It was just last December when Venkat Meenavalli, the chairman and chief executive of LongFin, the trade finance group with a crypto-currency blockchain arm, appeared on the television channel CNBC saying his company’s market cap of over US$3bn was not justified. At the time, shares in LongFin had soared by as much as 200% in a day and were trading as high as US$56.30.
Indeed, Meenavalli’s comments were farsighted. The wild see-sawing in LongFin’s share price, which peaked at US$71.10 on March 23 before tumbling to US$9.13 earlier in the week and then rebounding 70% in Thursday’s mid-morning trade, mimics the drama surrounding the company.
For his part, Meenavalli — who reportedly owns 90% of the company’s shares — is attributing the recent plunges in LongFin’s shares to short sellers and is refusing to sell his stock position. “I’m not going to sell for the next three years,” he told a CNBC interviewer on Wednesday.
Read: LongFin shares dip following 2 days of sharp gains after announcing purchase of blockchain company
But whether the company will be able to surmount its recent setbacks remains uncertain.
Not only has the group reported material weaknesses in its financial controls, but the Securities and Exchange Commission’s division of enforcement is in the throes of an investigation into the trading of its shares. The probe also comes just weeks after the company was booted from both the Russell 2000 and 3000 indices, the groupings of small and mid-cap companies that are tracked by passive indices.
According to a 10-k SEC filing, regulators have requested the company hand over certain documents in connection with its investigation, including those related to its initial public offering in December 2017 and other financings, plus its acquisition (also in December 2017) of Ziddu.com, a crypto-block chain company that caters to LongFin's importer and exporter clients by providing smart contracts and microfinance lending.
Kate Judge, a law professor at Columbia University, who specializes in finance and regulation, thinks the SEC’s investigation into LongFin will be lengthy and hard-hitting, given the group’s ties to cryptocurrency via Ziddu.com.
“These cryptocurrencies look like currencies and once you introduce them as currencies, you subject yourself to a slew of regulatory requirements,” Judge said. “I think in the short run what you’re seeing is a move by the SEC to take these sorts of companies quite seriously. We’re going to see a continued trend of a number of companies seeing new regulations.”
Index fiasco followed by SEC investigation
News of the SEC investigation also comes weeks after LongFin was ousted from the Russell 2000 and 3000 indices. After the group was added to both indices on March 16, the managers of index tracking funds, pushed up LongFin’s share price as they rushed to buy shares for the purpose of tracking the index.
But its addition to the indices was mistaken as FTSE Russell neglected to pick up on the fact that LongFin failed to meet a requirement that stocks on these indices meet a minimum 5% free float. Simply put: FTSE Russell made a blunder and overestimated LongFin's float. Only about 2.5% of LongFin's shares were up for grabs for public purchase, according to published reports, which was far less than the 5% of shares required.
On March 28, after less than two weeks, LongFin was removed from the Russell 2000 and 3000 indices as a result of this mistake.
Also under scrutiny is LongFin’s initial public offering as the group, which conducts much of its business out of Singapore, managed to raise more than US$5mln in an IPO in what's known as a Regulation A+ registration, or a "mini" IPO, which offers fledgling companies better access to going public by setting the bar for accounting and disclosure rules lower than they are in traditional IPOs.
Short sellers smell blood
In a tweet on March 26, analysts from his research house Citron Research took aim at Longfin, saying that its “filings and press releases are riddled with inaccuracies and fraud” and that SEC enforcement “should not be far behind”.
Meenavalli, however, is not stepping back from the fight against the short-sellers and their doomsday forecasts for Longfin. Instead, he is doing the media rounds and is writing letters to regulators with the SEC and the Financial Industry Regulatory Authority (FINRA) to protest the short sellers' influence over Longfin's share price. At least in public, he seems confident that he and his company will survive the SEC probe.
"There are 28 billion shares shorted of $1.4 billion dollars bet against me," Meenavalli said on CNBC earlier this week. "The guys are going to destroy us. I'm fighting here."
In early afternoon trade, Longfin's share price was again being subject to tumultuous swings, soaring 70% to US$19.74 on the back of Meenavalli's public comments.