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.

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.

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.

The Other Side of Stevie Cohen’s Market Manipulation

The DOJ showed us they want to turn the world’s most famous hedge fund, SAC Capital, into the most notorious hedge fund when it filed criminal charges against the 1,000 person firm last week. SAC, which stands for Steven A. Cohen its founder, is accused of creating a culture where inside trading was encouraged for over a decade. This means traders who worked under Cohen got non-public material info about a public company and then went long or short the stock–while the rest of main street was clueless. The DOJ filed a long complaint detailing dates and time they think this happen at SAC but the Justice Department missed an element of seediness that happens within the outside hedge funds Stevie Cohen has invested his personal money in.

According to people who have worked within these seeded Cohen funds the alleged scheme works like this. The non-SAC fund hirs young traders anxious to get into a hedge fund and tells them what names to trade in and out of based on fund research. They are given long or short large buy orders and a day or two after the trade is made they watch it fall apart. That’s because according to traders who’ve been part of the transaction Stevie’s just moved into a sizable position against their trade and the edge he has with inside info proves to be the winning trade.

“We were just there providing liquidity for him. But I had to take the loss on my P&L,” said a trader on condition of he’d never get another job if Stevie Cohen knew he talked to me.

The non-SAC fund, which usually has additional outside investors, figures if the sucker rookie trader is any good they can make up the loss on another trade. This way they make their whale investor (Stevie Cohen), who usually own half the assets under management in the fund, really really happy. It’s kind of like the entry fee for getting Stevie to give you any money at all.

One such fund that’s allegedly done this in the past decade is Scout Capital out of New York. I know this from speaking with people involved in the fund at one time or another. When Scout was just starting out in the early 2000’s they had less than $1 billion of aum and half of it came from Cohen. The Scout founders, Adam Weiss and James Crichton, never worked for SAC Capital (according to their company bios).

“If the intent is to wash trades or manipulate the market, then “NO” it’s not okay,” says Bill Singer former FINRA enforcement lawyer when asked if the scheme was legal. “If he (Cohen) is merely segregating short trades in one subset of accounts and longs in the other, it’s not that an uncommon use of subaccounts albeit via a hedge fund platform.”

Except in the above example this isn’t a ‘subaccount’ of SAC that is being used. It’s a totally separate fund that Stevie doesn’t have a investment advisor role in. So for the DOJ to use this ‘wash trades’ behavior to charge Cohen personally they’d have to get someone at one of these non-SAC funds to flip on the mafia-like hedgie fund titan. And while that might be the DOJ’s teenage fantasy it’s been as impossible as getting Kate Upton to do a full Penthouse spread.

The DOJ stopped short of sending Stevie Cohen through a perp walk himself when they charged his firm on July 25th. When I was on the scene last Thursday there weren’t FBI agents handcuffing the two-story water-side building on the edge of Old Greenwich, Conn. The justice department, who says it wants to seize any and all money SAC made with inside trades, didn’t even ask a court to freeze the funds assets. A call around to broker dealers who trade with SAC shows they are sticking by the firm. Just think if the hedge fund giant beats the DOJ or SEC case then the broker dealers would have given up millions in fees from SAC and likely be put on Cohen’s blackball list. So if the governments plan it to totally scare the rest of The Street from enabling SAC to stay in business it isn’t working.

I’ve written before the DOJ has had a hard on for Cohen for some time now. But to make it a really good humpty dumpty (see explanation number 2), the DOJ’s top dog Preet Bharara will need a lot more dirty evidence (like Stevie doing wash trades) to put Cohen in serious pain.

EDITOR NOTE: I didn’t bother calling SAC’s overpaid outside press Jonathan Gashalter for comment because he’ll just deny it’s even thinkable for Stevie to do this. But I think it’s totally possible so I reported it.

Roll-Up King Jonathan Ledecky is Back

A 90’s investment manager who made a killing buying small independent companies in the same business line and stuffing them into a public company is back. Harvard alumni Jonathan Ledecky has just sealed a deal creating the first SPAC in the mobile advertising space. I interviewed the SPAC CEO for Growth Capitalist today who says Ledecky is going all in with a big bet on this space. This means they expect to start gobbling up more digital ad companies–especially ones who’ve figured out how to make revenue off those annoying video ads media companies like Forbes force you to watch before you get to their stories.

