Menu
8 Aug

Banker Peyton Patterson Won’t Pay Her Taxes

Peyton Reed Patterson, now former CEO of Bankwell, apparently doesn’t like to pay taxes. On Thursday the regional bank announced Ms. Patterson was quitting as CEO for personal reasons. This is two months after Matt Pilon of the Hartford Business Journal exposed the multi-millionaire banker for being a deadbeat with her creditors. In fact these creditors have secured court judgments against her for over $400k. This included contractors for her new McMansion in New Canaan, country club bills, and back real estate taxes owed to Madison, Conn.

What hasn’t been reported yet is Peyton Patterson also doesn’t like to pay taxes to New Canaan. A town records search shows New Canaan filed a tax lien on June 5th, 2014 against the banker for $36,146.63 and the tax assessor office shows she still hasn’t paid this year’s taxes. In fact, since she moved to town in mid 2012 she hasn’t really been timely in paying any taxes on her $4.2 million home at 112 Clearview Lane.

Peyton garnered years of glowing press from local and national media on her track record of buying and selling banks or raising money to bring them public. She’s a dealmaker kind of CEO who reportedly made over $16 million in 2011 on a deal she did with New Haven’s NewAlliance Bancshares. So how does this divorced single mom, who is clearly a double-digit million now, not have the cash to pay her damn taxes? She won’t answer reporter questions so maybe someone close to her will speak up and share what in the world is going on. As a CEO of a public company (well now a once CEO of Bankwell) shareholders have a right know why the leader of their bank, who is in charge of money, can’t seem to manager her own finances.

In April 2012 it appears she look $1.2 million from the NewAlliance deal payday and made a down payment on a huge 8,000ish square foot McMansion in ultra rich New Canaan, Conn. Town records show she then borrowed $3 million from Bank of America to fund the rest of the home purchase. So it’s not like she used up a bunch cash to buy a $4.2 million house out right. Which brings us back to question of why she’d risk her stellar reputation as a smart female CEO banker to not pay trade workers or pay taxes that fund schools and roads in the towns she lives in.

Something doesn’t add up. Is Payton a closet ultra Libertarian and doesn’t believe in paying any taxes? I would love to hear local residents or people who know Peyton and tell us what you think is going on.

Peyton Patterson Tax Lein

1 Comment
30 Oct

Biotech Firm NanoVircidies Sued For Executives Abuse of Assets

A Biotech company whose stock is soaring this year has caught the eye of short sellers after recent SEC filings showed possible self-dealings with company assets by its founders. I reported for Growth Capitalist last week, NanoViricides ($NNVC), was sued by a group of early angel investors in a shareholder derivative suit, filed in Colorado federal court, claiming company executives Anil Diwan and Eugene Seymour are abusing company assets and have breached their fiduciary duties. Yet last month the budding development company was still able to raise over $10 million through Midtown Partners with a private after market stock sale called a registered direct offering.

The RDO was offered to institutional investors at a discount of 26% percent. This means they can buy the stock after the close at the discounted price and then sell it into the market the next day at a profit. It creates trading volume in the stock but not necessarily long term value for main street investors because the hedge funds who buy the deal usually just dump the stock. Midtown Partners has done multiple RDO’s for NanoViricides raising over $30 million before fees in the last three years. But the recent offering apparently needed some help getting sold because Midtown, the placement agent, also had to offer 5 year stock warrants at $5.25.

When I asked Midtown Partners, Prakash Mandgi, about the pricing on the deal he tried to spin the terms explaining it was done at “a 20% discount to the 20 day volume weighted average price at closing and the warrants were issued at 120% of the 20 day vwap at closing”. Now here is why that is a suspect answer.

Instead of giving me the discount from the market price at the close of the day of the deal, he gave me the discount from the 20 day volume weighted average price. But, and this is important, traders do not compute NAV at 20 day VWAP prices, they mark to the closing market price. He was comparing apples to oranges.

So the units for $NNVC’s recent capital raise were priced at a deep discount (no matter how you spin it). The deep discount stock was not enough, however, and the deal also included warrants. The strike price of the warrants was at a premium to the “20 day VWAP”. Now, in the same way that the discount on the stock looks smaller if you use “20 day VWAP” instead of market price, the premium of the warrants looks greater when you use the “20 day VWAP”.

