FINRA Fraud?

Good afternoon,

Stock futures spiked more than 1% one minute before the CPI print, mentions of JPow are spiking before this afternoon’s FOMC, and the amount of pre-IPO Goldman partners is plummeting.

Yesterday's dovish CPI surprise has left markets to all but price out any Fed tightening by 2023. On a year-over-year basis, mortgage rates have increased by +104%. Cheers, friends, we’re making history.

Let’s dive in.

Bottom Line Up Front

• Meta sued for $2bn over Ethiopia violence (BBC)

• Twitter has not paid rent for its San Francisco headquarters or any of its global offices for weeks (CNBC). They’re probably just using Quickbooks.

• The EU will impose a tax on imports based on their greenhouse gas emissions, inserting climate-change regulation for the first time into the rules of global trade (WSJ)

• A bipartisan group of lawmakers seeks to ban TikTok from the US (Reuters)

• Jimmy Fallon, Gwyneth Paltrow and Justin Bieber have been sued for misleading their followers into a Bored Ape Yacht Club (NFTs) pump and dump (Yahoo)

• The Energy Department said yesterday that scientists achieved a “breakthrough” in research on nuclear fusion, which is seen as a potential source of clean, “limitless” energy (WSJ)

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“Investors” sign petition to override FINRA’s “illegal” halt of MMTLP

The long-awaited spinoff of Meta Materials preference shares took a more unexpected turn than Kim Kardashian venturing into private equity. Let’s dive into the Reddit-accredited investors who were so serious about their outrage, they took to Twitter to air their threats.

Trading of Meta Materials preference shares (OTC:MMTLP) was suspended Friday ahead of Meta’s (NASDAQ:MMAT) planned spinoff to Next Bridge Hydrocarbons. For brief background, Meta Materials is a Canadian firm that was listed on the Nasdaq in June 2021.

Why are the kids not alright?

FINRA’ announcement that it would halt trading came earlier than expected, shocking MMTLP shareholders across the board. The agency cited halt code U3, which is reserved for “extraordinary events.” Remember – this isn’t a second-coming of GME. People are losing their minds over penny stocks.

Shareholders were quick to take to social media to voice their concerns on the halt. Since Friday, both #finrafraud and #MMTLP have been trending on Twitter. Some shareholders speculated that FINRA assisted short sellers by halting shares early.

In other words, their argument rests on the conspiracy that the SEC(-overseen) agency and hedge funds love and respect each other enough to collude. They argue that these short sellers would be forced to cover their short positions by buying shares of MMTLP, which could drive up the price of the stock.

Background on the short squeeze

TikTok day traders were lighting up social media a month ago with news of MMTLP going to the moon. As MMTLP was skyrocketing up the charts, dozens of YouTube channels, stock twits and Redditors were all feeding this excitement back into their filter bubbles. Then came news of the short squeeze.

MMTLP, in most likely not-licensed advisors’ opinions, was “heading to the moon.” Makes sense, because we all know potential return pretty much means actual return. So, YouTubers and stock twits sought to take advantage.

For example, Youtuber “Bird Lady” would tell anyone who would listen that there were millions of MMTLP shares short. As her name suggests, from a sense check, we wouldn’t trust her alone with our office dog, let alone our portfolio. But then, Torchlight – the company Meta was merging with – CEO John Brda appeared on multiple live streams with Bird Lady agreeing with everything she was saying. He went as far as saying that “everything Bird Lady was saying was right over the bullseye,” which gave her an air of legitimacy.

A bigger sense check

We’ve had to listen to way too many YouTube investors upset over what is simply the risk inherent in penny stocks for this piece. After hearing their logic, the thing they all seem to miss is that MMTLP wasn’t trading like a regular stock because it isn’t – stay with us here – a regular stock. That means it didn’t have this enormous short position stuck in it during the last week.

Let’s think through this – or just ask it as a screening question in your next intern interview. If a huge short position of tens of millions of shares had to be covered in days, you’d expect hedge funds to cover it a long time ago.

The last day that MMTLP traded, last Thursday, it lost almost half its value due to relentless selling. Investors saw the writing on the wall. So it wasn’t, realistically, a short squeeze, but rather a mass selloff. When Meta’s team balances the books in the coming days, it seems Meta will not have much of a leg to stand on.

So, sadly for those of you still annoyed you had to take the SIE, FINRA was just doing its job. (If you’re not a banker, the SIE is an intro exam for getting licensed. It’s also, most likely, the reason a friend got cut in their first year banking.)

So what now?

According to your Gen Z younger sibling’s fave news source – Twitter – there are dozens of “investors” saying that FINRA is corrupt and working with the hedge funds to “screw the little guy.” In other words, the little guys are annoyed, to say the least, they couldn’t make it big on their pipe dream to take a penny stock and transform it into millions. Not like OTC stocks are more volatile investments that are usually speculative in nature.

According to its shareholders, what happened to MMTLP is “unprecedented” and nothing like this can happen again on the bulletin boards. For your consideration, we've highlighted our highlights from the open letter.

To recap:

• They're demanding $1,000 per share per investor for a penny stock

• It's a non-negotiable offer

• Yes, they used the wrong whose*

Close, but no cigar. This is not what happened. Should the disgruntled shareholders ever want to learn the basic principles needed to give legal financial advice, FINRA’s rule book clearly states that it “may impose a trading and quotation halt in an OTC Equity Security pursuant to Rule 6440(a)(3).” In other words, it’s literally FINRA’s job to ensure a fair and orderly marketplace.

FINRA disclosed via a statement said that “Please note that this disclosure and dates from FINRA regarding the trading of MMTLP in connection with the distribution of the shares of Next Bridge Hydrocarbons, Inc. supersedes and replaces all of META’s prior disclosure regarding the logistics and timing of the trading of MMTLP in connection with the distribution.”

So, FINRA halted the stock to protect shareholders who would have bought MMTLP after the 8th. That’s because, given Meta’s merger, anyone buying after the 8th did not get the Nextbridge shares and would have been buying an empty placeholder. Everyone who was invested in MMTLP will now be shareholders in Nextbridge Hydrocarbons – a private Company.

What will they get upset about next

Some retail investors have accused FINRA of market manipulation, while others have praised its short interest levels. Many traders have called for a lawsuit against FINRA, naming market influencers such as Elon Musk and AMC Entertainment (NYSE:AMC) CEO Adam Aron as targets. So far, and we can’t believe we have to confirm this, all of the actions appear to be legal. Because that’s how financial markets work.

Over 9,000 grieved investors have signed a petition against FINRA, citing the suspension of the stocks as “unlawful, greedy, corrupt and thieves.” At least they're finally seeing some value from those English degrees.

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