A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia

In Mid September I wrote a letter to Australian regulators which detailed my concerns about a fund manager in Australia known as the Astarra Strategic Fund – formerly known as Absolute Alpha.  This letter resulted in regulatory action against a cluster of related funds (almost twenty), however my letter was almost entirely about only one fund in the group.  I did not make any major suggestions in the letter about other funds in the Astarra complex.  My involvement was detailed today in the Sydney Morning Herald (see stories here, here and here, with the first story on the front page below the fold).  There was no genius in my letter – everything could be found (fairly easily) on the internet – and the original tip-off came from a reader of my blog – who noticed links with a story I wrote up in March 2009.

For reasons I will explain below this fund collapse is qualitatively different and more serious than any previous fund collapse in Australia and that the Australian press have not yet detailed why this one is important.

The letter argued that it was possible that the Alpha Strategic fund was a fraud.  I did not have the ultimate proof of that so I did not make my letter public and will not do so yet.  However there is a way of proving that a fund is not a Ponzi – and that is to “show us the money”.  If the assets are really there then it should be possible to convince regulators of that fact by showing them the assets.  If Bernie Madoff had been asked to prove the existence of all the money he supposedly managed then he would have been caught because he could not comply.  An honest fund should be able to comply fairly quickly – sometimes within 20 minutes – but almost certainly within a week.

The Australian regulator asked Astarra to show them the money – and to date that has not happened.  That does not mean that the money is not there.  It is however suggestive, especially as approximately three months have elapsed whilst regulators and fund administrators have tried to “value” the fund assets.  Indeed the difficulty of valuing assets was sufficient for the regulator to cancel licenses and to place the funds in the hands of administrators. 

At a meeting last week the (regulator appointed) administrator Neil Singleton said that with respect to one fund the only proof of assets they have is a letter from a Virgin Islands company stating that the fund (presumably the Strategic Fund) held 118 million in interests in other hedge funds.  This letter did not detail any interests held and gave no mechanism for confirming that statement.  However the administrator has not stated that the assets are not there – so – like the regulator and the administrator I too will leave that question open.  The press simply says the details as to the  $118 million are “sketchy”.

Background to the Australian privatised social security system and where various Astarra entities fit in to that system

Australia has a privatised social security system.  Much of the money is with large honest players run in a nearly index manner and which have cut fees to relatively low amounts.  Those funds are run by Australia’s otherwise dying trade unions.  Privatised social security (which Australians call “superannuation”) has been the saviour of the union movement in Australia – and – through their control of funds the unions now are within a breath of control (though generally do not vote their control) of a large proportion of Australia’s industry.  

The money that is not with the union funds is in a rag-tag of funds run by large banks (for example Colonial’s wraps owned by Commonwealth Bank) or with independents and/or self-managed funds.  The money in those funds (wraps) is let to a large number of sub-funds – sometimes large, sometimes boutique funds managers who live off the large and mandated fund flows from our “superannuation system”. 

The boutique funds range from very good to awful and shonky.  Indeed I think the best no load mutual available anywhere in the world is in Australia (I used to work for the manager).  But there have been some flea-bitten dogs sold to Australians.  One thing is for sure – you cannot do privatised social security without very good fraud protection because that amount of money from unsophisticated investors is a truly massive honey-pot for scammers and flim-flam artists.  As an aside, possibly the worst thing about George W’s privatised social security proposals was that they would be supervised by Cox’s toothless and supine Securities and Exchange Commission.

Trio Capital (the “mother-ship” of the Astarra entities) is a “wrap provider” – meaning a  financial planner might use Trio to invest all their client’s retirement money.  The Astarra Strategic Fund is an individual fund under that wrap.  My letter was about the Strategic Fund – and the collapse of the Strategic Fund would not be qualitatively different from the collapse of any of about six funds that collapsed during the financial crisis.  The financial planner might have put her clients in six (or more) funds – and the loss of one of them is a blow – but in no way imperils the system. 

But (somewhat surprisingly) the entire Trio edifice has been placed with administrators – which means that the end-beneficiary has had their entire retirement savings blocked.  In some funds there is not even enough cash to pay pensions to retired people for the month of January.  Some pensioners are not having their current payments blocked but there are doubts about future payments.  [Details as to who will receive pensions for the month of January can be found on Trio’s website.]  This is qualitatively different from earlier fund failures because it is a failure of every fund that a person might have invested – a failure of the core asset protection mechanism in the Australian system.  [I cannot work out why the otherwise sensationalist Murdoch press has not written a single story on this yet.  All they need to do is find a cluster of pensioners who will not receive their pension this month and who will have no idea as to why.]

How I came to write my letter to regulators

Six months ago a reader pointed me to a fund of hedge funds (called Absolute Alpha) based in Australia. 

I looked – and within forty minutes I became very concerned – but could not prove harm to the fund’s investors.  I tipped off the Sydney Morning Herald.

The journalists at the Herald worked hard at the story but alas they too could not prove harm.  Indeed a major bank misled them as to whether the assets were in (their) safe custody.  The bank confirmed the assets were in custody – a statement they have now withdrawn.  Obviously with a reputable third party vouching for the assets any hypothesis of harm was going to be hard to sustain.  The Herald published nothing. 

I however remained suspicious – but could not easily do anything.  For there to be something desperately wrong either the bank had to be a party or grossly negligent as to their custody of the assets. 

Absolute Alpha was a boutique fund manager loosely associated with – and partly owned – by a superannuation wrap provider called Astarra.  Astarra is now called Trio.  The wrap provider did all the superannuation compliance and in turn (claimed to) invest funds with other fund managers – mostly reputable managers.   The relationship between Trio and some of the funds in which they were supposed to invest is complex. 

The amount of money in Absolute Alpha was probably under 100 million.  There were plenty of things that did not look right – but I did not think there was much I could do about it.

So I let it go – though I did not forget about it.

Later I tried to log into Absolute Alpha’s website and it was dead.*  This (falsely) indicated my worst fear. 

Again I alerted the Herald. 

Alas it was not so simple.  Absolute Alpha it seems had taken over the funds management of all the money in the Astarra wrap.  They had renamed themselves Astarra.  Astarra later renamed itself Trio.  Astarra’s website boasted of a billion dollars in funds under management. 

This was potentially very bad news.  Australia is about a twentieth the size economically of the United States – so $1 billion in funds under management was the equivalent economically of $20 billion in the US.  If my bad-case was true we had a Madoff (at least proportionately) in the making.  [Now the funds have been taken into administration the official numbers are about 40 percent of the numbers boasted on the website.  The danger was not quite as big as I thought it was.]

Anyway I wrote a letter to the Australian Securities regulator (ASIC)  laying out all my concerns and (implicitly) the method for testing my concerns were false.  [I sincerely hoped I was wrong – and hoped the regulator would prove me incorrect by identifying and valuing the assets.  I still sincerely hope all the money turns up in the British Virgin Islands.]

I have heard lots of criticism of the Australian Securities regulator.  However on this important matter their actions were exemplary.  They did what the SEC could not do and act on a “Markopolos letter” within weeks.  They did what the SEC should have done when they investigated Madoff – and attempted to confirm the existence and value of the assets. 

Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any moneys going out.  They acted to protect investors.  This showed responsiveness that Mary Schapiro and American regulators can only aspire too.  The Sydney Morning Herald finally published a cryptic story on the front page.  The Sydney Morning Herald article did not suggest – and I did not reasonably think – that the problems extended further in the Trio edifice.

A few months have passed and eventually all major Trio entities were placed in administration by the superannuation regulator.  They will probably be liquidated.  The funds have been passed to (reputable) private sector “forensic accountants” – the choice of accountants being made by the securities and superannuation regulators.  They are the sort of liquidators you use when (as stated by the regulator in their press release) you are not “able to satisfy concerns regarding the valuation of superannuation assets”.

The whole mess will be explored by the accountants -  and if the assets are not there then the matter will played in court – at which point I will publish my “Markopolos letter” analysing what I got right and wrong. 