Here is an example of how this spin pricing works:

$NNVC Market price: 4.76
20 day VWAP price: 4.25
Deal/RDO Price: 3.50

So in this scenario the discount to the market price is 26.4% 1-(3.5/4.76)
The discount to the 20 Day VWAP price is 17.6% 1-(3.5/4.25)

To spin the deal as not being as bad, the bucketshop bankers like to talk about the discount from the VWAP price. Watch out if you hear your small cap stock broker or banker talk this way.

Now lets add the warrant pricing.

$NNVC Warrant Strike Price: $5.25
Market Price: 4.76
20 Day VWAP: 4.25

The strike price of the warrant computed using market price is 110% (5.25/4.76)
The strike price computed using VWAP price is 123% (5.25/4.25)

So using the VWAP price makes the warrants look less valuable. The lower the strike the more valuable the warrant. Bankers using VWAP pricing is a way to make the deal look less egregious than it really is.

Now NanoViricides CEO Eugene Seymour is fully aware of this magic math. Short sellers like Joe Spiegel of Dalek Capital Management, say they remember Seymour from a 90’s biotech stock that pumped up its share price but left long term investors in a dump. When Spiegel saw stock promoter, Patrick Cox, pumping the stock in 2010 he thought that signaled an opportunity to short it. One of the reasons listed in the investor lawsuit was that Cox had allegedly received inside information about a special biotech credit the company ‘might’ be able to get which would be worth millions of dollars. Cox allegedly published this info in his investor newsletter and the stock took a ride up. It also crashed latter when the info didn’t pan out. The suit also alleges there is a new stock promoter named ‘DrFeelGood’ who uses $NNVC stock message boards to rally interest in the stock with inside information. A look at the trading volume right before the biotech company files a press releases is something a regulator could be inspecting if they learn the stock promoters did not disclose they were getting paid to promote the stock or if they really did get inside info and traded against it.

NanoViricides hasn’t filed a response in Federal court yet to the investor claims and did not return a request for comment.

The medical technology they are working to build out, using plastic to attach to diseased cells and flush them through the blood stream, is possible but so far reads like a science project. Instead of news about the company completing medical trials investors keep hearing about their recent listing on the NYSE Mkt (the old AMEX or Scamex as some traders called it).

The details of how co-founder Anil Diwan is using $NVCC’s stock and balance sheet for side deals that benefit him personally can be found in my Growth Capitalist story.

5 Comments
11 Oct

SunTrust Pays a Billion for cheating Fannie & Freddie on Mortgage Loans

This week we learned SunTrust had to pay around a billion dollars to settle with the government over the mortgage fraud they committed against the GSEs. News of this investigation detailing how the bank committed the fraud was first reported by me at finance trade publication Growth Capitalist in November 2012. This means there is a high probability SunTrust knew for over a year they would have to pay a large fine for these actions but instead they kept telling shareholders their legacy mortgage problems with Fannie Mae and Freddie Mac were behind them.

Original news report Nov 2012 for Growth Capitalist:

November 5, 2012 by Teri Buhl

SunTrust under SEC Investigation

Atlanta-based SunTrust Banks (STI) is under investigation by regulators for alleged mortgage fraud against Fannie Mae. Whistleblowers who worked in SunTrust’s residential mortgage underwriting group filed a whistleblower suit with the Securities and Exchange Commission this spring. After the Washington, D.C. office of the SEC received the complaint a director of the SEC’s Atlanta office and a forensic accountant were assigned to begin an immediate investigation in the bank. Three people involved in the case told Growth Capital Investor interviews with SunTrust employees who worked in the bank’s mortgage unit started in May, along with an inspection of the methods SunTrust used to qualify prime loans sold to Fannie Mae.

SunTrust saw its stock price fall off a cliff in the financial crisis, and subsequently participated in the federal TARP program aimed at shoring up distressed banks. Investors who held the stock valued at $73 a share in October 2007 watched their investment wiped out when it fell to $7 by February 2009. Distressed investors who bought the stock in the high-teens at the end of 2011 have now witnessed a near 50% rise in the stock as the bank paid off its TARP funds and increased mortgage lending. Analysts started to boast buy ratings on the stock this year and Jefferies currently has a $32 price target on SunTrust.

