Tax Tip for Losers

OK. This one just for US Taxpayers (as far as I know).

There is a lot of talk about how the Bush-sanctioned cut in capital gains runs out in 2010 and rates go back up to their pre-2003 levels. Here’s a LINK. And ANOTHER.

However, what NOBODY talks about is that there are a lot of people out there who have tax LOSSES and not gains. Especially after that wonderful market performance of 2008. It’s not like everyone was short.

Capital Losses can be compensated with future capital gains or written off over time, but only at the rate of $3,000 per year. If we all knew how to generate capital gains every year, we’d all be happy and there would be no need for this discussion.

But let’s say you’re sitting on $100,000 of capital losses, because you believed in the stock market or you’re simply a lousy trader. You’ve sworn off stocks. It’s going to take you over thirty years to write off those losses on your 1040.
So you think: I have to generate some capital gains, to compensate this. Easier said than done, since you’ve sworn off the market and now your money is in CDs.

The interest from those CDs is NOT going to compensate your capital losses, since it is taxed as ordinary income.

Here’s where a BOND can help you. Coupon payments from bonds are ordinary income, but if you “sell” them for a profit, it’s a capital gain. Easiest way to get a capital gain from a bond is to buy it at a discount and get 100% at maturity.

So which bonds give you a good chance at that? Junk bonds, of course., but also CONVERTIBLE bonds. Especially if the Convertible feature is no longer worth much, since the strike is far out of the money. These “fallen” convertibles have low coupons and trade at discounts. Not all of them are risky.

Here are few examples of convertibles for LOSERS:

Flextronics 1% 08/01/10 ASK: 92 YTM: 7.4% BB
AMGEN 0.125% 02/10/11 ASK 94,75% YTM 3.1% A+
MEDTRONIC 1.5% 04/15/11 ASK 95.5% YTM 3.8% AA-
AMKOR 2.5% 05/15/11 ASK 82 YTM 12.4% B-
AMD 5,75% 08/15/12 ASK 49.5% YTM 30.9% B-

The coupon part will be taxable as ordinary income, but the capital gain portion (which is the main part in these bonds) will go to compensate your losses. The yields are in line with issuers’ other (non-convertible) bonds.

A broker or planner will normally look at someone in a high tax bracket and send them straight to the muni desk. But if you have losses, here’s a different option.

The Two Felixes and the Upside Down House.

A few weeks ago, Felix Salmon brought up an issue at the heart of the housing mortgage meltdown mess, when reviewing the case of another Felix, whose plight was highlighted on CNBC.

Basically, poor Felix (the other one) is a bloke who bought a house for $600,000 and now finds that he owes $350,000 on a house he estimates is only worth $270,000. He is not in financial difficulty, but wonders if he should walk away from this negative equity (i.e. spare the $80,000).

The pundits at CNBC gave Felix the “if you can pay, you should stay” lecture, affirming he had a “moral” obligation to the house. Blogger Salmon, on the other hand, made the compelling argument that by turning in the keys Felix was indeed complying with the terms of the mortgage contract (giving the bank the agreed collateral) and he should AT LEAST use that leverage to negotiate better terms with the lender.

This analyst will side with Felix (the blogger) over CNBC on principle. However, I’ll take exception on the criterion used (home value vs. loan). And this is an important consideration for ANYONE facing a “negative equity” situation and perhaps a “rent” vs “own” decision. That is a LOT of people in the US these days.

Back to Finance 101, boys. They drill it into your head: if it’s not a cash item…it’s not relevant. And ALL attached cash flow should be considered. So the argument isn’t the $270,000 house vs. the $350,000 loan…it’s about the net present value cost of Felix’s need for housing.

So if we’re going to be technical, Felix has to estimate all the future cash flows derived from staying in his present house: mortgage payments, maintenance, property taxes, insurance and the (important) tax shield of his mortgage. If possible in different scenarios.

Felix’s mortgage financing is firmly attached to the “own house” decision. No one is going to give him 30 years at a tax-deductible 5% per annum without a house to back it up.

Then Felix has to determine a discount rate (his cost of opportunity) and find that NPV.
That can be tricky, given his outlook for the future and state in life (the cost of opportunity for a newly grad may not be the same as for a retiree, for example). But it’s not necessarily the rate on his mortgage, so the net present value of the loan is not necessarily that loan’s nominal value (the $350,000).

Repeat with all his other “housing” alternatives (buy something else, rent, move back with parents etc). They will all come back with different NPVs. Since they are also different “quality of life” characteristics, Felix has to determine which price (NPV) and quality (living arrangement) combination is the best fit for him. He may choose to pay a bit more (in NPV) to keep some privacy or luxury…for example.
To be exhaustive, all cash flow (or equivalent) items should be considered, such as the cost of moving his stuff, closing costs, deposits, etc, etc. Even the time to look for a place (if that time has an opportunity cost) should be considered.

Done this way, Felix may find that staying put could very well be the right financial decision, regardless of moral considerations.

