Charles Gasparino - Reporting or Selling Books?

Why does CNBC allow Charles Gasparino to hawk his new book in every one of his on-air reports? Gas-Bagarino is always telling us that he's an objective journalist. When people try to sell me something at the same time they are supposed to be imparting objective information, their credibility is diminished.

What do you got for us today, Charlie?

Jeff Macke and Kanye West

I was wondering what ever happened to Jeff Macke. He, famous for the quip, "only 2 positions to have in this market are cash and fetal", hadn't been on CNBC's Fast Money of late. As I Googled his name, this interview with Dennis Kneale came to light. Crazy, drunk, or drugged, I can't tell.

They said the current wave of celebrity insolence started with Rep. Joe Wilson yelling at President Obama from the House Chamber and then continued with outbursts from Serena Williams, Roger Federer and Kanye West. For my money, Jeff Macke is the father of on-air insolence... Watch this clip and you'll know why Mr. Macke has been M.I.A.

Alan Abelson & the Broken Clock

We've all heard the cliché that a broken clock is right twice a day. Well, my son once told me that this saying is not always true. If the clock is spinning, but spinning at the incorrect speed, it could be broken without ever having been correct at least twice a day.

I'm reminded of my son's words as I read this week's Alan Abelson column in Barron's. For over 20 years, I have enjoyed the wordsmithing of Barron's resident editor and curmudgeon. But as a market timer, Mr. Abelson has historically been bearish and following his market opinions would have had the investor missing the predominance of the 25 year bull market that has seen the Dow Jones Industrial Average rise +800% since 1984. Mr. A. usually spins his bearishness though the surrogate words of analytical nabobs of negativism on a weekly basis. On the rare occasion that he grudgingly concedes that stock prices are likely to move higher, it is invariably because of something phony or ephemeral such as the dollar-drunkenness of the Federal Reserve or the irrational exuberance of the average investor. When the market does decline for a period, A.A., like the broken clock in the cliché, is there ready to say he's been telling you the right time all along.

In this week's column, Mr. Abelson demonstrates why a broken clock may never tell the right time. As he ridicules the idea of securitizing life insurance settlement policies, calling it a "scheme" and implying that it is another CBO crisis in the making, he draws the wrong lesson from the mortgage crisis and misses the value of the new instrument. Say you are a 70 years old widow and had funded a life insurance policy to leave to your child. Then, somewhere along the way, the relationship between parent and child sours and you decide you would rather spend the value of the policy to better enjoy your remaining years. With the creation of a secondary market for these policies, one can get a substantially higher price for the asset than the cash surrender value the insurance company would give you. For the investors in these pools of life settlement policies, the only significant risk is that the pricing based upon actuarial tables is accurate. But in terms of the underlying policies being paid off, this is a secure instrument, possibly as secure as a government bond. Most insurance companies are triple A rated and there has never been a default on a life insurance policy death benefit.

Mr. Abelson misses the lesson of the sub-prime crisis, which was that the mispricing of the underlying assets is what caused the collapse of the CDO/MBS market. No one group can be made the villain in the asset pricing scandal because so many factors and factions contributed to creating the housing bubble. One culprit in the creation of a real estate bubble was the largely Democrat politicians who cajoled banks to ease lending standards for low income Americans and then created tax policies that artificially advantaged buyers over renters and raised the prices of homes that many of these folks couldn't afford in the first place. Another culprit was the turn of the century Republicans, who confused over-regulation with proper regulation and made it politically suicidal to promote regulation of any kind. Congress, the overseers of Fannie Mae and Freddy Mac get a fair share of blame by allowing a quasi-government agency to warp the private loan market by alchemizing junk mortgages into investment grade government guaranteed paper. Worse, by immediately flipping the loans they created, their co-conspirators at the banks and mortgage companies absolved themselves of the future performance risk related to the paper they created. It was also Wall Street/The Banks/The Government who allowed the historic 20% deposit standards to lapse, the consequence of which was homeowners walking away from their obligations when the debt on their home exceeded their equity in the property. But most certainly, the culprit was WE THE PEOPLE who did not understand that policies and practices that decoupled the relationship between rental cash flow and a property's resale value can be both popular as well as wrong-headed. It was WE THE PEOPLE, who kidded ourselves into thinking that we could live above our means for a while and then some greater fool would bail us out before our artificially low teaser mortgages reset. These factors as well as many others turned a cyclical decline in home prices into a value pyre. There is nothing scheme-y about securitizing assets and bundling them into a new investment instrument. In of itself, it is a proven concept that has created wealth since Solomon Brothers popularized it in the 1980's.