But as bank executives have worked to clean up the troubled balance sheet created during its go-go lending years, 2005 to early 2008, the prior actions of its mortgage team could still place a dent in future profitability.

SunTrust financials show since 2005 they sold $233 billion of loans, with the bulk being bought by the GSEs (Fannie Mae and Freddie Mac). SunTrust built a special relationship with Fannie Mae who allowed them to have a custom underwriting system that connected to Fannie’s automated mortgage buying program. The Desktop Underwriter program, or DU, was designed to buy prime residential loans from banks like SunTrust who were heavy volume mortgage originators. The Federal Housing Finance Agency Office of Inspector General reported in an audit of Fannie’s lending standards that more 1,500 banks originated loans through the DU program in 2010, comprising 71% of all loans bought by the GSE. All SunTrust had to do was meet the right mix of income and personal asset qualifiers, enter them into Fannie’s DU system, and the loan was swiftly bought off the bank’s books, freeing up reserves for new loans. Fannie would then book these loans as ‘lender selected’ prime loans, even though there was little human inspection of the documents that qualified the borrower.

The SunTrust whistleblower complaint says bank executives then taught underwriters how to ‘trip the DU system’ to make it accept loans that were actually less than prime quality. All SunTrust had to do was make sure they were scored right and their custom DU Fannie Mae program even allowed them to re-enter borrower data multiple times until they got the right score. Internal documents from SunTrust management show how to avoid red flags or “beat the Fannie Mae DU system.” One whistleblower explains how they re-entered a borrower’s income ten times until they got the right acceptance score. Snapshots of these repeated DU data runs were turned over to the SEC in the whistleblower complaint along with internal memos that encourage underwriters to “get loans” into the DU systems.

“We knew we were making Alt-A loans but Fannie thought they we were selling them prime,” said one former SunTrust employee. “Then the bank would also book the loan as Prime because that’s what Fannie bought. This amounted to billions of Alt-A loans booked as Prime.”

Regulators are now looking at how SunTrust learned to beat Fannie’s underwriting system.

Bill Singer, a former regulatory attorney who reviewed the whistleblower claims, told Growth Capital Investor, “Given the allegations involving Fannie Mae’s auto-underwriting system, one truly has to wonder just what oversight and controls Fannie had in terms of the integrity of the data entered into its system, and, further, for the data entry interface itself. Beyond the necessary due diligence inherent in vetting the underwriting data, Fannie was also obligated, I would think, to make sure that its interface was not being gamed.”

The SEC is currently working with the mortgage task force, set up by the Obama administration, to investigate and prosecute individuals and financial institutions who contributed to criminal or civil violations that led to the financial crisis. The national watchdog includes prosecuting attorneys from the Department of Justice, state attorneys general, and securities enforcement attorneys.

“If it turns out that not only was fraudulent qualification data repeatedly submitted to Fannie but that the computerized interface was routinely over-ridden by laddering an applicant’s net worth, income, and assets in increasingly higher levels during a data-input session, the wrongdoing is no longer sourced solely from the originating bank but the finger must also be pointed at Fannie,” says Singer.

A third quarter earning presentation says the bank had $6.4 billion of mortgage repurchase requests – put-backs of under-performing or deficient mortgages by Fannie to the mortgage originator – with repurchase demand increasing 9% in Q2. Of that number only $1.4 billion have been recognized as a charge-off on SunTrust books.

In September SunTrust told investors the amount of money they reserve for repurchase requests was going to increase. The bank’s leadership claimed the increase was a direct result of conversations with Fannie Mae and Freddie Mac along with a review of full loan files, conversations that appear to have happened after the SEC began its investigation this May. When a bank adds to repurchase reserves it affects a bank’s capital levels, regulatory ratios and bottom line. SunTrust claims the 140% increase to repurchase reserves over the previous quarter should be the last significant increase to reserves.

Aleem Gillani, SunTrust CFO, told investors during its third quarter earnings call this month, “Our third quarter mortgage repurchase provision was $371 million. Consistent with last month’s announcement, we expect the resulting mortgage repurchase reserve to be sufficient to cover the estimated remaining losses from pre-2009 vintage loans sold to the GSEs.”

