David Einhorn slammed the SEC for not noticing the 'real story' of Archegos, which he says involves the firm driving a 400% gain in a company short-sellers call a fraud

• In a recent investor letter, hedge-fund manager David Einhorn slammed the SEC for not noticing what he called the "real story" of the Archegos implosion.
• Einhorn said Archegos of drove up the stock price of a company by 400% by purchasing most of its available shares.
• The company, GSX Techedu, is currently under SEC investigation after short-sellers alleged that it faked sales.
• Einhorn says the SEC should have noticed the unusual activity in the stock.
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In his latest investor letter, hedge-fund titan David Einhorn called out the SEC for its lack of action on what he considers the "real story" of the Archegos Capital implosion.

According to Einhorn, the news media was distracted by the poor risk management of banks and excessive leverage assumed by Archegos. He says that caused people to miss how Archegos "cornered the market" and drove a massive gain in a stock that short-sellers say faked sales.

"The real story is how Arch-Egos was able to buy up most of the float of GSX Techedu, causing the stock to soar 400% in the face of unrefuted allegations of massive fraud," said Einhorn.

Complaints against GSX Techedu began in 2020, when Grizzly Research released a report accusing the company of drastically overstating its profitability and faking student enrollments. Prominent short-seller Carson Block called GSX Techedu a "near-total fraud," while Andrew Left of Citron said it's "the most blatant Chinese stock fraud since 2011."

According to Einhorn, the US regulator should have noticed the unusual trading activity in GSX Techedu if it was investigating the company. Einhorn said the US Congress needs to call to account the "absentee regulators."

"The SEC has an ongoing investigation of GSX but appears to not have noticed a single fund (or a small group of funds) essentially cornering the market," said Einhorn. "A traditionalist could say this was market manipulation and transparently illegal."

Although it's not technically illegal to buy the entire float of a stock, if it's done with the intention of controlling and moving the market, regulators could consider that stock manipulation, said Amy Lynch, Founder and President of FrontLine Compliance and former SEC and FINRA regulator.

Lynch suspects that the US SEC did notice the GSX Techedu trading activity, but may have been unable to connect it with Archegos.

"It takes time to uncover actual share ownership, especially if it's owned by an unregistered person or entity, and perhaps the story broke before they had gotten that far," she told Insider.

Shares of GSX Techedu plummeted in late March amid a barrage of block trades in companies linked to Archegos. According to Bloomberg, GSX Techedu founder Larry Chen lost $3.1 billion in one day as the stock plummeted.

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