June 11, 2010
June 08, 2010
Madoff: "F--k My Victims"
Perhaps one should not be surprised about Bernie Madoff's complete lack of remorse, but a New York magazine article is sure to infuriate not only the con man's victims.
April 09, 2010
Rubin: “I Did Not Want Significant Operational Responsibility”
By Ravi Nagarajan
Robert Rubin received a total of more than $126 million in cash and stock compensation over a ten year period at Citigroup for serving as a board member and as a “strategic advisor” to senior management. However, the role never had any clearly defined operational responsibilities as Mr. Rubin was quick to point out at a hearing of the Financial Crisis Inquiry Commission yesterday:
Let me know turn to Citigroup more specifically. My role at Citi, defined at the outset, was to engage with clients across the bank’s businesses here and abroad; to meet with foreign public officials for a bank present in 102 countries; and to serve as a resource to the bank’s senior executives on strategic and managerial issues.
Having spent my career in positions with significant operational responsibility — at Treasury and Goldman Sachs — I no longer wanted such a role at this stage of my life, and my agreement with Citi provided that I would have no management of personnel or operations.
This brings to mind the old saying: “Nice work if you can get it”.
While there is no doubt that Mr. Rubin brought a great deal to the table in terms of his contacts with foreign officials and experience in the industry, this situation always appeared to be an example of the revolving door between Washington and Wall Street that Simon Johnson criticized in his recent book, 13 Bankers, which we reviewed last month.
Was Mr. Rubin really hired for his expertise in the industry and the advice he could provide to senior management or to use his knowledge of government to pave the way for Citi to grow in size and influence to the point where it clearly became “too big to fail” in the recent crisis? This is a legitimate question to ask in light of Mr. Rubin’s statement that he had no operational responsibilities and was unaware of serious problems until it was too late.
To be fair to Mr. Rubin, it is clear that Citi’s management (which undeniably did have “operational responsibilities”) entirely failed to manage risk properly. While former CEO Charles Prince should get credit for expressing remorse at the hearings yesterday, he bears a great deal of responsibility for delegating key risk management tasks to a chief risk officer.
As Warren Buffett has stated on several occasions, risk management must be a core responsibility of a CEO and should never be delegated. Mr. Prince obviously failed to follow this advice and instead famously stated that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
We have now seen what happens when the music stops and an institution is left only with incompetent management and senior advisors who disclaim any operational oversight responsibilities.
The author of this post is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.
March 13, 2010
Was Lehman’s CEO Criminally Negligent or Merely Incompetent?
By Ravi Nagarajan
In a pattern that would be amusing if it was not so disturbing, we are again witnessing the spectacle of lawyers for a disgraced CEO who claim that their client was “unaware” of key risks that led to the downfall of their firm. The Lehman Brothers bankruptcy examiners report has been widely covered in the business media over the past few days and, at a minimum, paints a picture of shocking incompetence and an intent to mislead among Lehman’s senior management team. It is the type of scenario in which a former CEO’s only defense appears to rest on claims that he was incompetent rather than criminally negligent.
Repo 105 Transactions
The Wall Street Journal reports that Lehman management routinely engaged in “Repo 105″ transactions in an attempt to dress up the balance sheet prior to the end of financial reporting periods. In a normal repurchase agreement, a borrower uses a financial security as collateral for a cash loan. The agreement generally involves the sale of the collateral combined with a commitment to repurchase the same security at a point in the future at a higher price. In a “Repo 105″ transaction, Lehman was able to book the transaction as if it was an outright sale rather than an ordinary repo transaction because the assets the firm moved were worth 105% or more of the cash it received in return.
Through this accounting maneuver, Lehman was able to appear less leveraged than it really was. According to the Wall Street Journal, no United States based law firm would sanction this accounting treatment so Lehman secured an opinion letter from a London law firm named Linklaters. If a U.S. based Lehman entity needed to engage in a Repo 105 transaction, it would have to move the security to a European division to execute the transaction.
Lehman executives are on record acknowledging the necessity of such transactions as the following quote from a Wall Street Journal article clearly demonstrates:
Four days prior to the close of the 2007 fiscal year, Jerry Rizzieri, a member of Lehman’s fixed-income division, was searching for a way to meet his balance-sheet target, according to the report. He wrote in an email: “Can you imagine what this would be like without 105?”
A day before the close of Lehman’s first quarter in 2008, other employees scrambled to make balance-sheet reductions, the report said. Kaushik Amin, then-head of Liquid Markets, wrote to a colleague: “We have a desperate situation, and I need another 2 billion from you, either through Repo 105 or outright sales. Cost is irrelevant, we need to do it.”
Grossly Negligent, Criminally Responsible, or Merely Incompetent?
Lehman’s CEO Dick Fuld is cited in the bankruptcy examiner’s report as being “at least grossly negligent” regarding the Repo 105 transactions:
The examiner wrote there was “sufficient evidence” to support a legal claim that Mr. Fuld was “at least grossly negligent for failing to ensure” Lehman filed proper financial statements about its accounting for the transactions, and that a key former executive of the firm, the chief operating officer, personally briefed him on the matter.
Of course, Mr. Fuld’s attorneys have decided to pursue the “incompetent” defense as opposed to taking any responsibility for the situation:
Mr. Fuld’s lawyer said on Thursday that Mr. Fuld “did not know what those transactions were” and wasn’t “aware of their accounting treatment.”
It is unclear what is more shocking: The prospect of a CEO of a major financial institution willfully pursuing financial transactions designed specifically to mislead investors and counterparties into thinking that the firm was less leveraged than it really was or the idea that the CEO really had no idea that these maneuvers were taking place at all.
Buffett’s Decision on a Lehman Investment
The bankruptcy report also contains some interesting information regarding Lehman’s attempts to have Warren Buffett invest $2 billion in the company as a “stamp of approval”. Of course, Mr. Buffett decided against doing so when he found problems in Lehman’s 10-K as well as negative signals from Lehman executives who were unwilling to invest in the firm on the same terms he was offered.
As is often the case, we can also look at Mr. Buffett’s statements regarding corporate governance to understand what went wrong at Lehman:
“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.”
– Warren Buffett’s 2009 Letter to Shareholders.
If Lehman’s story can be distilled down to its core problem, it seems to be that the company’s CEO did not regard himself as the Chief Risk Officer. Based on Mr. Fuld’s own admission (if we are to believe him), he was not aware of critical accounting policies that misled investors and counterparties who were using Lehman’s financial statements to judge the health of the business. Of course, the Repo 105 maneuver was only necessary because of other failures to control risk at the firm.
It would be a refreshing change if at least one CEO involved in the demise of a major financial institution would step up and admit that the responsibility was his rather than hiding behind the “incompetence” defense.
The author of this post is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.