So now it’s September 2009. The market is in the process of recovering from the recession of '08 and new exotic financial instruments tied to the securitization of assets are again being created. In the long run, such instruments positively impact consumers by creating price discovery on a series of asset classes that formerly had an illiquid market and opaque prices. The American financial market will becomes strong again, create new jobs and reemerge as one of the few sectors where we lead the world. Alan Abelson will continue to besmirch the industry that makes his publication possible and play the spoiler to every advance made by the Dow Jones Industrial Average. Alan, with all due respect, your distain for the upward march of capitalism is like the broken clock that never tells the correct time.

The Day the Music Died - A Year Later

By Robert Teitelman for The Deal Magazine

Labor Day 2008. What were we thinking before le Lehman deluge? What was going through the minds of principals as the storm gathered? As they left their beds on Sept. 2, did they sense the forces already primed to explode? Did they sense inevitability? Lehman Brothers shares had been falling all summer. Lehman trader Lawrence McDonald, the co-author of "A Colossal Failure of Common Sense," sat on Cape Cod gloomily hanging onto fading hopes of a deal with Korea Development Bank. Joseph Tibman (a pseudonym), in his soon-to-be-published memoir, "The Murder of Lehman Brothers," emphasizes the hope that drove rank and file: the belief that the business was sound, bad assets would recover and someone would save the firm. David Wessel in "In Fed We Trust" reports Henry Paulson and Tim Geithner took calls from Lehman chief Dick Fuld "for months," rejecting a good bank, bad bank scheme (on the federal dime) and a plan to become a bank holding company. On Labor Day, regulators fixated on Fannie Mae and Freddie Mac, which were failing; the government seized them on Sept. 7. Soon after, Wessel writes, Paulson and Ben Bernanke met at breakfast, then over a midmorning conference call, to discuss Lehman, which had preannounced another huge loss. "With Lehman clearly struggling for survival, Paulson and Bernanke assured each other -- and others on the call -- that all the companies and traders that did business with Lehman had been given time to protect themselves from a possible Lehman bankruptcy."

Like a bubble, inevitability only exists after the fact. There are many roads into the forest and only one road out. And that road -- Lehman's failure -- shapes both the future and the remembered past. Throughout this period at Lehman there were two murky, dynamic, determinative realities. First, was the hole in its balance sheet. How big were subprime and commercial real estate losses? Fuld obviously had some sense, but he may have been delusional (he's not talking or writing). But Bart McDade, who replaced Joe Gregory as COO in June, and his senior team were not. Did they see a way out, or were they praying for a deus ex machina too? And what of regulators, who, at least since the Bear Stearns Cos. implosion in March, were presumably all over Lehman? Everyone else had to peer through a foggy window. Given the evidence of the bankruptcy filing, well over $100 billion in losses, short sellers, led by David Einhorn, came closest to the mark, which is something to ponder. (Shorts can create their own reality, but even Einhorn couldn't concoct that big a reality.) Staffers, many of whom didn't (or couldn't) sell their shares, continued to believe, as Tibman notes. Still, given what we know about losses, wasn't the game effectively over before Labor Day? Was a near-term market that would have refloated those assets remotely realistic? Ah, hindsight.

Second, there was Lehman's systemic situation. Wessel's offhand comment, which he never elaborates, implies that Bernanke and Paulson were wrong about Lehman, and that no one corrected them. They seem to have had only sketchy notions of the scale of impaired assets (or worse: they knew and did nothing) and no idea how deeply Lehman continued to be still entangled with everyone else. Granted, this is tricky: Warn counterparties to back off and you trigger the very run you wish to avoid. The result: paralysis, which seemed to seep into less overt steps, like a comprehensive examination, without the Lehman spin. If you can't act, at least you can get the full monty, internally and externally, and game out a response. There's no evidence of that (and Wessel is a sympathetic chronicler), although other testimony, like Paulson's own book, may alter that view.

