Monday, August 3, 2015

Government Ignores Potential Fraud: My Experience with HHS

Liberty Blitzkrieg reported:

Federal prosecution of individuals identified by the government as white collar criminals is at its lowest level in the last twenty years, according to the latest data from the Justice Department

The decline in federal white collar crime prosecutions does not necessarily indicate there has been a decline in white collar crime. Rather, it may reflect shifting enforcement policies by each of the administrations and the various agencies.
I had a personal experience with this that culminated last week.  On August 4, 2013 I submitted a fraud concern to the Office of Inspector General of the Department of Health and Human Services.  I shared information that a local agency had fraudulently applied for and gotten nearly $900,000 in federal grant funds through a Section 1115 Medicaid Waiver grant.  On October 7, 2013 I spoke with an investigator who said they would refer it to their boss.  I heard nothing for fifteen months.

I submitted a public information request on the status of my complaint on March 2, 2015.  I wrote them at the time:

I reported my concern of fraud as an ethical citizen.  I truly wish to learn the outcome of the investigation.  The pursuit of rewards is ever so degrading and distasteful, especially when one enters a maze of complexity and obfuscation.  I hoped the government would view me as a partner in a serious matter.  

Staff said they had nothing to share as the case was "under review."  They gave me the impression it was being actively investigated and I could check back later.  I inquired again on July 17th and received a document on July 20, 2015.  The information said the case was closed on November 11, 2013.

I gave them information that clearly showed a grant applicant violating more than one requirement to receive federal funds, doing so with arrogance and impunity.  Investigators didn't have to do much, just affirm in public records, minutes and video, the admissions of agency leaders that they willfully ignored federal requirements in crafting and submitting their application for HHS funding. 

I was shocked by their callous lack of interest and by their defensiveness when questioned in the most basic way.  Now I know why.  Government is a fast track for pushing out money.

Saturday, August 1, 2015

Texas AG Faces Indictment for Securities Fraud

Chron reported:

Attorney General Ken Paxton is expected to surrender to authorities Monday following an indictment on multiple felony charges stemming from his involvement with a North Texas technology company accused of defrauding investors, according to multiple sources close to the case.

A Collin County grand jury issued the indictment against the first-term attorney general on Tuesday, two sources who had been briefed on the proceedings told the Chronicle on Saturday.

Paxton faces two counts of first-degree securities fraud and one count of third-degree securities fraud, with the most serious charges carrying a minimum sentence of five years in prison, special prosecutor Kent Schaffer told The New York Times.

Schaffer said Paxton is accused of encouraging people, including current and former members of the Legislature, to invest more than $600,000 in a McKinney-based technology company called Servergy without telling them he was making a commission. He also misrepresented himself as an investor in the company that the U.S. Securities and Exchange Commission was investigating for defrauding stockholders as recently as December 2014. The first-degree charges each carry a sentence of five to 99 years in prison and a fine of not more than $10,000.

The third-degree charge stems from his failure to properly register with the state as an investment adviser representative, which carries a sentence of two to 10 years in prison, as well as a $10,000 fine.
Wow,  this speaks to the abysmal level of leadership in both business and politics.  They serve themselves at nearly every turn. 

Huffington's Solace: Rubenstein & Conway's $30 Million in Vermillion

The Carlyle Group lost several investments in Spring 2008 prior to the Fall financial crisis.  Carlyle Capital Corporation's failure resulted in a high profile investor suing Carlyle and its marketing co-founder.  Forbes reported:

Michael Huffington, the wealthy former Republican congressman from California, is suing the Carlyle Group and its co-founder, David Rubenstein, over misrepresentations and deceptions Huffington claims they made regarding his $20 million investment loss in Carlyle Capital Corp., Carlyle’s failed publicly traded mortgage fund.
Seven years after Carlyle Capital Corporation declared bankruptcy, Carlyle associated hedge funds have suffered massive losses and redemptions.  WSJ reported:

Two of Carlyle’s co-founders, David Rubenstein and William Conway, invested their own money in the firm to the tune of $30 million, according to a person with knowledge of its operations, and kept it there even amid the losses and redemptions from other investors. The current value of their stakes is unknown. 
I hope it's $30 million each for Michael Huffington's peace of mind.

Vermillion had $2.2 billion under management at the time of the Carlyle acquisition; its assets in the legacy flagship, metals and freight funds have fallen to just over $400 million since then, though the new strategies in lending and index products have added about $1 billion. The firm’s total assets under management now stand at $1.4 billion.
Carlyle's commodity hedge fund wilted from $3.2 billion to $1.4 billion. That a 56% haircut. Huffington's $20 million Carlyle investment turned into a 100% loss.  Might he find justice or solace in Rubenstein and Conway taking a hit to their personal pocketbook? 