And quite possibly another Felix in an upside down house in a what could seem to be a similar situation, should be making a completely different decision, given his own particular financial characteristics (tax bracket, opportunity cost and housing alternatives),

It’s all about the cash flow. Which is kind of ironic, because that was one of the mantras that fueled the housing bubble in the first place.

The J-Word

(ED: A few days ago, I wrote about bonds, in general. Follow this link. It’s an easy read).

JUNK. JUNK. There…I wrote it. A financial slur. This one regularly tossed at “high-yield” bonds…those “outcasts” of the investment world.

And “high-yield” isn’t necessarily right, either, because the yield may not be THAT high.
The right term would be “low-rated”, because junk bonds are only “JUNK” because someone has deemed them to be such. That “someone” is none other than the rating agencies (i.e. masters of the universe – holders of the absolute truth), S&P, Moody’s and Fitch. Yes, these are the same people who told us that MBS (mortgage backed securities) were AAA and Lehman Bros was “investment grade” (until it wasn’t).

S&P Ratings Explained

The S&P rating system is simpler than it looks, think grade school: letters and pluses or minuses. A twist is that you can have more than one letter. Rules of thumb: Higher letter, better, more letters better; a plus sign beats no sign and minus is worse than no sign.
So A beats B; BB- beats B+; and B- beats CCC+. Get it? If not wikipedia will answer.
BBB- is the limit of respectability…everything below that is labeled with the J-Word.
D is for default and not death, because there IS life after default.

Why do they rate bonds as “junk?”

Usually, these issuers or bonds have some imperfection or flaw. Either the company is small or its in a tough industry, it might have a significant amount of debt or maybe it isn’t familiar or “American” enough. In other words, there is more risk that it may default (in the opinion of the credit agencies).

So what?

It’s just someone’s opinion, right? The same as if an analyst said BUY, HOLD or SELL on a stock, right? Unfortunately, NO.

The problem is t that the “junk” label is almost a curse. There are serious consequences to carrying it.

The media calls these bonds “too risky” and “only for pros”. Regulators tend to concur and it can be considered an “inadequate” investment for a conservative investor (advisors can be sued for recommending them). There are a considerable number of brokers/banks who REFUSE to offer “high-yield” bond recommendations. Additionally, junk bonds cannot normally be used as collateral for a margin loan, while any old stock over $5 will usually do. Only a handful of online brokers will offer them as an alternative to clients. Furthermore, a number of pension or retirement funds have statutory prohibitions concerning investing in “junk” while they can buy all the equities or leveraged hedge funds they like. More than a label, it’s a stigma.

This is incredibly unfair. Let’s not forget that bonds AS A CLASS are less risky than stocks. But the stock of the SAME issuer can be considered an “adequate” or even “conservative” investment suitable for everyone, while its corporate debt (bond) is deemed to be “junk” and only the “pros” are allowed to go near them.

Here’s a practical example, straight from my wife’s (junk) bond portfolio:

She holds Davita bonds carrying a 6.625% coupon, maturing March 15, 2013 (about 4 years), currently trading at about 97% to yield 7.3%. (high yield? hardly) These bonds are rated B+ by S&P, so they are not “borderline”, they are solidly in “junk” territory.

FYI, DAVITA is a company that operates kidney dialysis centers. It’s a stable business (if you need it, you need it) and sadly also a growing business. Recession-resistant? Probably. Doesn’t seem like a discretionary expense.
Notwithstanding, the company has a significant amount of debt (not unlike a utility) and default is always a possibility.

Oh...and Davita’s stock is also publicly traded (DVA). Currently at $43, it has weathered the crisis relatively well and is considered to be “defensive” for obvious reasons.
No broker or advisor would be open themselves up to liability if they recommended this stock to a conservative investor. But if they recommend (or buy) the bond…it’s junk and they open up a fiduciary can of worms (if it goes bad, of course).

For those who don’t get just HOW unfair this is; Davita STOCK would have to go practically to ZERO before default is a factor for the bonds. And EVEN in the event of default, bondholders can expect to come away with something. But Davita stock is “defensive” and you can use it for margin while its bonds are “junk” and worthless as collateral.

This is exactly what happens when regulators use a third party opinion (the credit agency) as the basis for policy. And investor “protection” takes on a whole new meaning when those investors willing or needing to take a little more risk for a higher return, end up invested in offshore CDs, hedge funds, REITS or high-risk equities…instead of some good old boring bond, which could have served them well. Just because somebody called it “junk”.
It’s financial bigotry at its worst.

So, as an equal opportunity investor…I like junk, I wish it were more available, had better markets and were easier to acquire and trade. It deserves a place on the menu and certainly a better rap.

And as a believer in free markets, I wish that some day, stocks and bonds -investment grade and junk (and even distressed)- along with derivatives of all kinds could join together and trade freely in more efficient and transparent markets, for the benefit of all.
Without the J-word.

Millennium Bank of Napa Valley?

