| Programming note: Money Stuff will be off tomorrow, back on Thursday. WeWon't Well WeWork has finally sued SoftBank, but it is a little anticlimactic. I imagine that if you were to sit WeWork's founders and early investors and independent directors and employees down in one room, and SoftBank in another room, and ask them to write down their grievances about each other, you would get long and juicy lists that would be fun to litigate. But the special committee of WeWork directors is not looking for fun things to litigate, so the actual lawsuit is kind of technical. Last October, after WeWork's initial public offering failed, SoftBank Group Corp. agreed to buy $3 billion worth of WeWork stock from existing WeWork investors, including the company's former chief executive officer Adam Neumann, some of its big venture capital investors, and current and former employees. But SoftBank didn't buy the stock immediately; it had to get regulatory approvals, and the purchase was scheduled to close this April 1. There were some conditions that had to be met before SoftBank was obligated to close, and last week SoftBank announced that the conditions had not been met and that it wouldn't close. Today WeWork's special committee sued; here is the complaint. SoftBank has given several vague reasons for not closing; the one that has gotten the most press is that there are ongoing regulatory investigations of WeWork. WeWork sensibly dismisses this concern. SoftBank has controlled WeWork for months; it just can't go around pretending to be surprised by its regulatory troubles, which in any case seem pretty mild compared to its, you know, actual troubles: The investigations were not a surprise, given Neumann's conduct and the Company's loss of billions in value. SoftBank had complete knowledge of the facts underlying the investigations when it executed the MTA. Certain of the investigations even concerned statements that SoftBank made regarding its own threats in October 2019 not to fund the Warrant when it came due in April 2020. Some investigations had been disclosed to SoftBank in the disclosure schedule to the MTA. Others had been publicly reported in the press. All of the investigations were known to SoftBank at the time that it signed the December 27, 2019 amendment to the MTA. But SoftBank did not raise the investigations as a basis not to consummate the Tender Offer until recently, as the approaching April 1, 2020 closing date caused it to become increasingly desperate. In any event, the investigations did not give SoftBank an escape from its obligations. None of the investigations could "reasonably be expected" to prevent the consummation of the Tender Offer or to have a "material adverse effect" or result in any "material liability to the Company," as required by the plain language of the Investigations and Claims Condition. (The "MTA" is the Master Transaction Agreement covering SoftBank's purchase.) "Certain of the investigations even concerned" SoftBank's own actions, which makes a lot of sense, since much of the scandalous weirdness of WeWork does seem to have come directly from SoftBank. Meanwhile WeWork's actual troubles—the fact that much of its business is shut down by the coronavirus, etc.—are bad. ("Thousands of WeWork tenants have refused to pay rent or sought to terminate their leases over the past month, heaping pressure on the lossmaking group as its occupancy level and cash pile dwindles," etc.) But they don't give SoftBank an out. "Despite the months between the signing of the MTA and the expected closing of the Tender Offer, the MTA does not contain any material adverse effect ('MAE') provision or similar termination right that is common in such agreements." The risk of WeWork's business collapsing between October and now was supposed to be on SoftBank—which again makes sense, since SoftBank has been WeWork's controlling shareholder since October—so it can't back out because that business collapsed so dramatically. But there is another condition. "The primary condition SoftBank has touted to avoid closing the Tender Offer is the roll-up of ChinaCo." WeWork has a joint venture called WeWork Greater China Holding Co., and part of the deal agreed to in October was that SoftBank's Vision Fund would exchange its shares of that joint venture for shares in WeWork. Getting that exchange done was a condition to the tender offer. But getting that exchange done required consent from other shareholders of the Chinese joint venture, who would have to waive their rights of first refusal and co-sale. So, according to WeWork's special committee, SoftBank sabotaged the deal by telling those shareholders not to waive their rights. For instance in December Masayoshi Son, the head of SoftBank, met with Trustbridge Partners, one of those shareholders: At this meeting, while assuring the Company that SoftBank intended to close the Tender Offer, Son