Tuesday, December 22, 2009
Specifically, Bear Stearns, CSFB, Goldman, Lehman, Merrill Lynch, Piper Jaffray, SSB and UBS Warburg issued research reports that were not based on principles of fair dealing and good faith and did not provide a sound basis for evaluating facts, contained exaggerated or unwarranted claims about the covered companies, and/or contained opinions for which there were no reasonable bases in violation of NYSE Rules 401, 472 and 476(a)(6), NASD Rules 2110 and 2210, as well as state ethics statutes. In other words, they screwed their clients intentionally and knowingly by putting the firms profits ahead of the clients best interest. Again, not to worry, they all agreed under the terms of the firm settlements that, 'an injunction will be entered against each of the firms, enjoining it from violating the statutes and rules that it is alleged to have violated'. Go ahead, its alright, read it again until it makes sense.
To clarify, they ALL did something- maybe or maybe not, they ALL paid a record fine, and ALL agreed that if they had done some things- that they will not do these things again.
In August of this year (2009), examiners at the Financial Industry Regulatory Authority, the industry self-regulatory body known as Finra, and the Securities and Exchange Commission announced they intend to ask Goldman for information regarding their weekly get-togethers-known as 'huddles'. The reason: Internal documents show that at times in these huddles, short-term trading tips differed from Goldman's long-term research. Critics complain that Goldman's distribution of the trading ideas to Goldman traders and major clients hurts other Goldman customers who aren't given the opportunity to trade on the information, and may be relying on the firm's longer-term research to make investment decisions. In addition, the trading tips go first to Goldman traders and then to clients, but Goldman says its traders aren't allowed to act on the tips until they have been relayed to clients. Yup, read it again, the Goldman trading desk gets access before EVERYONE! One regulator said that it might be worth looking at how Goldman polices the handling of this information. Ya think???
Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.
Maybe he missed the meeting last April.
In April 2008, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. The tip- buy Janus Capital Group. At the time, Goldman analyst Marc Irizarry had a neutral rating issued on Janus-a rating he would eventually raise to bullish almost one week later. When the vast majority of Goldman's clients, received Mr. Irizarry's research six days later- Janus shares had already jumped 5.8% because the 50 favored clients had access to the bullish insights a week earlier in a huddle.
Recently, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Did they include fines or censures for Goldman? No. Did they enact new rules to assure all Goldman's clients have the same access? No. Did they take steps limit the information flow to Goldman's trading department? No.
What action are they willing to take as the industry's self-regulatory body? According to FINRA, they have proposed and are strongly considering the following:
'Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible'.
Yup, read it again.
Wednesday, November 25, 2009
The capital markets in the United States provide many exchanges for public and even private trade. As a company grows they have the ability to utilize these markets. In order for a company to grow, they must be funded. As we are discussing companies that are small by nature whether a company is self- funded or funded by an investor it relies on this capital heavily- as typically small companies lack the cash flow necessary to operate week to week or month to month- investment is critical to survival.
It is a fact that roughly half the capital invested in the PIPE’s market was requested for redemption during the crisis. Billions upon billions of dollars had flowed into the PIPE’s space from 2001-2006, literally half of it was being requested back at the same exact time. This is the same capital that was being utilized to fund nano and micro cap companies that relied upon the investment funding to survive. At the time, with the credit markets frozen and absolutely no inflows of new capital, yet massive net redemptions the issue becomes obvious- how will all these companies operate on half as much investment? The answer is as obvious, they cannot. The numbers simply don’t work.
The choices are extremely difficult for a fund manager amidst financial crisis. For most of us financial crisis is realizing we bounced a check, can’t afford the cable bill or we wonder- ‘how will we pay for our children’s college?’ During this crisis managers all over the world were put in the position of asking themselves “hard questions.” Many of these questions had no answers. Many of these questions were answered in theory and conjecture as are typically the only way to answer questions regarding uncharted territory.
In the case of the PIPE’s market there were gates, SPV’s (Special Purpose Vehicles), restructures, liquidating classes, non-liquidating classes and even a secondary market developed. The managers are obviously doing everything in their power to theorize their way through this uncharted territory in order to take the appropriate steps to move forward on behalf of their investors, but as they do so their valuations are being taken into question by regulatory authorities, their investments are being scrutinized by government agencies and their reputations are being destroyed by unsubstantiated innuendo- all in the name of truth and justice- this type of scrutiny tends to instill a massive lack of confidence in ones investors and only leads to reputation issues and further redemption.
We are all for truth and justice, but we also believe in a reality check from time to time. As we saw in the case of Bear Stearns employees Cioffi and Tannin, sometimes things happen and there is no one to blame. The reality is that their was nothing these two men could have possibly done to their investors or for their investors because they couldn’t have ever conceived of such a melt down. In fact, the greatest economic minds of our times, the worlds largest investment banks and several multi-billion dollar ratings agencies didn’t foresee the implosion at our heels.
The state of financial quagmire we are living through will not just end, it needs to be managed in order to assure an appropriate economic climate change that will lead to future prosperity. From Ben Bernanke to Larry Sommers, we have the greatest economic minds of our time doing their best to lead us forward through the implementation of economic policy which include: TARP’s, TALF’s, restructures, new management, programs like ‘Cash for Clunkers’, all with a common goal of strengthening the economy and all utilizing a theorized plan. A PIPE’s manager has to restructure without a TARP or a TALF and has to do it in the face of mass redemptions, lawsuits, investor ire and government scrutiny. Most are doing everything in their power to realize appropriate solutions. Ironically, the unfortunate fact may be that the strategy was simply flawed- in the face of a credit crisis, tightening liquidity and massive redemption- the PIPE’s market froze and contracted. In other words, its not a valuation issue, its not a shorting issue and its not a question of investment, what we have here are the affects of economic shock waves which have lead to tremendous aftershocks which constituted the ‘perfect storm’ that obliterated the PIPE’s market even while the managers did everything in their power to try to right a sinking ship, while desperately gasping for their last breath.
Monday, November 16, 2009
The case was seen as the first major litmus test of the U.S. effort to obtain convictions tied to the subprime mortgage crisis and subsequent recession. The trial was the first stemming from a federal probe of the collapse of the subprime mortgage-market, which cost investors as much as $396 billion. These two men were indicted in June 2008, by Brooklyn U.S. Attorney Benton Campbell a year after their hedge funds failed.
Last week a jury of eight women and four men deliberated less than a day before reaching a verdict of not guilty on all counts. Cioffi, 53, the portfolio manager for the hedge funds, and Tannin, 48, their chief operating officer, went on trial Oct. 13 in federal court in Brooklyn, New York. The charges were conspiracy, securities fraud and wire fraud. They faced as many as 20 years in prison if convicted. Although their wives were noticeably relieved, the two men remained stoic. Perhaps all too aware, that this was a major victory, but far from the end of the battle.
Experts agree, this acquittal makes it more difficult for the Justice Department to bring additional prosecutions for fraud related to the subprime market and the various financial instruments that were based upon it, as it should. A jury of their piers answered quickly as well as emphatically that these men are innocent, as we at The Cold Truth had predicted. The public will require more than simple scapegoats as signaled by this jury's public push for the end of this era of prosecutorial permissiveness. According to juror Serphaine Stimpson, “As the witnesses began to testify I had my doubts...the defense tore the government witnesses apart.... jurors just weren’t 100 percent convinced." She then added, the defendants, “were scapegoats for Wall Street.”
Another Juror commented, “When people are making money, they say anything, when people are losing money they want to put the blame on somebody." The juror, Hong, said that if she had money, she would invest it with Cioffi and Tannin.
Assistant U.S. Attorney James McGovern said during the trial, “There is evidence here of a conspiracy which is ‘Let’s not tell anybody about the problems we’re having,” It’s also about ‘Let’s not tell the investors about the level of redemptions we’re having, because then there will be a run on the bank.’” AUSA McGovern shows himself to be clearly uneducated when it comes to markets as preventing a run on the fund is not a fraudulent activity in fact nothing could be further from the truth. It is an imperative as a manager in such a situation. It is a managers fiduciary responsibility to do so, most especially when the facts are rapidly changing and it it is ones job to disseminate information on a moment to moment basis, even as that information is changing too rapidly for one to do so.
