Jeff Pantages, CFA Chief Investment Officer

Dirty Rotten Scoundrels a short history of financial skullduggery

Presented by Jeff Pantages, CFA Chief Investment Officer

Alaska Permanent Capital Management 900 W 5th Avenue Suite 601 Anchorage, AK 99501

www.apcm.net

a song about outlaws

Yes, as through this world I've wandered I've seen lots of funny men; Some will rob you with a six-gun, And some with a fountain pen.

Woody Guthrie Pretty Boy Floyd The Mephistopheles of Wall Street

Jay Gould

died December 1892

2 abandon all hope…

3 Gould on Wall Street

4 The man himself…

Charles Ponzi

5 buy IRCs in Italy and redeem in America

6 financed by issuing Ponzi Notes

7 The Ponzi Scheme

 Ponzi proposed arbitrage in International Reply Coupons (i.e. stamps)

 Raised funds selling Ponzi notes via his Boston based Securities Exchange Company

 Promised 50% return in 45 days

 But, investment strategy was unworkable, so he “robbed Peter to pay Paul”

 Raised $10M from December 1919 to June 1920

8 The Ponzi Scheme

The Boston Post discovers his past criminal record and other discrepancies.

9 The Ponzi Scheme

20,000 “investors” received 37₵ on the dollar 10 The Crash of ‘29 11 after a market collapse

“When the tide goes out you see who is swimming naked.” – Warren Buffett

12 The Embezzler Richard “Dick” Whitney

President NYSE 1919-1935

Sing-Sing Penitentiary 1938-1941

Gordon Geckko Ivan Boesky Greed is Good Greed Works Inside Trader Extraordinaire

Michael Milken

The Junk Bond KING Charles Keating

And The Keating Five

14 The Wall Street Movie

Greed is good. Greed is right. Greed works.

15 The Risk Arbitrageur

Ivan Boesky

Insider Trading

2 Years in Lompoc Federal Prison

16 The Junk Bond King Michael Milken

10 year sentence

served 2 years at Camp Pleasanton Federal Prison

17 The S&L Executive

Charles Keating Lincoln Savings & Loan

73 counts of fraud, racketeering, and conspiracy

served 5 Years in federal prison

18 The Rogue…

19 The Rogue Trader

Brought down Barings Bank via $1.3 billion in losses from unauthorized derivatives trading

Served 3.5 years in Changi Nick Leeson Prison (Singapore) and released in 1999 1995 20 The Rogue Trader

Now a consultant and Nick Leeson professional speaker on such topics as risk 2011 management and ethics 21 .com and beyond: the bubble years

22 The Wall Street Analyst

Head of Internet Research at Merrill Lynch Produced bullish reports influenced by investment banking relationships Buy ratings for stocks he privately disparaged in emails as “a piece of junk” or “a piece of sh*t” Charged with securities fraud and fine $4 million Henry Blodget 23 The smartest guys in the room? 24 Houston, we have a problem

25 Enron Timeline

 Stock went from $90 to zero and nation’s 7th largest company fell into bankruptcy. Employees (28,000) lost everything in 401K.  Jeff Skilling remakes the company into an energy trading giant. Voted most innovative company 6 years in row 1996-2001. Resigns suddenly 4 months before debacle.  Andy Fastow receives CFO of the Year award in 1999. But growth was artificial and off balance sheet financing hid debt and investment losses. Chewco, Raptors, Jedi SIV’s  California power market manipulation nets $2 billion in profits. Get shorty, Fat boy, Death star trading strategies.  Sherron Watkins smoking gun memo: “I am incredibly nervous that we will implode in a wave of accounting scandals.”  Trading is a “confidence sensitive” activity and Enron experienced a “run on the bank.”  Accountant Arthur Andersen convicted of obstruction of justice though overturned later-but too late.

26 it was all because of bad reception

The Arthur Andersen partner was on his cell phone when he said: “Ship the Enron documents to the feds.”

But his secretary heard: “Rip the Enron documents to shreds.”

27 a brief summary of Enron

28 The Telecom Cowboy Bernard “Bernie” Ebbers

CEO Worldcom 1985-2002

Oakdale Federal Prison 2006-2031

29 boom and bust in telecom

30 Worldcom

 Bernie Ebbers leaves motel management for a deregulating telecom industry

 LDDS (later WorldCom) buys cheap long distance minutes and resells at a profit

 Mergers and acquisitions and eventual purchase of MCI makes WorldCom second largest telecom company and only Fortune 500 company in Mississippi

 Wide eyed optimism: internet traffic doubles every quarter and telecom was the backbone for the internet and dot.com companies

 CFO Scott Sullivan asks several employees to help “get us over the hump” to meet earnings expectations…a slippery slope…capitalize expenses, enhance revenues, cookie jar reserves, etc. (met analyst expectations 13 Q in a row, but in reality only met 2)

 Internal auditor Cynthia Cooper blows the whistle on $3.1 billion of accounting irregularities in June 2002 and WorldCom eventually declares Chapter 11

 Ebbers: not a sympathetic character as he borrowed $400 million from company and $1 billion from Citi to “diversify” into timber, hockey team, biggest ranch in Canada, for example. But 25 years in prison?

31 CEO Ebbers takes the 5th

32 CFO Scott Sullivan tells all…

33 The Piggy Bank CEO Dennis Kozlowski

CEO tyco 1992-2002

New York State Prison 2005-2030

The Domestic Diva

Martha Stewart

It’s not the crime… …it’s the coverup.

Alderson Federal Prison 6 Months

36 Bernie Madoff 150 Years in Federal Prison

of LIES 37 Bernie Madoff: The Wizard of Lies

 December 2008 Bernie Madoff confesses to a $65 billion dollar Ponzi scheme  Had claimed consistent 1% returns per month using “sophisticated arbitrage strategies”  Fueled by Word of mouth, affinity groups, feeder funds  Money was never invested – – Paper trades, monthly statements, it was all a sham  There had been whispers. – Barron’s, Hedge Fund magazine, and Markopolos question returns in the early 2000’s.

38 Barron’s May 2001 “It’s a proprietary trading strategy. I can’t go into it in more detail.” – Bernie Madoff

39 Harry Markopolos: no one would listen

 He couldn’t reproduce Madoff’s “split strike conversion” strategy

 He couldn’t find anyone who actually traded with Madoff

 He noted major Wall Street firms had no money with Madoff

 He sent 5 letters to the SEC over a period of 2000-2008.

 Markopolos notes “The SEC come in after the crime is committed, to toe tag the victims and look for the crooks”

40 aftermath: finding the villains and getting the money

 Madoff gets 150 years in jail, with seven others awaiting trial

 Family not complicit, but dereliction of duties?

 Inspector General report documents SEC bungling/incompetence

 Trustee determined to pay “net losers” first and invoke “clawbacks”

 Initially, claims trading at 20 to 30 cents – it’s Wall Street!

 Net losers claim $20 billion vs. $10 billion recovered, so far…

41 how to stop these white collar criminals?

 Reward whistleblowers

 Train and pay regulators

 Reconsider compensation system

 Imprison the scoundrels – tougher rules

 Educate investors – diversify, trust but verify, TANSTAAFL

 Trust in the Lord…but check out the church!

42 will we ever learn!

43 when the tide goes out…

Source: The Economist 45 Madoff has not been exactly contrite!