-- 9/26/2019) New York, NY -- We get asked often about fraud in Private Equity as it's an Over the Counter (OTC) market and not exchange traded. Our answer is the classic answer - the majority of the risk lies in the underlying asset, i.e. the stock you're buying, not the secondary market counterparty. Fraud exists in Pre IPO as in any industry but is easy to detect especially when transacting with regulated counterparties. Like the FX market, which is completely unregulated and untamed, the majority of counterparties in Pre IPO are regulated investment banks, broker-dealers, or Venture funds with substantial capital (they may be exempt, but they are highly regulated due to their size). When dealing in SPVs, the administrators and custodians where they are held are typically large custodians that have insurance which often is superior to SIPC and FDIC. The fraud risk would be, someone posing as one of these institutions but really wasn't. This was the scam method used by classic ponzi scammer Trevor Cook
, who created US based Dummy Corporations with the exact name of the legitimate Swiss "Crown Forex." Understanding and learning about past frauds enables us to better detect possible frauds in the future.
So it comes as a great source of consternation that we read and post this damaging information about WeWork, potentially the first Pre IPO Fraud. Why fraud you say, WeWork is everywhere in NYC? WeWork is a real company, it's not a ponzi scheme?
Remember that Enron was trading in energy markets and many other markets, and lots of investors made money in Enron. It was a fraud, but it wasn't a complete MLM Ponzi scheme - Enron had a real business. They just crossed the line of using their capital and market influence to manipulate markets which is illegal. What's the definition of Fraud:
In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law, a criminal law, or it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong.
So here, we aren't stating that WeWork is a fake company, clearly not. Many of us have worked in or visited WeWork offices. We are stating that based on evidence we are including here below, which summarizes intentionally misleading statements made by WeWork founders and executives; that WeWork is a fraud based on deception, inflated projections while hiding liabilities. They covered this intentional misleading deception by having an aggressive marketing push, and involving celebrities like Ashton Kutcher who would make soft statements like "It's not about the numbers anymore - it's about how WeWork can impact the world."
The real product
Anecdotally, we are looking at office space in NYC, New Jersey, Charlotte, Boca Raton, and Atlanta, for Crediblock.
Not really knowing about WeWork, we contacted Regus and the usual suspects one would for quick to setup office space without leases (or flexible terms at least). With all the WeWork in NYC we contacted them as well and did a comparison. Dollar for dollar, we're not really sure what the allure is to WeWork - is it all branding? Free beer, stylish furniture? Really? Is that what the $47 Billion valuation is based on? See this simple comparison from Tyler (Zero Hedge
WeWork vs IWG
We: loss $1.9BN
IWG: profit $0.5BN
We: 29 countries; 528 locations
IWG: 120 countries; 3000 locations
We: valuation $10BN - $47BN
IWG: $3.7BN valuation
We have to mention that we have used Regus in the past and the cool thing about it is that as you travel you have access to their worldwide network which you may pay for but anyway it's very useful, to have an office in Boca Raton should you need a quick conference room to do a power point presentation at the last moment. 120 countries is really a lot of countries. One big negative, the smaller the lease term the higher the rate, just like for an apartment. Perhaps they have a more realistic tenant approach than WeWork? From the perspective of the renter - we looked at WeWork ONLY because of the discounted no-lease option. While this is obviously beneficial for small businesses and entrepreneurs, it's not clear how this can be positive for WeWork.
We're not jumping on the We-dumping here just stating our observations as potential customers of WeWork. And in the process of asking others how they like the WeWork, some of the 'weworkers' told us 'it's all about the networking' where the tenants we knew said they never communicated with any of the co-workers and they were in 'their own world's' - certainly NYC is not in need of more networking events, offices are places to escape from events and get work done. But the networking fit into the WeWork branding model, just like any great MLM needs great branding, WeWork needed a great story, and it had.
Fortunately, we never bought any WeWork and didn't transact in it. Strangely, there were ROFR issues surrounding the company and rumors about brokers that were 'cousins' of the founders that could pass ROFR but we didn't see any transactions happen in the secondary market. They did happen, and there was a market for it, we just didn't transact in it. So for now, we're writing this as a Post Mortem report that we can move on to productive and exciting things we have going on such as Blackwatch Digital
, and seeing what Palantir has up their sleeve this fall.
Research & Articles referenced
Here's a collection of the top research articles on the topic, read and come to your own conclusions.