To no-one’s surprise the SEC came out yesterday and charged St. Vincent and the Grenadine’s Millennium Bank with being a Ponzi scheme. That’s because after the Stanford case broke, any good google search would come up with Millennium when looking for offshore banks. The blogs were all over it from the beginning. It even got TV time (Fox Business and perhaps othes) even before the SEC charged them yesterday.
I was asked about this bank several times, but there wasn’t much to say, these guys didn’t even bother publishing financial statements (false or otherwise).

So how did the SEC catch these guys? (They need hard evidence, remember).
They followed the money. It seems deposits to the bank, even those sent to St Vincent were FEDEXed back to Napa California where they would be put in a remote deposit machine to the United Trust of Switzerland’s account (Millenium’s holding company) at Washington Mutual. And they then paid everything from that account, including their own personal credit card expenses ($2.8 million), auto expenses $820,000 and wine $90,000. Airplanes? of course.

The defendants also paid out money to themselves. Some of it was more than they could spend, I suppose, so they set up investment Co’s. No news of “hedge funds” or if they had money with Madoff.
The take was at least $68 million, because that was the amount of cash deposited in the WaMu account. Millennium could have played this game in other jurisdictions also, since they catered to investors all over the world.

Big red face for WaMu compliance on this one. So much for the Patriot Act. Guess it doesn’t work well when the crooks are Patriots.

Bonds for Everyone

I’ve checked this blog’s stats and people from 78 different countries have visited it. Obviously, most for the Stanford issue, but a number have been sticking around and reading the stuff and links I’m putting up here. And I put some ads on the site, which earned me a total of $0.01 yesterday, so this is a promising business for sure. LOL But other than the Stanford people and some of the media, I have absolutely no idea who is out there, what your degree of financial knowledge and what you want to read about. So I’ll take requests. And I’ll keep it simple, because I like simple.

First request is from a former Stanford Investor from Mexico, who was asking (aside from the Stanford stuff) for help with investing. I know a little about that, so here goes with the caveat of DYODDD (Do your own due diligence. dude), shamelessly stolen from a fellow blogger.
The lesson of the day is about BONDS, later we’ll get to JUNK bonds (my favorite kind).

Bonds are among my favorite investments. Junk bonds in particular. Here are seven reasons why I like them and why I like recommending them.

1. Bonds are simple.

It’s a loan. An IOU. This isn’t a bond primer, so here are few links if you are a total neophyte. LINK 1, LINK 2 and LINK 3. Things are defined and orderly. You know how much they should pay you and when they should ay it. They don’t call it “fixed income” for nothing. So you can plan around them and with them.
Like all loans, there are responsible payers, deadbeats and rip off artists. But the investor knows that these things exist (or should). The idea is to find an area or niche where you feel comfortable.

2. Bonds eliminate the middleman

I dislike middlemen between my investments and myself. So I COULD take my money to the bank, open a CD, get a low rate (or not), get a government guarantee (or not) and the bank would then turn around and lend the money to Dow Chemical, Procter & Gamble, the Republic of Kazakhstan, the US Treasury, or whatever. Or I could buy a bond and do the lending myself. I’m taking on a risk, no one will bail me out, but there is usually a reward associated with it (higher return).
It’s not the only way to eliminate the middleman. I could lend money to people also, with peer to peer systems like Prosper.com, but that is outside my personal comfort zone.

3. Bonds are more self-reliant

I hate relying on other people for things. That’s one of the issues I have with stocks. You can analyze them and find what looks like a great opportunity. But the way you make money is that someone else comes and buys that stock for a higher price than you paid for it. It’s frustrating for an analyst to see a great stock he bought cheap languish or decline, while “lesser” stocks flourish, particularly if all he predicted is coming true (company performance, etc.). But that happens…all the time. So you wonder “why doesn’t this stock go up?” and maybe it will and maybe it won’t and maybe in the end you were wrong. With the bond, the DD centers on one main issue: will these guys pay me back? If you think they will, or at least you like the odds (risk/return relationship), you can go ahead and buy. If you’re holding for maturity, you have your final buyer: the issuer itself (when they pay you back the principal).

4. Bonds don’t require much maintenance

People complain that investing is hard work and it is. You can work hard at your bond portfolio, if you want to…but if it’s hold to maturity you can let it go and let them work for you. Bonds pay YOU to wait patiently.

5. Bondholders get a little respect (not much…but a little)

CEO’s are always telling us that “they have a duty to shareholders, etc.”. To a point that’s true, I guess. But no one was asking Me about the CEO’s salary, bonuses and cutting the dividend, when I was holding stock (kind of, but not really). So, yeah, there is a duty to the stockholders, but the CEO and the board usually get to keep their jobs unless they really screw up (and sometimes even then).

With bonds, there is a “little” more respect because they’re a bit higher up in the pecking order, and you don’t care about the company’s performance that much, as long as they pay. The day they don’t pay or don’t want to pay, there can be consequences (Default), which more times than not involves these guys losing their jobs (unless you are the President of Ecuador, of course). Most of these guys really like their jobs. They’ll at least LOOK like they’re making an effort to pay.

