June 2, 2021, 5:00 a.m. ET
In a letter to his investors this April, David Einhorn, founder of the hedge fund Greenlight Capital and a well-known short-seller, complained that the stock market was in a state of “quasi anarchy.” As one piece of evidence, he pointed to Elon Musk, whose commentary on Twitter, Einhorn said, amounted to market manipulation. “The laws don’t apply to him, and he can do whatever he wants,” Einhorn noted. As another example, he cited a restaurant in rural New Jersey called Your Hometown Deli, which despite making $13,976 in revenue last year had somehow attained a value of $113 million on the stock market.
Later that morning, a PDF of Einhorn’s letter appeared on the financial-news website ValueWalk. Soon, the Bloomberg journalist Joe Wiesenthal tweeted a link, with a screenshot of the part about the deli. “What the hell?” he wrote. Hundreds of people retweeted him. The story took off. Your Hometown landed on the front page of The Financial Times, in The New Yorker’s Talk of the Town, on NPR and in the business section of The New York Post. “Your Hometown Deli in Paulsboro, N.J., was just an unassuming sandwich stop,” CBS News reported. “Now it’s a Wall Street mystery.”
It was the sort of mystery that seemed to be everywhere in the pandemic year, a time in which money, many people felt, stopped making sense. Within the end-times atmosphere of Covid-19, strange financial instruments were appearing, offering dubious chances to flip a stimulus check into overnight riches. A Reddit user posted Robinhood screencaps showing GameStop options worth millions of dollars. Dogecoin, a cryptocurrency named after an internet dog meme (“favored by Shiba Inus worldwide,” its website notes), spiked 24,145 percent in 12 months, before losing about half its value while its chief booster, Musk, struggled through his performance on “Saturday Night Live.” The artist known as Beeple sold what basically amounted to a digital image file for $69.3 million. SPACs — “special purpose acquisition companies” that let investors take a private company public without an I.P.O. — were being launched by celebrities to catapult everything from space-exploration companies to marijuana firms onto the public markets with limited oversight. Traditional rules about money and value, which had always applied to everybody but the rich, now seemed in flux universally. What if digital Shiba Inu coins mattered more to your household finances than your income, your rent and what you paid for food?
Your Hometown sold cheese steaks and chicken Parmesan in a concrete building with red awnings about 20 miles south of Philadelphia. This would not seem like a high-growth business model, but since it went public in 2019, the deli’s stock price had risen 1,200 percent, to $13 a share. In regulatory filings, it announced an intention to franchise. “Your Hometown Deli plans to feature ‘home-style’ sandwiches, food items and groceries in a casual and friendly atmosphere,” one document stated. “In addition to ready-to-eat food, Your Hometown Deli sells cold cuts by weight. A wide variety of beverages are also sold together with potato chips and similar products.” Your Hometown’s chief executive was listed in public filings as Paul F. Morina, the principal and wrestling coach at the local high school. A Paulsboro High math teacher, Christine Lindenmuth, appeared in filings as Morina’s vice president. Morina was listed as C.F.O. and treasurer too.
In his letter, Einhorn cautioned that Your Hometown seemed like a scam. “Small investors who get sucked into these situations are likely to be harmed,” he wrote. And maybe that was all it added up to: further proof that the U.S. stock market had become hopelessly underregulated, prone to meaningless whipsaws, a place where individuals got smoked by random chance while billionaires enriched themselves with tweets. Exhibited next to GameStop or Dogecoin or a $69 million JPEG, a cheese-steak restaurant gaining 1,200 percent in market value was not uniquely unbelievable.
But it was uniquely hard to explain. Some people had gone to the trouble of opening a small business in far-Western New Jersey that sold sandwiches, soda and chips. They took it public. Then they watched as its value climbed past $100 million. Or had they made it climb? Was the situation in Paulsboro an accident, or intentional? And if someone had done it intentionally — why?