But for the moment I will leave you with what attracted me to Absolute Alpha in the first case.  It was the CV’s of the principal players.  Here they are:

Shawn Richard - Chief Executive Officer

Shawn is the founder of Absolute Alpha and a key member of the investment team.   Prior to founding Absolute Alpha, Shawn has held and continues to hold, various senior positions, including directorships of companies both in Australia and overseas.

Shawn has been involved in financial markets since 1996 and had been specialising in alternative investments for more than 8 years, both offshore and in Australia. Over this time, Shawn has established relationships with some of the most exclusive hedge fund managers around the globe.

Shawn’s offshore experience in alternative investments includes among others, structuring and analysis of derivative instruments with some of the largest private hedge funds in the United States. Shawn was also part of a small team of professionals providing risk management services to Asian institutions and regional banks in relations to their exposure in equities.

Shawn holds a bachelors degree in Finance from the University of Moncton.

Eugene Liu -Chief Investment Strategist

Eugene is the Chief Investment Strategist of Absolute Alpha. As Chief Investment Strategist, Eugene is involved in the development and evaluation of asset strategic plans, development and modelling of analytic tools, reviewing and analysing investment data to formulate investment strategies, and the investment risk management process. Prior to joining Absolute Alpha, Eugene worked with the Asset Management team of Pacific Continental Securities and World Financial Capital Markets in the US and Asia. In these roles, Eugene performed extensive financial modelling and valuation analyses of various hedge fund strategies. Eugene also led a team of arbitrage specialists who provided structured product deal flow to many of the largest hedge funds in the industry.

Eugene holds a degree in economics from Trenton State College in New Jersey.

Charles Provini (US) - Asset Consultant

Charles has been involved in hedge funds for more than 20 years and is a senior asset consultant and member of Absolute Alpha’s investment committee. Currently, he is the President of Paradigm Global Advisors, a well established hedge fund manager based in NY and he is also the Chairman of C.R. Provini & Co., Inc., a financial services firm, founded in 1991. Prior to this, Charles held various senior positions, including, President of Ladenburg Thalmann Asset Management, Director at Ladenburg Thalmann, Inc., one of the oldest members of the New York Stock Exchange, President of Laidlaw Asset Management, Chairman and Chief Investment Officer of Howe & Rusling, Laidlaw’s Management Advisory Group, President of Rodman and Renshaw’s Advisory Services, and President of LaSalle Street Corporation, a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette.

Charles has been a leadership instructor at the U.S. Naval Academy, Chairman of the U.S. Naval Academy’s Honour Board and is a former Marine Corp. officer. He is frequent speaker at financial seminars and has appeared on “The Today Show” and “Good Morning America” discussing financial markets.

Charles is a graduate of the U.S. Naval Academy and has an MBA from the University of Oklahoma.

Now the first CV – Shawn Richard – is notable only for what it does not say.  It does not mention a single firm that Shawn ever worked for – and hence reduces the possibility of doing due-diligence. 

Eugene Liu’s CV is not so careful mentioning two firms, Pacific Continental Securities and World Financial Capital Markets.  Pacific Continental is easy to find – it was a bucket shop of enormous proportions in the UK.  Essentially the firm found hapless victims and steadily moved their life savings into soon-to-be worthless scam stocks for huge commissions.  This was explored widely in the UK press including beautiful articles about a salesman’s time as scam artists.  World Financial Capital Markets is a little harder to trace as a firm.  Several firms have had that name – but one firm by that name met an unfortunate end involving fraud and the principals reappeared at Pacific Continental. 

It turns out that Shawn Richard was a manager with Pacific Continental in Taiwan.

The third CV is of Charles Provini who used to be the CEO of Paradigm Global and who was (falsely) claimed to remain in that position.  When I copied these CVs off the Absolute Alpha website Provini had not worked for Paradigm for about two years.  Some of the rest of Mr Provini’s CV is raised my eyebrows too – for instance he worked as the President of Laidlaw Asset Management.  A firm of that name was cited by the UK securities regulator (the FSA) for cold-calling and selling scam funds to UK investors. 

The link to Paradigm Global was what raised my eyebrows.  Paradigm is an asset manager (for funds of hedge funds) owned by Hunter Biden and James Biden.  These are the Vice President’s son and brother respectively.  I have written about Paradigm extensively before as it has an unfortunate habit of being associated with scams.  Absolute Alpha was not difficult to do due diligence on.  It took me only 40 minutes to work out that they were needing very close scrutiny.  It does not speak well to the due-diligence of a fund of hedge funds (which is what Paradigm claims to be) that they keep being associated with cases like this.

The Biden connection was what prompted me to look at Absolute Alpha and hence what led me to write my “Markopolos letter” to ASIC and hence what rapidly led to the closure of Astarra and Trio.  It is worth asking how deep that connection is.

Are Absolute Alpha/Astarra really associated with the Biden’s firm?

At first glance the links between Astarra and the Bidens’ firm are weak.  Provini could have been marketing “vapourware” with no real association.

All that is certain is that Provini was cited on the Absolute Alpha website as an asset consultant and President of Paradigm for at least two years after he was sacked from Paradigm.  Provini is now running inconsequential penny stock companies. 

But the links run deeper than that.  Absolute Alpha also used to cite other staff members who worked at Paradigm – indeed the original “managing partner” was also a staff member at Paradigm.

Absolute Alpha used to publish a process diagram as to how they identified funds to invest in.  I have reproduced that diagram below:

 

It mentions two things which link Absolute Alpha (now called Astarra) to Paradigm global.  These are the use of the Park Score (named after James Park – the founder of Paradigm) and the PASS database – the core database of hedge funds from which Paradigm claims to make its investment decisions. 

Still, this could all have been ripped off Paradigm without Paradigm knowing. 

Alas Paradigm does not get off so lightly.  The boys from Absolute Alpha went to New York and co-marketed with people from Paradigm.  Indeed I know someone who thought that Absolute Alpha were OK because staff at Paradigm had vouched for them.  Whether Paradigm knew that Shawn and Eugene in Australia were using “Paradigm inspired” marketing material however is unknown. 

Paradigm – the Biden’s firm – had unwittingly got involved in another funds management firm which has been closed by regulators or been exposed as Ponzis.  That is four I know of now – and I have yet another one that I suspect of being unsound. 

A plea to Michelle Malkin

So much of what is published by the conservative blogosphere is non-fact based muckraking.  And yet – sitting here has been my observation that the fund of hedge funds associated with the Vice President’s family has an unnerving habit of association with scams and other funds closed by regulators.  Surely a competent muckraking conservative blogger can actually do some digging rather than pontificating from the sidelines. 

It makes me think of conspiracy theories.  Maybe conservatives in the US do not want to do this sort of financial digging because most the fraudsters and scamsters are part of the Republican movement and do not like regulators because – well – they might catch them.

But there must be honest Republicans out there.  It is time for Michelle Malkin to do some honest work.  So I will plead with her – can you please do some digging into Paradigm or find some other muck-raking conservative to do it for me. 

I for one want to get back to making money honestly.

 

 

 

John

 

*Incidentally – I was attempting to log into the Absolute Alpha website because I was discussing the whole matter with a reader from Talking Points Memo.  You know you you are.  Thank you.

Titanium Asset Management - notes on paper trading and murder

There is a story in the Sydney Morning Herald today about Titanium Asset Management - a funds manager in Western Sydney that operates as part of the Titanium Financial Group.

Titanium has been on my must-look-at list for some time. I found them when researching Astarra/Trio - a funds management fraud shown to me by one of my readers which I reported to the regulatory authorities. Titaninum had agreed a white-label deal distribution deal with Astarra, a deal which to the best of my knowledge was never consumated with real money. Titanium said that there was no relationship with Astarra but one Titanium entity wound up in the hands of the Astarra/Trio liquidators. [Someone has suggested in the comments that the Titanium entity in the hands of the Astarra/Trio liquidators is not related to the Titanium financial planners and that no money ever changed hands with the agreed white-label deal linked above. I see no reason to disbelieve that - especially as the article is dated within a month of the demise of Astarra/Trio.]

