Oh My Fraud

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

[00:00:00] How do you get a $100 million market valuation for a company? Virtually a shell company, mind you mean it has one asset and that asset is a money losing asset and its total annual revenue from selling sandwiches isn't even $20,000. How do you do that? Like David Einhorn said, the pastrami must be amazing. Either that or it's fraud. Yeah, it could be fraud.

[00:00:31] If you'd like to earn CPE credit for listening to this episode. Visit earmark cpcomm. Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now on to the episode.

[00:00:55] Hello and welcome to Oh My Fraud, a true crime podcast where our shells are the company kind and not the bullet kind. I'm Greg Kite.

[00:01:04] And I'm Caleb Newquist. Hey, Caleb. Before we dive into today's podcast, let's indulge in a quick listener review. Yes, let's indulge. This one is from Cmag's oh three. Quote What a great podcast. The humor alongside great reporting and storytelling is the best I've come across. Please keep up the great work. This is prescribed listening for me and I genuinely enjoy the level of detail, especially around controls. That's awesome. Thanks cmag's. Oh three. We will definitely keep up the the great work or at least the mediocre work however you like to do it. And we will be your dancing poodles in the fraud podcast space for as long as we can. A control lover? Very. Yeah. Wasn't didn't see that coming. Control Freak. Control freak. There you go. Yeah. And our therapist. Thank you for the positive affirmation, for our experience. And we'd like to encourage anyone out there listening to leave us a review on whatever podcast platform you listen to or use because yeah, we'll read them and it helps people find the show. Exactly. It's so great. That's a it's a, it's a free podcast. So if you feel guilty about that, leave us a review. That's what leave us a review. That's what we're after. Okay. So let's get into this, Caleb, to to, to make a left turn here real quick.

[00:02:28] Are you a foodie? Do you consider yourself to be a foodie? Um, no, I'm more of an EDI. Okay. I would say I'm an Eddie. What do you mean by that? I like eating, okay? I mean, I just like eating. Yeah. I mean, I like lots of different kinds of food, and I like, like, in the spectrum of, I guess, sophistication. Is that the word? I don't. Yeah, I think let's just. Let's just put it this way. I'm as comfortable in the outhouse as I am in the penthouse. I get that. I totally get that because sometimes I like to think of myself as a foodie and then I realize that I'm not I'm probably not really a foodie. I'm probably just a glutton with some disposable income is really what it is. And. And yeah, I'm with you. You're like an eater. You're an eater who can, like, splurge once. Exactly. Exactly. Yeah. Do you remember, like, the most expensive meal that you've ever had? Or at least a very expensive meal? Oh, yeah, sure. Um, I mean, you always. If you. I do not go to steakhouses often, but when I do, it always feels like I'm spending lots of money. Yeah, yeah, yeah. You know. Yeah. I'm trying to think. Oh, you know what? My wife and I went to, um, sushi at a very. A very fine sushi restaurant near where we live. And we did the Omakase, which is like a tasting menu. I hope.

[00:03:53] I hope I'm pronouncing that my Japanese is nonexistent. So but I think that's how it's pronounced. But that's a that's essentially like a, I don't know, like an 11 course thing. You can do it as sushi. I've done I've done it a couple of times. Once in Japantown in San Francisco. And then we did it once here. I did that with a friend and I did another one here, um, with, with my wife. And those are real fun. You get to try a lot of different things, a lot of weird things, but it's pricey. You pay for it because it's, you know, it's kind of extravagant and a lot of food, but it's super fun. That's super fun. So that's yeah, I highly recommend that for sushi people. Sushi Sushi is one of those foods that you don't want to go cheap on either. Two things. No, two things. You don't go cheap on tattoos and sushi. So good advice. That's good life advice, right? It really is My the it might not be. No, no. I think it still is the reigning champion for the most expensive meal that I've ever had in my life. But I was invited to by Ron Baker to a very Sage symposium in Napa, California. And part of this, like it's not a conference, it was a little too intimate for a conference. But part one of the events that they were doing was a was a meal in a wine cave. And it was three 350 bucks per person to go to this wine cave.

[00:05:13] And it's interesting that for both of us, when we talk about our most expensive meals, neither of us mentioned a sandwich that made our most expensive meal likely, I would say, if we said our best meals, I've had some pretty fucking amazing sandwiches, but if I were to list my best meals I've had in my life, you know, sandwiches and wouldn't really make it on there. And what makes that interesting is that today we're going to be looking at a deli, a place that sold cheesesteaks and Italian subs, and that deli was somehow valued at over $100 million. So there's this little town of less than 7000 people. It's called Paulsboro, New Jersey. It's directly across the Delaware River from Philadelphia. And in Paulsboro, there's just one high school in the town. And the principal of Paulsboro High School, his name's Paul Marina. He was a wrestling legend. He himself he won two NCAA Eastern regional wrestling championships when he was a student at James Madison University, which is in Harrisburg, Virginia. And as the head wrestling coach in Paulsboro, he earned 25 state championships with his team in 27 years. The dude was he was legendary in the in in because there's like big time wrestling. This is like small time wrestling. But he was a he was a big fucking deal in right. There's no there's no championship belts I believe in. No not not for high school Did you you didn't wrestle did you.

