Notablecalls1

A Real Handicap?

2007-11-04T08:06:00.000-08:00

When Mettill Lynch’s search committee interviews potential successors to ex-CEO Stan O'Neal, it probably should inquire about their golf games. Why? There's been a pretty good correlation between financial-industry CEOs' golf scores and stock-mkt performance over the past 3ys.

Co’s headed by good golfers frequently have trailed those led by duffers and non-golfers. O'Neal, for example, is a golf fanatic with a handicap of 9. He lost his job last week after presiding over Merrill’s disastrous foray into subprime mortgages and derivatives that led to an $8bn quarterly charge.

In contrast, Goldman Sachs, led by Lloyd Blankfein, a golfer with a handicap around 30, has become Wall Street's best-managed big firm. (A handicap denotes how many strokes above par a golfer usually shoots. On a typical 18-hole course, par is 72.)

It might cheer Merrill's board to know that Larry Fink, a prime candidate to succeed O'Neal, doesn't golf. Neither does Jamie Dimon, boss of JP Morgan, which weathered this year's financial messes relatively well. And Berkshire Hathaway, headed by a so-so golfer Warren Buffett, has a marvelous long-term record. Buffett's handicap is 20. He doesn't play much anymore and now would be thrilled to shoot his handicap.

Goldman, BlackRock and JPMorgan have done well in the stock market since 2005's end, while Merrill, Washington Mutual and Bear Sterns, all led by good golfers, have been laggards. "Golf takes an enormous amount of time," one CEO says. "If you're too good a golfer, you're spending too much time at it."

O'Neal spent a lot of time on the links from mid-Aug through the end of Sep, according to information posted on a US Golf Association Website that maintains handicaps for nearly 2m golfers across the country, based on information provided by the golfers. O'Neal, a member of four clubs, played 20 times from Aug. 12 through Sept. 30, most of it on weekends.

Bear Stearns CEO James Cayne, meanwhile, drew criticism for taking a helicopter for a round of golf at his New Jersey club during the summer when his co was reeling from the collapse of 2 of its hedge funds.
On the other hand, CEO Dick Fuld of Lehman Brothers and American Express boss Ken Chenault both know their way around fairways and bunkers. Lehman has been a stock-mkt laggard since '05, but it has an extraordinary long-term record. Fuld and Chenault are considered to be among their industry's top CEOs.

Still, the evidence suggests that CEO's who spend too much time on the greens might not produce enough green for their shareholders.

Shorting Cramer

2007-08-19T01:46:00.000-07:00

THANKS TO HIS NIGHTLY CNBC SHOW Mad Money, Jim Cramer has become the chief cheerleader for the bull market, or what was the bull market until a few weeks ago. Last spring, he was giddily exhorting the Dow Jones Industrial Average toward 15,000, with no troubles in sight. Earlier this month, as the Dow tumbled in the direction of 13,000, he had an on-air meltdown, complete with screaming, sobs and predictions of financial doom. The clip quickly made the rounds on YouTube. Friday, after the Fed cut the discount rate, he said that the Dow's run to 14,500 had begun. With dramatic pronouncements like that, it's no wonder that more than 100,000 viewers tune in each weeknight for his antic mashup of sound effects, Streetwise advice and stock picks.

It's those stock picks that caught our attention. Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher.

We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks -- Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.

When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from YourMoneyWatch.com contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.

CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections -- about 12 a week -- that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.

We analyzed those stocks ourselves, and, as in all our calculations for this story, relied on Patrick Burns, a statistical-computing expert in London who consults for hedge funds and major investment firms.

It turns out that CNBC did its analysis incorrectly, and that the stocks beat the S&P by 0.4% in one month and 1.2% over two months. CNBC measured the stocks' performance against the average performance of the S&P year-to-date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren't held for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically significant 2.2% through last week.

Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?

Then there's the day-after-pop phenomenon. Our analysis of Cramer's picks over the past two years, from YourMoneyWatch.com, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days (see chart). This offered an opportunity to make money -- 5% to 30% a year -- by selling Cramer's selections short.

Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks -- a trade that he'd jump on if he still were at a hedge fund. "If you short the bump, you will do well," he said last week. "I've said it on the show many times."

There's no doubt that Cramer is trying diligently to make you money. His advice is generally smart, his knowledge of individual stocks amazingly detailed. But the credible evidence suggests that the telestockmeister's picks aren't beating the market. Did you really expect more from a call-in host who makes 7,000 stock picks a year?

THE 52-YEAR-OLD CRAMER HAS PROVEN HIMSELF a Renaissance man, if you don't mind applying that term to someone who goes on TV donning everything from Rasta wigs to football helmets, and, on a bad day, decapitates bobble-head dolls made in his own likeness. He struck it rich in the heyday of hedge funds, started a successful online media company and put up some of the best financial journalism in print and broadcast. Simultaneously.

He's written several books, including Confessions of a Street Addict, a wonderful memoir of his highs and lows as a trader and entrepreneur. It's peopled with the amazing Old Boy network that Cramer started building during his days as a student at Harvard: New York Gov. Eliot Spitzer, New Republic editor-in-chief Martin Peretz, Microsoft CEO Steve Ballmer. And, it turns out, the screaming, chair-throwing character that Cramer plays on TV is based on the real-life person he was, as he pursued success through any obstacle, including those of his own making. In the memoir, Cramer freely confesses to his screw-ups, as he continues to do on Mad Money. That self-flagellation makes him a lovable protagonist in a modern American success story.

After entering Wall Street as a Goldman Sachs broker, Cramer started his hedge fund in 1987. The market crashed, but he was in cash. His firm, Cramer Berkowitz, went on to rack up 24% annualized returns over the next decade or so, a performance for which Cramer generously shares credit with his former colleague, Jeff Berkowitz, and one of the firm's traders: his then-wife, Karen.

If Mad Money offers unconvincing proof of Cramer's long-term stock-picking prowess, so does his account of his hedge-fund activities. His memoir suggests that some of Cramer Berkowitz's profit came from clever trading. The $300 million fund might execute hundreds of trades a day, some of them a bit gimmicky. Cramer describes how they'd find a stock in which selling had petered out, then build a position. Next, they'd hunt up some bullish news on the company and feed it to sellside analysts and reporters. On the subsequent rise, Cramer could profit by selling out his position. "Buzz merchandising," his book calls it. Smart and effective, but definitely not in the fuddy-duddy style of Graham & Dodd.

In December, Cramer made a video for TheStreet.com describing the ways his hedge fund had used tricky trading techniques. He said hedge funds could pass negative rumors to "bozo" reporters. When the video circulated through Wall Street and caused an uproar. Cramer said that he'd only been talking hypothetically, to blow the whistle on the hedge-fund industry's bad actors.

OF COURSE, CRAMER DIDN'T NEED REPORTERS to get out the story on his stocks. Early on in his hedge-fund career, he pioneered a new kind of participant journalism through his frequent magazine columns and television appearances. Cramer talked to his audience from the playing field, instead of from the distant press box where other financial journalists sat.

In outlets like SmartMoney, he often discussed stocks that his fund owned. That was a good thing, if Cramer imparted valuable information and didn't secretly trade against his recommendations. Over the years, regulators have frisked Cramer's trading records for duplicity. They've always found him clean.

In 1996, Cramer launched TheStreet.com, his own financial-media vehicle. Three years later, the mania for dot-com stocks was epidemic. At their initial offering, shares of TheStreet.com's (TSCM) were priced at $19, but opened at $60. For a short while, Cramer's stake was worth upward of $250 million. Then the dot-com bubble burst, driving the stock below a dollar by 2001.

But the Website survived the shakeout, and the stock now is around $10. TheStreet.com has become a feisty competitor to other online financial news sites -- including those of Dow Jones (DJ), which publishes this magazine and is half-owner of Smart Money. Cramer has always been the site's main draw, but TheStreet.com has employed many other talented editors and reporters.

After retiring from his hedge fund in 2000, Cramer became a full-time journalist, writing for TheStreet.com and New York magazine. But he had the most fun on TV. For years, he'd pitched broadcasters, trying to get his own show. He finally succeeded with CNBC, the financial channel owned by the NBC Universal unit of General Electric (GE); first, with Kudlow & Cramer, and then, in March 2005, with Mad Money. (Dow Jones currently has an agreement to supply content to CNBC).

CNBC's evening schedule had been Desolation Row for years. Mad Money changed that, grabbing viewers with a combination of unequivocal stock picks and slapstick -- a concept that Cramer developed with the help of his nephew and co-writer Cliff Mason, as well as some talented CNBC producers. By cable-television standards, the show has been a hit, with its Nielsen ratings rising every year to a 2007 level of 134,000 homes -- many of them fairly affluent.

In the first part of the show, Cramer typically gives prepared recommendations on one or more stocks. Sometimes, he'll interview the CEO of a company whose stock he then endorses. All the while, he's donning sombreros, shoving toy bears in a meat grinder and sneaking in slyly erudite quips.