Larry Ribstein, a professor of law at University of Illinois completely agreed with our position at The Cold Truth when he stated, “This never should’ve been the subject of a criminal prosecution. It was a case of standard business dealings where the views of the markets were shifting rapidly and these guys were being criminally punished for expressing views on one day and acting differently another day,”
This battle has just begun as the SEC plans to sue the Cioffi and Tannin in civil court because the burden of proof is much lower than the criminal court- this is why the two remained unmoved upon their acquittal as they have many more legal challenges ahead, including answering the numerous client law suits that Tannin and Cioffi have face as an unfortunate bi-product of the US Attorneys criminal charges. “We of course respect the criminal verdict,” SEC spokesman John Nester said. “But at this time, we expect to go forward with litigating our civil action.”
More to follow.....
Wednesday, November 11, 2009
Clients may have been prompted to go to the SEC by what some could consider questionable investments, in addition to the onerous fees collected by Yorkville (YA Global Investments). Yorkville deal documents and their audit show the following:
* Yorkville and its funds take fees on all sides of their transactions- including structuring.
* They take their management fee as well as a healthy portion of the profits from their funds and then write-off all their costs against these fees. In simple terms – it would appear they have no costs of their own.
* 'Double Dipping' - Investors being charged twice.
Sources close to the SEC allege that Mark A. Angelo and Matthew Beckman – key people at Yorkville's PIPE fund– may soon be hit with inquires. Yorkville also operates under the name YA Global Investments. It is a complex structure many theorize is utilized to circumvent taxes, among other reasons. It is possible that there may be some irregularities on a deal announced October 19, 2009 with Finnish drug developer Biotie Therapies Oyj (HEL: BTH1V)
What is wrong here? The deal is as follows:
Oct 23, 2009 (M2 EQUITYBITES via COMTEX) -- 23 October 2009 - Finnish drug developer Biotie Therapies Oyj (HEL: BTH1V) said today the fund YA Global Master SPV Ltd committed to subscribe and pay up to EUR20m for ordinary no-par Biotie shares in the next 36 months, under a stand-by equity distribution agreement. The deal aims to secure the financing of Biotie's working capital in the short and medium-term. YA Global is entitled to a one-time commitment fee of EUR200,000 in shares and has already received customary structuring and due diligence fees. At any time during the 36 months Biotie may request YA Global to purchase shares. The maximum portion of the commitment amount to be used at a time is EUR50,000 for the first tranche, EUR100,000 for the second tranche and EUR300,000 for the subsequent tranches. The pricing of the shares will be determined as 95% of the lowest daily volume-weighted average price of the five days after the date on which Biotie shall have sent YA Global a notice to buy shares, but will be at least 85% of the volume-weighted average price of Biotie shares on OMX Nordic Exchange in Helsinki on the last trading day preceding the notice.
Maple Energy could be another target of the eagle eyes at the SEC as some believe that Yorkville Advisors artificially inflated the funds value with the goal of tidying up its balance sheet so its PIPE fund looked stronger to attract new investors.
November 05 2005- Maple Energy secures $30m funding facility for new opportunities
Peru-based oil and gas group Maple Energy has secured a US$30 million financing facility with American investment group Yorkville Advisors, which manages YA Global Master SPV Ltd.
As is usual with Yorkville – which funds numerous small cap natural resources companies – the package has been structured as a standby equity distribution agreement (SEDA). This means that Yorkville has agreed to subscribe for up to US$30 million of Maple’s shares as and when the company needs the cash over the next 30 months. Maple will use the proceeds from the SEDA as a means of raising additional working capital, including for its Ethanol Project, and for general corporate purposes.
Rex Canon, Maple’s chief executive, said the facility gave Maple certainty and flexibility of funding. “The capital can be accessed quickly and at attractive pricing enabling Maple to respond to new opportunities and funding requirements as and when they appear,” he said.
In addition some industry experts are speculating that the SEC may be looking at cases of possible manipulation by Yorkville in SEDAs or Standby Equity Distribution Agreements.
Also at issue is- Richard Y. Roberts - his activities believed to include influence peddling, on behalf of Yorkville, behind closed doors. Roberts served as a Commissioner of the U.S. Securities and Exchange Commission (SEC) 1990-1995. In addition to his service at the SEC, from 2002 to 2004 Mr. Roberts served as a member of the District 10 Regional Consultative Committee of the National Association of Securities Dealers, Inc., and from 1999 to 2001, he served as a member of the Market Regulation Advisory Board of the NASD and from 1996 to 1998 he served as a member of the Legal Advisory Board of the NASD. Currently Mr. Roberts is a partner at Roberts, Raheb and Gradler, a regulatory and legislative consulting firm he co-founded in March 2006, where he provides legal, consulting and advisory services to clients on issues relating to financial institution regulation and legislation. He is closely linked to Yorkville.
Lastly, on the Yorkville table at the may be a question of special inside knowledge utilized in the following deals:
Wednesday, November 4, 2009
SAC is a multi-strategy, private asset management firm founded by Steven A. Cohen in 1992 with 9 employees and $25 million in assets under management. SAC's initial investment style was "trading" oriented. However, they have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds, and Emerging Markets.
Lee has pleaded guilty to insider-trading charges in along with 19 others. According to his recently released cooperation agreement, he acknowledged that his illicit trading has been going on for over 15 years-since 1994,including while the entire decade he was working at SAC. In return for helping the government, Lee won’t be further prosecuted for any insider trading he may have committed at SAC, which oversees $14 billion, or at his next two employers, as long as he has disclosed the crimes, according to his Oct. 8 plea agreement. Although no one at the Stamford, Conn.-based hedge fund have been accused of any wrongdoing, authorities will certainly be searching further to see who knew what and very likely will have many questions for Cohen himself.
Investigators are expected to examine transactions at SAC, the Wall Street Journal reported on Nov. 7, citing people familiar with the matter. Cohen declined to rehire Lee because he was suspicious about the abrupt closing of San Jose, California-based Spherix, the newspaper said. Spherix Capital LLC, which Lee started in 2007 with Ali Far, closed in March after returning about 10 percent in 2009. Before Spherix, Lee worked for about three years at Stratix Asset Management LLC, a defunct hedge-fund firm in New York run by two former SAC traders.
The SEC has been quite vigilant in their investigation and have made it clear that they will pursue the case, no matter how long it takes or where it may lead. According to reports clients of the firm are being advised that SAC has reviewed its buying and selling of stocks cited in the Galleon Group LLC insider-trading cases and has found nothing suspicious. In addition, it is believed no subpoenas have been served as of yet, but cannot be ruled out as the investigation
Tuesday, October 27, 2009
So what now? Sources in Albany and close to the State Police say that David Mack is suspected of having used his influence on behalf of friends to “manipulate” official investigations and, in one case, stop or derail an investigation by The New State Insurance Department into a questionable insurance business run by Kenneth D. Yellin. Yellin has worked with MassMutual Life among others. It is believed New York State is reviewing an investment in which Yellin may have worked on credit insurance to enhance investments. Mack is well known for his influence on the Nassau Police Department. Rumors from inside that department are that he has in the past intervened on behalf of friends, some of whom were suspected of drug use far beyond just casual. Having spent much money on police causes locally, he remains influential in Nassau County.
On Septmber 11, 2009 the Times reported also: “Republican fund-raiser and real estate executive who repeatedly took the Fifth Amendment during a state investigation of political interference at the State Police said on Friday that he would resign from his seats on the boards of the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. The executive, David S. Mack, had refused to cooperate with investigators from the office of Attorney General Andrew M. Cuomo during Mr. Cuomo’s ongoing investigation of the police agency.”
So what is Mack hiding? Sources close to the New York Attorney General say that Mack may have abused his power to award contracts to cronies while also serving on the board of the MTA. He served as Vice Chairman for Procurements. Under investigation, according to sources, is that Mack used his influence to award a $735,000.00 contract to Conti of New York, LLC at a board meeting on April 29, 2009. This is a subsidiary of the Conti Group which has been linked to organized crime in the past. http://www.silive.com/southshore/index.ssf/2009/07/cleanup_of_staten_islands_broo.html
Another area that is also under review is to what extent Mack has used contact with the Securities and Exchange commission of initiate investigations of companies disliked by him. He may also have been able to stop an investigation into Mack Cali Realty Corporation and The Apollo REIT run by family members.