The United States is home to the two largest stock exchanges in the world, the New York Stock Exchange and the Nasdaq, whose combined market capitalization of $45 trillion exceeds that of the next 10 exchanges put together. Most of the biggest companies in the world, like Apple and Alibaba, list on one of those two exchanges. But there’s a third major stock market in America, the one where Your Hometown Deli is traded: the Over the Counter Markets Group, or O.T.C. Unlike the Nasdaq and the N.Y.S.E., which have strict criteria for listings and process trades through centralized computer systems, the O.T.C. is a decentralized platform in which buyers and sellers make trades directly with one another. It’s a little like a peer-to-peer file-sharing service. The market’s dimensions reflect this democratic spirit: The total capitalization equals N.Y.S.E.’s, at $24 trillion, but the number of individual stocks listed on it is four times as great, representing more than 11,000 different companies.
The O.T.C. is made up of three official tiers. The top-tier listings are largely respected international firms like Adidas, Air Canada and Heineken, which want access to U.S. capital markets but might not want the regulatory annoyance of an exchange. Below them are the strivers, the luggage-makers and lithium miners and ammunition foundries and budget-hotel chains. Beneath them, in the market's lowest tier, jostle the shell companies and even outright scams. While the N.Y.S.E. and the Nasdaq can “delist” a company for breaking the rules, the O.T.C. Markets Group can only “flag” a stock as suspect and report it to the Securities and Exchange Commission. Jason Paltrowitz, the director of the O.T.C. Markets Group International, told me he prided himself on enforcing high standards and requirements. Even so, he estimated, 2 to 3 percent of the 11,000 stocks were “the bad ones.”
I was talking to Paltrowitz because I wanted to understand how a company with effectively no revenue could wind up valued at $113 million on his platform. Like an exchange, the O.T.C. calculates “value,” or market capitalization, as the current price of a share multiplied by the total number of shares in existence. For stocks with lots of traders on the big exchanges — Target, Pfizer — market capitalization is a meaningful figure. Millions of shares in these companies change hands every day, and there is always demand for shares at the posted prices, so the value of all the shares put together becomes a rough estimate of what the market thinks the company is worth. This was not the case for the deli, which traded under the ticker HWIN. The company had little to no trading volume. You could look at the history and see weeks go by without a single trade occurring. How had the price risen, in the absence of any demand?
On an exchange, the prices are set by computerized interactions among buyers, sellers and brokerage houses. On the O.T.C. market, they’re set by individual parties: You just have to find someone who will agree to pay what you’re asking. Any trade of more than 100 shares gets “printed” — registered to the central database. Whenever a new trade gets printed, the computer takes the price, multiplies it by the total number of shares and spits out the new market capitalization. If you stopped reading this article, called a stockbroker and bought 100 shares of HWIN at $129 each, roughly 10 times their current price, you would cause the deli’s market capitalization to go to $1 billion.
There is a venerable scam that might explain Your Hometown. In a penny-stock pump and dump, insiders buy shares in a worthless stock; brokers push it on unwitting buyers; the price rises; the orchestrators cash out before it crashes. But the deli has retained its market capitalization as of this writing, despite a weekslong turn in the spotlight of the global press. No penny-stock scam works like that. In a penny-stock scam, the price eventually falls, because the original shareholders sell. And the deli had only 60 shareholders, not the hordes of marks that a pump and dump required. These 60 individuals had run up the price in sporadic transactions of a few hundred shares at a time.
“It was this very small group,” Paltrowitz said, “and they traded, a little, at this outsize valuation.”
Your Hometown Deli LLC, the physical deli in Paulsboro, was a subsidiary of something called Hometown International Inc., a corporation that was formed in Nevada in 2014. The New Jersey storefront opened in 2015. That same year, Hometown International began filing disclosures with the S.E.C. These filings were made because Hometown, like lots of new companies, had issued shares to the people involved at its inception, and even nonpublic companies typically disclose such transactions to the S.E.C. At first, the filings showed that Lindenmuth and Morina, the math teacher and wrestling coach, together owned about 95 percent of the business, split evenly.