Then comes the show's truly distinctive feature: the Lightning Round. With no advance notice, Cramer takes calls from viewers who -- after shouting the obligatory "Booyah!" -- ask him about a stock. Within seconds, Cramer gives a curt Buy or Sell rationale. Then on to the next caller. It's dazzling -- a display of Cramer's freakish ability to remember something about thousands of stocks.

The show's popularity hasn't hurt TheStreet.com. Site traffic, ad sales and the share price have risen. Cramer, meanwhile, has been selling. Since 2005, he's sold $4.6 million worth of TheStreet.com shares through an automatic selling program.

Cramer is unapologetic about his self-promotion, but he acknowledges his bad calls, too. What he hasn't done is tell his viewers the overall score for his two-plus years of Mad Money picks. When he hits his "Buy Buy Buy" sound-effect button, can viewers expect market-walloping results?

In trying to figure that out, we came across YourMoneyWatch.com, a Website started by Michael McGown, a retired securities analyst who worked for several major brokerage firms. McGown started the site not long after the show started, and says Cramer sent a complimentary e-mail after noticing it. McGown counts only Cramer's clear and unconditional Buy recommendations, following a sensible set of rules. McGown tracks the stock until Cramer says sell. "As a person watching the show," says McGown, "I think it's a fair way to rate him."

Over two years, YourMoneyWatch has tracked 1,300 Mad Money picks. It's this tally that shows Cramer's stocks lagging behind the Dow and the S&P 500. This year, Cramer's done better. McGown's data show his picks up 3.2%, while the S&P is up 2%; the Dow, 4.9%; and the Nasdaq, 3.7%. CNBC says the YourMoneyWatch data, as well that of Cramer's Mad Money Website, are "not authoritative."

Hoping to get Cramer's advice on how to measure his Mad Money picks, I called him a few weeks ago. He tore into me. "I've never read a single article that I thought wasn't a massive distortion of what the show's all about," he said. When I said I just wanted to see Mad Money's record, he replied: "I've never seen an analysis that I've regarded as honest, and I doubt yours is any different."

WHERE DID THOSE ANALYSES GO WRONG? They counted buys and sells from the Lightning Round segment, said Cramer, and they ignored his caveat against purchasing on the day after a broadcast -- a 24-hour rule he decreed in his Mad Money book. "I say buy it on Day Two," he explained. "I can show exact data, which says my picks are much better than the S&P."

Hearing that, I asked if I could see it. Cramer spelled out the e-mail address of someone at TheStreet.com. I spent the following days -- and weeks -- trying to get a response from that person, from Cramer, from CNBC. Meanwhile, I pored over his Mad Money book, including the two chapters that detail the importance of his Lightning Round advice. He writes that, by definition, Lightning Round recommendations are based on his previous knowledge of the stocks, not on fresh research. Yet he doesn't tell his viewers to ignore the call-in segment's Buys and Sells, concluding: "I still think you should listen to what I'm saying."

While waiting for a response from Cramer, I made a happy find: http://madmoney.thestreet.com/. It called itself an exact record of every recommendation in the show since January of this year. A personal note from Cramer likened the site to an audited record of his performance, outside of his control. "I am doing this because my personal reputation is at stake," said the words by Cramer's picture.

There were more than 3,400 recommendations in the database. Better still, it distinguished between stock picks made in the Lightning Round and those from other portions of the show. Our analysis of these stocks found no difference between the performance of the Lightning Round picks and the rest of the Mad Money recommendations.

Jim Cramer has defined himself as a financial journalist who gives you clear Buy and Sell recommendations to make you money. If he's serious about that mission, he or CNBC should publish a database that tracks all his picks from the show's launch date. Even cheerleaders need to be accountable.

10 Biggest Pops

Cramer's picks often jump during the trading day before they're mentioned on his 6 p.m. Mad Money show. Of the 1,300 picks tracked by YourMoneyWatch.com, these 10 spurted the most. CNBC offered a variety of reasons why stocks might run up so much before the show, including news events affecting the companies involved and Cramer mentioning the stocks on his radio show, which was cancelled in December. CNBC has added disclaimers to warn viewers that Cramer may mention his picks elsewhere before the show, but we found very few pre-broadcast mentions in his Action Alert newsletters. For his part, Cramer told us he didn't do any stock trading on his own account and held only cash, a beach house, his charitable trust and some mutual funds. One possible explanation for the run-ups: He often jumps on stocks that are in the news and moving up sharply. Not always a smart move for long-term investors.

Dear Investors, We're...

2007-08-16T01:31:00.000-07:00

Running a hedge fund means never having to say you're sorry, at least not in so many words.

That isn't to say some hedge-fund managers don't have a lot to feel bad about. In the past few weeks, some of the biggest names in hedge-fund land -- Goldman Sachs Group, Highbridge Capital Management, AQR Capital Management, Renaissance Technologies -- have certain funds that lost as much as a third of investors' money as stock and credit markets seized up, and stocks moved in unexpected ways, in reaction to the spreading subprime-mortgage debacle.

None of these highly paid managers are prostrating themselves before their clients, begging forgiveness, however. Instead, in letters to clients, they point fingers at other hedge funds, once-in-a-lifetime events and their own computer programs.

Black Mesa Capital, a Santa Fe, N.M., hedge fund captured the "don't blame us" spirit with its letter last week, blaming "unprecedented market events," including "a very large or several very large trading entities, possibly very large hedge funds...liquidating massive" portfolios. The managers, Dave DeMers and Jonathan Spring, said they are taking "unprecedented actions" to fix its problems, a response to the "unprecedented market events." The fund lost about 10% in the first eight days of August. Black Mesa didn't respond to a request for comment.

Highbridge, which saw its $1.7 billion statistical-arbitrage fund lose 18% in just the first eight days of the month, sent out a letter pointing to other hedge funds, who the firm said were making similar trades, rather than explaining Highbridge's own mistakes. "As you may be aware, many hedge funds and asset management firms utilizing similar strategies are experiencing unprecedented volatility," said the firm, which has $37 billion in total assets.

Goldman's letter portrayed the firm's money-losing hedge funds as innocent bystanders, caught up in a violent market.

"The quantitative funds run by Goldman Sachs Asset Management have not been spared in this difficult environment," said the Goldman letter, sent Aug. 13, explaining why its hedge funds lost between 17% and 34% in the first 10 days of the month. "Our response has been comprehensive and immediate." Goldman didn't respond to a request for comment.

A simple mea culpa would be more satisfying for many investors. "I would like to hear an 'I'm sorry,'" says Jane Buchan of Pacific Asset Management Co., an Irvine, Calif., firm that invests in hedge funds.

The recent pain has largely centered on quantitative hedge funds, which rely on computer models of the sort more often developed by math whizzes than English majors. So, some of the explanations are heavy on the jargon. "The culprit is not the Basic System but our predictive overlay," said Jim Simons, who runs Renaissance Technologies, one of the largest hedge funds, in an Aug. 9 letter telling investors that one of his funds had lost almost 9% in the first eight days of August. He's gained back a chunk of that in the past few days.

"When you've done your best, there isn't a great deal to apologize for, the event was a whirlwind that caught everyone by surprise. It certainly caught us by surprise," Mr. Simons said in an interview. "But not having anything to apologize for and not feeling bad are two different things -- certainly, I feel bad for anyone losing money."

Lawyers say they advise hedge managers to detail losses quickly, but restrict their explanations to the facts. Owning up to mistakes or apologies could give an opening to investors to level lawsuits, they say.

"It's sort of like how doctors never say they're sorry," says David Moody, a partner at law firm Purrington Moody Weil. "It's an invitation for a lawsuit."

One major hedge-fund manager admits to using the word "sorry" in his letter to investors, but striking it at the last moment, arguing that he had nothing to apologize for. Another executive argued that funds sending out letters were treating their investors better than other big losers who have left their investors in the dark.
"Don't sugarcoat it," says Jacqueline Whitmore, a Palm Beach, Fla., author who gives speeches about business etiquette. "There's a hesitation to want to say that you were wrong, but it can be worded in a way where you can tell the truth, but it doesn't sound like this is the end of the world."

Clifford Asness, a founding principal of AQR, a Greenwich, Conn., firm, was blunt about his failure. But he blamed others, too. "Our stock-selection investment process, a long-term winning strategy, has very recently been shockingly bad for us and for all of those pursuing similar strategies," wrote Mr. Asness, whose largest fund is now flat on the year. "The very success of the strategy over time has drawn too many investors. Now, we are witnessing some of them exit, and...it's painful."

But there are times when the losses are so bad that hedge-fund honchos feel the need to give a full mea culpa. When Sowood Capital, a Boston hedge fund, was losing big money in July, few of its investors realized how bad things were getting. Then they received a letter, on July 27, and another on July 30, describing how Sowood's two key funds had lost more than 50% in just a few weeks and were winding down.

"We are very sorry this has happened," Jeffrey Larson, Sowood's founder, wrote to his investors. "A loss of this magnitude in such a short period is as devastating to us as it is to you."

Nice haircut

2007-07-12T00:39:00.000-07:00

In January 2005, someone using the name "Rahodeb" went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

"Would Whole Foods buy OATS?" Rahodeb asked, using Wild Oats' stock symbol. "Almost surely not at current prices. What would they gain? OATS locations are too small." Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5. A month later, Rahodeb wrote that Wild Oats management "clearly doesn't know what it is doing .... OATS has no value and no future."