What will happen next is not certain yet. According to some contacts in Albany the New York State Police is now reviewing all actions taken by Mack. What’s more, some sources say that Mack may become subject of an indictment before the end of the year for influence peddling and corruption.
Tuesday, October 20, 2009
The amount of money they wield control over is staggering, however the oversight for these aides is underwhelming and suspect. These six aides whose official title is, ‘Counselor to Geithner’, oversee and determine policy on $700 billion in banking rescue and are heavily involved in crafting executive pay rules as well as revamping financial regulations. Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.
Defending the policy of appointing advisors Treasury spokesman Andrew Williams said, “the department needs people with a deep understanding of markets and the financial system, especially as it works to fend off the worst recession in half a century. The secretary thought that the best way to utilize their talents was to allow these individuals to provide advice to the secretary on policy issues through appointments as counselor,” He added, “All of Geithners’s counselors are subject to federal ethics rules, including a pledge to avoid contact with their former firms for at least a year.” Many feel that despite these ethics rules this will lead to cronyism and back room deals as the largest banks erstwhile employees form economic policy at the highest levels. In addition, many mock the ethics clause, as it is simply implausible.
The advisors list is a virtual who’s who of Wall Street including: Chief of Staff Mark Patterson the former chief economist at Citigroup and lobbyist for Goldman Sachs. Deputy assistant secretary Mathew Kabaker, worked with private equity firm Blackstone Group LP on domestic finance policy and helped build the Treasury plan to push banks to sell their toxic assets, earned $5.8 million working on private equity deals at Blackstone in 2008 and 2009 before joining the Treasury at the end of January. Much of the compensation was in stock. Other advisors include Gene Sperling, who earned $887,727 from Goldman Sachs last year and over $2.2 million in total and Lee Saks a partner of New York hedge fund Mariner Investment Group, who earned over $3 million in salary and partnership fees last year. Sources on the street think there is no way this group can remain objective when it comes to issues, one in particular that seems glaringly obvious is executive compensation.
The President has promised to change Washington by keeping lobbyists for special interests at a distance and by making decisions in the open. In September, while speaking to financial executives, President Obama warned, “We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.” The unfortunate fact is that this list of Geithner advisors seems very much like its own special interest group for the top tier of American banking firms. They have access, they have influence, they are setting policy and they are doing it all unchecked, behind closed doors. This is far from the promise of the President and makes you wonder, ‘what happened to the transparency we were promised?’
Tuesday, October 6, 2009
“No, I’m not going to allow it,” Block said. “They will know this person made $20 million a year.”
The prosecutors had hoped to introduce the exact membership fee's of the country clubs the manager belonged to as well as Ralph Cioffi's three exotic Ferrari's. Their intent is to persuade the jury that the manager spent significant sums of money on an expensive lifestyle which would have ended once the sub-prime markets crashed and in order to perpetuate this lifestyle, Mr. Cioffi & Mr. Tannin intentionally misled their clients about the health of the sub-prime market.
Cioffi and Tannin are accused of misleading investors in the two hedge funds, the Bear Stearns High-Grade Structured Credit fund and more highly-levered sister fund, about the health of the funds just prior to their collapse, which cost investors $1.6 billion. Cioffi also faces an insider-trading charge. The failure of the two hedge funds, in July 2007, helped precipitate the collapse of Bear Stearns less than a year later, in March 2008.
But many believe that these men and the case itself are being used as scapegoats by regulators and prosecutors both of whom are under tremendous pressure to provide the public with individuals to hold accountable for a systemic collapse. Trillions of dollars have been lost world wide, some of the worlds largest insurance companies, banks, auto makers and financial services titans have been bankrupted. It's glaringly obvious that these men cannot possibly be personally accountable for an international economic crisis.
At the center of the prosecutions case is an email from Tannin, the funds CFO to his friend Ray McGarrigal. According to prosecutors, in an April 22, 2007 e-mail, Tannin lamented the state of his hedge funds, which were heavily invested in subprime mortgage securities.
“The entire sub-prime market is toast,” Tannin wrote. “There is simply no way for us to make money—ever.” A few days later, according to prosecutors, he was lauding the both his funds and the subprime market during a conference call with investors. he commented, that in fact he was, “very comfortable with exactly where we are,” and of regarding the subprime problems, “there’s no basis for thinking this is one big disaster.”
It was an extremely poor choice of words Tannin chose to lament to his friend, but in the end, this is just one friend complaining to another about his dead end job. Imagine their surprise when only a few days later, incompetent regulators befriended by over-zealous prosecutors scouting high and low for scapegoats to sacrifice to the angry, poor huddled masses, gathered a grand jury and turned Tannin's e-mail gripe session with a former colleague, into a massive scenario of fraud.
That's how easily it happens. On Monday, you're a frustrated fund manager complaining about business (perhaps to vehemently) to a colleague. On Tuesday, you do your best to adjust your attitude realizing as always, your fiduciary responsibilities come first. On Wednesday on a conference call you do your best to keep investors calm during an unforeseen and as of yet undefined crisis. Thursday, you are doing your best to gather information on the crisis and on Friday, you've been indicted for committing fraud while becoming the worlds poster-child for the collapse of Bear Stearns.
Perhaps it is time we took a step back and remember before this is all behind us and it's too late, the rating agencies are all clearly at fault. They all failed miserably at their jobs. In fact, failing miserably at their jobs may not be a strong enough term as implies that they did their jobs at all. S&P, Moody's and their cohorts are directly responsible for this crisis. Investors and managers both utilize the ratings agencies in order to gauge the value of their investments. The agencies ratings were wrong which led to investor confusion and over-valuation, which led to the ratings cuts that were deemed too little, too late. the rating agencies couldnt have blundered more if they had tried. This is a fact and is undisputed, yet there have been no arrests, no indictments and it is business as usual for the agencies.
Cioffi and Tannin, like most of those investigated in the aftermath of the credit crisis, are simply scapegoats. Low dangling fruit. Easy to pick and easy to point to. Instead of scapegoats, we should be investigating and then initiating a complete overhaul of the ratings industry. Ratings agencies need to be far more highly scrutinized and in all likely hood far more regulated. We need to weed out those responsible for the financial collapse and replace them with new analysts and new agencies. We must rebuild the portion of the system that failed. Nobody is more responsible and nobody failed more than the rating agencies.
Friday, September 25, 2009
According to a letter sent to clients, the firm received “higher-than-anticipated” requests for a Sept. 30th distribution from its
Vicis Capital Fund. In a PIPE strategy, exiting investments typically takes a longer time than a long-short equity fund, so when a large percentage of investment capital is redeemed at once, it could have cataclysmic results on the remaining investors. It is akin to a run on the bank, only there is no SIPC or Federal government to bail you out. The New York-based hedge fund will resume withdrawals if clients approve a plan to separate hard-to-sell assets into another pool, the letter said. The managers believe the separate pool is necessary as it is one of the only ways to retain value while eliminating toxic assets.
The firm said it plans to start a fund that mirrors the strategy of the Vicis Capital Fund. According to the letter investors can withdraw their money on an annual basis after giving 90 days notice so that the firm can seek to profit from longer-term investments. This is a strategy often employed by many funds these days. While this is one possible solution- there are many investors who will disagree with such a strategy. It may lead to investor law suits in which investor funds are used to fight investors who disagree with each other on how exactly each separate class of fund member should be treated.
According to people familiar with the firms - hedge funds including New York-based Fortress Investment Group LLC and Harbinger Capital Partners, last year, limited investor withdrawals to avoid raising cash by selling off holdings at distressed prices. Many managers are still faced with these tough decisions. The investors that wish to redeem- expect cash proceeds,
while the investors who wish to continue, expect cash to be used for further investment. The irony is, separate classes of investors in the same fund now have distinctly different goals and are at odds with the manager over how to appropriately deploy cash proceeds. Deploying depleting assets, while battling investors on both sides of the table has led to a tremendous increase in unfounded investor law suits. Defending suits further frustrates an already volatile situation, not to mention the six-seven figure price-tag, per suit which is paid for by the management fees, or in other words, by the investors.
