Taxpayers invested millions, but these Wall St. pros have yet to deliver

From time to time idealists send us propaganda urging the Inquirer to join crusades for government-run banks, and other schemes for irrigating the private sector with the people’s money.

As cost increases for health care and college show, prices for goods largely funded by the government but run by private business tend to rise faster than inflation.

The challenges are stark and familiar: It’s easy to lend and invest money. It’s hard to get it back. And it’s harder for the representatives of the people to tell sheep from goats, when financial visionaries spin shiny tales of jobs and revenues. Our reps tend to understand making and spending taxes better than running a business. Or they wouldn’t be politicians.

Consider the tale of our neighbor New Castle County (where most people in Delaware live) and the aspiring Delaware Board of Trade securities exchange, started by traders from Philly, now in its fourth year as a taxpayer-supported enterprise.

The Delaware outfit’s head, John Wallace, former chairman of the Philadelphia Stock Exchange, and his former CFO, Joe Jennings, say there’s money to be made from innovative new financial marketplaces. Never mind how the speed-of-light automation has left even the New York Stock Exchange floor a sleepy shelter for a shrunken crowd of aging traders.

To be sure, their ex-PHLX basement trading floor at 1900 Market in Center City is being replaced by — not the old jokingly-predicted bowling alley — but a boxing ring (Everybody Fights).

But PHLX’s successor site, now Nasdaq’s options and IT center in the FMC Tower, is lately prospering. “They have taken a third floor, they moved people down from Connecticut and New York, they’re doing great,” Wallace reminded me last week, echoing bullish remarks by Nasdaq CEO Adena Testa Friedman when she visited the Chamber of Commerce last fall.

Unfortunately Wallace’s own start-up market — the Delaware Board of Trade, where he is chairman, and Jennings is CFO — can’t say the same. After Wall Streeters declined to back its infancy, DBOT borrowed $3 million in New Castle County funds in 2015, paid $180,000 (6 percent interest) each fall since, and promised payback next year — or earlier, if it raised $15 million elsewhere.

Wallace has since announced investments in DBOT — how much he won’t say — by a China media group backed by Goldman Sachs and a member of the McMahon pro wrestling family, who are close to President Donald Trump; by a local group, including friends of ex-Vice President and possible Democratic presidential hopeful Joe Biden; and by Dubai-based S.S. Lootah.

His team has also pitched money-making proposals for DBOT. It was to be a center for regional penny-stock trades under a plan backed by President Barack Obama and congressional Republicans; it was going to draw hundreds of well-paid professionals seeking affordable trading and new tech; it was going to be the first blockchain-enabled securities market.

The market initially set up what regulators call an Alternative Trading System (ATS), for stocks not listed on major U.S. exchanges.

But since 2015 “the hundreds of local jobs promised by this company have failed to materialize,” county executive Matt Meyer told me. “This company owes New Castle County residents their money back from this unlawful use of taxpayer funds,” which he blames on a predecessor, who approved the loan before Meyer bounced him in the next Democratic primary.

So I went to Wilmington on Tuesday to watch Wallace, Jennings, and DBOT lawyer Richard Carroll, from the Philadelphia law firm Saul Ewing, visit County Council with a progress report.

“We are on time for our payments,” began Carroll, emphasizing the positive. Then, back to the future: “We are expecting more big investors coming in, this year.”

“We are in discussions with a public company. We are very close,” said Wallace. No names, but “it’s listed on Nasdaq,” he added. "We have sort of a handshake agreement. If this goes through, they would take on” the county loan. “They are acquiring a New York Stock Exchange-listed company they would wrap this up with. And they would add people and space in Delaware.”

And just “today," said Wallace, “we made application with Finra [the Financial Industry Regulatory Authority, stock trading’s self-governing body], for tokens. Not Bitcoin. Security tokens. They are asset-backed, they are guaranteed, you can list them [on an exchange, for trading] as a token. Not an Initial Coin Offering. These are [SEC] Regulation B offerings,” typically penny stocks.

The dozen council members listened respectfully. I was the only person smiling. (I am allowed to smile, I am a columnist, 10 years this month.)

Tokens mean secured, verifiable software packets representing fractions of an asset. For example, property owners could sell tokens, Wallace said hopefully. “We’d make sure the land was really there. We’d outsource that to a local law firm.” You might “tokenize” office buildings. Or hotels: “A luxury brand company that just bought a hotel in Italy brought this up with us.”

A group in Australia, he said, approached DBOT about tokens for “iron ore and copper mines." Yet another group wants to tokenize art: “We’d fractionalize privately owned art into a Delaware Statutory Trust. We’d get them authenticated by the artist.”

If the artist is dead? Wallace knows a guy — a gang of guys — “it’s a Chinese-Swiss-French team." They can verify anything!

"If it’s a really big painting we can do it under [SEC] Regulation A,” like a big-company stock, Wallace added. “There’s an enormous amount of interest. A large auction house in New York approached us about this.”

Still no names. I hope DBOT is successful, pays the county, and makes its investors rich. And Wallace ought to be right: Blockchain-enabled tokens could prove more efficient at carving up assets and tracking the pieces than lawyer-customized partnerships or regulator-constricted stock offerings. Why not?

But will token issuers really rush to do these deals at DBOT? “All these things seem to be moving forward and very rapidly,” Wallace said. Finra might approve “four months from today or six months from today.”

Council president Karen Hartley-Nagle piled on questions without waiting for all the answers. The DBOT team responded selectively, as if used to being deposed.

Have they raised the $15 million that triggers repayment, she asked, noting that a previous transaction announcement had implied a total value for DBOT of more than $20 million. The team looked at each other. “About $6 million,” plus the $3 million loan, volunteered Jennings. He acknowledged they hadn’t brought an income or asset statement to share. But DBOT has been talking to the county lawyer and the county auditor, keeping them abreast, said Carroll.

Shareholders in DBOT “are not responsible for its debts,” Carroll pointed out, like a human disclaimer. “We know there’s a lot of concern.”

But council shouldn’t worry: DBOT has “a long-term lease” in Wilmington’s former Hercules building, Jennings added. He didn’t add how DBOT had reduced the size of its suite last year.

County Councilman George Smiley thanked the group for last year’s interest payment. That’s what’s important, he said. And the DBOT Three were free to go.

"They never laid a glove on you,” I told Wallace in the elevator.

He asked me to name an Italian restaurant in Wilmington. Luigi Vitrone’s Pastabilities, I offered. Meet you there for supper?

No thanks, said Wallace: "Tomorrow I got a flight to Macau.” China’s gambling capital.