Tuesday, June 12, 2012

Ha! Three guilty in $194 Million Ponzi scheme

And Ha again!
In our July 5, 2007 post "Magical Markets, Enron and GE and a New Word" I related:
I was looking for Alt/Renewable energy ideas a couple nights ago when I found a story in a middle-market newspaper that had a sentence in it that is now the front-runner for funniest line of the month:
"We protect against all losses through hedging"
Here's the set-up. Some forex guys just bought a $3 mil. historic mansion to run their business out of. They're doing some smaller scale Yen carry-trade "arbitrage" (retail min. $50K). They borrow from the BOJ at 1/2 point and say they invest at 5%. Looking at the yield curve, you have to go out seven years to get 4.99%. Borrow short-term, lend long-term.

Then they gear it up 2.7 times and are showing their investors 12% risk free. At that point in the story I started laughing so hard my eyes were watering.

Right now the 30-day treasury yield is 4.51%. That is the risk-free rate of return. That's the number you plug into your slide-rule to do options pricing.

If someone is offering you greater than 4.51% at 1:00 pm EDT on 5Jul07 you are, by definition, taking on risk. Period.

Now don't get me wrong, risk is good. Risk allows you to die with a garage full of stuff. Like a helicopter. In the garage. On your yacht. There was one with a 3000 square foot master suite offered on ebay last year for $168 million.

The second problem with the story is: the minute you use leverage you no longer have an arbitrage. You might still have a really, really good hedge, a six-sigma hedge; but it's not an arbitrage. Remember that wonderful term of the eighties "Risk Arbitrage"?
Only one of the words was accurate.

There are three types of people who would say "We protect against all losses through hedging"

1. A fool-they don't even understand the game.

2. A moron-they may have some nifty swaps and other derivatives to hedge against the one and two standard deviation event risk, but what about the 3,4 and 5 SD risks? Last night I heard a farmer in Kansas say "We had our last once-in-a-hundred-year flood in '86". Now that guy understands, I'd bet he knows more about markets than the folks at LTCM.
I'm sure the forex guys have the currency risk covered, they may even have something to cover a magnitude 9.5 Tokyo earthquake. But what if your counter-party had physical exposure you didn't even think of? Maybe their bullion vault was on the fault-line. There's no Force Majeure, only insolvency.

3. A liar.

The guys I traded with as a pup would right now be figuring out how they'd like to furnish the historic mansion in a middle-market-newspaper town that they just took from the 1, 2 or 3 above, forex guys.

Andy Fastow of Enron fame said "I can strip out any risk"; well maybe, how'd you hedge the risk of doing six years hard time?...

...I forgot to mention the "journalist" who wrote the carry-trade story was touted as being "the author of more than 20 books on business and investing".
Here's the finale, from the Minneapolis StarTribune:

Jurors convicted three men of helping convicted fraudster Trevor Cook to bilk 700 investors of $194 million in an international scheme.
Jurors in Minneapolis on Tuesday found three men guilty of helping convicted fraudster Trevor Cook pilfer the savings of more than 700 investors in an international Ponzi scheme that targeted conservatives and Christians and spoiled the retirement dreams of mostly elderly victims who have little chance of recovery.
All three were found guilty of all the charges resulting from the $194 million fraud scheme -- the second-largest Ponzi scheme in Minnesota history..

Jason "Bo" Beckman, a 42-year-old Plymouth man who claimed to be among the top portfolio managers in the nation, was convicted of a variety of fraud and money-laundering charges.

Beckman, a former Anoka High School hockey standout, also was convicted of attempting to defraud the National Hockey League on his failed effort to buy a $5 million piece of the Minnesota Wild; of defrauding an elderly Spring Lake Park couple out of nearly $4 million in life insurance proceeds that he used to bolster his NHL bid; and of several tax charges.

Faribault entrepreneur and former coin dealer Gerald Durand, 62, was convicted of fraud and money-laundering charges; of attempting to mislead the government about two foreign currency transactions; and of several tax charges.

Minneapolis huckster Patrick Kiley, 73 -- whose "Follow the Money" radio talk-show program lured the most investors -- was found guilty of fraud and money laundering counts.

Cook's Ponzi scheme is second only to the $3.65 billion, decade-long fraud of Twin Cities businessman Tom Petters, who's serving 50 years in federal prison for his crimes....MUCH MORE
Some quick points:
1) Ya gotta love that job title, "huckster".
2) Here's the house they were running the scam out of, It looks like a nice pile of stones, if you're into the Richardsonian Romanesque thing:

Colliers Turley Martin Tucker

Anyone so into style over substance has gotta be suspect. The house is now owned by a 'Catholic priest sex abuse' plaintiffs lawyer.

3)Why the heck didn't we see more on the Petters scam, that's a fair chunk of change.