Last year Ledecky started buying video gaming companies but quickly branched out from trying to score off a Zynga like play. Then he found this ad executive Robert Regular and wooed him into allowing his private advertising exchange company, Kitara Media, to be part of the SPAC. Regular got a nice salary contract and ten million in the SPAC’s stock in return for agreeing to be Ledecky’s CEO. This is good news for budding start-up guys in mobile advertising because it means there are deep pockets out their looking to buy your company if you fit with the SPAC’s strategy. You’ll need $5-15 million in revenue and the SPAC* CEO Robert Regular (it’s called Ascend Acquisition Corp $ASCQ) might be interested in doing due dilly on your budding business.

This isn’t Robert Regular’s first rodeo either. He’s was part of a team that made sick big money on the sell of Right Media to Yahoo for $800 million six years ago. He then built Kitara Media from a boot strapped budget over five years, saying no-no to Vulture Capital money, and some how has it earning real money…like $20 million in yearly revenue. They haven’t filled SEC documents detailing how he built Kitara yet (audited Balance Sheet and Income Statement is coming) and wouldn’t tell me if there is actually a net profit. But in our Growth Capitalist interview he extolled he thinks the market will see it as real company, making real money , with a solid chance to make a ton more (I’m paraphrasing).

Check out www.growthcapitalist.com for more insight into the deal and additional VC interest in the space.

*SPAC = Special Purpose Acquisition Company. Hedgies go out and get investors to trust them blindly and give them millions. They use this shell company to buy other companies but it’s not totally clear what they might buy when you first invest (RISKY). Then without the pain in the butt work of a roadshow for a traditional IPO (or expensive investment banking fees) they just do a reverse merger with a private company and boom it’s public because the SPAC already went out did the leg work to get that neat little ticker symbol ($ASCQ) so it could trade on the public markets. This stock is usually really cheap at first and the gamble is the guys running the SPAC will actually buy stuff that the market thinks can make real dollars…not just have manipulated cash flow statements and revenue numbers that they don’t always collect the cash on. If you’re selling your company into the SPAC and you have to lock up all the stock they gave you but then you get sold out of the SPAC or shut down then you could get screwed and not earn a lot (RISKY). But if you get to stay in and one of the companies in the SPAC earns a NET PROFIT and people buy the stock. Holly Cow your little start up just made you a millionaire. Only three SPAC deals have been done this year according to this research. So it’s going to be interesting to see if hedgies are going to start make an investing comeback with them.

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.

Hedgie Investors file Securities Violations Complaint against Greg Imbruce with Texas Regulators

New Canaan hedge fund manager Greg Imbruce is back in the hot the seat. I reported for Growth Capitalist that high net worth investors from Connecticut and Texas filed an explosive amended complaint that says Imbruce took his largest investors’ money and represented to his other limited partners that it constituted his own personal investment. A former staffer for Imbruce’s ASYM funds, as well as a multitude of other limited partners, all swore in signed statements to the Connecticut Banking Commission that Imbruce lied to them about having ‘skin in the game’ when he was soliciting investments into his funds. This is similar behavior to how we saw the SEC come down on two other local CT hedge funds Aladdin Capital and New Stream.

In recent months Imbruce investors voted him out as general partner in a move to eliminate him profiting from the possible sale or IPO of an oil gas portfolio company the funds own called Starboard Resources. Starboard filed SEC documents this month that show it intends to go public. A transaction Imbruce could profit handsomely from if he did not have issues with looming securities violations in the state of Connecticut and Texas. Either state could issue cease and desist order. But Imbruce isn’t taking this sitting down and refuses to go, claiming as General Partner (with funds he allegedly didn’t actually invest) he gets to vote along side his limited partners on his ousting as the hedge fund manager. Investors are now basically dependent on the old laws the Connecticut Banking Commission had, before the implementation of Dodd Frank, to help them ban Imbruce as an investment advisor and take away his ability to earn performance fees.