What amazed me though was the returns of Titanium Asset Management. It was limited according to its documents to being long-short the stocks in the ASX200 (an index of the top 200 companies in Australia). These were the monthly returns as reported:

These returns are astounding. 40 percent in October 2008, 20 percent in February 2009. Magic numbers really.

So I rang the fund manager - Peter Rice - to try and work out how he did it. I did not understand - at least it did not make sense to me so I reported my concerns to ASIC.

I did make an effort though. I found an interview with Peter Rice on Sky News (repeated below). That made no sense either.



Anyway I put it out of my mind.

A couple of weeks ago I looked again. Here are later returns.

The early months had all gone. (No more 40 percent months!)

The return in February 2009 had gone from plus 20 percent to minus 7 percent.

I was puzzled.

I rang the auditor as listed in the original product disclosure status. He sounded sorry for me - wondering if I was an investor in the fund. He told me he had never been the auditor and had gone to some lengths to let the regulator know that he was falsely listed as the auditor.

I rang Peter Rice and he told me the original returns came from "paper trading". I wondered why he did not tell me that the first time I rang and he said that he did not believe he was under an obligation to disclose that. (Indeed when I rang him the first time he told me that he had an independent back office and used Citigroup as his prime broker - both things that would not occur if the profits were from paper trading.)

I sent it all to the Sydney Morning Herald. (My job is to manage money - not explore these things...)

I think Michael West did a great job of the story.

He also pointed out something that truly surprised me. Andrew Blanchette who controls Titanium (at least is listed on the license and is the owner of the domain names) was once the boyfriend of Sydney model Caroline Byrne. She was found dead at the bottom of Sydney suicide spot The Gap. Maybe suicide. Maybe murder.

Caroline's death was the subject of much gossip in Sydney - the prime suspect was Gordon Wood. Wood was Caroline's boyfriend at the time of her death and was also the chauffeur to Rene Rivkin a colourful Sydney stockbroker. Rivkin has since committed suicide.

Wood was convicted but since then Australia's highest profile current affairs program has thrown that conviction into doubt.

This mostly proves that Sydney is sometimes a very small town. No more.



John

The tough task facing the Australian securities regulator

Australia has several jurisdictional issues that make it a haven for corporate criminals. These features are sometimes for better, sometimes for worse, but they leave the securities regulator with a task considerably harder than any similar sized country.

Feature one: compulsory privatised pensions (called superannuation)

Australians are forced to save almost ten percent of their salary into lock-box savings accounts that they cannot touch until retirement. 

Twenty year olds are locking up tens of thousands of dollars that they cannot see, cannot touch and cannot benefit from for decades. They naturally enough become disengaged from this money.

This is real money though - and collectively it adds up to over a trillion dollars.

Bluntly - this is the biggest pool of disengaged money on the planet - with large amounts of financial assets held by people of middling to no financial sophistication.

Financial institutions in Australia have been fattened on fees from these collected savings. I personally have been a beneficiary.

That said these savings have attracted fraudsters, sometimes on a grand scale. I was quite publicly the person who reported one of the biggest frauds - when organised crime looted hundreds of millions of dollars raised by a fund manager called Astarra/Trio. Privately I have reported other frauds some of which ASIC (our securities regulator) has acted on.

Feature two: very plaintiff friendly defamation laws

Australia has some of the most plaintiff friendly defamation laws on the planet. There is a reason why I will not tell you which other frauds I reported to ASIC. The perpetrators would sue me (and may succeed even though the client money is mostly gone).

So far the most prominent people who have successfully blown the whistle on Australian frauds publicly are American short-sellers who write a reports and then hide in America - safe behind the American First Amendment and their freedom of speech. 

Major frauds in Australia have been well known for years by market participants who simply could not say anything because of the enormous power of Australian defamation laws. For example Dominic McCormick knew about Astarra Trio for years before he tipped me off. And he said nothing in part because he was scared of being sued.

Feature three: a historically weak securities regulator (ASIC) and low sentences

You would be blind if you did not notice that ASIC has a poor record of prosecuting securities fraud. So few people have been to prison for what is straight theft it is laughable. When they do get a prosecution sentences are sometimes ludicrously low. Shawn Richard from Astarra/Trio for instance ran an entirely fake funds management company for many years which simply took client money and wired it overseas. He got some of it diverted to a Lichtenstein bank account. He got two and a half years. In the US he would have got over twenty.

The Newly appointed Securities Regulator chair

The Australian Government has just appointed a new chair of ASIC and I am scared.

The appointment is Joe Longo who actually worked when (much) younger at the regulator he now leads. 

Much more controversially he was a senior corporate lawyer at Deutsche Bank for seventeen years when Deutsche Bank was the most scandal ridden and blatantly criminal investment bank on the planet.

I am not saying anything particularly controversial about Deutsche Bank. They have paid over USD15 billion in fines. 

Joe Longo was a lawyer there through most of that.

I know nothing about him. For all I know he may have been trying to reform the bank from within. 

Or he may not have. I genuinely do not know and the case has not been made.

But Deutsche was so bad that a senior corporate lawyer would have spent years gasping for breath has he was immersed in one pool of pus after another. It was not pretty.

Appointing a Deutsche Bank in-house lawyer to run your securities regulator is - politely - a brave political appointment. Heroically brave. Far braver than I expected from Josh Frydenberg - the relevant Australian Minister.

Poacher turned gamekeeper

I am not totally without hope though. Many a poacher has become an effective gamekeeper.

The US has more of a tradition of noblesse oblige than Australia and sometimes US government appointments come from skimming the top of the barrel. The average Goldman partner for instance would have the skills to be a very good securities regulator and some former Goldman staff have become very fine public servants.

I genuinely hope Joe Longo, with his long history of swimming through Deutsche Bank's pools of pus, lives up to his promise. Because the costs of failure are high. 

John



PS. To illustrate the costs of failure - about 300 million dollars were stolen in the Astarra/Trio debacle. $200 million of that was compensated by government - the money effectively taken from other pensions/superannuation accounts. There is no reason why this cannot be ten times or a hundred times larger, and if the regulator fails it will be a hundred times larger. Refunding money stolen by organised crime is not where I want my taxes to go.

So many scams, so little time

Some hat-tips.

Roddy Boyd has been chasing a dodgy fund manager. Today he got his man: Bryan Caisse was arrested in Bogota Colombia. A lot of work went into that.

There is some satisfaction, albeit fleeting, in seeing fraudsters lose their liberty... 

Today Shawn Richard - the Astarra/Trio fraudster was released from prison. Shawn was the second person imprisoned following tip-offs from your correspondent. [Both original tips came from readers...] 

There is fine story - maybe too generous to the malefactors - on the Astarra/Trio scandal here. 

I pity the regulators. There are so many scams. So little time. And the satisfaction is so short-lived. The sadness of the people who have lost their life savings (as many Astarra/Trio victims did) is however long-lasting...

John

Astarra Trio: report of the Parliamentary Inquiry

This post is a victory lap on Astarra-Trio. If you are not interested in fraud in the Australian superannuation industry you might skip it.

Long-time readers of the blog will know that I am responsible for reporting to authorities the largest fraud ever conducted in the Australian Superannuation system.

For non-Australians I should note this is important. Australia has a privatised compulsory social security system where individuals are compelled to invest money in funds to fund their own retirement. Choice of fund is important (because returns are dependent on choice) but the investing population is usually unsophisticated in finance and often uninterested. Large pools of unsophisticated investors are - in my experience - always a magnet for scammers.

The fraud I reported was in a fund called Absolute Alpha - but it was only part of a larger network of fraudulent funds.

Spotting it required no genius on my part: I was tipped by a blog reader.

The regulators acted very promptly (within weeks) to my tip and closed the fund. I have described their behaviour as exemplary.

Several prominent people in the funds management market denied fraud - and one publicly argued that I was motivated by (a) greed* and (b) publicity for my fund.

Later one of the main perpetrators admitted guilt and is serving what I thought was as surprisingly short prison sentence.

