Part 1: China Cover-Up by the U.S. Securities and Exchange Commission (SEC)
Weibo (NASDAQ:WB), a U.S. publicly traded company, sold or transferred its ByteDance ownership with no transparency. Why did the SEC do nothing to protect shareholders?
SINA and Alibaba, two China-based U.S. publicly traded companies, owned a sizable portion of Weibo (WB), another U.S. publicly traded company.
In 2009, SINA (NASDAQ:SINA) launched Weibo, a microblogging platform modeled after Twitter. SINA is often referred to in the U.S. as the Yahoo of China. Weibo eventually was spun off from SINA and became its own company.
In April 2013, Alibaba became an owner of Weibo with SINA. Alibaba purchased an 18 percent equity stake in Weibo for $586 million and also had the option to buy an additional 12 percent. SINA also announced an expansive partnership with Alibaba.
On April 17, 2014, Weibo went public on the NASDAQ under the symbol WB. Daniel Zhang, Alibaba’s Chief Operating Officer at the time and now CEO, joined Weibo’s board of directors as part of the IPO process.
On September 19, 2014, Alibaba went public on the NYSE under the symbol BABA, completing the largest IPO in history.
On December 31, 2014, Alibaba increased its Weibo ownership to 31.5 percent of outstanding shares.
On March 31, 2017, Sina owned 49.8 percent, Alibaba owned 31 percent, and others, including U.S. retail/institutional shareholders, owned 20 percent of Weibo's shares.
Back in 2014, Weibo invested in ByteDance, owner of TikTok, Douyin, and Toutiao, w/Sequoia Capital China.
In June 2014, Weibo and Sequoia China invested $100 million in ByteDance Series C at a $500 million post-money valuation. ByteDance was often referred to by the name of its first product, Toutiao, which means “headline” in English. Toutiao is an AI-based news aggregation service.
On April 6, 2017, the media, including the website SINA, revealed that Weibo owned 5% of ByteDance, implying that Weibo invested $25 million in the Series C investment round in exchange for 5% of ByteDance back in June of 2014.
By the end of 2016 and into 2017, ByteDance had become not only the world's fastest growing startup, but also the fastest growing startup in history, and it was only getting started.
Early in 2016, ByteDance recognized Toutiao, an artificial intelligence-based news aggregation service, was a huge success. By using AI to curate content based on viewing patterns, Toutiao solved a very challenging problem.
In September 2016, ByteDance launched its second product, Douyin, the TikTok of China. With a much better AI back-end that curated content based on viewing habits, Douyin was comparable to Musical.ly and took off immediately.
ByteDance had two products that were exploding, a cutting-edge lab for artificial intelligence, had solved a problem with numerous applications, and had plans to go global at the end of 2016 (acquiring Sequoia Capital-backed Flipagram).
ByteDance 2016 revenue was reported to be just under $900 million USD (6 billion yuan) and profitable.
On November 9, 2017, the Wall Street Journal reported that ByteDance had closed the acquisition of Muscial.ly.
Weibo sells or transfers its 5 percent ownership in ByteDance with no transparency sometime at the end of 2016 or in early 2017.
On April 6, 2017, several Chinese media outlets revealed that ByteDance (Toutiao) had raised a new funding at the end of 2016. Sequoia Capital and China Construction Bank Capital, the investment arm of one of China's four major state-controlled banks, invested $1 billion in ByteDance at a post-money valuation of $11 billion.
The April 6, 2017 media reports also revealed that at the end of 2016 Weibo sold (transferred) the companies 5% ownership in the rapidly growing ByteDance. One of the articles was published by Sina, which owned nearly half of Weibo.
The April 6, 2017 article also stated that according to SINA’s CFO the ByteDance shares were transferred not at the valuation paid by Sequoia and CCB capital for the Series D investment, but at a reasonable price.
Despite the fact that Weibo is a publicly traded company, its CEO, Gaofei Wang, refused to comment on the Weibo/ByteDance transaction. SINA and Alibaba, both public companies, were also significant shareholders in Weibo.
Charles Chao, who controlled Sina and Weibo, and Neil Shen of Sequoia Capital, who served on ByteDance's board of directors, have a history of controversial transactions.
Weibo issued no press release on the sale of its ByteDance shares.
Between September 30, 2016, and May 30, 2018, Weibo made 23 SEC filings, including 2016 and 2017 annual reports; none of the SEC filings disclosed Weibo’s sale of ByteDance shares.
Later in 2017, Reuters and the Financial Times reported on a new funding round and a spat between ByteDance and Weibo.
On August 10, 2017, Reuters reported that ByteDance was raising $2 billion at an over $20 billion valuation (fifth round of funding or Series E). ByteDance increased in value by over $10 billion in just 6 months (first half of 2017) from its Series D investment.
The August 2017 Reuters report also referenced that Weibo was no longer an investor in ByteDance (Toutiao).
On September 12, 2017 the Financial Times reported that ByteDance (Toutiao) was cutting ties with Weibo over a content ownership spat and that the dispute started in August 2017.
Weibo’s balance sheet analysis raises more questions - no new cash influx from ByteDance share sale.
A 5 percent ownership in ByteDance, sold at a $10 billion valuation, should have netted Weibo and its shareholders $500 million.