The comments were typical of banter on Internet message boards for stocks, but the writer's identity was anything but. Rahodeb was an online pseudonym of John Mackey, co-founder and chief executive of Whole Foods Market Inc. Earlier this year, his company agreed to buy Wild Oats for $565 million, or $18.50 a share.

For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It's an anagram of Deborah, Mr. Mackey's wife's name. Rahodeb cheered Whole Foods' financial results, trumpeted his gains on the stock and bashed Wild Oats. Rahodeb even defended Mr. Mackey's haircut when another user poked fun at a photo in the annual report. "I like Mackey's haircut," Rahodeb said. "I think he looks cute!"

Mr. Mackey's online alter ego came to light in a document made public late Tuesday by the Federal Trade Commission in its lawsuit seeking to block the Wild Oats takeover on antitrust grounds. Submitted under seal when the suit was filed in June, the filing included a quotation from the Yahoo site. An FTC footnote said, "As here, Mr. Mackey often posted to Internet sites pseudonymously, often using the name Rahodeb."

After The Wall Street Journal contacted Whole Foods yesterday, the company said in a statement that among millions of documents it gave the FTC were postings its CEO made from 1999 to 2006 "under an alias to avoid having his comments associated with the Company and to avoid others placing too much emphasis on his remarks." The statement said, "Many of the opinions expressed in these postings now have far less relevance than when they were written." Whole Foods didn't confirm every Rahodeb posting as being from Mr. Mackey.

Bulletin Boards

Mr. Mackey declined to be interviewed. But he soon posted on the company Web site, saying that the FTC was quoting Rahodeb "to embarrass both me and Whole Foods." He also said: "I posted on Yahoo! under a pseudonym because I had fun doing it. Many people post on bulletin boards using pseudonyms." He said that "I never intended any of those postings to be identified with me."

Mr. Mackey's post continued: "The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn't. Sometimes I simply played 'devil's advocate' for the sheer fun of arguing. Anyone who knows me realizes that I frequently do this in person, too."

Like Whole Foods itself, Mr. Mackey, a 53-year-old vegan, is somewhat unconventional. He dropped out of college and worked at a natural-foods store before co-founding Whole Foods in Austin, Texas, in 1980. He and his wife practice yoga and meditation and own a 720-acre ranch west of Austin. He once took a sabbatical to hike the Appalachian Trail.

He built Whole Foods in part by acquiring many smaller chains. In January, he slashed his salary to $1, saying, "this is what my heart is telling me is the appropriate thing to do right now."

Whole Foods agreed this February to acquire Wild Oats, of Boulder, Colo. The FTC sued in federal court in Washington to block the deal, saying it would reduce competition. The agency is trying to use Mr. Mackey's own words against him. Its suit quotes the CEO as telling other board members the takeover would enable Whole Foods "to avoid nasty price wars" and reduce the risk that a big conventional grocer would create a competitor to Whole Foods.

When that part of the suit became public, Mr. Mackey fired back with a 14,000-word treatise on his blog on the Whole Foods Web site. He accused the government of "bullying tactics," failing to do its homework and taking out of context "macho posturing" by executives that's common.

Rahodeb had begun posting on Yahoo Finance in the late 1990s, and quickly became known as a cheerleader for Whole Foods stock. "I admit to my bias," he wrote in 2000. "I love the company and I'm in for the long haul. I shop at Whole Foods. I own a great deal of its stock. I'm aligned with the mission and values of the company ... Is there something wrong with this?"

Rahodeb expressed pride in the CEO's work. "While I'm not a 'Mackey groupie,'" he wrote in 2000, "I do admire what the man has accomplished."

By 2005, Whole Foods' $4 billion in annual sales made it the leading player in natural and organic foods. In January of that year, with the stock at a split-adjusted price of about $47, Rahodeb predicted great things: "13 years from now Whole Foods will be a $800+ stock before splits." The stock closed yesterday at $39.50.
For an executive to use a pseudonym to praise his company and stock "isn't per se unlawful, but it's dicey," said Harvey Pitt, a former Securities and Exchange Commission chairman. Told of the Mackey posts, Mr. Pitt said, "It's clear that he is trying to influence people's views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it's bizarre and ill-advised, even if it isn't illegal."

A spokeswoman for Whole Foods said Mr. Mackey only revealed information about Whole Foods that already was public knowledge. His comments "weren't illegal" and weren't "against company policy," she said.
Rahodeb sometimes sparred with other users. "Your quarterly cash flow variance isn't statistically meaningful because the time period is too short," he told a user who criticized Whole Foods in March 2006. Rahodeb then pasted a summary of the previous six years of the company's operating cash flow, saying that over five years it "has increased 330%."

When it came to rival Wild Oats, Rahodeb didn't pull punches. He often criticized Perry Odak, who resigned as Wild Oats CEO last year. "While Odak was trying to figure out the business and conducting expensive 'research studies,' to help him figure things out, Whole Foods was signing and opening large stores in OATS territories," Rahodeb wrote in 2005. "Odak drove off most of the long-term OATS natural foods managers." Reached yesterday, Mr. Odak said he had no idea Mr. Mackey was behind the postings, but "it doesn't surprise me."

Keeping Abreast

Sometimes when Rahodeb went without posting for several weeks, other users expressed concern. Once, Rahodeb reassured them he was keeping abreast of the chat.

Last August, Rahodeb filed his last post on the Yahoo message board. He said he had lost a bet with "hubris12000" about Whole Foods' stock performance, and the bet's terms required that he quit posting. He blamed the whims of the stock market for a 40% decline in the company's shares.

"Whole Foods itself has a very bright future, and I will continue to hold my stock for a very long time," he wrote. "I've enjoyed my eight years on this Board, but all things must come to an end. I wish everyone the very best. Hog152 -- keep the faith. Liberfar -- good luck with your market-timing game. Hubris12000 -- take your profits while you can."

Giving New Meaning to Green Revolution

2007-04-29T03:25:00.000-07:00

By BILL ALPERT

The full page ad in Wednesday's New York Times suggested to me that my industry's ad sales must be really struggling. It promised riches to anyone who bought Nano Chemical Systems Holdings, a penny stock with two very important nanotech patent applications for biofuel production: "NCSH is the right company at the right time for savvy investors looking for big gains."

Nano Chemical (NCSH) actually makes spray wax sold in discount stores. The shares (ticker: NCSH) ended Wednesday at 72 cents. It takes heroism to sell print ads these days, but the Nano Chemical copy read like a spammer's e-mail. To this worshipful New York Times reader, it was as if the book of Leviticus carried a massage parlor ad -- and that was before I discovered the Environmental Protection Agency's hazardous waste proceeding against this "Green" company's factory; the Securities and Exchange Commission's open investigation; the chief executive's undisclosed fraud settlement with the SEC; and its investment banker's conviction for cocaine trafficking.

Calling the ad's phone number for more information, I reached Redwood Consultants in Novato, Calif. While I waited for a reply, I found that Redwood is run by Jens Dalsgaard, who used to be a broker with A.G. Edwards before the Big Board's regulators fined him $15,000 in 1999 for secretly trying to arrange a short squeeze in the shares of Diana Corp., a meat distributor that went bankrupt after trying to become an Internet company. Dalsgaard didn't return my call.

So I called Nano Chemical directly in Seaford, Del. When I asked for Chief Executive Alexander H. Edwards III, they referred me to the Tampa, Fla. offices of John Stanton, an accountant who's controlled several of Edwards' previous employers. Edwards became CEO this month, after the company borrowed $300,000 from a Stanton business. The company bio on Edwards details his 1987 graduation from the U.S. Naval Academy and his stint as president of a publicly-held surgical supply company. While I waited for Edwards' return call, I found that his bio left out the part about his paying $50,000 in 2003 to settle (without admitting) the SEC's civil fraud charges that he faked the surgical company's sales.

I can't blame Nano Chem for turning to The New York Times. Little else seems to have worked. In 2005, it arranged to get $1.7 million from an Italian financier who had previously bankrolled a chain of topless nightclubs called Scores. That money never materialized. In the last year or so, it's sold stock to Tampa area investors like Robert M. Esposito and Raymond J. Carapella. Esposito's Barrington Financial is Nano's investment banker. Before that, he ran nightclubs and got busted for selling cocaine. Carapella's long criminal record includes convictions for armed robbery and a scam in which he sold fake diet pills with his older brother George, who consented last year to an SEC bar against his participating in penny stock dealings, because of his prior history of running pump-and-dump stock frauds. The SEC subpoenaed Nano Chem itself last year.

When CEO Edwards called me back Friday, he said he was very bullish about where the company was headed. Since its nano-enhanced Green cleaners and lubricants were as good as or better than non-environmentally friendly products, he said, why wouldn't consumers buy them? "Lord have mercy, I have four children," he said. "I would hope that everybody would buy it."

