SPV’s Evolving Into SPACs: Recipe for Disaster

The goal is to avoid strict registration and disclosure requirements and regulations by the SEC. That is the goal because the only way unscrupulous investment bankers can at least argue that they are not cheating anyone is by withholding information about the brand new investment vehicle. But they’re cheating and they are creating nothing out of nothing and then selling it as if it was something.


The goal with SPV’s was to get into the lending business without being a lender subject to regulation for lending and without being regulated as an issuer of securities. So far the courts are rewarding such behavior through sheer ignorance — i.e., Wall Street has created so many layers of apparent complexity that in the courtroom nobody knows what they’re talking about.

see https://www.nytimes.com/2021/02/10/business/dealbook/spac-wall-street-deals.html?action=click&module=Top%20Stories&pgtype=Homepage

We have seen this in the falsely dubbed “REMIC’s that are not real estate, not mortgages, not conduits, and not a very good investment as thousands of institutional investors found out. They bought certificates issued by investment banks under a fictitious name (“trust”) believing that they had some rights to require enforcement of the payments they were promised and the protections they were promised.

When it turned out they had nothing they screamed bout bad underwriting because the fund managers did not want to admit that they had failed to do due diligence and that they were looking for short-term favorable reporting so they could keep their jobs, get a raise, and even a bonus. But it turned out that the mortgage-backed bonds were nothing of the sort and that the investment bankers all had a negative incentive to make money for themselves at the expense of the investors.

With the epic success (for Wall Street brokers) of the Special Purpose Vehicle (SPV) masquerading as a real entity that owned residential loans, now Wall Street is branching out. But they are taking a slight step back from the brink of fraud and Ponzi schemes. The SPV in schemes falsely claiming to be securitizing loans never owned anything and never received the proceeds of the offering of certificates for sale to investors.

The SPAC takes a little from the SPV experience and raws heavily on reverse merger strategies in which publicly traded shell companies trading as penny stocks are “acquired” by a merger between the public shell company and the real business. The public shell issued so many shares that ownership effectively transfers from the old owners of the penny stock to the owners of the real business. Presto, the private business becomes public without an initial public offering and all the red tape that entails.

The current iteration of the Special Purpose Acquisition Vehicle (SPAC) is very similar to when I was on Wall Street and taking companies public that had a business idea (I wouldn’t call it a plan), a chair, a desk, and a typewriter. We would raise $3 million over a weekend and the underwriting and selling fees were huge compared to market rates at that time (1968-1972). 95% of such companies went broke in the first two years of operation. But at least in those offerings, we told investors to consider their money lost and that this was an extreme gamble. Some of the companies went on to prosper making their investors quite wealthy.

So now celebrities or other well-known investors are organizing the SPAC with a business idea, to wit: we are looking for a private company that we can buy. Invest with us and we will find it. If we pick the right company you could make a lot of money. If we pick a dud the SPAC shares will be virtually worthless. When they find the target company they “merge” with hat company effectively taking it public without an initial public offering. They sell SPAC shares without much disclosure because there is nothing to disclose. But like the SPV used in transactions with homeowners, they lie and mislead as to the risks of the investment.

Experienced hedge fund managers and other fund managers who actually read the prospectus and then perform due diligence recognize the SPV certificates and the SPAC shares as a retail product not suited for managed funds. Translation: they know that anyone investing in such schemes will most likely lose all or part of their investment. What does a celebrity know about how to buy a private company and make it prosper? The answer is usually nothing.

All of this points to the parallel universe in which the same facts are construed in multiple ways to suit the brokers on Wall Street. So the SPV is loosely named as an acquisition company (which acquires nothing) whose name is used in forming the name of a fictitious trust, in whose name empty certificates are sold to investors. They own nothing except a discretionary promise from the investment bank to make payments that are expressly NOT backed by mortgages or any security and in which the insurance and other protections flow to the investment bank, not the investors.

B U T, then they use the SPV’s name as the claimant for administration, collection, and enforcement of scheduled payments from homeowners. The hapless homeowners are making payments through “servicers” who do not touch the money nor account for it. the payments are ultimately collected by the investment bank who has long since charged off the transaction and receives the payment as revenue (untaxed because it is reported as “return of loan principal” or capital). The goal was to get into the lending business without being a lender. And so far they have succeeded.


Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.

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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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2 Responses

  1. They ALL know about it.

    Presidents, Senate, Congress, HUD, SEC, CFPB, their media, Courts, ect .

    ALL of them know the truth. Even if they are in the stage of denial.

    And we now know it too. And as soon as more people will know – results can be unpredictable.

    And than longer the Government and Courts will be in denial – than more damages it will cause.

  2. This is nothing more than an extension of deregulation as promoted by Bush – and, even more so by Clinton. It is way out of hand. Foremost, the media must be informed that the financial crisis was not perpetrated by those who “bought too much house.” Unless the media, who is always in the dark on truth, gets a grip on this, nothing will change. Media loves to promote nonsense. Summer, can we call them (media) “clueless?”

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