The time has come to awaken and remember that there is risk involved in the stock market. The goal is to mitigate such risk while achieving upside potential. In fact, that is precisely what all hedge funds attempt to do. From the early nineties through 2007 many hedge funds succeeded because they mitigated the risk and therefore showed a strong return which led the average investor into the sector. It allowed the industry to proliferate. Unfortunately, we all forgot about the risk. Vicis Capital Fund is just one cautionary tale about a PIPE fund, its investors, its manager and the way of the world. Everyone made so much for so long, that risk and due diligence became an afterthought. The PIPE market has always had many risks which have been brilliantly navigated by most successful managers. The unforeseen risk in this case was the investors demanding their money back from everyone, everywhere all at once. It had never happened before in our lifetime, so no one was prepared for it, but it was an irrational reaction based on fear which has led investors down a prim rose path of selfishness and righteousness which is lined with man, many thorns.
Wednesday, August 5, 2009
Unfortunately the media today is full of sensationalism. It used to be you would have to go to the news stand and look at US Magazine sitting there next to People or another like gossipy rag. One says Brad and Angelina are in love, the other claims a separation is imminent. Who is right? Who is wrong? Who knows and more importantly who cares? Well in the world of diminishing returns in newspaper and magazine reporting editors care and make reporters care even more. So a reporter will go for a story. Yes even a reporter from Forbes or the Wall Street Journal. It sounds sensational. It will produce followup articles, get picked up by other media and create, a feeding frenzy. Kind of like when you feed fish who haven’t been fed in a month. Or when you watch a special on the feeding of sharks. Yes I said it.. Sharks. We trample through a story never really looking or checking. There is no real journalism today there are just young people with laptops and cell phones oh, and of course blackberrys. They scower the world searching for the next big story. They will talk to anyone who will talk to them. I mean anyone. They do not really understand investigative journalism or what it takes to get a story right. All they know is there is a deadline, a story and they are going to wow the editor with it.
I have watched as reporters have said Donald Trump the King of the deal is defunct or is in trouble here or there.. As with anyone in business no one gets each thing they do right, but let’s not forget, he is Donald Trump is he not. You can say a lot about him, but he is after all, The Donald. The same goes for the Sage of Omaha, Warren Buffet. I giggled profusely when reporters were calling his demise in the market as even the most respected investor of our time had issues. Then there is the recent skewering of who some people have called The King of PIPEs, Corey Ribotsky. Who as interesting as a news story as it has become, really isn’t too interesting at all. Who really cares about a guy managing a larger Pipe fund. There are lots of those.
I watched in amazement as one simple torrid story begat another as if this guy was really larger than life. Who the hell is this guy? What had he done? Why was this happening? Was there truth to it all? Or was this another attempt by us, the reporter with a deadline to get a story done? As the story unfolded it almost sounded illogical or “made up”. So I decided to go to the heart of the matter. Look through the malaise and see for myself. I spoke to people familiar with the PIPE or Reg D investment space. I spoke to colleagues of the once great King. Here’s what I found……..
Let’s start by saying no one understands this investment space. That’s first and foremost on the list. The media loves to compare the King’s returns to other hedge fund returns. That’s like comparing thirty year old scotch to beer. Both are alcohol, but can you really compare the two? PIPE like funds come in all different shapes and sizes these days. Back when the King started it was a much smaller industry and he was one of a hand of funds that actually did these kind of financings. As the markets changed more and more came to the party until there were larger and more well known fund managers doing these kind of deals. (Some really, really large funds did it too although they may not want to openly discuss it. Household names, that you know. GLG. Highbridge. Fortress. Citadel to name a few) But in this space, the small or micro cap ok lets call it nanocap world, there are a few players. They will all tell you they are different they are bigger and they are better. Except one. The King. From all of our research and talking with people in the industry, the King is the only one who stayed true to his original strategy and never made excuses for what he was investing in. A colleague who declined to be named said “yeah all of the funds, especially Laurus and Yorkville always renamed themselves or reinvented themselves. Ribotsky was always true to the investment style and always said we are microcap pipe investors. That’s what we do”. We further went and looked at the returns of the King’s colleagues and competitors. Well, now that you lay it all out in front of you, a pattern emerges. All PIPE, ABL or Reg D like funds have something in common, a similar return profile. Why? Well gee let me see, they all invest in similar things whether they admit it or not. They all utilize similar valuation methodology that is accepted under GAAP accounting standards. They are all audited by a hand full of nationally recognized auditors. Some, like the King, use independent valuation while others do not. But from my research not one has had been skewered in the press for anything they have done like the King. Not one of their returns has ever been questioned? Why? All have gated. All have restructured as the King did in some form or fashion. So what is so special about that? I kept wondering and wondering. Do you know how many hedge funds put the gate down? Too many to mention and that this is certainly nothing new or unusual. Some of the largest to some of the smallest. In the PIPE space most haven’t even begun to give back cash, although we have confirmed that the King has. Maybe not as much as investors would want, but hey cash is cash right? The others have given back Payment in Kind (PIK) which is giving you a piece of the portfolio as I best understand it. (not sure investors really wanted that, but hey that’s what they signed up for) Some funds gave back individual positions others put investors into what is called an SPV. That’s a Special Purpose Vehicle for all of those who do not understand hedge fund talk. The fund tells you that it cannot redeem you in cash, and let’s face it with so many redemptions it is really a run on the bank for most of these funds. They invested using the investment style they proposed, none of which ever took into account these kind of market conditions. Look what happened to Bear Stearns when it was overwhelmed with client withdrawals a shorted stock and a lack of confidence. Look at Wamu. Over one weekend almost all of its depositors made a withdrawal. That’s the death knell. Bye, Bye. Game over. So what is so interesting about the King? His fund’s restructuring is no different than anyone else’s and he actually gave you cash back. That was the most interesting part to me. So I decided to try and understand it. I looked at some large Pipe, ABL or Reg D funds other than the King.
Laurus Funds was the topic of news in October 2008 as it closed its flagship fund under pressure from large investor Russell and decided to liquidate. There was some litigation involving the two in a Cayman court, although Laurus has done a fine job of suppressing that news. I haven’t seen it, have you? It then pulled investors and pieces of the Laurus portfolio off to a new fund that it had started sometime earlier. Valens. Instantaneously Valens had a nice size AUM and then went out and raised more money. I wonder if the people there explained that their AUM was really portfolio pieces of the original Laurus fund? I guess we will have to wait and see. Valens eventually gated too and the firm is now looking at launching a new fund. What is interesting in their SPV or redeeming classes is a certain deal called PetroAlge. Look at the deal and it has a structure even people in the PIPE industry I asked about it couldn’t understand. Seems like an awful lot of money to have in one deal. While I do not know the exact figures but some close to it said some $30,000,000 to $50,000,000 of actual investment was made. Wow that seemed large in a company that doesn’t really trade and seems to have had a stock price hit a high of $34.00 right before the end of a month and then drop back down. Interesting to say the least for the once $1,700,000,000 shop.
Yorkville has always been another firm in the space. Doing similar deals and seems to have done a much better job of remaining out of the news fray. They do Equity Lines of Credit. Which for those of you who do not know hedge fund speak is a transaction where the company registers stock and the fund then buys it, but has the chance to sell it before it buys it. Perfectly legal as I understand it, but hey sounds kind of maybe a little on the edge. Yorkville that was once Cornell (they changed the name several years ago and no one knows why) has been sued by a former employee. This litigation was reported on by the popular hedge fund media and then that media took it down. I wonder why? No one seems to want to discuss it which leads me to believe that certain media felt threatened by Yorkville or its counsel. The litigation is very interesting reading and describes exactly how their legions of “deal people” make tons of money that does not go to their shareholders in their fund. A look into this a little further suggests that Yorkville not only charges a management fee and an incentive fee like most hedge funds, but it takes deal fees on its transactions. The deal fees are used to compensate everyone including management. So if we have that straight, and from people I spoke to we do, they receive compensation on the deal side, a management fee to run the money and a piece of the profits. Well sign me up that seems like a great gig! How come no one has reported this I wonder. This seems a lot different than Laurus or the King. I am not sure why no one discusses this or Yorkville’s investors do not seem to have a problem with a Pipe manager getting extra compensation in order to provide a similar return as the King does. Wonder if the regulators have ever looked at that? Seems like a conflict of interest and double dipping to me. On a reported almost $1 billion in assets Yorkville that’s a lot of fees. Yorkville also restructured and put everyone into SPVs instead of giving back cash. People close to the situation say this was so the fund can preserve cash and pay its fees to the manager. Sounds like another conflict to me. Oh and by the way, this fund was up in 2008 and apparently was on Barron’s List of the top funds with the King.