What about the company's EPA problems? He said those were the responsibility of prior owners. The SEC? The investigation is closed, said Edwards. After glowing testimonials about IR-man Dalsgaard and banker Esposito, he said he knew nothing about their histories. "They have no active management in the company," Edwards said about their records. "And I don't see that that's germane to what we're talking about."

Was his own fraud settlement with the SEC germane? Time had passed, he said, so that he wasn't required to make the disclosure. "You sound like my wife's divorce attorney," he told me. "But I hope you put a positive spin on what we're doing here."

Stanton, Esposito and the Carapellas didn't return calls. After my inquiries to the company and its promoters on Friday, the shares plunged 27% to close at 43.5 cents, on six times their average trading volume.

The Times ad was placed by a just-formed corporation paid $232,102.94 by a "third party." That corporation's phone number is Esposito's.

Moto, Eat Nokia's Dust

2007-01-28T10:49:00.000-08:00

Ever since Motorola reported its shockingly horrible results for the fourth quarter about two weeks ago, my editors have been asking for a prognosis.

I kept telling them that we needed to wait until Nokia reported its numbers in order to assess the true magnitude of the damage in Schaumburg, Ill. Is the entire industry under siege, or did Motorola trip up?
The verdict is in: The industry is under pressure, but Motorola (ticker: MOT) is in a deep hole.

Last week, rival Nokia (NOK) surprised most everyone by reporting better-then-expected revenue and earnings, especially in the wake of Motorola's financial implosion. But the biggest takeaway from Nokia's call was that its cellphone margins actually rose, despite the lower asking prices for phones that were introduced because of intense competitive pressure. Nokia's handset operating margins were 17.8%, up more than two percentage points from the previous quarter's level, while gross margins in all segments were up. In comparison, Motorola's margins came in at 4.4%, about half as high as expected.

To be fair, other handset makers, such as LG and Samsung, have suffered from shrinking margins, while Sony-Ericsson is the only other major handset maker, with Nokia, to buck the trend. Sony-Ericsson can thank its concentration on high-end, music-enabled phones for that. Meanwhile, Motorola is racking up market-share gains and high-volume growth in emerging markets, at the expense of margins and profitability. That isn't a winning combination.

Don't look for Nokia to give Motorola a break soon. The operating gap between Nokia and Motorola could widen during this year's first half, as Nokia unleashes new handsets. Prices will likely come down, but margins could continue to expand as production costs slip faster than prices, predicts Charter Equity Research analyst Ed Snyder.

Motorola has been riding the super-successful RAZR for three years, while Nokia consolidated its model templates and developed new, lower-cost handsets that are rich in features and fashion. Motorola handsets such as the multimedia KRZR and the BlackBerry-like Q have failed to capture momentum, in part because Motorola slashed RAZR prices to irresistible levels in order to grab share.

"We see this as the end of Motorola's latest run in handsets," Snyder posits.

Nokia's scale and cost advantages, owing to decisions made at the height of RAZR-mania, could allow the Finnish company to thrive in a year when most everyone else, except Sony-Ericsson, struggles.

At the recent Consumer Electronics Show in Las Vegas, where Motorola CEO Ed Zander was a keynote speaker, the company had so few new products to unveil that seemingly a third of his speech was filled by a Yahoo! executive, who was touting that company's new mobile-search service. That wasn't one of Zander's better moments. Worse, the keynote speech came a day before Apple threw its hat in the ring as the latest entrant to an already cut-throat arena.

After two quarterly-earnings misses in a row and with no hot successor to the RAZR in sight, the prognosis for Motorola isn't healthy.

While enticing at 18-plus a share -- its price Friday afternoon -- and trading at only 15.2 times trailing earnings (versus Nokia's 17.2 times), Motorola stock appears to be no better than dead money for at least the first half of 2007.

Notablecalls: No trade.

The Inner Workings of InnerWorkings (Nasdaq:INWK)

2007-01-14T02:57:00.000-08:00

The key figure in a software company selling stock has left a trail of unhappy investors.

In a road show continuing this week, Morgan Stanley hopes to persuade investors to part with $150 million for the follow-on stock offering of a company called InnerWorks. This Chicago-based company claims that its proprietary software is radically changing how American companies procure print jobs. In just the five months since their initial offering, InnerWorkings shares (ticker: INWK) have risen a radical 80%, with a recent print of 16.20.

But those reading the prospectus should also re-read the Dr. Seuss story about the Sneetches, who paid a huckster to change their plain bellies into star bellies, and vice versa. The chap ends up leaving town with all their money, while laughing: "They never will learn...You can't teach a Sneetch!"

You see, InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss's huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly's software was never what Lefkofsky promised. The current InnerWorkings road show and stock-offering is, in part, aimed at cashing out much of Lefkofsky's stock while InnerWorkings shares teeter at stilted levels.

Eerily like Starbelly, there's less than meets the eye to the company's touted "PPM4" software, say some InnerWorkings ex-employees. In the weeks before Morgan Stanley's eagle-eyed due diligence team toured InnerWorkings for its August 2006 initial underwriting, workers stayed late padding the company's off-the-shelf FileMaker Pro database with an impressive-looking list of suppliers. Then they dummied up some screen-shots of the software for the inside cover of the prospectus. Citing the quiet period prior to its stock offering, the company declined to answer my questions.

Despite its Potemkin technology trappings, InnerWorkings is a glorified broker of print jobs. Like others of its ilk, it beats up on printers on behalf of corporate clients and splits any savings it extracts. Much of its sales growth has come through roll-up acquisitions of other print brokers. And a related-party transaction in the months before the IPO seems to have produced a big part of InnerWorkings' profits. Even so, the last-reported 12 months' profits amounted to a paltry $5.7 million. So the current stock market valuation of $700 million is 125-times those trailing profits.

That's a ridiculous valuation for a company in the mundane print brokerage business. And I suspect that fact isn't lost on the 37-year-old Lefkofsky who, with his wife and others, controls 35% of InnerWorkings shares via some holding companies. Unwilling to wait even until the Feb. 11 expiration of InnerWorkings's IPO lockup agreement, Lefkofsky and other insiders would unload 6.2 million shares in the follow-on offering that Morgan Stanley reportedly wants to price this week. That would net insiders $100 million.

InnerWorkings' prospectus makes only passing mention of Lefkofsky, with a sentence buried on page 54 describing him as someone "instrumental in the formation and development of our company" who served as a director until May 2006 and also as a consultant. When I asked InnerWorkings about him last week, a company spokesman said Lefkofsky's consulting had stopped back in June 2006.

So I thought it generous of Lefkofsky to be still laboring at InnerWorkings on Friday, while the firm's title-bearing leaders junketed on Morgan Stanley's road show. The InnerWorkings phone directory doesn't list Lefkofsky, but the company operator quickly put me through to his office, where a friendly-sounding lady told me he was running a meeting. He did not return repeated voice-mails and e-mails.

Ex-employees tell me that the company's disclosures hardly do justice to Lefkofsky's daily role at the company, where he has remained a foul-mouthed, coffee-chugging boss who micro-manages InnerWorkings by force of his strong personality and his group's 35% control position. On the other hand, it's easy to see why the company and its underwriters would want him to remain behind the curtain. He's left a trail of burned investors and fraud allegations. Just out of law school in 1994, Lefkofsky got the city of Columbus, Wisc., to back his takeover of a local clothing maker where he promised to create jobs making apparel branded by major-league sports teams. After laying off the workers, the firm sought bankruptcy protection, with its bankers alleging in a state suit that Lefkofsky applied the business's resources to starting his next venture, Starbelly.

Business-to-business procurement Websites were hot in 1999, and Starbelly.com held itself out as a marketplace where companies could arrange to put their logos on promotional items of clothing and hard goods like coffee mugs. Through some family connections, Lefkofsky and his partners attracted the eye of a Chicago-based promotional items vendor named Ha-Lo Industries. A due diligence investigation by Ernst & Young warned Ha-Lo that Starbelly's software was not as proprietary -- or even as functional -- as Starbelly claimed, according to Ha-Lo documents discovered in subsequent shareholder suits. The publicly-held Ha-Lo nevertheless bought Starbelly for $240 million in cash and stock in May 2000, saying that Starbelly's website would bring in $1 billion in revenues.

Lefkofsky and his Starbelly pals quickly assumed control of Ha-Lo, according to lawsuit records. But the software fizzled and the website was a flop. In scarcely a year, Ha-Lo wrote off Starbelly completely. It entered bankruptcy court in July 2001. Class action fraud suits against Lefkofsky and others were ultimately settled, but not before turning up vulgar, reckless Lefkofsky e-mails (one of which is reproduced verbatim below) that might bring shudders to any public investor entrusting her savings to his latest venture.

"Lets get funky. Lets announce everything. Lets be WILDLY positive in our forecasts," he told his Ha-Lo colleagues, even as that business was falling apart. "if we get wacked on the ride down -- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares."
No wonder he's taken a low public profile since starting InnerWorkings with Richard A. Heise, Jr. -- another promoter hounded himself by the fraud suits of investors who said he never delivered his promised Internet software for managing executive benefit plans.

Numerous ex-employees of InnerWorkings told me that its vaunted software also doesn't work as claimed. A century ago, there was an investor named Mark Twain who lost a bundle investing in ersatz printing technologies. He said that history doesn't repeat itself, but sometimes it rhymes.