March 12, 2010
Financial Middlemen Can Cost Up To 6% Annually
Bloomberg has put together an interesting interactive presentation on the layers of costs often assumed by stock market investors. Writes Bloomberg:
Beware the costs of financial middlemen. You may think you're only paying 0.5% to 2% to have other people manage your money, but the multiple layers of financial intermediation that is so prevalent in today's investing world – with one money manager subcontracting to another – can lead to as much as 6% in non-performance-related fees being assessed along the way. What's worse is that this proliferation of the middlemen has been accompanied by rising CEO pay but often lukewarm returns for shareholders -- the ultimate owners of the companies.
Lehman Bankruptcy Examiner's Report: The Roles of Warren Buffett and David Einhorn
The bankruptcy examiner assigned to the Lehman Brothers bankruptcy case published a 2,000+ page report yesterday, which reads like the modern-day equivalent of a Greek tragedy. Many things went wrong on Lehman's road to collapse, a collapse that appears to have been preventable had Lehman executives owned up to the company's dire situation. Lehman chief Richard Fuld let slip away several opportunities to shore up Lehman's capital base, most notably an opportunity to cut a deal with Warren Buffett of Berkshire Hathaway. Such a deal would have put an important "stamp of approval" on Lehman, likely giving it much-needed time and credibility.
The Role of Warren Buffett and David Sokol
Here are some passages that mention Warren Buffett's contacts with Lehman as it was trying to raise capital:
pp. 613-614: After the near collapse of Bear Stearns, Lehman moved to raise additional capital. Lehman initiated work on an equity offering and restarted efforts to locate candidates willing to make a strategic investment in Lehman. In late March [2008], Lehman undertook discussions with Warren E. Buffett, CEO of Berkshire Hathaway. However, those discussions did not result in any investment by Buffett, Berkshire Hathaway, or any of its affiliates. Instead, at the beginning of April 2008, Lehman completed a $4.0 billion convertible preferred stock offering. Other offerings to bolster Lehman’s capital followed in May and June.
pp. 640-642: The SpinCo idea was a variation on a good bank/bad bank structure. Among
Lehman’s strategic options, SpinCo had a longer time horizon than other options, because substantial advance work would be needed. By early August 2008, Lehman anticipated completing the spin‐off in the first quarter of 2009. Lehman intended SpinCo to accomplish four interrelated purposes. The first and primary purpose of SpinCo was to relieve Lehman’s balance sheet of its “outsized” commercial real estate exposure that had become a source of increasing market concern and pressure. Second, by moving those assets to a separate entity, Lehman hoped to avoid the necessity of having to continue marking down those assets as the market continued to deteriorate. That process had exposed Lehman to criticism in the press and by analysts in what Hugh “Skip” E. McGee, III, the head of Lehman’s Investment Banking Division, referred to as the “are we marked correctly game.” Third, by spinning off those assets, Lehman would avoid a “fire sale for the vultures” that would have locked in its paper losses. Instead, SpinCo would allow Lehman to manage those assets on a value‐maximizing basis for the benefit of Lehman’s shareholders, either by selling the SpinCo assets or holding them to maturity. Fourth, once Lehman had purged its balance sheet of “toxic” commercial real estate assets, it hoped that the post‐spin “clean” or “core” Lehman (a.k.a. “CleanCo”) could achieve returns on equity in the low teens, twelve times net leverage, and maintain an A rating. However, SpinCo faced substantial structural and execution issues that led some observers to question its feasibility. Paulson told the Examiner that he expressed great skepticism about SpinCo to Fuld and advised him to abandon the plan. James L. “Jamie” Dimon, JPMorgan’s CEO, told the Examiner that he did not believe that SpinCo would work, thinking that the proposal was too leveraged, too complex, and involved too much real estate. When the concept was described to Buffett, he dismissed it. Ultimately, Lehman was not able to carry out the SpinCo plan prior to its bankruptcy.p. 651: In March 2008, Lehman had approached Buffett concerning a private investment. In mid‐July 2008, Lehman again considered approaching Buffett about investing in SpinCo debt. In late August or early September 2008, McGee called MidAmerican Energy Holdings’ President David L. Sokol, hoping to entice Sokol either to have MidAmerican Energy Holdings invest in the SpinCo plan or to advocate the plan to Buffett. McDade and McGee showed Sokol Lehman’s “Gameplan”
presentation, explaining that Lehman was ready to execute the plan if Lehman had an investor. Sokol was not interested in investing, but relayed the basic premise of the SpinCo plan to Buffett. During that discussion, Buffett dismissed the idea as unrealistic.
p. 664-667: In late March 2008, McGee suggested that Lehman reach out to Buffett. McGee had a pre‐existing banking relationship with Sokol of MidAmerican Energy, which is majority‐owned by Buffett’s Berkshire Hathaway. Either McGee or Joseph G. Sauvage, LBI Vice‐Chairman, called Sokol to ask if Buffett would take Fuld’s call. Jerry A. Grundhofer, who was about to join Lehman’s Board, also asked Buffett if he would take Fuld’s call. Buffett agreed. Before calling Buffett, Fuld called Sokol on March 27, 2008. That same day, Lehman prepared a draft of a letter, to be sent by Fuld to Lehman employees, outlining a $3.5 billion investment from Buffett in Lehman’s preferred stock at a $54 per share conversion price. Fuld told the Examiner that he did not know how that letter came to be prepared, and it does not appear that Fuld saw the draft. Fuld also did not recall Buffett indicating a willingness to invest $3.5 billion. Buffett was surprised that Lehman had prepared a draft letter announcing the deal, because he never got close to a deal with Lehman. Fuld and Buffett spoke on Friday, March 28, 2008. They discussed Buffett investing at least $2 billion in Lehman. Two items immediately concerned Buffett during his conversation with Fuld. First, Buffett wanted Lehman executives to buy under the same terms as Buffett. Fuld explained to the Examiner that he was reluctant to require a significant buy‐in from Lehman executives, because they already received much of their compensation in stock. However, Buffett took it as a negative that Fuld suggested that Lehman executives were not willing to participate in a significant way. Second, Buffett did not like that Fuld complained about short sellers. Buffett thought that blaming short sellers was indicative of a failure to admit one’s own problems. Following his conversation with Buffett, Fuld asked Paulson to call Buffett, which Paulson reluctantly did. Buffett told the Examiner that during that call, Paulson signaled that he would like Buffett to invest in Lehman, but Paulson “did not load the dice.” Buffett spent the rest of Friday, March 28, 2008, reviewing Lehman’s 10‐K and noting problems with some of Lehman’s assets. Buffett’s concerns centered around Lehman’s real estate and high yield investments, lending‐related commitments, derivatives and their related credit‐market risk, Level III assets and Lehman’s securitization activity. On Saturday, March 29, 2008, Buffett learned of a $100 million problem in Japan that Fuld had not mentioned during their discussions, and Buffett was concerned that Fuld had not been forthcoming about the issue. The problems Buffett saw in the 10‐K along with Fuld’s failure to alert Buffett to the issue in Japan cemented Buffett’s decision not to invest in Lehman. At some point in their conversations, Fuld and Buffett also discovered that there had been a miscommunication about the conversion price. Buffett was interested only in convertible preferred shares. Buffett told Fuld that he was willing to agree to a $40 conversion price per share, while Fuld thought Buffett was offering to buy in at “up‐40,” or 40% above the current market price, which would have been about $56 per share. On Friday, March 28, 2008, Lehman’s stock closed at $37.87. Fuld spoke to Lehman’s Executive Committee and several Board members about his conversations with Buffett. Lehman recognized that an investment by Buffett would provide a “stamp of approval.” However, Lehman already had better offers for its April capital raise, and Lehman did not think it could give a better deal to Buffett at the same time it gave a less attractive deal to others. On Monday, March 31, 2008, before Buffett could tell Fuld that he was not interested, Fuld called Buffett to say that Lehman could not accept his terms.
