Former President Donald Trump’s new financier Patrick Orlando has become famous overnight for his unusual deal. But in the SPAC world, Mr. Orlando had already drawn attention for trouble at another one of his blank check companies.
Mr. Orlando, who is CEO of Digital World Acquisition Corp. (ticker: DWAC), the SPAC merging with Mr. Trump’s media startup, is also CEO of two other blank-check companies. One of them is Yunhong International (ticker: ZGYH), a Wuhan-China based entity that raised $60 million in early 2020 and hasn’t yet announced a deal.
In a rare if not unprecedented SEC filing last year, Yunhong revealed that it had suffered a loss in its trust account. As with any SPAC, the funds raised in an IPO are meant to be kept safe in short-term government securities so they generally earn a small amount of interest (or none when rates were cut to zero) and should not decline in value.
But according to Yunhong’s filing, it was discovered that Morgan Stanley, the trustee, had not invested in government securities but another asset – presumably one that could have offered better returns but carried risk. “Thereafter, we immediately took steps to liquidate such investments and to reinvest the funds only in the types of securities specified under the Trust Agreement,” Yunhong’s filing said.
The unrealized loss totaled $1.15 million but Yunhong was able to recoup part of the losses and incurred a “shortfall” of $565,000. Yunhong wound up remedying the matter by contributing money back into the trust, so investors weren’t actually harmed in the end.
Even so, the situation raises questions about how safe investor money was – and what controls lapsed. It is not clear who made the decision to invest in riskier assets or who even had knowledge of it. Morgan Stanley didn’t immediately respond to a request for comment and one of Mr. Orlando’s associates who answered his phone directed IPO Edge to email his press team which didn’t immediately respond. IPO Edge also attempted to reach Mr. Orlando through the Gmail address listed on the Bloomberg Terminal.
The Yunhong mishap raised eyebrows in the SPAC world, with one investment bank, EarlyBirdCapital, Inc., hosting a Zoom meeting to discuss the matter with clients. (To be clear, EarlyBird wasn’t involved in Yunhong’s IPO which was underwritten by Maxim Group).
The bizarre event is yet another twist in the ongoing drama with Mr. Orlando and his SPACs. DWAC shares have been on a rollercoaster ride for the last few days, rising as high as $175 a share after announcing the deal with Mr. Trump. At $100 a share where the stock currently trades, the company has an implied value of several billion dollars.
The DWAC deal is also highly unusual because Mr. Trump’s company is little more than some big picture ideas sketched out in a short presentation deck. While some SPACs have merged with companies that don’t yet have revenue, Mr. Trump’s operation is even more nascent.
Mr. Trump’s company has reportedly has faced issues as it begins to build its social media platform. Last week, The Software Freedom Conservancy said Mr. Trump’s company had violated the rules of a software license.
The excitement is likely to continue in coming days. Options trading in DWAC is expected to begin this week, which has the potential to drive even more volatility in the shares.
Brokers interviewed by IPO Edge in recent days say that trading in DWAC has been almost entirely been driven by individual retail investors. Some big hedge funds owned DWAC before the deal was announced but have generally sold out of their positions, those brokers said.
There appears to be some demand to bet against Mr. Trump’s deal, but it’s a costly wager. “DWAC stock borrows are going between 250% and 350% fee this morning,” said Ihor Dusaniwsky, Managing Director and Head of Predictive Analytics, S3 Partners. “There is just not any stock loan availability in size on the street – but there is significant short selling demand.”
Jarrett Banks, Editor-at-Large