%1

A top securities regulator warned about the surge in fundraising by blank-check companies known as special-purpose acquisition companies, the Wall Street Journal reported. Securities and Exchange Commission official John Coates yesterday said that there are “some significant and yet undiscovered issues” with SPACs, which allow private companies to go public with a structure that offers outsize potential rewards to backers while bypassing some safeguards of a traditional initial public offering. Those issues are “not something that’s going to stop them by any means, but they are relatively as yet incompletely worked through mechanisms, despite the fact they have been around for a while,” said Mr. Coates, who is acting director of the SEC’s Corporation Finance division. SPACs are shell companies that list on a stock exchange to merge with a private firm and take it public. The private company then gets the SPAC’s place in the stock market. SPACs have become hot investments for everyone from hedge funds to individual investors. Well-known SPAC creators include investors such as Bill Foley, former chief executive officer of Fidelity National Financial Inc., and former Citigroup Inc. executive Michael Klein. Star athletes and celebrities have also gotten into the SPAC game. Basketball icon Shaquille O’Neal, tennis star Serena Williams and skateboard legend Tony Hawk are all involved with SPACs. The surge in SPAC deals has drawn the attention of regulators. Mr. Coates didn’t detail his concerns with SPACs, but other officials have said in recent weeks that the deals raise unique investor-protection worries. For instance, the private companies that merge with SPACs, forming a new entity listed on a stock exchange, are often younger firms forced to quickly adopt stricter regulatory, accounting and governance systems that public companies must use, the SEC’s chief accountant, Paul Munter, said in a speech last week.

Actor Zachary J. Horwitz was arrested yesterday in Los Angeles on a federal charge that he ran a massive Ponzi scheme that defrauded investors out of $227 million by touting fictitious film licensing deals with HBO, Netflix and other platforms, the Los Angeles Times reported. Horwitz, who has appeared in minor films under the stage name Zach Avery, was accused of fabricating emails from HBO and Netflix executives about nonexistent film distribution agreements in an attempt to stave off demands for payment from investors. In a sworn statement filed in Los Angeles federal court, FBI agent John Verrastro laid out a brazen scheme by Horwitz to persuade investors to pour huge sums of money into his film distribution company, 1inMM Capital LLC. Horwitz sent investors bottles of Johnny Walker Blue Label scotch with the company's 2015 annual report that highlighted a "library" of 52 films his company was supposedly distributing in Africa, Australia, New Zealand and South America, according to Verrastro. The roster of films included the 2012 horror movie "The Lords of Salem" and the 1989 action film "Kickboxer" with martial arts action star Jean-Claude Van Damme. Horwitz told investors falsely that he had "strategic partnerships" with HBO, Netflix and other platforms to license the foreign distribution rights. The investors were promised returns as high as 40% within a year.

The U.S. Securities and Exchange Commission opened a preliminary investigation into Bill Hwang over his leveraged trades that have roiled Wall Street, Bloomberg News reported. The SEC started the civil probe in recent days after Hwang’s Archegos Capital Management made a series of wrong-way wagers that prompted brokers to liquidate his positions, said a person familiar with the matter, who asked not to be named because the inquiry isn’t public. The examination is in its early stages and is being led by the asset-management group in the SEC’s enforcement division. It’s fairly routine after a major market blowup for the SEC to launch a review. The probe may not lead to any allegations of wrongdoing. After some positions moved against him last week, Hwang was forced to put up more collateral. He ultimately faced margin calls that he couldn’t meet, prompting banks including Goldman Sachs Group Inc. to unwind his positions through a series of block trades. That sent shares of companies including ViacomCBS Inc., Baidu Inc. and Tencent Music Entertainment tumbling. Credit Suisse Group AG and Nomura Holdings Inc., which served as brokers for Hwang’s wagers and lent him huge sums of money, are now warning shareholders that they face “significant” losses. Goldman was ahead of the pack in cutting exposure and expects any impact on its financial results to be immaterial.

President Joe Biden’s plans for a new era of tough Wall Street oversight will take center stage this week when two of his top regulator picks face questions from Senate Banking Committee members at a Tuesday hearing, Bloomberg News reported. Gary Gensler, whom the White House has tapped to head the Securities and Exchange Commission, and Rohit Chopra, the administration’s choice to lead the Consumer Financial Protection Bureau, are likely to win confirmation, lawmakers and financial executives say. Yet their strong support from progressive Democrats means they’re certain to get pointed questions from Republican senators about their plans to crack down on businesses. Gensler, 63, is well known on Wall Street after leading the Commodity Futures Trading Commission during the Obama administration and making a fortune decades earlier at Goldman Sachs Group Inc. Chopra, a 39-year-old Federal Trade Commission member who helped Senator Elizabeth Warren set up the CFPB, would run an agency that Democrats want reinvigorated to protect consumers from abuses involving credit cards, mortgages and high-interest loans. “There remains a sharp divide between Republicans and Democrats on the role of the CFPB in financial regulation,” said Andrew Olmem, National Economic Council deputy director in the Trump administration who is now a partner at the Mayer Brown law firm. “This is a very important nomination because a new director can significantly shift the direction of the CFPB.” Gensler, who has been been teaching at the Massachusetts Institute of Technology, indicated in his prepared testimony that he planned to examine whether SEC rules have kept pace with advancements in technology. “I believe financial technology can be a powerful force for good — but only if we continue to harness the core values of the SEC in service of investors, issuers, and the public,” he said. Chopra signaled he would focus on the economic impact of coronavirus, which he said has left millions of Americans’ finances “in ruin.” “Experts expect distress across a number of consumer credit markets, including an avalanche of loan defaults and auto repossessions,” he said.