But the out-of-state incorporation, along with the fact of the S.E.C. filings, suggested the presence of some high-finance people behind the scenes, and the filings bore this out. From the beginning, Hometown had ties to a North Carolina banking firm called Tryon Capital. Some of the ties were easy to untangle. For example, the remaining 5 percent of the shares seem to have been distributed among the family and friends of Tryon executives. One of Tryon’s analysts, as Fast Company reported, had attended Paulsboro High School and signed, as the landlord, the lease for the building that Hometown had rented since opening in 2015. Tryon’s managing director, Peter Coker Sr., occasionally lent Hometown money, either personally or through an entity he managed. Another Tryon employee, Beth Floyd, was also listed as the secretary for Lindenmuth and Morina.
Some of the ties were more confusing. Despite having minimal revenue, Hometown was paying Tryon a monthly consulting fee, for “experience in the fast-food business.” It was not obvious where this expertise came from, as Tryon's client list, according to its website, included a medical real estate firm, a golf supply company, a resort and “an insurance program for trees,” but no restaurants. I showed the documents to a professor of finance, whom I knew to be a wizard with regulatory filings, and he speculated that the consulting fees could have been part of a scheme to reimburse Tryon for shares that it planned to purchase at prices it had purposely inflated. “There may be something more clever and even more sinister behind this,” he wrote me in an email.
Whatever was going on, it proceeded unchangingly for years. If you looked at the filings from 2015 through 2019, you could see that sales were low and insignificant, and the majority shareholders stayed the same. Lindenmuth and Morina held about half the business each, never wavering by even a tenth of a percentage point.
In late 2019, though, the situation flipped. Hometown went public on the O.T.C. at $1 a share. Then, Lindenmuth and Morina were demoted to minority holders. A new majority holder entered the picture, whose name had never appeared in a filing until this moment: Peter Lee Coker Jr., the son of Peter Coker Sr., the managing director of Tryon Capital. In a single transaction, Coker Jr. took ownership of 37 percent, giving himself control of the now-public business. In 2020, other shareholders were added to the registry, and not the kind you’d expect to be interested in a small-town deli. A hedge fund in Hong Kong took a $2.5 million stake. A firm headquartered in Macau joined them as investors.
Steadily the share price rose from $1 to $13, as minuscule quantities changed hands. One day, a thousand shares would move, then a week later 700, then a few thousand more the following month. Some days only 100 shares traded, the minimum volume that caused the new price to print. If a tiny pack of shareholders were trying to boost the price intentionally, I thought, this is what it might look like.
My calls to the Cokers and Tryon Partners were going unreturned. Morina and Lindenmuth weren’t responding, either. (Ultimately, none of them would respond to multiple requests for comment.) I cast my net a little wider, to see what I could learn about Peter Coker Jr. A college friend of the elder Coker, Harold Blondeau, told me that he hadn’t seen “Little Pete” in many years. “Little Pete has lived in Asia for a long time,” he said. “He was there during Tiananmen Square, and he’s been there ever since. I don’t know what he did over there. I have no idea what he did. And I don’t know what he does now.”
Peter Coker Jr. has worked at investment firms in Asia since at least the mid-2000s. Before Hometown, his highest-profile venture was a casino hotel in Macau, the former Portuguese territory in the Pearl River Delta that has the distinction of being the only place in China where gambling is legal. Currency controls are light; money laundering is reported to be rampant; the opportunities for a quick score (or wipeout) are manifold. The Wynn and MGM corporations operate casinos there; so do the Rio and the Venetian.