SEC Officials to Defend Decisions In Insider-Trading Probe of Pequot

2006-12-05T00:50:00.000-08:00

Securities and Exchange Commission officials will take the offensive on Capitol Hill today, countering allegations that they stopped an insider-trading probe into hedge fund Pequot Capital Management Inc. after the investigation got too close to a prominent Wall Street executive.

The testimony, to be delivered to the Senate Judiciary Committee, also includes documents that offer an inside look at how Pequot amassed and used information. The material gathered by the SEC alludes to Pequot's use of research from Goldman Sachs Group Inc. before the brokerage firm published the material and to information that Pequot received in conversation with a Microsoft Corp. employee it later hired. The SEC didn't find that any of the evidence it gathered amounted to illegal behavior.

The testimony from SEC Enforcement Director Linda Thomsen and top enforcement officials offers a different picture than the one painted by Gary Aguirre, a former SEC enforcement attorney. Mr. Aguirre has alleged that he was fired in September 2005 after his supervisors blocked him from issuing subpoenas to John Mack, former chief executive of Credit Suisse First Boston, now head of Morgan Stanley. Mr. Aguirre had suspected Mr. Mack of tipping off Pequot to a pending merger, but said he wasn't permitted to pursue the investigation because of Mr. Mack's "powerful political connections."

Ms. Thomsen is expected to say, according to a copy of testimony: "These allegations are simply not true." She will note that Mr. Aguirre "had continued personality conflicts with other staff attorneys, resisted standard supervision, and ignored the SEC's chain of command." She also will say that the SEC tried to accommodate Mr. Aguirre, including giving him time to "pursue an unsuccessful age-discrimination claim against the SEC for failing to hire him on 22 prior applications." Mr. Aguirre is 66 years old.

Senate Finance Committee Chairman Charles Grassley has said that the evidence he has gathered so far is on balance "supportive" of Mr. Aguirre's claims. However, Ms. Thomsen's explanation is supported by testimony from three other current and former SEC enforcement officials. Paul Berger, a former associate SEC enforcement director, is expected to say that "no one refused his request to take testimony of John Mack. In fact, Mr. Aguirre was told that his request to take testimony might make sense, but that he hadn't yet done enough investigating to obtain testimony that would be useful."

Mr. Aguirre brought his concerns to Congress earlier this year and laid out his allegations before the Senate Judiciary Committee. The SEC subsequently took Mr. Mack's testimony this summer. Mr. Mack cooperated with the investigation, Morgan Stanley has said.

The SEC staff formally closed its investigation of Pequot last week without recommending any enforcement action. By May 2005, the investigation began focusing on Pequot's July 2001 short sales of General Electric Co. stock and purchase of Heller Financial Inc. shares. GE's acquisition of Heller was publicly announced on July 30, prompting a rise in Heller's stock price and a small decline in GE's stock price. Pequot made $17 million on the Heller trade and about $1.9 million on GE.

The question of whether Mr. Aguirre had enough information to issue a subpoena to Mr. Mack, who is close friends with Pequot Chief Executive Arthur Samberg, is at the heart of the dispute between Mr. Aguirre and his former bosses. Mr. Aguirre has said that "growing evidence" pointed to Mr. Mack. His bosses say that Mr. Aguirre didn't have enough facts.

"He was extremely anxious to take Mr. Mack's testimony, so much so that I grew increasingly concerned that his desire to take Mr. Mack's testimony stemmed from Mr. Mack's high-profile status, not an objective assessment of the facts," Robert Hanson, the SEC branch chief who supervised Mr. Aguirre, plans to say according to a copy of his testimony. "My concern was heightened because Mr. Aguirre wanted to take Mr. Mack's testimony immediately, before gathering documents from CSFB that could shed light on whether Mack had received information about the merger before he joined CSFB."

Mark Kreitman, an SEC assistant director who was Mr. Aguirre's professor at Georgetown University's law school, said that Mr. Aguirre's behavior became "increasingly unprofessional, irresponsible, and erratic" as time went on. He said that Mr. Aguirre, who had received a positive evaluation for his performance through April 30, 2005, "threw what can only be reasonably described as tantrums, storming up and down the halls in a furious crouch." Mr. Kreitman says he and Mr. Aguirre's other supervisors had to amend Mr. Aguirre's evaluation because his behavior "exceeded the bounds of acceptable professional conduct."

In a brief phone interview, Mr. Aguirre called their testimony "fiction." He says there is no evidence that SEC supervisors were unhappy with his performance until after he complained about what he said was Mr. Mack's special treatment.

How a hedge fund vanishes

2006-10-17T00:53:00.000-07:00

Top Global Trader Is Suddenly Losing Investors

Ravinder Mehra built a hedge-fund empire on smart trades and savvy marketing. But sudden losses are exposing deep cracks in that empire's foundation.

The 48-year-old Mr. Mehra, for many years considered among the top traders in global bond and currency markets, launched Vega Asset Management in 1996 with just $25 million. Mr. Mehra and his team wooed the middlemen of the hedge-fund world, a rising group of professionals who represent wealthy investors and search for the next hot hedge fund. By 2004, Vega, with offices in Madrid, London and New York, was managing more than $12 billion, making it the largest fund in Europe and one of the biggest in the world.

A series of poor bets on global bonds by Mr. Mehra -- and an unwillingness to change his bearish stance on fixed-income investments -- have hurt returns. Vega's biggest hedge fund, the Vega Select Opportunities Fund, which is run by Mr. Mehra, has lost about 17% so far this year, most of it during August and September.

"You're only as good as your last trade in this business, and on that basis I am awful," Mr. Mehra says. "We deserve to be punished if we don't perform; we haven't met our objectives for two years."

The deep losses have sparked a rash of investor withdrawals. Mr. Mehra says Vega now manages about $5 billion. Some of that is money that has been invested in other funds and isn't managed by Vega's own managers, reducing the firm's compensation and making it harder to get a clear view of how much Vega itself manages. Mr. Mehra's Select fund is down to about $1 billion from more than $1.5 billon a few months ago.

Along with billions of dollars in energy losses recently racked up by Amaranth Advisors LLC's Brian Hunter, the downturn at Vega serves as a stark reminder of the risks that individual traders continue to represent at some large hedge funds, even as other funds take a more conservative approach.

Vega's losses, however, are very different from those at Amaranth, which shocked investors with the degree to which the fund moved to riskier energy trades. Vega has been open with its investors about its trades and their risk, though that hasn't made them any more accepting of the losses.

"Obviously you can't be pleased with the performance," says Andre de Gaspar, who runs AIS, a $500 million fund-of-funds firm based in Geneva, that has about 2% of its portfolio in Vega, down from 7% a few years ago. "But this isn't a case of doing things they weren't supposed to do. The position was sizable but compliant with the fund's risk budget," he says.

Mr. Mehra rose to prominence giving investors what they wanted. Mr. Mehra, who was born in India, did trading stints at Citigroup Inc. and HSBC Holdings PLC before joining Spanish bank Banco Santander Central Hispano SA in 1990. In 1996, Mr. Mehra created his first Vega fund with colleague Robert Slutz. After two years, Vega went out on its own with seed capital from Santander.

Vega attracted interest by allowing its investors to withdraw their money each month, as long as they give 30 days notice -- a more lenient redemption policy than at most hedge funds. Vega also shares the rationale and details of its big trades with its investors. Vega's risk-management techniques force the firm to dump positions after a sizable loss or if returns become very volatile, a selling point that assuaged investors.

The best-performing fund in Vega's stable, Mr. Mehra's Vega Select fund, has scored an average annual return of 12.3% since 2000. That is in line with other "macro" hedge funds, which bet on broad economic trends, though below the 25% average return he aims for. Four of Vega's five other funds have returned less than 7% a year since they began.

Some investors who passed on Vega said the firm's returns didn't justify their marked volatility. In three of the past four years, Vega experienced two-month periods of double-digit percentage losses. The firm says it has rebounded from previous big declines in 2002 and 2004 and investors are aware of the volatility.

As Vega's assets soared, Mr. Mehra cut a wide swath among hedge funds. Investors and colleagues say he entertained them with late-night dinners at some of Madrid's top restaurants. One investor recalls the firm sending a blue Porsche to pick him up on a visit to the firm's offices.

"If you join Vega and dine with me you will enjoy a lot of fine wines, I have a hell of a cellar," Mr. Mehra says.

This summer Mr. Mehra's bet against bonds became a problem, in part because the attributes of the firm that attracted investors began to undercut Vega's performance. He and his team figured that the U.S. economy would continue to expand and that inflation could be a problem, putting pressure on bond prices. But bonds rallied sharply in September. Vega's risk techniques forced the firm to exit from many of its losing positions last month -- just before the bond market headed south, a move that would have been profitable for Mr. Mehra had he held on to his investments.

"Clearly I am really frustrated," he says. "I have the majority of my net worth in the business."

Now, Mr. Mehra is trying to right the Vega ship. He is telling his investors that they now will need to give him 90 days notice before pulling out of the fund, among other moves to give him more "flexibility," he says.

