OK, here’s the play: Slip information to stock analysts, let whispers spread through the market — and watch the money grow.
Even for Howard Lutnick, a Wall Street billionaire known for sharp elbows, a move like that might sound close to the line.
But there was Lutnick, dialing into a videoconference, suggesting that very idea.
Relax, Lutnick told potential investors. Rules are rules, he assured the listeners — but you can be very smart about them.
All the more so because the investors were following Lutnick down the rabbit hole into the Wonderland of SPACs, those soaring — and now sinking — blank-check investments.
One of the most remarkable stories behind the Wall Street SPAC machine is the characters pulling the levers. SPACs — officially, special purpose acquisition companies — provide a shortcut to the stock market. As insiders have rushed businesses into the public’s hands, they’ve employed a range of maneuvers — some of them downright astonishing to the uninitiated — to win even when investors lose.
How do these guys do it? Lutnick, who runs brokerage Cantor Fitzgerald, held out the most valuable commodity on Wall Street: information. He told investors earlier this year that he could find subtle ways to help research analysts tell a story, according to a person familiar with the matter.
Whether or not his pitch worked, he ultimately locked down hundreds of millions to make his latest SPAC deal possible.
Another SPAC maestro, Michael Klein, has been paid handsomely. Or rather, Klein has paid himself handsomely.
When Klein, a prominent financial adviser to Saudi Arabia, has needed a banker to consult on his SPACs, he’s hired his own boutique investment bank. Many millions in fees have rolled his way, regulatory filings show. Amid those riches, The Klein Group also received hundreds of thousands of dollars in federal pandemic relief money.
And when Tilman Fertitta, billionaire owner of the Houston Rockets, went looking for a business for his SPAC to acquire, he found one surprisingly close to home. It was a division of his Golden Nugget hotel and casino. The bonus: the SPAC promised to pay down Golden Nugget’s debt, a move that also stood to benefit his Wall Street partner in the deal.
An executive at Fertitta’s restaurant empire said the deal made business sense. A spokesman for Klein declined to comment on the fees. A representative for Cantor vigorously denied that Lutnick has ever spoken to analysts about his firm’s SPACs.
From the start, regulators have struggled to keep pace with the SPAC rush. Blank-check companies are created for one purpose: To merge with other businesses. But the Securities and Exchange Commission keeps pointing to potential problems with this arrangement — from dubious business practices to conflicts of interest to questionable disclosures and, most of all, to an alarming misalignment of interests between the people selling SPACs and the people buying them.
Yes, cooler heads have begun to prevail after all the hype in 2020. One index of SPACs has tumbled more than 20% from its February high. Some individual ones are down twice that much — or more. The latest loser: Lordstown Motors Corp., the much-hyped electric-truck company that’s now hit a major pothole.
And yet more than 550 new SPACs have been conjured up this year anyway. That’s even more than in all of 2020, when more than $83 billion flooded into this formerly obscure corner of the capital markets and everyone from Shaquille O’Neal to GameStop-loving Redditors was salivating over these things.
Some wonder what’s taking the SEC so long to tighten up on SPACs in general. The commission has tweaked certain accounting rules and is considering doing more.
"Everyone is sitting on pins and needles, hoping they get some clarity,” said Edward Muztafago, an analyst at United First Partners.
SEC spokesperson Scott Schneider says the commission “is engaged in careful reviews of SPAC disclosures, including on how sponsors and managers derive compensation or other benefits from the deals.”
It will be 20 years this September since Howard Lutnick became a face of 9/11. When American Airlines Flight 11 struck One World Trade Center, 658 of Cantor’s 960 New York employees were killed. Among the dead: Lutnick’s brother, Gary. That Howard Lutnick survived was blind luck: He happened to be taking his son to kindergarten that morning.
Since then, Lutnick has rebuilt Cantor and then some. He’s pushed into everything from sports betting to prime brokerage to real estate to SPACs, where Cantor has become a leading adviser.
