I Suspect ARK Invest and Cathy Wood of Fraud.

To be clear, I am not making any criminal allegations YET, it's just come to my attention that the firm might be outright lying about the sort of growth they expect in the stocks they hold in order to pump up valuations artificially.

Cathy Wood hired mostly young finance professionals, most of which have no direct experience in asset management and some of which have held no other full time job outside ARK Invest. For a time I ascribed many of ARK's faults to inexperience, but note that due to the low bargaining power of most her employees the lion's share of ARK's fat 0.75% expense ratio will being going to her. I cannot stress enough, that most if not all of Cathy's employees are young enough to be her children, and I have no idea if she's just an old lady trying to be hip or if she's doing all she can to increase her share of the profits. Their website even has a merch store so maybe a little of both...

Profit margins are definitely a motive for some of ARK's actions. ARKX (Space ETF) has in its top 10 holdings PRNT (3d Printing ETF). There's nothing wrong with that as one of the widely anticipated applications of 3d printing is allowing astronauts to custom make any tools they need while in space. However, by putting the one fund into the other fund that allows ARK Invest to double dip in their fees.

They also are insatiable optimists, apparently. At one point Cathy asserted that breakthroughs in AI technology would cause GDP growth to reach 30% a year. She also gave performance targets for her fund that would make them by far the highest performing investment fund of all time due to all the allegedly paradigm shifting technology stocks it contained, with second place going to a 3x levered fund that closed long ago She has even gone as far to argue the pre-revenue companies they hold represent "deep value" investing. Ordinarily, I ascribe nonsense like this to a poor understanding of science because science is rarely profitable. However, while that appears to be a factor, more recently extremes have made me unsure if they really believe the junk that comes out of their mouths.

What convinced me to join Michael Burry in shorting ARK Invest was when Tesla soared and actually met ARK's bizarre target prices, they just raised the target price anticipating faster growth. However, in 2022 with rising interest rates it hasn't made anyone back down over there, and now they're issuing equally aggressive growth targets for the physical Tesla factories, arguing growth over the next few years will outpace all previous years. This isn't just insane autism, this flatly contradicts the facts on the ground. The previous pace of factory setup was so rushed it caused lawsuits, and Tesla is closing their unprofitable Shanghai factory and slashing prices to compete with other EV companies and has no known plans to build more factories at the moment. The only thing going for them is that other less skilled EV companies are going under in the credit crunch and Mr. Musk told his employees to ignore the market and keep making cars. But in any case, for some time now I and many others have believed most if not all of ARK's investments are bubbles, and we were all at least partially right.

Inexperience certainly is a factor because they threw John Deere stock in the Space ETF, with their research officer thinking they were mighty clever finding value in that John Deere does a lot of work with precision GPS mapping for their tractors. While John Deere is a solid stock in its own right (they supply the most essential equipment to the most essential industry), the idea they'd profit any more than marginally from space exploration is silly.

Also, they invested heavily in everything connected to decentralized finance, and we all know by now that's a decentralized Ponzi scheme. However, I have no idea whether ARK Invest knew this at the time or if they were duped like many were for a time.

But perhaps the most suspicious thing ARK Invest does is their Adjusted Earnings Reports. There are strict GAAP rules (Generally Accepted Accounting Procedures) about what companies can and cannot report as earnings. Sometimes GAAP compliant books make a company look worse off that it is, so companies also publish adjusted earnings reports to show what they're thinking. Other times, it's just the execs trying to pump their own stock.

ARK Invest is almost exclusively in pre-revenue companies since you want to grab the moonshots as early as possible. Near all of them are cash incinerators with leverage hidden via private equity investors, and ARK Invest presents their case with adjusted EBITDA (Earnings Before Interest Taxes Depreciation Amortization). However, ARK's adjusted earnings would be considered extremely brazen accounting fraud if it were remotely subject to GAAP rules.

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1. All R&D costs are adjusted down to the average of the NASDAQ 100. The average NASDAQ company spends 12% of their revenue on R&D while ARK's portfolio spends an average of 27%. The idea is this R&D is an investment, not a cost.
2. Identical treatment for sales/marketing as this is too is an investment, not an expense... Somehow.
3. Identical treatment for employee stock and options. ARK's companies pay an average of 23% of their employee compensation in stock, many times the norm. Again, they say this is an investment, not a cost.
4. Ignore all non-cash costs. This includes equipment/buildings breaking down over time, which by GAAP rules is allowed to show up as a monthly cost as a portion of the total cost of the asset.
5. Recognize deferred revenue. This is when a customer pays in advance for something they receive in the future. I.E. By GAAP rules if you buy a plane ticket now it's not allowed to be counted as revenue until you use the ticket. ARK's companies are often loaded with preorders for products that are not fully invented yet, so this is a bigger deal than it looks.

There's probably more, but I'm not an accountant. However, by ARK's metrics, all the cash incinerators they own are either breaking even or are wildly profitable. You can imagine the type of racket there can be cooking the books for companies on your own initiative and getting paid a fee to do so. However, it is not clear if this is the motive, as we may still be dealing with young and stupid investors who don't know a thing about accounting.

But... ARK owns 10% or greater position in 17 different small cap companies and has large stakes in dozens of OTC stocks and never backed down from these illiquid investments even when they had record inflows. They can definitely be a whale with interest in their own fund driving up the price of the underlying assets. Also, the average investor is chasing fund returns, meaning the bigger year over year returns equals more fund inflows and more fees generated. ARK's worst performing year actually generated the most revenue for the company as that is when AUM (Assets Under Management) reached their highs.

Needless to say, ARK's portfolio's behave suspiciously similar to a leveraged S&P fund both in long-term performance and daily volatility. They were likewise demolished by rising interest rates as equity investments behave like leverage even if they're not counted as liabilities. Personally, I pray the Fed keeps interest rates where they are so that we have no more of these fools and frauds we've seen in recent years. Which one is ARK? Well, as Napoleon said: "Do not ascribe to malice what can be adequately explained by incompetence."

And Cathy if you're reading this don't think I'm just a total amateur anonymously talking trash about stocks I short. My name is Elijah Noah Shekinah Rose, currently working on a PhD in military history specializing in terrorism. Tearing apart bullshit is my specialty and I am not accusing you of any crime, for now. If you didn't have any ill intent, I recommend you take a serious look at some of the men you have working for you, because they may be lying to you.

Disclosure: I own shares in SARK and sold a naked long-term call in ARKK and am also short some of the constituent parts of ARK funds.