Then there is Vision Capital. A fund that has been reported in the press nicely but seems to have a valuation methodology that not even the best Pipe manager can understand. They have a Harvard schooled mathematician or MBA guy over there and after listening profusely to the explanation most have been so confused that it must sound right. One thing was certain, there was no independent valuation of the portfolio. They claim to have had pieces independently valued if they were hand picked by management. Well that doesn’t seem like independence to me, yet Vision runs some $600,000,000 in assets.
In the direct ABL space there is Stillwater Capital. Stillwater lends on real estate, lawsuits, special situations lending. Stillwater has reported a return in 2008 giving it a space on the Barron’s List as well. But yet, Stillwater which at its height managed $900,000,000 dollars of ABL investments still has yet to return a dollar back to investors. In its letter to investors it actually explains the same concepts that the King’s fund explained to investors. All of the same concepts. Yet Stillwater is not in the news. Stillwater is not being questioned or called a sham. Why? The returns are quite similar.
I then went and looked at each an every accusation made against the King. I dissected it like a real reporter is supposed to and analyzed it. It seems really simple. On the face reporters just went with the story which based on what we know now was the work of one upset investor who is suing and a disgruntled former employee. This is where the real story of the movie would be. The King, almost like Arthur of Camelot fame brings Lancelot to the round table. Calls him brother and makes him part of the kingdom. Lancelot as we know repays Arthur by stealing his bride and ultimately being tied to his demise. Sound familiar?
First we looked at the Tucci claim against the King. Well this site has reported on these people before but we looked at the deal the fund gave to Tucci more closely, Wellstar International, Inc. As with all stocks this one seems to have gotten battered maybe by Pipe financing, but who really knows. What we do know is during the time that the Tucci’s said it didn’t trade and was worthless it traded an average of over $1,000,000 a month and has ever since last November when this occurred. So if you were an investor and received a piece of the deal and only had to get out of $1,500,000 and change, why wouldn’t you? Maybe the Tucci’s were friends of Lancelot and wanted to try to dethrone the King? Maybe Wellstar is really a good company, even though it trades in the nanocap world? Maybe just maybe if Tucci’s son that was an investment banker really knew what these Pipe transactions were all about, he would have realized he made the wrong decision that cost his family money? The numbers do not lie. In six months to a year or so it seems you could have been out of this position with limited ease. With all of your money back. So doesn’t that mean that the value is there? I mean I looked at the actual deal documents that are available for all to see. They do not lie either. So its obvious that there was either incompetence or a desire to dethrone the King.
Second, we looked at the Mizel claim against the King. Which is really just a repacked Tucci claim. Well this is one for the record books. One must look into Steven Mizel and his past or present to understand this better. Sources close to it say Mizel is currently suing 100 investment managers. A person we spoke to said “Steve Mizel seemed to invest with us to sue. That is his business it seems”. Do a little research ladies and gentlemen and one can see it checks out. Mr. Mizel tries to make claims against the King that are just what they are “claims”. If any reporter worth their weight reads the actual pleadings, they will see that there is no evidence of any thing. None. Not a single statement or piece of evidence that shows the King did something other than what countless other funds around the world did, gate and restructure. So? There is certainly nothing wrong with it as each and every investor gives a fund manager the right to suspend redemptions. Did you not read that correctly Mr. Mizel? Certainly a man with the means to invest in 100 investment partnerships is a sophisticated investor capable of understanding the nuances and intracacies of hedge fund management or its terms and conditions. How can valuation be fanciful if it has been the same since the fund began? Independently audited by a nationally recognized firm? Independently valued by two separate nationally recognized firms? Sounds like something Lancelot would say to try to create fear in the hearts and the minds of the citizens of Camelot.
It is quite frankly absurd that any reporter, magazine or newspaper gave this airtime. How many companies are sued every day and are actually sued for things that were done? What was done here? A fund that went to protect all its members gated and restructured? Did Mr. Mizel try to get these stories written? To taint the world towards his story as we understand he is losing ground on many suits at the same time and will most likely lose this one legal pundits say? Was this done in conjunction with Lancelot? There is some interesting reading out there about Lancelot too. If the things mentioned there are true, then the plot thickens and our miniseries or movie gets better. When you left the kingdom and do not want to take responsibility for your own decisions or life you blame others. So some sue. Get articles published. Others like Lancelot try to dethrone the King in hopes of becoming the ruler of the kingdom.
All that has really happened is a good man’s name has been smeared and tarnished. Calling this guy Madoff on steroids is really offensive if you ask me as there is nothing remotely like Madoff here. If I were this guy I would be steaming mad. Madoff didn’t trade a thing for anyone. Stole people’s money completely. You may not like what this guy does or that he is successful at it. But Madoff this guy isn’t. Hell people are talking all over about this deal and that deal. Don’t you all realize that this means the funds were really invested ???? So sorry all, no Ponzi scheme.
Unfounded accusations are all we see. All of these funds are similar and all have had similar issues, why is this one so special. I guess it is really Lancelot in the long run. Too scorn about not getting Guenevere or the kingdom for himself. But the damage has been done and may continue to be done to all the other investors who are indirectly damaged by Lancelot’s sick trick.
This reporter is convinced that the King will make it through and be able assist the citizens of Camelot if they let him do what he does best. Because like Mr. Mizel’s litigation, these allegations are fanciful and sell papers. But there is not one piece of substance to them.
Monday, July 20, 2009
Litigation Release No. 21129 / July 14, 2009
On July 14, 2009, the Securities and Exchange Commission (the Commission) filed settled Final Judgments against L. Dennis Kozlowski, the former Chairman and Chief Executive Officer of Tyco International Ltd. (Tyco), and Mark H. Swartz, the former Chief Financial Officer of Tyco, in the Commission's action arising from their violations of the federal securities laws while officers of that company. The Final Judgments permanently enjoin Kozlowski and Swartz from violating, or aiding and abetting violations of, the antifraud, proxy statement, periodic reporting, books and records, and lying to auditors provisions of the federal securities laws and permanently bar each of them from serving as an officer or director of a public company.
The Commission's complaint alleges that, from 1996 until June 2002, Kozlowski and Swartz failed to disclose hundreds of millions of dollars in executive indebtedness, executive compensation, and related party transactions that they received while at Tyco. As alleged in the complaint, Kozlowski and Swartz granted themselves undisclosed low interest and interest-free loans from the company that they regularly used for personal expenses and other unauthorized purposes. They repeatedly arranged to have many of these loans forgiven by Tyco. They also engaged in undisclosed related party transactions. In violation of the federal securities laws, Kozlowski and Swartz failed to disclose their indebtedness, loan forgiveness, and related party transactions and caused Tyco to fail to disclose those items in its proxy statements and annual reports.
Without admitting or denying the allegations in the Commission's complaint, Kozlowski and Swartz consented to the entry of Final Judgments that will permanently enjoin each of them from violating Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 14a-9. The proposed Final Judgments also bar Kozlowski and Swartz, pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act, from serving as officers or directors of a public company. The proposed Final Judgments are subject to the approval of the United States District Court for the Southern District of New York.
In 2005, a New York State court sentenced Kozlowski and Swartz to prison terms of 8 1/3 to 25 years for their roles in the Tyco fraud. Pursuant to their criminal convictions, Kozlowski and Swartz also paid approximately $134 million in restitution to Tyco and criminal fines of $70 million and $35 million, respectively. On October 16, 2008, the New York Court of Appeals affirmed Kozlowski's and Swartz's convictions. On June 8, 2009, the United States Supreme Court denied a petition by Kozlowski and Swartz for a writ of certiorari.