In February 2013, Coker partnered with Stephen Hung, a flamboyant Chinese casino impresario, to create a luxury destination called the 13 (a truncation of the original name, Louis XIII). The 13 would lure customers with amenities like private villas, an invitation-only “atelier” for couture and jewelry shopping and three-Michelin-star dining. Coker and Hung raised hundreds of millions from respected financial backers, including the prominent hedge-fund manager Julian Robertson. According to the company's reports, the Ontario Teachers’ Pension Fund took a 37 percent share. In a research note promoting the 13 stock as a “buy,” analysts at the brokerage house CLSA predicted that the hotel would “introduce Macau to a new demographic — the highly sophisticated and super rich.” As the capstone to these ambitions, the 13 ordered 30 custom-designed extended-wheel-base Rolls-Royce Phantoms, painted “Stephen Red,” at a total cost of $20 million. Coker owned millions of shares of stock and collected a salary of around $1 million per year.
But the 13 flopped. Construction delays devoured cash. There was a problem obtaining gaming licenses. Hung resigned in 2018. Shortly after, the casino unloaded 24 of the custom Rolls-Royces at a steep discount: What was supposed to have been an “incomparable luxury experience” was now a used-car dealership. Staying overnight at the 13 in November 2019, a Macau-based business journalist wrote that it reminded him of the hotel in “The Shining.”
All of the 13’s regulatory filings were hosted on the website of the Hong Kong Stock Exchange. You could follow the losses piling on top of one another. But my attention slid back toward the beginning, the way in which the business was founded. Instead of going public in the traditional way, through an I.P.O., the company used a technique called a “reverse merger.” In a reverse merger, a private company merges with an already-public company, taking a majority stake in the newly formed entity. That way, the private firm’s owners get all the advantages of a public firm — like listing on a stock exchange, where they can raise capital from outside parties — without having to undergo the regulatory scrutiny that usually precedes an I.P.O. In this case, Coker’s casino firm had reverse-merged with a Bermuda-incorporated company called Paul Y. Management Contracting Group Ltd.
The main reason to use a reverse merger is to get access to more capital. Many investors who would not get involved in a private company would happily buy shares in a public one. But reverse mergers can also be a way to vault across national boundaries: You merge with a shell company that is already incorporated in a foreign jurisdiction, like the U.S., then immediately take it over. In the past 20 years, more than a thousand firms — mostly Chinese and Canadian, but also Russian, German, Irish, Costa Rican, Israeli, you name it — have entered the U.S. stock markets by reverse-merging with American shell companies. Locating a shell poses little hassle. The O.T.C. markets are dotted with firms that incorporated legitimately and are still publicly listed, but have, in reality, gone dark. These “dormant shells” are empty space, which you can fill however you want to.
Laura Anthony, whose firm Anthony L.G., PLLC makes a specialty of taking small and midsize companies public, told me that many firms aren't large enough to handle the expense of listing on an exchange like the N.Y.S.E. or Nasdaq, so they turn elsewhere to raise money. “I get inquiries every day from people I don’t know,” she said. “At least four times a week there’s somebody out of China or Hong Kong that is looking to go public on the O.T.C. markets.”
Lots of these companies transact their uneventful business and make money without attracting any attention. But not all of them. One of the main problems with reverse mergers is that the fact of being publicly listed can lend a fraudulent company a sheen of legitimacy, as small-time investors wrongly assume that someone, somewhere, has vetted the underlying financials. Since 2012, the S.E.C. has been running a “fraud fighting” initiative called Operation Shell-Expel, whose incredibly stupid name has the virtue, at least, of requiring no explanation. “Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers,” an S.E.C. official explained when the initiative began, “the tools by which they ply their illegal trade.” The commission reports that some 800 shells were suspended in the first three years.