Weibo's balance sheet showed no discernible increase in cash, cash equivalents, or short-term investments from Q4 2016 to Q3 2017:
Dec 31, 2016 $396.0 million
March 31, 2017 $444.2 million
June 30, 2017 $609.2 million
September 30, 2017 737.0 Million
Weibo’s early sale of its 5 percent ownership in ByteDance with no transparency raises substantial questions.
Who bought Weibo’s 5 percent ownership in ByteDance, when, and how much did they pay?
Why was Weibo, which didn't need cash, exiting its investment in the fastest growing startup in history so early and without disclosing anything? Even if there had been a spat, Weibo could have kept its 5 percent stake while terminating its partnership.
When Sequoia China and CCB Capital (Chinese government) invested in ByteDance's Series D, was the sale or transfer of Weibo's ByteDance shares disclosed? Were Weibo Series C shares distributed to Sequoia China and CCB Capital (Chinese government)?
Was the transaction approved by the board of directors of Weibo?
Why did Alibaba (Daniel Zhang) and SINA (Charles Chao), who represent two US public companies on Weibo's board, approve this transaction and support Weibo not disclosing any information?
Were any safeguards put in place by Weibo's board to ensure that the sale was competitive and did not benefit a related party at the expense of Weibo, SINA, and Alibaba shareholders?
Why did Julie Gao from Skadden Aprs, the corporate attorney for Sina, Weibo, and ByteDance, believe it was acceptable for Weibo to withhold details about the Weibo/ByteDance transaction from shareholders, or did board members not listen to her? Julie Gao was recently named CFO of ByteDance.
The most pressing question is why the SEC did not even send an inquiry to Weibo or ByteDance for what clearly should have been a material transaction? Access to accounting working papers is not required. The responses could have come from a number of ByteDance board members based in the United States.
Despite a complete lack of transparency, the SEC does not even attempt to protect Weibo, Sina, and Alibaba public shareholders with a simple inquiry. The SEC's leadership, including Chairman Jay Clayton, has significant conflicts of interest.
Jay Clayton, who spent his career as a private sector attorney at Sullivan & Cromwell was appointed SEC Chairman on January 4, 2017, and sworn in on May 4, 2017.
Clayton's first senior hire was Simpson Thacher's William Hinman, with whom he previously worked to bring Alibaba public. Goldman Sachs oversaw the largest IPO in history.
Shortly thereafter, Clayton hired his former Sullivan & Cromwell colleague, Steven Peikin, to be co-head of enforcement at the SEC.
Aside from revealing that a former client introduced Clayton to the administration, Jay Clayton withheld the identity of the person who recommended him as SEC Chairman. It is believed Gary Cohn, a longtime Democrat, and former Clayton client at Sullivan Cromwell recommended Clayton for the SEC Chairman role.
Cohn was the former President of Goldman Sachs and the Director of the White House Economic Council until President Trump imposed tariffs on China. He left immediately after that. According to the Wall Street Journal, Mr. Cohn was designated to play a central role in “financial regulation.”
The SEC's director of corporate finance, William Hinman, and Chairman Jay Sullivan, along with Gary Cohn's Goldman Sachs, represented Alibaba in its September 2014 IPO. Alibaba was the largest IPO in history earning all of them substantial fees at their firms.
Hinman and Clayton’s law firm’s relationship with Alibaba and its executives was substantial. Beyond the IPO, it included substantial fees for: acquisitions, large debt offerings, personal work, and Alibaba's Hong Kong IPO. Those fee’s continued at the firms while they were at the SEC.
Simpson Thacher and Hinman even represented Alibaba in its strategic alliance with Weibo and Sina.
With numerous transactions between 2013 and 2016, China business became a significant revenue stream for both Hinman and Clayton's firms. The Shanghai Guanxi, which included Alibaba, Sina-Weibo, and Sequoia Capital, had a particularly tight relationship with Sullivan & Cromwell and Simpson Thacher.
Many of the deals worked on by Hinman and Clayton/Peikin law firms were controversial due to a lack of transparency and were subject to civil litigation, such as the WuXi Pharma and Focus Media take private deals.
At the SEC, this isn't just a Clayton, Hinman, and Peikin story. What is Chairman Gary Gensler doing?
Chairman Gary Gensler, the SEC's senior staff, and members of Congress, were made aware that Clayton and his SEC's leadership were making decisions not to pursue claims against his former clients in China. These allegations were documented with indisputable facts.
Gary Gensler has continued the ruse that the main China issue is related to accounting transparency issue. It is well-known many claims don’t require access to accounting papers, but the accounting issue is used as an excuse not to pursue at the SEC.
The problem with Chinese listings in US capital markets is a lack of corporate governance at the companies and a lack of SEC enforcement. Nobody is looking out for American shareholders. Only the elite in the U.S. and China are being protected.
Despite obvious problems, conflicts, and more than enough probable cause to open criminal investigations at the SEC under Clayton's leadership, the current administration has decided that this is the one place where no wrongdoing will be pursued for some reason.
The current administration has gone after anyone and everything connected to former President Trump. You have to wonder why they have decided not to pursue any wrongdoing against Clayton's SEC. This is just one of many allegations that will be presented in several parts.
This is only Part 1 of many parts, stay tuned for Part 2……