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19 May

China Stock ZST Planned “Go Dark” Scheme to Cheat U.S. Investors

UPDATE 6-3-13: I reported for Growth Capitalist today that the firms who ZST went to for their ‘go dark’ plan in 2011 were Scorpion Capital and Global Hunter Securities.

Original Text
A wealthy businessman from New Canaan, CT is single handedly taking on a China company, ZST Digital, that gutted U.S. investors who bought into its NASDAQ-exchange traded stock. Peter Duetsch, who owns a New York-based wine distribution company, has watched U.S. regulators stand by and do nothing to go after the China reverse-merger companies and the boiler-room American investment firms that promoted their now worthless stocks. So after he saw ZST simply stop filing financial statements in a move to ‘go dark’ he asked his long time business lawyer David Graff to use the Delaware Courts to inspect what really happen. What he found made his blood boil.

I reported for Growth Capitalist on Thursday, the court appointed receiver, Rob Seiden of Confidential Security and Investigations, pulled off a move no one has witnessed yet in the aftermath of Chinese reverse-merger frauds. Seiden got control of ZST’s parent company assets and bank accounts in China. He found this company is sitting on tons of money and not in dire straights. So why did it stop filing financial statements with U.S. regulators and make its company seem to have gone out of business?

I reported messages recovered on ZST’s CFO cell phone during a raid of his home show the company was allegedly working with a few U.S. investment firms in a scheme to depress the stock and then buy it back for cheap and take it private. Apparently we now have Wall Street types helping the Chinese raise money from main street investors and then say screw you to U.S. securities laws because they think the long arm of the American law can’t reach them in China. But Deutsch said, “I can’t let them do that to us” and used a bulldog private eye, Seiden, to attempt a global take down of these alleged foreign cheaters.

Deutsch, who has gotten the Delaware court to say he’s owed $32 million by ZST for his 3,431,370 shares in the company hasn’t gotten his money back yet but my report at www.growthcaptialist.com shows how close he is. Last week Seiden even found the ZST owner in China was so bold, he moved cash out of the company into his personal bank account in the last 30 days while litigation was ongoing. That’s fraudulent conveyance, which could be litigated against the CEO personally in a China court. And you bet Deutsch is going to try to use that info to get the company to pay up on the U.S. court ordered claim.

Attorney David Graff told Growth Capitalist, “Based on a review of assets we seized, and our own investigation in China, we think we’ll be able to show ZST has $75 million to $100 million in cash.”

This wasn’t the only China reverse merger stock Deutsch invested millions in. Financial journalist Roddy Boyd questioned why a small time investment advisor firm in New Hampshire, run by Carol and David O’Leary, was putting Deutsch’s millions into these China stocks after research reports came out advising investors of problems in their SEC filings. Boyd’s story questioned why Deutsch was going long in barley collapsed companies–it’s not like Deutsch was a professional investor. Deutsch’s attorney, David Graff, says his client just trusted the audited financials statements filed with the SEC. But I haven’t been give an on record reason from Deutsch on why he spent so much money in these risky China stocks.

What I do know is if Deutsch, Graff, and Seiden pull off this international take back expect more U.S. high net worth investors to use private eyes and civil litigation to hit the wallets of China company CEO’s who screwed them over on reserve merger stocks and not wait for the likes of the SEC to fight for their investor rights.

To follow the outcome of the case check out my reporting at www.growthcapitalist.com.

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23 Apr

Fannie Mae Keeps Asking for Billions of Mortgage Putbacks from Suntrust: SEC Silent on Investigation

The SEC investigation into SunTrust Banks alleged gaming of Fannie Mae by the bank’s wholesale mortgage division is back in the news. Gretchen Morgenson, New York Times columnist and reporter, has picked up on my exclusive news reported in November for finance trade publication Growth Capitalist. Morgenson has a habit of journalism shoplifting by writing about other reporters original investigative news without crediting them. But it’s at least refreshing to see the New York Times try to hold the SEC accountable for not moving faster on the Suntrust case. A case that Barry Ritholtz headlined this week could be the “biggest fraud in mortgage history”.

I reported in November for Growth Capitalist, the Atlanta office of the S.E.C. started interviewing people involved in the case almost a year ago and the worry is if the last action of alleged misconduct by Suntrust was in 2008 then the regulator could be near its statute of limitations.

Filed with the S.E.C. more than a year ago by a former SunTrust employee, it appears to be languishing even though time’s a-wasting, writes Morgenson.

The whistleblowers got Morgenson to write about the lawsuit the SEC is looking at in hopes of putting pressure on the securities regulator to act and the Dept of Justice to get off their rears and charge Suntrust for a crime that was very similar to what they charged Countrywide for in ‘The Hustle’ program.

Ritholtz, an asset manager who runs a well read financial blog called The Big Picture, published this view by housing analyst Mark Hanson yesterday:

Bottom line: Agency “Shortcut” loan programs, exclusively originated by SunTrust, made loan underwriters impotent in their due-diligence; these Alt-A loans that should have carried higher interest rates and been originated using more stringent guidelines; were sold to Fannie Mae as premium full-documented loans, and have resulted in abnormally high default and loss rates relative to true “fully documented” loans.

Suntrust is one of many banks on which Hanson has focused for years, warning hedge funds, of problems pertaining to high-risk legacy loan originations and fraud that has led to large rep and warranty liability and bank loan losses. He has also spoken with the Suntrust whistleblower named in the SEC suit about the alleged pattern of behavior to wholesale billions of Alt-A loans to Fannie Mae disguised as Prime loans.

The impact to Suntrust net profit, because of mortgage repurchase demands, is hardly visible yet because the bank sold near two billion dollars of Coke stock last year to pay for a $375 million mortgage putback charge. You see Fannie Mae knows prime loans they’d bought from Suntrust from 06-08 were really Alt-A low doc loans so they keep going back to the bank and telling them it’s time to honor your contract and buy these defunct loans back. On Suntrust Q1 earnings report, released Friday, they admitted another $491 million worth of loans had been submitted as putbacks. Over the last five quarters the average quarterly putback demand from the GSEs has been around $400 million. That’s a lot of faulty loans they sold the taxpayer funded Fannie Mae.

In September 2012 when Suntrust sold the Coke stock the bank also issued a press release that this should be the last of their legacy putback request from the GSEs. And now we see how silly that statement is because 2013 Q1’s mortgage putback request of $491 million is actually the highest over the last five quarters. Suntrust investor relations team even came up with an excuse that the GSE has ‘accelerated their work pace of auditing the vintage loans’ bought from Suntrust and that’s why they still have high mortgage repurchase demands. Suntrust doesn’t actually buy all those repurchase demands back right away from the GSE. They stall and claim they have to do their own audit and then slowly take charges of the faulty loans sold to the GSE on their income statement.

The big hit to earnings that Suntrust could face is if the DOJ grows a pair of balls and charges the bank for billions of fraud like they did Countrywide last fall. Of course the other issue is the new chiefs at the SEC and DOJ financial crime unit could just gloss over all the evidence turned in by the Suntrust whistleblower and then as Ritholtz says we’ve seen:

” willful purposeful fraud for profit resulting in taxpayer obligations for many billions of dollars.But whatever you do, you cannot prosecute any banks for this — we don’t want to disrupt the global economy! ”

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