For this year, however, the moves are too late. Mr. Mehra says his big fund is largely out of the market, after cutting his positions in recent weeks to keep a check on losses.

"I know I'm under the gun, I know I have to perform," he says. "But I don't see it as a catastrophe, if we get good performance we'll get traction."

NY Post started imaginary Hedge Fund

2006-08-17T01:40:00.000-07:00

Notablecalls: The New York Post started few weeks ago imaginary hedge fund that manages imaginary $1bn. So far so good. It is a entertaining reading every morning and I would recommend it to You, dear readers, too.

Todays story is here:

August 17, 2006 -- The Make Us Rich hedge fund will place a big bet against the stock market and against the dollar at the end of this week.
Last Friday the imaginary $1 billion fund run by Wall Street veteran Bill King and me predicted that the stock market would do well this week, mainly because equities typically rise on options expiration weeks.
This is one of those weeks and stocks behaved predictably well - up about 230 points on the Dow Jones industrials since Monday. Some good news out of the Middle East and mixed results on inflation also helped.
As I said in my last column we got that prediction right but missed the trade because Bill was lying in a hammock all weekend - acting like a real hedge fund manager - and I was busy partying with Playboy models in Atlantic City.
(Hey, if this is an imaginary hedge fund then I can have an imaginary social life.)
But we aren't going to miss this one: this week's stock rally probably exhausted the buyers and we now expect the market to start worrying about all the world's woes.
So we are shorting the market by immediately buying 500 put contracts on the Standard & Poor's 500 index, with a strike price of 1,285, at $11.80. And we will buy another 500 puts tomorrow and perhaps 500 more on Monday if stocks rally.
We aren't going to hold these positions very long - probably just a few days - because we do expect the market to rally at the end of the month.
We are also buying $300 million worth of euros, which is a bet that the dollar will go down in value in the coming weeks against that currency. We bought the European currency at $1.280.
The fund believes the dollar is vulnerable because monetary policy here is at a delicate stage and the European economy is stronger. Currency problems tend to bloom after Labor Day.
But since big-shot traders like us can't be constrained by old media deadlines from now on we are going to document our moves on the Post Web site - www.nypost.com.
So far we have a profit of $3.9 million with just two trades. Moving to the Internet will give us the speed to make more trades.
Hopefully they will be good ones.

This press release just came in

2006-07-13T12:34:00.000-07:00

Goldman Sachs challenges Web site Goldmansex.com

Goldman Sachs Group (GS), the blue chip investment bank, wants a Netherlands man to change the name of a sex-themed Web site called goldmansex.com.
Goldman Sachs last week submitted a complaint to the National Arbitration Forum (NAF) arguing the Internet domain name goldmansex.com would cause confusion and contained links to objectionable "adult" material. The NAF mediates corporate disputes including those over Internet domain names.
Goldman Sachs and goldman.com are registered, the bank said.
Goldman Sachs spokesman Peter Rose said the bank would not comment beyond its NAF filing.
But Rob Muller, 32, who founded goldmansex.com and is its sole employee, said "Goldman" was a nickname given to him by his friends because "People thought I was always lucky in my life." The Web site provides links to strip clubs and escort agencies, Muller said in a phone interview on Thursday from his home in Albian, the Netherlands, that he had never heard of the world's largest investment bank until recently. He said the NAF notified him about Goldman's complaint on Monday.
NAF lawyer Christine Dorrain declined to comment on the case, citing policy about pending cases. Muller said he had hired a lawyer and would fight to retain the domain name because he does not think it should cause confusion. "Would their clients really think this is some sort of new product line?" he said.

Notablecalls: This press release just crossed the wires. LOL

Hedge Manager Teaches SEC a Lesson

2006-06-28T00:35:00.000-07:00

Phil Goldstein, hedge-fund champion, is the unhedge-fund manager.

The head of Bulldog Investors, Mr. Goldstein single-handedly challenged the Securities and Exchange Commission's attempt to require hedge funds to register with the agency. Last week, a federal appeals court delivered him victory, overturning the SEC's attempt to impose a modicum of regulation on the exploding industry.

He stands out among hedgies not because he was raised in blue-collar Brooklyn; those bootstrap stories are fairly common in the industry. It may be that he was a New York City civil engineer for 25 years. Now 61 years old, he made the move from managing building projects to running money in 1992. These days, a city worker has less of a chance of managing others' wealth than Jeff Skilling has of ringing the opening bell of the New York Stock Exchange.

The clincher of his maverick status in the world of hedge-fund managers is that Mr. Goldstein will admit, on occasion, that there are things he doesn't do well.

"I was never a very good engineer. It wasn't until my mid-to-late forties that I decided what I wanted to do when I grew up," he explains. Even today, he says, "I'm not a valuation expert. I'm a good value investor, but not that good." He credits his partner with his small-time ($225 million) operation's best investing instincts. He calls his main investment technique -- buying closed-end funds trading at a discount to their asset value -- "investment for dummies."

But Mr. Goldstein is good at stirring up trouble. Although more than 1,200 hedge funds registered under the new rule, he detested it. So he decided to fight. No other hedge fund joined his suit. Few gave him much of a shot to prevail. The fight cost him and his partners $300,000 out of his own pocket -- not, he emphasizes, his investors' pockets.

Now the requirement is likely to fizzle away. The SEC could appeal, but it probably won't. Lawmakers might try to jump in to change the SEC's mandate. The congressional clamor begins today, with a scaremongering hearing before the Senate Judiciary Committee on hedge funds' alleged collusion with independent stock-research shops.

But my guess is that after a lot of noise, Congress won't push for registration. So, in the end, many hedge funds will deregister, though some may not -- a sort of Good Housekeeping seal of approval.You might think the ruling from the court had something about whether the hedge-fund registration was a good thing or not, but you would be wrong. It centered on a definitional conundrum: whether the investors in an adviser's hedge fund are "clients." Under securities law, any adviser with more than 15 clients has to register. Hedgies tend to run firms that manage fewer than 15 hedge funds. Agreeing with Mr. Goldstein, the court ruled that the funds are the clients, not the underlying investors.

The ruling may well be correct as a matter of law. It is obvious to anyone who isn't a lawyer that the investors actually are the clients. Even Mr. Goldstein occasionally slips and calls his investors "clients," just like every hedge-fund manager.

It is always gratifying to see a David go up against a faceless governmental bureaucracy and win. But I just can't come around to the view that hedge-fund registration is so terrible. Nor can Mr. Goldstein, as it turns out.

"If the SEC had asked just for name, rank, serial number, audit and other basic information, I probably wouldn't have filed the lawsuit," he says. But because the SEC registration form asks for everything from "your last small-pox vaccination to every dirty joke you got on email," he says, it is onerous and intrusive. The registration forms run at least 35 pages long, asking for information about things such as compliance procedures, business relationships with investment banks and stock-research companies and regulatory records.

Antiregulation forces argue the costs outweigh the benefits. It is emblematic of a greater regulatory backlash these days, most forcefully expressed in the movement against Sarbanes-Oxley.

Hedge funds get a management fee of at least 1% and 20% of the investment gains -- often more. They are richly rewarded to control other people's money. Increasingly that money comes from the pension funds of regular folk. Given the huge fees and the enormous responsibility, the price of registration and keeping some lawyers on staff simply isn't that high. Nearly half of all investment advisers registered with the SEC have five or fewer employees. If they can handle the costs and hassles, hedge funds can, too.

Opponents maintain that registration won't prevent frauds. After all, as Mr. Goldstein points out, Atlanta hedge-fund firm International Management Associates LLC had registered with the SEC before its manager allegedly ripped off a bunch of investors.

Well, of course. Nothing will prevent all fraud. It turns out the SEC detects plenty of skullduggery through routine examinations. According to Lori Richards, the SEC's examinations director, 11% of SEC enforcement actions brought last year were the result of fraud detected during such inspections.

"Fundamentally," she says, "what we're looking for in these exams are indications of fraud. We look at the account statements the adviser sends to its clients and compare them with the custodian's records to see whether they match, we look at the adviser's disclosures to its clients, and we look at the adviser's process for pricing securities."

Here is the key: "Like any cop on the beat," she adds, "the prospect of being examined by the SEC itself has a deterrent effect."

Another benefit is that a hedge-fund census would give the SEC improved perspective. Hedge funds are diverse entities, engaged in sophisticated strategies. It is clearly to the rest of the market's benefit if the chief market regulator knows generally who and what is out there to better anticipate potential problem areas and crises.

What hedge funds should realize is that registration is good for them. The industry is attacked for being secretive, under-regulated and engaged in risky behavior. The reality is much more benign, especially since most hedge funds take fewer risks than typical, long-only mutual funds. Their name derives from the fact that they hedge their bets -- often by betting on declines in stocks and indexes by selling them short -- to avoid volatility. Registration would make hedge funds loom less ominously in the public consciousness.

The SEC should have offered some carrot with its stick of registration. It still can. Let hedge funds advertise. Let them tout performance, as mutual funds do. Let them open themselves up to a wider variety of investors.

Then Congress should make them register.