Big U.S. companies are giving a more detailed picture of diversity in their ranks, with dozens of them publicly sharing gender or race breakdowns, many for the first time, the Wall Street Journal reported. Three-quarters of the workers at General Electric Co. were men. Half of senior executives at engine-maker Cummins Inc. were women. Chicken processor Tyson Foods Inc. said 25% of its U.S. workers were Black. At Chipotle Mexican Grill Inc., 38% of U.S. employees were Latinos. These disclosures and dozens of others like them — many from company securities filings — are voluntary but nudged by a new Securities and Exchange Commission regulation, along with investor interest. They also reflect a new focus among many companies on workforce diversity following last summer’s protests over discrimination, racial inequity and the death of George Floyd while in police custody. The Wall Street Journal reviewed more than 160 annual reports filed by S&P 500 companies for 2020. About a third included diversity disclosures, though the details varied widely. Most provided a tally of women in their workforces. Almost three-quarters disclosed at least some information on racial and ethnic diversity — often a combined count of nonwhite employees. A few provided data on veterans, younger or older workers, people with disabilities and those who identify as gay, lesbian or transgender. Some provided figures only for their corporate boards.

GameStop shares closed up 19 percent Thursday, after surging as much as 88 percent, as retail investors returned to the shorted stock that set off a trading frenzy last month that shocked Wall Street and sparked federal scrutiny, the Washington Post reported. GameStop ended the session at $109.15, pushing the video game retailer’s market cap past $7.6 billion, even as the broader market slumped. The Dow Jones industrial average fell 559.85 points, nearly 1.8 percent, to 31,402.01. The S&P 500 shed 96.09 points, or nearly 2.5 percent, to close at 3,829.34, while the tech-heavy Nasdaq tumbled 478.53 points, or 3.5 percent, to end at 13,119.43. Other shorted stocks that have attracted intense interest, propelled by online investor communities such as the subreddit WallStreetBets, also had big swings. Koss Corp. jumped 17 percent, to $21.53 per share, after soaring as much as 48 percent. AMC Entertainment soared 5 percent before reversing course; it closed at $8.29, down 8.8 percent.

The Securities and Exchange Commission (SEC) announced Wednesday that it will update its guidelines on how publicly traded companies should disclose climate change-related risks to investors, The Hill reported. Acting SEC Chair Allison Herren Lee said in a Wednesday statement that the commission will review how companies were complying with its 2010 guidelines, discuss climate-related disclosures with firms and analyze how the stock market is handling climate risks. The SEC will then update those guidelines, likely expanding on how much information companies are expected to disclose about the risks climate change poses to their business. “Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future,” said Lee, a Democrat appointed by former President Trump. Lee’s announcement is the SEC’s first step toward expanding the scope of information publicly traded companies are expected to reveal about their vulnerability to climate change. The SEC was widely expected to boost its emphasis on climate-related disclosures after President Biden’s election, which gave Democrats a chance to establish a majority at the independent agency.

Robinhood Markets Inc. Chief Executive Officer Vlad Tenev offered an apology for the company’s decision to temporarily curb trading in some stocks, including GameStop Corp., on Jan. 28 amid extraordinary volatility, the Wall Street Journal reported. “Despite the unprecedented market conditions in January, at the end of the day, what happened is unacceptable to us,” Tenev said after being questioned at a congressional hearing Thursday. His apology came after House Financial Services Committee Chairwoman Maxine Waters (D- Calif.) interrupted the Robinhood CEO during his opening remarks. Her request was unusual as witnesses are allowed to make opening statements before taking questions from lawmakers. The GameStop episode, in which a group of online traders helped send shares of the videogame retailer on a wild rally earlier this year that ultimately crashed, has raised concerns about the integrity of the U.S. stock market and the rules that govern it. The Securities and Exchange Commission and other authorities are investigating whether the saga calls for policy changes or was fueled by criminal misconduct such as market manipulation. Read more. (Subscription required.) 

For a hearing replay and prepared witness testimony, please click here.