If not, justice may be served by the Royal Court of Guernsey in a case brought by Carlyle Capital Corporation's liquidators:

The Court has set the case schedule and trial is scheduled for the first available date after February 1, 2016.
Carlyle has a pattern of settling cases so it does not have to reveal its PEU secrets in any court.  We'll see how that and Carlyle's hedge fund investments hold up.  

Friday, July 31, 2015

Carlyle Co-Founders Warn on Frothy Valuations, Hedge Fund Underperformance

Carlyle co-founder Bill Conway stated in their recent Q2 earnings call:

The question on everyone's mind is probably why aren't you investing more money? We invested $1.6 billion in our carry funds from the second quarter; we are slightly more than half of that amount outside United States. So far this year we have invested about $3.1 billion. Let me put this investment pace into perspective. Over the past eight years we have invested about $79 billion in our carry funds averaging almost $10 billion per year, which is approximately what we invested in 2014. Our annual investments have ranged from high of $14.5 billion in 2007 to a low of $5 billion in 2009.

There are several factors driving this year's cautious investment pace. Most importantly we think prices in many assets classes are high. Our caution is further driven by uncertainties in Greece, fluctuations in the Chinese stock markets, continued high levels of leverage and a significant movement in energy prices. Also, with corporations struggling to find growth, they have turned to M&A to meet revenue targets while private equity activity has remained relatively muted. 

We believe current conditions will service catalysts for the next round of buying opportunities and while we cannot predict when all these opportunities will present themselves, the breadth of our platform and our dry powder positions us to take advantage when the time comes.
Conway recall the warning signs leading to the 2008 financial crisis.  Carlyle lost their hedge fund Blue Wave Partners due to poor returns and redemptions  Here's what Carlyle chiefs said about hedge funds in the recent analyst call:

Unfortunately, our significant hedge funds were down about 4.3% in the quarter.  

However, management fees from our hedged fund in investment solutions businesses are in total down about $19 million from Q2 of last year due to net redemptions and foreign exchange.

The decrease in distributable earnings primarily reflects a $19 million decline in fee related earnings as a result of lower management fees of $10 million from our hedge fund partnerships and $9 million in higher fund raising expenses associated with raising our second energy mezzanine fund which is not yet commenced management fees.

And our significant hedge funds largely remain below the high water marks and therefore are not contributing any meaningful group performance fees in 2015 as they did in the first half of 2014.

JP Morgan analyst Ken Worthington mined this concern:

Just on the hedge funds, the AUM decline this quarter and seems poised maybe to decline further in coming quarters. I guess first as you see it what are the issues? Obviously there have been some performance problems but is there maybe a greater issue with regard to either oversight or ownership structure or even management selection of purpose. Two, is there something that US managers need to or maybe are able to address here and then three, how do you return that the hedge fund specific operation kind of back to growth? Thanks.
 Conway replied:

I think that the -- it has been volatile and tough environment generally for investing. Sometimes I look at them and I wondered how it can be so low based upon all the volatility I see in the market. I don't think there is any kind of systematic problem with regard to our oversight or the job of the people running the hedge funds are doing or governance or anything like that. Obviously the hedge funds particularly Claren Road; they had a tough time in the first half of this year. But they do have a long track record of strong risk adjusted returns, very a proven team that's been doing the job, same people that when we initially acquired 55% of the business. We are working closely with them to sustain and restore the confidence that their investors have had with them for more than a decade, hopefully we and they will be able to do that. But I don't see it as a systematic problem or anything like that.
Carlyle's hedge funds made the wrong bets in all the volatility. Blue Wave Partners and Carlyle Capital Corporation were the canary in the coal mine that became the Fall 2008 financial crisis.  A hedge fund advisor recently suggested investors redeem their Claren Road investments.

FinAlternatives reported on a Carlyle commodity hedge fund that's virtually disappeared due to high redemptions

The founders of Carlyle’s Vermillion Asset Management hedge fund unit have left the firm amid steep losses and investor redemptions in its flagship commodities fund.

Chris Nygaard and Drew Gilbert, who founded Vermillion in 2005 and sold 55% of it to Carlyle in 2012, parted ways with Carlyle at the end of June, according to The Wall Street Journal

The firm’s Viridian commodity hedge fund, which trades oil, metals, and agricultural products, lost 23% in 2014, which touched off a wave of redemptions that brought assets in the fund from nearly $2 billion to under $50 million.