p. 667-668: McGee contacted Sokol again in late August or early September 2008 and outlined Lehman’s “Gameplan” for survival, specifically SpinCo. During a subsequent telephone call with Sokol, McGee explained the “good bank/bad bank” scenario and stated that Lehman would need an investor. Sokol believed the e‐mail and call were intended to induce Sokol to pass that information on to Buffett, so Sokol briefed Buffett on SpinCo. Buffett thought the idea would not solve Lehman’s problems. Sometime during the week prior to Lehman’s bankruptcy, McGee again reached out to Sokol with what both Sokol and McGee described to the Examiner as a “Hail Mary” pass. McGee asked, “Do you have any ideas to save us?” Sokol, who was bear hunting in Alaska at the time, told McGee that he did not.
p. 708: On Saturday, September 13, 2008, Barclays reached out to Buffett to ask whether Buffett would guarantee Lehman’s operations until a Lehman‐Barclays deal closed. Barclays and Buffett discussed a scenario in which Buffett would provide $5 billion of protection. Buffett expressed interest in that possibility, but Barclays did not pursue it.
p. 709: Lehman’s management had scheduled a Board meeting for noon on Sunday, September 14, 2008, but delayed the meeting until 5:00 p.m. in order to try to come to some resolution at the FRBNY meetings. At some point on Sunday, Fuld was told that the FSA would not waive the requirement that a guaranty of Lehman’s obligations required the approval of Barclays’ shareholders, and therefore the FSA would not approve the Barclays deal. Fuld asked Paulson to call Prime Minister Gordon Brown, but Paulson said he could not do that. Fuld asked Paulson to ask President Bush to call Brown, but Paulson said he was working on other ideas. From that, Fuld inferred that Paulson was going to call Buffett, although Paulson never mentioned Buffett’s name. Fuld brainstormed about other means to contact and convince the FSA to permit the deal, including having Jeb Bush, a Lehman advisor, ask President Bush to call the Prime Minister.
The Role of David Einhorn
Greenlight Capital's David Einhorn is also mentioned in the report. Here are the excerpts:
p. 205-206: ...David Einhorn of Greenlight Capital, who at the time held short positions in Lehman, stated in an April 8, 2008 speech: "There is good reason to question Lehman’s fair value calculations. . . . Lehman could have taken many billions more in write‐downs than it did. Lehman had large exposure to commercial real estate. . . . Lehman does not provide enough transparency for us to even hazard a guess as to how they have accounted for these items. . . . I suspect that greater transparency on these valuations would not inspire market confidence." Einhorn’s skepticism was also reflected in the financial press. On March 20, 2008, Portfolio.com published an article titled “The Debt Shuffle,” which asked: “What actually happened to Lehman’s balance sheet in the first quarter? Assets rose. Leverage rose. Write‐downs were suspiciously miniscule. And the company fiddled with the way it defines a key measure of the firm’s net worth.” Lehman’s Head of U.S. Global Credit Products, Eric Felder, forwarded this article to Ian Lowitt, Lehman’s Co‐Chief
Administrative Officer, with the note, “bunch of people looking at this article,” to which Lowitt replied, “[d]oesn’t help.” Firms such as Lehman required the confidence of the market to assure its sources of short term financing that they would be repaid; and the market’s confidence in Lehman was publicly questioned.p. 661: SpinCo was seen by some as validation of their suspicion that Lehman’s assets were not properly valued. David Einhorn, President of Greenlight Capital, told the Examiner that the creation of SpinCo supported his contention that Lehman had not been marking down its commercial assets. Einhorn believes that Lehman’s efforts to spin out its commercial real estate into a company where the assets did not have to be marked to fair value revealed that Lehman had not been marking those assets to fair value.
p. 713: After Bear Stearns nearly collapsed, short sellers began to focus on Lehman and other banks. On March 20, 2008, Russo contacted Linda Thomsen, the SEC’s Head of Enforcement, regarding rumors of hedge funds “taking another run at Lehman.” On April 1, 2008, at Lehman’s prompting, Erik R. Sirri, head of the SEC’s CSE program, made a statement at an annual conference regarding the SEC’s view of the seriousness of rumors and stock manipulation in the context of short sales. At the April 15, 2008 Board meeting, Lehman’s management discussed Lehman’s concerns regarding short selling. On May 21, 2008, at the Ira Sohn Conference, one day after the comment period for the SEC’s proposed rule concluded, Einhorn gave a presentation on Lehman, analyzing Lehman’s Form 10‐Q, filed April 9, 2008.2767 Einhorn announced that he was shorting Lehman’s stock based on his belief that the stock was over‐valued. Before that presentation, Einhorn had corresponded with Callan in mid‐May 2008, as part of what he described as fact‐checking in advance of his presentation at the Ira Sohn Conference. Einhorn focused on four major issues in his correspondence with Callan and in his May 21, 2008 speech: (1) Lehman’s disclosures regarding CDO exposure and related write‐downs; (2) the difference between the amount of Level III assets disclosed in the Form 10‐Q filed in February 2008 and during Lehman’s first quarter 2008 earnings call; (3) Lehman’s disclosure and valuation of its stake in KSK Energy; and (4) Lehman’s write downs of its CMBS assets. On the day of Einhorn’s speech, Lehman’s stock closed down $2.44, with its highest volume of the entire month of May 2008. Einhorn’s criticism of Lehman and Callan is commonly cited as the reason for Callan’s replacement less than three weeks later. Following the near collapse of Bear Stearns, Einhorn published a book, Fooling Some of the People All of the Time, which focused on Allied Capital. Thomas C. Baxter, Jr., General Counsel to the FRBNY, said that reading Einhorn’s book made him think that the FRBNY should pay more attention to short sellers’ concerns. However, Baxter did not reach that conclusion for the reason that Lehman would have wanted, namely to persuade the Government to regulate short sellers, but rather because it appeared to Baxter that Einhorn may have been shorting Lehman for good cause. Baxter was unable to say, however, whether anyone at the Federal Reserve followed up on Einhorn’s criticism of Lehman in his speech.
