October, a federal courthouse in lower Manhattan, Trevor Milton, founder of the Nicola Corporation, is sitting at a defense table listening to a jury read back a verdict.
Guilty, guilty, guilty.
Three counts.
Wire fraud, securities fraud, the whole thing.
Here's the part that should make your stomach drop.
By the time that jury said those words, the damage was already done.
Completely, totally.
irreversibly done because Trevor Milton had already sold and pledged about $280 million in Nikola shares.
He'd cashed out.
The SPAC merger that took Nikola public in 2020 had already happened.
The stock had already peaked above $65 a share.
And the retail investors, the people who bought in because they saw a hydrogen truck company on CNBC and thought, this is the future.
They were already holding shares that would eventually fall below a dollar and become delisted.
The fraud conviction did not give them their money back.
The four-year prison sentence handed down in December 2023 did not give them their money back.
Nothing gave them their money back.
And here's the thing that should keep you up at night because it keeps me up at night.
Nikola never had to prove the trucks worked.
It never had to show revenue.
It never had to demonstrate a viable business.
It just had to go public because going public was the product.
The IPO was not a means to build something.
The IPO was the exit.
The offering was the mechanism, which by private risk got quietly legally structurally handed to people who could least afford to absorb it.
That is not a bug in the system.
That is a system working exactly as certain people designed it to work.
William?
Joshua.
Welcome back everyone.
This is The Overlap.
I'm the aforementioned William.
And I'm Joshua.
So today we are talking about share dilution, which I know how that sounds.
I know that that phrase makes people's eyes glaze over.
think, the finance bros are at it again.
But that's exactly why this specific scheme, this Kickstarter product that never actually happens, continues to work.
and why it's sapping your pension dollar by dollar.
Stop for a second here.
Dear listener, if you're listening to this on your commute or folding laundry or whatever, stay with us.
Don't zone out entirely because this episode is not about finance.
It's about a mechanism, a very specific, very legal, very repeatable mechanism for moving money from people who have less of it to people who already have lots more.
It's a pipeline and like any pipeline, it looks boring until you trace where it actually goes.
So here's what we're gonna do for you today.
We're gonna walk you through how public offerings, IPOs, SPACs, secondary assurances, toxic convertible notes, I know that's all a word and letter soup right now, but it's
gonna make sense by the end of this episode, become something that functions less like capital formation and more like a structured transfer of risk onto whoever is standing at
the end of the line.
And the people at the end of the line are almost always the same people, right?
Individual investors, retail holders, people who saw a ticker symbol and believed the story that was actually attached to it.
So travel back in time with us, dear listener, to 1929.
To Samuel Insull and his utility holding company pyramid, where retail investors got the most eluded, most exposed position in a structure that insiders had already quietly exited
before the whole thing collapsed.
And we're gonna come all the way forward to right now to 2026 where the SEC under Paul Aitken's is revisiting disclosure rules around at the market offerings, which are
mechanisms basically that let companies continuously issue new shares without a formal prospectus for each transaction, very quietly, very continuously while you're not
watching.
Which means your shares become worth less every time they do that.
Now we're gonna see this structure over and over again.
The names will change.
The structures get more sophisticated.
The distance between the person designing the offering and the person absorbing the loss gets longer and more technical and harder to see.
but the direction of the money never changes.
Let's get into it.
So Samuel Insull is standing in a Chicago courtroom in 1934, 74 years old, extradited from Greece because that's where he fled when the whole thing came tumbling down.
And the charge he was charged with is actually mail fraud, embezzlement.
But the real crime, like the thing that destroyed the retirement savings of 600,000 individual investors,
was something far more boring and far more deliberate than anything the indictment actually captured within its language, right?
He built a pyramid, not metaphorically like a literal pyramid of holding companies, each one owning shares in the one below it, each one issuing new securities to the public to
fund the purchase of the layer underneath it.
And those retail investors, the people who actually bought shares in the outer shell, were always at the widest part of the base, the most exposed, the most diluted, the last to get
paid, first to lose everything.
And Insull wasn't even bothering to hide this.
That's the part that gets me every time I hear this case.
The structure was visible.
holding companies were publicly registered.
Securities were sold openly.
But the complexity was the camouflage.
By the time you traced the ownership back from the share that you bought to the actual power plant generating actual electricity, you'd pass through so many layers of
incorporated entities that no ordinary investor could map where their money was or what it was actually worth.
The structure was the fraud.
The disclosure existed, right?
Like the disclosure was basically meaningless.
So the whole pyramid collapsed in 1932 and it collapsed because Insull's holding companies were leveraged to the point where a single bad quarter, right?
In the underlying utility revenues could actually trigger a cascade and retail investors lost everything.
So Insull himself,
had already extracted an enormous amount of money through management fees, insider transactions, and early share sales at prices the public never had access to.
Now he was acquitted entirely, by the way.
So all counts, the jury was literally out for five minutes and they were like, innocent, fine.
Five minutes, you can't introduce yourself in five minutes as a jury.
I certainly couldn't, which tells you something about how 1934 juries understood securities law.
mean, right, exactly.
But also something about how hard it is to convict somebody for doing something that was technically disclosed.
And here's why that case matters for everything that comes after.
Ferdinand Pecora, the prosecutor who ran the Senate Banking Committee hearings that exposed all of this, basically wrote the intellectual blueprint for the Securities Act of
1933 and the Exchange Act of 1934.
Roosevelt signed both.
The SEC was created.
Mandatory disclosure before public offerings became federal law.
And the explicit goal was to make sure that what Ansel did
which has used public offerings to extract insider value while retail investors absorbed all the risk, could never happen again.
It took about 40 years to find the next vehicle.
Yeah, that's how long never is in case you're keeping track.
50 years maybe.
Yeah, Michael Milken in 1987, Drexel Burnham Lambert.
And if you wanna understand what Milken actually did, like not the Hollywood version, not the suspenders and green is good shorthand, you have to understand that he did not invent
junk bonds.
just, right, he just industrialized the dilution.
He found a way to use the public capital markets.
to fund leveraged buyouts where the existing shareholders of a target company were wiped out.