Much has been made of the unprecedented circumstances that faced executives and regulators last fall. And there's some truth to that. But what's growing clearer as these books emerge is the inertia that prevailed. It appears that by Labor Day, Lehman was all but dead, though the persistence of hope, nurtured by partial knowledge, is astounding. There had been time to act. Fuld would have had to move to deal with the problem at least a year or more earlier; instead he gunned the engines and bought back shares. The board was fatally passive. Regulators had months to decide what to do if Lehman failed. But as summer ended, Washington still lacked a clear view of the situation. Fuld looked to Paulson and Geithner; Paulson, Geithner and Bernanke looked to counterparties, potential acquirers, the market, and that gang looked at one another -- and bailed. And when Sept. 15 arrived, the decision had to be made quickly and in the dark. Maybe it was dark because it was always someone else's job to turn on the light. Maybe it was just fate.

Hedge Fund Shuffle

Nathan Vardi

Laurus Capital is using money raised for new funds to cash out of an old one. How much are its holdings really worth?

The Laurus master fund was on a tear two years ago. The New York hedge fund had $1.8 billion under management and had reported 18% annual returns to investors so amazingly smooth that they included a single monthly loss in its six-plus years in existence. The problem Laurus faced was that many of its holdings were illiquid. To keep its streak alive, and its managers generously paid, it needed a buyer.

Enter the PSource Structured Debt fund. The closed-end fund raised $60 million on the London Stock Exchange in August 2007 and promptly used the entire sum to buy assets from Laurus. Say this for the PSource fund's investment managers: They knew what they were buying. That's because they were the same guys behind Laurus--brothers Eugene Grin, 51, and David Grin, 39. On the surface the Grins have achieved astonishing results at Laurus Capital Management. They've done it by funneling money into thinly traded penny stocks via private investments in public equity, otherwise known as Pipes.

This has proved a very profitable way to invest. For the Grins, at least. They have extracted tens of millions of dollars from Laurus Master since founding it in 2001. That includes management fees of 2% of assets a year, plus an average cut of 3.5% off the top of each of the dozens of new investments they arranged for Laurus. In addition, the Grins are entitled to a minimum 20% of reported profits (which they do not appear to have withdrawn). All told the brothers have amassed $88 million in deferred compensation, Laurus financial statements show.

Despite paying its managers top dollar, and the support of PSource, the Laurus Master Fund has run into serious problems. In fact, it is now being liquidated in the Cayman Islands, where its big feeder fund is domiciled, following a redemption request from Russell Investments, Laurus' largest investor. Laurus' problems, it would appear, have to do with the investments it made in a number of companies that later filed for bankruptcy protection. Another big Laurus holding is losing money hand over fist developing algae as a biofuel yet magically boasts a market value of $2.5 billion. None of this deterred the Grins from charging their funds $30 million for their services last year.

Russell, a unit of Northwestern Mutual Life, invested assets from its hedge-fund-of-funds in Laurus. It declines to comment, other than to say it is "a passive investor [and] has no decision-making authority."

Penny stocks--the informal, if not always literally accurate, description of shares in companies whose market values are completely disconnected from fundamentals like earnings and book value--are as old as Wall Street. What's new is how, over the past few years, they've been turbocharged by hedge funds operating through Pipes. A good question for investors: If that hedge fund you are in is invested in Pipes, is it really earning the return it's reporting? In that light, the Grins' claims of double-digit gains amid a flurry of trading among related parties in illiquid securities merit a close look.

As many investors have learned the hard way lately, reporting impressive returns is very different from realizing them. The way the Laurus Master Fund has cashed out of positions is by selling to related parties that the Grins control or have a hand in. They include PSource and the Valens group of hedge funds, which the Grins set up two years ago. Last year Laurus Master received $492 million from PSource and Valens for a basket of securities, many illiquid. That resulted in Laurus' booking a gain of $59 million above its cost basis for the securities, according to its financial statements, which were audited by Rothstein Kass. Also propping up reported returns in the Grins' various funds have been investments in PetroAlgae, a renewable energy outfit.

