Addentax and Starbox in the Magic Empire

There’s something curious going on involving Asia-based companies listing in the US.

Last week, Addentax floated on the Nasdaq. The company’s SEC prospectus says it’s a Nevada-based holding company with “no material operations of its own”, which conducts most of its business through a Chinese group called Shenzhen Qianhai Yingxi Industrial Chain Service Co.

A quick Googling of that company suggests it shipped disposable face-masks to the US throughout 2020. Addentax in turn describes itself as an “integrated service provider focusing on garment manufacturing, logistics service, property management and subleasing, and epidemic prevention supplies”.

But back to the IPO last Wednesday, which went off with a bang to say the least.

Shares in Addentax (revenues for year ending March 31: $12.6mn) were priced at $5, opened at $27 and quickly soared a ridiculous 13,000 per cent on the day, pushing the company’s value to more than $20bn. As Bloomberg pointed out at the time, that made it bigger than about a third of S&P 500 Index members.

It didn’t last. The share price was largely wiped out on Thursday, plummeting 95 per cent. None of this is normal. And it’s also happened before.

A week earlier, Starbox Group Holdings (revenue for year ending September 2021: $3.1mn) — a Malaysian holding company “engaged in building a cash rebate, digital advertising, and payment solution business ecosystem targeting micro, small, and medium enterprises” — also listed on the Nasdaq. Shares jumped 1,050 per cent on IPO day before plunging all the way back down again over the next few days.

Something similar happened on August 8 with Magic Empire Global (revenue year ending December 2021: $2.1mn), an offshore holding company incorporated in the British Virgin Islands with “no material operation” that conducts its business in Hong Kong through a subsidiary called GCL.

Shares in the stock leapt 6,000 per cent on its Nasdaq IPO. Shock, horror, those gains have since evaporated, too.

At first glance this looks a lot like the meme-stock trend that continues to grip the US. Yet Addentax, Starbox and Magic Empire all share one thing in common. Each IPO was underwritten at least in part by the same company: Network 1 Financial Securities.

Established in 1983, Network 1 runs an investment bank service assisting public companies “that want to take advantage of the rapidly changing equity markets” and a “Chinese Concept IPO service” offering “unique expertise and execution capabilities with emerging growth companies”.

On top of bog-standard “greenshoe” options, each of the three companies it helped to list offered Network 1 so-called compensation warrants entitling it to a portion of the shares issued. 

Warrants like this are far from typical. “Bulge bracket banks definitely do not take warrants like this,” said one former investment banker. “I always thought there was something dodgy about them . . . there’s a serious conflict of interest”.

But what else do we know about Network 1?

Back in 2020, the company was fined by Finra after consenting to findings that between 2016 and 2017 it “failed to develop and implement a written [anti-money laundering] program, and failed to establish and implement policies and procedures that were reasonably expected to detect and cause the reporting of potentially suspicious transactions.”

During that period, Finra said a Network 1 customer (Customer A) bought and sold roughly 2.6bn shares of microcap securities for $730,688 through the company.

“This activity included; (a) trading in a security for which Customer A had disclosed to the firm that he was an insider; (b) trading in another security for which the Firm could have determined he was a stock promoter; and (c) trading patterns displaying red flags as Identified In the Firm’s AML procedures . . . 

“Customer A’s trading in microcap securities exhibited many of the red flags of money laundering or other illegal activities that were Identified in the Firm’s procedures,” Finra continued. These included “the deposit and liquidation of shares of internal)securities, followed by the wiring out of proceeds; trading during price and volume spikes; and trading by a known stock promoter

The accounts also appeared on exception reports provided to the Firm by its clearing firm to detect potentially suspicious microcap securities trading. However, contrary to the Firm’s AML procedures, the Firm failed to timely review those exception reports and its daily deposit and withdrawal activity reports, and, as a result, failed to detect or investigate those red flags”. 

Network 1 agreed to pay Finra $60,000 without admitting to any wrongdoing. The list of its potential oversights goes on, however.

In 2007, and acting through an “associated person”, the company “solicited one of its customers, who was a controlling shareholder of a company, to sell the firm shares of the common stock in amounts that exceeded the limits that a controlling shareholder could sell in public transactions”.

“Network purchased these shares with the intent to distribute them through its market making activities and then resold them to the public”, Finra said. This time the fine came to $100,000. Network 1 did not admit to any wrongdoing.

But what of the people at Network 1? Its president, chief operating officer and chief financial officer is one William R. Hunt, who’s described on the company’s website as having been active in the securities business for over 40 years.

His LinkedIn account yields an interesting extra detail, however. Between 1976 and 1986, Hunt worked as a branch manager at First Jersey Securities, a penny stock brokerage firm that MoneyWeek described as follows in an article headlined “Great frauds in history”, referring to its founder Robert Brennan’s conviction in 1994 for fraud:

First Jersey Securities was a “boiler room” where salesmen would use high-pressure techniques to sell shares in worthless companies to unwitting investors. At the same time, Brennan’s [the founder] two other brokerages would work to manipulate the stock price upwards, giving the impression that the shares were rising in value. Those brokerages would then dump their shares, causing the price to quickly collapse. Unlike later boiler-room operators, such as Jordan Belfort, Brennan would target the wider public, spending large sums on advertising and making high-profile donations to various public causes to generate publicity (as well as discourage prosecution).

For what it’s worth, Addentax, Starbox and Magic Empire aren’t the only companies whose shares have spiked dramatically following US listings this the summer. For example, shares in Hong Kong-based, New York listed AMTD Digital rose more than 14,000 per cent in early August after its IPO the previous month; it does not appear that Network 1 was involved in its IPO.

Since 2015, Network 1 has participated in 34 other IPO transactions on top of the three mentioned above, according to its website. It says it also acted as a placement agent in special purpose vehicles for Revolut in 2021, Klarna in 2020 and SpaceX the same year. (The sums of these placements were small, at $3.6m, $5m and $2.4m, respectively.)

Network 1 declined to comment, and Hunt did not respond to a request for comment by pixel. Addentax, Starbox and Magic Empire did not respond to requests for comment.