6. My wife likes bonds

My wife is an extremely intelligent person (despite her marrying me). She knows a great deal about marine biology and in particular fish. But investing and finance is not her greatest interest (where I come in). However, being smart, she also realized I may not be around forever (women outlive men and her lifestyle is a whole lot healthier) and maybe leaving all the investing to me wasn’t the greatest idea either.

Long story short, we went a bond seminar at a local broker’s office. Two hours. She “got it”, of course, and I filled in the blanks. Not long thereafter, she set up a little low-maintenance bond portfolio with her sisters that is doing quite well. Not that she really looks at it. She doesn’t really have to. She knows when the bonds are due to pay interest and principal. Nothing too risky, but most of it is what is considered “junk” (which is an awful thing to call a bond, and I’ll get back to that later). I’ll describe the portfolio in another post, if anyone is interested. Expected return: about 8-10%, if things go reasonably well.
She’s happy with it and if she’s happy, I’m happy.

7. Brokers and advisors hate bonds

If they hate bonds, why should I like them? Well, they don’t really hate bonds as an asset class, but they’re not enthusiastic because there isn’t a lot of money to be made selling bonds retail. Especially, if the client is just going to sit on them. Don’t get me wrong: they WILL get their cut, particularly when you first buy. They’ll hit you with a commission and probably a “mark-up” (they go and “get” the bond in the market and sell it to YOU for more…crazy huh?). But that’s usually it. It’s a one-time thing and you can milk these bonds for YEARS. So they don’t like that. They will prefer to sell you a Bond “Fund”. That has its advantages. You get a quick diversification and “professional” management. It’s usually more liquid. You WILL pay these conveniences, as long as you hold the fund (management fee). You also won’t know necessarily what’s in the fund.

I, particularly, like knowing who owes me money and I buy my music, rather than renting it. So I BUY my bonds. But that’s me. And I don’t really like paying middlemen (especially when I’m doing the DD).

This post is running long…like a BOND. More on “JUNK” and the problems with bonds....later.

SEC getting it?

Reuters is reporting that SEC Chairman Mary "Schapiro also said SEC lawyers are working on a plan to require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets"

Basically the idea is to crack down on operations like Madoff Securites, Westridge and countless others which would take a check from investors, claim it was buying securites, send them a false statement and doing whatever with the money.

You see the way things work today, you can give a RIA (Registered Investment Adviser) a check, and all he needs to send you is a quarterly statement with some numbers on it.

Of course, if that advisor has a third-party custodian (like Pershing..remember them?), the money and securities is out of the advisor's hands and you can get your info from that third party.

Eventually it would make sense to make every advisor use a third party custodian, but that's a transition that won't come quick or easy.

South Park takes on the Economy

Last Night "South Park" took on the Economy. If you wondered about CDOs, MBS, TARP, Wall Street bonuses, etc. It is all explained in this episode called "Margaritaville".

The episode isn't on Hulu yet, but you can see it HERE. At least for now Click on the Margaritaville Episode - watch full episode.

It is irreverent and not politically correct,as usual, so if you are easily offended...well you shouldn't watch South Park...ever.

ED: Episode has been removed, hopefully it will be reposted at some time in the future.
ED2: Now its back up!...just try and see if it works.

FINRA on Scams

The people at FINRA have gone to the trouble of putting up tips on their website about “Avoiding Investment Scams”. Here’s the LINK.
It’s quite a good explanation about the different types of common scams and the sales pitches used to sell them. Makes a good “educational” read.

They also have a SCAMMETER that you can run an investment proposal through, to see how many red flags it raises. And to top it off there is a RISKMETER, which is a self-test that measures how vulnerable you may be to a scam.


It’s work that is worth applause and probably about time. BUT, in the end, how useful is it? I ran the Madoff fund and a Stanford Antigua CD through the SCAMMETER and they came out ok. I wasn’t quite sure if Madoff was offering “high returns with low risk”, because it had such a track record, but that was never offered or guaranteed. In the Stanford case, the tough question was if it was actually a “high-yield” investment program, because the yields were good, but not extraordinary. But in any case, since these investments were coming from a licensed broker/dealer they STILL checked out ok on the SCAMMETER (even with the high yield or low risk offer).

Bank of America shares, on the other hand, which were selling at $3.80 when I picked some up on the advice of a blog (now $7.20 yippee!), gave me two red flags. One for being below $5 a share and the other for me not knowing the guy who writes the blog.
But I’m kind of liking that investment right now. (Target = $10).

So the scam meter is only good for the low quality scams (FINRA seems to admit it). The really good and really big scams we have seen lately, like Madoff, Stanford, and Westridge, were all pulled off by FINRA-licensees. So, run your advisor through FINRA to see if he might be part of a small scam (not licensed) or part of a multi-billion dollar one (licensed).