But analysts doubt the residential mortgage repurchases are over for SunTrust considering they also added another $400 million of repurchase requests in the third quarter. Repurchase requests are made on loans from 2005 to 2012. Ken Usdin, a Jefferies senior equity analyst, wrote on October 22 the downside scenario for SunTrust is, “mortgage repurchase losses are not done and litigation expense remains elevated.” SunTrust says of the third quarter repurchase demands, $78 million are from 2006, $213 million are 2007 vintage, and $68 million are 2008 vintage.

“If SunTrust was sued for not disclosing risk to its shareholders or civil mortgage fraud the SEC would ask for damages and three times those damages as a penalty,” says Singer.

SunTrust isn’t the only one regulators think gamed the GSE’s mortgage buying system. On October 25the Department of Justice filed a civil suit against Bank of America’s Countrywide unit for similar actions against the GSEs described in the SunTrust whistleblower suit. The DOJ claims the GSEs suffered at least $1 billion in losses from loans Countrywide sold that didn’t actually meet the standards they said they did.

In an email sent by one of the SunTrust whistleblowers after he read the Countrywide fraud suit, he said, “Two pages into reading this complaint it’s the same as ours just under a different name.”

A SunTrust spokesperson would not comment on the whistleblower claim or an SEC investigation. The SEC said it doesn’t comment on investigations. Former Fannie CEO, Daniel Mudd, is currently fighting a SEC securities suit that alleges the Fannie executive knew the bank was buying billions of less than prime loans in 2006 and 2007 but didn’t disclose this risk to shareholders.

1 Comment
9 Oct

Regulators Investigating Firms Sub-Account Use in Shorting Stocks

Government regulators are investigating investment firms that set up sub-accounts with their broker dealers to mask illegal short selling schemes. I reported for Growth Capitalist this week that FINRA and the SEC are currently doing a sweep of hedge funds and their brokers dealers for the use of sub-account under the hedge funds master account to essentially naked short a stock.

The regulatory investigation is on top of the short selling fines the SEC imposed on 22 firms last month. The government is focused on how firms short a stock within a five day rule before a new issue for the stock – which is basically naked shorting.

The use of sub-accounts, sometimes set up in names of people who are not actually the investor in the funds, is similar to the ‘rathole’ game Jordan Belfort used in the mid-90’s at his illustrious Long Island firm Stratton Oakmont. You might remember Belfort from his tell-all novel ‘The Wolf of Wall Street’ – which is now going to be a lucid and greedy portrayal of what can happen behind the scenes with stock trading in a major motion picture this year.

But regulators aren’t just looking at bucket shops trying to use straw buyers. Even if a real investor’s money is being used to short a stock in the subaccount, while the Master account is long the stock, say five days before a new issue (illegal practice Rule 105), FINRA or the SEC is likely to come after the firm. And they’ll fine the broker-dealers for not inspecting what the hedge funds are doing via compliance violations even if the broker-dealer had little or no intent on allowing the hedgie to do illegal trading.

Last year the poster child for this kind of scheme, William Yeh of Genesis Securities, was banned from nearly every stock exchange for what he did with master and subaccounts. You can read all about Yeh’s scheme in the FINRA lawsuit here.

I am now seeing Wall Street securities lawyers warning their clients to be on guard for this kind of thing:

Master/sub-account relationships raise a host of regulatory issues for firms and carry the risk that the firm does not know the identity of its “customer” as required by federal securities laws, including the Customer Identification Program (CIP) provisions of the Bank Secrecy Act, and FINRA Rule 3310. In some situations, despite the fact that there is an intermediary master account, a firm may be required to recognize a sub-account as a separate customer of the firm. FINRA examiners closely review firms’ procedures for determining the beneficial ownership of each account within a master/sub-account structure in accordance with the guidance published in Regulatory Notice 10-18. FINRA examiners will review firms’ systems for monitoring, detecting and reporting suspicious activity in master/sub-account structures, whether or not the sub-account should be considered the firm’s customer for CIP purposes.

