Fifty miles south of midtown Manhattan, in a red-brick building bounded by a railway track, sits a little-known brokerage behind some of the world’s wildest initial public offerings.
From its base in Red Bank, New Jersey, Network 1 Financial Securities Inc. has underwritten six US microcap IPOs this year that surged by an average 2,190% on their first day of trading. That’s more than 250 times the performance of offerings underwritten by Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, according to Bloomberg-compiled data.
Unfortunately for investors, the downside for Network 1’s listings has proven equally extreme. While still in positive territory, the brokerage’s average offering this year plunged 75% from its peak within a month.
Big moves in tiny stocks are nothing new on Wall Street, but the deals underwritten by Network 1 -- which was founded in 1983 and markets itself as a full-service brokerage for sophisticated investors -- stand out for consistently outsized swings. They’re part of a remarkable stretch of gut-wrenching volatility in New York IPOs, mostly by companies from China, that have baffled longtime market observers and drawn the attention of US securities regulators.
In one of the most striking examples underwritten by Network 1, China-based garment maker Addentax Group Corp. soared 13,000% to $656.54 on its Aug. 31 trading debut to briefly become bigger than about a third of S&P 500 Index members. That’s despite having less than $13 million in revenue for the year ended March. The following day it fell to $30.
The building that houses the Network 1 offices in Red Bank, N.J. (Bloomberg)
The trend is eerily familiar to market participants in Hong Kong, which was a hotbed for mysterious moves in tiny stocks before a regulatory crackdown brought new offerings to a virtual halt. As small Chinese companies that might otherwise have listed in Hong Kong turn to the US as an alternative, Network 1 has emerged as one of the most active players in this growing corner of the market.
“Investors should definitely err on the side of caution given how a number of these stocks have quickly pulled back 98-99% from their peaks,” said Ken Shih, the Hong Kong-based head of wealth management, Greater China at Saxo Capital Markets HK Ltd, speaking about the wild microcap IPO moves in general. “What investors should be least comfortable with is the lack of transparency in these stocks to make sense of their unusual meteoric rise in pricing.”
Network 1 did not respond to multiple emails and phone calls asking for comment. When Bloomberg News reporters visited its New Jersey office nobody was available to talk. The company has not been accused of any wrongdoing in regards to the IPOs.
In a recent video on his LinkedIn page, Chairman Damon D. Testaverde said its clients are “high-net worth, sophisticated investors here in the United States and in other countries.”
Regulatory Censures
Network 1 has a history of run-ins with regulators. It has been censured for breaches ranging from a failure to develop written anti-money laundering programs to a lack of policies to detect suspicious transactions and insider trading, according to Financial Industry Regulatory Authority’s records.
In 2007, it agreed to pay a $100,000 fine for soliciting a customer, who was a controlling shareholder of a company, to sell shares in amounts that exceeded regulatory caps, which Network 1 then bought and resold. Testaverde was suspended for about four months following the decision, according to the Finra report. Testaverde didn’t reply to messages sent via Linkedin or to his company email address.