Eugene Grin is an old pro at the penny stock trade. He got into it at F.N. Wolf & Co., a boiler room that regulators shut down in 1994. Since Eugene and his brother started their own hedge fund in 2001, they have become two of the biggest penny stock investors of the decade. The Grins' hedge funds have pumped an estimated $850 million into nearly 250 companies, mostly via Pipes, according to Securities & Exchange Commission filings, court documents and PlacementTracker. Most of the money has gone into thinly traded public companies in exchange for secured notes that pay the Grins' funds interest, as well as warrants and options convertible into common shares. The converts often grant the Grins rights to buy stock below the prevailing market price.

Many of the Grins' biggest investments have not done so well. In September 2006 Laurus extended a $67 million line of credit to Puerto Luperon, which planned to build a tourist complex in the Dominican Republic. Puerto Luperon defaulted five months later and told Laurus it shut down operations. In an August 2007 deal the brothers bought a $12 million secured note from Incentra Solutions; the borrower wound up in bankruptcy court. 360 Global Wine is another major Laurus deal that produced a bankruptcy filing. (Laurus claims Incentra and 360 Global Wine restructured and became profitable.)

The Grins' valuations for secured notes sometimes seem optimistic. Laurus Master lent $71 million to Boom Drilling. Boom filed for bankruptcy protection in September 2008, but three months later, on Dec. 31, Laurus Master was still carrying the Boom Drilling debt on its books at a value of $70 million.

How can Laurus report the value of loans to bankrupts at close to 100 cents on the dollar? Because the loans are secured--that is, in a liquidation, Laurus would be entitled to whatever can be realized from the collateral. So Laurus says in a written statement supplied by its lawyer, Hillary Richard of Brune & Richard in New York. "Given that the [Laurus] Funds are usually the senior secured lender, they can preserve their economic interests during many restructurings," says her statement. She lists four Laurus debtors that filed for bankruptcy but still paid back the Laurus funds in full and says, "Such recovery has occurred on numerous other investments."

While saying it hardly ever suffers losses from bankruptcies, Laurus claims to have struck gold pretty often, too. Among eight deals it says have been profitable are a $50 million investment in telecom outfit 180 Connect and a $49 million one in publisher Penthouse International.

Another bit of heritage the Grins share with penny stock touts of yore are brushes with criminals. Five years ago Laurus Master Fund became a creditor to Thomas Equipment, a Canadian maker of skid-steer loaders that eventually came to owe the hedge fund $73 million, SEC filings show. Laurus' partner in the deal was Frank P. Crivello, who pleaded guilty a decade earlier to a felony charge of misleading a lender. Thomas' operating units filed for insolvency proceedings in Canada, and Laurus assigned its debt in Thomas to Valens, SEC filings show. Laurus lent $6 million to Coach Industries Group, a limousine maker, in 2004; Coach's chief executive, Francis O'Donnell, pleaded guilty in 2007 to criminal dealings with the Genovese crime family that were unrelated to Coach. Coach filed for bankruptcy protection in September 2007.

With this as its legacy, Laurus Master Fund ceased raising money in May 2007. The Grins promptly set up and began sucking outside money into their Valens hedge funds. Valens holds $725 million in assets, according to documents prepared by Amber Partners, an investment consulting firm.

The Grins began working around the same time with Soondra Appavoo, a managing director of PSource Capital, which itself is a unit of the Punter Southall Group in the U.K. Appavoo says he'd met Laurus exec Dennis Pollack at a London hedge fund conference and shortly thereafter flew to New York to meet the Grins. They hatched a plan to form the PSource Structured Debt fund for the purpose of buying assets from Laurus--a fact fully disclosed to investors. As part of the deal, it was also agreed that Laurus Capital Management would manage the PSource fund's investments. Translation: The Grins are on both sides of the negotiating table.

Despite the related-party nature of such transactions, the bankruptcies and the elbow-rubbing with crooks, the Grins sent their investors an e-mail message this February that claimed the Laurus Master Fund had posted an average annual return since 2001 of 12.2%, notwithstanding a disastrous 2008, in which it lost 22%.

