Wednesday, August 5, 2009

Lancelot and the King

It has the makings of a TV movie. Hell, maybe a real movie. Its all in there. I can see it plain as day. Maybe a miniseries. Yeah, that’s it. A miniseries. It’s almost an unbelievable story, which is why it interested me. I did not follow the rest of the media pack and report on the story as they were. Because there had to be more to it right? A story behind the story. Which is the key to real journalism. Do not believe everything you hear or read…..

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.

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