The following are links to the Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers:
March 06, 2010
Hank Greenberg Ready to Testify About General Re Transaction
By Ravi Nagarajan
AIG’s former CEO Maurice “Hank” Greenberg has indicated that he is ready to testify regarding AIG’s transaction with Berkshire Hathaway’s General Re group in 2000. The transaction in question was orchestrated by General Re in a manner that allowed AIG to inflate its loss reserves by $500 million. Mr. Greenberg was never charged with a crime but prosecutors identified him as an unindicted co-conspirator and he refused to testify citing his fifth amendment right against self incrimination. Now that the statute of limitations has apparently expired, Mr. Greenberg is willing to provide testimony in the case.
The AIG situation has been a headache for General Re and Berkshire Hathaway over the past decade. On January 20, General Re finally reached a settlement with the federal government which will allow the firm to avoid prosecution for its role in the accounting fraud. General Re paid $92 million in total fines as part of the settlement. Several General Re executives were implicated in the sham transaction and the entire episode threatened to tarnish Berkshire Hathaway’s reputation. (The AIG matter is not the only trouble Berkshire ran into after the 1998 General Re acquisition. We provide extensive detail regarding Berkshire’s troubled history with General Re in the Berkshire Hathaway 2010 Briefing Book.)
Warren Buffett was never accused of any wrongdoing in the case and willingly spoke to prosecutors regarding his knowledge of the situation. When the $92 million settlement was announced, Mr. Buffett made the following statement regarding the matter:
“We did something wrong and we paid the price,” Buffett said during an interview on the Fox Business Network. “It shouldn’t have been done, and there’s nothing inappropriate about the fine we paid, so I have no problem with it.”
So on one hand we have Mr. Buffett who willingly cooperated with prosecutors and has taken responsibility for the actions of one of his companies and on the other hand we have Mr. Greenberg who refused to testify years ago and is only coming forward now that the statute of limitations has expired.
Mr. Greenberg had every right to exercise his fifth amendment protection against self incrimination, but Mr. Buffett has clearly set the better example in this case.
The author of this post is a private investor and writer focused on applying value investing techniques to find securities trading well below intrinsic business value. He is a Manual of Ideas contributor and editor of The Rational Walk.
Disclosure: The author owns shares of Berkshire Hathaway and is the author of The Rational Walk’s Berkshire Hathaway 2010 Briefing Book which provides a detailed analysis of the company along with estimates of intrinsic value.
November 27, 2009
The Global Economic Crime Survey: Economic Crime In A Downturn, by PricewaterhouseCoopers, November 2009
November 25, 2009
Bryan Burrough's Vanity Fair Profile of Marc Dreier
By Nadav Manham
Anyone who co-wrote Barbarians at the Gate belongs in the Business Writers Hall of Fame. Anyone who wrote Vendetta about Edmond Safra also belongs in the Hall of Fame. Anyone who wrote The Big Rich about the great Texas wildcatters belongs there too. Bryan Burrough did all three, which puts him on Mt. Rushmore.
Now that I've regained my composure: The November 2009 Vanity Fair features Burrough's extended profile of Marc Dreier, which Dreier cooperated with. It's a shame Bernard Madoff came along and ruined everything because Marc Dreier's scheme was even more audacious and difficult to imagine. It's one thing to go after and defraud the naive and the gullible, rich widows and orphans and status-seekers who don't know much about investing, and to do it via a Ponzi scheme, which has an internal logic to it that makes it easier to prolong. Dreier just "went full con artist", which everyone knows you should never do (start watching at 0:25 and stop at 1:10), and he went after and defrauded the best, stealing from a who's who of hedge funds.
The obvious question is how someone like Dreier could have stolen so much from people who are so good. And he stole the most from the best--you're just going to have to trust me when I say this. Without knowing the details of the scheme in full, all I can say is that if Dreier had had to deal one-on-one with the managers of these hedge funds, rather than with people who reported to them, he would not have had a prayer of success. It's one of the buried risks of investing in large funds--the founding genius can't oversee everything.
The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is a Manual of Ideas contributor and editor of The Investor's Consigliere.
November 07, 2009
Cast of Characters in Galleon Insider Trading Case
From Bloomberg:
Raj Rajaratnam: Galleon co-founder Rajaratnam, 52, was arrested and charged Oct. 16 with making millions of dollars by trading on insider information. Rajaratnam, born in Sri Lanka, earned a degree from the University of Sussex, England, in 1980, and an MBA in Finance from the University of Pennsylvania’s Wharton School in 1983. Rajaratnam lives in New York.
Roomy Khan: A former employee of Intel Corp., Khan, 51, was convicted of wire fraud in 2001 for passing inside sales information to Galleon. She worked for Galleon in the 1990s and tried to rejoin the firm in late 2005. She has agreed to plead guilty to charges of conspiracy and securities fraud. She is cooperating with federal authorities. She lives in Fort Lauderdale, Florida.
Deep Shah: A former analyst at Moody’s Investors Service, Shah, 27, is alleged to have given insider information to Khan, including Hilton Hotels Corp.’s impending takeover by Blackstone Group LP. Federal authorities believe he is now in India.
Rajiv Goel: Goel, 51, a former Intel Capital employee, was arrested and charged Oct. 16 with passing inside tips about Clearwire Corp. and Intel earnings to Rajaratnam. He lives in Los Altos, California. He has an MBA in Finance from Wharton and is a friend of Rajaratnam.
Danielle Chiesi: Chiesi, 43, was a consultant at New Castle Funds LLC, a former Bear Stearns Cos. hedge fund. She was arrested and charged Oct. 16 with insider trading. Prosecutors claim she passed tips along to Rajaratnam, including advance notice of a spinoff by Advanced Micro Devices. Chiesi lives in New York.
Mark Kurland: Kurland, 60, co-founder of New Castle, was Chiesi’s boss. He was arrested and charged in the insider trading case Oct. 16. Kurland lives in Mt. Kisco, New York.
Robert Moffat: A former executive with International Business Machines Corp., Moffat, 53, was arrested and charged Oct. 16. Federal officials claim he passed tips to Chiesi, including information about the Advanced Micro Devices spinoff and IBM earnings. He lives in Ridgefield, Connecticut.
Anil Kumar: A friend of Rajaratnam, Kumar, 51, is a former director at the consulting firm McKinsey & Co. He was charged with insider trading Oct. 16. Investigators claim Kumar gave Rajaratnam inside information on the impending spinoff of Advanced Micro Devices, which was a McKinsey client. He lives in Saratoga, California.
Hector Ruiz: The most prominent executive tied to the Galleon case, Ruiz, 63, is the former chief executive of Advanced Micro Devices. He is the executive prosecutors say provided insider information about the upcoming Advanced Micro Devices spinoff to Chiesi. Ruiz, who has not been charged, said he will resign as chairman of Globalfoundries Inc., the company that resulted from the spinoff, Jan. 4. He is on a leave of absence from the company.