The question remains of just how much of that value the Grins' funds will be able to realize if their money hose runs dry and they are forced to sell assets to arm's-length outsiders. Last year Laurus Master Fund unloaded mostly illiquid securities it was carrying at a cost basis of $300 million onto Valens Offshore Fund for a $54 million profit. Valens U.S. Fund paid another $88 million for Laurus assets the same year. Valens, meanwhile, suspended redemptions by its own investors late last year. It says it will begin permitting them by Sept. 30.

Meanwhile, Laurus and Valens investors aren't likely to take much comfort from the hedge funds' financial statements that say "the ultimate amount of proceeds that might have been paid had a third party been involved could differ and might have been materially higher or lower." Attorney Richard, in a written statement, says: Laurus did not profit from the sales; "there was nothing improper about these transactions, which were fully and transparently disclosed to investors and rigorously audited."

The PSource fund, the third leg of the investment stool, has raised $125 million to buy assets from Laurus Master Fund and Valens. While it's true that the Grins manage investments for both Laurus and PSource, all their transactions are overseen by outsiders, including an independent board of directors and a valuation consultant, says Appavoo. The transactions are between a "willing buyer and willing seller," he insists.

If all this weren't murky enough, the Valens funds and PSource also last year bought minority interests valued at $188 million in four special-purpose entities originally set up by Laurus Master Fund. These outfits house investments made by Laurus Master Fund, its financial statements declare.

Then there is the amusingly effervescent PetroAlgae. The Melbourne, Fla. company aims to harvest oil from algae and claims its "production will be scalable and highly prolific," thanks to "proprietary algae strains."

PetroAlgae started trading on the otc Bulletin Board in December 2008 through a reverse merger with a public shell. It has no revenue and has lost $34 million since its inception. Yet in July it was changing hands at $40 per share, bestowing on it a $4 billion market value. A mere 1% of PetroAlgae's 104 million shares float freely; the rest are owned by the Laurus Master Fund, the Valens funds and PSource. The stock's run-up came on average daily volume of 2,555 shares between December and August.

"From a business perspective I don't understand it," says Robert Walsh, chief executive of Aurora Biofuels, a rival algae entrepreneur.

As of Dec. 31 Laurus Master Fund was carrying its stake in PetroAlgae at $352 million. That means PetroAlgae accounted for 54% of the Laurus Master Fund's net assets, its audited financials show. The cost basis for that stake was listed at $28.7 million. The Valens Offshore Fund booked the cost of its PetroAlgae stake at $23.4 million as of Dec. 31 and was carrying it on its books at $90 million. That represented 17.9% of its net assets. Laurus says its valuations are reviewed by outsiders and that PetroAlgae is carried "at a very significant discount to market value."

"PetroAlgae is recognized by respected sources, including Biofuels Digest and Greener Dawn Research," Laurus says through its attorney. Whether it grows into a moneymaking enterprise or not, PetroAlgae is already cultivating plenty of green for the Grins, thanks to the fees they charge on the net asset values of each of their funds.

At the PSource fund, PetroAlgae currently makes up 34% of assets, helping drive an average annual return of 11.9% since its launch two years ago.

"It's a good thing to have a good stock," says PSource's Appavoo. "It [PetroAlgae] has signed up a very major transaction in China. It's going to be in time a full Nasdaq company."

It would seem that Appavoo still has some selling to do. The PSource fund's London Stock Exchange-listed shares are trading at a 42% discount to their purported net asset value.