A letter seen by Growth Capitalist shows how the Connecticut Banking commission, under Howard Pitkin’s reign, is responding to funds with smaller amounts of assets under management. Imbruce had asked to be exempt and not fined for failing to file with the state that he is conducting business in as an investment advisor. But the Banking Commission denied his request and issued an opinion that he DID have to register with the state. They also warned him regardless of if he registered with them or not they could still come after him for fraud. The banking commission doesn’t have the ability to charge Imbruce criminally but does refer financial fraud cases to the Justice Department. If Justice got involved they could charge Imbruce with wire fraud for his alleged false statements made in marketing materials sent to investors in other states. I previously reported on the Banking Commission investigation into Imbruce for Growth Capitalist in March.

Now I’ve learned his investors in Texas filed a complaint with the Texas Banking Commission on June 16th and the Texas regulators have responded they are looking at the complaint. Still, the investor fraud lawsuit against Imbruce has been going on for one year now with slow progress made on getting him to settle or leave the fund. Investors did force him off the board of Starboard and took away his control of the company. Also 87.5% of investors in all three funds Imbruce runs finally voted to remove him as the hedge fund manager. They replaced him with Charles Henry III who is not taking fees to run the fund and is also a limited partner. Henry is there to basically collect votes now.

Imbruce tried a tricky legal tactic this January when he offered his investors rescission and restitution of their full investment into the fund plus 6% interest. This means he planed to give them back their full investment if they stopped suing him. Imbruce hoped if the investors did not respond within 30 days to the rescission deal they could not have sued him in CT state court for securities fraud. But the lawsuit shows investors learned Imbruce didn’t have the millions he promised to pay back in a bank account. In Texas this false promise, which reads like writing a bad check to get a deal done, can be a civil fraud charge.

Texas Securities Act section 33H (1) says

The offer shall include financial and other information material to the offeree’s decision whether to accept the offer, and shall not contain an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

If the investors can prove in court Imbruce didn’t have the cash he made in the rescission offer that’s clearly an untrue statement that would violate the law and might have criminal repercussion.

Imbruce also operates Glenrose Holdings, another investment advisor firm that he refuses to register with the state of Connecticut. That business has recently done deals with investors in a small penny stock called American Petro Hunter. Before he did energy deals for the Madoff family fund (which earned him a FINRA violation) he was analyst on the energy research desk for Jefferies.

Imbruce hired a former enforcement lawyer with the banking commission Rick Slavin to defend him against the Banking Commission investigation and his investors fraud suit. Attorney Slavin of Cohen & Wolf told me, “Mr. Imbruce has only acted in the best interests of all limited partners while achieving significant returns for his investors. Mr. Imbruce has done nothing wrong. Under the circumstances he will respond more completely at the appropriate time.”

Imbruce hasn’t actually paid his investors any returns in recent years or shown them his books even though investors made multiple request. The next step will be for the investors to file a books and records request in Delaware Chancery Court. A move we saw as very fruitful for another New Canaan investor Peter Deutsch. As I previously reported Deutsche was able to get the courts to give his attorney power to do a Marshall raid on the home of a China stock executive involved in ZST Digital. Deutsche as a result got records showing all kinds of fraud and is near a mega million case settlement with the China company.

Imbruce, who is an avid sailor and member of Stamford Yacht Club, recently bought a $2 million home at 92 Turtleback Road in New Canaan. Around the time he learned his investors were going to sue him town records show he transferred the home into his wife Alana’s name for $1 dollar. That transfer is also now part of the investor fraud suit against him with a claim of fraudulent conveyance of assets.

The investor’s attorney (another New Canaan resident) Jonathan Whitcomb would not comment on his clients litigation.

CT Banking Commission Investigation Letter to Greg Imbruce by Teri Buhl

NY State Court Halts Judge Shopping in RMBS Putback Cases

UPDATE 4pm: The NY Courts have now issued an official policy about their ‘One Judge’ for RMBS cases. Ironically on the same day I started asking questions about these private decision they are now public!

