Assets Have Tanked at Two of the World's Biggest Short Sellers; Scorpion report on QuantumScape; Black Cube Was Paid 'Large Amount of Money' to Improperly Discredit Judge; For Jazz Pharmaceuticals, Failure Is the New Winning; Living where you want

1) As I've said many times before, I think short sellers – especially those who go public (whether anonymously or not) with their research and conclusions – play a critical role in a healthy market, especially one (like ours) that's filled with fraud, speculation, and other assorted foolishness.

So it's with sorrow that I read Michelle Celarier's article in Institutional Investor about the carnage among short sellers: Assets Have Tanked at Two of the World's Biggest Short Sellers. Excerpt:

If there's any lingering doubt about how awful 2020 was for short sellers, recently released securities filings make the pain abundantly clear.

Jim Chanos' Kynikos Associates and Jim Carruthers' Sophos Capital – both of which started 2020 with around $1 billion in regulatory assets – ended the year a shadow of their former selves.

Chanos, arguably the most well-known short seller in the world, lost more than 50% of its assets last year. Kynikos ended 2020 with about $405 million in regulatory assets under management, down from around $932 million the prior year, according to annual ADV filings with the Securities and Exchange Commission.

The long bull market has punished Chanos for years. In 2018, when Institutional Investor profiled him, Kynikos ran just under $2 billion, having already lost almost three-quarters of his assets since the financial crash of 2008, when it ran $7 billion...

Sophos had an even more dramatic decline than Kynikos.

The firm started 2020 as the world's largest short seller with $1.16 billion in regulatory assets under management. But by year end, the firm was winding down some positions and scaling back, as Institutional Investor previously reported. Sophos ended 2020 with $258 million, according to its ADV.

2) Speaking of activist short sellers, Scorpion Capital released a 188-page bearish report yesterday on battery developer QuantumScape (QS) entitled A Pump and Dump SPAC Scam By Silicon Valley Celebrities, That Makes Theranos Look Like Amateurs, which knocked the stock down 12%. Excerpt:

• The real QuantumScape – a preview of key findings. We conducted 15 in-depth research interviews, including nine former R&D employees, four leading solid-state battery experts, and two employees in Volkswagen's EV battery effort. Our research leads us to conclude that the company is no different than other recently exposed SPAC promotions and EV frauds.
• Volkswagen employees indicate that engineers and battery experts internally are highly skeptical of QuantumScape's claims, getting "nice PowerPoint slides" and little else.
• Our due diligence of QuantumScape's six key technical claims leads us to conclude they lack credibility and exhibit Theranos-like red flags.

I don't know this industry well enough to opine on the Scorpion report, but a friend of mine who does sent me this e-mail:

100% consistent with everything else I have heard, QuantumScape is in the early research stages of trying to figure out cold fusion for a TV drama while smoking weed. It's starting to test on mice while claiming that it's a millimeter away from Phase III approval for a magic drug (which is a decade away, if every step works 100% perfectly). It's one of the most exaggerated stories of all time.

The probability of total failure somewhere on that timeline from here to a finished product in mass production? At least 99%.

My guess: This stock will be a rounding error away from zero within approximately a year.

People will look back at QuantumScape as "Theranos without the charm of the deep voice and turtleneck."

It's fitting that they exposed this fraud the day after Bernie Madoff died.

3) This story caught my eye both because it's so crazy – hire an investigative firm to smear a judge you don't like?! Black Cube Was Paid 'Large Amount of Money' to Improperly Discredit Judge, Court Rules. Excerpt:

Black Cube, a secretive Israeli investigative firm, sought to embarrass a judge who made an unfavorable ruling against a financial-firm client for a fee of as much as $11 million, according to an Ontario court ruling.

The client, Toronto private-equity firm Catalyst Capital Group, agreed to pay the fee to Black Cube, which dispatched agents to discredit a Canadian judge and a rival firm in an effort code-named "Project Maple Tree," the ruling said.

The ruling, by Judge Cary Boswell of the Ontario Superior Court of Justice, provided a rare peek into Black Cube's workings and fee arrangements. The private investigative firm, often referred to in media reports as a "private Mossad," has helped corporate clients by covertly eliciting damaging information about competitors or legal opponents, with mixed success. Mossad is an Israeli intelligence agency.