[00:07:03] Was that a sport that you picked up. No, no. I was a bit too lanky, probably. I was I wrestled in seventh and eighth grade in middle school and then I didn't in high school. And I'm glad because it seemed like in high school that's when those guys, the wrestlers just got weird and intense during and well, it's all that. It's all that. Not eating. Yeah. All the spitting in a can to try to make weight that was. There's something, there's something that'll that'll make you a little nuts not healthy about that but so so speaking of Paul Marino this this wrestling legend, he was he so he was the principal of the school. He was the wrestling coach of the school. But in public education side, hustles are a way of life. And I know that from experience because, like, you know, I was a in a past life, I was a middle school math teacher. And every summer there was something that I had to do. So in 2014, Paul Marina, the principal and coach, he started your hometown deli. It was a nice little modest deli right across the street from Paulsboro High School where he was, you know, giving kids detention and making them do burpees. And and and I kind of I mean, and none of the research that I get into this detail, but I figure his motivation for starting this deli was one, he could make a little scratch on the side.

[00:08:29] And you got to think if you open a if you're the wrestling coach and you open a food place right across from your high school, you know, the A wrestlers are going to be your clientele and B wrestlers are going to be your staff. So he was probably thinking, you know, I'm going to hire a couple of my wrestling guys and help them make enough money so they can afford their singlets and their ear guards and their wrestling shoes. So what happens, though, after that is not too long after he opened this deli, he was approached by, of all people, one of his former wrestlers, this guy named James Patton. And James was talking to Paul Marino and saying, hey, what if we take your hometown deli public make make this single, listen, make this single location, newly minted, just real basic sandwich shop. Let's take this thing and make it a an SEC certified certified public company. Let's do this because let's shoot for the stars and and and and the connection. The funny thing, the connection between James Pat and Paul Marina is James Patton was actually one of Paul Marino's wrestlers at Paulsboro High School back in the 1970s. But like I said, we're talking 2014 now. These guys are both older fellas. And what Patton was doing at this point is he was a financial analyst for a company called Tyron Capital. And also fun fact about James Patton is he had already been barred by regulators from acting as a stockbroker and had been not once, but repeatedly disciplined for things like allegedly manipulating stock prices and things of that nature.

[00:10:22] So, yeah, this is the guy who came to very salt of the earth, Paul Marina, and said, Hey, let's make this deli a public company. And that's exactly what happened. Your hometown Deli was acquired as a wholly owned subsidiary of Hometown International Inc. in mid 2014. And in mid 2015, Hometown International went public with just one small deli as its only asset and its only business. The deli founder slash wrestling coach Paul Marino was made president, CEO, CFO. And treasurer of Home Town International and was awarded a shit ton of shares in the company. Yeah, about 1.5 million shares out of about 8 million shares outstanding. To be precise, that is according to regulators. I think that does qualify technically as a shit ton. Yeah, that's a of shares. Yeah. Yeah. So anyway, and this deli went along being a boring underperforming deli for seven plus years and apparently Hometown Deli made a good cheesesteak, a good Italian sub. Okay. I love I love a good Italian sub sub I love I also like an Italian beef steak, to be honest. I love an Italian beef. Do you? Myself, I'm a big fan. I'm saying as long as as long as you put enough meat on that Italian sub, I'm going to be a happy guy.

[00:11:44] Don't don't skip on. Don't skimp on the cold cuts is what I'm saying. As far as business is concerned, Hometown had its best year in 2016 when it earned a whopping $76,213 in revenue. Not profit. Yeah. Not profit. Not profit. Revenue 76. Not 76 million. Not 760. $76,000 in revenue. Yeah, yeah, yeah. The top one. Yeah, the top one. They made as much money. The deli made as much money as, you know, a second year associate in, you know, in a second year associate at PwC in in Jersey City. Yeah. Yeah. And and in Philly. Since Philly since Philly is a little closer we'll say PwC associate in Philadelphia. I would think that Paul Marino was probably making about $76,000 combined between coaching, wrestling and being a principal of a high school. That was probably about the same as his his take home from both of those gigs. Yeah, yeah. Now its worst year was in 2020 when the COVID 19 pandemic began and its revenue that year was only $13,976. Yeah, barely not even hitting 14 K for for that year. And I think from from the research I did, it was actually closed for about half of that. Like they they just did not allow restaurants to operate in New Jersey for about six months so that it makes sense but still not a not a real thriving business, even when there's not a global pandemic, even by deli standards. Even by deli standards. Yeah. Yeah, I know, I know.

[00:13:27] I know. Subway's are raking in a whole lot more than than that. Those those Jimmy Johns, probably. Yeah. Those are tightly run ships. Exactly. All right. So hometown never turned a profit. In fact, every year it posted huge losses. Why? A lot of it was because revenue was not good. But the biggest factor is because it was a public company. It cost a lot, right? Yeah. To to keep a pump if it costs a lot to become a public company. Yeah. But then it costs a lot also to stay a public company. Exactly. Which is why this is so weird that it's like, hey, not only is this a a brand new deli, but it's it's untested. And we and also you got to go. Delis aren't really going to they're not going to go to the moon is like like best case scenario over a decade or two you will start franchising and end up making. But it's not it's not going to be it's not a rocket ship. You're not you're not jumping on the next flight to to Mars. No, I mean I mean, let's be honest here. We're talking about meat and cheese and bread. Yeah. And some decent pickles. And you got a business. Yep. And but yeah, it's not a. It's not a big business. Yeah, it's not. Not huge profits. Nobody's spending 350 bucks a head for your for your cheesesteak. Right. So let's to give it some context. The average amount that an SEC registrant pays for an audit and to pay for an audit.

