Dive Brief:

• The Securities and Exchange Commission (SEC) charged the former CFO of African Gold Acquisition Corp. with stealing $5 million from the special purpose acquisition company (SPAC) and from investors in two other SPACs that he incorporated.
• The agency alleged in a court filing Tuesday that from June 2021 until July 2022, Cooper Morgenthau embezzled money from African Gold and from Strategic Metals Acquisition Corp. I and II to pay for personal expenses and for trading in meme stocks and crypto assets.
• The filing “demonstrates our commitment to holding individuals accountable, particularly when they seek to take advantage of public investment vehicles such as SPACs,” John Dugan, associate director for enforcement in the SEC’s Boston office, said in a statement. Morgenthau agreed to a judgment that, in part, bars him from serving as an officer or director at a publicly traded company, with “monetary remedies to be determined” later, the SEC said.

Dive Insight:

After a record year in 2021, the SPAC market collapsed in 2022 amid sharper SEC oversight, compliance challenges, the most aggressive monetary policy tightening since the 1980s and a downturn in traditional initial public offerings (IPOs) and broader equity markets.

SPAC IPOs plummeted to 86 last year at an average size of $156 million compared with 613 transactions in 2021 at an average size of $265 million, according to SPACInsider. As of Wednesday, 383 SPACs are searching for companies to combine with in an IPO.

“There is a glut of SPACs yet to announce or complete a de-SPAC,” EY said in a report last month, noting that many of the blank-check companies face liquidation if they fail to arrange a merger in the next six months. “An increase in redemption, regulatory scrutiny and tightened market liquidity coupled with poor stock price performance have dampened investors’ appetite and momentum during most of 2022.”

SEC Chair Gary Gensler has repeatedly warned that SPACs pose risks to investors. He has said the agency will investigate how the shell companies raise cash from the public and merge with target companies, and has asked agency staff to recommend robust disclosure rules for SPACs.

“SPAC sponsors generate significant dilution and costs for investors,” Gensler warned during a meeting of the agency’s Investor Advisory Committee in Sept. 2021.

The CFA institute has voiced similar concerns, saying the SPAC market poses risks to investors from celebrity hype, conflicts of interest, a scarcity of basic information and an abundance of the so-called blank check companies chasing a limited number of opportunities.

The SEC alleged that Morgenthau used more than $1.2 million of African Gold’s money to trade options on meme stocks. He sought to avoid detection by deleting his transactions on written statements, overstating the account balance by as much as $1.19 million and emailing the fabricated statements to African Gold’s accountants and auditor, the SEC said in its filing.

Morgenthau either spent or lost through securities trading all the money he stole from African Gold, which was created to acquire a gold mining company, the SEC alleged. To cover his losses, he raised money by persuading more than 50 investors to help launch two other SPACs, using approximately $4.7 million in proceeds for himself, the agency said.

By August 2022, Morgenthau had run out of money — the bank accounts for the three SPACs were empty, the SEC said. His actions came to light when vendors snubbed African Gold, and the company fired him on Aug. 26, the agency said.

The SEC requested monetary penalties, disgorgement of gains and a ban on Morgenthau holding leadership positions in public companies.

The U.S. Attorney’s Office for the Southern District of New York announced on Tuesday criminal charges against Morgenthau for wire fraud related to the two SPACs he incorporated.

Morgenthau pleaded guilty and is scheduled for sentencing by Judge Paul Engelmayer on April 25, the Department of Justice said. He also agreed to pay restitution of $5,111,335. Wire fraud carries a maximum sentence of 20 years in prison.

SPACs have appealed to many companies and investors as a faster, cheaper way to raise money than through a traditional IPO.

A SPAC sells shares listed on a stock exchange and then merges with a private company, usually within two years, in a so-called de-SPAC transaction.