Notablecalls: You are probably not going to find this article from www.sec.gov

Is Your CEO Lying? - Barron's cover

2006-06-24T08:58:00.000-07:00

In their eternal quest to get an investment edge, hedge funds have long hired forensic accounting firms and even private detective agencies to ferret out dirt on short-sale targets. But now that pursuit has moved to another level.
Barron's recently stumbled across several hedge funds that have hired a five-year-old Boston company called Business Intelligence Advisors, which employs a number of former CIA and other national-security operatives to do behavioral analyses of corporate executives. The intent: to detect when managers are being less than candid or lying in their communications with shareholders, during interviews and quarterly earnings conference calls or even in press releases or management discussions in 10-Ks.

"The richer the medium, the better for detection," says the company co-founder and chairman, Liam Donohue, who also is a venture capitalist. "But our people can glean plenty of insight from heavily lawyered news releases as opposed to our being present during interviews or analyzing video or audio tapes."

The company also offers training seminars to teach security analysts, portfolio managers and, lately, corporate auditors detection techniques and how to ask questions that better elicit information.

But uncovering deceptive behavior -- regardless of whether it's executives are being evasive or telling baldfaced lies to cover up a scandal -- remains the ne plus ultra of BIA's mission for the hedge-fund crowd. "This is information that's incredibly useful to anyone making high-stakes financial bets," boasts BIA's other founder, former corporate lawyer Cheryl Cook.

One hedge-fund analyst regularly uses BIA operatives (information "elicitors," in company jargon) to analyze the conference-call transcripts and press releases of companies that his hedge fund is shorting. He even had a Business Intelligence Advisors expert, posing as an assistant, accompany him to an interview with two executives from a financial-services concern in which his fund had a large short position. While he took notes on the interview, the BIA employee concentrated on just one thing -- the managers' verbal and nonverbal behavior. The BIA agent, unaware of whether the hedge fund was betting on, or against, the company, found both executives acting highly deceptively when discussing a number of key financial issues, such as possible shenanigans with their reserves.

The stock of the company in question -- the hedge-fund manager would speak with Barron's only if we wouldn't identify him, his firm or the stock -- has since fallen more than 25% and the analyst thinks it has a long way to go on the downside, despite a once avid bullish following on Wall Street, he contends.

"The value of BIA experts is both in their ability to confirm what one suspects and also indicate where in the financials one should drill down into," he explains. "Of course, all they can uncover is concern or deception. They can't tell you the degree of magnitude of any problem areas they detect."

Such services don't come cheap, but getting an exact figure is difficult, in part because they vary from job to job.
Most important to Business Intelligence Advisors -- which doesn't appear to have any rivals that do precisely what it does -- are language cues, mainly because printed or transcribed corporate communications are at times the only material its experts have to work with.

First, its specialists try to gauge whether managers definitively and directly answer questions and forthrightly address issues, rather than tap dance around the subjects. Among the verbal dodges they look for are managers' use of "protest" statements when confronting areas that make them uncomfortable instead of, say, firm denials of questionable behavior. Here, the term "protest" is used in the older sense of the word -- as an assertion or affirmation, rather than an objection.

The litany of common protestations is numbingly familiar to anyone who has a passing familiarity with corporate spin.
"Our accounting is in strict accordance with Generally Accepted Accounting Principles" has been asseverated by executives charged in every financial fraud during the Enron era. Likewise, fraudsters never tire of asserting that their companies' financials have passed muster by their accountants, rating agencies and regulators such as the Securities and Exchange Commission. Other bromides often evoked as protest statements are: "We have an experienced management team in place." Or perhaps, "Our business is extremely complex." And, finally: "We have a great business plan that will really start to deliver soon."

Protest statements, according to BIA operatives, fulfill a number of purposes beyond permitting executives to avoid giving factual answers. By invoking a higher authority such as GAAP, the managers hope to divert attention from problems and convey the sense that all is well with the company. At a minimum, protest statements imply a lack of comfort on given issues. At a maximum, they signal outright deception.

Other cues that BIA experts place a lot of stock in are management replies larded with irrelevant specifics, meant to obscure some troubling issue. Often the details are accurate as presented.
Qualifying words can be important also. When executives resort to such locutions as "candidly," "honestly" or "to tell the truth," watch out. They might be trying to manage perceptions rather than convey fact.

Ad hominem attacks on accusers are another staple of managements seeking to cover up problems and blunt charges. Typically, whistle-blowers and other critics are dismissed as "disgruntled former employees" or "cranks." The aim is both to impugn an accuser's credibility and to avoid having to directly deny the charges.

Nonverbal cues can also be important, though they are often subtle. For example, BIA officials assert that, in judging credibility, most people are overly biased by such nonrevelatory externals as lack of eye contact, apparent nervousness and posture. Instead, BIA looks for such indicators as what it calls "shifts in anchor points." Executive zingers are often proceeded by a sudden shift forward in body weight, for example. The onset of fidgeting -- such as playing with a water bottle or cup of coffee -- can likewise betoken acute discomfort in an executive. This is particularly telling if it contrasts with previous mannerisms and tics.

Examples of Business Intelligence Advisors' methodology are found in the company's main training video -- an April 2001 CNBC interview of Sanjay Kumar, then the CEO of Computer Associates, which is now called CA Inc. (ticker: CA).

At the time, the Business Intelligence Advisors staff had no way of knowing that, five years later, Kumar would plead guilty to securities fraud and obstruction of justice, stemming from the company's use of back-dated contracts to pump up quarterly sales and earnings over several years. The SEC and Justice Department didn't launch their investigations of Computer Associates until almost a year after BIA had begun using the video in the spring of 2001. What BIA operatives had seized on were Kumar's on-camera responses to questions that had been raised in a New York Times article. To the observers, they reeked of deception.

Recently, in a Business Intelligence Advisors conference room in Herndon, Va., one of the company's experts ran through the video for Barron's, pointing out various cues or "tells" that, she asserted, had pointed toward deception.
The expert -- we agreed to call her by the pseudonym Grace -- a trim woman who, following graduation from Duke (with a double major in history and psychology), worked 20 years as a CIA interrogator. "No rubber hoses or other coercive techniques," she offers with a dismissive chuckle. "Duress just raises people's defenses. You catch a lot more flies with honey, rather than vinegar."

Early on in the interview, Kumar sedulously fires off protest statement after protest statement, rather than strongly denying the charges of dodgy accounting. To wit, he declares, Computer Associates accounting methodology met the strict GAAP standards "that we all live by" and, he adds, were blessed by two accounting firms.

Then CNBC interviewer Bill Griffeth gives Kumar a temporary out by talking about the revenue-growth problems that technology companies in general were having in the then-tough economic environment. Kumar seizes the opportunity to go off on a long riff about general industry difficulties. "He's trying to divert attention away from Computer Associates and run the clock out on Griffeth," Grace comments.

A trained "elicitor" pays close attention to the unwitting cues in the interview. At one point, Kumar grandly declares that there's "nothing wrong fundamentally" with the company's business practices. "Oh, really?" Grace interjects after freeze-framing the interview DVD. "That qualifier 'fundamentally' shows a real lack of conviction on his part. It implies that problems exist in at least some areas of the culture."

IN DUE COURSE, Kumar resorted to the tried and true tactic of smearing the accuser, the New York Times, to shake viewer confidence in the veracity of the article. After saying that there's no point in playing "tit for tat" with a company that buys paper by the ton and ink by the barrel, he proceeds to do precisely that. He complains that the article had no named sources, save a couple of small commercial customers. "Incredibly," Kumar adds, the reporters hadn't contacted any Wall Street securities analysts, who, of course, "know the company well." Moreover, the Times article is completely "devoid of factual reporting."

Grace moves on to another training DVD -- Bill Clinton's famous 1992 60 Minutes interview, just before the New Hampshire primary and right after widespread publicity about Gennifer Flowers' adultery charges against him had imperiled his chances for the Democratic presidential nomination.

The moment of truth comes when Clinton is asked whether he denied having had a liaison with Flowers. His reply: Both he and she previously had denied such an involvement. In Grace's view, it was a classic "non-denial denial." Clinton was to make use of the strategy again, especially when the Monica Lewinsky story broke with such ferocity.
Grace, however, points out other interesting aspects of the 60 Minutes segment, including some involving Clinton's now-famous wife. "Watch the behavior of Hillary closely, when the key question comes up," she says.

Mrs. Clinton, sitting next to her husband, had been nodding in an exaggerated metronomic fashion during the interview, in apparent approbation and support of her spouse. But Bill Clinton's answer about Flowers seems to momentarily knock her off stride. She shifts position and glances quickly at him before resuming her nods. "Something clearly upset her," Grace maintains. "Maybe he didn't give the answer she expected or deviated from the script."

Next on the hit parade is a Scott Peterson interview with ABC Television's Diane Sawyer, done in January 2003, about a month after his wife Laci was reported missing.
According to Grace, Peterson's dissimulation is obvious throughout the interview. For example, he involuntarily smirks for a brief moment after he denies to Sawyer that he murdered his wife. At another point, he closes his eyes ("Just like Jeff Skilling did when testifying before Congress on the collapse of Enron") immediately before telling what later turned out to be a lie.