Eventually there was a Parliamentary inquiry by the Joint Committee** on Corporations and Financial Services. The inquiry reported last week.

It is amusing to find this blog post written into the Hansard (permanent record) or the Australian Parliament. The inquiry was quite nice to me. They essentially accept all my propositions about how the fraud worked and described me as "persistent". I can't complain at any of the comments about me or this blog.

After reading the report (from Parliamentarians who had more resources and more time than me) I  conclude I knew most - but not all - of what was going on. I don't find anything in the recommendations I strongly disagree with - but I can't see why the clients of ARP Growth should be treated any differently to the clients of (say) Tarrants - both were in self-managed super funds established in cookie-cutter fashion by their financial planners.

And I thank the Joint Committee for their observation that whilst the response to my letter was exemplary the persistence with which the regulators followed leads after an admission of guilt leaves a bit to be desired. In particular I have been surprised and disappointed that so little has been done to examine the ARP Growth Fund. The Committee expressed the same surprise.

Astarra-Trio may be a one-off. But somehow I doubt it. There is over a trillion dollars invested in superannuation schemes and almost all of the end-clients are way less sophisticated than the readers of this blog. I hope the Parliamentary Inquiry leads to a closer regulatory focus on ways of preventing theft in Superannuation. A honey-pot like the Aussie Super Pool is too attractive to fraudsters to leave so lightly guarded.



John

*I responded that it was hardly an insult to claim a hedge fund manager is motivated by greed. My clients expect nothing less. Controlled greed is what my clients pay me for.

**Joint Committee simply means that members come from both the Senate and the Lower House.

Danger danger: The Wall Street Journal has no idea on how to do hedge fund due diligence

About 30 percent of Bronte's portfolio is shorting frauds.  We are very good at identifying frauds: we are experienced and diligent.

Alas some members of the fourth estate – often those with high profile mastheads – have no idea what they are doing.  This article: “Danger danger, thinking of investing in a hedge fund.  Here are some tips for sniffing out potential fraud” is so misguided as to be comical.

Lets state it up front.  There is a single tip that will allow you to avoid almost all the frauds – just one.  The tip is this:

Do not invest in a fund where the fund manager has access to your assets.

Ok – that needs a little explaining but its not complicated.  If – as an American -  you invest in Bronte Capital you don't give us the money.  We are not even legally allowed to take it.  You send the money to Citco.  Citco is the world's largest hedge fund outsource company – but there are alternatives.  David Einhorn's Greenlight Capital uses one of the bigger banks.  There are smaller players such as Spectrum, Conifer and others.

When you send the money to Citco they hold the assets.  We just trade them by issuing instructions to brokers.  However if we asked Citco to send the money to our personal bank account they would (rightly) refuse.  Moreover Citco value our assets every month and they – not us – send the statements to the clients.  We don't do the valuation so we can't fake it.  We don't hold the assets so we can't steal them.

Private clients surprisingly don't get this.  One of my friends runs a successful (albeit small) fund from his home.  People regularly make out checks out to him.  (If you send us money we will say thank you and send it back...)  The core due diligence test is simply not understood by retail clients – and alas the Wall Street Journal perpetuates their ignorance.

And guess who was the custodian for the assets invested in Bernie Madoff's fund.  BMIS – and that stood for Bernie Madoff Investment Securities.  And Bayou- another large fraud.  Well Bayou of course.  How about Astarra – the fraud I exposed in Australia.  Well their custodian was Trio Capital – a small custodian in the rural Australian town of Albury.  And guess what – Trio and Astarra had the same owners!  What about New World Capital Management – a fraud I wrote up but which was never prosecuted: well the perpetrator himself of course.  I could go on and on and on.  It is really easy to spot frauds and the fact they keep reappearing is testament to people not having a clue how to look for one.

If there is a single due diligence lesson then it is this: ensure that your money mangers have an independent custodian and preferably one of the majors.  And the first step in due diligence is this: don't do your due diligence on the fund manager – do it on the custodian.  Ring the custodian through their switch (not on a phone number provided by the fund manager) and confirm statements of the fund manager with the custodian.*

If you do this you are unlikely to get fleeced.  Simple as that.

Rob Curran misguidedly – and in the interest of the financial establishment tells you what his first red-flag in assessing managers is.  I quote:

The Fund Came to You: The Fund Came to You:  While it's not unheard of for a hedge fund to approach a wealthy individual, reputable funds usually concentrate their prospecting on institutional investors, says Randy Shain, executive vice president of First Advantage Litigation Consulting, who has been looking into hedge funds for 20 years. Always ask for the names of a fund's institutional investors, then contact them to verify that they are investors and have no qualms about the fund's legitimacy. While it's not unheard of for a hedge fund to approach a wealthy individual, reputable funds usually concentrate their prospecting on institutional investors, says Randy Shain, executive vice president of First Advantage Litigation Consulting, who has been looking into hedge funds for 20 years. Always ask for the names of a fund's institutional investors, then contact them to verify that they are investors and have no qualms about the fund's legitimacy.

Well politely – garbage.  I have written before on how institutional investors are right people to contact when you want to move the fund from $500 million under management to $1.5 billion under management.  They are absolutely useless at finding the hot fund manager with $5 million under management on their way to five years of 30 plus percent returns.  If you used this rule you would never have invested with Warren Buffett when he ran Buffett partnership.  All of the Buffett biographies make clear he approached well-to-do people like local medical specialists.

But its worse.  If you invest in managers that come to you through funds of funds or institutions you will probably wind up paying double-layer fees to get something like the average of all hedge fund managers.  Our initial client sent us the multi-fund manager record for a major (and successful) fund of fund.

(Click to expand).

He thought this these returns were BS.  I was kinder – these returns ok relative to equities over the same period – and more stable and probably ex-ante lower risk – so I believe this fund of funds has added value.  But the returns are not what you get from a couple of clever guys doing smart stuff.  Moreover there is a real danger in going through the institutional managers – which is that you get something that averages near the financial consensus.  And being in a crowd on Wall Street feels safe but it is actually shockingly dangerous.

Anyway my summary is that the number one method of choosing a fund given by Rob Curran (that is avoid one that comes to you) is counterproductive.  And the number one method of proving you are not defrauded rates a very thin method in the Rob Curran article.

And the Rob Curran article annoys me too – because at Bronte we are careful about trying to construct portfolios without regard to the consensus.  We don't look like institutional managers (no suits).  We don't sound like institutional managers (those accents).  And we we don't think like institutional managers (we don't like style boxes and we will happily change styles if market conditions change).  Rob Curran is telling all the WSJ readers to avoid funds like Bronte or Kerrisdale or any of the other thoughtful start-ups out there.**  And if this criticism sounds a little strident then it should be.  He is defending the financial consensus and the big institutions and frankly I don't think the big institutions covered themselves with glory over the last five years.

Secondary steps to chose the individual hedge fund

You know my view – the really good fund managers are outside the consensus.  Ratbags if you will – but ratbags with risk control.  Danny Loeb was a tearaway when he was younger.  [The rumor is that he posted more than 100 thousand messages on chatboards under the moniker of Mr Pink.]  David Einhorn might look like he is 18 (he is preternaturally young) but listen to what he says and he throws grenades.  (Who can forget the stoushes with Allied Capital and Lehman Brothers?)  And these guys are really smart.  And I guess if you want to chose a hedge fund and you don't want to work too hard you could ring them up.  In the mutual fund space my old boss at Platinum in Australia is far less out-there than those two but he is super-smart and he is not afraid to have people disagree with him.

But you would have missed Einhorn and Loeb when they were young and their best returns were mostly when they managed relatively small amounts of money.  Being an initial year investor in either of these funds was frightfully good.  [Incidentally Buffett's best returns were also when he was younger and smaller.  Buffett partnerships returns were substantially better than Berkshire Hathaway.]

So how do you chose a smaller manager?

Well first remember my test: do they hold the assets themselves of give them to a reputable third party to hold.  Don't forget this rule – it solves almost everything.