And FINRA says it’s using 16 examiners to figure out if a hedgie/traders master account is basically being allowed to operate as an unregistered broker-dealer:

FINRA examiners also will focus on whether the firm is properly monitoring transactions in master/sub-account structures for potentially manipulative activity and reporting that activity, as appropriate, on a Suspicious Activity Report (SAR). In a recent enforcement action, FINRA sanctioned a firm for failing to adopt risk-based procedures to verify the identity of sub-account holders, even though these customers lived overseas in high-risk jurisdictions and could freely execute trades for their own profit, and also for failing to adopt effective procedures for detecting suspicious activity.

The problem with these regulator inspections is master/sub-account relationships have now also raised issues under other FINRA and SEC rules, such as margin rules and books and records requirements. Meaning firms could get hit with a ‘net-capital charge’ if the regulator thinks there is prop trading in the sub account and the real owner who reaps the dollars is different than the master account.

This is seen as a ‘Johnny Come Lately’ action by the SEC and FINRA by some small cap stock CEO’s who have been made to look like lunatics for complaining about naked shorting over the last decade and our Chris Cox/ Mary Shapiro style of leadership at the SEC did nothing about it. Others think it’s a witch hunt by the SEC because Main Street is frustrated at their total lack of getting BIG fines out of traders who break securities laws and keep making millions of dollars.

2 Comments
26 Sep

JP Morgan Shareholders: I told You RMBS Settlements Would be Mega Billions

The U.S. government and its regulators want a lot of money from Jamie Dimon’s bank because they think the institutions it owns did some really bad things when selling mortgage backed securities to every tom, dick and harry on The Street. This is a story I’ve done original reporting on for three years now starting at The Atlantic, then DealFlow Media, and have made multiple appearances on RT’s Keiser Report warning their RMBS fraud settlement will be huge. In fact, I told Max Keiser viewers in early 2011 it would be around $10 billion and then watched traders on the street shake their heads at me because they just couldn’t imagine it.

This wasn’t because I had a crystal ball and guessed right. It was because I knew the amount of documented evidence and whistleblowers against JP Morgan / Bear Stearns was so strong that the number would have to appear big to the general public; so our Too Slow To Do Anything regulators might appear like financial crime cops and say they got a big number out of JPM. Of course if the SEC, DOJ or NYAG had done something when the mortgage insurers first started to complain about Tom Marano’s (Bear Stearns Head of Mortgages) rmbs team not buying back faulty loans, like their contract said they would in 2007, just think of all the actual bond losses, and jobs, and individuals net worth that might not have been wiped out.

Now we see my peers in the financial press are just starting to wake up to the fact that JP Morgan is going to have to pay mega billions (like $10 billion plus) to settle fraud claims for the role of Bear Stearns mortgage traders during the housing boom and few other illegal things they did related to mortgages. That’s about two quarters of net profit for JP Morgan.

JP Morgan doesn’t want to make this settlement; especially if they have to admit guilt or wrong doing because that could cement more civil fraud settlements by all the investors who bought the bank’s RMBS. According to JPM’s quarterly filings, those investors equal at least $160 billion of private rmbs litigation these days. And while JPM is a very profitable bank ($2.4 trillion in assets) making money hand over fist it doesn’t have enough cash to payoff all those private rmbs suits at the dollar amount they could likely legally win if they ever went to trial.

Last month we saw JPM settle its first RMBS fraud suit with one of the monolines, Assured Guarantee. This suit, filed by top lawyers at Patterson Belknap, was key in finding over 30 whistleblowers to detail a mafia like level of deceit/cover up and out right stealing from their own damn clients. It also showed that in mid 2008 when JP Morgan found out about the really bad stuff Bear was doing they created a plan to : delay contractual payouts agreed upon and just up and change the calculations on mortgage loan defaults/payouts that Bear/EMC had been using so they didn’t have to pay the monolines around $1 billion of rmbs putbacks in 2008. Yep you heard me right. The monoline lawyers at PBWT found buckets of emails from JPM executives spelling out this nifty little plan. That’s why a NY State judge, Ramos, allowed JP Morgan to be sued for fraudulent conveyance in the Assured case. Because JPM flat out knew Bear committed fraud and in 2008 didn’t want ( or couldn’t afford) to pay it.

