Social Rejection?: Hedgie Steve Cohen Wants Out of East Hampton

The world’s most infamous trader wants to get out of East Hampton, NY. Yesterday I reported for the New York Observer that Stevie Cohen, of SAC Capital, is trying to broker a private deal to sell a $60 million ocean front home he bought less than a year ago. His reasoning, according to a person on the deal, is East Hampton is ‘too Jewish’ and he has instructed people to start looking for another home in other Hampton enclaves.

This one real estate transaction has fueled a social media debate about what he’s really doing. Having lived and worked among Cohen-ites and his SAC Captial traders for the last decade out in Connecticut’s gold coast I don’t think his comment is a signal of anything anti-Jewish. Instead I believe it shows his social network could be failing since the hedge fund he founded plead guilty to supporting a culture of massive inside trading.

Cohen paid the highest fees to broker dealers who moved his trades for over a decade but according to people who worked with him, starting from his early days a Gruntal & Co, they hated him because of the way he did business. I’ve been told stories of dealers at Lehman leaking other funds trade volume to Cohen and Cohen even funding smaller hedge funds to use them to create liquidity when he wanted to short a stock. The years of alleged cheating to beat the markets has left sour grapes in mouth of many on Wall Street. And now that he’s shutting down his large hedge fund his volume of fee paying to The Street will shrink. This could mean people aren’t as motivated to play friendly with the Cohens in their social time.

Stevie Cohen Family photo

Before we ran the story about why he wants to sell his East Hampton home I had multiple conversations with Cohen’s outside pressman (aka his block and tackle Flack) Jonathan Gashalter about what was going to be reported and he expressed anger at the idea we’d print the ‘too Jewish’ comment. He also would not go on the record to say neither house is up for sale before he went to print. No one knows what’s really in this hedgie’s mind when he said it and I’m sure Cohen never thought it would get repeated. Stevie Cohen has gotten stories held or changed for years through Gashalter but as the market ( and my peers in the media) are apparently waking up to how he operates it was refreshing to see the New York Observer stand by the news report and my reporting.

The news on anything Cohen, or what his family, does isn’t going to stop. Nick Verbitsky, director of Frontline’s new blockbuster film ‘To Catch a Trader’, told me the FBI even admitted that have three stock trades they are still investigating that could lead to criminal charges against Cohen. It’s my understanding one of them has a whistleblower willing to flip on Cohen; which is something we have yet to see in the DOJ’s seven plus years of trying to nail Cohen for inside trading.

Even if the DOJ is never able to get a criminal charge against Stevie, how the markets and his social network respond to what ‘they think’ he’s done is much more of a barometer for how The Street will or won’t police itself.

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.

Mastercard Hates Bitcoins

The new boss in charge of giving out a MasterCard licenses has no intention of allowing the brand or any bank that does private label cards to use Bitcoins. In fact, he nearly bragged to me about killing the BitInstant deal with a U.S. bank for the first planned $BTC card this year.

Stephen Ruch, the MasterCard executive, is just a year into his job with the company, and while he monitors the Bitcoin space he told me he is still under the impression it’s one big Ponzi scheme. Even after meeting with this person socially multiple times, where I explained the mechanics of how digital currencies actually work, he still had a blind eye to its legitimacy. His biggest fear was it would ‘hurt the MasterCard’ brand.

RT’s most popular TV journalist, Max Keiser, weighed in on MasterCard’s fearful attitude telling me, “We can say without equivocation that firms like MasterCard, Visa and the TBTF banks like JPMorgan and Goldman hate the idea of ever having to compete for business again. They have grown comfortable in their corrupt world of writing laws for themselves without any regulatory oversight. They enjoy the exorbitant privilege of bilking the American economy with extortionary transaction rates. They are scared of Bitcoin. And they should be. It offers transparency, cost efficiency and anonymity.”

Now Ruch isn’t blind to helping MasterCard make every penny it possibly can but it appears it’s going to take the likes of someone like Jon Matonis to have a little sitdown to open this man’s mind. On October 18th Ruch sent me a link to a story on ‘Why Bitcoin will fail’ that his staff pulls together for him to monitor the Bitcoin space. I thanked him for the link and responded I was a little behind on $BTC news. Ruch then said responded he thought a lot of people involved in the Bitcoin business were not on the up and up.

I thought WOW he is really afraid of this thing. Whenever I hear anyone think the digital currency is a Ponzi scheme it makes me realize they are just not educated on the subject or they are close minded to the viability of a currency outside the paper money sphere. Now Ruch is an intelligent person but this is also a man who told me he thinks Fox News in the morning is a credible source of information.

Peter Vessenes of CoinLab has often drilled into me that $BTC has to get accessible to scale, to get in the hands of mass main street, and draw the interest of institutional money. But if we’ve got a major road block, at one of the two most powerful institutions who could open the floodgates for Bitcoin accessibility with a debit-like BTC card, then the digital currency space could have problem.

Well at least there is always Visa right?

Editor’s Note: I met Ruch socially and not in an official interview but he knew he was speaking with a journalist who has written about Bitcoins. This is just one of those factual events I felt was important to publish and didn’t think getting MasterCard’s permission to go on the record was needed. The Stamford, Conn. resident, Ruch, official title is SVP/Global Head of Growth Innovation & Planning- Franchise Development

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.