Then ask how they get the returns.  Leverage levels matter (they should be low – but 120 long 40 short is probably less risky than just 100 long).  Position size matters.  Short positions should generally be small (or using other mechanisms that limit risk like shorting debt rather than equity).  Long positions can be (much) larger.

Then ask them questions.  Pick an industry that you know really well and they profess to know.  If you can't do that work out some other mechanism to check out that they are not talking through their posterior.  (Clever and well thought through shareholder letters are a good start.  A blog is not bad either!)

Finally there is a test which I do (and which has enabled me to see many frauds) but that is seldom done elsewhere.  Match the stated returns to the ex-ante stated positioning.  For example I have disclosed several times on this blog that I am interested in shorting fraudulent Chinese stocks.  It should then come as no surprise that we are doing (very) well this month.

Likewise alas it was well known that Bank of America was our biggest position as it fell back from the 19s to the 11s.  Bank of America was above 19 in March 2010.  Here are our returns:

(These returns are for a separately managed account for our foundation client.)

The Bank of America position wasn't the only reason for the dud-period in the middle.  We are a global fund and measure ourself in US dollars.  The US dollar appreciated sharply through that period (devaluing our largish Euro denominated positions).  We quite explicitly generally do not hedge currency so you would expect to see currency volatility in our returns.  We also had a position in Maguire Preferred (now MPG Preferred) which gave us a wild though profitable ride.

More to the point – this was done primarily with big cap long positions (and small profitable positions in some defaulted preferred securities) and highly diversified and usually small cap shorts.  The positioning is as explained in my lament post.

Finally I have some strong views about prime brokers.  You should use only funds with US domiciled prime brokers for the reasons outlined in this post.

In other words it is pretty easy to do due diligence on us.

Incidentally the question we are asked almost all the time is "how much money do you manage?"  The implication that you need to be large to be good.  I assure you in almost every case returns are negatively correlated to funds under management.  You want the answer to be low - another inversion of the normal presumption.  Large however is the comfort of crowds - a comfort misplaced in markets.

Here are the steps generalized for any small gun hedge fund manager you might want.

Step 1:  Check the independence of the asset custodian.  This is a black-and-white test.  Any gray in the answer then the fund fails.  Period. Actually if it fails email enforcement@sec.gov and see if you can get bounties for spotting it.

Step 2:  Are they smart?  Test them on some industry. Bring an expert if you have one. Otherwise carefully read their material.

Step 3: Do they keep the position size and the leverage low enough to be safe?  Shorts must be smaller than longs.

Step 4: Do their returns correlate with what they say?  Focus on the particularly good months and the flat months.

Step 5: Is their brokerage arrangement sound (especially do they use US domiciled prime brokers).

And if you are a rich guy and they ring you out of the blue.  They are either trying to steal from you or they are being entrepreneurial.  Entrepreneurial is good – sometimes very good.

Follow the above steps and you will sort the wheat from chaff.

Is it too much to ask the Wall Street Journal to do the article properly next time?


John


*If you ring the custodian at a phone number provided by the money manager you could find yourself talking to a Potemkin custodian – just as people who rang advertising agencies at phone numbers provided by CCME would up talking to Potemkin advertising agencies. No kidding.  When someone gives you a reference do not ring the number they give you – ring the switchboard of the company they work at.  Always.

**Kerrisdale is far more aggressive than Bronte.  Their returns are better too.  But I have wondered openly whether aggression and risk are actually that well correlated - and I would use them as a case example.  I have conducted none of the tests described here on Kerrisdale.

Reminding Peter Johnston what he once thought about Astarra

Some people are just too precious.

Longtime followers of this blog will remember that I was instrumental in the exposure the biggest funds management theft in Australian history - Trio/Astarra.

Most of the victims of Astarra were clients of financial planners where the planner was a member of the Association of Independently Owned Financial Planners (the AIOFP). Astarra and its principals were regular attendees at AIOFP conferences and AIOFP members received kick-backs from Astarra - some disclosed, some not disclosed.

Peter Johnston is the executive director of the AIOFP and a regular apologist for AIOFP members. He is quoted today in Investor Daily - an Australian industry newsletter:

Association of Independently Owned Financial Planners (AIOFP) executive director Peter Johnston said it was a comfort that Trio and Astarra Asset Management were deemed "a blatant fraud". 

"The advisers are tired of being blamed for product failure, these products should not have been in the market in the first place and the ultimate responsibility lays with the successive politicians over the years who have failed to understand the industry," Johnston said.

Well Peter, I differ. Financial Planners market themselves as having expertise and are required under law to understand the products they sell. Moreover Peter clearly thinks he has this expertise. I have an email he sent to two financial planners who put their clients into Astarra. It says:

Peter/Steve, met with Shawn [the guy who ran Astarra] today. I am still of the opinion that he is innocent of any fraudulent behaviour with Astarra, I will back my 30 years of being in business and dealing with all sorts of characters with my assessment. He no doubt can be accused of sloppy paperwork but that is a far cry from the hell he has been through.

It is funny how Peter conveniently forgets that he vouched for Shawn Richard. He did so repeatedly (although not publicly since Shawn admitted guilt).

Peter Johnston agreed to a $100 thousand bet with me on the innocence/guilt of Shawn Richard and whether the money would be found where Peter thought it was. He later backed out which is a pity because I would otherwise be $100k richer. (You can read the story here.)

Peter accused me in the press of being motivated by "professional jealousy" re Astarra. I told him that was defamatory: I am a hedge fund manager - I am motivated by money.

Finally Peter thought that I would get sued over Astarra. To quote an email to me:

I suggest you read below and start amending your views or check your sources as you ‘can never believe what you read in the paper.’ I checked with the asset consultant then Shawn himself, this is now been confirmed by the Administrator, ALL of the non hedge fund monies are exactly where they were supposed to be. You will also now find that the ASF cash and 3 of the 5 Hedge Funds are now accounted for. We are awaiting the final 2 which is going to put the spot light and legal proceedings in a different direction, you can be assured of that.

Peter Johnston
Executive Director
ASSOCIATION OF INDEPENDENTLY OWNED FINANCIAL PLANNERS

Bluntly, Peter Johnston threatened to sue me. He defamed me in the press.

And now he revises history to absolve himself and his members.

But that is not my problem with Peter Johnston. Peter Johnston is a coward who does not have the courage of his convictions. He bet 100 thousand dollars on the Astarra outcome. And then - when he realized that I was serious - he backed down.

Coward.





John

Astarra and the financial planners – Ross Tarrant tells us how his business survived the financial crisis without shedding a job

By now it is obvious – the money in the Alpha Strategic Fund – now named the Astarra Strategic Fund – has been stolen. Who was the actual controller of this theft and who was “just following orders” has yet to be judicially determined – but Shawn Richard – the front-man for this mess in Australia – put forward (under privilege) the Nuremburg defense: he was just following orders from Jack Flader in Hong Kong.

More interestingly he testified that he paid large undisclosed commissions to financial planners – sometimes going under the rubric of entirely undocumented loans and sometimes called “marketing allowances”. The loans were particularly peculiar – after all when was the last time a financial institution “lent” you a million dollars based on a handshake with no documentation and not recorded in any accounts?

Anyway Ross Tarrant – who I gather perceives he has done nothing wrong – was the recipient of “marketing allowances”. He runs a large financial planning firm in Wollongong NSW. The local paper has reported that he has come out fighting. This may be the only time in my life I have quoted the Illawarra Mercury with approval – but this deserves to be quoted in full…

Tarrants managing director Ross Tarrant has broken his silence on bombshell claims his company accepted secret, illegal kickbacks from failed fund manager Trio Capital.

A NSW Supreme Court hearing last week was told Tarrants allegedly accepted $840,000 worth of secret payments last year as an incentive to invest clients' money in the failed venture.

In a statement released yesterday, Mr Tarrant described the money as a "marketing allowance" and said while the firm did not normally accept commissions, the one-off payment helped the firm survive the global financial crisis.