The Assured settlement was confidential of course but people close to the settlement told me Assured was ‘thrilled with the settlement number’ and it was close to the near $100 million of putbacks they were suing for. JPM didn’t admit wrong doing in this case but they sure spoke with their wallet by paying Assured once the monoline had secured most of their claims through beating JPM’s motion to dismiss.

So now we have the DOJ, NYAG, & FHFA wanting to see Jamie Dimon admit his bank owes RMBS investors a lot of money. The FHFA has been leaking settlement numbers to Kara Scannell at the FT for a few weeks now. The first number she reported was they were asking JPM for $6bn for the crap rmbs sold to Fannie and Freddie (the GSEs). Then we watched the DOJ, who always calls the WSJ went they want to get a message out, report the DOJ wanted $3bn and JPM said no way. When we see settlement numbers get reported like this it means the government is desperate to push a bank into a deal. They use press embarrassment and ‘lets scare the shareholders’ to get the bank to settle and my peers blindly print whatever the government tells them. The only journalist (besides me) I’ve seen continually follow the evidence/litigation against JPM with detailed, insightful analysis is Alison Frankel – a Reuters legal columnist.

Don’t let press reports of JPM adding to its litigation reserves fool you into thinking they’ve been properly setting aside money to pay this hefty bill. Unfortunately most of my peers in the financial press don’t know how to read the tricky accounting language JP Morgan uses to hide their problems and JPM doesn’t tell shareholders how the litigation reserves will be used. Heck, for all we know it could all be set aside to sue Max Keiser because they are sick of his ‘Buy Silver crash JP Morgan’ campaign. The amount of money JPM has set aside and the amount of money they have paid out in rmbs putbacks and litigation is often inaccurately reported or not reported at all because no one can figure it out.

The story these days isn’t really the number JP Morgan will pay, but the payout number compared to the legal reserves they have been booking. This is something I was first to highlight in May 2012 and now we see Bloomberg commentator Josh Rosner calling JPM out on the same issue–which is a good start but everyone of my fellow reporters covering this story should be writing about this at the top of their stories.

You see JPM’s legal reserves hit their bottom line (and their regulatory capital levels) so they don’t want to admit they will have to pay this money until the very last minute. But that’s not really fair to shareholders. In fact we don’t ever get see what is the current amount JPM is holding in their legal reserves. What we see is a reasonable estimate of what COULD be added to their legal reserves and it’s hidden in a footnote. Last quarter that footnote estimated it was ‘reasonably possible’ that around $6.8 billion could be added to legal reserves; but this number doesn’t effect their balance sheet it’s a just an estimate the auditors make them write.

We do see litigation expense, which comes right off the income statement and effects net profit, but that has been really small number this year ($400mn in Q2 and $300mn in Q1). And they don’t break down what is in this litigation expense. It could be taken from their legal reserves bucket or just be Sullivan & Cromwell’s legal bill. We never really know what is being credited and debited.

Robert Christensen of Natoma Partners has been warning his clients about this for over a year now in his very insightful quarterly newsletter.
He told me in an interview today, “It’s been increasingly clear in the last few days that JP Morgan has egregiously been under reserving.” Christensen goes on to point out that their is NO information publicly available in which you can count the current litigation reserves they hold on the balance sheet. That’s because he says the bank reports what is going into the legal reserves but not what is coming out. And the estimates we see in footnotes is not what hits the income statement or capital levels.

“We are seeing very big numbers coming out of the press on what JPM will likely pay the Government for rmbs suits but that’s just the government. What about the $100 billion plus of private rmbs suits that expect a settlement also?” warns Christensen.

And on top of all that the OCC, their bank regulator, and the SEC, their securities regulator, have been allowing JP Morgan to under reserved for RMBS lawsuits and putbacks for years now. It’s like the regulator is now part of the scheme to defraud JP Morgan shareholders.

Christensen wrote in his June newsletter:

Litigation expense recorded in Q1 2013 was $0.3 billion. There was no disclosure of how much of this amount was for litigation reserves or
how much was mortgage related… all such current and future claims are not included in the mortgage repurchase liability, but rather in litigation reserves. However, those amounts have not specifically been broken out and the total legal reserve for private label loan sales has never been disclosed.