Richard Choo-Beng Lee: Lee, 53, and Rajaratnam were colleagues at the research firm Needham & Co. almost 20 years ago. Lee and Ali Far founded Spherix Capital LLC in 2008. Lee has a degree in electrical engineering from Duke University and an MBA from the University of California, Berkeley. He pleaded guilty and is cooperating with federal authorities. He lives in San Jose, California.
Ali Far: Far, 47, is a former Galleon employee who founded Spherix Capital with Lee. He pleaded guilty and is cooperating with the government. Far lives in Saratoga, California.
Steven Fortuna: Fortuna, a co-founder and principal of the hedge fund S2 Capital in Boston, pleaded guilty and is coopering with prosecutors. Fortuna is alleged to have traded on a tip from Chiesi about Akamai Technologies Inc. earnings. Fortuna, 47, lives in Westwood, Massachusetts.
Ali Hariri: A former vice president at the semiconductor company Atheros Communications Inc., Hariri, 38, allegedly tipped Far and Lee to company earnings. He was arrested Nov. 5 and charged with conspiracy and securities fraud. Hariri lives in San Francisco.
Arthur Cutillo: Cutillo, 33, a former attorney at the law firm Ropes & Gray LLP, was arrested Nov. 5 and charged with passing insider tips on deals the firm was working on involving Hilton, Avaya Inc., 3Com Corp. and Axcan Pharma Inc. Cutillo, who is alleged to have received kickbacks for the tips, lives in New Jersey. Prosecutors say he was a key source of inside information for the ring.
Jason Goldfarb: Prosecutors claim Goldfarb, a 31-year-old New York lawyer, received tips from Cutillo and passed them on to Zvi Goffer.
Zvi Goffer: Prosecutors claim Zvi Goffer, 33, was known within the ring as “the Octopussy,” due to his reputation for having multiple sources of inside information. Goffer, the founder of Incremental Capital LLC, previously worked at Galleon and Schottenfeld Group LLC. Prosecutors say he paid Cutillo and other tipsters and gave them prepaid mobile phones to avoid detection. He was arrested and charged Nov. 5 with fraud and conspiracy. He lives in New York.
Emanuel Goffer: The brother of Zvi Goffer, Emanuel, 31, was a trader at Spectrum Trading before joining Zvi at Incremental Capital. He was arrested and charged with securities fraud and conspiracy Nov. 5. Emanuel is alleged to have traded on insider tips from Zvi.
Gautham Shankar: Shankar, 35, was a trader at Schottenfeld. He pleaded guilty to securities fraud for trading on tips from Zvi Goffer and is cooperating with the authorities. He lives in New Canaan, Connecticut.
David Plate: A trader formerly with Schottenfeld, Plate was arrested and charged Nov. 5 with securities fraud and conspiracy for trading on tips from Zvi Goffer. Prosecutors say he now works for Incremental and lives in New York.
Craig Drimal: Drimal, 53, was arrested and charged Nov. 5 with fraud and conspiracy for trading on tips from Zvi Goffer. Prosecutors say he worked in Galleon’s office space without being employed by the firm.
Michael Kimelman: Kimelman, a trader with Lighthouse Financial Group, was arrested and charged Nov. 5 with fraud and conspiracy for trading on tips from Zvi Goffer.
October 20, 2009
Galleon Due Diligence
Manual of Ideas contributor Nadav Manham of Elera Advisors writes on his blog:
From the FT. An excerpt from one due diligence report:
"Crudely, there are three ways to make money as a hedge fund manager," said one large multi-billion dollar asset manager.
"You can take advantage of trading technology, but few do.
You can be more intelligent than others, but few are.
"Or you can have some specialised source of sustainable information. Unless that information is from fundamental analysis – and in Galleon’s case it did not all seem to be – then that’s a red flag for us."
October 05, 2009
Red Flags: Watch For These Words In SEC Filings
Vito Racanelli writes an interesting article in Barron's on phrases that may spell trouble for investors:
"ANYONE WHO HAS SLOGGED THROUGH THE legalese of a thick Securities and Exchange Commission filing knows the devil is often in the footnotes or the appendix. A good rule of thumb, particularly for adverse corporate information, is that the further back in the report, the more important the information. The urge to skip sections of a 100-page 10K is a strong one, but you do so at your peril."
"Now that most regulatory filings are easily searchable on the Internet, investors can troll through the documents for key phrases suggesting something could be amiss -- let's call them dirty words."
September 15, 2009
Marc Dreier's Pre-Sentencing Letter to Judge Rakoff
Former New York corporate lawyer Marc Dreier sent an illuminating letter to Judge Jed Rakoff ahead of his sentencing in a fraud scandal that shook New York's legal establishment.
We won't spoil the outcome for you, so click here when you're ready to view the sentence ultimately given to Dreier.
July 25, 2009
A Bull Market In Financial Fraud
The Economist reports that,
"over 730,000 counts of suspected financial wrongoing were recorded in America last year, according to recent data from the Treasury Department's Financial Crimes Enforcement Network. Institutions such as banks, insurers and casinos are required by law to report suspicious activities to federal authorities under 20 categories. Financial institutions filed nearly 13% more reports of fraud compared with 2007, accounting for almost half of the increase in total filings. The number of mortgage frauds alone rose by 23% to almost 65,000. But not all categories saw an increase: incidents suspected terrorist financing fell. Just under half of all filings are related to money laundering, a proportion that is little changed in over a decade."
June 16, 2009
SEC bars Madoff from securities industry
Consider this headline from today's AP news item on Madoff: "SEC reaches settlement with Bernard Madoff, bars him from securities industry."
It's nice to know that the SEC needs to reach settlement with a guy who has pleaded guilty to one of the biggest frauds in history in order to bar him from the securities industry. Thank you, Bernie Madoff, for allowing the SEC to bar you from the industry. It appears the SEC might not have accomplished this without you.
June 12, 2009
When Bankruptcy Is A Boon To Some Bondholders
Imagine that you have invested $10 million in the bonds of Company XYZ, a cyclical business that has just breached a covenant specified in their indenture. The company needs your agreement to waive the covenanttemporarily so as to avoid a damaging bankruptcy filing.
Most bond holders in this situation would waive the covenant, perhaps in exchange for an increase in the interest rate payable on the bonds or, if the company is in more serious distress, in exchange for free warrants to buy the common stock.
You would not really have an incentive to put the company into bankruptcy -- unless you sneakily also purchased so-called credit default swaps (CDS), which are essentially low-cost insurance contracts that pay off in the case of a specified event such as a bankruptcy filing.
You might have bought CDS on Company XYZ even after you knew of the covenant breach. The price of the CDS had gone up somewhat after the covenant breach, but this does not bother you because you can still make 10x on your CDS "investment" if the company files for bankruptcy.
