By Alison Preece | April 11, 2023 | Lawyer Limelights
The market volatility in the last couple years has turned the tide on two prior market darlings: SPACs and crypto. We spoke with securities litigation heavyweight Jeremy Lieberman about the downturns of both, which he sees as inherently fraud-prone and speculative products that almost scream, “investor beware.”
SPACs have “less regulation, disclosure and transparency” than traditional IPOs, says Lieberman, which can make them attractive for companies but risky for investors. Similarly, crypto dodges the regulatory scrutiny of traditional currencies and other financial products, which gets some people excited but “ultimately leaves investors unprotected.” Without strict regulation by the SEC or other bodies to prevent investor losses in these products, litigators are left cleaning up after the bust.
Lieberman is the Managing Partner of Pomerantz, a leading securities litigation firm. He led the historic litigation against Petrobras, the mammoth Brazilian oil company involved in a massive corruption scandal. The $3B settlement he secured for damaged investors was the largest securities class action settlement involving a foreign issuer and the fifth largest ever in the U.S. He also litigated against Yahoo! for its data breaches, BP for its oil spill, and other cases involving fraud, insider dealing or corporate governance issues.
Lieberman is widely recognized as a titan of the plaintiffs’ bar, and a formidable adversary for defense firms.
Lawdragon: So you’re seeing a parallel between the waning popularity of SPACs and the recent spate of investigations against crypto companies?
Jeremy Lieberman: Yes, because these are both frauds that anyone with a bit of a skeptical eye, as I think all investors should have, could see from the start. As a litigator, I don't consider myself a veteran in the market but we’re watching it and we're involved in the trends of the securities markets. Both SPACs and crypto were just very specious enterprises that were generating huge amounts of buzz and a huge amount of money. They were making people with bizarre personalities, billionaires. It was rewarding the eccentric and the fraudulent.
You just saw this bust coming, I believe, miles away. Now there's a wide swath of securities fraud lawsuits that have been triggered as a result of this trend. It shouldn’t be a surprise. The question really is, why did the SEC allow these SPACs to get on board to become public? Why wasn't there more scrutiny?
Crypto, the same thing. The SEC has tried to clamp down, but once again, too little too late. Now investors and litigators are picking up the pieces on these issues. There'll be some large cases and then there'll be some material recoveries but it's always better to catch these things before they break.
The main allure of a SPAC was the fact that there was less regulation and fewer disclosure requirements. People didn't want to go through the rigor of a traditional IPO, they didn't want to give past financial statements. In an IPO you can't make forward-looking statements and give projections about future growth; in a SPAC you can. Stripping all the protections from an IPO and putting them on the market, that's what made a SPAC attractive. For an investor, for a regulator, that means less transparency and less protections when these instruments are being used.
LD: Are there any SPAC cases that stand out to you as particularly egregious?
JL: Take the Nikola case, where they used a SPAC to come to market. Nikola was an electronic truck company whose CEO was Trevor Milton. They spoke about how they made their own products, and they were able to run a truck efficiently on hydrogen. All sorts of boastful representations. Turns out, they didn't have even a working automobile. For a video, they took a truck and dragged it up a mountain then let gravity roll it down. The technology never worked, it was never operational, yet they were able to bring it to market through a SPAC.
Both SPACs and crypto were just very specious enterprises that were generating huge amounts of buzz and a huge amount of money. They were making people with bizarre personalities, billionaires. It was rewarding the eccentric and the fraudulent.
There was also the Danimer case, where this company is talking about producing biodegradable plastic. It sounds great but there is no such thing as biodegradable plastic. I think we all know that. You can't take plastic and put it in the sea, it's not going to just dissolve organically. Just claims about things that people would like to believe about the world, that you could run a truck on air, or you can take plastic and make it biodegradable, run by people with very little business experience, and sometimes very young people.
LD: And with crypto? The big headlines, of course, are around FTX and Sam Bankman-Fried.
JL: He’s an example of just a bizarre character who was somehow able to dupe investors out of billions and billions of dollars. A really unfortunate lesson for investors. We're still dealing with the repercussions, and we'll see people promoting cryptocurrency still. There are still legitimate people saying, "Bitcoin is still a good business, is still a good investment." Someone maybe one day will explain to me what Bitcoin is exactly and who's behind it. They don't even knows who's behind Bitcoin, they don't even know the identity of these people. People invested trillions of dollars in this coin.
The absurd is taking over the markets. There are many things that people just really want to believe, so there’s a lot of excitement and a lot of hype around false promises, and ultimately investors get caught holding the bag. The remuneration for investors and the recompense, while important, it's not the cure. You never get 100 percent of the money back, you never can. And recovery is a years-long process. It's an important job, being a securities litigator. That's the business we're in, and we do the best we can, but there are a lot of frauds and issues that should never happen in the first place.
