NakedShorts

At last, a Citadel IPO

Just not that one.

Citadel in Talks With Four Banks for $200 Million IPO
by Will McSheehy and Mahmoud Kassem
Bloomberg Feb. 26 2008

Wiping the smirk off his face

Come in Scammy, your time is up

Samuel Israel III, the only Bayou hedge fund fraud defendant to have so far evaded his comeuppance, will be sentenced Apr. 14 by a judge tired of “granting endless extensions of time so that Mr Israel could be sentenced at his convenience (which is, apparently, never) or so the Government could take an infinite amount of time of hold ‘meetings’ with Mr Israel.”

Provoked by what she described as “an extraordinary letter” from Scammy’s counsel, requesting yet another sentencing deferral, Judge Colleen McMahon issued an extraordinary letter of her own earlier this month, ripping “inexcusable presumption” on the part of counsel for both the Government and the defense for the latest, and apparently last, delay.

Scammy was to have been sentenced tomorrow, Feb. 28. But on Feb. 5, his counsel sought the umpteenth sentencing deferral since the Bayou founder and chief executive’s guilty plea in Sep. 2005.

Mr Israel requires three surgeries: one to replace his pacemaker, one to replace an electronic device implanted in his body to address pain, and one to decompress one or possibly two discs in his lower spine...he has two rods and ten screws already in his spine. He suffers from aggressive degenerative [degenerate, surely?—Ed] disc disease.

Resisting the temptation to seek volunteer surgeons from the ranks of defrauded Bayou investors, Judge McMahon—who, in late January, sent former Bayou chief financial officer Daniel Marino down for 20 years—was unsympathetic.

I am not interested in defendant’s medical problems, especially since it appears that he has taken a rather desultory attitude to resolving them, in the apparent belief that his sentencing could and would be endlessly postponed...His failure to attend to these medical matters in a timely fashion is hardly the fault of the court, and should have no impact on his sentencing date, since if Mr Israel is sentenced to a term of imprisonment, his medical needs can be met by the staff of the Bureau of Prisons...

...Mr Israel will be sentenced on April 14 at 10 am...There will be no adjournment of this date FOR ANY REASON WHATEVER; if Mr Israel has back surgery between now and then and is still not ambulatory, he can be brought to his sentencing in a wheelchair. [Emphasis in original].

From where, assuming McMahon dishes the same treatment she did Marino, he will be immediately wheeled off to the Metropolitan Detention Center. Complete correspondence after the jump. Or, for Scammy, the high jump.

FT goes offline

If The Financial Times is looking for a front-page lead for tomorrow, it might like to interview someone from its IT Department (if any) about why ft.com has been virtually inaccessible to US subscribers for much of the last 48 hours, to NakedShorts’ personal knowledge. While loading a fresh browser can get to www.ft.com, links off the front page end up in ‘This program cannot display the webpage’ hell.

A call to customer service this afternoon elicited sympathy: “We can’t get onto the site either,” said the woman who eventually picked up the phone. And when will it be fixed? “They been updating the system in London and hope to have it fixed by the end of the day today.” A story somewhat undermined by an admission that the problems were supposed to be solved by the end of the day Monday.

Suggested workaround: The FT’s RSS feeds, including

http://ftalphaville.ft.com/blog/feed/

are still working. Although the links back to FT stories don’t.

Dropping like flies

Robert C. Trosten yesterday became the latest member of the Refco crime syndicate to ’fess up, pleading guilty to assorted fraud and conspiracy charges less than a month before he was to go on trial, and less than a week after underboss Phillip Bennett copped his own plea. The former chief financial officer is in line for up to 85 years in prison but has agreed to give evidence at the trial of Tone Grant, the sole remaining defendant in this particular action, in return for leniency.