What's neat about this hypethetical situation is that you have the power to put Company XYZ into bankruptcy by refusing to waive their covenant breach. Even if you lose $10 million on your bond investment, your comparable investment in CDS might pay you $100 million when the company files for bankruptcy protection.
Not a bad position to be in -- and it's apparently perfectly legal. Forget about the fact that you have "insider information" about what you will do with regard to the covenant breach -- the SEC doesn't care. Forget about the fact that you will screw other bondholders and shareholders -- you're out for yourself. Forget about the fact that the company's business will be harmed by a bankruptcy filing and employees will be fired -- who cares. You stand to make a cool $100 million on your CDS, just by using your $10 million bond investment as the vehicle to getting there.
It's clear that the legality of this kind of scheme threatens the corporate bond market and invites market manipulation. This is precisely what may have happenedrecently in the bankruptcy filing cases of AbitibiBowater (ABWTQ.PK) and General Motors (GM). To be clear, these companies might have gone bankrupt anyway, especially in the case of GM. But that's not the point. The point is that there might have been bond holders of AbitibiBowater and General Motors who wanted the companies bankrupt because they had side deals with payoffs that were far sweeter than any potential return on their bond investment. Those folks might have put the companies into bankruptcy even if the remaining bondholders had wanted to find a compromise solution.
Listen carefully to the recent comments of George Soros in this Bloomberg video.
May 20, 2009
Staley Cates of Southeastern Asset Management on Chesapeake CEO Compensation
Staley Cates, President of Southeastern Asset Management, provided his view on the compensation package of Aubrey McClendon, CEO of Chesapeake Energy (CHK), during an annual presentation of Southeastern on May 7. In light of our recent critique of the scandalous dealings between Chesapeake and McClendon, we believe it is appropriate to bring you the most eloquent argument to the contrary. Says Staley Cates:
"Most recently, like in the last week or so, Chesapeake and Aubrey McClendon are hitting all these compensation lists for highly paid CEOs. There are two big misconceptions in the current discussion around McClendon being number one on that list. First, the payment of 75 million bucks to him is a lump sum allowance towards drilling that applies to the next five years. In other words, it should be viewed as 15 million per year, not 75 million in one year. While in societal terms, of course that’s absurd compared to what teachers make, but it’s less than all of his peers at similar companies like XTO and Devon. But the second point and the most important is the concept of pay for performance. Many of the people in the highly paid list did poor jobs in 2008 and did nothing to de-risk their companies where things, when things were good. By contrast, McClendon made shareholders about 30 billion dollars on three of his big four shale plays. He had paid 4.6 billion for three shale play land positions and last year he sold less than a third of those for 8.6 billion, which implicitly valued what they kept at 25.9 billion. In addition to highlighting 30 billion dollars of value created, these sales brough in a lot of cash to de-risk the balance sheet. Because gas prices plunged in ‘08, his stock did poorly, then it did even worse when his big margin call took him out. At no point did he endanger the company with his bad personal decision, and he certainly couldn’t control gas prices. Over the long term, his company has built the most per share value of almost any company in the world. So for this, it’s probably okay to pay him industry average, but his Board has framed this poorly, then they made smaller bad decisions on peripheral compensation that muddied the water. The bottom line is this is a fantastic company, he has done a terrific job, and if you were on that comp committee, you would have leaned towards rewarding him handsomely for his 2008 performance."
The argument Cates makes obviously does not change the very significant compensation figures involved, nor does it eliminate the company's unjustifiable purchases of the CEO's art collection, hiring of his catering company, and sponsorship of a sports team in which McClendon has an equity stake.
Nonetheless, Staley Cates makes some good points. We respect Cates's partner Mason Hawkins and believe Hawkins and Cates are the types of investors who pay attention to the quality and compensation of management. If they views McClendon's compensation as appropriate, we are certainly inclined to soften our stance on it.
Dislcosure: No positions.
May 16, 2009
Chesapeake Energy: Case Study in Bad Corporate Governance
A truly amazing letter by the Chesapeake Energy (CHK) general counsel ("GC") is making the rounds among investors concerned with public companies' corporate governance practices. While we have not followed CHK's corporate actions to date, the above-linked letter caught our attention.
In the letter, CHK's GC attempts to justify paying a $75 million bonus to CEO Aubrey McClendon in 2008, a year in which Chesapeake's stock price declined by 5.9%. Actually, we stand corrected: the price dropped by an order of magnitude more -- it finished 2008 down an impressive 59%. Mr. McClendon's total compensation during such a notable year? 100 million sixty-nine thousand two hundred and one U.S. dollar (see it for yourself in CHK's proxy statement).
As if the compensation issue was not sufficient, the GC felt it necessary to justify another use of corporate funds as follows:
"In December 2008, the Company purchased an extensive collection of antique historical maps of the American Southwest from [CEO] Aubrey [McClendon] for $12.1 million, which represented his cost. The collection includes over 500 museum quality pieces. A dealer who had assisted Aubrey in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million. The maps have been displayed at the Company's Oklahoma City headquarters for a number of years, during which the Company has been insuring the maps in exchange for their display."
We are relieved that they bought "museum quality" pieces. Anything less would have been a waste of shareholder funds.
Least but not last, the GC explains another use of corporate funds as follows:
"In 2008, the Company paid Deep Fork Catering approximately $177,000 for food and beverage catering services, primarily for two large events sponsored by the Company. Deep Fork Catering is an affiliate of the Deep Fork Grill, an Oklahoma City restaurant in which [CEO] Aubrey [McClendon] is a 49.7% owner. Aubrey is not involved in decisions to hire Deep Fork Catering and has requested that the Company’s future use of Deep Fork Catering be limited."
How could anyone think that McClendon might be "involved" in hiring his own catering company? Don't these ignorant shareholders know that there are only a handful of catering companies around in Oklahoma City? Besides, isn't it reassuring that McClendon wants future hirings to be "limited"? They will surely not exceed CHK's cash balance and borrowing capacity, so what's the big deal?
Last but not least, the GC indulges shareholders with another wholly unnecessary explanation of a surely optimal use of shareholder funds:
"In 2008, the Company became a founding sponsor of the Oklahoma City Thunder, a National Basketball Association franchise owned and operated by The Professional Basketball Club, LLC ("PBC"). [CEO] Aubrey [McClendon] has a 19.2% equity interest in and is a non-management member of the PBC. The Company paid $3.5 million in 2008 and $1.2 million in 2009 pursuant to its sponsorship agreement for the Thunder’s 2008-2009 season. As a founding sponsor, the Company received valuable
television and radio advertising for local broadcasts of Thunder games, arena advertising space, advertising in game-day programs and on the team website, team participation in a Company-sponsored community event, game tickets and use of an arena suite. Our sponsorship level is consistent with that of other major employers in Oklahoma City, some of which also have ownership ties to the franchise. In addition to the advertising and promotional activities related to its sponsorship of the Thunder, the Company believes the sponsorship provides valuable support to the local community and contributes to employee morale."