Small compared to the Goldmans of the world, Cantor has vaulted into the Top 10 of IPO underwriters on the back of its blank-check franchise. The firm also has sponsored no fewer than eight SPACs of its own. All in all, Cantor is shaping up to be one of the biggest winners of the blank-check boom.
In the first quarter of this year, Lutnick Zoomed in to pitch investors on his latest SPAC, CF Finance Acquisition Corp. III. From its headquarters on Park Avenue, Cantor had already raised $230 million for the blank-check company and had spotted a potential acquisition: AEye Inc. of Dublin, California. The eight-year-old company specializes in light detection and ranging, or Lidar, for use in autonomous vehicles.
Cantor was sold on the promise of AEye, Lutnick told private investors looking to invest in the public equity.
Then he went further. Once the SPAC acquired AEye, Lutnick said, analysts could be handed information about AEye’s progress with business partners, according to records of the meeting.
He then explained how Cantor had used a similar strategy in the past to help a company.
In that instance, Cantor had a relationship with a manufacturer that had promised to keep quiet about its business partnerships. So Lutnick said, according to the records, he had 20 people film a factory that the manufacturer was building in China. Then he had a third party run some numbers based on what the video showed. What emerged was a look at the company that hadn’t yet been available to the investing public.
But how to get such information out? In the case of AEye, that’s where analysts come in, Lutnick told the investors. He said he’d help analysts get the information they’d need to work up reports.
AEye wouldn’t say a word or divulge anything itself, Lutnick assured them, but Cantor could find ways around that.
This, he said, is the way the rules work.
“Neither Cantor nor Mr. Lutnick have ever spoken to analysts of financial firms with respect to Cantor sponsored SPACs,” said Karen Laureano-Rikardsen, a spokeswoman for Cantor. “The story shows a lack of understanding of the SPAC business.”
A representative for AEye said the company’s CEO denies that Lutnick told potential investors that he could use analysts to distribute sensitive information.
The Cantor CEO’s salesmanship pulled in money. It came from institutions that fill a gap in funding after initial investors ask for their cash back. Most SPACs can’t finalize a merger without raising hundreds of millions of dollars from private investors who bet on the public equity, or PIPEs. Cantor raised $225 million from private investors.
Only now, the market is recalibrating. After rising to $13.71 in February, CF Finance Acquisition Corp. III has sunk back to around its $10 offering price. Last month, AEye lowered its valuation to $1.52 billion from $1.9 billion and pushed out the deadline for the merger with Cantor’s SPAC.
SPACs have proliferated so quickly over the past 18 months that it can be difficult to keep track of them all. Amid the rush, insiders have found creative — and perfectly legal — ways to get rich even when public shareholders don’t.
Take Klein, a former star Citigroup banker. Inside regulatory filings is his formula for SPAC riches: All of his businesses pay fees to the advisory firm he runs out of offices above Fifth Avenue.
Klein billed his first SPAC, called Churchill Capital Corp., a $12,500 fee for his advice. He then charged his second one, Churchill Capital Corp. II, a lot more: $4 million. He also tacked on a 2% charge for external funds raised, which comes to about $10.6 million, as well as a fee of $20,000 per month for office space and support.
Fees like those are far from normal.
His third SPAC, involving the health analytics company MultiPlan Corp., has turned out to be a disaster for its investors. Klein bought MultiPlan from private-equity firm Hellman & Friedman in an $11 billion deal. The stock has since plunged about 20%.
Some of Klein’s investors aren’t happy about who’s been making money (Klein) and who hasn’t (them). They’ve filed a class action lawsuit, claiming Churchill misled them into approving a bad deal. The Klein Group has said it will defend itself vigorously.
Klein himself has already made a fortune on that one. Along with the merger, the board approved having Churchill retain none other than The Klein Group. It agreed to pay Klein millions as soon as the deal closed: A $15 million transaction fee, and then a placement fee of $15.5 million. Plus, there's a $50,000 monthly charge for office space and administrative support.