and other representatives of SoftBank gave Trustbridge reason to believe that it would be against the interests of the ChinaCo minority stockholders to waive their first refusal and co-sale rights. On information and belief, SoftBank also had discussions with other ChinaCo minority investors to pressure them not to waive those rights. In hindsight it seems a little odd to give SoftBank an out like that in the first place. SoftBank has gotten a reputation for walking away from handshake investment deals, and at the time this deal was negotiated, relations were not exactly great between SoftBank and WeWork. In a typical merger agreement you sort of assume that the buyer and seller both want to do the deal, and you try to allocate the risks reasonably and make both sides commit to do their best to get the deal done. Here both the buyer and seller were absolutely miserable about the deal, which was a desperation measure designed to salvage what was left of a disastrous situation; you can't assume that SoftBank would work cheerfully to get it done. If SoftBank could get out of paying $3 billion for nearly worthless WeWork stock just by bad-mouthing the deal to some other investors, why wouldn't it? Hardcore I guess one theory would be that the coronavirus crisis would increase the value of business travel. In the old times, you got on a plane to visit clients to demonstrate the seriousness of your interest: "I care about our business relationship so much that I paid for a plane ticket and left my family to come out and see you," was the implicit message of every business trip. Now, the seriousness of that signal is vastly increased. "I care about our business relationship so much that I literally risked my life to come out and see you," would I suppose be the message now? How could clients not hire you to do their mergers, if you braved a plague to come see them? I don't exactly mean to endorse that theory but, um, here you go: On March 26, the fourth day of New York's statewide lockdown, JPMorgan's [Nicholas] Adragna dashed off a note to his subordinates. Troy Rohrbaugh, the bank's global head of markets, "continues to want to push everyone to get back into the office," Adragna said. A record had just been shattered in the investment-grade credit market, as U.S. companies raced to issue billions of dollars in bonds to bolster their financing. Adragna's team had traded more than $3 billion of bonds that day and, the reasoning was, that wouldn't have been possible if they'd been working from home. "With the amount of issuance trading we can really separate ourselves and do a great job for customers by being in the office," Adragna wrote. "Let's attack and use this as an opportunity to differentiate ourselves both internally and externally. LET'S GO." I suppose it is a way to differentiate yourself! "Internally and externally." The key to success at an investment bank is not just demonstrating to your clients that you are hardcore and would do anything for them, it's also demonstrating to your bosses that you are hardcore and would do anything for them. This is mostly a free-floating artifact of investment bank culture, by the way, not always something demanded by the clients or the bosses. Presumably JPMorgan's senior executives have not announced extra bonuses for whichever trading desk differentiates itself by being in the office the most during a pandemic. The desks just sort of implicitly assume that that's the behavior that will be rewarded. If you ran JPMorgan you could push back on that assumption! If you wanted to! You could announce extra bonuses for whichever desk differentiates itself by being in the office the least during a pandemic, or for the desk whose traders stay healthiest. You could communicate your expectations not in vague ways ("We've stated many times that anyone who doesn't feel comfortable coming into the office doesn't have to," says a JPMorgan spokesperson) but in concrete ways. JPMorgan isn't quite doing that. Anyway that's from a story about how the banks are handling the competing pressures to (1) work in the office and make a lot of money but also (2) socially distance and not get everyone sick. It is a mixed bag: Inside Natixis SA's New York office, nerves frayed after the French bank sent traders to a recovery site outside the city so cramped that social distancing was impossible, one person said. The firm later ditched the plan and sent people home, where employees received an important email from a top executive: "Highly Confidential: Covid 19 - Staff Infection List." Workers who clicked the attachment realized it was an anti-phishing test on behalf of the compliance team and that they had failed it. Many were furious, the person said. That's gross but also I kind of admire it, that's a really good phishing subject line, how could anyone resist clicking that? Even having read the punch line I still would