We don't doubt for a second that it contributes to the morale of at least one employee. Go Aubrey!
Disclosure: No position (you seem surprised).
April 26, 2009
Eric Rosenfeld of LTCM on Lessons Learned
The blog Zero Hedge has posted a lecture by Eric Rosenfeld of Long-Term Capital Management fame. Says Zero Hedge about the video,
"A great way to spend an hour and a half and understand just how black swans can annihilate seemingly riskless portfolios, especially those with a preponderance of Ph.D.'s as portfolio managers who claim to understand "risk". If nothing else fast forward to the 1 hour mark to listen to Eric's discussion of endogenous risk and LTCM's trading of liquidity in a crisis, and how it can all go horribly wrong when you have too many people on the same side of the trade. Prime Brokers, especially those of preferential banks, likely can see all the "liquidity" exposure from their counterparties and nudge their own institutions to react appropriately. (hat tip *.*)."
April 08, 2009
Goldman's Blankfein: Banks Had Unjustifiable "Swagger" and "Overvalued" Their Contributions
April 07, 2009
AIG Payments to Goldman Sachs Probed
Bloomberg reports on an investigation into taxpayer money that recently flowed through AIG to Goldman Sachs and other banks:
The Treasury’s chief watchdog for the U.S. financial rescue program is probing whether American International Group Inc. paid more than necessary to banks including Goldman Sachs Group Inc. after the insurer’s bailout.
Neil Barofsky, special inspector general for the Troubled Asset Relief Program, opened an audit last week into whether there were attempts made by New York-based AIG or the government to reduce the payments, according to an April 3 letter to Representative Elijah Cummings. The Maryland Democrat had requested the probe last month along with 26 other members of Congress.
March 31, 2009
Harvard Management Company Analyst Questions Dismissal
The Harvard Crimson reports on the case of a former HMC analyst who was fired after complaining about HMC's risky trading practices.
March 24, 2009
AIG's bizarre news keeps coming
The New York Post reports today that,
"AIG got shut out yesterday in its latest court attempt to seize $365 million in stock held in a charity the insurance giant wants to tap so it can pay additional bonuses to AIG executives."
The paper also reveals that,
"AIG has battled for the stock on two legal fronts simultaneously, in federal and state courts, with mixed results for 3½ years, running up a legal tab nearing $100 million."
Despite the legal defeat, AIG apparently plans to fight on -- at taxpayers' expense.
March 20, 2009
Robert Cialdini's Take on Madoff Seduction
Cialdini is author of the Charlie Munger-recommended Influence: The Psychology of Persuasion.
March 19, 2009
It's Good To Be AIG
There's more at The World I Know.
March 14, 2009
Stewart v. Cramer: A Period Piece
Every once in a while TV doesn't just report the news but becomes the news. TV coverage of the Kennedy-Nixon presidential debates may have altered the outcome of that election by helping to draw a stark visual contrast between a young, energetic Kennedy and a tired-looking Nixon. CNN's coverage of the first Gulf War made war transparent and immediate to viewers all over the world in a way that had not been done before.
While Jon Stewart's evisceration of CNBC money prophet Jim Cramer won't be remembered in the same pantheon of unforgettable TV moments, it undoubtedly struck a cord in a nation battered by Wall Street excess and duplicity.
Jim Cramer may become the face of recent Wall Street excesses in a way that Michael Douglas's character in the movie Wall Street -- Gordon Gekko -- became the face of greed in the late 1980s. Obviously, Gekko was a fictional depiction of what was wrong on Wall Street at the time. He did not exist in real life and therefore could not have been actually responsible for what went on in the Board rooms and trading floors at the time. While Jim Cramer is a character of flesh and blood, he is only a minor figure in Wall Street's backroom game. The bigger figures appear to be certain hedge fund characters who grace Fortune's list of the richest Americans yet whose portraits are harder to come by than those of undercover CIA operatives.
Even for folks such as ourselves who are engaged in the Wall Street game but try to play it in a way that has some reference to the real economy, the Wall Street "side bet," as Jon Stewart has called the unregulated -- or lightly regulated -- trading in exotic instruments, is suspect.
Wall Street was invented to channel capital to productive uses, thereby making the economy more efficient. That was the way Wall Street was supposed to earn its just reward: By providing companies with capital and then letting those companies earn satisfactory returns on that capital, Wall Street was supposed to aid in the growth of profitable industries while starving industries that would destroy wealth over time.
Not only has this not happened in many instances -- witness airlines and auto makers -- but, perhaps more importantly, by being at the nexus of savings and investment, Wall Street decided long ago to hoard a large portion of capital it was supposed to help direct to productive uses. The result was a mushrooming of the financial sector the world had never before witnessed. Instead of becoming an efficient, lean allocator of capital, Wall Street turned into a humungous industry in its own right, with "side bets" that could only be properly understood and exploited by insiders. The latter got rich while savers footed the bill.
It's high time that Wall Street got called on this -- and it's a shame no one could do it except the anchor of what's billed as a comedy show. Not funny.
If you missed Stewart's face-to-face evisceration of Cramer, here it is:
March 12, 2009
Bernard Madoff: Case Study of a Seducer
Two more Madoff profiles, one in New York Magazine, one in Vanity Fair. Naturally they focus not on the technical aspects of his fraud but on how he maneuvered among and affected Society (not to be confused with "society").
Bit by bit, little details emerge about Madoff's seduction tactics, which worked remarkably well on a group of people you would have thought was not vulnerable to it. Either he was extremely good at the art of con, or his victims were more gullible than I thought, or a little of both. Most people concentrate on the latter, but don't discount the former.
(What makes it even more amazing is that, unless I'm missing something, his taxable investors didn't earn all that much more investing with him than they would have in municipal bonds. The idea that Madoff "made people rich," as the VF article in particular states, doesn't seem plausible. Per the NY article his returns averaged 12% a year, which as I understand his trading strategy would have been taxed near the top marginal income tax rate. For most of his NY investors that's about 50%, so their net returns after tax were not that much more than what they could have earned in NY munis. But there's no country club for people who invest in NY munis.)
Seduction--in the non-sexual sense of persuasion based on something other than the pure merits of something--is not taught in school, and it's a highly undervalued part of investment manager selection. It's a dark art, but I think it's ultimately amoral, not immoral. Legitimate investment managers, especially those looking to raise money, should probably study Madoff's methods. Unfortunately, they work.
Not on me though . . .
The author of this post is Nadav Manham, president of Elera Advisors LLC, an investment advisory company focused on value-oriented manager selection. Mr. Manham is also editor of The Investor's Consigliere.
Related document: Text of Madoff's guilty plea (PDF file).
