Your Hometown Deli was a seemingly modest sandwich shop with a “mean cheesesteak.”
Then, a memo from hedge fund manager David Einhorn exposed the deli as the sole holding of Hometown International, a public shell company valued at $100m+.
This week, the Justice Department charged three men involved with the company of securities fraud, per The New York Times.
So what the heck happened?
Back in 2014, this saga started with a real deli. But unlike most sandwich shops, according to prosecutors, the owners were convinced by a friend with a finance background into incorporating the deli as a subsidiary under the umbrella of Hometown International.
Instead of trying to make New Jersey’s best pastrami, this friend allegedly sought to use Your Hometown Deli as a vehicle for an obscure financial transaction called a reverse merger.
A reverse merger is when a private company goes public by acquiring an already public shell company.
Hometown International was going to be that public shell
In 2019, the company went public on the OTC Markets, a stock market like the Nasdaq and NYSE but with crucial differences.
- First, transactions take place between two parties rather than a centralized exchange, making it easier to manipulate share prices.
- Second, the OTC doesn’t delist companies if they break rules.
Prosecutors allege this lax environment allowed Hometown’s shareholders to manipulate its share price. So, despite the corporation owning just one deli with ~$40k in annual income, its stock soared 939% from $1.25 per share in 2019 to $12.99 in 2021, just before Einhorn’s heavily publicized callout.
So what now?
Hometown International completed a reverse merger with Makamer, a private bioplastics startup, in March. But given the indictment, its leaders may end up serving prison time instead of cashing in.
The worst part: The deli closed permanently after the Makamer merger, leaving locals with one less option for quality hoagies.
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