A Chinese firm helping former president Donald Trump take his new media company public has been the target of investigations by federal securities regulators, who say the firm misrepresented shell companies with no products and few employees as ambitious, growing enterprises, documents and interviews show.
The United States allows shell companies to be listed on public markets but requires operators to truthfully represent them as businesses with no active operations, securities lawyers said. The U.S. Securities and Exchange Commission has accused Arc of deceiving investors about the scope of its operations, the locations of the businesses and the identities of the people behind them, documents show.
This year, Arc helped create Digital World Acquisition, an investment vehicle that has raised over $1.2 billion to conduct a merger with Trump Media and Technology Group. Digital World is what’s known as a special purpose acquisition company, or SPAC, a type of shell business that raises money from investors to acquire a private start-up with strong growth prospects. The deal, which still must be approved by shareholders and regulators, has the potential to enrich the former president and turn his nascent social media start-up into a public company overnight.
The Trump name has attracted investors, pushing shares of Digital World up five times their listing price in anticipation of the merger, despite a lack of information about the actual business. Trump Media has released two slide presentations as part of its proposal, but the material offers scant detail about company’s proposed management team, corporate structure, finances or other information typically used by investors to judge a business’s viability.
“There’s a shell company basically merging with another shell company, because, as far as we know, the Trump media company hasn’t yet been formed,” said Robert B. Lamm, a lawyer who chairs the securities practice at Florida-based law firm Gunster.
Representatives from Arc Capital, Trump Media and Digital World did not respond to multiple requests for comment. In a promotional video last year, Arc managing partner Sergio Camarero cited SPACs as one of the business opportunities Arc was pursuing, along with helping Chinese state-owned companies identify infrastructure investment projects overseas.
In the United States, “there is a lot of capital floating into SPACs and going toward SPACs instead of traditional IPO, so this is a place where we are very well positioned,” Camarero said in the video.
An unusual team of advisers is supporting the former president’s effort. Andy Litinsky and Wes Moss, former stars from Trump’s TV show, “The Apprentice,” pitched the idea to Trump earlier this year, according to a person who was briefed on one of their meetings. Rep. Devin Nunes (R-Calif.), a fierce defender of Trump who does not have experience as a corporate executive, recently announced he will leave Congress at the end of the year to be the company’s CEO.
At the center of the deal is Arc Capital, a tiny Chinese outfit that is virtually unknown on Wall Street, but well known to some regulators in Washington who have spent years examining the firm and raising concerns about its unconventional business practices.
In 2017, the SEC stopped three Arc-backed companies from publicly selling shares, citing “material misstatements and omissions” in their registration documents, agency records show. The SEC suspended trading in a fourth Arc-financed business as it investigated whether Arc engaged in fraud, the documents show. No charges have been brought against Arc in these cases, and the current status of the investigations is unclear.
Kevin Callahan, an SEC spokesman, declined to comment on Arc Capital or on the status of any of the agency’s investigations.
The SEC is now examining communications between Digital World and Trump Media, the former disclosed in a filing earlier this month. Securities regulators are seeking to determine whether the firms may have violated rules forbidding SPACs from planning a deal with an acquisition target before announcing it publicly, the New York Times has reported.
Callahan declined to comment on the Trump deal beyond pointing to remarks this month by commission Chairman Gary Gensler, who said the SEC’s enforcement division continues to be a “cop on the beat to ensure that investors are being protected in the SPAC space.” The agency recently charged an early-stage space transportation company and the SPAC business acquiring it for making “misleading claims” about the company’s technology.
The Financial Industry Regulatory Authority is also reviewing trading in Digital World securities in the days before the announcement of the Trump deal, Digital World said in the filing, noting that both Finra and the SEC have said the investigations do not necessarily indicate that the company has violated any laws.
Finra did not respond to a request for comment.
A successful SPAC deal could boost Trump’s financial situation, which has taken some hits in recent years. Revenue dipped considerably at some of his hotels during his presidency, as travelers who disagreed with his politics avoided his properties. The pandemic later delivered a separate blow to the entire hospitality industry.
Other Trump ventures have come under scrutiny in recent years, including his charitable foundation, which shut down after an investigation by the New York attorney general’s office, and Trump University, an online school that closed and paid a $25 million settlement to former students.
Manhattan District Attorney Cyrus R. Vance Jr. and New York Attorney General Letitia James, both Democrats, are investigating Trump’s business and have already charged his chief financial officer, Allen Weisselberg, and his business with tax fraud. Both pleaded not guilty to all charges. Trump has not been accused of any crimes.