Like Bennett, Trosten apologized. And, like Bennett last week, went for a sentencing discount by way of the waterworks:

Crying as he faced a judge, [Bennett] said he knew he was wrong to keep quiet about big losses at what was once one of the world's largest commodities brokerages.
Associated Press (via IHT) Feb. 16 2008

“I take full responsibility for my actions and my conduct,” a tearful Trosten told US District Judge Naomi Buchwald at his plea hearing today.
Bloomberg Feb. 20 2008

“Tone Grant, as we've said from day one, is innocent, and we stand ready to prove that,” said Grant's lawyer, Norman Eisen, according to Bloomberg. Just so long as he does it without blubbing.

In the meantime, Trosten can get back to his day job: driving his 2007 Mercedes within 50 miles of Franklin Lakes, New Jersey, and running his 2005 Mercedes and his 2006 Mercedes back and forth from the dealer. No, really.

It's a miracle! Lauer indicted

One question: WTF took so long?

Five individuals who defrauded hedge fund investors of more than $200 million dollars have been indicted on charges of conspiracy and wire fraud, Assistant Attorney General Alice S. Fisher of the Criminal Division and U.S. Attorney R. Alexander Acosta of the Southern District of Florida announced today.

Defendants named in the indictment, unsealed today in Miami, are Michael Lauer, Martin Garvey and Eric Hauser, co-owners of management companies which directed the hedge funds, and Laurence Isaacson and Milton Barbarosh, who had financial interests in Boca Raton, Fla.-based "shell" companies in which the hedge funds invested. All of the defendants are charged with one count of conspiracy to commit mail, wire and securities fraud and six counts of wire fraud. If convicted, each of the defendants faces a maximum sentence of 20 years and a $250,000 fine for each count of wire fraud and five years and a $250,000 fine for the conspiracy count. The indictment also seeks forfeiture of their criminal proceeds...

After all, the US Securities and Exchange Commission has been on this case since Jul. 10...2003. After then New York Post columnist Chris Byron had already been on it for a while. Even PricewaterhouseCoopers has already paid the bill for its auditing skills.

Michael Lauer and Four Others Indicted
US Department of Justice press release
Feb. 19 2008

Those Refco co-conspirators in full

Down the Refco Memory Hole III

Last week’s surprise guilty plea by former Refco chief executive officer Phillip R. Bennett takes some of the glitter off next month’s criminal trial, where the remaining defendants—Robert C. Trosten, the former chief financial officer, and Tone N. Grant, the former president— will doubtless adopt expressions of aggrieved innocence, point to the empty chair at the defense table and adopt the Sergeant Schulz strategy: “I know nothing.”

It’s not exactly clear why Bennett changed his plea, which was entered Friday, Feb. 15, the day after his attorney Gary Naftalis told prosecutors of Bennett’s decision. No deal was struck: Bennett, 59, copped to the entire 20-count indictment and its maximum 315-year sentence meaning, as Judge Naomi Reice Buchwald observed, his Bureau of Prisons address will likely be his last. He is not expected to be called as a prosecution witness.

But while coincidence is not causality, the government released “a list of individuals...identified as co-conspirators” with Bennett, Trosten and Grant on Monday, Feb. 11. The list included two people—Santo Maggio and Joseph Collins—who have been separately indicted; BAWAG, the Austrian bank; and a dozen individuals, most known to have worked in senior and middle-management roles at Refco while the fraud was in progress.

The co-conspirator designation does not mean the named individuals broke the law, although James Cohen, a law professor at Fordham University in New York, told Bloomberg “the only thing worse [than being identified as a co-conspirator] is being listed as a co-defendant.” It does mean, however, that their statements, which might otherwise be excluded from evidence at the trial, can be admitted.

The named co-conspirators were, alphabetically:

Famous days in finance

Bloomberg Markets’ March 2008 edition—already on a pixel-stand near you—brings detailed coverage of the financial rapine and pillage visited upon unsuspecting Pennsylvania school districts by the corporate descendants of John Pierrepont Morgan. JPMorgan Chase and Morgan Stanley got special mention for captaining the longboats, eagerly crewed by conflicted investment advisors and welcomed ashore by alleged guardians of the public weal whose common distinguishing mark was utter ignorance of the contents—mostly wet newspapers—of the over-priced bags they purchased.