Tuesday, July 7, 2009
The SEC claims Headstart Advisers LTD., which had at least $500 million in funds at its height, would trade mutual funds after the market closed but still receive the current day's net asset value, profiting on post-market events. The trades in question, took place between September 1998-September 2003. The scheme entailed engaging in late trading through Headstart's accounts at two broker-dealers. The commission alleges the fund earned about $198 million through the process.
As for its part in the scheme, Chief Investment Officer Najy Nasser, who was personally fined $600,000 commented, "Headstart is very pleased to have reached a settlement." He added, " We responded to U.S. concerns about market timing and immediately ceased this element of Headstart's business in September 2003." Given the CFO's statement, it is somewhat ironic that Headstart is neither admitting nor denying the allegations.
In total Headstart Advisers Ltd., its chief investment officer and the hedge fund itself will pay $17.8 million. Although Headstart Fund is now defunct, the adviser said the settlement will allow them to concentrate on its business as an investment adviser to offshore hedge funds and expand the core business with the launch of new funds.
Monday, June 29, 2009
Convicted Wall Street financier Bernard Madoff was sentenced to 150 years in prison Monday for orchestrating a fraud so extensive that the judge said he needed to send a message to all potential imitators and to the victims who demanded harsh punishment.
Bernard Madoff rose to prominence in the 1960's when he founded Bernard L. Madoff Investment Securities LLC. His firm was an early user of the National Quotation Bureau's Pink Sheet and would eventually grow to become one of the largest market makers in the NASDAQ. Madoff would come to serve as Chairman of the board of Directors of the NASDAQ and on the NASD's Board of Governors.
U.S. District Judge Denny Chin announced the sentence with Madoff standing at the defense table wearing a dark suit that seemed to hang over his thinned frail frame, white shirt and a tie. He appeared to have lost many pounds while awaiting sentencing. Weighing possibly 10-12 pounds less than he did at his last court appearance in March. Head barely raised, he gave no noticeable reaction when the sentence was announced.
This sentence dwarfs other prison terms handed out for other high-profile white-collar fraud in recent years, such as former Worldcom Inc. Chief Executive Bernard J. Ebbers, 67, and Adelphia Communications founder John Rigas. Ebbers is serving 25 years in prison, while Rigas, 84, is serving 12 years in prison.
After the victims spoke, Mr. Madoff himself stood up from the defense table to acknowledge the damage he had inflicted and express regret.
“I’m responsible for a great deal of suffering and pain, I understand that,” the 71-year-old convicted swindler told the court. “I live in a tormented state now, knowing all of the pain and suffering that I’ve created. I’ve left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren.”
A short time later, Ruth Madoff, who was not in court to witness her husband's humiliation, broke the silence she has maintained since her husband's arrest. "I am embarrassed and ashamed," she wrote in a statement. "Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years."
Several victims applauded in the court room upon hearing Judge Chin's sentence. Many were more than happy to comment. Including especially moving remarks by Burt Ross, a Madoff victim and a former mayor of Fort Lee, N.J. Ross made it clear he was satisfied with the sentence and that Madoff deserves to go to his grave "an unmourned man."
Thursday, June 18, 2009
investment adviser is required. Cox confirmed that the SEC would neither seek en banc review of the Goldstein decision, nor would it petition the U.S. Supreme Court for a writ of certiorari. Accordingly, the Court of Appeals decision became effective upon its issuance of a final mandate.
Now, Senator Jack Reed (D-R.I.) has introduced a bill which covers hedge fund, private equity, venture capital and other investment pool managers and requires them to register with the SEC. Under his proposal, only firms managing more than $30 million would have to register on the federal level; smaller funds would be regulated on the state level. This is not the first time a Senator or Congressman has introduced such a bill since 2006. In fact, they seem to be a all the rage these days.
Since 2006 many Senators have introduced or threatened to introduce their own bills calling for regulation of the hedge fund industry including Senator Grassley (R-I.A.), who seems particularly focused introducing a bill bearing his name. The Grassley initiative was a direct response to the 2006 D.C. Circuit Court of Appeals overturning the regulation imposed by the Securities and Exchange Commission requiring hedge funds to register. The federal courts said the Securities and Exchange Commission was going beyond its statutory authority. The initiative was never passed.
Another bill was introduced in Congress by Rep. Barney Frank (D., Mass.); Rep. Michael Capuano (D., Mass.); and Rep. Paul Kanjorski (D., Pa.) They hoped to not only amend the Investment Advisors Act of 1940, but more importantly, they wished to re-establish the authority of the SEC to regulate hedge funds, a power the commission gave itself in a controversial rule enacted in 2004, Goldstein. It too, was not passed.
The focus on Phillip Goldstein et al. v. SEC is understandable, as is the ruling overturning it. Hedge funds are a private business. The government, Federal or State, clearly over steps its authority when they attempt to regulate private industry. In fact, it was only after billions and billions of tax payer dollars were used to bailout some of our countries largest companies, that the board members, officers and shareholders of these public corporations finally ceded much decision making and control to federal officials. Again, these are public companies, forced to relinquish much control due to poor management which led to forced bailouts utilizing TARP loans.
There is no bailout for hedge funds. There are no TARP loans. After all, it would make absolutely no sense for the taxpayer to bailout private industry. That being said, the same holds true of government regulation in private industry- it makes absolutely no sense. In fact, many managers went through the onerous process of registration in 2004. Imagine lots of lawyers, accountants, paperwork and then a process of question and answer that can take weeks or months. Once one is registered, often, the SEC will come to your offices for a formal review. This too is costly, the taxpayer pays for the SEC employees and the rest is paid for by the investor via management fee. The process takes time, the most precious commodity in the fund business. A manager now spends time on reviewing paperwork, filling out forms and SEC responses, instead of focusing their undivided attention on performing for the investor.
Ironically, in the long run with the overturning of Goldstein we realize the SEC had indeed overstepped its authority. The managers precious time and investors funds as well as taxpayer money, was wasted fulfilling the reckless, lobbyist infused needs of politicians. These are the same individuals who were responsible for overseeing the markets. These men sat on the banking committees that were in charge of overseeing the regulatory agencies that are being blamed for everything from acts as incredulous as looking the other way on Madoff, to simply not admitting that they lacked the knowledge needed to understand the complex financial instruments they were in charge of regulating. No matter how you view it, this was a massive failure of the regulators and a direct reflection on certain members of Senate and Congress whose committees were directly responsible for oversight.
The failure did not take place within the hedge funds. In fact, many survive in spite of the failure of the system. The ones that have gated, the ones that have restructured and even those that have failed, most are victims of the system rather than that of a flawed strategy. The system that was supposed to regulate, and protect them, failed them. The government checks and balances that oversee the regulators failed them. Hedge funds have actually been a scapegoat of blame. They are far from responsible for any of our systemic issues, so why call for regulation? The industry has not been offered any TARP funds and has managed to survive without any help from the government, so why regulate them now? The taxpayers have already paid enough between the bailout and the flailing economy, spending more to regulate an industry that survived economic turmoil without incident, would simply be adding insult to injury.
Thursday, June 11, 2009
While blaming short sellers for the companies trading woes, Altomare and his cohorts lived well by continually issuing and selling stock. This activity continued for almost a decade. Universal Express was a company whose bosses were in constant violation of securities laws. Incredulously, the appeal brief argued that as the company had been through bankruptcy, it could issue all the shares it wanted without regard to securities laws.
Amusingly, at one point, after negative press, Altomare and his USXP friends took out a full page ad in The
Times to denounce a particular writer, the S.E.C. and of course the- "bad guys" -the short sellers. Ironically, according to The Times advertising department, the ad was never paid.
Tuesday, June 9, 2009
Last year, amid turmoil, Deutsche Bank closed its fund Topiary. The fund, with US $1.3 billion, was the sister fund of Deutsche Banks Global Masters Fund. According to Financial News the decision was made in February to shutter another Deutsche Fund, Global Masters.
The liquidation of Global Masters has reportedly been delayed by a redemption gate imposed by one of its portfolio funds. This type of gate has become extremely common as managers weigh the needs of the redeeming investor versus the needs of the investors who choose to stay, both groups need to receive the same fiduciary treatment. In addition many other factors come in to play, such as cash on hand, costs of closing and of course the losses incurred when selling into a weak market.
