What's up guys and welcome to wall street millennial on this channel, we cover everything related to stocks and investing today, we're looking at jamath, paula, habitia, the billionaire founder and ceo of social capital. Chamoth is the face of the spak frenzy of 2020 sponsoring six packs, including the one that took virgin galactic public in late 2019.. However, many investors are starting to grow weary of tremont over the past few months. His spacks have started to tank and there are growing concerns about transparency and the motivations behind dispatch.

He claims to be democratizing the stock market and helping out retail investors with its backs, but at the same time, he's also lining his own pockets to the tune of hundreds of millions of dollars. In this video we'll go over how to moth built up his reputation in the first place and how he launched so many spacks in 2020. We'll also go over some recent controversies regarding his facts. Specifically, the fraud allegation against clover health and his controversial decision to dump a large part of his virgin galactic stake.

This video was chosen by our channel members. Members get to vote on some of our video topics and get access to our videos one day in advance. Chamath first made a name for himself in the early days of facebook. He was one of the first executives that zuckerberg hired and he was instrumental in scaling the platform to 1 billion users in 2011.

He left facebook to start a venture capital fund social capital which invests in early-stage tech startups throughout the 2010s. He had an impressive track record. He first started buying bitcoin in 2013.. He also invested in high growth tech stocks, including amazon and tesla.

He accumulated a net worth of more than one billion dollars and became a dominant force both on wall street and in silicon valley. In 2019, he capitalized on his reputation as a visionary investor by launching a special purpose: acquisition, company or spac. A spac is a shell company that raises money through an ipo after the money is raised, the sponsor finds an acquisition target to take public through a reverse merger. Chmath used his spac to take richard branson's space company virgin galactic public virgin galactic was the first pure play space company to go public.

It received a lot of initial hype, especially among retail investors. In the first couple months of trading, the stock increased more than two hundred percent. It has been extremely volatile since then, but it's consistently stayed well above the stack price of ten dollars. The success of virgin galactic drove shemot to sponsor many more specs in 2020.

These include online realty company, open door, healthcare, company, clover, finance, app sofi and others. He shows no sign of slowing down in early 2021, he filed for more than seven spacks. This will bring his total number of blank check companies up to 14.. He paints specs as a way to democratize the stock market, allowing retail investors to invest in early stage companies that would otherwise only be available to private equity firms.

He frequently goes on financial news channels to talk up his stack deals and gather more interest from individual investors, but chama's motivations for taking these companies public via spec are not completely altruistic. Specs have complicated fee structures and typically end up being much more expensive than a traditional ipo. Chamoth makes tens of millions of dollars in fees from every one of his specs. Even if the share price ends up trading poorly, the fee structure and dilution of specs is very complicated and difficult to understand.

If you're, not a corporate lawyer or investment banker, harvard law school recently published a study looking at the total fees and dilution investors face when they invest in a spec we've included. A link to the study in the comments section below the spac merger process is extremely complicated. With a lot of moving parts. The exact dilution retail investors suffer depends on the warrants issued how many redemptions there are and other factors after taking redemptions into account.

The median spac sponsor takes 31 percent of the equity value for free as his fee for running this back. In addition, there are underwriting fees paid to the investment bank in further dilution from warrants. In total, an investor in a median spec is diluted to the tune of 50 percent, as the sponsor chamath gets a sizable stake in the companies pretty much for free. While he does put some of his own money in as well, the stock price can go down significantly and chamos will still be in the green on the investment.

This dilution comes at the expense of retail investors, who end up paying a higher valuation as a result of the dilution. The effect of the dilution is apparent with the recent spak grab, which is being acquired at a massive valuation of 40 billion dollars. This is roughly double the company's private market valuation from just a few months ago. Part of the reason the valuation is so high is to account for the dilution of the spec.

At the end of the day, the retail investors are the ones who will end up holding the bag because they buy at an inflated price. This dilution results in poor average returns. Renaissance capital analyzed 89 specs from 2015.. They found that the average return from 2015 to july 2020 was negative 19.

The median return was even worse at negative 36. The average return for traditional ipos during the same period was positive: 37 in the legendary gamestop short squeeze of late january and early february. Chamath. Paula habitia managed to gain even more favor, with the retail investing crowd right when the gamestop short squeeze was beginning.