probably open that attachment. Meanwhile at Goldman Sachs, working from home gives people new opportunities to be weirdly hardcore: One senior trader at Goldman Sachs said she's been writing emails while sitting on a yoga ball, and doing pull-ups on bathroom breaks. When she has to go back in the office, she said, she'll miss doing burpees, a type of squat thrust, while listening to conference calls. Oh I don't know I bet she will just keep doing burpees on conference calls once she's back at the office. Honestly what is the point of doing burpees on conference calls unless everyone knows about it? Margin calls (1) As I have said before, my instinct, when banks and their customers are fighting over margin calls, is to side with the bank. The deal with margin lending is that you buy stocks using the bank's money, and then when the stocks go up you keep all of the profits. That is a good deal for you, if there are profits. It is not such a great deal for the bank. They're putting up much of the money for your investment, but they are not a co-venturer with you; they don't share in your gains. They earn the same interest on their money no matter how well you do. The only way this makes sense for them is if they earn the same interest on their money no matter how poorly you do. You don't treat the bank like a partner when things go well and you make money, so you should not expect the bank to treat you like a partner when things go poorly and you lose money. When your stocks go down and the bank calls you for more margin, you can say "no no this is a temporary drop in a sound long-term investment, let's ride it out," but they can and should ignore you; it's not their long-term investment. Instead, as soon as anything goes wrong, your bank is going to be demanding more money, and if you don't get them the money fast enough they will seize your collateral, blow out your position, protect themselves and leave you with the loss. This all tends to be very clearly spelled out in the legal documents, not only because it is the proper allocation of the risk (you mean to take risk and the bank doesn't), but also because the bank is probably bigger than you are and so can write the documents to favor itself. And so to exaggerate slightly your margin loan contract probably says something like "if the bank gets nervous about anything for any reason it can sell all your collateral and seize your money and there's nothing at all you can do about it ever." And yet when there are widespread margin calls, there is often litigation; despite that clear allocation of the risks, margin borrowers always seem surprised and angry when they get margin calls, and sue their banks to stop them, and sometimes even win. There are various reasons why—sometimes banks can be overly rapacious in their margin calls, or sell collateral to themselves for too cheap, etc.—but here's a fascinating one: Investment contracts give banks clear rights to liquidate positions. But lawyers say there still can be scope for making claims if banks act too quickly or mishandle a liquidation and impose bigger losses than would otherwise have been crystallised. They say there are risks that, in the often-heated conversations that come with a disputed margin call, things might be said which contradict the contract wording and create opening for legal claims. Mike Hawthorne, legal director at Pinsent Masons, said: "The danger for banks and brokers is that, in the course of the potentially confrontational discussions around the margin call, something might be said which the customer could misinterpret as an agreement to allow more time to provide the margin or before closing out the account." Basically the lawyers write a contract saying "we can do whatever we want," and the traders and risk managers say "let's do everything we can to protect ourselves," but then the salespeople and relationship managers get on a recorded phone line with the customer and say "obviously we want to work with you here, we are reasonable people, you are a valued customer," and the signals become a bit mixed. No salesperson ever wants to tell the customer "nope, we can do nothing to help you, we're standing on our contractual rights and we don't care how it affects you," even though that may be exactly the bank's position. And so the salesperson says something vague and conciliatory and it ends up being used as a reason to sue. Margin calls (2) We have talked a lot recently about large-scale margin calls caused by crashing markets and leading to cascades of fire sales, markdowns and further margin calls, so it is sort of refreshing to see a margin call caused not by the coronavirus or economic collapse but just by old-fashioned fraud: Banks stand to lose more than $100 million from a loan they made to the chairman of Luckin Coffee Inc., whose share price plunged after the Chinese coffee chain last week said much of its 