Peterson answers promptly with a convincing "no" when asked if he'd had extramarital affairs, other than one he admitted to with Amber Frey. But he stumbles badly when asked if he'd ever beaten Laci. "Violence towards women is unapproachable," he replies, somewhat incoherently, evading the question.

Later, Peterson doesn't mention Laci when apologizing to both his and Frey's family for his affair with Frey. "Don't forget that, at that time, Laci was only missing, so the omission indicates that he knew she was dead," Grace asserts.
Of course, behavior analysis is easier after the fact; we all know that Scott Peterson was found guilty. But Business Intelligence Advisors has had some great calls beyond Sanjay Kumar.
Another hedge-fund manager furnished Barron's with the company's analysis of bond insurer MBIA's press release responding to an April 2005 Barron's article accusing the company of accounting manipulation and inadequate loss-reserving, among other issues.

The report proved to be prescient. For example, it predicted that three reinsurance contracts that the company had used in 1998 to cover up a nasty $170 million claims loss would cause MBIA additional problems, even though the insurer already had voided $70 million of the $170 million in contracts and taken an appropriate earnings hit. Indeed, by the end of 2005, the remaining contracts also were voided, further hurting earnings.

The Business Intelligence Advisors analysts found indications of the additional problems in the release's wording. In one section, MBIA claimed that the investigation of the three deals was "substantially complete." To the analysts, "substantially" set off alarms.

The MBIA release also went into numbing detail as to the scope of the investigation, describing who had been interviewed and listing the documents that had been reviewed. These, according to BIA, were mere "specifics" designed to impress Wall Street while artfully sidestepping the central issues.

The release was also larded with qualifiers that, the analysts suspected, implied a lack of conviction on MBIA's part. For example, MBIA stated that it "believed" that its claims reserves were adequate. That's a weasel word. In fact, the reserves, unallocated to specific losses, have been dropping precipitously ever since, leading some critics of the company to predict that it might be facing a big reserve charge.

Business Intelligence Advisors also noted that while MBIA asserted that Barron's had created "many misimpressions," the company's response noticeably failed to rebut the article's main allegation that MBIA had manipulated earnings. Stay tuned on that score.

The stock (ticker: MBI), though currently trading in the 50s, around the same level as when the Barron's story appeared, remains under a cloud. MBIA is being investigated by the SEC, the Justice Department and the New York Attorney General's Office.

Other reports obtained from third parties show interesting assessments of different managements' credibility. For example, JPMorgan Chase (JPM) CEO Jamie Dimon scores fairly well on the candor front in a recent earnings conference call by forthrightly dealing with his concerns over the bank's credit-card growth and the likely rise in nonperforming commercial loans.

The same can't be said for the management of Kodak (EK). BIA analysts contend that Kodak executives, in their latest earnings conference call, were less than open about the company's back-to-school sales prospects, in-store kiosk results and campaign to boost operating margins. And, as if General Motors (GM) didn't have enough problems, the analysts give its management low marks for openness and credibility.

To be sure, there's an element of hocus-pocus in BIA's techniques. The company is secretive about many aspects of its methodology. And there's often a big difference between evasiveness and lying. But BIA doesn't overpromise. "We're more compasses for clients than human lie detectors," Grace comments.

Even so, BIA should have a bright future. After all, gilding the lily and spinning perceptions will never go out of style, especially on Wall Street.

Notablecalls: Amazing stuff.

At the Internet Cafe, Day Traders in India Live Mumbai Dreams

2006-06-21T00:56:00.000-07:00

MUMBAI, India -- On the second floor of the Reliance Web World Internet cafe, behind a tangle of teenagers trying to kill each other in the network game Counter Strike, is another group of customers. They are older, noisier and glued to their rented screens.

"Hindustan Petroleum, sexy!" yelled Vinod Mishra, 38 years old, as he pumped his fist in the air, grinning at the flickering stock price of India's second-largest refining company. "My screen is like my wife. When it tells me to sell, I sell; when it tells me to buy, I buy."

While the former sailor sounds like day traders the world over, Mr. Mishra is a distinctively Indian type of investor. His office is this cramped Internet cafe, strewn with discarded paper teacups. At home, he doesn't have his own computer, Internet connection or even reliable electricity. His portfolio is tiny. His profit target is $10 a day.

"I'm not greedy," he says. "I just need enough to look after my family."
India's hot stock market has inspired many to ditch their day jobs and look for shortcuts to a better future. Online trading has more than doubled in the past 18 months to make up more than 15% of all trades on some days, according to the National Stock Exchange. Some 1.5 million Indians buy and sell stocks online, each trading an average of less than $150 a day.

But piggybacking on the stock market's historic run higher is no longer the no-brainer it has been for the past several years. The stock market has plunged 22% since touching a record high last month, wiping out $200 billion of market capitalization. That has squeezed a similar percentage of these tiny traders out of the market.
Gauri Vaswani, a real-estate broker turned day trader, says she has lost close to a third of her stock-market investment -- and a few good friends -- since the market started falling. She blames Federal Reserve Board Chairman Ben Bernanke for touching off a global selloff with talk of raising interest rates to combat inflation.
"I was stupid. I should have sold," says Ms. Vaswani, who moved to a new apartment two months ago so she could be closer to the Internet cafe where she spends her days. "Now I'm waiting for Bernanke to shut his mouth."

What Ms. Vaswani and many of her fellow traders haven't lost, is the bug. Many still hope to eke out enough profit from intraday movements up or down to change their lives in small but appreciable ways.
Other regulars at Web World left their low-paying jobs trading textiles and selling ayurvedic herbs to cash in on the unprecedented run on Indian stocks. Some have doubled their incomes.

Even with the market falling, Mr. Mishra says he makes more money buying on the dips than he could in his previous job selling engine parts for ships. There, the $6 a day he earned wasn't enough to support his wife, two children and mother, who live in a small apartment in the noisy suburbs of this city formerly known as Bombay.

He says he earns an average $15 a day from day trading. Mr. Mishra says he can now afford a private grade school for his son and daughter, a cellphone to call his brokers, a monthly movie date with his wife (a Julia Roberts film if one is showing) and still set aside some rupees for retirement.

So far he has been lucky in the market. When he loses money, it puts him in a bad mood for days but not out on the street. He refuses to even imagine what would happen if he started losing regularly. "I can't be pessimistic if I want to grow," he says.

Most Indians still earn less than $2 a day. Even someone with experience like Mr. Mishra, who fixed Navy ship engines for 15 years, usually makes less than $150 a month. He is like many Indians who want to get ahead but don't have the skills to grab one of the few good jobs as a computer engineer or the English to be a call-center employee.

Mr. Mishra grew up farming wheat, corn, sugar cane and potatoes in the fertile fields of Uttar Pradesh in northern India. He attended grade school under a tree without paper or pencils. Later, he graduated to a shed that students shared with cows.

Two years ago, he took $1,000 in navy pension money and began trading at Web World. Since then, he has doubled his take-home pay. Every morning he takes a crowded 90-minute train ride to downtown Mumbai and shows up for "work" at the back corner of the cafe before the opening bell at 9:55.

Web World charges around 25 cents an hour, hoping to earn still more from its coffee. It has squeezed more than 50 terminals into the ground floor of an old building at the center of the oldest neighborhood in Mumbai. With flat-screen panels and air conditioning, it's a noisy haven that boils over when nearby schools let out and the gamers arrive.

At 12:30 in the afternoon, Mr. Mishra empties his briefcase of its only contents: plastic containers of spicy vegetables and Indian bread prepared by his wife for lunch. The television set Web World installed for its most loyal customers -- the day traders -- is tuned to CNBC India all day.

The "trading floor" is filled with a constant banter, as each trader yells tips and taunts to the others about the money they made or lost and hot stocks they have found. One trader trades in his bare feet, while listening to tunes from the latest Bollywood movies. Another carries his trading tools -- a grimy calculator and dog-eared investment magazine -- in a plastic bag from a clothing store called Turning Point.

Each trader has his own tricks. Sumit Mehta, 27, who used to sell herbal extracts, looks for large trades by foreign brokerages and rides the slipstream. Neeraj Lohia, 29, waits until he sees the benchmark index bottom out, and then buys blue-chip growth companies. Mr. Mishra trades Indian sugar shares when there is overnight news about sugar production in Brazil.

Chairs and computer screens broken from overuse have been pushed to the corner. By the end of the five-and-a-half-hour trading day, most traders are usually a few dollars richer. Those who haven't figured out how to ride the market's current volatility were weeded out weeks ago.

Mr. Mishra says he continues to make money: about $17, he bragged at the end of a recent trading day. He says he has saved around $3,000 over the past two years. Once he has $10,000 in the bank, he says, he plans to start making larger and riskier bets on the market.

He has already used some of his earnings to rebuild his family home in the village he grew up in. He doesn't plan to go back there, though.

"It is giving me food, it is my provider," he says as he touches his fingers to his monitor, keyboard and then forehead in a Hindu sign of respect for his computer. "This is a 90% improvement to the life I lived in the village."