The decision is the latest development in a long-running dispute between Catalyst and competitor West Face Capital. West Face, which was a target of the Black Cube investigation, sought a court order compelling Catalyst to produce documents relating to the probe.

So what kind of person would hire Black Cube for such sordid work? None other than Newton Glassman, the Managing Partner of Catalyst Capital Group, about whom I wrote in my daily e-mail two and a half years ago:

Roddy Boyd of the Southern Investigative Reporting Foundation nailed Newton Glassman, head of Catalyst Capital Group, a Toronto-based private equity fund with $4.3 billion in capital commitments, and its sister company, publicly traded Callidus Capital, in this article in April, Newton Glassman's Legacy of Ashes. Since then, Callidus' stock is down by 67%. Here's Roddy's update from yesterday: Newton Glassman and Other People's Money. Excerpt:

Things are not going well for Newton Glassman.

Southern Investigative Reporting Foundation readers will recall Glassman was the subject of a lengthy exposé in April, detailing the many ways his direction of Catalyst Capital Group, a Toronto-based private equity fund with $4.3 billion in capital commitments, and its sister company, Callidus Capital, should alarm both investors and regulators.

Specifically, the reporting illuminated the risk Catalyst's limited partners face because of the fund's continually growing exposure to Callidus – a lender to distressed companies the fund bought in 2007 and took public in 2014 – whose performance has been disastrous. If that wasn't bad enough, Glassman directed the fund's plunge into a series of costly and reputation-threatening lawsuits against a host of purported enemies.

On both fronts, incredibly, things have gotten worse.

Callidus is kept alive only because Glassman has repeatedly violated one of the cardinal tenets of investing: don't throw good money after bad.

But the bigger questions for the limited partners who invested in Catalyst's funds is how are they going to get all of their money back? Especially if Catalyst can't sell its holdings?

You won't be surprised to hear that Callidus, facing "insolvency and/or liquidation," was acquired for a pittance less than a year later.

4) Speaking of Roddy, he raises questions about a cancer drug being marketed by Jazz Pharmaceuticals (JAZZ) in his latest report: For Jazz Pharmaceuticals, Failure Is the New Winning. Excerpt:

Jazz and PharmaMar disclosed that lurbinectedin had failed to meet the primary endpoint of its clinical trial's Phase III: achieving improvement in the overall survival of participants. The medication did not succeed in proving its benefit to study participants over the standard of care offered by already approved treatments for small cell lung cancer.

The Food and Drug Administration ("FDA"), however, did not pull the drug off the market. This lack of a response is becoming commonplace: The agency has permitted many drugs in the accelerated approval program to remain commercially available after their Phase III clinical trial failures...

Traditionally, the FDA has viewed a drug's inability to outperform current treatments in extending or improving the life of study participants as disqualifying – except for medications in its accelerated approval program, such as lurbinectedin. And lurbinectedin, like many cancer drugs, has documented side effects including fatigue, nausea and declines in white blood cell counts.

Commercially, though, lurbinectedin has been far from a failure, and brokerage analysts have projected that Jazz could take in $200 million to $225 million in revenue this year from sales of the drug. One Wells Fargo (WFC) analyst, in a June 2020 research note went so far as to suggest that Zepzelca's annual sales might peak at $700 million. PharmaMar is benefitting handsomely, too: Jazz's annual report noted the $300 million in payments it made to PharmaMar last year.

And the actions of Jazz stand in sharp contrast with those of larger rivals with oncology drugs. After Bristol-Myers Squibb (BMY) and Merck (MRK) recently disclosed the failure of confirmatory trials for their own bestselling drugs under accelerated FDA approval for treatment of small cell lung cancer, both companies immediately stopped marketing them for that purpose and removed the indication from their labels.

5) I was recently speaking with one of my oldest, wisest friends about how many of our friends and colleagues from New York City are considering moving (or have already moved) to Florida to avoid the increase in taxes here.

He made an insightful comment that I 100% agree with: "Isn't the point of being rich that you can live wherever you want?"

Best regards,

Whitney