SEC issues stop orders
Arc Capital was founded in 2015 by Mexican entrepreneur Abraham Cinta and a few of his colleagues, who decided to leave their jobs at an investment firm to strike out on their own, according to interviews with three former Arc employees and biographical information on Arc’s website.
Cinta, a slight man with a boyish grin and an often disheveled appearance, saw an opportunity to help Chinese companies list their shares on U.S. stock exchanges, according to the former employees, who spoke on the condition of anonymity to discuss confidential information about their former employer.
Cinta and Arc’s managing partners did not respond to a detailed list of questions for this story.
Cinta often remarked that U.S. securities regulators were generally looser with rules around registering public companies than Chinese and Hong Kong regulators, so it would be easier to take unproven, early-stage businesses public, two of the former employees said. He would sometimes illustrate this point by showing colleagues SEC registration statements containing what he thought were outlandish claims, such as a man who said he founded a Texas amusement park because Jesus Christ told him to do it, one of the former employees said.
Even that man raised $15 million, the person remembered Cinta saying.
Arc’s businesses had their own peculiarities. Go EZ, which filed to sell shares on the public market in 2015, described itself to investors as a Miami Beach-based tech and retail business that sold smartphones and smartphone accessories. However, Cinta, who lived in Shanghai, was the sole employee, the SEC claimed in an order, and Go EZ’s first registration document did not once mention the word “revenue,” suggesting it had not sold anything.
After the SEC said in a letter to Cinta that Go EZ appeared to be a shell company, “because you appear to have no or nominal operations and nominal assets,” Go EZ updated the registration statement to include revenue from Cellular of Miami Beach, a retail cellphone store it claimed to have acquired months earlier. SEC investigators later interviewed the man who sold the Florida store to Go EZ; he said the firm never provided any money, inventory or other assistance, so he eventually cut off ties to Go EZ and reclaimed the business for himself, the SEC said in its order.
Go EZ was one of three Arc-related businesses the SEC stopped from selling shares in 2017. The operators of the firms “materially misstated the nature and scope of their businesses” and failed to disclose the identities and potential conflicts of all the people behind them, the SEC said in its “stop order” of the three companies.
Arc did not fully cooperate with the SEC’s investigation and key personnel, including Cinta, refused to make themselves available for testimony in the United States, the stop order said. The SEC revoked Go EZ’s registration in 2019 because it said the company was delinquent in its filings.
Stop orders, which prevent public listings because of misleading or deficient registration statements, are rare: In the past decade, as hundreds of businesses have gone public, only 35 companies have had their registration statements suspended in this way, according to a count of stop orders listed on the SEC’s website.
Three former employees who worked at Arc’s headquarters in Shanghai described a start-up culture dominated by Cinta and the firm’s four managing partners. These managers sometimes pushed employees to exaggerate in their analyses of firms, such as making unrealistic projections of future revenue, said two of the employees, who discussed internal company information on the condition they not be identified.
Both employees said they became concerned they were being asked to bend the rules. “I remember thinking to myself, ‘Am I going to be in trouble here?’” one said. “ I was definitely worried about it.”
The third employee, who also spoke on the condition of anonymity, said the company often relied on the most optimistic possible business projections but that he was never asked to exaggerate in a way that might mislead investors.
In 2017, the SEC suspended trading in Atlas Technology International, a company that had gone public in 2014 as an in-home bakery called Sweets & Treats but which said it transferred to new owners two years later, changing its name to Atlas and shifting to touch-screen devices. The business was allegedly part of a “fraudulent scheme” to manipulate the markets by a California businessman named Ahmad Haris Tajyar, according to an SEC complaint, which this year charged Tajyar with securities law violations.
Operating four online brokerage accounts in different names, Tajyar allegedly bought and sold Atlas shares with himself to create the illusion of an actively traded business, the SEC said in its August 2021 complaint against Tajyar. He also allegedly staged an earnings call with a friend posing as a Wall Street analyst asking questions about the business and allegedly paid a professional investment analyst to write research on the company, the SEC complaint said.
In its regulatory filings, Atlas listed Arc Capital as a creditor that had provided Atlas with loans of more than $80,000. But in a 2017 declaration by an SEC staff member, the agency said Tajyar and the principals at Arc Capital may have been “undisclosed control persons” for Atlas. The logo for Atlas appears in one of Arc’s promotional brochures on a list of its “public listing” clients.
Two of the former Arc employees said Arc had worked behind the scenes as an adviser of Atlas, providing marketing materials and financial models. One of the former employees said he worked on the deal but was taken off by his managers when he started asking questions about why its office address pointed to an L.A. parking garage and why he couldn’t meet with any of its executives in person.