[00:14:58] Right. Because they have to have them. Yeah. In 2016 was over $1.9 million. Yeah. The that's the average price average. Yeah. And that went up to over 2.1 million inches 2020. Hometown's audit costs were about 20,000in 2019 and 2020, which wiped out all of their revenue for both of those years. Right? Yeah, because because 2020 the revenue was was not even 14,000. And I remember looking at the 2019 and the two years combined and they said this over and over again in the in the different articles about this case is that in those two years they didn't even make 40,000 bucks. So yeah, literally all of their revenue for those two years was just taken out in just the audits. Yeah. And, and they have to buy things other than an audit. Right. Right. They have to have, they have to have bread. Yeah. And they have to have pepperoncinis. Yes. And, and, and probably the little paper cups for the, for the Diet Pepsi. Right. Yeah. Because wrestlers aren't drinking. They're not drinking the sugar sodas. They're drinking the diet. And and if you're having wrestlers you probably they probably want the mustard because they're watching the calories. They do. They do. And they're probably wasting napkins. So, yeah they they were tanking on their on their and actually, the financials that I looked at, it was the 2020 financials. So it had to look back to 2019 as well.

[00:16:25] And in 2020 they lost over $600,000 according to their their income statement. And in 2019, the year before, they lost about $150,000 on their on their PNL. So just in those two years this this shop again to keep it in perspective the best year was was like 70 something thousand $76,000. Yeah. And in 2020 they lost not ten times that, but pretty damn close to ten times that in, in a year. So they're, they're not, they're not doing great. Not doing great. They're losing hundreds of thousands of dollars every year. Revenue is going down, not up. Right. Which is usually the opposite of what you want. That's what you want. There's no sign of them trying to expand because how could you? Right? And yet the principals and shareholders continue to throw money down the hometown Delhi toilet because that's good business. And then comes April 15th, 2021. And we all know on April 15th, everybody should be distracted with tax day. And in 2021, everyone should have been distracted by Lil Nas X's hit song, Call Me by Your Name, as you remember that song from April 2021, right, Caleb? Yep, Yep. And instead of those two things, the media gets all sorts of crazy about, Guess who? Hometown deli. Oh, and the. Yeah, and the reason why. Hometown Deli, The sleepy little delicatessen in Paulsboro, New Jersey. The reason why that became the big story of the day is because on that day, hedge fund billionaire David Einhorn dropped his newsletter.

[00:18:22] And in his newsletter, he pointed out the weirdness that was Hometown Deli International, as you remember, the parent company of Hometown Deli. This is what David Einhorn says in his newsletter. He says, Someone pointed us to Hometown International, which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only 13,976in 2020. Hometown International reached a market cap of $113 million on February 8th, 2021. The pastrami must be amazing. Regulators who are supposed to be protecting investors appear to neither be present nor curious. A scathing indictment of regulators and a pointed concern of just because Caleb, this was this was back around when there was the whole Robinhood and GameStop weirdness, the meme stocks. Sure. Yeah. So this was so this was after that. And this is kind of what he was pointing out. He was like going, What the hell is going on with our capital markets? Because they're doing weird things like valuing a deli at $113 million and a single deli, a single deli and a single deli. And you were I asked you to look at some other companies that had similar market capitalizations. Yes. And the one the one that you brought up that I thought was the best example was Bed, Bath and Beyond. Yeah. Yeah. So Bed Bath, do you have a bed? Bath? Just out of curiosity? Yes. Is there a Bed, Bath and Beyond in your community? Can you drive to one from your house?

[00:20:10] I mean, of course. Yeah. I mean, it's. I mean, of course I can drive to one. Yeah. But I mean, the closest one is, um. It's a few miles, I would say, like ten minutes. Okay.

[00:20:22] Yeah. You're not walking there, but. But if you know, definitely not walking if you need, you know, if you need some household gadgets or if you or more likely if you're going to someone's wedding and they registered there, you can get there to buy them something from their registry. I certainly can. And same with me. There's one it's not ten miles away. It's maybe, you know, 2 or 3 miles away. So it's. Yeah, and that's the that's the point. Everybody's got a bed, Bath and beyond that's near them. Here's another. I did a little research. Um, quick, just. Just try to guess how many locations do you think Bed Bath and Beyond has?

[00:20:57] Well, I know they've been falling on hard times lately.

[00:21:00] They have been. That's true. So I.

[00:21:02] I think the number is dwindling. Yeah.

[00:21:04] Is it more than. Is it more than one? That's really what I'm getting at, Caleb. Oh, yes.

[00:21:09] I do believe there's more than one.

[00:21:11] I think we just. I think we just stated that there's at least two. There's one near Denver, Colorado, and there's one near Orem, Utah. Yeah. So there's more than one. And what I what I saw was earlier this year there were 691 Bed Bath and Beyond locations. And if you look at their annual revenue per location, they're actually pulling in around $9 million in revenue per location every year. Oh, but as you said, they aren't in the best shape, but their market capitalization with 691 locations, $9 million in revenue each store, they have a $55 million market capitalization for Bed, Bath and Beyond. I can't think.

[00:21:56] That's pretty. That's pretty small.

[00:21:58] That's pretty. That's. That's like half. That's. That's. That's half of what hometown International's market cap was. Yeah. Which is bizarre. And even if you made the case that, oh, their market capitalization should be low because they're on hard times, they're, they're at least like making a decent amount like the dollars per store alone is like if anything, you kind of you got to wonder if Bed Bath and Beyond is undervalued at $55 million.

[00:22:28] Hold on. Hold on. This is Caleb from the Future Jumping in. I can hear some of your brains breaking. You're thinking, Wait, Greg. Bed, Bath and Beyond went bankrupt. And you're absolutely right. While my good friend Greg was trying to make a point about the potential value of Bed, Bath and Beyond, reality had other plans. On April 23rd, 2023, Bed, Bath and Beyond filed for Chapter 11 bankruptcy. All of their stores, as well as all the locations of its subsidiary, buybuy baby, will be closed by June 30th, 2023. Okay. All right. Back to the episode. So Greg, since we've mentioned it a few times, I think it's worthwhile to explain to the audience for those that don't know what market capitalization is. Yeah. And how it kind of because like you pointed out earlier, there's 691 Bed Bath and Beyond stores and they all have revenue of $9 million. Right? So let's make it easy and round it up to 10 million. That means that shouldn't this company it makes $700 million.