March Activist Investments - 70 Companies Targeted

Ticker	Company	Investor
ACTL	Actel Corp	Ramius Capital
AGYS	Agilysys Inc	Ramius Capital
AMLN	Amylin Pharmaceuticals	Eastbourne Capital
ASPM	Aspect Medical Systems	First Manhattan Co
ASPM	Aspect Medical Systems	Coghill Capital
AVCA	Advocat Inc.	Bristol Investment Fund
AVGN	Avigen Inc	Biotechnology Value Fund
BARI	Bancorp Rhode Island	Financial Edge Fund
BASI	Bioanalytical Systems	Thomas Harenburg
BBI	Blockbuster Inc.	Mark Wattles
BBW	Build-A-Bear Workshop	Crescendo Capital
BNV	Beverly National Corp	Lawrence Seidman
CAMD	California Micro Devices Corp	Dialectic Capital Management
CEE	Central Europe & Russia Fund	City of London Investment Group
CHIC	Charlotte Russe Holding Inc	KarpReilly Capital Management
CITZ	CFS Bancorp Inc	Financial Edge Fund
CLCT	Collectors Universe	Shamrock Activist Value Fund
CLHI.PK	CLST Holdings	Red Oak Partners
CRGN	Curagen Corp	DellaCamera Capital
CTO	Consolidated Tomoka Land Co	Wintergreen Advisers
CYBI	Cybex International	Discovery Partners
DSCM	Drugstore.com	Discovery Partners
DVD	Dover Motorsports, Inc.	Gamco Investors
FACE	Physicians Formula Holdings, Inc	Mill Road Capital
FMMH.OB	Fremont Michigan Insurance Corp	Harry Long
FSCI	Fisher Communications	Gamco Investors
GET	Gaylord Entertainment	GAMCO
GET	Gaylord Entertainment	TRT Holdings
GMXR	GMX Resources	Centennial Energy Partners
HWK	Hawk Corp	Gamco Investors
IPAS	iPass Inc	Foxhill Opportunity Master Fund
JAX	J. Alexanders Corp	Mill Road Capital
KFS	Kingsway Financial Services	Oakmont Capital
KONA	Kona Grill	Mill Road Capital
LCAV	LCA Vision Inc	Stephen Joffe
LGF	Lions Gate Entertainment	Carl Icahn
LNBB	LNB Bancorp	Richard Osborne
LSR	Life Sciences Research	Andrew Baker
MCGC	MCG Capital	Springbok Capital
MCRL	Micrel Inc	Obrem Capital
MDS	Midas Inc.	Silverstone Capital
MHGC	Morgans Hotel Group Co	Edward Scheetz
MIM	MI Developments	Hotchkis & Wiley Capital
MXF	The Mexico Fund Inc.	City of London Investment Group
MYE	Myers Industries	GAMCO Investors
NLCI	Nobel Learning Communities	Blesbok Inc
NOX	Neuberger Berman Income Opportunity Fund	Western Investment
NTN	NTN Buzztime	Trinad Capital
NUF	Nuveen Florida Quality Income Municipal Fund	Western Investment
PHH	PHH Corp	Pennant Capital
PNNW	Pennichuck Corp	Gamco Investors
PPCO	Penwest Pharmaceuticals	Tang Capital; Perceptive Life Sciences
PXD	Pioneer Natural Resources	Southeastern Asset Management
RDC	Rowan Companies	Steel Partners
RHDC.PK	RH Donnelley	Dodsville Investments
RPT	Ramco-Gershenson Properties Trust	Equity One
RUBO	Rubios Restaurant	Alex Meruelo
SCLN	SciClone Pharmaceuticals	Sigma Tau Financial
SLRY	Salary.com	Raging Capital Management
SRLS	Seracare Life Sciences	Ltova Holdings
SSE	Southern Connecticut Bancorp Inc	Lawrence Seidman
SUAI	Specialty Underwriters Alliance	Hallmark Financial Services
SUG	Southern Union Co	Sandell Asset Management
TDS	Telephone & Data Systems Inc.	Gamco Investors
TGT	Target Corp	Pershing Square Capital
TMI	TM Entertainment & Media	Bulldog Investors
TRID	Trident Microsystems Inc.	Spencer Capital
TRMA	Trico Marine	Kistefos AS
VSNT	Versant Corp	Discovery Capital
WBSN	Websense Inc	Shamrock Actvivist Value fund
WOC	Wilshire Enterprises	Pennsylvania Avenue Funds
WOC	Wilshire Enterprises	Bulldog Investors

Structured Investment News

Rights Offerings: The New PIPEs? (from the PIPES Report)

by Steven E. Siesser, Steven M. Skolnick, Michael J. Reinhardt, Lowenstein Sandler and Frederick D. Johnson, William Blair & Co.

The continuing dislocation of the capital markets has led to an increased interest in rights offerings. Market participants, including cash-starved issuers, intermediaries and other advisors, are beginning to explore the viability of using a rights offering as a means of raising capital. A rights offering can be fairly characterized as a hybrid PIPE and registered direct (RD). One important aspect of a rights offering is that it can be structured so it is not subject to an exchange's 20% shareholder approval rule.

Call 212-576-1515 for more information