The German bank is finalizing plans to shut its Global Masters fund of hedge funds following a brutal 2008 and major redemptions. The fund which once managed almost US $10 billion, had fallen to just US $2 billion in assets. The fund fell, as investors fled, following an 18% drop in the previous year.
The fleeing of the fund of funds investor has become the unfortunate downfall of many hedge funds. It is also the beginning of the end of the fund of fund business. This type of investor seems to have the fatal and distinct inability to understand that as they extinguish all leverage with one hand and then redeem all funds with another, they are making reactionary decisions that will lead not only to their own losses, but also to their own extinction.
Wednesday, May 27, 2009
Thursday, April 23, 2009
Ken Lewis, CEO of Bank of America recently made the following statements, “Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Even our internal economists are a little at odds as to the timing with some seeing recovery earlier (than year end). We believe unemployment levels wont peak until next year at somewhere in the high single digits.” Given these statements it’s no wonder banks are being accused of not lending. Maybe it is time that the banks tried leveling with us. Given today’s economic climate most loans appear to be bad business.
All of the major banks, JP Morgan (JPM), Wells Fargo Corp. (WFC) and Citigroup Inc. (C) are guilty of doing it, they are not loaning the TARP funds they have received. Instead, they are using the funds to make their banks balance sheets stronger. Critics believe that the banks should be loaning this money in order to stimulate the economy. These loans are supposed to lead to investment, increase business, jobs and overall stimulus of the economy, but the money must be lent for this to happen. The banking community insists they are lending while the consumer wholeheartedly disagrees.
This morning Donald Trump appeared on CNBC. As usual he was selling something. In this case, it was a book. He lamented that the banks are not lending. He was quick to point out that contrary to what the bank spokespeople and CEO’s were saying on CNBC and to reporters, they are not lending. He further protested that a bank loan, a home loan or a new credit card are next to impossible to obtain for almost all consumers. The position that he took was accurate. The unfortunate fact is banks are keeping the money because the real issue, according to banks, is that we are not worthy of the loan.
From home loans, to car loans and everything in between, we are defaulting. Student loan defaults are at an all time high. Small Business Loans (SBA) are at an all time high. Home foreclosures are at an all time high. As rational individuals, we must see the banks point of view. If you put money in your bank and returned to find it no longer there, would you deposit again? We doubt it. The banks feel the same way. Each time they lend, they lose, so why lend again? You know what, they have a point.
The issue here is that the banks make money from lending and the consumer needs the loan. Neither is getting what it needs right now. This has created a vicious cycle that the Fed did not intend. Why did the chicken cross the road? In this case, all the banks know, is there cant be a default if there is no loan. And the consumer knows, without the loan they are immobile. We feel, given the tarp funds, the banks need to make the first step.
So, I guess the real question is, “when will the chicken cross the road?”
Article Written by: Steven Gray
Sunday, on Meet The Press, White House economic advisor Larry Summers had this to say, “the President is going to be very focused, in the very near term, on a whole set of issues having to do with credit-card abuses. He said abuses included charging consumers "extraordinarily high rates that they wouldn't have paid if they knew what they were getting themselves into." Mr. Summers is meeting with credit company CEO’s today along with President Obama.
Today’s meeting comes as issuers have aggressively raised borrowers' credit card rates to as high as 30%. This week, the House Financial Services Committee approved legislation to crack down on issuers' ability to raise interest rates on existing credit card debt. This new bill hopes to clamp down on how credit card issuers do business. These proposals along with recent restrictions imposed by the Federal Reserve, mark the most significant efforts toward reforming predatory industry practices that have been in place for decades.
The situation is further frustrated because the credit card companies have been receiving TARP money. Consumers feel this money should be utilized on their behalf. Lower rates and easier access to credit are what the consumer requires. Unfortunately, the banks and card companies disagree on this point. Carol Kaplan of the American Bankers Association feels, as for the bailout money, the TARP funds “provide a foundation” for companies to bolster their balance sheets, and aren’t meant to go toward things like helping credit-card customers directly.
The consumer and big business are often on different sides of the table. It is a rare occasion that finds them seated side by side. Currently, the table is set and we eagerly await the outcome. President Obama and today’s discussion will go a long way towards settling these issues. The President and Larry Summers seem to be on the right side of the table, ours, so lets applaud the administration for being there at all, but reserve our judgment until after we see what they are serving- and who picks up the check.
Thursday, March 19, 2009
This week, attorney general Andrew Cuomo criticized AIG’s spending on executive compensation. “In the last several months, as A.I.G. was teetering toward bankruptcy, and operating with unreasonably small capital, A.I.G. nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets and perks for its executives.” He was particularly dismayed by a $5 million cash bonus and a $15 million “golden parachute” that were given in March to A.I.G.’s chief executive at the time, Martin J. Sullivan.
Cuomo denounced this spending as it violated New York State law. In addition, he threatened to take legal action against the company if needed. It was only after the subpoenas were issued that A.I.G., in turn, said it would “fully cooperate” with the attorney general’s office. This included, agreeing to cancel a $10 million severance package for its former chief financial officer, Steven J. Bensinger.
The agreement came a day after Attorney General Andrew M. Cuomo assailed A.I.G. for making “unwarranted and outrageous expenditures” which he said violated New York law and that he found particularly “irresponsible and damaging” especially in light of the federal government’s $123 billion rescue of the company. The terms of the agreement call for A.I.G. to provide the AG’s office with a complete accounting of all compensation paid to senior executives. A.I.G. also agreed to eliminate all activities not justified by legitimate business needs. AIG will immediately cancel more than 160 events with costs exceeding more than $750,000 per event, for a total savings of more than $8 million.
AIG CEO Edward Liddy, who testified before the sub committee commented on the public outrage: "Obviously, we are meeting today at a high point of public anger. I share that anger. As a businessman of some 37 years, I have seen the good side of capitalism. Over the last few months, in reviewing how AIG had been run in prior years, I have also seen evidence of its bad side. Mistakes were made at AIG on a scale few could have ever imagined possible. The most critical of those was the creation of a credit default swap portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG.”
Liddy, who took the reigns last September after the company had turned to the U.S. Government for financial support, went on to thank the Federal Reserve and the U.S. Treasury, “…. for making the extraordinarily tough call to provide that support. It has meant that together we have been able to preserve jobs and businesses, and protect policyholders who rely on the promise of insurance to secure their well-being.”
With high hopes tempered with a measure of cynicism, we sit, we wait and we watch as the wind blown stench of the meltdown slowly invades and taints our entire world. We voted one administration out and another in, while we eliminated one group of CEO’s and anointed the next group in their place. Our new administration is still bailing out in a directionless manner while corporate America continues their attempt to take what they can only relenting under threat of subpoena. Meet the new boss, same as the old boss….
Monday, March 2, 2009
The author of this article is an active FOF manager who declined having his name used.
As a due diligence specialist in the fund of funds space of the financial world, my job consists of finding appropriately performing opportunities for others and receiving a fee for directing clients to these investments. This process includes a stringent, often referred to as onerous, due diligence process, during which we meet the managers and investment professionals. We review every facet of their organization including: operations, back office, analysts, traders, partners’ history and even the managers’ personal credit. This process typically takes many months of countless hours of extremely hard work reviewed and agreed upon by a handful of dedicated employees who work with me as a team. Together, we have made hundreds of recommendations over the last 20 years. This onerous, systematic form of due diligence has always been the process that leads to our recommendation, for better or worse. This, over time has led to many relationships with managers all over the world (these as well, are for better or worse) and as such, I have come to know many of these people who managed my clients money, very well.
Recently, many were caught completely off guard by the news of market maven, Bernard Madoff and the fact that the supposedly steady returns he had been delivering for decades, was nothing more than a ponzi scheme. There were obvious exceptions. Most notably, Markopolous and JP Morgan’s Jamie Diamond. The former, had been trying to prove to anyone that would listen, including the SEC, that Madoff’s returns were not possible. Markopolous had created an accurate financial model years earlier in 2001 that proved for a fact (and beyond a doubt for those of us who understood Mr. Matkopolous’ computations), that Madoff’s returns, based on his acknowledged strategy was not possible. The latter, well they figured it out too. In fact, many people on wall
street had it figured out. This is exactly why no major investment bank was caught up in the Madoff scandal in its final stages. As a member of a team (most of us work for many years on a team before we become managers) that performed due diligence on Madoff many years earlier, we too found, what many others in the industry found, these returns were not possible for a myriad of reasons. This and situations like it, (Bayou, Stanford) continue to take the street by surprise. With clients more nervous than ever I have become more concerned than ever with rumors and innuendo. When mathematical modeling, credit checks and top down reviews check out, next we check the “rumor mill.” It’s a big world, but a much smaller financial community within, than the average investor realizes. While we never believe them at all, we still believe in doing as much homework as one can do. Even doing it twice.