He tweeted tell me what to buy tomorrow and if you convince me i'll, throw a few hundred grand at it to start ride or die. He then went on to announce on twitter that, due to all the talk around gamestop, he had bought 50 contracts of 115 strike calls the calls expired less than a month from that time, meaning that he pretty much had made an fd in gamestop in true wall Street best form the next day he went on cnbc to talk about his yolo and used the opportunity to defend wall street bets in the interview he described wall street bets as a collection of people who were pushing back against the establishment and which has the capability To do high quality, investing in the face of the traditional cnbc host scott wapner, who has expressed negative feelings about wall street bets in the past. Chemoth really took a stand on the side of wall street vets. I ended up closing out my position this morning and i wanted to announce that i'm taking all the profits that i made plus my original position.

So i'm going to take 500 000 and i'm going to donate to the bar stool fund for small businesses um. But i really want to tell you, beyond the 500 grand um donation or the the money that i invested, which was you know, not a huge amount in the grand scheme of that stock or the entire market. What i learned, because i think what i learned over the last couple of days is important for everybody: um, that's watching cnbc, and that is, i think, that what you're seeing is um, essentially a push back against the establishment in a really important way. You have a lot of people and i would encourage anybody who is dismissive of this thing to go into wall street bets and actually just read the forums, and i think that you're going to see three kinds of posts.

The first kind of content are a lot of people, doing some incredible fundamental diligence on companies trying to think about long-term value and, in my opinion, many of them are doing as good and, frankly, a better job than a lot of hedge fund. Analysts that i work with that's number one. The second are a lot of people who believe that you know coming out of 2008. What happened was wall street took an enormous amount of risk and they left retail as the bag holder.

This interview was met very positively on wall street bets with many people, cheering him as a man of the people and taking a stand against the establishment to many people wall street elites, shorting gamestop was in us against them situation and chamoth was on the us side. However, things started to crack in the chamath narrative, not long after. In early february, when gamestop was still going on, one of chamos's, most hyped spikes was given notice of an sec investigation, as well as prose by the justice department for possible fraudulent business behavior. The sec investigation was sparked by a hindenburg research report alleging blatant fraud in the company in the report.

The reputable research firm called chamoth the king of spaxx and said that he had lured retail investors into a potentially fraudulent company. Among the allegations were reports that the department of justice was already having an ongoing investigation into the company which the company did not disclose to investors either before or after the spec merged. This investigation was related to possible kickbacks and other fraudulent marketing schemes for the clover assistant product. Supposedly, the clover assistant was actually a pretty useless product that many doctors hated and presumably they needed to resort to fraudulent sales methods to get sales.

But perhaps the most disturbing thing about the allegations was the hypocrisy of chamoth regarding clover. Clover is one of his major spac deals that he went on national television pitching to retail investors watching cnbc and bloomberg when his backs were doing well. He did not hold back about all the good things about his own deals, including clover, health. For some reason, in an interview from late last year, chamoth seemed focused on his claims that cloverhealth was a company focused on transparency or over time, and the reason.

Why is because they create transparency, they don't play games, they don't motivate doctors to up code or do all kinds of things in order to get paid. They've created an extremely transparent and efficient business, so their gross margins out of the box are better and we think they're going to continue to only get better relative to the companies like united and humanity. So now investors are wondering what is chamath's definition of transparency after the hindenburg allegations, clover admitted that there was in fact, a justice department, investigation ongoing, and there had been one since before the spac. That report, but importantly clover, said this morning that it did receive a notice of an sec investigation and says it intends to fully cooperate and perhaps more importantly, it acknowledges that hindenburg's research of saying that there is a department of justice inquiry taking place and that they're Cooperating with that inquiry was in fact, true and something that they did not disclose.

They said they did not disclose it at the behest of their lawyers, who said that it would not necessarily be required to be disclosed, arguing that it was not material, but that in fact, chamath pali, hapatia and other investors and people involved in this transaction clearly knew About it as part of the diligence process in advance, of course, the public did not know about that in advance. They're now saying they didn't have to tell the public about it in advance, saying that there are lots of inquiries in the medicare space like this, and that this was quote unquote. I don't know if they use the word routine, but that was the the idea that they were trying to get clearly some lack of transparency. At the very least on the news.