[00:23:33] Yeah. Is that is that right. Yeah.

[00:23:35] Yeah. So shouldn't that shouldn't that make it worth more than 55 million? That doesn't make any sense. Right, Right, right. So market capitalization keep me honest here, because I've been known to make mistakes. But market capitalization is the number of outstanding common shares for a company. Yes. For a public company, Yes. Multiplied by its current stock price. Yes.

[00:24:05] By its most recent stock price.

[00:24:07] Yeah. Like close. Close of business. Right.

[00:24:10] That's it. Okay.

[00:24:11] And so of course, it because stocks are traded throughout the day, the market cap will fluctuate throughout the day. Right. But at the end of day, you can say, oh, you know, and since it changes every day, it's, you know, it's very fluid, but.

[00:24:25] It's a moving it's a moving.

[00:24:26] As of this recording, as of this recording, the number of Bed, Bath and Beyond shares times its market price. Yep Equaled $55 Million.

[00:24:35] There you go. That's exactly right And and that is accurate and that's really what you know for for layman like us who aren't you know, we're not professors of finance so that's certainly not that's really a good enough example. But but our you know friend of the show, Matt Levine, he he he actually full disclosure, he's not really.

[00:24:55] A friend of the show, but.

[00:24:56] Oh, he's a friend. He's a friend of the show now. He. Oh, is he. Oh great. Yeah, I think so. He's a friend of. Sure. He made a very good writer. He is. And he made a case that you that all of it's not just all the outstanding shares, but it would be the fully like if if everyone's options and warrants and things like that were executed that you have to include that in the number of shares that you multiply by the most recent sales price. So right, which is very interesting because when he did that calculation, he says hometown Delhi was worth more like $2 billion, if you look at it like that. But everybody was saying 100, 100 million because like the calculation that you said, that's really more the the quick and dirty and I'd say arguably more accurate calculation as well. So yeah, a little. Because again, if everybody if all of a sudden the market was diluted by, you know, 20 times or something like that, if every if all the if all the possible shares were out there, that that would, I'm sure, based on the laws of supply and demand, that would drop your share price pretty quick.

[00:26:04] Yes. Yeah. Like a rock.

[00:26:06] Yeah, exactly. So so okay.

[00:26:08] That was that was fun.

[00:26:10] That was super enjoyable.

[00:26:14] So you'd think that the media attention that Einhorn brought to hometown would burst its bubble. The stock price would tank. Yeah. And everything would go back to normal, right?

[00:26:24] Yeah.

[00:26:26] No. The day after Einhorn's letter, people were buying a shit ton of hometown stock. The average daily trading before his letter was about 350 shares per day. Okay. Actually here. Exactly 353. If if Greg Kite's research is to be believed.

[00:26:50] Oh, it's my research is dead on with that one. Impeccable.

[00:26:53] So the day after David Einhorn's newsletter, over 42,000 shares traded.

[00:27:03] Which is is crazy, but also wonderful.

[00:27:06] And the day after that was just under 15,000. Right.

[00:27:11] And and so some of the explanations.

[00:27:13] Can I just stop you? Yeah, You were you were a middle grade math teacher. Middle, middle, middle school math teacher. Yes. I think that meets the definition of exponential growth, right?

[00:27:23] Oh, yeah, that definitely would. Yeah, definitely would not. Well, and and it's even it's just bizarre. Growth is what it is. Yeah. Right. And and even that like people were trying to wrap their brains about why in the hell that happened but it was but but again remember this is right on the heels of the whole GameStop thing. So as weird as it is, a lot of the explanation for why it blew up was that there was just people who thought it'd be cool and funny to buy a couple of shares of the shares in that deli. Yeah. And so if you've got enough people like I'm going to just throw it, you know, because they were trading it like, you know what was. Well, yeah. What were the, what was the share price. Yeah. For these guys.

[00:28:07] So what's also weird because this is a pretty weird story. Yeah. It's also weird is despite the huge uptick in trading volume, the price of the shares actually went down a little bit. Yeah. Which like you mentioned it earlier, kind of seems to violate the law of supply and demand. Yeah. The pre Einhorn price was $13.50 per share. Two days and 57,000 trades later the price was. $12.99, about a 4% dip. But. Hometown was still a $100 million company.

[00:28:46] Yeah, and that's and that's the thing. So if each share if we're just talking, you know, 12, 13 bucks a share. Yeah. I could see people who were just market enthusiasts going, hey I'll, I'll, I'll throw 130 bucks at that and buy ten shares. Ten shares just to, just to say I did it. Yeah.

[00:29:08] Got some hometown Delhi.

[00:29:09] Yeah. Portfolio and there there might even been well I don't know I don't believe this that because people get people get excited about a hot stock that's higher than it's supposed to be because they assume it's going to keep going higher which is the complete opposite of what they should think. So there was there was some there was some chitter chatter about how that might have been part of it. But whoever's buying because they think it's a hot stock, even though it's only on anybody's radar, because David Einhorn said it's a bullshit, stock is just an idiot and deserves to lose all the money that they put into it. So it's it's just it's maybe the whole idea that, no, no press is bad press is what that tries to, you know, drive home. So with all this happening, everybody just wanted to know what the hell is going on with this goddamn company. And and the the first one of the things that you need to know is you need to know that hometown stock is called an over-the-counter or an OTC stock, which basically means and again, this is dumbed down for me because I'm not the brightest guy, but it basically means it's a publicly traded stock, but it's not listed on an exchange.