"During ... one of the greatest financial crises of our time, the receipt of this once-off marketing allowance from Astarra enabled Tarrants to weather the GFC without shedding a job," Mr Tarrant said.

"After receiving the marketing allowance from Astarra, Tarrants returned to a 98 per cent fee-for-service position."

I do not think this needs any embellishment.

(PS. For those that do not know the Mercury is a small – usually reactionary – local paper - which - given the style - I incorrectly thought was News Corp)

Weekend edition: In the tradition of Yves Smith’s – antidote du jour

I went to a free concert on the Opera House steps on the weekend.  The billing was very strange: Laurie Anderson (and possibly her partner Lou Reed) were giving a concert on the opera house steps for dogs.  Thousands of dogs.  It was billed as inaudible to the owners – and I could not tell whether Lou Reed was having us on.  After Lou Reed brushed off the Metal Machine Trio for an impressively loud show in the concert hall (earplugs supplied) – and he was going from something you could not listen to to something you could not hear.
I was pleasantly surprised. Dogs and family loved it.  Lou Reed did not appear but milled around the audience allowing this ridiculous photo of your blogger and his designer mongrel:


Lets call it a Walk on the Wild Side. 
Seriously though – how could I resist a connection – any connection – with the Velvet Underground and one of my favorite albums. 

Astarra weekend edition: Lockhart Road

David Morisset is the nom-de-plume of David Andrews – a former director of Astarra Capital – later Trio Capital – the responsible entity for the Astarra funds.  The Morisset persona is a self-published poet and a worthwhile writer.  He writes a blog which deserves more attention.

However as an independent director of a financial institution he has a problem – under his nose it seems about 170 million has simply gone missing.  With respect to one fund (the Astarra Strategic Fund or ASF) the judge said:

there are strong reasons to believe that a substantial part of the funds of AFS were invested fraudulently and have been lost;

It is unlikely those were lost to David Andrews or David Morisset.  Instead he was just a director when it happened.

When you hear me sing in the corridor you would (justifiably) suggest I do not give up my day job.  But seeing how well Morisset writes and his problems as a financial director I suggest that he is much better at the weekend job.  Award winning even.

And below is a riff he wrote about a fictional funds management organization.  The resemblance to Astarra is surprisingly strong… 

The Sydney Morning Herald notes that this “cracking yarn” is suddenly missing from Morisset’s blog – which is a pity.  Like many things written by Morisset it deserves more attention.

To ensure that I have reprinted it below.

 

 

John

PS.  For Michael Mascasero in the fiction substitute Matthew Littauer who was murdered in Roppongi in mafia style circumstances…

WEDNESDAY, MARCH 17, 2010

LOCKHART ROAD

The following is an excerpt from the opening pages of David Morriset's crime fiction novel set against the background of Australia's trillion dollar superannuation industry.


Michael Macasero had apparently found out the hard way that the noise and traffic on Wanchai’s Lockhart Road in the early morning hours was ample cover for discretely committing murder in a rubbish-strewn alley. Two Chinese garbage men, who had shaken with fear at their discovery, had found the blood-soaked body. Overworked but politically sensitive police had come up with an inconclusive finding on the death. Macasero was, they had surmised, just another American who got into trouble in the red light district and could not find a way out of it with all his vital arteries intact. The police reports had skirted around the demonstrably obvious facts that the weapons used and the nature of the wounds suggested Triad connections.

None of the Hong Kong law enforcement agencies had seemed inclined to give the matter any more thought until years later when the Australian Federal Police raised some questions at the instigation of investment regulators puzzled by apparent irregularities in a Sydney-based superannuation fund. Even then the Hong Kong authorities had been artfully unhelpful and the Australians appeared to give up and go away to solve less complicated problems – or at least that is what they did at first.

Macasero had been proud of his reputation as an investment guru in the baffling field of hedge funds and he had claimed the equivalent of US$100 million under management. Still in his thirties when he was killed, he had set up supposedly sophisticated vehicles in various tax shelters to provide services for his clients in Hong Kong and was expanding into Australia. He knew very little about the great southern land but he had been attracted by its various governments spruiking the notion of Sydney as a major financial centre. His young English colleague, Joel Rogers, had an Australian mother and he had already set up a small Sydney office. Rogers was ready to move there permanently as soon as Macasero made the call.

Like many Filipino Americans Macasero was the product of a family that had escaped people power with a fortune assembled during the Marcos years and had then relocated everything but its money to the land of the free. An only child, he attended college at UCLA and then set off for New York to learn about hedge funds. Tiring of the compliance obligations of working for Wall Street firms, he was seduced by a job offer from a charismatic English investment banker who was looking for a hedge fund specialist to exploit new business opportunities in Hong Kong.

By this time Macasero was unencumbered by any unbreakable links to his adopted country. His parents had died and left him with ample financial resources, which his father had cannily spread around the Caymans, the British Virgin Islands, and several other similar havens of the rich and secretive. There was even a large balance in a Swiss bank account that gave Mr Macasero senior some evident respectability when he wanted to source political donations. Where the fortune came from was not clear to Michael but he was grateful for it and determined to preserve it as a first priority and add to it as a matter of urgency before he retired to enjoy the rest of his life. Inheriting his father’s entrepreneurial gifts and distaste for traditional ways of doing things, the hedge fund industry was a natural fit. It was mysterious, gently regulated and seemingly irresistible to high net worth customers and ill-governed institutions. Returns were driven not by the overall market trend but by the wits of the investment manager. Some would say it was all a matter of luck, but Michael Macasero described himself as skilful without any embarrassment.

Rodney Hawker was more than twenty years older than Michael Macasero when they met by chance at an investment seminar in the Pierre Hotel in a huge function room overlooking the yellow taxis of Fifth Avenue and the tree-lined borders of Central Park. When the conversation switched to hedge funds and the opportunities for new business they presented, Hawker mentioned his interest in prospecting the money men of Hong Kong as a first foray into the vast wealth management sector that was ready to be born in China. Macasero was all ears. They walked over to Trattoria del ’Arte on Seventh Avenue and, while they sampled the restaurant’s paper thin pizza and home-made pasta coated with subtle sauces, Hawker talked Macasero into coming with him to Hong Kong later that month. Macasero severed his Wall Street ties, sub-let his apartment and hopped on a plane without a second thought.

To the eyes and ears of a young American, Hawker epitomised suave English manners and style. His navy pin-striped suit was expertly tailored, but a little crumpled, his sky-blue and white check shirt did not quite match his Ferragamo tie of tiny red golf clubs on a grey background, but his voice was full of rounded vowels and seemed to come from the depths of his throat where it seemed a double bass had lodged. A more urbane observer might have noticed the traces of cockney in his accent – traces that became more pronounced as he drank his favourite scotch.

Hawker was a self-made man of the most determined sort because he had reinvented himself several times over. Now well into his fifties he could look back on stints as a junior civil servant in the sprawling administrative divisions of the Foreign and Commonwealth Office, a commercial banker for Barclays at a time the bank was struggling to come to grips with the fallout from deregulation, several roles as researcher and stock-picker with small funds management groups that ended when his employers were gobbled up by bigger players, and a time as a freelance investment consultant, which was proving to be hard going to such an extent that his financial reserves were starting to diminish at a rather alarming rate. Convinced that he was finished in England, he decided to try Hong Kong.

Within six weeks of his arrival, Hawker had set up a tiny office on the fringes of the Island’s financial district near where it merged into the night life of Wanchai and then he had acquired an apartment in a nondescript building just off Nathan Road in Kowloon. He had also hired Bo, a young Filipina, as combination concubine, housemaid and procurer of alternative sexual services when he felt the need for variety or multiple partners. A veteran of two disastrous marriages, Hawker made it clear from the outset that he offered Bo sexual experimentation, a steady income that allowed her to meet the needs of her extended family in Manila’s slums, a comfortable place to sleep, ample food to eat, and a much more secure life than she had as one of the city’s unfortunate bar girls. The fact that Bo was almost thirty and losing her ability to pull customers on a regular basis meant that she was easily persuaded and, indeed, she was actually grateful for the chance to be exploited on such a generous basis.