The new company was loaded with high yield debt and the fees generated by structuring and selling that debt went to Drexel and Milken personally.
In 1987 alone, he earned $550 million in compensation in 1987.
That's not a typo, right?
That is one man in one year.
Wow.
Has a person ever been named better than Michael Milken?
The people absorbing the cost from Milken's were the workers whose pension funds bought those junk bonds.
The shareholders who got bought out prices that looked like a premium until you understood the debt being loaded onto the company, but they no longer owned.
And eventually the savings and loan institutions that bought the bonds and then failed when the bonds were defaulted.
The SNL crisis cost taxpayers $130 billion.
B-b-b-b-billion.
Bobovillion, right?
And Mr.
Meanwhile Milken paid 600 million in fines and settlements and went home.
That's one year's salary for him.
The math there is, I mean, look, you do the actual adding and subtraction on that trade, and it's really hard not to laugh or cry, but both, honestly.
And here is the through line from Insulet O'Milken that I want you to kind of hold onto, because it's the same mechanism wearing different clothes.
In both cases, the public offering,
which is the formal regulated disclosed act of selling stock or shares, right, to the public was not primarily a way to raise capital for a productive enterprise.
It was a way to create a liquid pool of risk absorption.
People who would buy in at a price that reflected the story rather than the product or the substance and who would be left holding the bag when the story ended.
the sizzle, the steak, right?
I mean, the story is always the product.
The shares are just the delivery mechanism.
And what we see is that this just becomes more more transparent as you go through the different iterations of this scheme.
Yeah, so then we get to 1999, right?
The dot com bubble.
And this is where the mechanism gets refined in a way that is still with us right now, today, in 2026.
Because the junk bond era was at least honest about the fact that it was debt.
You knew you were buying a bond.
The dot com era introduced something more insidious, which is the dual-class share structure.
Companies going public with two classes of stock.
You have class A share and that's for the public.
That's for everyday Joe who wants to just go on Fidelity.com or their brokerage account and type in the stock ticker and buy some.
But then you get class B shares.
Those are for founders where the public shares had sort of one vote in the annual meeting, right?
And the founder shares had 10 or 20.
and sometimes even more votes than that.
And if you ever want to see an example of this in real time, look at the two different Google stock issuings, formerly Alphabet.
I think it's now back to Google, but yeah, that's basically an example of that.
They've got the two different shares that you can buy and you can see them both listed on the exchanges.
So you're buying economic exposure, meaning you participate in the gains and losses of the underlying company, but you have no actual say in how the company's run.
You're a shareholder in name, but in terms of governance, you might as well be furniture.
Yeah, I mean, it is weak, right?
I mean, you still technically get a vote.
If you own any stock whatsoever, you get this sort of proxy thing and they send it to you.
And it feels like you're making a choice in any of this, but believe me, you're really not.
um Right.
You're, this matters, I guess, for this dilution part of it specifically, because it means that
When the company later decides to issue more shares to more people, right, to raise more money, to pay executives in stock, to fund actual acquisitions, the people who hold the
voting power are not the public, right?
So when we say it's a publicly traded company, the individual investors don't really have that power.
It's the insiders.
It's the CEO, the CFO, the person who accepted half of their salary for five years in equity, right?
who would be diluted the most is the public shareholders because they really don't have a vote to stop it.
The structure that was sold to you as sort of democratizing access to great companies is really just a way for permanent insider control over that dilution lever that when they
need to add more water to the tea, they add more water to the tea.
And let's not forget about the investment bankers who make all this magic happen.
Like Henry Blodgett, which again, these names, I these are people who were just born to be financial supervillains.
Henry Blodgett was at Merrill Lynch during this period, recommending stocks publicly that he was privately calling garbage and internal emails.
Frank Quattrone at Credit Suisse First Boston was allocating hot IPO shares to executives of companies that were doing banking business with the firm.
A practice called spinning, which is a very general word for it is essentially a bribe.
paid in pre-dilution equity.
And none of this was hidden.
It was happening again out in the open, in the filings, in the allocations.
Again, the complexity is the camera.
Five trillion, trillion dollars.
That is the market capitalization that evaporated when the dot com bubble collapsed.
Now that's probably the first of many financial major catastrophes that have happened within our millennial timeline.
uh If you remember it at all, before or after.
Yeah.
So the average retail investor who
bought into this dot com IPO at their offering price and held it through the crash lost somewhere between 60 and 90 % of their entire investment.
And not because the market turned, right?
Like all of a sudden the market went bad.
It was because the structure of the offering was designed to put them at the end of the risk chain on the lowest totem of the creditors, quote unquote creditors from a value
perspective when those companies were liquidated.
Right, and to say that it's not because the market turned, really the reality is there, when they lost all that value, their shares were finally appropriately priced.
The market was actually pricing in the real value there.
So it's not like the market collapsed.
It's just that they were holding shares that were worthless because of this mechanism.
So then you fast forward to 2008, which is a slightly different version of the story, but one that I think is actually the most clarifying.
Because in 2008, the dilution happened to people who already owned the stock.
They didn't make a bad decision to buy into a fraudulent IPO.
They owned shares in Citigroup.
Bank of America, the stagiest, most staid institutions that had existed for decades.
And when those institutions needed to recapitalize, when they destroyed themselves with mortgage-backed securities and needed actual cash to survive, they issued new shares,
massive quantities of new shares.
Yes, Citigroup actually raised $45 billion through TARP and share issuance.
So Vikram Pandit was the CEO at the time and the people who absorbed that dilution were the existing shareholders.
Those were pension funds, yeah, but also individual investors who had bought Citigroup stock thinking they owned a piece of a bank.
After the issuances, right.
After the issuances, they owned a smaller piece of a much weaker bank at a fraction of the price that they paid.
So the share price went from around $30 in early 2008 to under a dollar by early 2009.
Oh, and here's the thing we need you to sit with for a second.
If you're listening to this, those shareholders did not do anything wrong.
They did not buy a fraudulent startup.
They did not chase a meme stock.
They bought Citigroup, one of the largest financial institutions in the history of the world.
And the mechanism of dilution was used on them anyway, not as punishment, not as fraud, but as a completely legal capital raising tool.
that transfer their losses on their existing position while the people who caused the crisis negotiated their severance packages.