[00:30:30] Is that that's your understanding of OTC, right? Yes. All right. Caleb. Yeah. And so so it's not So basically you have you have private listings and private buying. It's not it's not New York Stock Exchange. It's not Nasdaq. It's just people who have them for sale and other people who are like, I'll I'll buy some of that. Second thing you need to know is that the vast majority of all of the stock that was that was out for Hometown International all was owned by a small group of people. And the third thing you need to remember is what we just said about how market cap is calculated. It's just the last sale price by the total number of outstanding shares. So if you take all that together and you're a thoughtful person, it'll come to mind pretty quickly that there's a huge risk of market manipulation with these over-the-counter stocks. Wait a minute. Yeah, it's why?

[00:31:30] Why wait? Why would you conclude that there's market manipulation?

[00:31:33] Well, I'm not. Well, I would conclude there's market manipulation because everybody's going, why the hell is this one company worth $100 million? That's why I would conclude that.

[00:31:43] On paper, that looks very strange.

[00:31:45] It looks very strange. But then it also makes sense with these OTC stocks that it'd be easy to get there because and let's let's take this example. Let's say that you have two institutional investors who both own shares of an over-the-counter stock and.

[00:32:02] By sorry, just to make sure everyone understands by an institutional investor, you mean like somebody big, like a mutual fund or like a state pension fund or something like that?

[00:32:13] Well, I'm even talking more pedestrian than that, where it's more like there's just a company whose sole purpose is to purchase, to invest in stocks. You just hedge fund. It's a A company. As Yeah, a hedge fund would be an example of that. But you could just have somebody who set up an LLC that's just like they're trading and you know, Oh yeah. Oh, so real Market Speculation LLC.

[00:32:36] Okay, got it.

[00:32:37] Yeah, but, but, but the things you said like, like a pension company or a hedge fund, that's also, that would also be an institutional investor. But let's keep it, let's make it a little bit. A little bit more. Yeah. Like I said, pedestrian than that. Let's just say it's a couple LLCs that were set up just to do speculation in stocks. Okay. And so they're two separate entities. But let's say those two separate entities have the same person who is in charge of the operations of those two different entities. Very easy to do. And if those two entities both own shares in the same OTC stock, they can sell the stock back and forth to each other for whatever price they want to sell the stock for. And then all of a sudden, if that's the last price that was given for a share of the stock, then that all of a sudden is the lever for your market capitalization. So if you if if you want to double the market cap for that company, you just sell from one of your companies to the other company twice of what it last sold for, you could sell one share for that and that would double your market capitalization. Now people are usually going to be a little bit more. Like sneaky about it and maybe maybe slowly build it up rather than say, here, I'm going to buy one share for $1 million. And now it's a, you know, bazillion dollar market cap company. But also, weirdly enough, that's what some people have done with some crypto cryptocurrencies that they've just made and thought it'd be funny to say it's worth, you know, $4 quadrillion. So they do the they do the hocus pocus and all of a sudden they've got they can say that a cryptocurrency is worth a gazillion dollars even though no one owns it except one guy and his brother.

[00:34:21] Yeah, so, so Caleb, talking about these two fictional institutional investors with the same guy who's able to to call the shots at both of those companies. Bottom line, that's actually what was happening with with hometown. There was there was that exact kind of thing going on. Now, in case you didn't know, market manipulation is totally illegal. But what makes Hometown even weirder is that typically market manipulation is part of a pump and dump scheme where you pump up the price. Then you get the word out about how hot this stock is. And hometown share price was up 939%. And then after you go, Hey, this thing's going to the moon, It's up. It's already up 939%. Get on this train before it leaves the station and then everybody clamors to get your shares. You sell all of it to all these super stoked investors, and you make lots of money, and then you don't really give a shit after that what happens to the stock because you just rang the cash register and got your money and got the hell out of Dodge. However, in the case of hometown, there was all the pumping but none of the dumping. And in fact, it's weird. One of the weird things, one of the many weird things about this hometown case is that there was there was zero attempt to even publicize the stock or the price of the stock or the growth of the price of the stock.

[00:35:52] The other thing that people speculated was going on with hometown is that its entire reason for existing was to become a vehicle for a reverse merger. Back in episode seven, when we interviewed Francine McKenna, we talked about SPACs. Those are special purpose acquisition companies.

[00:36:09] I remember this because I remember you and her talking about SPACs and me interjecting and said, Hey, what's, what's a SPAC? Spac.

[00:36:19] She was very gracious with you.

[00:36:21] So gracious. She should have just said she should have just left the podcast. But she instead explained to me what they are.

[00:36:27] Yeah, and a reverse merger is a shadier version of a SPAC. And SPACs aren't exactly squeaky clean, but.

[00:36:36] Right, right. That's like saying filters cigarets are a healthier version of a of a cigaret.

[00:36:44] Well said.

[00:36:45] Yeah, well.

[00:36:46] Said. In both cases there's a shell company that's a public company. Okay. Yeah. Some other company comes along that wants to be a public company, but it wants to do it fast or cheap or both and without too much scrutiny. Okay, so the second company acquires the shares of the shell company, and then that shell company buys the company that wants to be public and boom, the not public company is suddenly a public company. Cool.

[00:37:23] Yeah, that makes sense because it's basically you're going to do a hostile takeover of the shell company and then once you're in control of the shell company that doesn't really have anything, you say, I know what we're going to do. We're going to acquire that company over there, which is really the company that we are already in. And then you do a merger and then all of a sudden your private company is a public company. Makes sense to me.