Setting about the task of networking amongst the expatriate community and finding his way around Hong Kong’s financial labyrinth was second nature to Hawker. He had a glib tongue and his resume was edited in such a way that it looked both impressive and authentic. However, running an office and the administrative chores that went with it were a bore. When it was time to buy information technology items like computers, software and printers, Hawker was quick to surrender to the obvious. He was a twentieth century man with enough in the way of people skills to sell himself and his services to people like him. But when it came to dealing with twenty-first century office infrastructure and its suppliers, he was lost in a jumble of words, symbols and business practices that were indecipherable. So he did what any sensible twentieth century man would do – he placed an advertisement for an assistant with a superior IT skill set and an interest in starting a career in the investment industry on the bottom rung of a very high ladder.

Most of the respondents knew almost as little about IT as Hawker but one of them was different. Joel Rogers had only been in Hong Kong for a few days and he just wanted a start. Hawker offered him the job and he commenced work immediately after the interview, during which Rogers had babbled on about hedge funds and the dearth of them in Hong Kong.

Rogers was more than capable. He had graduated from the University of the West of England in business studies. While students came from all over England to study at what used to be the Bristol Polytechnic, Rogers was almost a native. He was raised in Portishead on England’s dreary west coast in a house on Blaggard Street, so named, according to regional folklore, because of its former associations with smugglers and pirates. Unfortunately his west country accent and the origins of his qualifications did not play well in the City of London and all he could manage after six years of trying was a series of low-paid but extremely stressful dealing desk jobs. One day he found himself gazing out of a Canary Wharf skyscraper window and looking east. Like many others before him, sensing failure in London, he decided to give it a go in Hong Kong.

After three months, Rogers formed the view that Hawker was a bit of a pain-in-the-neck. He delegated only the most menial tasks and left his assistant almost office-bound. However, new business opportunities were abounding. Very soon, Rogers expected, he would be managing money in a hands-on way that would have still been light years away in London. Hawker, unfortunately, had other ideas. He flew to New York, ostensibly to attend a hedge funds conference, but, in reality, his main aim was to find a fund manager. He found one in Macasero.

When Macasero landed in Hong Kong and set himself up in Hawker’s office suite in a corner offering a view over Wanchai, Rogers was disappointed at first. However, that soon changed. Macasero knew what he was doing and started taking care of all the details that were beyond Hawker and unknown to Rogers. More importantly, he adopted the role of mentor to Rogers in a collegiate fashion that reflected the small age difference between the two of them. Rogers was learning business development from Hawker and money management from Macasero so he was happy.

Within three weeks of Macasero’s arrival, the firm had adopted the catchy name of Triadica Securities and was about to launch its flagship fund, labelled, rather pretentiously, as the Masterwork Macro Fund. The word "triadica" was the name of flower common in Southeast Asia, chosen by Macasero for sentimental reasons and because it seemed to refer to the firm’s founding by three theoretically equal partners. Lack of awareness that there were other organisations in Hong Kong who might find the company’s name interesting was evidence of Macasero’s naïveté and a testimony to the entire group’s ignorance.

Philidor 2.0: Valeant and Stephen King play Chess with a lot of pharmacies

Valeant (VRX:NYSE) has managed the improbable.

It sells 

(a). Generic drugs often with close substitutes,

(b). It has raised their prices sometimes to absurd levels ($1000 acne antibiotics with full generic substitutes is an example)

(c). It claims to raise volumes of these products.

I call this the improbable trio. It seems improbable that a company could do this. Not impossible, just improbable.

The trick it appears is reliance on non-traditional distribution models. 

The size of non-traditional channels

Valeant's non-traditional channels are very large. During the dispute between Allergan and Valeant Allergan noted that the IMS sales data for Valeant products was crappy. 

Valeant responded that IMS data was unreliable for Valeant. To quote:

U.S. IMS data will cover less than 30% of Valeant’s business and, for that portion of Valeant’s business IMS covers, the IMS data will not properly collect sales through a numbers of channels (e.g., specialty pharmacy, physician dispensed sales, corporate accounts, and alternative fulfillment).

The non-traditional distribution methods are hugely important in Valeant.

The Philidor allegation

The Philidor allegation is that Valeant [through undisclosed proxies] established or owned pharmacies (such as R&O in California) and used their pharmacy numbers to deceive insurance companies into believing that scripts for expensive drugs with generic substitutes were being presented at smaller suburban pharmacies rather than at a Valeant captive pharmacy. 

Bloomberg has reported for instance that Philidor staff routinely wrote "dispense as written" on scripts to prevent generic substitution. [This is fraud.] 

If however they put all those scripts through one Valeant associated pharmacy the insurance companies would wise up.

So they put the scripts through multiple pharmacies - deceiving the insurance companies into not checking for the fraud.

How many pharmacies?

One of the games we have been playing is spot-the-Valeant proxy pharmacy.

We know pharmacies outside the Philidor web: the proxy captive pharmacies extend beyond Philidor.

But the scale of Philidor problems is not widely understood and has not been disclosed to the market. I doubt Mr Ackman would have adopted his Martingale strategy had he fully understood.

So lets start.

All these pharmacies were registered in Delaware. Many are named after chess terms (as are many previously disclosed Philidor entities) but we are also noting a distinct Stephen King theme.

This should keep the fraud investigators for various insurance companies busy. I suspect this will also get added to the list of things Congress is investigating.