Also, Ken Lewis at Bank of America was overseeing the acquisition of Merrill Lynch while Merrill was paying out billions in bonuses that it had not disclosed to shareholders.
So, acquisition was dilutive.
So the bonuses were hidden, the shareholders voted on the deal without the material information that they should have been given.
And the SEC eventually settled with Bank of America for $33 million.
which the judge initially rejected as inadequate, which is one of the few moments in this entire history where someone with authority looked back at the math and was like, this
sucks.
This sucks for everybody.
And it's not good.
This is not a balance sheet.
This is a nightmare.
Yeah, it never balances in these deals.
Yeah, it never balances because it's really not designed to balance.
And the thing that connects Insult to 1932 to Milken in 1987 to the dot com bankers in 1999 to Pandit and Lewis in 2008, it's not a series of separate scandals.
It's just the one mechanism running continuously.
It's just finding a new vehicle to do it.
The public offering, the formal regulated disclosed act of selling shares.
keeps getting repurposed.
Not to form capital to create value, right?
It's to transfer the risk downward, always downward to whoever's at the end of that line.
Since this is technically legal, it just made me think maybe we should do this for the United States.
You know, just form a new country to take on all of our bad debt and let us all walk away with lots of money and then sell the shares to the rest of the world in the worthless.
Yeah, step three profit.
We haven't even gotten the specs yet.
No, so we've not gotten to Trevor Milton standing in a field next to a hydrogen chuck that didn't work telling the world that it did.
That one, I mean I'm still angry about that one in a very specific way.
Yeah, we're going to get there, but I want you to understand that by the time we get to Trevor Milton, you should be recognizing the structure because you've seen it before
several times.
Now the vehicle in no pun intended, but pun intended is new, but the mechanism is not.
Trevor Milton, like we said, stood in a field next to a truck that had no working drive train and he was on CNBC talking about how it was this technological breakthrough in
hydrogen.
technology, right?
That is the origin point.
But the origin point is not where the fraud actually happened.
The fraud is almost secondary to this.
The origin point is that the SPAC structure that made the fraud irrelevant to the people who designed it.
Okay Joshua, I'm going need you to explain that a little bit more because I think people hear a SPAC and their eyes glaze over.
The acronym does the work of obscuring the mechanism.
Yeah, so let's do that.
So we said SPAC a couple of times now, it's time we actually define it talk about what it is.
So special purpose acquisition company, a blank check company.
You raise money from the public.
In Nicola's case, Vecto IQ raised it first.
And then you go and you find a private company to merge with.
And the structure has a feature baked into it from the beginning that has nothing to do.
with the target company's actual value, right?
The sponsors get founder shares, that class B that we talked about earlier, about 20 % of the post-merger company for almost nothing, fractions of a cent per share.
So before the retail investor buys a single share.
Before they buy a single share, 20 % of the company has already been handed to the people who set up that blank check mechanism.
Now that's not a side effect, right?
That is the product.
So this dilution is not a risk, it's the business model.
Right, so hang on to that idea of a blank check.
we're talking about somebody who understands that they've been handed a blank check by these investors, these investment companies, and then told you get a percentage of
whatever you're able to raise or to pour into this fake company.
mean, Trevor Milton knew what he was doing.
Yes, he, Milton sold or pledged about $280 million worth of Nicola shares around the time of that SPAC merger.
And in the months immediately after.
Now the truck didn't work.
We know this now.
The company had zero revenue.
the hydrogen technology he was describing publicly did not actually exist in the form that he claimed it existed.
And none of that mattered to the actual extraction.
The shares existed, the market was liquid, the exit was available, and he took it.
Not to burden this already dense topic with an overly raw pun, but Nicholas shares was probably the most transparent thing they ever called it.
We'll that process a little bit.
So unsurprisingly, Mr.
Milton was convicted of fraud in October 2022, since because he committed fraud.
Yes.
ah Since he was sentenced to four whole years in December of 2023 and Nicholas share price went from
over $65 to under $1.
which usually gets you delisted from the market.
Just if you're not familiar with the stock market, that will get you delisted from the New York Stock Exchange and the NASDAQ as well if you do it for a long enough period of time.
uh Right, and Nikola stock was eventually delisted.
So this means that retail investors bought in at like 30, 40, $50 per share.
F they didn't get four years, right?
They got nothing.
They got a certificate representing a fractional claim on a company that was hollowed out before they actually got there.
There was no money left.
There was no technology left.
There was no actual IP intellectual property there at all.
It had all been hollowed out.
And since they don't actually get physical share certificates anymore, uh they basically got a digital version, but you can print it out and put it on your wall as a souvenir of
the time you got had.
But there's something, exactly, there's something about not being worth the paper it's printed on.
But there's something philosophically precise about the timing.
The damage is structured to occur after the exit.
It's not that they ran and left a mess, it's that the mess was the point of arrival for everyone who came after.
Samuel Insull did this in 1929, right?
His utility holding company issued layers and layers of securities of different stocks, of different shares, preferred stock, common stock, bonds.
And the public always ended up holding the most junior, the most diluted, most exposed layer.
And when that whole structure collapsed in 1932, the insiders had already taken the dividends and management fees for years and years and years while people were filling,
figuring out that this was a scam.
And the retail investors lost everything because they were by design the last in line in the creditor scheme.
Ninety years later, the mechanism is identical.
Only the acronyms have been changed to facilitate the further fraud.
Yeah.
And so here's what you're, what you should be sitting with right now.
If you've ever bought shares in a company that went public through a SPAC between 2020 and 2022, the SEC's own research and independent academic analysis found that investors in
those deals lost an average of 50 % or more within 12 months of the merger closing.
Not 50 % of the bad ones.
Average.
Across the entire category, the structure itself generated that loss.
because they're all bad ones.
our Jamath Palipataya, excuse me, raised over $4 billion across his social capital, Hedda Sophia SPAC vehicles.
And I want to be careful here because he was not convicted of anything.
But Clover Health, one of his SPAC targets, went from $15 a share to under $2 a share.
That is not a rounding error.