[00:37:49] Cool. Now, SPACs at least have certain safeguards, procedures, rules that must be followed. Reverse mergers, on the other hand, do not reverse. Mergers are not explicitly illegal, but it's they should be seen as kind of a red flag. Yeah, it's like if your tinder date rolls up in a nice car and then takes you to an expensive dinner, but then during that dinner you find out he lives with his mom. That's kind of like that's more or less it. It doesn't mean that he's a loser or a serial killer, but if and when he does turn out to be a loser or a serial killer, everybody, including you, will say that they always knew it, right?

[00:38:36] It was obvious. Yeah, it was obvious. It was obvious. We knew it the whole time. Knew the whole time. And just just quickly to note, we our explanations of reverse mergers and SPACs are very superficial. There's a lot more to learn about it. We put a link in the show notes, so if you want to get a better understanding of reverse mergers and SPACs, just check out the show notes and and research to your heart's content. So in his April 2021 newsletter, David Einhorn said, quote, Regulators who are supposed to be protecting investors appeared to be neither present nor curious.

[00:39:15] I remember from earlier in the show. Yes. When you read that and.

[00:39:21] It turns out that one of the best ways to make regulators both present and curious is to very loudly, very publicly and very specifically accuse them of not being present and curious and boom, all of a sudden they just show up out of nowhere. And this this media frenzy that David Einhorn sparked pretty much forced the SEC to to look pretty closely into what was going on at Hometown International. As it turns out, there's three people who are key players in this whole situation. The first one is James Patton. We talked about him before. He's the former Paulsboro High School wrestler. The second guy was Peter Coker Senior, and the third guy was Peter Coker Jr. All three of these guys were associated through James Patton's employer, Trion Capital. And. Hey, yeah, wait.

[00:40:20] Didn't you say Tyron earlier?

[00:40:23] Early in the podcast. Yeah. No, I said try on, try on.

[00:40:27] Like try on a pair of pants.

[00:40:29] Yeah. Like. Are you sure?

[00:40:31] Yeah, I'm pretty sure. You said Tyron.

[00:40:32] Like, uh. No, no. Go back and listen to it again. You'll see. It was try on the whole time. All right? Like, try on a hearing aid so you can hear what I said when I said it. Anyways, these three guys, Patton, Coker and Coker, transferred millions of hometown international shares to these nominee entities, which basically, like we were talking about before these, it was companies that were just there to speculate in stock exchanges. And and they were they transferred all these millions of shares to mask their control over the shares so that they could then indulge themselves in the pumping of the value of the stock. But they went beyond that, too. They also transferred shares to family, to friends and to associates. And then after transferring those shares, these three guys gained control over those people's trading accounts by obtaining their login information. So they still basically had control over all those shares that they transferred. But that also continued to obfuscate the fact that they did, in fact control those shares. And then they engaged in wash sales and the pumping of the stock price, as we mentioned before.

[00:41:55] Now, we should say at some point, right, that these are allegations as of this recording, these are only allegations.

[00:42:05] It is these are alleged. Nobody's been sent to jail yet. But this is what this is what things appear to to be to the powers that be. Okay. Yes. Got it. But like we said before, there was just the the inflation of the stock price, but not the dumping of the stock onto the unsuspecting masses, because it's also and and this is the thing and we'll get to this even later. It's still super confusing. What the hell these guys were really trying to do. But it seems as though their ultimate intention was rather than dump the shares to execute a reverse merger, because apparently if you're doing a reverse merger with $100 million company, it's way cooler or way or it feels more legit to the company that's trying to do this not so legit thing to to do a reverse merger with a $100 million company and not with a $50,000 company. So that's that's part of the at least the as people are trying to decode what happened and try to back into some meaning of this that's that's pretty much what they're figuring these guys are trying to do is to execute one of these reverse merger. And the other thing is there was also an intercepted text message sent by Peter Coker Jr, that said that once the reverse merger was announced that the price of hometown stock should get another upward bump and then at that point they could sell the shares for even more of a profit. That's what he said. But we don't really see the.

[00:43:44] The dump in the pump and dump.

[00:43:46] That would be the dump. But that's the thing. And but the dump never happened. Nobody ever took a dump. And that's what and so we got these three guys and they actually never any of them made money on home hometown stock sales or on the reverse merger. They didn't. If you just look at what they they had they didn't make any any and and there was actually a reverse merger that did happen. It happened on April 1st, 2022, with a company called Machemer Holdings Inc., which was a start up company. And as a start up, it had zero revenue, which if you're keeping track, zero revenue is less than the Delhi, not a lot less, but it's still less than the Delhi. The only way that there was any money made by these three knuckleheads was in consulting fees. So the so Hometown International paid the COKERS a little over $500,000 in consulting fees. Apart from that, nobody made much money. And if you think about $500,000 over the course of seven years, you're talking $70,000 per year. Not a huge haul for the cokers even at that. And what's awesome is that this whole hometown situation got a lot and so much a ridiculous amount of intention and then it just kind of died. And people are still unsure if it fizzled out because because of all the attention and. Scrutiny that resulted from Einhorn's newsletter, or if it fizzled out just because Pat and Coker and Coker were bad at doing crime.

[00:45:34] Regardless of their ineptitude. Patton and the father son cookers have all been indicted. They were charged with securities fraud, conspiracy, wire fraud, money laundering and securities manipulation. The Securities and Exchange Commission also filed civil charges against them. James Patton and Peter Coker SR were both from North Carolina, but Peter Coker Jr was living in Hong Kong when everything went down. Patton and Coker SR. Were arrested right away, but Coker Jr disappeared. He turned up three months later when he was found and arrested in Phuket, Thailand, where he voluntarily agreed to be extradited to the US. And as of this recording, he's still in a Bangkok jail awaiting extradition. The wrestling coach, by the way, got off scot free. And despite its great cheesesteaks and a colorful backstory, they closed the deli in June 2022. So, Greg, did we learn anything? I'm not sure.