Entity	State	Entity ID	Registered Agent	Notes
Fifty Moves, LLC	DE	5640758	Corporation Service Company	Chess term: Fifty Move Rule
ELO Pharmacy, LLC	DE	5762328	Corporation Trust Company	Chess term: ELO ranking system
C-K Pharmacies, LLC	DE	5762330	Corporation Trust Company	Chess term: The Caro-Kahn defence
Tarrasch Pharmacy Holdings, LLC	DE	5762881	Corporation Trust Company	Chess term: Tarrasch was a great player
NC3 Pharmacy, LLC	DE	5770687	Corporation Service Company	Chess term: The rarely used Dunst Opening
Lasker Pharmacies, LLC	DE	5770702	Corporation Service Company	Chess term: After the great player and theorist Emmanuel Lasker.
B&W Pharmacies, LLC	DE	5770706	Corporation Service Company	Black and White: the usual colours of chess pieces.
NC3 Pharmacy Holdings, LLC	DE	5770708	Corporation Service Company	Another Dunst Opening reference
Knight & Knight Pharmacies, LLC	DE	5770718	Corporation Service Company	Chess Knights I presume.
First Rank Pharmacies, LLC	DE	5770741	Corporation Service Company	Another entity is called "Back Rank: another chess term.
Forsta, LLC	DE	5774549	A Registered Agent, Inc.	Entity by same name sought wholesale pharmacy registration in AZ with Gary Tanner (Owner) and Jacob Power (Pharmacist-in-Charge), both ex-Philidor/VRX
Charmberlain Pharmacy, LLC	DE	5775980	Corporation Service Company	Named for a favourite Stephen King location...
Mears Pharmacy, LLC	DE	5775991	Corporation Service Company	Named for a repeated Stephen King character...
Marsten House Pharmacy, LLC	DE	5775997	Corporation Service Company	Named for a key location in Salem's Lot. Notably a symbol of evil.
Torrance Pharmacy, LLC	DE	5776000	Corporation Service Company	Named for key characters in The Shining.
Overlook Pharmacy, LLC	DE	5776004	Corporation Service Company	The Hotel in The Shining.
Topiary Pharmacy, LLC	DE	5776008	Corporation Service Company	Topiary animals in The Shining.
Hallorann Pharmacy, LLC	DE	5776022	Corporation Service Company	Named for the chef at the Overlook Hotel in The Shining.
Decker Pharmacy, LLC	DE	5776025	Corporation Service Company	Possibly named for another Stephen King character...
Twinner's Pharmacy, LLC	DE	5776026	Corporation Service Company	Named for Stephen King's repeated doppleganger meme.
Parkus Pharmacy, LLC	DE	5776027	Corporation Service Company	A Stephen King character in The Talisman.
Halleck's Pharmacy, LLC	DE	5776029	Corporation Service Company	Named for another major Stephen King Character.
Flagg Pharmacy, LLC	DE	5776032	Corporation Service Company	Randall Flagg is a major Stephen King Character
Derry Pharmacy, LLC	DE	5776033		Derry is a repeated location in Stephen King novels.
Pennywise Pharmacy, LLC	DE	5776037	Corporation Service Company	Pennywise the Clown is a recurring Stephen King character.
Plymouth Pharmacy, LLC	DE	5776038	Corporation Service Company	The iconic Stephen King car in The Shining and others was a Plymouth.
Hanscom Pharmacy, LLC	DE	5776039	Corporation Service Company	From Ben Hanscom, a Stephen King character
Trips Pharmacy, LLC	DE	5776042	Corporation Service Company	From Captain Trips, a virus that exterminates most the human population in The Stand, a Stephen King novel.
Delain Pharmacy, LLC	DE	5776044	Corporation Service Company	From Delain, a mythical Stephen King domain.
Creed Pharmacy, LLC	DE	5776045	Corporation Service Company	From Louis Creed, the main character in a Stephen King novel.
Odetta Pharmacy, LLC	DE	5776046	Corporation Service Company	From Odetta Holmes, a recurring Stephen King character
Hemingford Pharmacy, LLC	DE	5776047	Corporation Service Company	From Hemingford Home, a Stephen King location.
Ludlow Pharmacy, LLC	DE	5776048	Corporation Service Company	From Ludlow Maine, a Stephen King location.
Crandall Pharmacy, LLC	DE	5776050	Corporation Service Company	From Jud Crandall, a Stephen King character.
Sheldon Pharmacy, LLC	DE	5776053	Corporation Service Company	From Paul Sheldon, a major Stephen King character.
Freemantle Pharmacy, LLC	DE	5776054	Corporation Service Company	From Abagail Freemantle, a major Stephen King character.
Revlowe Pharmacy, LLC	DE	5776055	Corporation Service Company	Presumably from the Reverend Lowe in the Cycle of the Werewolf.
French Landing Pharmacy, LLC	DE	5776058	Corporation Service Company	The location in Black House, a Stephen King novel.
Wilkes Pharmacy, LLC	DE	5776059	Corporation Service Company	From Annie Wilkes, a Stephen King character.
Henreid Pharmacy, LLC	DE	5776060	Corporation Service Company	Possibly from Lloyd Henreid, a minor Stephen King character.
Beaumont Pharmacy, LLC	DE	5776062	Corporation Service Company	From Thaddeus Beaumont, another Stephen King character.
Sawyer's Pharmacy, LLC	DE	5776064	Corporation Service Company	From Jack Sawyer, another Stephen King character.
DH Stark Pharmacy, LLC	DE	5776065	Corporation Service Company	Possibly short for Dark Half from the novel of the same title. George Stark is the major character.
Shardik Pharmacy, LLC	DE	5776066	Corporation Service Company	Shardik is one of the twelve guardians of the Beams that hold up the Dark Tower (again a Stephen King reference).
TCM Pharmacy, LLC	DE	5776067	Corporation Service Company	We are fairly sure this is associated - but have not worked out the link.
Burlingame Pharmacy, LLC	DE	5776070	Corporation Service Company	Jessie Burlingame is a major Stephen King character.
Lauder & Cross Pharmacy, LLC	DE	5776071	Corporation Service Company	Try these names... http://stephenking.wikia.com/wiki/Harold_Lauder and http://stephenking.wikia.com/wiki/Nadine_Cross
Claiborne Pharmacy, LLC	DE	5776072	Corporation Service Company	Dolores Claiborne is a Stephen King novel.
Edgecombe Pharmacy, LLC	DE	5776073	Corporation Service Company	From Paul Edgecombe, who used to run Death Row in a Stephen King novel.
Georgia Pines Pharmacy, LLC	DE	5776074	Corporation Service Company	Georgia Pines is a retirement home in Stephen King novels.
Garraty Pharmacy, LLC	DE	5776075	Corporation Service Company	From Ray Garraty, another Stephen King character.
Cold Mountain Pharmacy, LLC	DE	5776076	Corporation Service Company	The Cold Mountain Penitentiary is where Paul Edgecomb ran death row.
Coffey's Pharmacy, LLC	DE	5776078	Corporation Service Company	John Coffey is another Stephen King character.
Stillson Pharmacy, LLC	DE	5776079	Corporation Service Company	Steve Stillson is the President of the United States in a Stephen King novel.
Rainbird Pharmacy LLC	DE	5776080	Corporation Service Company	John Rainbird is a Vietnam Veteran in a Stephen King novel.
Longmont Pharmacy, LLC	DE	5776083	Corporation Service Company	Longmont VA is a location in the Stephen King novel, The Shop.
Dawes Pharmacy, LLC	DE	5776086	Corporation Service Company	Barton George Dawes is another Stephen King character.
Castle Rock Pharmacy, LLC	DE	5776088	Corporation Service Company	Castle Rock Maine is a location of paranormal activity. I guess like a Valeant pharmacy.
The Shop Pharmacy, LLC	DE	5776089	Corporation Service Company	The Shop is a secret Government Agency in Stephen King novels. I guess this is a secret Valeant agency.
Cambers Pharmacy, LLC	DE	5776096	Corporation Service Company	Joe Cambers, a Stephen King character runs an auto-repair shop in Castle Rock. Probably another paranormal shop.
McGee's Pharmacy, LLC	DE	5776099	Corporation Service Company	Charlie McGee, a Stephen King character, has pyrokinetic powers - perhaps they include ripping off insurance companies.
Juco Pharmacy, LLC	DE	5776103	Corporation Service Company	A nickname for Joe Cambers rabid family dog.
Roland's Pharmacy LLC	DE	5776108	Corporation Service Company	Roland Deschain, a major Stephen King character.
Tower Pharmacy, LLC	DE	5776110	Corporation Service Company	Possibly a reference to The Dark Tower, a Stephen King novel.
Hawkmarten Pharmacy, LLC	DE	5776111	Corporation Service Company	We think this is one of the many aliases of Joe Flagg. Suggestions accepted.
Carrietta Pharmacy, LLC	DE	5776115	Corporation Service Company	The full first name of Carrie, of the infamous Stephen King novel.
PBG RX Pharmacy, LLC	DE	5794828	Corporation Service Company	We have not found the reference here. The registration details make us think it is related.
Decker Pharmacies, LLC	DE	5794834	Corporation Service Company	Another reference to Decker.
French Landing Pharmacies, LLC	DE	5794836	Corporation Service Company	Another reference to French Landing.
NC3 Pharmacies, LLC	DE	5794839	Corporation Service Company	See the above chess reference.
C-K Pharmacy, LLC	DE	5794840	Corporation Service Company	See the above chess reference.
ELO Pharmacies, LLC	DE	5794842	Corporation Service Company	See the above chess reference.
Roland's Pharmacies, LLC	DE	5794844	Corporation Service Company	See the above reference to Roland Deschain.
Hemingford Pharmacies, LLC	DE	5794849	Corporation Service Company	See the above reference to Hemingford Home
Flagg Pharmacies, LLC	DE	5794852	Corporation Service Company	Joe Flagg again.
Overlook Pharmacies, LLC	DE	5794854	Corporation Service Company	The hotel in the Shining again. Do we see a recurring theme.
Fischer Pharmacy Holdings LLC	DE	5805160	Corporation Service Company	Surely a reference to Bobby Fisher, world Chess Champion

We are just playing with one State here.

There are pharmacies in other states. And they are all we think related to Valeant.

But here is the gem. The registration of false pharmacies continued AFTER Philidor was exposed and after Valeant said that they would stop doing business with Philidor.

And the people on registration documents are also often on the pay roll of Valeant (not Philidor).

I hope the longs can explain that inconvenient fact away - because it is not obvious how you do that.





John