Yeah, Clover Health also had an undisclosed DOJ investigation at the time of that merger that Hindenburg Research surfaced in 2021.
The SPAC merger documents did not mention that fact.
Retail investors who bought in at $15 didn't know they were buying into a company already under federal investigation.
And can I just point out the beauty of the naming Hindenburg research?
Because that's all I could think about with a hydrogen vehicle that doesn't work.
Yeah, the Hindenburg, which is it felt like everybody was riding on when this all happened.
But the disclosure rules at the time.
Yeah, they were written for traditional IPOs, right?
So the IPO initial public offering, that's when a company first offers public stock for sale.
The SEC finalized new SPAC specific disclosure rules in 2024 after the boom, right?
After the losses, after tens of billion dollars in retail capital, retail money had already been transferred upward, of course, through the founder share structure, right?
The regulation arrived to address a crime scene, not prevent one.
And that's the second through line you identified in the research, which is the regulatory response surprise always lags.
Always.
to be fair here.
Yes, it does.
It does always lack, but it is the nature of our system, right?
Like we are responsive.
We can't be proactive in some of these things because otherwise we would have people that just tried to come up with scams all day, right?
Like the SEC should just be sitting there trying to create a scam.
No, I mean, I don't think that that's reasonable.
I think we need to react to these things.
But because of the slow moving cogs of our legislative process, we end up with very, very slow, very, very
unresponsive laws that usually come about when they've moved on to a new vehicle at this point.
And I am going to mention a possible upcoming new vehicle before the end of this podcast.
But we'll hold off on that just for now.
So,
The 1933 Securities Act, we just talked about, was written to address what Insel did in the 1920s.
So by the time Milken was running that junk bond LBO in the 80s, he had found a completely different vehicle that the 1930s rule didn't think about.
They didn't figure it out by then, right?
Milken made $550 million in compensation in 1987.
One year, he paid $600 million in fines.
in 1990 and went home.
Like his interest alone on one year in 1987 would have been more than any of us could have handled from a monetary perspective in our lifetime.
And he barely paid the principal back on that in 1990.
And then he was just done.
So the math on that settlement is kind of its own sad, dark comedy.
He paid back slightly more than one year's earnings and just kept everything else, including whatever vehicle he placed it into.
The, and the pattern continues.
The.com bankers used dual class share structures to give founders disproportionate voting power while retail investors received diluted economic and governance rights
simultaneously.
You bought the share, but you did not buy your vote within the company.
And that's the way it's supposed to work, right?
Like you own a piece of the company, you get a decision in the company.
Henry Blodgett.
at Merrill Lynch was publicly recommending stocks that he was privately calling garbage in internal emails.
Frank Quattrone at Credit Suisse, First Boston was allocating these hot IPO shares to executives at companies that were also banking clients, right?
Which, which Will talked about earlier called spinning.
So it generated loyalty by giving insiders access to these pre-diluted prices that retail investors never actually got to see.
Okay, so let's pause again here for a second because it's getting complicated.
But I think our listeners need to feel the geometry of that.
The insiders buy in before the IPO.
The public buys in at the IPO price.
The insiders' shares were cheaper to start with.
The public shares are immediately worth less than what the insiders, excuse me, paid per unit of ownership.
The dilution is not a future event.
It's already happened before the opening bell.
Right, and in 2025, 2026, this is not really history.
Right now on OTC markets and in micro cap stocks, there's a financing structure called a toxic convertible note.
A lender gives a struggling small company a loan, a bank or whatever, right?
The loan converts to shares at a discount, typically 30 to 60 % below market price.
So the lender converts the debt.
receives the shares at a very, very steep discount, it's 30 to 60 % on average, and immediately sells those shares back into the open market.
Which of course, anytime that you have a large investor selling a lot of shares, that pressure is gonna drive the price of the stock down, right?
If we're still talking about availability, more shares available means price gets lower.
That's really all it comes down to.
The lender converts
More debt at the new lower price receives more shares, sells again.
It's this mechanical self-reinforcing funnel of share value.
And every single retail investor holding that stock watches their position in that company evaporate in real time down the drain.
from the inside of the blender, so to speak.
FINRA and the SEC flagged multiple cases of exactly this happening in 2025, not the past 2025.
At one time, that was even the future.
It's the past now, but just barely.
The thing they get to me is the transactions are technically disclosed in SEC filings.
However, written in language that a securities attorney could parse and a retail investor cannot.
Because the average retail investor doesn't have an attorney.
I mean, it's just, it's a ticker that you believe in for a minute to try to convert it into something valuable over time, right?
it's on the stock exchange with all the legitimate companies.
Right.
And so, so what we now know is that this disclosure is not really transparency.
That's the gap that the entire system lives in.
The 1933 Act required disclosure.
Okay, great.
But it didn't require you to be able to understand that disclosure.
It could be written in Greek for all you know.
It didn't require that the person handing you the document also had to explain it to you, right?
And explain what it means in your specific financial situation.
You signed
The prospectus.
This is the promise of what this could be and what it could be worth.
The prospectus mentioned this convertible note on page 47.
You bought the shares, you lost 80%, you were warned, it's fine.
And there's a cruelty in that framing that I find genuinely difficult to sit with, which is that the legal protection of the disclosure and the actual protection, which doesn't
exist, are not the same thing.
They're the same only in name only.
Yeah.
Meanwhile, the SEC under Paul Atkins in 2026 began revisiting disclosure requirements for at the market offerings, ATMs, which they are called, which is either completely
obliviously accidental or the most honest branding in all of financial history, right?
An ATM offering allows a public company to continuously issue new shares into the market.
without having to file formal prospectus for each transaction, right?
Drip by drip, continuous dilution.
And if you really wanna think about this, I think tea is the best way because to me, tea makes the most sense and I'm drinking a little bit of tea right now.
You're adding more water to this tea.
It's getting more and more diluted.
Every time you add a drop of water to your glass, it's gonna get more and more diluted.
That's why concentrates exists, right?
So.
Proposed, the proposed amendments, right, would reduce the disclosure burden for smaller companies doing these offerings under the guise of, we're being pro small business.
So the regulatory direction in 2026, that's now, is toward less visibility into the dilution mechanism.