But, huzzah! Look who allegedly left money on the table:

JPMorgan's gross markup on the swaption was 0.82 percentage point of the rate compared with a 0.16 percentage point charge Goldman Sachs Group Inc collected from the Philadelphia School District on a comparable swaption the city had bid competitively in March 2004. [Emphasis added.]

So that would explain why Hank Paulson was let out to pursue other opportunities.

Schools Flunk Finance
by Martin Z. Braun and William Selway
Bloomberg Markets March 2008

Prop job of the (holi)day

With private equity sidelined by the credit debacle, and sovereign wealth funds nursing severely scorched fingers, this was probably inevitable. Hezzanidea: why not go the whole hog, and have AIG, MBIA and Ambac insure the portfolio?

(Click for a larger image)
The Financial Times
Feb. 19 2008

PBGC Announces New Investment Policy
Pension Benefit Guaranty Corp press release
Feb. 18 2008

Tom Dittmer’s sensitive side

Down the Refco Memory Hole II

One thing that former Refco chairman and chief executive officer Phillip R. Bennett becomes emotional in court Friday while delivering an entirely insincere and pro-forma apology and staring down the tunnel of a 315-year membership of the federal Bureau of Prisons. How about the hurt feelings of his predecessor, Thomas H. Dittmer, fighting to keep his prodigious payout from the Refco poker table?

To the documents:

2. The Complaint seeks to avoid and recover several payments made to Dittmer from 1999 through 2005, purportedly as part of the alleged “fraudulent scheme” (collectively the “Challenged Payments”), under the fraudulent conveyance provisions of the New York Debtor and Creditor Law and the Bankruptcy Code.

3. Before launching into a discussion of the alleged “fraudulent scheme” and the “Challenged Payments,” Plaintiff makes the following irrelevant, gratuitous and inflammatory allegations:

During Dittmer’s tenure as CEO, Refco was cited for more than one hundred Commodities Futures Trading Commission (“CFTC”) violations. In 1983, the CFTC fined Refco $375,000, and also fined Dittmer $150,000 personally, for violating trading limits designed to prevent people from cornering markets. In 1999, during Dittmer’s tenure, the CFTC fined Refco $6 million for massive violations of record-keeping and internal control laws and ordered Refco to pay an additional $1 million to fund an industry study geared to curtail customer abuses.

Dittmer wants the entirely accurate “irrelevant, gratuitous and inflammatory allegations” struck from the suit brought by Refco’s bankruptcy trustee, citing rules empowering the court to “strike from a pleading . . . any redundant, immaterial, impertinent, or scandalous matter..on the ground that the matter is impertinent and immaterial...[blah blah blah].”

Irrelevant, gratuitous and inflammatory? Redundant, immaterial, impertinent or scandalous? That’s NakedShorts’ job. Stricken. (Bangs gavel.)

Motion to strike certain allegations
Refco Inc v. John D. Agoglia et al

Shocgen rue-mania

Too small to be measured in Kerviels®, but...(shakes head):

SG teller charged with $3.2m theft
Associated Press Feb. 6 2008

Forelock-tug: You know who you are.

Unbundling Tom Dittmer’s 401(k) Plan

Down the Refco Memory Hole I

One of the highlights of any self-respecting financial wreck is the autopsy, and the legal coroners’ subsequent dissection of the worm-ridden carcass. Which is how we come to an answer to one of the more widely-wondered-about questions in The Refco Saga: How much did former chairman Thomas H. Dittmer get away with?

In round figures: $91.8 million. Less $15 million he had to fork over to resolve what was probably just an unfortunate misunderstanding between friends. The new question is whether or not the old scalliwag, whose mile-high file at the Commodity Futures Trading Commission was somehow overlooked in his Futures Industry Association Hall of Fame citation, gets to keep it.