[00:46:42] Well, yeah, and I'm not sure. I'm not sure.

[00:46:45] I love this story. I do too. I love the story, but I'm not sure what I learned.

[00:46:48] Listen, I. Yeah, I. I've realized that I love all food related fraud stories that we've done, food or beverage related. I love this one. I love the fruit cake fraud. I love the Pappy Van Winkle. Bourbon fraud. Yeah, I love all of them. If you put if you put food or booze in a fraud case, I'm in with both feet. And I also like it when the fraudsters are at least arguably incompetent. And I and and I'll still I'll still say that I, I think these guys were incompetent at what they were doing because all of the maneuvers that they were doing throughout this entire story, the Cokers and and Patton, everything they were trying to do was clearly to make money on the price of these stocks. And as as you said, as was stated earlier, the only money that was made was the $500,000 in in consultation fees, which which again, you look at that, you divide it three ways. You divide it over seven years. It's it's like chump change really for anybody in finance. So it was kind of a nothing they they they missed the mark and and again I think they had something there where they if you're going to go to jail, at least go to jail for it there. These guys are all in huge trouble. And they didn't even really do the fraud that they were going to do. And that makes me that makes my heart feel good that.

[00:48:20] They fell far short of. Yes. Or at least our expectations.

[00:48:24] Right. It's like it's like they, you know, you're in jail and it's like, what are you in for? Fraud? How about you? Attempted fraud? And it just doesn't it doesn't give you the cred in the yard. I'm assuming I'm projecting, but I think that that's probably the case. But Caleb, here's in terms of learning the place that my brain goes with this story. And of course, this is because my whole world is the CPA accounting world. So my brain goes to the CPA firm that audited hometowns, books. And I looked into it. The firm is called Liggett and Webb. They're a CPA firm. They've got offices in New York and Florida. The Florida branch was the ones that audited hometowns, books. And and a little backstory on Liggett and Webb is these guys were censured and fined by the PCAOB in August of 2020. So if you got your timeline right, that was before Einhorn's letter about hometowns. So their censure was not related to this engagement. But regardless, they were were censured, which is interesting. But also maybe it's not because Caleb, I don't know if you have the same impression, but it seems like every firm that audits public company gets censured and fined at some point by the Pcob. It seems like it'd be hard to find a firm that hasn't been in trouble, that is public companies that hasn't been in trouble.

[00:49:57] I think you'd be hard pressed.

[00:49:59] Yeah, to.

[00:50:00] Find a firm with a spotless record.

[00:50:03] From the PCAOB. Yes. Yeah. Because there's just. There's a naughty list that goes on forever with those guys. So maybe that was just good. It's making a lot out of a little because it looks good that they got in trouble by a regulator when everybody's getting in trouble with the regulator. Yeah. Um, but also, I think this isn't nothing but one of their partners, James Liggett, who you've got to assume is one of the founding partners of this, was barred from being associated with any registered public accounting firm. But again, his the discipline against him was not for the home town situation. And despite his name being Liggett, it's also still unclear if he was part of the hometown international engagement. So all this to say and we see this with everybody, like I talked about with Patton, he had you know, he he was barred from being a stockbroker. The the company that's doing their books is, you know, is being censured and fined. And one of their founding partners is, you know, was was disciplined by, I assume, the state board of CPAs. Even if you look deeper like the law firm, the the law firm that helped these guys go public, initially, they got in trouble for some other IPO shenanigans that they were involved in. So there's just this this web of of people with checkered backgrounds being involved with hometown. But. All that being said, here's here's my dilemma. And the dilemma is this Did Liggett and Webb, did they do something wrong? Because all of this feels like an Arthur Andersen kind of deja vu thing where Liggett and Webb, because never in any of my research did anyone say that they did anything wrong. But also they were front row to what was happening. And they didn't they didn't do anything about it. Is that is that okay or is that not okay? Like like, for instance, do you when you look at this case and you think about Liggett and Webb as a CPA firm, should they have even stayed on the engagement with hometown or should they fired them as a client? What what do you think about that?

[00:52:24] I mean, we know we all know that like audit firms aren't they're not they're not known for taking stands against clients.

[00:52:36] So that's like, Well, and you're right, they're definitely not known for that. But I think that that doesn't change the question because the question is, should they have? I mean.

[00:52:49] Look, you have a you have a public company that consists of a single deli with almost no revenue. Yeah. And it's it has a value. It has a market capitalization of $100 million. Like there's some any auditor. Can take a look at that on paper and be like, What's going on here? This is.

[00:53:13] Fishy. This is fishy. This. This doesn't make any sense. It's red flags. It's. It's just it's just full of red flags.

[00:53:21] So, yeah, I don't I don't know if they should have fired the client. I don't know if they should have rang up the SEC before David Einhorn made a spectacle of everyone. But, you know, it's pretty weird. It's pretty weird when you just look at the circumstances and you understand what auditors have to do is they have to get an understanding of the business. Yeah. Then it it doesn't look good. Yeah.