I mean, with our current administration, I don't think that's likely a surprise to anybody listening to this podcast, but at the same moment that SPAC activity is seeing finally
this sort of renewed wave and special acquisition companies are coming around everywhere again, over $10 billion raised through these SPAC structures in the first quarter of 2025
alone, according to SPAC research data, the boom that the 2024 rules were supposed to address is actually back.
It's alive and well.
with the rules in place and the enforcement posture actually softening.
Now ask yourself something, not rhetorically, actually sit with this.
When you hear that a company went public, what do you assume that means?
That they needed capital to grow?
That they had a product and needed resources to scale it?
Because that assumption is doing a lot of work for you.
And in a meaningful percentage of cases, it's dead wrong.
Right.
The hometown international case is one that I keep returning to, right?
It's a single deli in New Jersey.
$35,000 in annual revenue.
One location, market capitalization of about $100 million in 2021.
For a single deli, David Einhorn, not a regulator, a hedge fund manager, writing a letter to his own investors.
looked at that number and said out loud, this company exists to be diluted.
The company status is the product.
The deli is the cover story.
And federal prosecutors eventually charged individuals connected to affiliated entities with securities fraud in 2022.
The scheme was not sophisticated, it was brazen.
The sophistication was in how long it persisted before anyone with the authority looked at the map.
Which is the same thing Judge Jed Rakoff said in 2009 when he rejected the $33 million settlement with Bank of America over the Merrill Lynch bonus disclosures, right?
He looked at the math, a settlement where the penalty is paid by the shareholders who are the ones who are actually harmed, not the executives who made the decisions and said on
the record, this doesn't add up.
He was overruled on the appeal.
So the settlement actually stood at 33 million.
So the judge noticed and the system resorted to noticing and continued.
That is the sentence, write it down.
The system absorbed the noticing and continued.
Because from Insul's holding companies to Milken's junk bonds to Quattrone's spinning to Milton's fake hydrogen truck to these toxic convertible notes draining micro cap investors
right now in 2026, the mechanisms did not change.
The names rotated, the vehicles evolved.
The direction of transfer never reversed.
It's always the same direction, always toward whatever is furthest from the room where it happened, where the structure was actually designed.
And these rooms are still there and the meetings are still going on.
Before we go into the next case, I want to stay in that room for one more second because there's something that gets lost when we talk about market capitalization numbers and
settlement figures.
The people who bought shares in Hometown International's single location deli were not institutions.
They were not hedge funds running dilution arbitrage strategies.
They were people who saw stock moving and thought maybe this is the one.
Exactly.
They were like, maybe, maybe Pestrami is on the rise.
The Nikola corporation, right.
Nikola corporation.
Let's go there because this one has an actual conviction to it with real teeth.
Trevor Milton took Nikola public in June, 2020 through that SPAC merger with Vecto IQ, no revenue, a truck that as it would later emerge.
had been filmed rolling down a hill under its own gravity because it could not drive under its own power, the share price hit $65 per share.
The market capitalization for a small period of time exceeded that of the Ford Motor Company, like Ford, a company that has been manufacturing actual vehicles for well over a
century.
Yeah, Milton sold or pledged about $280 million in...
personal shares about the same time as that merger in the period immediately after.
yeah, this was in the SEC versus Trevor Milton, United States versus Trevor Milton in the Southern Department of New York, 2022.
Southern District.
Yeah, that's where a lot of these cases end up because it's the financial headquarters where the Wall Street's located.
Right.
$280 million.
While retail investors were buying it at 50, 60, 40, based on claims that Milton was making publicly.
And we all thought it was true.
mean, Twitter, in interviews, promotional videos, commercials about a technology that did not exist.
And the SPAC structure bypassed the scrutiny of the traditional IPO altogether.
No underwriter doing the extended due diligence that a conventional offering would actually require.
The merger was the mechanism.
The mechanism was the point.
And for all those people who bought it in at 65.
Yeah, the stock's under a dollar now.
Um, when Trevor Milton was convicted of fraud in October, 2022 and sentenced to four years in prison in December, 2023, that is the justice system working.
A conviction, sentence, a man going to prison, but the shares are still under a dollar.
Which the part I don't want us to rush past because the conviction is real and it matters that it happened and yet it does not return a single dollar to a single person who bought
it 40.
The legal system can establish that a wrong occurred.
It's much less capable of reversing the direction of a transfer that already happened, a legal transfer.
Right.
The law is better at naming the crime than undoing it.
Right.
And this is this is not I mean, I am guilty of these cynical observations, but it's a structural observation.
Right.
The money moved.
The shares were weakened.
The sentence doesn't flow backwards through the transaction.
There is no mechanism we currently have in place to claw this money back for retail investors.
And again, those retail investors are the people on the other side of those trades.
That's what sticks with me.
It's not an abstraction.
Specifically, people who are retail investors, their pensions, you know, it's...
And look, we don't, we don't always get their names, right?
That's kind of part of the design.
The retail investor is this anonymous structure.
They're a liquidity source.
The founder, the SPAC sponsor, the underwriter, those peoples have names in these filings, but the buyer in a retail brokerage account at 1130 on a Tuesday morning does not have a
name.
Right.
All right.
Now the one that I actually, I, I per I bought into Luckin coffee.
this was, did you, did you as well?
I did not.
Unfortunately I missed this one.
I bought it in my share, don't get me wrong, but not this one particularly.
Sure.
I was, uh, I was paying for a Motley Fool or something and Motley Fool came out hardcore in support of this one.
Luck and Coffee from May of 2019.
This was a Chinese coffee chain that was listed on NASDAQ and the pitch deck was entirely straightforward.
The perspective, everything.
They are the Starbucks of China.
And I'm thinking China's got it over a billion people.
and Starbucks, right?
In 2019...
What's that?
though.
I'm gonna drink coffee though.
Who knows, but that was the promise, right?
That's a billion people that could be the next Starbucks of China.
They were growing faster than anyone.
Here's the numbers.
know, like the IPO raised $600 million from US public investors.
And then in January of 2020, this was right before the big crash of COVID, but the secondary offering raised another $865 million.
Those numbers were fabricated.