The most notorious run of shell-company reverse mergers occurred between 2006 and 2012. At the time, the Chinese economy was growing rapidly. Americans wanted in, and China was happy to accept the flood of dollars. Not all Chinese firms could list directly on U.S. exchanges, though, so they went public via reverse mergers instead. Brokerage houses in the U.S. started to push these stocks on their clients, making a killing in transaction fees along the way. But as the 2017 documentary “The China Hustle” recounted, many of these supposedly fast-growing firms were frauds. In one scene in the movie, the American investor Carson Block visits what is supposedly a high-volume paper mill and finds what looks like a garbage dump. In another, the investor Dan David puts a surveillance team on a huge fertilizer firm and learns that it employs a single truck driver.
One advantage of a shell company can be the ability to choose where it’s located — to choose the state whose corporate law you want to “rent.” You rent the law, usually, in one of two places. Delaware is the blue-chip state, easy on business; a majority of Fortune 500 companies are incorporated there. In a much-cited Harvard Business School paper from 2013, researchers found a correlation between reverse mergers in Delaware and clean S.E.C. filings. Nevada, the other popular choice, offers a different kind of appeal. In Nevada, the law is designed so that courts are seldom able to “pierce the corporate veil,” or, in other words, hold individual investors responsible for the behavior of a corporation. One Nevada law firm that advises on reverse mergers offers a “$100,000 corporate veil guarantee,” to be applied to your court expenses if someone attempts a veil piercing. If a shell is incorporated in Nevada, its reverse-merged offspring is more likely than its Delaware counterpart to develop “corporate governance and data manipulation problems,” the Harvard paper found.
The only detail that doesn’t matter at all is what business, if any, the shell company claims to transact before the reverse merger devours it. The shell’s former life is immaterial, which can lead to some striking metamorphoses. This February, a Chinese waste-management firm called Hengshui Jingzhen Environmental Company went public in the U.S. via a reverse merger with a “glass craft products” distributor called Summit Networks Inc., which maintained a business address in Latvia and had no revenue or assets — but traded on the O.T.C. and was incorporated in Nevada. Shenzhen Houmu Wealth Management Company went public this March via a reverse merger with a “multicultural digital content” provider called XXStream Entertainment, which had spent 15 years as a dormant shell with no revenue or assets but, again, traded on the O.T.C. and was incorporated in Nevada.
Hometown was a perfect vehicle for a reverse merger: an obscure public company incorporated in Nevada with a clean regulatory history and a simple day-to-day operating business. All you needed was someone smart and well connected who could help Hometown find a target company to merge with.
In early 2020, as the 13 was selling off its Rolls-Royces and its bankers were calling in their loans, Peter Coker Jr. approached a Hong Kong hedge fund called Maso Capital Partners. The co-chief investment officer at Maso was a man named Manoj Jain, a British-born Cambridge graduate who spent a couple of years at Credit Suisse in New York City, where he specialized in mergers and acquisitions. In 2012, he and a partner opened Maso, which now managed about a half a billion dollars for clients, including, reportedly, the endowments of Vanderbilt and Duke. Jain and Coker already had a business relationship. Both men sat on the board of a SPAC called Duddell Street Acquisition Corporation, named for the street in Hong Kong’s Central neighborhood where Maso had its office. (Coker is no longer on the board and was recently removed from Duddell Street’s website.)
Coker described an O.T.C. company that might make a good vehicle for a reverse merger. Maso, which was frequently approached by Asian and European firms looking to go public in the American market, agreed. The firm put $2.5 million into Hometown, giving itself a stake in whatever merged entity ultimately resulted from the deal. A Macau-based firm, Global Equity Limited, followed with an investment of about $2 million, which they acquired from Peter Coker Jr., who, according to an S.E.C. filing, had acquired his shares from Lindenmuth and Morina for $3,000.
According to a person familiar with the deal, here is what was supposed to happen next. Once Maso selected a target company that wanted to merge with Hometown, the parties would work out a “merger ratio” — the precise combination of shares and stock options that each party would wind up owning in the new business. In determining the ratio, Hometown’s absurd market capitalization would become irrelevant. One securities lawyer told me that a private company that used the public shell company's share price as the sole metric for estimating its value before the merger would have to be “so naïve.”