[00:53:53] And I guess where my brain goes to is like, should they have? And I classify that as more of like, should I be giving more to charity? Like, and it's like, yeah, I should, but am I obligated to? I'm not. But should I? Yeah. If I. In a perfect world, I'd be given a lot more to charity than I am right now. And I'd say, in a perfect world, I'd say, Hell yeah. Linkedin Webb should have fired him. They should have called the SEC and said, Hey, this is weird. Please look into these clients of mine because they're following the rules with in terms of accounting procedures. But by seeing all this, there's something weird going on in this company. They should have done that. Now, I also can easily default back to being super rule follower kind of person and go, But did they follow all the rules? Did they have all the proper disclosures? And clearly they did because like I said, there was zero implication in any of the research that Liggett and Webb didn't do a top notch job with these financial statements, like.

[00:55:01] The SEC filings were. I just remember reading in one of the Levine newsletters was like, these are the SEC filings were fine, clean. Yeah, yeah. Right.

[00:55:12] So which which is is also part of the whole SPAC reverse merger racket is that if your SEC filings of all that stuff isn't pristine, you're not a good candidate for a reverse merger or for a SPAC. So you got to have those. So was the quality of the financials good? I think unquestionably so. But but then that goes back to the whole Arthur Andersen thing, which I guess played out in a similar way because Arthur Andersen, they were they went out of business, but not because they were disciplined by regulatory companies, but just because they got such bad reputation by being involved with Enron. So same kind of thing here where these guys didn't they got no slap on the wrist or anything like that, even though they were front row to some bad goings on. I guess that's kind of like if you if you're doing the taxes for the mafia, do you have to do you have to call the cops on them? I don't. Not if you want to keep your kneecaps, I guess.

[00:56:17] No, not if you want to. Yeah.

[00:56:18] The only thing above ground. The only thing to me looking through the k-1s or the the K-1s the 10-K is for hometown International is. I did notice that they did not that Liggett and Webb did not include a going concern disclosure in their auditor's report. And to me, if you're losing $600,000 on a company whose revenue is $76,000, you should be putting a going concern disclosure in the auditor's report. That's the only thing that I saw that seemed to be missing from their financial statements. Sure.

[00:56:57] Yeah, sure. I mean, that would have probably got some that would have probably maybe drawn a little more attention, but maybe, maybe not. Like, you know, there's plenty of there's plenty of businesses that get going. Concern that have going concern warnings. I don't mean plenty, but it's not It does happen. And people are just like, all right, like.

[00:57:20] And I guess the only other thing I learned on this one is that it's weird how so blatantly obvious of a of some sort of weirdness and shenanigans where it's just right in your face. And in our capital markets, people, if it's not hurting anybody, nobody's going to do anything about it. Because again, I think if Einhorn didn't didn't blow the whistle on these guys through his newsletter, it would have been very interesting to see what happened with them. And likely they would have, I think I assume tell me if you if you don't agree with me, I think they probably would have done the reverse merger, made the money the way that they thought they were going to and would have gone on their merry way. What do you think? Yeah. What is your crystal ball tell you?

[00:58:02] I don't know. Like, I think again, I think one of the things I read was that because they were over the counter, that meant they they were not they couldn't be traded on Robinhood, for example.

[00:58:14] Right.

[00:58:15] So retail very little exposure to retail investors. Right. So that was that was the case like in the in the meme stock frenzy of this time period, which really wasn't that long ago. That was the big deal that people were like clutching their pearls about, was that retail retail investors were the ones that were going to get hurt. And they certainly they certainly did. Yeah. In this case, because it was a thinly traded stock, it wasn't eligible to be on Robinhood and for example. And so, like, who's the victim here? Yeah, it's like like if you were going to make a defense, if you were going to make a defense of these guys and someone certainly is defending these guys. Yeah. It's like, who's the who's the real victim here, right? Is it a victimless crime or is it or is this. Yeah, that's the question, right?

[00:59:06] That's exactly.

[00:59:07] Well, it does. But to Einhorn's point, it's like we have we have regulators that are kind of asleep at the wheel. Exactly. And we have financial engineering going on that is maybe not in the spirit of good, good finance, you know? Yeah.

[00:59:28] Yeah, exactly.

[00:59:29] And so and yeah, that, that it's just it's the weirdness of it that caught people's attention. They're like, Hey, maybe we should look into this. I'm like, Oh, this is what's going on.

[00:59:39] Well, and to even wrap it into the Francine McKenna episode one more time is this is the golden age of fraud because regulators are not present and not concerned. Yeah. All right. Well, that's it for this episode. Remember, if you order a pastrami sandwich, make sure that it costs less than $100 million.

[01:00:05] And also, remember, a reverse merger is a financial transaction option, not a sexual position.

[01:00:12] If you want to drop us a line, send us an email at my fraud at earmark cpcomm. And Caleb, where can people find you? Out there in the Internet.

[01:00:23] On Twitter at Newquist and LinkedIn Backslash. Caleb Newquist. Greg, Are you on the internet?

[01:00:29] I am. One thing you can do to find me is just Google Greg Kite with the last name spelled properly k, y, t, and it'll show you all of me and maybe a couple of things of like a firefighter in Georgia. But other than that, it's it's all me. I'm on Twitter at Greg Kite and LinkedIn backslash Greg Kite.

[01:00:49] Oh my Fraud is written by Greg Kite and myself. Our producer is Zach Franc. If you like the show, leave us a review. Share it with a friend. That's how people find the podcast. Subscribe on Apple, Stitcher, Spotify, wherever you listen. And for the accountants out there, listen on earmark. Get some CPE. It's a great deal. It is. There's no sandwiches involved, but none CPE.

[01:01:13] I'm already I'm already 25% of the way through of my CPE for the next two years. Oh, great. Thanks to earmark CPE. Hey, it's easy and enjoyable.

[01:01:24] It's a fine endorsement.

[01:01:25] Oh, it's so good.

[01:01:27] Join us next time for more average swindlers and scams from stories that will make you say, Oh, my fraud.