Riding the Blockchain Hype: How Longfin Hoodwinked Investors, Part 1

Riding the Blockchain Hype: How Longfin Hoodwinked Investors, Part 1

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I’ve been writing about cryptocurrency for awhile now - where to buy it, how it works, why it could change the world, and so on. However, this doesn’t mean I only focus on cryptocurrency - indeed, I am always trying to become a better and more knowledgeable investor in all sorts of areas. This is why I recently set out to teach myself the ins and outs of the stock market, including more sophisticated things, such as derivatives markets like “options contracts.” If this sounds like a bunch of gobbledygook to you, don’t worry - it was confusing to me at first too, as this is a whole new world with its own dictionary full of terms non investors are probably unfamiliar with, such as “calls” and “puts” and “strangles” and “straddles.” I’ll explain a lot of this stuff in “Part 2,” - but first, let’s focus on Longfin (LFIN) and how I got caught up in what I’d characterize as the biggest crypto scam since Bitconnect.

What Is Longfin?

Longfin is a company founded and run by CEO Venkat S Meenavalli. On their website, they bill themselves as “A Global FinTech NASDAQ Listed Company,” and their slogan appears to be “Calculating the Incalculable.” If you’re already rolling your eyes at this nonsense buzzword-talk, you’re in for a real treat - here are some more bullet points lifted directly from their website:

Seven Points that define Our Reliability

Financial Disintermediation powered by Blockchain

Calculating the Incalculable (Probability)

Eliminating Counterparty Risk

Real-time Settlements

Low-latency and accession to Global Financial Markets

Global Alternative Risk Transfer (ART)

Alternative Structured Finance (Shadow Banking)

Now, I don’t want to be too flippant, but with at least half the things on this list, my immediate thought is “what the hell does any of this mean?” Seven points that define their reliability? What? Is “disintermediation” even a real word? Well, actually, it is. Per Google:

dis·in·ter·me·di·a·tion
disˌin(t)ərmēdēˈāSH(ə)n/
noun
noun: disintermediation; plural noun: disintermediations

reduction in the use of intermediaries between producers and consumers, for example by investing directly in the securities market rather than through a bank.

So, basically, removing middle-men. Okay, I can get behind that - but with that said, I’m not convinced Longfin actually does or has ever done anything even close to the stuff they claim to be involved in. You don’t have to take my word for it - let’s see what Venkat himself has to say in person. Here is some of the interview that, in a sane world, would have brought Longfin’s stock price to the single digits:

This was published back in December 2017. There is so much content in this single interview that unpacking it all would be impossible without devoting hundreds of pages to it; instead, I’m just going to comment on some of the most salient points as to why this whole thing could be called “the writing on the wall.”

First of all, this guy just comes across as untrustworthy and weird. I realize that some might consider this to be low-hanging fruit, but optics are important. He rapidly talks in a barely-comprehensible accent, and the more he gets grilled on his wonky business practices, the faster he talks. Near the end of the interview it seems like he’s having a panic attack. Speaking frankly, I think he knows he’s a fraud and simply wasn’t expecting the CNBC Fast Money people to call him out on it. He also awkwardly calls the woman “madame” a bunch of times, and can’t stop nervously repeating “you have to understand.” It all just comes across as the kind of bizarre, suspicious behavior you don’t want to see in the CEO of a company you’ve invested in.

Getting more into specifics, though, there are a lot of things in this interview that just don’t pass my smell test. A few:

• He talks about his history, bragging that he started something called Stampede Capital in India. Let’s take a look at an old press release from Stampede:

• He keeps repeating that they are a “Reg A+” company, which he thinks exempts them having to follow any and all of the usual filing rules. This is maybe half true, but there’s also some controversy about whether they should have been able to file under Reg A+, or if Reg A+ should even exist in the first place. This recent Wallstreet Journal article suggests that this type of filing is a bad idea in general - all it does is allow companies to bypass some accounting and disclosure requirements, but Longfin appears to have taken this as carte blanche to do (or not do) whatever they want.
• Venkat says they “acquired the blockchain.” What they actually did was buy a company that Venkat already owned a 95% stake in. That company - really just a dinky little website called Ziddu - had created an ERC-20 token. I’ve written about ERC-20 before, and I want to make sure everyone understands how scummy and predatory it is to suggest that you’re doing something hyper-advanced by making an ERC-20 token; it’s very easy to create an ERC-20 token. I could do it within twenty minutes. Regardless of this, after December 15th, 2017 (the date Longfin “bought” ziddu.com), the value of Longfin’s stock began to skyrocket to absolutely insane levels. I cannot characterize this as anything other than predatorily taking advantage of the public’s relative ignorance about blockchain technology. I want to stress from a technical standpoint that this company has nothing to do with Bitcoin and barely anything to do with cryptocurrency, and yet they rode the blockchain fever anyway. To quote Melissa Lee from CNBC Fast Money:

“I want to go back because when you went public in your […] filing to go public there’s not a mention of being a blockchain company, and then two days later you buy a ‘blockchain company’ from, basically, yourself. Meridian Capital is 95% owned by you so - did you - you must have known this was going to happen. Why…?”

Here, she gestures with air quotes when she says “blockchain company.” It’s brutal.

• The Ziddu coin itself is almost completely unused - more squid ink, more smoke and mirrors. When asked about how many transactions are performed on Ziddu, Venkat clumsily deflects. Another FastMoney host lays into him on this after Venkat deceptively tries to suggest that Ziddu is “not a public coin”:

Well, you’re selling it on your website for 19 cents. That seems public to me. […] I can go on your website right now, on an unsecured website, and buy it for 19 cents.

I think my favorite exchange during this interview was when Melissa Lee asked the following:

“In the meantime, Longfin gained - what - four billion dollars in market cap? Is that justified? It’s not justified.”

In Venkat’s defense, he admits that the valuation of Longfin was ludicrous at this time. It had started around 5 dollars per share on December 13th, and by December 20th the price of one share of LFIN was about 70 dollars.

I could keep going, but I think you get the picture: way back in December when this interview was published, it was already extremely obvious to anyone paying attention that Longfin is a garbage company run by incompetents. So, if you’re unfamiliar with the situation, you might be thinking that LFIN’s price plummeted to below-IPO afterwards, right? Nope. It stabilized at around $30–$50 and even ran up back to $70 in March.

So we’ve not only established that the company is poorly run and doesn’t seem to do much, but that the people investing in it were seized with a sort of ludicrous mania. The story doesn’t end here, though —oh, no no no. We haven’t even gotten to the blatant fraud and how it is that I might lose an enormous amount of money after correctly betting against LFIN. That’s next time, though. For now, this is just about Longfin and how their shenanigans affect cryptocurrency.

Why This Is Bad for Cryptocurrency

Here’s another direct quote from Venkat, taken from the Longfin website:

“Reimagining the world of Alternative Finance (Shadow Banking), $72 trillion industry powered by Artificial Intelligence, Machine Learning and Blockchain enabled Smart Contracts.”

More buzzwords. More blockchain coat-tail riding. This blatant, naked, disgustingly shameless hype is what really gets my goat about Longfin. It’s the use of terms associated with Bitcoin to pump up a business (a business which basically doesn’t do anything), and then later the CEO acts like it’s some sort of surprise that the market cap ballooned to an insane level apropos of nothing. This kind of thing gives Bitcoin and blockchain technology as a whole a bad name. At least he was able to admit that his company shouldn’t have ever been valuated highly, but the damage is done. This is a company that fundamentally has nothing to do with Bitcoin and very little to do with cryptocurrencies, but non-technically-minded people bought into it anyway. When they inevitably lose all their money - and believe me, many of them already have - they’re not going to care about these distinctions. They’re going to think all of crypto is a scam, not just Venkat and his stock schemes.

Coming soon…

I’ll be releasing an article very soon with a continuation of my take on the Longfin saga. Next time we’ll be talking about:

• Options trading and what it has to do with Longfin
• How Longfin was thrown out of the benchmark Russell indexes
• The T-12 trading halt which has brought trading of LFIN to a temporary (maybe!) close on the NASDAQ
• The SEC’s investigation of Longfin for securities fraud
• My own stake in this, and how I might lose money despite correctly identifying Longfin as hot garbage

As you can see, we’re got a lot to talk about. I could see this taking a couple more posts - so stay tuned, more is coming soon!

Update: Next article is here.