‘There’s nothing wrong with being creative and putting deals together and making magic,’ said one financial attorney.
Once the deal closed, another aspect of the deal's terms would come into play. Maso and Global Equity each held millions of “warrants” — sort of like stock options — which entitled them to buy shares at a fixed price between $1.25 and $2. The warrants made possible two crucial transactions: generating investment for the new business at the beginning, and making money for Maso and Global Equity later on. If the new business wanted to raise capital to expand in the U.S., Maso and Global Equity could execute some of their warrants, expanding their investment in the merged entity. Then, the new management would take that cash — the $1.25 to $2 per warrant that Maso had just paid to the business — and put it to use, growing, competing, whatever businesses do.
A year or two might pass. If after that time the new business was succeeding, and the stock price had risen, Maso and Global Equity could execute some of the remaining warrants for a windfall profit: if the stock was trading at $13 a share, for instance, and the warrants cost $1.25 to execute, they’d see $11.75 per warrant. Currently, Maso holds millions of warrants, but that will most likely change as part of the negotiation over the merger ratio. Before any of that could unfold, though, Einhorn’s letter sprang out, turning Hometown into a media joke and putting the merger process on ice.
When I reached him by phone in Hong Kong, Manoj Jain told me that he still planned to execute a merger with Hometown. “We took the opportunity to invest in Hometown at a reasonable valuation, with the ability to assist in its acquisition strategy using our extensive network of private companies,” he said. He plans to find a target company for under $500 million, a price range in which SPACs tend not to operate. The target will then merge with Hometown and take it over, acquiring a greater than 51 percent share.
I asked Jain the question that drew me to the story to begin with. If the stock price didn’t matter for the merger ratio, why had the shareholders bothered trading it upward? “Maso Capital has no knowledge on the buying or selling in HWIN,” Jain said. He added that Maso had not traded any shares since the initial investment.
A former S.E.C. staff member suggested that HWIN's valuation could be part of a long-term plan to “uplist,” or move the stock from the O.T.C. markets to an exchange like the Nasdaq — market capitalization being one criterion the exchanges may use when agreeing to list a company. Exchanges offer more prestige than the O.T.C., a brighter halo of prestige, and their higher volume of transactions makes it easier to move shares without disturbing the underlying price, a benefit for anyone trying to execute a bunch of warrants (for example). But it seemed very unlikely that the market capitalization of the new entity would resemble the market cap of HWIN — and anyway, there were tons of other barriers to uplisting that Hometown might not clear. If there really was a price-manipulation scheme buried somewhere in this saga, perhaps it was even less sophisticated: At least a few shareholders unloaded their stock the day after Einhorn’s letter, the highest-volume trading day in Hometown’s history, presumably at a profit.
Douglas S. Ellenoff, a partner at Ellenoff Grossman & Schole L.L.P., whose firm has executed at least 25 reverse mergers, told me that although reverse mergers have been “abused on occasion,” the practice was, on balance, a beneficial one. “There’s nothing wrong with being creative and putting deals together and making magic,” Ellenoff said.
There was, I had to admit, a faintly magical quality to the transaction, an elegance to what Maso and Coker had engineered. It wasn’t the noisy retail-trader chaos that Einhorn envisioned, but a silent flow of capital redirected into new channels. After the merger, the shell company would transform. “The name changes, the ticker changes, the board changes, the management changes, everything changes as the target company enters the U.S. capital market,” Jain said. Some new, as-yet-unknown corporation would issue shares; some documents would be altered in the computer systems at the O.T.C. Markets Group and in the S.E.C.’s databases; a few clever individuals would cut a clean profit for their investors. No one knew what would happen to the sandwich place.
Jesse Barron is a writer in Los Angeles. He last wrote about the deaths of two men at the home of a West Hollywood political donor.
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