LD: Are these just the latest examples of frauds that we always see in corners of the marketplace? Or are you seeing a significant uptick in fraudulent products or practices?
JL: Well, you saw it in the dot-com bubble and bust. Maybe I was younger and less cynical at the time. But these days I think the issue is that you see more of a desire for people, both retail investors and even more established investors, to want to believe in certain things and certain people. If it sounds good, they'll invest in it. There’s a lack of skepticism.
We all want to have a car that’s green-friendly. We all want it, we all want that to happen, and we hope we find it one day. I'm no scientist but it seems to be pretty hard to get that done in an efficient manner. But people want to believe it. If someone comes and promises that he can do it, and tells you he can do it cheaply, a lot of people are going to invest in him, even people who are supposed to be veterans. There's more gullibility in the marketplace. People want to believe that there are easy solutions to these problems. If someone says, "Yes, I have a solution," and they're charismatic, and they know how to create a buzz, they can make a lot more money now than they could have years ago.
LD: How about the banks’ role when it comes to SPACs?
JL: It’s critical question. Just like, where is the SEC? Where are gatekeepers? Goldman Sachs was the number two underwriter of SPACs in 2021, underwriting tens of billions of dollars’ worth of SPAC deals. By the end of 2022, they decided they will no longer underwrite SPACs and they will no longer provide investment bank services to SPACs. They’ve washed their hands of SPACs. What does that tell you about all the work they did in 2020 and 2021 when they were peddling SPACs to investors, and all the fees they earned from them? Are they going to return those fees? To see that type of activity, to see one of the biggest promoters of SPACs completely withdraw from the business is telling, as far as how dubious these businesses are. The gatekeepers turned a blind eye because it suited their bottom line.
Turns out, they didn't have even a working automobile. For a video, they took a truck and dragged it up a mountain then let gravity roll it down.
LD: And the SEC?
JL: There's a broader question about, what is the role of the SEC? What is the SEC's duty in allowing a company to go public? Is it just allowing companies to make some technical disclosures and give enough technical warnings that they can evade liability? Or is their job to make sure that the investing public doesn't get completely hoodwinked? That when you go public, it's your actual viable company.
Right now, I think the SEC says, "Well, as long as the disclosures meet the law, then it's fine." I believe there's a greater duty. Before a company goes public, there should be some investigation by the SEC into whether or not it is truly a legitimate enterprise. The SEC has the resources and sophistication to ferret that out, rather than leaving it to investors. The lessons to fraudsters are pretty clear. As long as you don't go cross the line way too far, fraud pays. You can make your fraudulent statements as long as you hedge them with the right technical, boilerplate warnings about why you might not succeed. So you hoodwink investors, avoid being accused of fraud criminally, and make a lot of money doing it.
Only a few of these fraudsters have faced charges, which sends the message that fraud by and large pays. That's something the SEC should be thinking about. You'll never be able to completely stamp out fraud, but sometimes the cases are so extreme and the SEC wraps itself up in, "Well, our duty is just to look at the disclosures…" It's a self-disclosure regime. I think the SEC'S duty is greater. It is the major gatekeeper and has to determine, before letting a global public invest, whether each SPAC is really a legitimate enterprise or not. I think that's a fair question to require the regulators to ask.
LD: Where do you think we’re moving in terms of regulation for crypto?
JL: The SEC has been trying. Chairman Gensler has been more proactive than his predecessors, so I give him credit. The SEC as an organization can sometimes be too reactive. But they have been trying. I think they should unabashedly regulate it. Call it a security and regulate it. I have too many conversations with people in the marketplace saying, "Bitcoin is still very legitimate and they're still a great investment, there's still a future in them." And then I start to ask them questions like, “What's behind it? What is it? Just tell me.” I never really understand the answers.
We know who controls the U.S. dollar. We have the Treasury, we have the Federal Reserve. People try to say, "Well, the dollar is no longer backed by the gold standards." The dollar is backed by the U.S. government, the strongest military and economy in the world. That's what backs it. We don't even know the identity of the people behind Bitcoin. To me, it's absurd.
LD: Interesting. Proponents talk about how crypto is going to change the world and break down borders. The idea being that no one really owns it, so everybody owns it.
JL: Again, it’s wanting to believe in something. It’s a fantasy. All the structures of the world would have to change in order for that to work in the crypto space. So sure, maybe that’ll happen. Anything’s possible. But there’s a good chance it won't. And in the meantime, when there's lack of transparency and lack of understanding of what a product is, there's a lot more fraud.