2019 sales were fabricated. On Monday, Goldman Sachs Group Inc. said an entity controlled by Luckin Chairman Charles Zhengyao Lu defaulted on a $518 million margin loan facility. It said a group of lenders is putting 76.3 million of the Chinese company's American depositary shares—representing the collateral for the loan—up for sale. Goldman said it is acting as a "disposal agent" for the lenders, meaning it is helping to facilitate the share sale in one or more transactions. The identities of the lenders weren't disclosed, and a Goldman spokeswoman declined to say if the investment bank was among them. The securities pledged toward the loan are held by Mr. Lu and Jenny Zhiya Qian, Luckin's chief executive officer. The two are co-founders of the company, which had quickly emerged as a rival to Starbucks Corp. in China. The pledged shares were recently worth about $410 million, based on Luckin's closing price of $5.38 per American depositary share on Friday. Luckin announced last Thursday that its fake sales in 2019 "amount to around RMB2.2 billion"; its total reported sales in the first nine months of 2019 were about RMB2.9 billion. The day before Luckin came clean its American depositary shares closed at $26.20, giving the margin lenders collateral worth about $2 billion, about a 25% loan-to-value ratio, which is maybe a little high for a large margin loan on a volatile and controversial company to the chairman of that company, but basically reasonable. The next day the shares closed at $6.40, giving the lenders collateral worth about $489 million for a $518 million loan, oops. The stock closed yesterday at $4.39, making the collateral worth $335 million, a $183 million loss on the margin loan. If the lenders could even sell at that price, which seems doubtful. The American depositary shares trade an average of about 10 million shares a day. Trading was halted this morning, and the margin call and fire sales are not going to help investor confidence. I do not envy the Goldman salespeople trying to place these shares. "We got hoodwinked out of $518 million by a coffee company with fake sales, but the good news is, now you can own that company at a bargain price!" "The Facility is full recourse to Mr. Lu and his spouse," says Goldman's press release, so that's something. What! Is! Martin! Shkreli! Up! To! Would you believe: The disgraced biotech entrepreneur is asking for a "brief" three-month furlough from his federal penitentiary in Allenwood, Penn., to spend time researching potential treatments for Covid-19, the disease caused by the virus. "As a successful two-time biopharma entrepreneur, having purchased multiple companies, invented multiple new drug candidates, filed numerous INDs and clinical trial applications, I am one of the few executives experienced in ALL aspects of drug development from molecule creation and hypothesis generation," Shkreli wrote in a scientific paper posted online this week. Here is the paper; Shkreli is listed as the lead author, and his institutional affiliation is given as "Citizen Scientist, White Deer, PA." The title is "In silico screening for potential COVID-19 beta-coronavirus non-nucleoside RdRp inhibitors"; the stuff about letting Shkreli out is in an "Author Statement" at the end. It also includes a disclaimer of any intent to profit from discovering a Covid-19 cure, written in a way that sure makes it sound like he wants to profit from it? I do not expect to profit in any way, shape or form from coronavirus-related treatments. I believe any company developing a coronavirus drug should seek to recoup its cost at most and be willing to perform the work as a civil service at the least. If the government is willing to reward industry for their work on this catastrophic situation, it will be at each company's discretion to accept, negotiate or deny such funding, including bulk purchases, cost reimbursement, tax credits and other benefits. I love that he's already negotiating the tax credits for when he is hypothetically released from prison to hypothetically discover a cure for Covid-19. Things happen Fed Preparing to Finance New Small-Business Payroll Loans. Billions Idled at Banks After Regulators Balk at Following Fed. Downgrades flood junk bond market with 'fallen angels.' Airbnb raises $1bn from new investors. Oaktree, Elliott Among Bargain Hunters Circling Mortgage Trusts. SEC Suspends Trading in Two Stocks Over Coronavirus Claims. NYSE says industry will review circuit-breakers after vertiginous drops. Carnival Soars After Saudi Sovereign-Wealth Fund Discloses Stake. Warren Buffett's Death-Spiral Deal. PG&E's Settlement With California Fire Victims Is Fraying. How a brain-zapping device can calm hedge-fund traders' nerves when markets are chaotic, according to a veteran performance coach. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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