March 11, 2009
Jon Stewart Exposes Jim Cramer, Again
Last week, we pointed you to Jon Stewart's spot-on expose of CNBC and "investing god" Jim Cramer. Ever the huckster, Cramer couldn't let Stewart's comments go unanswered, especially as the Daily Show video spread like wildfire in the blogosphere. Apparently, Cramer never learned that you should probably not attack the truth too hard because it has a way of coming back to bite you. And bite it did -- in Stewart's latest take on Cramer's omniscient attitude:
March 05, 2009
If You Watch CNBC, You Must See This
Sometimes comedy is the only way to reveal the painfully obvious:
February 17, 2009
The Answer Is "Yes"
In a recent blog post, we wondered whether the Stanford Group was perpetrating "another multi-billion dollar fraud." The SEC now apparently says yes.
February 13, 2009
Fairfax vs. Shorts: Emails show Chanos had access to negative reports before they were published
Short seller Jim Chanos's firm Kynikos saw negative research on Fairfax Financial (NYSE: FFH) before it was published, according to a Bloomberg article referencing unsealed court documents. Kynikos apparently forwarded at least one such report by email to Steve Cohen's SAC Capital, another defendant in Fairfax's ongoing lawsuit against short sellers.
It is conventional wisdom on Wall Street that companies suing short sellers are bad companies and that they deserve to be shorted. Even if one agrees with this view generally, one has to acknowledge that the Faifax case is different. Fairfax is a real company with real assets and real businesses.
Fairfax is run by Prem Watsa, one of the most respected investors and corporate managers in Canada. Watsa's integrity has remained unquestioned by almost everyone except the shorts themselves. And while many other financial services firms have been crippled or gone bust recently, Fairfax has prospered due to Watsa's conservatism and investment acumen.
The only thing the shorts got right in the Fairfax situation is that they went after a company that depends on the perception its customers have of the company's soundness. Shorting a company of this kind while spreading vicious rumors can become a self-fulfilling prophecy as customers get scared and take their business elsewhere.
The shorts almost succeeded in their attack against Fairfax, and if they had, billions of dollars of value would have been destroyed. The shorts were not simply making a bet in the stock market. They attempted to destroy someone else's property. They should have to pay for this.
February 12, 2009
Another multi-billion dollar fraud?
While Houston-based Stanford Group deserves the presumption of innocence, a recent Bloomberg article raises some very serious questions about its affiliate Stanford International Bank, which has $8 billion in assets. Stanford Group is now under investigation by securities regulators.February 06, 2009
What a Ripping Looks and Sounds Like
There is little love lost for the SEC in Congress these days. Need proof? Here you go:
February 05, 2009
Madoff Client List (163-page PDF) -- Prospecting Anyone?
The full client list of Bernie Madoff has finally surfaced. Not surprisingly, it contains the names of many prominent businesspeople, investors and celebrities. A bit surprising is just how long the list is. It's remarkable that so many people -- many of whom are sophisticated investors -- could be duped by a guy whom Harry Markopolos convincingly called a fraud for an entire decade.
Now that the list is public, one can only imagine the junk mail that Madoff's victims will receive. Maybe they'll be pitched a book on the Top 10 Ways to Identify a Fraud, Even If Greed Is Blinding You. Or they'll be pitched a book on How To Live a Millionaire's Lifestyle on $100K. Perhaps most of all, the folks on Madoff's client list will be hearing from a lot of detectives and lawyers.
Carly Fiorina Has Nerve
The failed, overpaid former CEO of Hewlett-Packard is now arguing that government should not limit executive pay. Ms. Fiorina, thanks for your opinion, but you have zero credibility on this issue. What you do have is nerve.
February 04, 2009
Harry Markopolos Testifies on Madoff, SEC
Independent financial analyst Harry Markopolos testified on Capitol Hill today. Markopolos spoke about his decade-long quest to get the SEC to investigate Bernie Madoff, to no avail. Markopolos's testimony is as strong an indictment of the SEC as we've ever heard. If the SEC could not nail Madoff after Markopolos did all the leg work, the SEC cannot be expected to stop any financial fraudster.
January 25, 2009
What Do Uma Thurman, Charities, Mansions, and Bernie Madoff Have In Common?
Suppose you were on the cover of a popular business magazine with Uma Thurman on your arm and the headline read, "Charmed Life." You're a bigshot fund of funds manager, you give "millions to charities," jet between mansions, and your ex is Elle Macpherson. You're the poster boy for success in the world of money and influence. Clients have entrusted you with more than $10 billion, and you like to rip into underperforming hedge fund managers to show that you are different. Bloomberg quotes you as saying, "If these managers are not focused on preservation of capital, they should not have the right to manage other people's money."
Then, your facade is blown. Your clients are told that, despite the fact that it's your job to perform due diligence on other fund managers, you just lost them $230 million by investing with Bernie Madoff. Yes, that Madoff -- the one who had red flags following him everywhere. The Bernie Madoff that was the subject of Harry Markopolos's decade-long whistleblower effort, the Bernie Madoff that Goldman Sachs wouldn't touch with a ten-foot pole, the Bernie Madoff that Yale chief investment officer David Swensen says Yale was not even close to investing with because of the many red flags.
What would happen? What if you dismissed it by saying, "There's only so much due diligence you can do." Surely you would not still be in business, or would you?
January 24, 2009
Big 4 Ain't What They Used To Be, Or Are They?
Bloomberg reports on more trouble for the Big 4 -- how about signing off on $1 billion in cash that doesn't actually exist? One would think that at least the cash shown on the balance sheet of a company audited by a Big 4 firm should be real. The Enron/Andersen fraud, while still quite impressive, was relegated to items that involved some management estimates and judgment. Satyam and PriceWaterhouse apparently have taken accounting fraud to a new level. But hey, we live in a new era...
December 18, 2008
"The World's Largest Hedge Fund is a Fraud"
This 2005 letter to the SEC by Harry Markopolos gives an incredible glimpse into the behind-the-scenes failure of the SEC to shut down Bernie Madoff despite extremely credible allegations against him.
December 14, 2008
Madoff: How Does A Firm With $50 Billion Passing Through Get Away With Using a Three-Person Accounting Firm?
One of the most fascinating aspects of the Madoff fraud is the fact that investors in Madoff funds apparently turned a blind eye to Madoff's use of a no-name accounting firm:
Bernard L. Madoff Investment Securities LLC used Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs.
We wonder what excuse Madoff gave clients who inquired about the peculiarity of such a prominent investment manager using such an inadequate audit firm. Did Madoff say, "Well, we know everything is kosher, so we don't really care about paying extra for a big audit firm." Or did Madoff say, "If you're going to invest with Madoff, there needs to be an element of trust. The way you show that you trust us is by not letting the choice of our audit firm prevent you from investing."
Whatever Madoff's brushoff was, it worked. Many investors are blinded by greed -- and who would not be greedy for steady positive monthly returns even in times of market turmoil?