Which basically means America’s largest bank thinks a main street shareholder doesn’t deserve to know what it’s doing to payback the clients it’s accused of defrauding.

2 Comments
19 Aug

Retail Broker John Carris Investments Accused of Massive Fraud by Regulators

A New York City based retail broker is accused of running his firm rampant with stock manipulation and fraud. I reported today for Growth Capitalist that FINRA wants to shut down and impose hefty fines on George Carris, founder of John Carris Investments, along with executives with in his broker-dealer for a bucket list of nearly everything illegal a broker-deal could do to cheat main street investors and his staff.

John Carris Investments made headlines last year after former New Jersey Governor and failed MF Global CEO, John Corzine, was seen looking for office space to sublet in the firm’s office in the downtown Trump building. Corzine’s connection to the firm began when his investment manager in his family office, Nancy Dunlap, got involved in a private placement deal for an electric car. Dunlap was on the board of directors of AMP Holdings who hired George Carris’ firm to raise funds through a debt security called a PIPE. It’s unclear how much money was ever raised on the deal.

Carris stands accused of selling PIPE deals to mom and pop retail investors who are not accredited. If true, it’s a blatant violation of securities laws to sell debt instruments like this to non-sophisticated investors. On top that, his top lieutenants used the firm’s retail clients to make large buy orders in penny stocks in an effort to prop up the stock even though the clients had not ordered the stock buys.

Former staff says there were days they couldn’t trade because net capital limits were violated and bills were overdue with their clearing agent. Meanwhile, Carris would spend thousands on personal entertainment with the firm’s cash, according to the regulator’s complaint.

When retail brokers were fighting to keep their jobs after the financial crisis Carris got some bucks from his Dad to start the broker dealer firm in 2009 promising big bonuses and robust salaries to retail brokers who could bring in clients. When George decided the firm needed more cash, instead of natural revenue growth, they set up Invictus Capital and sold investor subscriptions into the fund through their retail brokers promising annual dividends off the revenue of John Carris Investments. Millions were raised but the first dividend payments were from new clients investing in Invictus. John Carris Investments was operating at millions in loss that year so it would have been impossible to pay real dividends as the offering documents said they would.

Growth Capitalist wrote, “In 2011, John Carris Investments operated at a net loss of $3,090,148 yet $39,342 of dividends were paid out during that year.” FINRA called those moves a Ponzi scheme.

Carris plans to fight the FINRA suit and is still running his firm at 40 Wall St. He would not comment about the litigation. It’s unclear how much capital is left within the broker dealer. The regulator said he also choose not to pay payroll taxes for his staff and owes the IRS around $600k.

FINRA quotes from mounds of internal firm documents it gathered and clearly did their home work building the complaint but this is not the first time Carris or others at the firm have had FINRA violations. Which begs to question how affective FINRA sanctions can be to protect retail clients. If all the evidence in their case is true I’d expect the justice department to come knocking on George Carris’ door sometime real soon.

8 Comments
1 Jul

Baker Capital’s Wine.com Investment Failed- URL Up For Sale

This story has been updated.

One of the most expensive URL’s has been put up for sale by Venture Capital firm Baker Capital after nearly a decade of failed attempts to turn a decent profit selling wine nationally online. I reported today for finance trade publication Growth Capitalist that Baker signed an exclusive deal to sell the Wine.com business with a bulge bank but insiders say the URL is the only asset worth buying. Meaning so far offers are not exactly coming in and Baker is expected to take a huge loss on the investment.

Matt Marshall, founder of Venture Beat, first covered the legal saga of Baker Capital using unique voting rights to squash a sell to Liberty Media back in 2005. A sale that wine.com founder Chris Kitze and CEO George Garrick said would have made their investors $30 million.

Growth Capitalist writes today:

In 2004 CEO Garrick convinced Baker Capital to put in $17 million in an initial round which gave the venture firm 35% ownership, two board seats, and co-liquidation veto rights with Kitze. The right for a VC firm with a non-controlling stock interest to veto any sale of the company was rare but Garrick believed Baker partner Joe Saviano when he said they’d never use it. A mistake in vetting a VC firm’s character that Garrick said later in court filings he regretted.