Refco’s litigation trustee is seeking to void payments, some going back to 1999, as either “actual fraudulent” or “constructively fraudulent” transfers on various grounds, including an allegation that when Dittmer left the company “he had knowledge of the fraud-infected [Refco Group Holdings Inc] Receivable scheme and related fraudulent activity through...his affiliation with entities that we part of the creation of the RGHI Receivable and with entities that participated in the Round Trip Loans.”

Dittmer’s payments were based on an Aug. 1999 redemption agreement memorializing his departure from the business that he controlled through a 51 percent ownership stake. Overlooking the fact that Refco was, but for its success in burying earlier customer losses, bankrupt when the agreement was signed, the early-stage goodies were relatively modest:

• An immediate payment of $5 million;
• $200,000 a year for office space, for five years;
• A monthly $20,000 housing allowance, also for five years; and
• Health insurance through his 65th birthday, which was to have been marked by
• Another check for $1 million.

But those were the hors d’oeuvres.

Barron’s v. Cramer (Round 4876)

The old saw about battles in academia being so vicious because so little is at stake is equally applicable to media squabbles. That, of course, in no way mitigates their entertainment value, so let’s get to the Columbia Journalism Review and Dean Starkman’s analyses of an imbroglio, triggered by Barron’s ‘Shorting Cramer’ cover story from Aug. 20 2007:

While the story didn’t make much of a splash at the time, it sparked a quiet but surprisingly fierce feud between the two business-news organizations, one that seems out of proportion to the story that caused it. Within days of publication, for instance, CNBC officials told Barron’s reporters who had appeared as on-air guests for years that their presence was no longer desired...

...The clash shows what happens when one business-news outlet goes after another: bad blood. In a recent interview with me, a visibly distraught Cramer displayed an emotional intensity entirely different from his ranting but comical on-air persona. “It was just so outrageous, so Kafkaesque,” he says of being a Barron’s target.

At least as outrageous and Kafkaesque: Cramer being any kind of distraught at being a Barron’s target. CJR omits mention of the long-standing, if recently low-key, enmity between Mr Booyah and Barron’s, the latter mostly in the form of its former editor and now columnist Alan Abelson; they’ve been tossing grenades at each other for at least the 7000 Dow points (counting the 2000 currently overhead).

Not to mention the fact that after how many years of polluting perfectly good bandwidth with Mad Money, CNBC “acknowledges” that airing a show centered about stock picking “without tracking its own performance or even keeping a record, using whatever criteria it chooses, of the stocks it picks” is a problem that it’s...“working on.”

Mad Money, Bad Blood
Why CNBC threw Barron’s off its air
by Dean Starkman
Columbia Journalism Review Feb. 15 2008

Disclosure: NakedShorts has been, under an assumed name, a (very) occasional contributor to Barron’s; he told CNBC where to stick its invitations several months ago.

New Chase in the Citi

(Click for a larger image)
The Financial Times
Feb. 16 2008

In an unrelated development, a consortium of US money-center banks announced plans to import 4 million tonnes of corn from Darfur (or Chad, or the starving, civil war-torn nation of your choice) to boost ethanol production in time for the summer driving season.

Amoral, Insolent & Gluttonous

Yesterday’s blow-up at AIG didn’t particularly surprise those among us who have long held the view that AIG is more continuing criminal enterprise than the rock-solid bullet-proof global mega-insurance company of its delusional flacks. Proving that even blind pigs snuffle the occasional truffle, auditor PricewaterhouseCoopers stumbled over material weaknesses in AIG’s internal controls when it came to valuing bags of wet newspaper*—more formally, credit default swaps—to the tune of $3.7 billion or so in previously undisclosed losses for October and November.

December? January? Your guess is as good as any. Mine? Make it a Kerviel®.

The company “is still accumulating market data in order to update its valuation” of the portfolio, according to its independent auditor PricewaterhouseCoopers LLP, the insurer said in today's filing with the US Securities and Exchange Commission. AIG said it believes it has “procedures to appropriately determine the fair value” of the holdings.