It’s nice that FINRA is trying to educate about fraud, but they shouldn’t try to tie some sort of moral or ethical value to the licenses they sell (and which are their raison d^etre), because they have none. These licenses also have a very relative “insurance” value. Investors do have the right to arbitration against their broker/dealer (if FINRA registered), but I’d hardly characterize FINRA as a “neutral” party to those disputes (guess who pays the bills?). And there is anti-fraud insurance through SIPC, but it’s limited in scope.

Is there some value to those licenses? Well, sure. The applicants normally have to pass a test, which requires some specialized knowledge and may include some ethics questions. But knowing the answers to those questions doesn’t make you ethical. And the questions themselves may not be the right ones. For example, in my recent Series 65 (Investment Advisor) test, I was asked “Under which of these circumstances can you take a loan from a client”. I was looking for “NONE”…but that wasn’t an option. So I guess I got it wrong. (Yes, I passed the test).

And herein lies the problem. The Securities Act of 1933 and the Securities Exchange Act of 1934 govern the US markets and the investment process. As good as these pieces of legislation may have been at the time, they are now celebrating their diamond jubilee. The world has changed a lot since then and version 2.0 is long overdue.

Just don’t make it like Vista…please.

Unmissable - Hey Paul Krugman!

Don't know this guy...but the song is REALLY REALLY GOOD!

Mini-Madoffs

They say there’s never only one cockroach. Or rat. Or Madoff. Especially when you start looking for them. The SEC has been looking and they have been filing complaints consistently so far this year. Some are calling it Ponzimonium. Or maybe it’s just a return to reality (or a return to “reality in returns”).

Here are a few from the SEC’s recent (three month) “Hall of Shame”

Joseph Forte of Philadelphia: ran a Ponzi scheme since 1995 trading S&P Futures contracts with reported annual gains of between 18% and 38%. Apparently Mr Forte actually traded; it just wasn’t his “Forte” (sorry, I had to). His only winning year was 2002, when he made $21,000. When his scheme was busted, investors had statements with $154 million on them, but there was only $146,814 in the account. Mr. Forte, of course, paid himself performance fees which supposedly were in the order of $10-12 million over the course of the scam. (The good old 2/20). He actually accrued $23 million in fees, so he didn’t even pay himself fully for his “false” profits. Scammed himself, if you will, along with 80 investors.
Forte’s company was a limited partnership and never registered with the SEC. Forté gave himself up, but only after he ran out of money and had even hit some friends up for personal loans to cover redemptions. Presumably he won’t be eating cheesesteak for a while.

James Ossie of Atlanta (CRE Capital), was promising 10% a month trading Yen futures. He actually traded those futures, losing about $12 million of the $25 million raised. CRE would get investors to “recruit” new ones, in classic pyramid style. 120 investors involved in this one, some of course, actually got to see that 10% a month.

Arthur Nadel was running six hedge funds in Sarasota, FL worth almost $500 million, when he mysteriously disappeared January 14th, leaving his fifth wife “Peg” with a note stating “withdraw as much cash as can” and “sell the Subaru if you need money”. He turned himself in two weeks later, attorneys at hand. The funds had only about $506,000 worth of assets in them, according to the SEC.
Nadel reportedly owned an aviation company, which had trained one of the 9/11 terrorists (not purposely of course). Also a shady past: he was allegedly disbarred in 1982 after defrauding clients to pay off debts to a loan shark. The rest…you guessed it…the one man show, the friendly CPA (unregistered since 1990). The green Subaru turned up at the Airport. Wonder if Peg will list it on eBay.

Gordon Grigg of Nashville took advantage of the “flight to safety”, by telling investors they were buying investments in the US government’s TARP program. The Program Relieved investors of their Assets, alright, but not their Trouble. $6.2 million was the reported “take” from 25 investors. The government-backed 12.5% notes offered only existed in Mr. Grigg’s fertile imagination. The pitch: this was a “private placement” the deal couldn’t be had anywhere else (right about that). Grigg had already been served with a “cease-and-desist” order in North Dakota for selling non-existent securities to a client in 2006. Maybe Grigg should be commended for actually finding SOMEONE with money in North Dakota.

Scott Ross of Gilbert Ill, was allegedly engaging investors to put their money in “life settlement contracts”. This is basically buying life insurance policies from people who expected to die soon (and really don’t need the money then, do they?). Mr. Ross who sold himself as a “sought-after expert on financial topics and strategies” (CNBC, anyone?) was using the money instead to “live it up” in a skybox in the new Colts stadium in Indianapolis and pay salaries and redemptions of his other funds. This scheme, which reportedly began in 2007, was tragically “short-lived” as the $2 million fund "expired".

Marvin Cooper (Billion Coupons, Inc.) of Hawaii was allegedly operating a Ponzi scheme among the deaf community on the islands. The complaint states that Cooper raised $4.4 million by holding investment seminars, offering 10-25% monthly returns trading Forex. Only $800,000 was actually invested, of which $750,000 was lost trading. Cooper allegedly spent $1.4 million, including buying a house and putting money down on real estate in Panama. In an email, Cooper wrote that down there he could “resume the OPM (Other People's Money) business without nasty headaches from those bastards from Wall Street and their cronies." Yeah, those bastards! Cooper, who is himself deaf, is still maintaining his innocence after the March 2nd “hearing”.