Orignal Text
Banks looking to judge shop in RMBS putback cases filed in New York State court are going to get shut out of the process. Apparently there are so many cases to litigate against banks, like JP Morgan and Credit Suisse selling billions of garbage mortgage securities to investors, that administrative judge Sherry Heitler has decreed all RMBS cases as of March 2013 now go to one judge. Roberta McClinton, Heitler’s law clerk, confirmed this today explaining that similar cases need to go to one judge now because it’s for ‘judicial economy’.

This news just came to light after I saw a non-public letter from Judge Heitler to JP Morgan’s outside counsel ,Andrew Cereseney and Robert Sacks, stating she appreciated JPM’s letter about their desire to have the NY AG’s civil fraud case against JP Morgan assigned to Judge Ramos but the court’s new policy is all commercial RMBS cases are now going to Judge Friedman. The problem is this doesn’t totally makes sense. The court is telling me on the record it’s for ‘judicial economy’ that like-cases go to one judge, and Judge Ramos already has the bulk of rmbs cases against JP Morgan, so why in March did the court suddenly choose to divert rmbs cases to new a judge? A judge who hasn’t seen a boat load of evidence about the ‘dogs’ and ‘sack of shit’ loans these bankers admitted, in their own emails, they were selling as safe investments to pension funds. Judge Friedman is known as a liberal ‘for the people’ judge. Judge Ramos has made comments in open court that these fraud claims by the monolines against JP Morgan are not something he is in favor of litigating.

Attorney Cereseney apparently grew a conscious after the NY AG’s case was assigned to Judge Friedman because in April he up and quit his lucrative job as partner for DeBevosie & Plimpton and joined the Securities and Exchange Commission as it’s co-head of enforcement. Robert Sacks has remained leading the dirty defense ligation of JP Morgan at banksters favorite law firm Sullivan and Cromwell.

Now here is where this gets even odder. Apparently JP Morgan’s lawyers starting circulating Judge Heitler’s letter around to other law firms that represented the banks. Judge Heitler’s PR man David Bookstaver confirmed today this letter was private and doesn’t have to be filed in the case records because it’s from an administrative judge to the lawyers involved and not from the judge on the case. Lawyers for DLJ Mortgage, a division of Credit Suisse who is also being sued for civil fraud by the NY AG, got a copy of Heitler’s letter and used it in a motion to file for judicial intervention last week. Richard Jacobson of law firm Orrick, was begging the court to give them Judge Kornreich in a billion rmbs suit filed by a trustee for aggrieved investors against Credit Suisse. The rmbs in this case is called Home Equity Asset Trust 2007-1 and was packaged by the traders at Credit Suisse; the trust is being represented by David Abrams, of Kasowitz Benson Torrres & Friedman, who is also helping the FHFA try and recover billions in rmbs fraud. Judge Heitler’s letter being circulated feels like the big bank lawyers were trying to warn each other you’d better get your motions for favored judge in cuz this legal trick is about to get shut down.

Now that some of the early RMBS putback cases are getting decided on it’s becoming clear who favors the banks and who favors the law. That’s why we are seeing big money law firms file all these ‘I have to have this Judge’ motions this year. Judge Kornreich has been ruling in favor of banks on these cases but she has also been getting over turned in appeals court. Judge Bransten has favored the investors who lost billions in RMBS and her decisions are holding up in the appeals court. It’s the wild west of case law being made in these mortgage securities lawsuits and it’s becoming clear who has the balls to make new decisions that will likely cost the banks billions in litigation payouts.

When I first saw the NY AG’s case assigned to Friedman after it was initially slotted to Ramos I thought Ramos had a conflict of interest with one of the lawyers on the case but that idea wasn’t proven. And while we now have some kind of answer from the court about the new judge assigning policy, the timing of the whole judge thing still just seems a little off.

What has become clear is now NO ONE can judge shop any RMBS cases not assigned yet. And you bet big law is about to learn everything they can about one lucky judge Marcy S. Friedman.

Judge Heitler Letter NYAG v. JPM