Due it Over Stupid
From the wisest FOF manager to the normal investor - all are going through the typical due diligence steps again, with each and every current investment. Needless to say, my team is not happy and has been sleep deprived and cranky for quite some time, as am I. During the first 6 months of investment reviews we covered many hedge funds with many strategies. Even the best of managers are currently under tremendous stress for obvious reasons and I must admit, we too feel the weight of the markets and the turning of the tide as many of our best clients demand their funds returned. Regardless of return profile, in times of uncertainty, investors flee the markets. It is an unfortunate fact, that history has never seen a greater time of flight from the stock market (and credit markets for that matter). The fear is palpable and we are all guilty of the horrible crime of trampling over one another on our way out the door. It seems we all vaguely recall the flight attendant warning us to walk, not run to the exit and still, we simply cannot help but sprint in an every-man for himself fashion, to a soon to be disclosed finish line. It’s an odd position to be in, we did well for our clients in certain spaces, and not so well in others. It doesn’t seem to matter. The loyalty lies within the money. Not toward any particular FOF or manager, rather it lies within the simplicity of the golden rule. And everyone wants their gold back, yesterday, if not sooner. We have an equal percentage of withdrawal in all. One fund, the NIR Group, an alternative investment fund, had a strong return, another, Laurus Funds, a slight loss, yet we were invested in both. The percentage of requested redemption from each is nearly identical. This shows us two things. First, people want their money, but secondly and more importantly, they want their money regardless of profit and potential which is indicative of irrational behavior. We spoke to the independent auditor of one fund, Marcum & Kliegman, a regional firm with hundreds of employees and far more clients as well as a division dedicated and specializing in fund auditing. They assured us, in regard to NIR, there were no issues they were aware of and had been the fund’s auditor since inception. They also were quick to point out that they have over 300 professionals on staff, aren’t a small firm and represent hundreds of investment partnerships. We were also referred to an independent 3rd party valuation firm who also had evaluated this particular funds portfolio, WTAS. My team spoke with WTAS regarding their valuation in the market, FASB 157 and how they had worked with the fund in order to determine an independent 3rd party evaluation apart from the accounting firms audit to further assure investors that the methodology is sound and that it meets all legal requirements and regulatory standards of accounting. This is a national firm with hundred of professionals, some of whom we had dealt with on previous evaluations of other funds, so we felt confident in their assessment abilities.
Next, we went on to speak to one of the market makers who the fund works with and whom we believe is responsible for a sizable portion of the firms trading, which clears through Penson Financial Services (PFS), located in Dallas, TX. He has traded micro-cap securities for many years and is considered an industry veteran. He and his team, trade hundreds of millions of shares each day, many of those shares are on behalf of the fund in question. We were able to discuss trading on these investments and the nuances involved in this niche market. He described other like funds and their strategies from his perspective. We spoke with him in detail about the overall market, its liquidity and where he believed micro-cap market was heading.
Legal due diligence has become very important. We live in the most litigious society in the world during a time of world wide economic strife, so we not only have to review all litigation, we also have to determine the effect, if any, such litigation may have on our decision to invest or directly on our currently existing underlying investments. Over the past few years, the firm had restructured and grown, but had also had several departures, as well as their fair share of bad press, all of which, is disconcerting. The rumor mill had this particular fund named in several lawsuits, as it turns out, they were the plaintiff in, all but one litigation. Mostly, these were standard suits against portfolio companies for not adhering to their deals. Non-performance seemed to be the common thread. The company invariably seems to make the claim that the fund(s) manipulated the stock and/or shorted when it agreed not to short. It is important to note that we reviewed all litigation the firm has been involved in (since inception) and all the times the firm had to deal with this counter claim (of shorting), not once has any company proven that they or anyone associated with their firm committed any wrong doing. Our legal due diligence determined that in all likelihood no shorting occurred. In addition our conversation with traders all pointed in the same direction. The suits were frivolous and most likely just a tactic in an attempt to scare the investor (fund) into settlement. None of these companies have every proved any of their allegations and, in fact, all counter-claims against the fund, were dismissed with prejudice.
During our review, we found one case in which our client fund was the defendant. As we came to understand it relates to the company restructure. According to the law enforcement report, “two large gentlemen entered the offices of NIR and demanded to see the fund manager over the restructuring.” We confirmed with the manager that an investor had indeed hired and sent two big guys to ‘collect’ their investment on the investors’ behalf. The firm’s general counsel took an impromptu meeting at which time the gentlemen explained that the investor wanted their money returned immediately; anyway possible and if not, the manager and his family were at risk. The firms’ owner immediately spoke to counsel and law enforcement personnel giving them all the information, which include the clients’ name, Tucci and the fact that this particular client was part of as larger investment group introduced by disgruntled former partner, Kenny Yellin. Yellin had resigned almost a year earlier and had been threatening the manager, the employees and counsel ever since. Yellin was the topic as we find out of an investigation into an insurance claim that he made under a homeowners insurance policy. This came up from our discussions with law enforcement.
As you can see, legal due diligence provides us with many challenges as it has infiltrated every aspect of our society and become impossible to avoid. Therefore we find this area of our expertise must not only be empirical, but more importantly, it must be viewed with a fluid understanding of its effect on our underlying and future investments in order to adapt to the rapidly changing environments. In other words, it has become our job to interpret the legal consequences as it relates to investment as opposed to how it relates to legality.
Just Due it
When determining initial suitability of a fund we look at many aspects of company. Paramount is independence. Auditors, they must be independent. In addition, they must be sizable and they must be well known and respected firms. In addition, many funds are turning to independent 3rd party auditors or valuation experts who review and evaluate the funds portfolio evaluation methodology, in addition to the primary auditors. This provides the manager and the investor with another layer of protection and an even greater assurance that the underlying accounting valuation methodology is quite sound. This theme of individuality must also be applied to traders, market makers and clearing agencies. The same basic principles apply. They must all be independent of the fund, sizeable and widely recognized as respectable known entities in their respective fields. Once we have made these determinations and are comfortable with our financial due diligence, we combine it with our legal due diligence. In this case, legal exposure as it related to the underlying investment was determined to be minor and would most likely have little to no effect on the underlying investment.
On it’s own, financial due diligence is an obvious must for any fund of funds. It is crucial however, to avoid the mistake of under estimating any appearance of impropriety, especially as it concerns related party entities, their inter-dependence and its possible effect on the underlying investment. In addition, legal due diligence hinges on the ability to not only understand the law, but equally as important, is the ability to fluidly determine a possibly undetermined outcome and its affect on an investment. It is only when these two partners in due diligence are combined, than one can finally see the whole picture. It’s absurd to believe that a Madoff feeder fund like Ascot Partners or Fairfield Greenwich, did the appropriate underlying due diligence, in my opinion. There are far too many obvious red flags, including the methodology and especially the incestuous relationship between trading firm and clearing agency. Finally, anyone who has followed the story is now aware that their auditor, Friehling & Horowitz was a firm so tiny, experts scoff at the possibility of such a firm handling the multi-billion dollar accounting necessary if Madoff’s trades and accounts had actually existed.
As time goes on, we find our jobs harder and harder to do and recently, even tougher to keep. Day to day we find more and more phone calls to be redemption requests from panicked investors. While we certainly cannot blame them for giving in to their emotions in this market many looking at tremendous losses, I am personally looking forward to a day where we can all look back and confidently think to ourselves, “we made it through.” I’m not exactly sure when this turmoil will cease or when that day will come. I’m not even exactly sure what this melt-down we will have made it through is, but I am confident that when that time arrives, my due diligence process will prove its resilience and the managers that warrant it, the ones that adapt, that persevere, they will be the ones who receive my clients investments.