By Rachel Louise Ensign and Amrith Ramkumar
Cantor Fitzgerald CEO Howard Lutnick was pitching a startup that said it made a key component of self-driving cars, which would soon be valued at $2 billion.
"I'm brilliantly successful because I select brilliantly," Lutnick said during a 2021 video call selling investors on AEye, which had almost no revenue at the time.
Lutnick was behind a blank-check company, or SPAC, that planned to merge with AEye to take it public. Such deals boomed during the pandemic, fueled by hedge-fund managers and day traders stuck at home and plowing money into unprofitable startups in search of the next Tesla.
AEye shares are now nearly worthless, and Lutnick is Donald Trump's pick for Commerce Secretary. In that post, he would be a key international dealmaker and oversee trade policy for a president-elect who made widespread tariffs a central part of his campaign.
The sharp-elbowed executive would bring to the job decades of experience on Wall Street, where he became a billionaire by pitching everything from new bond-trading technology to cryptocurrencies. Lutnick made SPACs a big focus in recent years. The deals made money for Cantor, but many worked out badly for ordinary investors.
In 2020, for instance, Cantor helped set up a SPAC endorsed by basketball legend Shaquille O'Neal. It merged with fitness firm Beachbody the following year. Shares are down about 99% since their debut at roughly 10 cents, when adjusted for a reverse stock split.
Lutnick and other proponents touted SPACs as a way for regular people to invest in companies -- such as sports-betting firm DraftKings or space-tourism firm Virgin Galactic -- that they normally couldn't access. "SPACs are really private equity for the public market," Lutnick said in a television interview during the boom.
Selling SPACs
Lutnick spent the past two-plus decades rebuilding Cantor after all of the employees inside its New York headquarters were killed in the Sept. 11, 2001 terrorist attacks. Lutnick, who wasn't at work because he was taking his son to his first day of kindergarten, made headlines as the CEO who wept on the news.
Lutnick calls his small empire "the biggest little guy" in finance. He owns the majority of privately held Cantor Fitzgerald, which controls three companies, two of which are publicly traded.
His holdings of the publicly traded stock of those two firms are alone worth $2 billion. Those companies paid Lutnick $37 million last year, more than what Jamie Dimon earned for running the much larger JPMorgan Chase.
A third private company held by Cantor offers investment-banking services and is a top adviser to SPACs.
A SPAC is a publicly listed shell company created to take a private firm public through a merger. SPACs raise money from professional investors and wealthy individuals. Once they start trading publicly, anyone can buy shares before or after the merger.
SPAC creators get ultracheap shares that protect them from losing money even if the stocks do poorly.
Cantor's investment bankers helped 82 SPACs raise $19 billion to take target companies public over the past four years, second only to Citigroup, according to data provider SPAC Research. Some of the deals Cantor underwrote did well, such as investment bank Perella Weinberg Partners, whose shares have more than doubled since its 2021 SPAC merger.
Cantor also created and funded nine of its own shell companies, six of which took private targets public. Only one of those, investment firm GCM Grosvenor, trades at a higher price than when it went public.
Another one of Cantor's SPACs merged with the conservative video-sharing app Rumble, which is backed by Vice President-elect JD Vance and has a partnership with Trump's social-media company. Rumble is down more than 25% since its debut.
Shares of Cantor's four other SPAC companies are down about 80% or more.
"It is worse than normal, which is saying a lot for SPACs, because normal is so darn bad," said Michael Ohlrogge, a law professor at New York University. Companies that did SPAC deals between 2019 and 2021 have seen their shares fall an average of about 55%, while insiders often made money, he said.
A warning to investors
Lutnick personally pitched investors on AEye, according to the video viewed by The Wall Street Journal. Existing backers such as General Motors, Intel and Subaru put more money into the company in conjunction with the SPAC deal.
In a separate 2021 investor presentation, Lutnick and AEye said the company would use its superior technology and connections to reach $617 million in sales within five years. In the first nine months of this year, the company had about $156,000 in sales and warned investors it may not survive without new funding. Shares are down more than 99% when adjusted for a reverse stock split.
Lutnick got about 6.2 million shares in the AEye deal at an average price of roughly $1.25, a deep discount to the $10 many other investors such as GM paid.
Lutnick paid about $170 million for shares in the nine Cantor SPACs and companies they took public. The value of those stakes was recently close to $200 million, according to an analysis by data provider SPACInsider based on average share prices.
Cantor and Lutnick would have made a lot more money if AEye and their other bets had performed well. It isn't clear what Lutnick's return was on these investments because disclosures are limited.
Another Cantor SPAC merged with View, a maker of "smart windows" that control for heat and glare, in 2021. The SoftBank Group-backed company said in an investor presentation it would eventually be profitable in part because "nobody likes blinds." View filed for bankruptcy this past spring.
In August, Lutnick and Cantor agreed to pay $12 million to settle a lawsuit from individual investors who said they were misled about the firm's growth prospects.
Write to Rachel Louise Ensign at Rachel.Ensign@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
December 01, 2024 05:00 ET (10:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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