company this week, assuming the chief executive post....

...Uttley said in the press release that his chairman role had been a "passive" one, but he now plans an active reorganization of the company, whose reputation has been stained by allegations that it is a scam insurance operation....

...In an unusually emotional statement to the press, sent from an Equisure board meeting Friday in London, Uttley told his version of events over the summer, which eventually led to the delisting of Equisure shares on the American Stock Exchange.

"The simple truth was consumed in the belly of deception, but now has been vomited for the world to see," Uttley began.

He then proceeded to tell a story of three men, whom he described as "liars," "cheats," and "scallywags," who worked with law enforcement officials and the press to spread false rumors about the company with the intent of buying Equisure out at 50 cents a share, a tiny fraction of the stock's trading price of $15, before AMEX suspended trading Aug. 1.
That is world class bloviating