Approximately 2.2 billion Chinese yen in sales were entirely invented.
Inflated to justify the share price.
So to justify that secondary offering, to justify insiders selling into the public market at prices that the real underlying businesses could not have supported.
And the secondary offering is the part that makes this specific because by January 2020, it already been public for eight months.
People were watching the stock, you know, they had it in their portfolios or watching it go up as people continue to buy in.
They'd seen the growth story told up or hold up apparently, right?
Everybody assumes everyone's buying in because it's viable.
They bought into the secondary at prices that reflected the fraudulent metrics.
They were not buying a pig in a poke at the IPO.
They thought they were buying a proven story.
And the stock went from over $50 per share to $2.
The company agreed to pay a $180 million penalty.
$180 million.
They had made like a trillion dollars.
Like literally, do the math on it.
It's like 1.4 something trillion dollars.
And they agreed to pay just over...
$180 million.
And then they were immediately delisted from NASDAQ in June.
So the penalty sounds big.
Until you divide that across the retail investors who lost money in that collapse, it covers almost nothing.
1.4 trillion versus 180 million.
And here's what I keep coming back to.
Sorry, go ahead.
It was 1.4 billion, not trillion, sorry.
so here's what I keep going back to about Luckin specifically.
The secondary offering is where the dilution argument becomes sharpest.
The IPO you can say, well, these are sophisticated actors, right?
IPOs, they understand what happens when you launch a new business.
There's risk disclosure, there's a prospectus.
Of course it was all made up, but the secondary offering is where ordinary investors who had watched the company for eight months watch the stock price go up and down.
They'd done what they were told to do, wait, watch, and verify.
And then they got in, and the verification was impossible because the data they were verifying was manufactured.
Not like we'd all travel to China and see how many people are drinking Luckin.
And the full thing was exposed too.
Like it was all exposed.
It was all like a big plot from the CEO.
remember, cause I kept getting the filings.
They were like, you know, like they had to disclose all this stuff now and the SEC got involved and all this other stuff.
so the disclosure regime assumes that the, of the information is real, right?
I mean, there is, it doesn't really have an answer for
a complete lie that's entirely fabricated with the help of the CFO.
In this case, that's what it was.
At scale.
I mean, this was, this was supposed to be a trillion dollar, multiple trillion dollar company, and it was just going to, it's supposed to just blow up like Starbucks, but in
China, China, and the, the SEC rules require you to tell the truth, right?
Like they can't, they can't force the truth to exist when it didn't exist before.
Right.
There's no mechanism for figuring out whether the numbers are real.
But again, that's where the gap comes in.
And that's where I want to keep coming back to.
I know it's not like a broken record, but it's the important part.
This is the real message.
The weight of all this fraud falls on the people who don't have the resources to absorb it.
Yeah.
So let's come back to the micro cap situation, right?
Because it's happening right now in 2026.
It involves a financial instrument that most people have never heard of.
And that is doing consistent documented, devastating damage to retail investors in small stocks.
These toxic convertible notes that I was talking about.
The mechanics are not complicated, right?
Like this is not a hard concept to understand.
The company
A small public company is struggling.
They can't get a bank loan because they're already in the negative, right?
And they can't do a traditional offering.
So it takes a loan from a specialty lender and there's plenty of specialty lenders out there.
The loan converts to shares at it.
Exactly.
The loan converts to shares at the discounted market price, the 30 to 60%.
and let's walk through what it actually does.
the lender converts the debt into shares at say 40 cents, right?
And then when the stock is trading at 70 cents, they immediately sell those into the market, driving the price down.
Then the next conversion happens at a discount to the new lower price, which drives it lower, which triggers another conversion.
And the retail investors who bought in at 70 cents, who are still holding, Watch the price go to 50 and then 30 and then 10.
and they have no conversion rates.
They have no discount.
They bought at market.
They are the exit.
by the time the bag gets to them, it's thoroughly empty.
You like you open it up and the moths fly out like the old comics, cobwebs and moths.
And this is all perfectly legal.
because it's disclosed.
It's in the SEC filings.
Written in language that, as our research describes it directly, is inaccessible to non-specialists.
The FINRA, the SEC enforcement actions in 2025 are flagging the most egregious versions of this, right?
But the structure itself, a company in distress taking convertible financing, isn't prohibited.
the people losing 70 to 90 % of their investment, their retirement, their 401k funds, their IRAs, they are in these situations, they're not being defrauded in the way that the
law can easily reach and easily understand, they are being correctly, technically disclosed to in a document that they can't read, like your end user license agreement that
you agreed to when you got your phone.
You know, I don't know what Stephen King's up to these days, but he should be writing these disclosure forms, right?
They're basically telling an amazing story, completely made up, whole-claw, and yet it ends in a horrible disaster, which is kind of perfect for Stephen King now.
But that's neither here nor there.
I want the listener to feel the specific cruelty of this, though, not the systemic cruelty, the specific kind.
You're told the information.
The information is there.
And the information is written in a way that requires years of financial and legal training to understand.
And so the disclosure sort of becomes their own alibi.
Yes, the disclosure is the alibi.
That's the exact way that it works.
The filing exists.
The filing was read by no one who bought the stock.
The filing protects the lender.
The retail investor loses 90 % and everyone followed the rules.
When we say working people, we're talking about people without financial advisors, without Bloomberg terminals, without access to anybody who reads Convertible Node Indentures for a
Living, which is a miserable life, if ask me.
We say these people are in the stocks, we mean it literally.
These are over the counter markets, OTC markets.
These are stocks that get discussed on Reddit threads and small investing forums, where the Beardstown ladies get together to decide where they're gonna put their money.
The people buying it, although they're less sophisticated than probably the Beardstown ladies were, they're doing what they can with the information they have access to.
And what they have access to is a market that was designed by its very structure at every layer to move risk toward them, not away from them, which is a violation of their
fiduciary capacity.
Right, and that's really the lie, but again, they can always point back to the disclosure.
We told you about the risk.
We put it, it's right in there, right on page 47.
Yeah, and yet here we are, right?
The direction of the risk transfer never reverses, right?
This is never, CEO's putting all their billions or millions on the line.
