by Pam Martens and Russ Martens, Wall St On Parade:
When the cryptocurrency exchange, Coinbase, first offered its stock to the public on April 14, 2021, its S-1 Registration Statement that was filed with the SEC indicated that Goldman Sachs, JPMorgan and Citigroup were its financial advisors, along with Allen & Company.
Most Americans would assume that if one is the financial advisor to a company going public for the first time, the financial advisor would know a considerable amount about that company’s business and future prospects.
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But as we reported last Wednesday, horror stories in the thousands about how Coinbase runs its exchange have been piling up in the publicly accessible database of the federal regulator, the Consumer Financial Protection Bureau. Three business days after we published that information, Goldman Sachs finally put out a sell rating on the stock of Coinbase. The news came from Goldman Sachs before the market opened this morning.
On Coinbase’s first day of trading on April 14, 2021, it closed at a share price of $328.28, giving it a market capitalization of $85.8 billion. About a month and a half after Coinbase went public, on May 24, 2021, Goldman Sachs’ analyst Will Nance initiated coverage of the stock with a buy rating and a forecast for a 30 percent gain in the stock. From Goldman Sachs’ initial buy rating on May 24, 2021 to May 10, 2022, the day before Goldman Sachs downgraded the stock from a buy to neutral, Coinbase went from a closing price of $225.30 to a closing price of $72.99 – a decline of 68 percent.
Should any analyst with common sense have tempered his enthusiasm to the public when the stock had declined by 40 percent? Perhaps by 50 percent? No, it took a decline of 68 percent in the shares of Coinbase to finally get a neutral rating from Goldman.
And it took our horror stories on Wednesday and a Moody’s credit downgrade on the debt of Coinbase on Thursday of last week to finally get a sell rating on Coinbase from Goldman Sachs this morning.
Moody’s credit downgrade noted how the revenues of Coinbase are tied to the price of cryptocurrencies:
“Coinbase’s revenue model is tied to trading volumes, transaction activity per user and overall crypto asset prices, said Moody’s. Coinbase’s customers pay it a percentage of the notional value of trades that are matched on its platform, a fee structure that can be very lucrative in a rising market coupled with high transaction volume, as was the case in 2021. However, Moody’s indicated that when crypto asset prices decline, the notional traded amount (price of the traded instrument multiplied by the traded volume) and transaction revenue generally decline too, unless trading volume increases commensurately….”
Analysts at JPMorgan and Citigroup don’t look much smarter when it comes to providing guidance to investors on Coinbase. One day after Goldman Sachs put out a buy rating on Coinbase last year, JPMorgan analyst Kenneth Worthington initiated coverage with an “overweight” (code for “buy”) rating. Worthington shared his view that “We see the cryptomarkets as durable and growing, and expect Coinbase has the opportunity to influence and benefit from this market growth as it innovates.”
But did JPMorgan really believe crypto would be “durable and growing”? It was widely reported in October of 2021 that the Chairman and CEO of JPMorgan Chase, Jamie Dimon, was calling Bitcoin, the largest of the cryptocurrencies traded at Coinbase, “worthless.”
JPMorgan did not budge from its “overweight” rating on Coinbase until more than a year later. On June 14, 2022, after the price had collapsed, JPMorgan issued a “neutral” rating on the stock, reducing its price target from $171 to $68. On June 14, 2022, Coinbase closed at $51.58 — $119.42 in the wrong direction from JPMorgan’s previous price target.
It took Citigroup longer to initiate a buy rating on Coinbase. It wasn’t until October 26, 2021 that Citigroup issued a buy rating, with a view that the shares of Coinbase could climb more than 27 percent. On March 22, 2022, with the shares registering a closing price of $186.08 – a fall of 43 percent from its closing price on its first day of trading, Citigroup modestly lowered its price target on Coinbase from $300 to $275, maintaining its buy rating on the stock. We were unable to ascertain exactly where Citigroup stands today on its outlook for Coinbase.
Wall Street banks collecting fees for serving as “financial advisors” in a company’s public stock listing, then being allowed to hawk those shares to the public, resulted in a major scandal during the dot.com era. On April 28, 2003, the SEC settled the rigged research practices of the dot.com era with 10 Wall Street banks for $875 million. Investors had lost trillions of dollars as a result of that rigged research but Wall Street got off with a payment of $875 million. No one went to jail.
The poster boy for that era was Jack Grubman, who pumped out glowing research reports on companies that were known to be dogs inside his Wall Street firm, Citigroup’s Salomon Smith Barney. In one internal email, Grubman wrote: “Most of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushback from banking.”
Grubman was eventually charged by the SEC in a civil case with issuing “fraudulent research” but he was never criminally charged by the Justice Department nor did he go to trial on the SEC’s civil charges. He paid a $15 million fine, was barred from the industry, and walked away. His haul while at Salomon Smith Barney according to the SEC, “exceeded $67.5 million, including his multi-million dollar severance package.”