Clover health stock plummeted as expected, but perhaps more importantly, it eroded chamas status to retail investors even further. His lack of transparency about his specs and him seeming to be pumping up the spax prices to retail investors started to become glaring. Here he is talking about his financial interest in the clovers back early on after claiming that he takes no fees and seeming to imply that his only financial interest in clover is the fact that he's investing in it. Andrew sorkin tries to probe a bit further into the true compensation structure of jamaat's deal five or six percent of the business.

That's it now. From my perspective, i think that that's a wonderful good good. No, i just think there is there's no warrants or other preferreds that would that would get you to a higher percentage of the company again. This is all on a fully loaded basis, so this very awkward exchange makes it obvious that chamoth is trying to avoid giving a simple and accurate explanation of what his economic stake in this pack is, and what i'm trying to do is put my promo.

But what you just suggested was that you're getting no promote. No, that's not what i'm suggesting what i'm suggesting is that you have 16 million dollars, initially plus 160 million dollars on the back total total total i've just told you what we own so you're saying now. That's going up to about 250 million dollars right now, automatically yeah, for example, an open door, the position that the reality is and chamoth just made it very hard to understand. But what is really going on is that chamoth put in about 171 million dollars into the clover deal which automatically went up to 250 million dollars worth of clover stock, purely for him being the smack sponsor.

This is called the promo, where the sponsor basically gets awarded free shares of the company to most people. This sounds no different than chamoth getting paid an 80 million dollar fee as a sponsor just paid in the form of stock instead of cash. But one of the first things he touted in the interview is that he isn't making any fees. This is all on a fully loaded basis, so i want to make sure that you're not confusing fees with investment fees.

I don't make any right and technically true but misleading, and it sheds a little light on why there are so many specs recently when a company considers going public. There are a few options: a traditional ipo, a direct listing or a merger with a spack for the company going public. There is little difference of doing a spac rather than a traditional ipo, except that the due diligence process and transparency is much weaker for this. Back.

This causes some extent of adverse selection in companies that choose to go public through specs. If a company knows that they won't make it past the due diligence process of a traditional ipo, they can sometimes get around it. By doing this back and finally, chamoth has recently showed signs of cashing out on a supercharged spax. He started selling virgin galactic one of his earliest facts late last year, despite his early statements that he would want to hold the sock forever here, he is trying to explain why he sold style to sell some shares of virgin galactic.

I saw you tweeted about it. You wanted to be transparent. People asked for you to address it up front on the show so go ahead. Yeah.

I have a lot of uh projects that i intend to fund in 2021. I'm probably going to put another. I don't know. I think the forecast was almost two billion dollars to work and i needed to manage my liquidity for this year and make sure that you know um.

I could continue to make all those investments and um fund my uh fund. All of the other things that i need to do and that's why i did and you're still a significant shareholder. I assume and you believe in the company yeah i mean uh. I remain completely committed to that business um.

You know i i it would have been better if i could have sold something else, but it's not quite possible and when we're entering it, when we, when you leave the tax year, you just have to make these decisions to lock in some gains against other losses And would have loved to have not had to do it, but i needed to manage my liquidity and so i sold you know it's a small portion of what i own, but he also kept selling and eventually sold out his entire stake in virgin galactic. Just a few months after he started selling them all told he sold out his entire stake only a few months after he was legally allowed to investors, disappointed in chemoth selling lost millions of dollars as virgin galactic tank double-digit percentages following the sale since then pretty much All of chamas specs have been losing money for retail investors. It was recently reported by bloomberg that jamaa's spacks have underperformed an index of other specs. It seems that the magic of the king of specs is starting to wear off, with retail investors left holding the bag.

Alright guys that wraps it up for this video, if you like the content, make sure to smash that like button and subscribe for future uploads, also check out our second channel wsm research, where we post dd on high growth stocks. As always. Thank you guys so much for watching and we'll see you in the next video wall street millennial signing out.