It's the retail investor that keeps getting hit every time.
Yeah.
And of course the room keeps meeting.
So we have three cases, a convicted founder, a fabricated coffee empire, a convertible note draining a microcap stock this week.
The details are different, but the math is the same.
Someone designed the structure, someone else absorbs the loss.
The difference between those two people is the story we keep telling.
Yeah, so let's sit with what we've established, right?
This is not a story about a few bad actors who just slipped through the cracks, right?
It's a story about a system.
The system has a direction.
It always had a direction.
And the direction is away from the people who designed it toward the people who trusted it.
because nobody's going to design a system that puts them at risk.
ah The three cases, yeah, right?
But these three cases, they may sound like it, but they're not outliers chosen for dramatic effect.
These are just examples.
These are the ones that have risen through to be prosecuted ultimately, but they are very, I there's so many more stocks out there.
For every one that we mentioned, there are hundreds, if not thousands that are going by unnoticed.
They're just examples of three different structural forms.
a SPAC that bypasses IPO scrutiny and let a founder cash out before anyone confirms the trucks even exist, a secondary offering built on fabricated revenue, and a convertible
note converting at 50 % discount while a Reddit forum debates whether the company was undervalued.
Three forms, one function.
While we're at it, I'm going to, I'm going to talk about a future upcoming IPO that I think is going to follow a very similar structure.
Um, it's one that you might've heard of called open AI.
Open AI is going to be doing a giant IPO.
I'm sorry.
I've got to do it.
It's, it's just, it's that real because it's really starting to come about, right?
Like, I mean, it's, can find it out there on YouTube.
There are other podcasts that are starting to talk about this sort of thing, but
Currently, OpenAI is valued at $852 billion in 2026, as of May 4th, is the latest data.
I heard apparently just surpassed by Anthropic, which is not supposed to be worth even more.
But Anthropic has not announced an IPO yet.
OpenAI has actually announced it, right?
So this company, in order to keep its valuation at $852 billion, the company has to continuously secure massive capital injections to service this unprecedented technical
debt.
And currently the burn rate for OpenAI
just for 2026 is currently already standing at $14 billion.
Meaning OpenAI is currently losing money at the rate of $14 billion so far with a long-term infrastructure commitment totaling to around $1.15 trillion, like more than the
A22 jet.
So a lot of critics are arguing that the valuation is kind of decoupled from revenue reality.
sustained primarily by hype and that the future of AGI, which we've talked about before, artificial and general intelligence rather than the current cash flow.
Because if you look at it from a current cash flow perspective, they're burning money.
They can't continue to survive like this without a capital injection.
And this is the perfect rife environment for exactly this type of mechanism to happen all over again.
but with different words.
So one of the things I want you to look out for is look out for exact situations like this, especially in this AI driven world where we're all kind of hyped up on AI in one way
or another and we can't remove it from the conversation.
That's the perfect scenario.
was the same thing with the dot com bubble.
It was the same thing with the public utility back in thirties, right?
Like the idea of having electricity in every home was the latest and greatest uh thing in the thirties.
So
What do you, what do you do with that?
What do you do with that information?
That's, that's one of the things that we try to give you here on the podcast.
We try to give you like, okay, great.
Everything sucks, but how do you do something?
Well, there are some things that you can do.
And the first thing I would do not, not like as a gesture, right.
But like as a real move is to learn to read about capital structure before you buy shares into it.
And look, here's the thing.
Most.
Retail investors now.
They just have a 401k.
They're not really directing it It's inside of a target fund If you have a 401k if you're lucky enough to have a 401k if you have an IRA or something like that You you likely have
a more advanced strategy But the average 401k users in a target fund and let me tell you they are heavily heavily investing in AI right now right, so Take take your 401k.
Take your 403 B.
Take take whatever Retirement mechanism you have and make sure
that they're not over leveraging inside of AI.
That's the first thing.
But read and use the common sense that you already have to go, there's no way they can, they're burning, they're negative 14 billion already.
And they're asking for 852 billion in injectable capital.
There's no way for them to profit without in-shitification, which is exactly how in-shitification has happened.
is they cannot continue in the way that they're currently doing things and make money that way.
So they make it objectively worse by making our lives worse by trying to rip more money out of our hands.
do your homework.
That's really what this suggestion is about, right?
It's homework.
Yes, it sucks, but it's the only way that apparently we're allowed to continue in this capitalist hellscape, in this post-capitalist hellscape.
It's to do your homework.
But there are specific tools that make this easy, right?
You can go to the SEC's Edgar tool.
It's a full text search.
You can go to that at EFTS.SEC.gov.
That lets you pull any company's S1 filings.
They're 10K, they're 8K filings, and you can search the text inside of them.
So it does OCR, optical character recognition, and you can search for specific words.
You're looking for three words, convertible, warrant, and dilution.
If those are words appear very frequently in a filing for a micro cap stock, that is the lender already inside the room.
And that is the structure already in motion.
Maybe you're hearing this and saying, well, it's not fair that I have to do the homework.
You're right.
It's not fair.
These things should be vetted.
But keep in mind who's writing the memos, right?
But maybe you don't think it's fair, or maybe you just don't have time to do the homework that way.
There is another path.
It's not ideal either, but it's what we've got.
And that's the legislative path.
The SEC under Paul Atkins is revising or revisiting, sorry, Rule 415, which governs at the market offerings, right?
These are not the IPOs, but the secondary offerings.
This is the mechanism that lets companies issue new shares continuously without a formal prospectus per transaction.
That rulemaking process has a public comment period.
It's open for comments right now from real people who can make real comments to move those processes.
Not in a feel-good way, but in a documented, on-the-record way that becomes part of the administrative record and can be cited in future litigation.
The place to submit your public comments is Regulations.gov.
Search Rule 415 or At-the-Market Offerings.
And when the comment window opens, use it.
A paragraph from someone who lost money in one of these structures carries different weight than a paragraph from some securities lawyer.
Write it plainly.
Get help from AI.
AI while it still exists.
ah Write it plainly.
Say what happened to you or someone you know.
The luck and coffee story is out there.
That is the input the rulemaking process is theoretically designed to receive.
Yeah.