All this was on top of the so-called founder's shares, a 20% cut that Klein received upfront for his expertise in sourcing, negotiating and executing the deal.
Klein's fourth and most celebrated SPAC deal to date, Churchill Capital Corp. IV, involves Newark, California-based electric car company Lucid Motors. That one has followed a similar pattern, filings show. Lucid got more than $1 billion from a deep-pocketed investor that Michael Klein knows well: Saudi Arabia's sovereign wealth fund. Before Lucid can take on Tesla, however, it will be paying Klein $50,000 a month for office space and support. And the SPAC has also said it might retain a Klein affiliate to be its lead advisor, which means more fees for Klein.
All that money aside, The Klein Group received $878,892 under the taxpayer-funded Paycheck Protection Program last May, before the Lucid deal went through, according to SEC filings. The small-but-mighty M&A boutique said in a document filed with the SEC on March 3 that it expected the loan to be forgiven completely. After Bloomberg asked about the loan, The Klein Group said it had been paid back.
For the first time in 108 days, cards were dealt out onto the green-felt-topped tables in Atlantic City. But by that day, July 2, 2020, the pandemic had done its damage to the casinos there, including Tilman Fertitta’s Golden Nugget.
For months the only sounds coming out of the place were courtesy of WWFP, 90.5 FM, a Christian music station whose main transmitter sits atop the 14.6 acre complex. The pandemic shutdowns had wiped out roughly a third of Fertitta’s wealth.
Enter Landcadia Holdings II, a SPAC that Fertitta set up with Richard Handler, chairman of a Wall Street firm with fewer employees than Cantor Fitzgerald, Jefferies Ltd.
Created in April 2019, before the pandemic hit, Landcadia would become a lifeline for Golden Nugget, which Fertitta had bought from the bankrupt Trump Entertainment Resorts back in 2011. Last July, as Atlantic City was beginning to reopen, Fertitta announced that Landcadia had spotted a convenient acquisition.
The target: Golden Nugget Online Gaming, the online business of Golden Nugget, where Fertitta is CEO.
The deal valued Golden Nugget Online at $745 million, about five times its estimated 2021 revenue. The SPAC also agreed to pay down half of Golden Nugget’s debt once the transaction went through. That benefitted one of its major lenders: Handler’s firm, Jefferies, which was also paid roughly $3.75 million for financial and capital markets advice.
Landcadia has disclosed those potential conflicts in its regulatory filings.
At first, the Golden Nugget deal looked like a winner for everyone. Thrilled by one of the early SPAC successes, the sports-betting site DraftKings, investors piled in.
“Following the huge success of the DraftKings merger with a SPAC, it was a natural opportunity for Golden Nugget Online Gaming to merge with a SPAC and Tilman with Jefferies already had a SPAC seeking an acquisition,” said Rick Liem, the chief financial officer of Landry’s, which is part of Fertitta’s empire.
By the end of December, Golden Nugget Online was up 160% and had joined the Nasdaq, trading under the ticker: GNOG. Since then, it’s been all downhill, and the stock has sunk about 50%. At $13, it’s still above its $10 offering price.
By Fertitta’s own account, some of his other businesses are looking up. In addition to a collection of high-end hotels, restaurants and casinos, he also owns Post Oak Motor Cars, a Houston dealer specializing in cars seemingly made for today’s SPAC masters: Bentleys, Bugattis and Rolls-Royces. Back in February, just as SPACs were starting to sputter, Fertitta told CNBC that the dealership was coming off its best year ever.
Cue the snark. “Good afternoon and happy May $GNOG bag holders,” Ray De Vivo, a self-proclaimed former Nasdaq market maker, tweeted on May 3. “Has anyone seen @tilmanjfertitta? Why are we down over 30% year to date?”
Fertitta hasn’t replied.
— With assistance from Ben Scent and Tom Maloney