This year, a judge permanently enjoined Tajyar from selling or promoting stocks as a result of his role in Atlas. Tajyar accepted the judgment without admitting or denying the allegations. He did not respond to requests seeking comment.
Arc was not named in the SEC’s complaint, and it’s unclear whether the SEC is still investigating the firm for its alleged role in the Atlas scheme.
Trump deal rides SPAC boom
The Trump deal is part of a recent boom in SPACs, which are seen as an easier way for some businesses to go public without the same expense and scrutiny of a traditional IPO.
In these deals, a SPAC, also known as a “blank check” firm, holds a public offering to raise money from institutional investors. When the SPAC’s management team identifies a private company to merge with, the SPAC’s investors are given the option of approving the deal and receiving equity in the newly public company — or taking their money back and walking away.
According to data published by New York law firm White & Case, 181 companies went public via a SPAC merger in the first nine months of 2021 — up from 93 in all of 2020 and 26 in 2019.
Arc Capital and an affiliated firm, Arc Group, have attempted to capitalize on this investment wave, becoming an adviser to at least 15 blank check companies in recent years, according to a review of regulatory filings. On several SPAC deals, including Digital World Acquisition, Arc has served as the sponsor, which is usually the firm that puts up the initial capital to hire lawyers, brokers and a management team in exchange for getting a sizable portion of the company that ultimately goes public.
Not all of the deals work out. Yunhong International, a blank check company Arc once described as a “successful SPAC listing” in a promotional brochure on its website, said in a filing last month that it would dissolve and return money to investors because it failed to meet its deadline of finding a start-up to acquire within a set time period. This type of requirement is unique to SPAC deals and probably will cause many deals to dissolve in the coming years, financial industry experts said.
Yunhong and Digital World, the blank check firm planning to buy Trump Media, are both led by a CEO named Patrick Orlando, a former investment banker based in Miami. He did not respond to requests for comment.
Many of the same executives, hedge funds and bankers appear repeatedly on Arc’s SPAC deals. Earlier this year, one of the investors in Yunhong claimed in a lawsuit that Kingswood, an investment bank that has been the underwriter for several Arc SPAC deals, is partly owned by Cinta. The investor claimed this was an undisclosed conflict of interest, since Kingswood was supposed to be acting impartially when it brokered deals with outside investors.
Lawyers for Benchmark, the parent company of Kingswood, said in a court filing that the investor “failed to substantiate” the claim that Cinta was an owner of Kingswood. Representatives for Kingswood and the Yunhong investor did not respond to requests for comment.
In June, Kingswood changed its name EF Hutton, taking the moniker of a famed, century-old investment bank. In a news release, Kingwsood said it had secured the rights to the trademark and consulted with the grandson of one of EF Hutton’s original founders.
Kingswood or EF Hutton are listed as the underwriter on all 15 of the SPAC companies where Arc is listed as an adviser. EF Hutton is the “exclusive placement agent and capital markets adviser” to the Trump SPAC, filings show. Digital World said in a filing that EF Hutton would receive a $25 million commission for pitching the deal to investors.
The bank helped prepare the slide presentation Digital World and Trump Media submitted to regulators as part of its proposal. The slides indicate that Trump Media expects to generate billions of dollars in revenue by competing in a number of different industries — social media, streaming, podcasting — but it has not announced any fully-formed products or services. They also include the first name and last initial of 30 possible staffers, along with the logos of 33 of their employers. But they provide no further information, making it difficult to identify the people or their experience.
Last week, Trump Media also announced it would partner with Rumble, a YouTube rival popular with conservatives, to deliver streaming content to its yet-to-launch social media platform.
It’s not uncommon for SPAC merger candidates to make bold promises light on details; they are often young companies with little or no revenue. Companies going public through a SPAC have more latitude to paint a rosy picture of their prospects compared with traditional IPO companies, which must have all of their financial statements and projections vetted by auditors and reviewed by regulators, securities lawyers said.
Still, the lack of specifics in the Trump slide presentation was “hilarious, even compared with other SPACs,” said Michael Ohlrogge, an assistant law professor at New York University who has researched SPAC transactions.
“So far, it’s vaporware,” said James Angel, a professor of finance at Georgetown University. The true test will come after the merger, when shareholders will expect Trump to use the money he has raised to build a formidable business, he said.
“Now that our ex-president has a billion-dollar war chest to play with,” Angel said, “it remains to be seen if he can actually build a successful media franchise.”
Alice Crites contributed to this report.