Which is exactly what it said six months ago. At the risk of being repetitive: Taking a Greenberg out of the company was one thing; taking the Greenberg out of a company, something else entirely.

AIG Falls on Concern Losses May Have Been Understated
By Hugh Son and Jesse Westbrook
Bloomberg Feb. 11 2008

*: © David S. Products.

Did. Didn’t. Discuss.

It’s not just on their opinion pages that The New York Times and The Wall Street Journal see the world through different lenses:

The New York Times

The Wall Street Journal [$$]

An inglorious anniversary

A party of anxious Fortress investors

Nobody else seems to have noticed, but Saturday marked the first anniversary of the listing of Fortress Investment Group. FIG was the first hedge-fund/private-equity group listed in the US, and priced at $18.50; back in the days when sub-prime meant finding gristle in a filet at Smith & Wollensky, it opened at $35, traded up to $37—still an all-time high—and closed at $31.

So how’s that worked out so far?

Not well. FIG closed Friday at $13.58. Which, to be fair, is an almost 30 percent gain over the $10.53 it hit on Jan. 22.

Anyway, special congratulations to Aircastle Ltd (AYR), a listed aircraft leasing company that dumped 11 million FIG shares at $30.80 on Oct. 10 last year for proceeds of $338.8 million.

Noted with interest: According to the somewhat less than entirely reliable Yahoo! Finance, Fortress Investment Holdings LLC owns more than half of AYR’s outstanding stock. Another major AYR holder, with 1 million shares reported that very same Oct. 10 2007, is one Wesley R. Edens. Curiously enough, or not, the very same name as FIG’s chief executive.

Germany now accepting Kerviels®

Europe’s new currency unit — the Kerviel®, equal to €5 billion—has struck again. This time, it’s at WestLB, the German state-owned bank with an unparalleled record for showing up at the scene of every popular financial accident, and more than a few of its very own invention.

FRANKFURT — WestLB, a state-owned German bank, said Friday that it would reduce its work force by 25 percent and receive 5 billion euros ($7.2 billion) from its owners to cover losses tied to bad trades and the subprime mortgage market.

German Bank Gets $7.2 Billion Bailout
by Carter Dougherty
The New York Times Feb. 9 2008

Earlier on NakedShorts

Wiping the smile off his face

Come in Scammy, your time is up

Samuel Israel III, the only Bayou hedge fund fraud defendant to have so far evaded his comeuppance, will be sentenced Apr. 14 by a judge tired of “granting endless extensions of time so that Mr Israel could be sentenced at his convenience (which is, apparently, never) or so the Government could take an infinite amount of time of hold ‘meetings’ with Mr Israel.”

Provoked by what she described as “an extraordinary letter” from Scammy’s counsel, requesting yet another sentencing deferral, Judge Colleen McMahon issued an extraordinary letter of her own earlier this month, ripping “inexcusable presumption on the part of counsel” for both the Government and the defense for the latest, and apparently last, delay.

Scammy was to have been sentenced tomorrow, Feb. 28. But on Feb. 5, his counsel sought the umpteenth sentencing deferral since the Bayou founder and chief executive’s guilty plea in Sep. 2005.

Mr Israel requires three surgeries: one to replace his pacemaker, one to replace an electronic device implanted in his body to address pain, and one to decompress one or possibly two discs in his lower spine...he has two rods and ten screws already in his spine. He suffers from aggressive degenerative [degenerate, surely?—Ed] disc disease.

Resisting the temptation to seek volunteer surgeons from the ranks of defrauded Bayou investors, Judge McMahon—who, in late January, sent former Bayou chief financial officer Daniel Marino down for 20 years—was unsympathetic.

I am not interested in defendant’s medical problems, especially since it appears that he has taken a rather desultory attitude to resolving them, in the apparent belief that his sentencing could and would be endlessly postponed...His failure to attend to these medical matters in a timely fashion is hardly the fault of the court, and should have no impact on his sentencing date, since if Mr Israel is sentenced to a term of imprisonment, his medical needs can be met by the staff of the Bureau of Prisons...