The SEC isn’t quite sure how much money James Nicholson of Westgate Capital (New York) was “managing” in his 11 funds. They think at least $100 million of investor capital was involved, and WC at some point claimed to have $750 million “under management” and at another it was only $200 million. But when two dozen investors’ reimbursement checks for over $5 million started bouncing in February 2009, it appears that true value of the assets was “materially less” (SEC’s words). Nicholson had been barred from the industry in 2001 and didn’t bother using a small accounting firm…he just made one up: “Havener and Havener”

On the other hand, in the case of Westridge Capital Management (something about the WEST, I guess), the accounting was much, much better. Mr. Paul Greenwood and Mr. Stephen Walsh are accused of misappropriating $293 million and $261 million respectively from their $667 million hedge funds. How do they know the “exact” amounts? Well, a Westridge “employee” would make these gentlemen sign a promissory note for the amounts they had “borrowed” every year. With this money the gentlemen and their wives (who are also named in the complaint) “invested” in a lavish life-style which included “multi-million dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears worth $80,000 each.”

The hedge funds’ strategy was “enhanced equity index management”…and they of course, achieved those sought-after “smooth” high returns. The “target” client (or should we say “mark”) was college endowment funds and pension funds. There were only a few dozen clients, but they were big ones. Carnegie-Mellon University, University of Pittsburgh, Ohio Northern University, Bowling Green University, Iowa Public Employees, Sacramento Public Employees, San Diego County Employees Retirement Fund, North Dakota State Investment Fund (more money from North Dakota!) and others. All seemingly “sophisticated” clients, many of which actually got into Westridge through other “advisors”.
In the immortal words of Led Zeppelin “I’m gonna send ya…back for schoolin”. Maybe next time run the investment past one of your own finance or statistics professors? How about it?

North Hills’ Mark Bloom (NY) didn’t even bother running a hedge fund. He had a “Fund of Funds.” That “Fund of Funds” apparently only invested part of the $30 million it received in one fund: the Philadelphia Alternative Asset Fund, which turned out to be a fraud itself, uncovered in 2005. He did manage to “Fund” loans to himself for at least $13.2 million, including the purchase of a $5.2 million townhouse, which he transferred to his wife, who sold it four years after purchase for $11.2 million. (Nice trade, unfortunately not for his client). Bloom had learned from the best, since from 1992 to 2001 he was a partner of WG Trading Co, which was none other than “Westridge” (see above). North, West…Hills, Ridge…all the same thing.

Real Estate is safe, right? Not these days, and not for the investors in SunWest, which raised $300 million from 1300 investors to be invested in retirement homes with a safe and modest 10% annual return. They were told they were buying specific properties, when the money was going into one big pot, out of which the company paid everything. SunWest put that money down to buy the homes, but they didn’t do so well, and SunWest was paying returns from new investor money and mortgage refinancings. Payments ceased with the company couldn’t refinance anymore and lenders started to foreclose.
This was an industrial-sized version of the “house as an ATM” concept.

Hundreds of investors of LA-based “Diversified Lending Group” and “Applied Equities”, many senior citizens, bought $216 million worth of “Secured Investment Notes” supposedly backed by property and mortgage lending. These notes would pay a guaranteed 9 to 12% per annum
However, there was no such backing, since the SEC alleges that CEO Bruce Friedman used the money for other unrelated investments and diverted at least $17 million of that to “support his lavish lifestyle, including purchases of a luxury home, cars, vacations, jewelry, and designer clothing for himself and an alleged girlfriend, who is named as a relief defendant.” How do you freeze a Prada purse?

Finally, we have Investment Adviser Leila Jenkins of Locke Capital Management in Rhode Island. Ms Jenkins isn’t accused of misappropriating funds, but rather “making them up”. Having “only” about $165 million under management, she apparently “invented” a billionaire Swiss client to inflate her AUM numbers when soliciting prospective new clients. She also allegedly “invented” performance records in the past, including a certain period when she had NO clients.
Who says that you can’t claim a 30% return on a ZERO dollar investment? How much is 30% of ZERO? Right?

Stealing from the elderly, deaf, the dying, the charitable the college educated and the colleges themselves, the Mini-Madoffs have been very busy the past few years. You can only hope the authorities have raided the nest and the roaches are out, but you can only wonder.

Oh...and look out for names with “West” in them.

SEC Complaints/Press Releases

Forte
Ossie
Nadel
Grigg
Ross
Cooper
Nicholson (Westgate)
Greenwood and Walsh (Westridge)
Bloom
SunWest
Friedman
Jenkins

Starting Blog - No More Stanford

This is my new blog.

The Stanford Blog entries have been moved to HERE

Este es el nuevo blog.