Baker is basically the evil VC firm in this saga who got too greedy trying to push out the original investors but when they got control of wine.com they couldn’t turn it into anything worth selling for a profit or make a viable IPO. Court records show Baker invested at least $26 million into wine.com but it’s likely more millions were spent keeping it going for the last 6 years that they had control ownership. Amazon could be a likely buyer for the URL, a name that according to valuate.com is now worth $5.4 million, but so far they don’t appear interested in buying it.

Baker also appears unable to admit their collapse in assets under management. The firm’s marketing material says they have $1.5 billion of AUM. But a check of their SEC records for registered investment advisors from December 2012 shows only around $500,000 of AUM. They also haven’t been able to close out and start a new fund since 2000 according to Capital IQ.

The wine.com deal highlighted a rich investor/tech company founder spending millions and 3.5 yrs of litigation in California State court to show the world that Baker Capital cheated them out of millions–only to watch the Judge rule in total favor of Baker because of how the transaction was set up under Delaware law. Gibson Dunn were Baker Capital’s lawyers on the deal and now tout the case as a win-win legal strategy for VC investors who hold significant stakes in companies and act in their own interest. Meaning it’s a legal strategy for how to screw over growth company founders.

This one is a buyer beware scare story for all you new tech or Bitcoin company CEO’s looking to the VC capital markets to grow your company. Chris Kitze the famed former founder of wine.com who has a history of successful start-ups told Growth Capitalist he’d never use a VC again. He’s since built two new tech and media companies–one about to launch out of beta that has some supper secret James Bond like two-way communication platform that even NSA and the FBI can’t get into. Kitze, who can’t comment on wine.com because of confidentiality agreements, is likely licking his chops and smiling at Baker loosing all their investors money on this deal.

There are ton of great details about the decade long history of the players involved in this company along with reasons why online retail wine sells will likely never be profitable so go read it at www.growthcapitalist.com.

UPDATE 7-2-13: Venture Beat has followed my reporting and add their own news that a whopping $75mn of VC and Angle money went into wine.com in the last decade. They also confirmed the revenue numbers that my sources have been told by the bankers selling this dog but the wine.com CEO leaves out the fact he is still at zero EBITDA.

UPDATE 7-3-13: The Wine.com CEO who was placed in the job by Baker Capital has gone into spin mode. We stand by our news report at Growth Capitalist. Berqsund, the CEO, is likely worried about employees jumping ship off the news. The CEO, Rich Bergsund, doesn’t get to deiced when the company is up for sale…that Baker Captial’s lucky job.

Update 7–10-13: Apparently Baker Capital now has their wine.com CEO promoting company numbers that relate to cash flow two years ago (and one EBITDA number from 2010) without admitting what their net profits are for the last three years. Rob Manning, one of the few remaining people at Baker Capital, told the SF Business Journal his VC firm likes companies that generate cash flow. Rob also knows that M&A bankers like continued positive EBITDA (Earning before Interest, Taxes, Depreciation, and Amortization) and investors want to see a company can actually make money after a VC firm has spent 9 years pumping their cash into it.
Former public auditor and consultant Francine McKenna told this reporter, “Cash flow is very subjective and doesn’t equal positive EBITDA, positive EBITDA doesn’t equal a net profit. Tech companies that are getting ready for an IPO or sale love to taunt revenue or sales numbers but that’s not a picture of profitability.”
You see taxes and interest eat up a lot of cash flow. If a company tells you they have positive cash flow for one year they could just be delaying paying suppliers, sold an asset that year (like one of their on ground wine shops) or simply be paying their bills late. So when I see CEO’s responding to a news report with half baked numbers (that might not even been audited) I know they are in full spin mode.
Baker Capital also doesn’t deny they hired a big bank to sell wine.com. I thought this story was newsworthy for Growth Capitalist subscribers because it showed a retail frontier that VC’s have pumped mega millions into but have been unable to nail down how to make the online business model really profitable for national wine sales. It also was a tale of how company founders can get screwed over by VC’s when they give up to much control for fresh capital.

Baker Capital (wine.com’s owner) and their attorneys were called for comment days before my news report ran at Growth Capitalist. All chose not to respond to the facts and comments we were planning to report.

2 Comments
« Previous Page
Next Page »