So there's an organization also that I kept finding in looking for suggestions for this.
And I want to you to know about them because I want you to help you understand all of this stuff without a law degree.
And so that's BetterMarkets at bettermarkets.com.
They're a nonprofit uh that specifically fights for retail investor protections in financial rulemaking.
That's really boring.
This is a very dense topic, but essentially this has to
is kind of important.
Right.
It is in the world that we're given.
This is what we, the mechanisms that we have to fight.
Right.
And so we wanted to bring this to you because it's, it's another example of a mechanism that this is not a left and right divide thing.
This does not hurt Republicans or does not hurt Democrats more than it hurts everybody else.
This is a top and bottom thing.
The top is creating new mechanisms to hurt the bottom.
That's the way that it always goes.
So bettermarkets.com.
uh You can they translate every single major SEC proceeding into normal human language and They tell you exactly when you can show up and do things.
They're not a charity.
They're not asking for your money Primarily, I mean, they're still a nonprofit so you can donate there if you want to but they're asking for your attention at specific regulatory
moments So you can sign up for their alerts go and put in those paragraphs go in and sign up for their their mailing lists
so that you can be aware of when we can fight for these things.
And they also, I mean, they expose candidates who are also paid for by these organizations.
And for those of you out there who want your investor protection with a little more of a litigation edge, the Public Investor Advocate at piaba.org, that's the Public Investor's
Advocate Bar Association, maintains a directory of attorneys who specifically handle retail investor loss cases involving dilutive securities fraud.
So if you or someone you know has been in a toxic convertible note situation and lost significant money, that's not just a personal loss to absorb.
There are legal theories, there are attorneys who work these cases, and their database is free to search.
So you need to find an attorney, although keep in mind, rarely are you gonna actually get your money back, but you may be able to get somebody penalized who took away your money.
Yeah, might be able to stab them a little bit back in the back.
Something else you can go to the, the sec's investor complaint portal.
Given the current administration, it's, it's hard to say what that's actually going to do, but it's, it's at sec.gov slash TCR.
And you can file a tip there.
here's the thing, the employees at the sec, they're still nonpartisan people who are trying to do their best to do their jobs.
even if the legislative side is and the the leadership side is letting us down currently.
So you can still go and file a complaint there about a company that kind of fits this pattern.
Convertible notes, you know, share price destruction, OTC markets.
The SEC whistleblower system is technically a tip system that is underfunded in terms of human attention.
So tips from retail investors about specific tickers, specific filings, specific lenders.
That creates a paper trail that enforcement can act on later and can also help out the public investor advocate bar association when they actually come to try these cases.
So you don't need a lawyer to file a tip, right?
You just need the actual ticker symbol on the offering and a description of what happened or what you saw.
Okay, one more thing.
I know we've given you a lot of homework, but if you're still interested in more, this dual class share structure problem we talked about with the class A and the class B
shares, where the founders retain voting control and the retail investors don't get really a meaningful say at all.
It's a live debate at every major stock exchange right now.
The Council of Institutional Investors at cii.org has been fighting this dual class structure for years and they published specific company level scorecards.
If you hold shares in any company through a retirement account, you can contact your fund manager and ask how they vote on shareholder resolutions related to share issuance
authority.
Most people don't know their index fund votes on their behalf, but most index funds vote with management.
So asking out loud can change the calculus even slightly.
Just embarrass them a little bit by habit voting with the management instead of the uh retail owner.
Yeah.
The system basically moves risk in one direction until enough people make that movement too expensive to move.
So that's, that's not optimism.
I'm not, I'm, I'm almost never guilty of that.
That's how the 1933 act actually happened, right?
Samuel Insull's victims were loud and specific and their losses were documented and a Senator, Senator by the name of Ferdinand Pecora put it on the record.
The mechanism for that still exists today.
The committee hearings are still happening.
The comment periods are still open.
The tips still get filed.
We're not saying this is fixable by next Tuesday.
We're saying that the system responds to specific, documented, persistent pressure from people who understand exactly what was done to them.
And now you're one of those people.
The disclosure was the alibi once.
It doesn't have to stay the alibi.
and the room keeps meeting.
The question is whether or not you are gonna be in that room.
So look, before we get out of here, one thing that I was thinking about this week was that Michael Milken made $550 million in a single year in 1987.
In today's dollars, that is well over a billion dollars.
And Vinny only paid $600 million in fines and completely walked away from it.
And the math on that is hilarious.
But really not, right?
It's really pretty sad because he essentially rented the entire American capital market for 10 years, a decade, and then handed it back slightly used, paid a cleaning fee, and
then got a presidential pardon in 2020.
That's not a cautionary tale.
That's a business model with a bad quarter.
And my standout example is a little quieter than that.
And it's not just because I'm hungry for a sandwich now, but the hometown international deli.
mean, one location, $35,000 in annual sales.
That's not million, that's not billion, that's thousand.
$100 million market cap.
And the thing that got me wasn't the fraud.
It wasn't that David Einhorn, a hedge fund manager with the research staff, had to write a letter to his own investors just to get anyone to look at it.
The mechanism for catching this existed.
The SEC filing was public.
The revenue numbers were public.
Nobody corrected it until someone with resources and a platform made it impossible to ignore.
That's not a gap in the law.
That's a gap in attention.
And attention is not equally distributed.
Yeah, so you can find us at fof.foundation.
That'll lead you to our podcast website on Cast a Pod.
So you can subscribe to us there uh if you have a Mastodon account or if you use Apple Podcasts or Spotify, you can subscribe to us there as well.
Leave us a review if you want more people to find this conversation.
Every single time you share one of these, you know, podcasts with one of your friends or something, a quiet transfer of risk onto someone smaller.
So we said that at the top, right?
Here's what we didn't say.
The someone smaller has a ticker symbol, a filing number, a conversion discount rate, and a comment period.
The fire is real, the exits are labeled, read the signs before you sit down.
Remember the disclosure was designed to protect you, but it became the alibi that they hid behind.
So don't let them keep doing it.
The line has moved before, it will move again.
And that's it from the overlap.
Till next time.
and maybe don't buy OpenAI at the IPO.
Maybe, just maybe.
Bye.