...Mr Israel will be sentenced on April 14 at 10 am...There will be no adjournment of this date FOR ANY REASON WHATEVER; if Mr Israel has back surgery between now and then and is still not ambulatory, he can be brought to his sentencing in a wheelchair. [Emphasis in original].

Complete correspondence after the jump. Or, for Scammy, the high jump.

Investor relations: In. Your. Face.

Not enough that a hedge fund says ‘Oooops, we’ve got a bit of a problem here, and you can’t have your money back until we sort it out.’ Now, they rub your nose in it.

Hedge fund manager John Devaney, who had to sell his yacht and jet plane last year after wrong-way bets on mortgage securities, says it's time to buy bonds backed by subprime loans...

...Devaney, 38, paid for comedians Jay Leno and David Spade to perform [at the annual conference of the American Securitization Forum] in previous years. This time, he’s sponsoring dinner and a show by the Blue Man Group, a theatrical troupe that sprays paint on the audience and vomits fake food...[Emphasis added.]

Of course, investors in the various hedge funds run by Devaney’s United Capital have only been waiting for their money since mid-2007. Rather less time than the punters entangled in the the slow-motion train wreck that is suburban Chicago-based Ritchie Capital Management LLC, where evidence is pointing to an indisputable conclusion that founder and one-time NFL-wannabe Thane Ritchie played all too much football without a helmet.

It’s been an eventful few weeks, with exasperated investors filing an involuntary bankruptcy petition against Ritchie Multi-Strategy Global LLC in late December, and the firm settling last week, for $40 million and change, a beef with the US Securities and Exchange Commission over its involvement in the mutual fund marketing-timing fracas.

Apologies for the inconvenience? Not here. Not now.

Ritchie Capital Management LLC has sued investors who are trying to force one of its hedge funds into bankruptcy, claiming they disparaged the Lisle-based investment firm...Lawyers for Ritchie assert in the Feb. 1 complaint that confidentiality clauses prohibit public criticism of the fund and its management.

Miscellaneous documentation on the dark side.

New York’s other big win?

Connecting dots in the clearinghouse raid

It’s 80 years more or less since the Department of Justice last hit Chicago quite so hard. But whatever grief Elliot Ness visited on the city’s racketeers in the 1920s, it was like a brief summer storm compared with the financial massacre triggered Tuesday when the department’s antitrust division woke from its long nap and rolled a smoking grenade into the cozy not-so-little futures clearinghouse racket.

Apparently, the exchanges’ control of their own clearing operations “may have inhibited competition among financial futures exchanges, potentially discouraging innovation and perpetuating high prices for exchange services.” And given that keeping competitors out and perpetuating high prices is the business model, the high-flying Chicago Mercantile Exchange (CME) took the kicking of its five-year life as a public company.

Its stock dropped $103.55, or 17.6 percent, Wednesday, closing at $485.25; its decline from Tuesday’s high of $624.51—reached after the exchange unleashed another record earnings report that morning—was almost $140, or 22.3 percent. The New York Mercantile Exchange (NMX), already snuggling into the CME’s warm embrace, also dropped more than 17 percent yesterday.

Given that the bureaucrats who were suddenly shocked, shocked to discover monopolistic exploitation going on at futures exchange clearing houses were the same ones who blithely waved through last year’s merger of the Chicago Board of Trade and the Chicago Mercantile Exchange, it’s probably worth examining a few widely-overlooked observations:

Noted with interest I: The antitrust division grenade is dated Jan. 31; it’s unclear when the document was actually released, but its existence was certainly not widely known until Tuesday afternoon, Feb. 5, when the John Lothian Newsletter published a Special Report.

The original document was couched as a response to a Treasury Department request for comments on the ‘Regulatory Structure Associated with Financial Institutions.’ That little exercise is part of Treasury secretary Hank Paulson’s plan for “a more effective regulatory structure that can adapt to the dynamic U.S. marketplace while improving oversight.”

Noted with interest II:

What did the CME know, and when did it know it?