When asked how to grow Carlyle's hedge fund business Conway replied:

The best and the most -- the best way to grow is to have the hedge fund perform. Hedge funds perform, they can grow themselves. People want to be in their funds. I mean hedge fund like Claren Road it had some redemptions. A year ago they were turning money away. I think they turned away $1 billion a year ago because of -- they just didn't feel that they had the market conditions or the right opportunities to put that money to work. And so these things can turn pretty quickly in terms of what might happen. But the things that were causing to turn are performance. You perform, people are happy; they give your more money. You don't perform, the opposite happens. 
Will there be another Carlyle Group hedge fund run?  Investors may want to add cash like Carlyle to position themselves for the next round of buying opportunities.   

Update 8-1-15:  After shrinking a $1.7 billion hedge fund to less than $50 million, Carlyle chiefs dangled a new pot of gold for investors.  “We are successfully repositioning our commodities business, particularly in commodities finance, to capture an enormous global opportunity.”

Tuesday, July 28, 2015

Disturbing Wealth Secrets of the 1%

Economist Sam Wilkin wrote in Wealth Secrets of the 1% (Daily Mail):

...behind almost every great fortune, there lies what he calls a 'wealth secret'. This is a piece of knowledge or a technique that, while not exactly criminal, certainly skirts the customs of the time, and possibly the laws as well. All of them, he says, involve 'some sort of scheme for defeating the forces of market competition'. Many involve legal manoeuvrings or the exercising of political influence. Boldness and fearlessness are a given. Mild psychopathy probably helps, too. 
Private equity began in the 1980's as leveraged buyout organizations.  LBO's skirted customs, landing junk bond king Michael Milken in jail.  The 1980's saw the rise of Dr. Deming, Dr. Juran and Phillip Crosby.  Dr. Deming's theory focus on systems, variation, knowledge, psychology and their interaction is absent from corporate board rooms.  Dr. Deming cared about the human spirit and proposed win/win.

Corporate boards designed executive compensation programs where people at the top win, convenient as boards are interconnected groups of other corporate executives.  Management adopted the practices of Michael Milken, supplanting far worthier management theorists.  It's the age of Milken management where the top take all they can while they can.  The rest be damned. 

America's Red and Blue political teams cater to the .1%, which is largely represented by the PEU class.  Customs skirted, check.  Legal and financial manipulation (tax avoidance, management fees, dividend recaps), check.  Exercising of political influence on a bipartisan basis, check.  Boldness, fearlessness, psychopathy and the complete and total absence of guilt, check. 

The rich made their way to the top on the backs of others.  It's that simple.

Will Carlyle's Bad Claren Road Bets Nix Founder's "Great Revolution"?

Bloomberg reported:

Carlyle Group co-founder David Rubenstein, 65, said the “great revolution” coming to the industry will be the ability to add non-accredited investors, or those with a net worth lower than $1 million or those earning less than $200,000 a year. Regulations of fund structures should change to allow such people to put some of their retirement savings in private equity vehicles, said Rubenstein.
Seeking Alpha may have thrown water on Rubenstein's vision with its summary of a WSJ report:

Influential hedge fund consultant Cliffwater LLC has advised clients invested in Carlyle Group's (NASDAQ:CG) Claren Road Asset Management to pull their money. The details of Cliffwater's about-face - the group was a strong proponent of Claren Road not long ago - aren't known, but Claren Road's flagship fund lost 4.9% in June, and shed 10% last year

Claren Road has $4.9B in AUM, and Cliffwater has clients with about $800M of that. As recently as September, Claren Road had $8.5B in AUM, but soured bets on Greece and the GSEs have stung results.

Cliffwater's call doesn't necessarily mean a rush of redemptions at Claren, as some clients could ignore it, and others have their own bureaucratic hoops to jump through before making a decision to pull money

Carlyle purchased a 55% stake in Claren Road in 2010, part of a move to diversify beyond LBOs. 
Carlyle already rolled up two mutual funds that failed to garner traction, i.e. investments.  

Sunday, July 26, 2015

Carlyle Monetizes Telecable

Interactive Investor reported The Carlyle Group will sell Telecable, a Spanish telecommunications company, to Zegona,  a firm founded by two former Virgin Media executives.  Carlyle's price is 650 million Euros, up 250 million Euros from its 2011 purchase price of 400 million Euros. 

Carlyle's 62.4% profit over four years is respectable but hardly in line with the PEU's claims of nearly 30% annual returns.  It's not clear how many millions more Carlyle took in annual management fees, deal fees, dividend recaps or the myriad of other ways private equity underwriters bleed affiliates.

Zegona employs a "buy, fix and sell" strategy.  What's to fix after four years of Carlyle ownership?