Los post sobre Stanford se han mudado a AQUI

Passing it On

Today I received an email from a group called "Stanford Victims Coalition", whose purpose seems to be quite self-explanatory.

I went to their website and it seems to be free. I registered (also free). There are some discussion boards where many of the questions asked here, plus others are discussed and victims can rant and vent also, which can also be therapeutic.

Here's the Link. They also provided a list of victims who wish to talk to the press, so that's good place for the media to contact victims for their stories.

Maybe I'm naïve, but I didn't see a hidden agenda. So I'm passing this on.

Who needs a lawyer?

(versión en español, en blog de venepirámides)
(Disclaimer: this is not legal advice…just my opinion)

I thought I was finished with this Stanford thing, but I have been getting emails with questions, so it’s better that I answer them here and everyone can read them. Let’s go case by case.

If you are the holder of an UNPAID Stanford International Bank LTD Antigua CD.

You do NOT need a lawyer. The bank in Antigua is in receivership and they are trying to collect as many assets as possible. The receiver in Antigua (Vantis) will be the one paying you eventually. You should keep track of the information that is coming out of Antigua and be patient. But please be realistic. There is not going to be much to distribute. My colleague at devilsexcrement had initially hoped maybe 10-20%, but now estimates 5% at most (more like 3%, if I read correctly). I’m afraid I must agree. The “investments” we know about aren’t worth much, and even if personal assets (jets, art, etc.) can be collected, much of it may go to fill in black holes elsewhere. For example, Stanford Financial may end up needing money, rather than supplying it. The bank franchises in Antigua, Venezuela and Panama have been taken over by the respective authorities. Even if they are re-sold, it is unlikely any money trickles back to the Antigua receiver.

Apparently the going rate for these lawyers is 40% of what is collected plus expenses.
Those expenses may turn out to be larger than any recovery. Some are going around claiming that they will be able to recover 40% of your investment. If they are so convinced, tell them to “buy” your claim for 20% and see the reaction. Not so enthusiastic anymore? I thought so.

In any case, ask what exactly do they plan to do. Sue SIBL? Sue your advisor? Sue the Antiguan Government? Maybe I’m missing something but I don’t see how a lawyer will put your claim ahead of the others.

The receiver in Antigua doesn’t think you need a lawyer either. Read the FAQ. Particularly the last one.


If you are the holder of a FROZEN Stanford Financial account and have never held an Antigua CD.

You do NOT need a lawyer. You need some patience. Your account will be thawed as soon as Mr. Janvey (the US receiver) verifies you have never had an Antigua CD. You do need to find a place to take your money because it can’t stay at Stanford, so start looking around.
If you want to sue Mr. Janvey for hardship, cost of opportunity, well go ahead. Remember that a judge has approved his actions.

If you are the holder of a FROZEN Stanford Financial account and have held an Antigua CD in the past.

You may think you were lucky to get out of Antigua, but unfortunately Mr. Janvey wants your money. If the interest you collected was part of Mr. Stanford’s fraud, you (according to this theory) are the beneficiary of “fraudulent conveyance” and need to return that “profit”. I’m not saying I agree with this, but apparently Mr. Janvey wants to do this.
If he does, you will be one of many affected. I would expect some sort of class action. You should probably join.

How far Mr. Janvey wants to take the “conveyance” principle is also a matter of speculation, because theoretically he could ask St. Jude Hospital to give back the Stanford donations or preferably for Mr. Stanford’s ‘acquaintances” or family to give back their Christmas presents. We’ll have to wait and see. For now he wants the Stanford accounts, because that is what is at his disposal. It may not be fair, but that is what it is.


If you are a past Antigua CD holder, lucky enough to not be anymore.

If you are outside of the US, you probably do NOT need a lawyer. I really don’t see how the Antiguan receiver can get at your assets for the “conveyance” thing, unless you have assets in Antigua. In the US, Mr. Janvey would have to find you first and unless the US firm has the records of all the Antigua CD holders, that won’t be easy to do.

Keep in mind, that people will be looking for money, and they may just want yours. So keep your options open, In any case, this will take some time, and no “conveyance” claims have been made yet in the Madoff case, as far as we know.

If you are a Stanford Advisor who didn’t sell Antigua CDs

You probably don’t need a lawyer, unless Mr. Janvey decides to collect those upfront “advances’ some of you received for bringing your business over to Stanford. I don’t see that case, but with these things you never know.
Keep your Rolodex, though. Good odds is that your clients may still like you and could even take their accounts to wherever you end up and keep you as an advisor.
If you find a new place, though…this time check it out better before signing on.

If you are a Stanford Advisor who sold Antigua CDs

You probably need a lawyer. Not to protect you from investor lawsuit, there is a 1994 Supreme Court decision that deals with that (or so I’m told). However, I could expect “fraudulent conveyance” to extend to the commissions and prizes that were paid for selling these CDs. If, on top of that, your assets are at Mr. Janvey’s disposal (frozen), I’d think he might want some of that. Besides a lawyer, maybe a career counselor would be good. There is a future for you in sales, but not so sure if in finance.
In any case, it always is a good policy to “know your client”, because they may be looking to know you better, after finding out that their Antigua CDs aren’t worth much anymore. Be careful.

If you are a Stanford Insider

You know you need a lawyer, but you already probably have the best other people’s money can buy.

Tell your tale of woe

If you are a Stanford Antigua Investor and would like to talk about your troubles, the BBC is listening.

Here's an email so they can contact you for an interview: LINK. They asked me if I knew anyone, so I'm just passing this along.

Jon Stewart - Financial Analyst

Mr Stewart has proven that not only is he a brilliant comedian, but an illuminated financial and market analyst.
Here is an invitation to watch last night's "Daily Show" (follow the LINK). It may be the best 21 minutes you ever invested.

LINK

You will understand WHY I am a fan.

(Oh...and Stanford is on it too)

Stanford vs. Stanford

This is just to clear up some concepts, especially for the friends in media and some of the readers who may be confused. I really should be getting off the case, soon.
There are several “Stanford” institutions being mentioned these days, so it’s important to try to separate and clarify.

Stanford International Bank (Antigua) is the center of the controversy and where everything started. This is the “CD” issuer and where the $8 billion (more or less) portfolio seems to be missing. There are 28.000 account holders very upset at this bank.

Stanford Group Company, based in Houston, is NOT a bank. It (and its subsidiaries) is a broker-dealer and investment advisor, along the lines of a Raymond James (with our apologies to the good people at RJ). It also has accounts, about 35.000 of them.

SGC, however, does NOT have custody of the securities or cash in these accounts. These are kept at Pershing, J.P. Morgan Clearing and others. SGC and its team of advisors and brokers just “managed” these assets, that is gave orders to buy/sell or whatever.
So these assets are “safe” and the holders of these accounts (including Johnny Damon, my mistake) have not lost their money (unless they had Antigua CDs…of course). But these accounts are currently “frozen”, as in the holders can’t make withdrawals or shift their assets to a different broker/dealer (Merrill, Morgan Stanley, etc.) at this moment. This is a bother for these people, but it should be temporary.

The value of these assets is also a good question, since SGC has claimed to have $50 billion “under management”. Given the “numerical enhancement” ability of the Stanford PR team, that would seem to be an overstatement. Why is this important? Read on.

SGC is owned by Mr. Stanford directly, presumably bought or established somehow with money originating in Antigua (compensation or “Loans”, etc.). So if this business could be liquidated or sold somehow, that money could be used to compensate the Antigua CD holders (stress the could).
The ideal scenario: sell SGC to a competitor quickly, take that money and put it in the bank to pay those CD holders.

However, the SGC receiver, a Mr. Janvey is quickly finding out that SGC is a little black hole in itself. Being an analyst, we went to see SGC’s statements. Only a balance sheet is available (no P/L) and its from 2007. But that’s good enough.

First glimpse: $85 million in equity. Hurrah! However at second look, it is not so good. The cash and “equivalents” is listed at $48 million. Normally that would be good. But in the notes we see that Mr. Stanford made a capital infusion of $7 million in SGC early 2008. Why would a stockholder put in additional capital to this company, if it had $48 million in cash and was way over regulatory net capital requirements?
The $48 million may have been there, but it was more likely an “equivalent” than cash.
Receivables from Antigua? Perhaps.

The other item that stands out is $39 million in “Advanced compensation agreements” From what we gather, SGC would pay money upfront to investment advisors/brokers for them to bring their clients’ assets to SGC. These amounts would be amortized over time, as those assets would generate fees (supposedly) for the company. If the advisor/broker left, he or she would be on the hook for this money (look up “disgruntled ex-employees”).

Basically this is money that has already been paid and never gets collected, as long as the advisor/broker works at the firm. If the firm no longer offers them a job…well I guess they may not want to pay that money back. In the current situation, this item would seem to be worthless.

The buildings have mortgages, the equipment is leased, you get the idea.

How about the intangibles? Although numbers are lacking, referral fees from Antigua made up a good part of SGC income. It did generate income from its internal business, but that would not suffice to sustain its current structure. You may not be able to give the company away.

That leaves the 35,000 accounts and Mr. Janvey’s headache. He would love to be able to “sell” or assign this business to another broker/dealer investment advisor. But this isn’t quite as clear-cut as when Barclays purchased Lehman’s business. Who are those accounts really tied to? Stanford or the advisor? Or given what has transpired neither?. No one is going to buy a business that walks out the door the first chance it gets.

Time is of the essence; the longer the accounts are frozen the more likely they are to move away once thawed. There is little or no cash to pay employees to come in and work a transition.

And there is likely to be very little left for the US receiver to distribute back to Antigua (if any at all).

Of course, the good news (if you got all this) is that the fraud still stands at around $8 billion (not $50 billion).

EDIT: The "assets under management" were estimated by the receiver at $6 billion.