04.08.08
Irrational Exuberance from MaxLife Fund Corp
I previously believed that MaxLife Fund Corp (OTC BB: MXFD, $17.50) was just an overvalued, over-hyped microcap. I found nothing fraudulent about the company’s actions. The company’s continuing and increasingly unrealistic optimism in press releases is leading me to consider that the company is not so innocent. Only by keeping a stream of good news flowing to the market can the company hope to maintain its inflated market cap, so it does so, regardless of the improbability of it ever achieving its forecast financial targets.
Maxlife Fund Corp just announced a new joint venture (see the joint venture agreement). MaxLife states in its 8k filing today that the goal of the joint venture with Capital Growth Planning Inc (CGP), called Maxlife - CGP Partners LLC, is to purchase up to $1 billion face value of life insurance policies (life settlements) this year. The companies expect to purchase, securitize, and then sell those policies to investors. The joint venture is legitimized by the fact that CGP has been in existence since 1969.
CGP does not have an unblemished record: two years ago the State of California issued a desist and refrain order temporarily preventing CGP from issuing certain securities in California that the company had failed to register and had sold using misleading statements. Also, CGP has traded very few life settlements, having been involved in the sale of only 55 life settlements (with a face value of $40 million) over the last two years.
Another thing to consider about the joint venture is that CGP is providing the management of the life settlements and will essentially run the JV. The only thing Maxlife Fund Corp is providing is funding. However, considering that since it has listed on the OTC bulletin board, Maxlife has raised only $500,000 from the sale of stock (see page F-13 of the 2007 10k), I find it hard to believe that it can provide the necessary funding to the JV for the JV to come anywhere close to its announced targets, at least not without seriously diluting current shareholders.
Anyone can forecast great sales. It is quite another feat to actually achieve such performance. Given the histories of MaxLife Fund Corp and CGP, I believe it unlikely that the companies’ joint venture will transact $10 million (face value) in life settlements this year, let alone $1 billion in face value of life settlements. I caution investors to put little faith in MaxLife’s projections until it shows some ability to function as a real company and not just a hype machine.
Disclosure: I am short MXFD. I have a disclosure policy.
InvestorsLive Blog » Blog Archive » Kentucky USA Energy next MXFD? said,
April 14, 2008 at 2:14 pm
[...] all the talk about MXFD - wonder how long it takes to catch on to [...]
bk said,
April 16, 2008 at 6:38 am
hi mike:
i really appreciate your blog. i was wondering what you thought of luk as a longterm investment. the stock’s run up considerably and the cfo has just sold a considerable chunk. not sure at this point, but thinking of buying a little.
also, impressive job shorting. i don’t really have the guts to short much, but i’m wondering where you place your buy-to-cover stop loss? do you use a certain percentage for your trailing stop?
thanks in advance. hope all’s good.
michael said,
April 16, 2008 at 6:50 am
LUK and LTR are both wonderful companies that I would love to own longterm. Also, while I own BRK-B, I have been wanting to buy more. I have not had the time to do real valuation of any of those three companies recently. I intend to do so soon.
As far as stops, I don’t use them. Sometimes I don’t even use mental stops and I resolve to hold on as long as I believe I am right. In one previous case, RMDX, I saw a 100% loss before covering. The stock then went up some more and I shorted a whole lot more, and then it finally cratered to below my initial short price.
Great Dane said,
April 23, 2008 at 8:59 pm
Michael, I finally succeeded in creating and funding new brokerage accounts at Interactive Brokers and Think or Swim, but I’m unfortunately still unable to locate MXFD shares to short.
E*TRADE and BofA don’t support shorting OTC shares. Even though shorting is anathema to Vanguard’s buy and hold model, Vanguard Brokerage Services (run by Pershing) ironically has provided the best locates for me. It’s recently allowed me to increase my positions on PRKR, SUF, and REFR, each of which have at times been very hard to find. They also support OTC shorting, but can’t locate MXFD.
Also, IB let’s me keep a GTC order open to short MXFD, but VBS and thinkorswim only support day orders. Any advice, as re-entering the order every day is tedious?
michael said,
April 24, 2008 at 8:18 am
Great Dane — Unfortunately, I do not know how to find more shares better than you. If I did, I would increase my short position in MXFD. I just opened up my ThinkorSwim (TOS) account and I have no idea how to place a GTC order on a hard to borrow stock (or if that is possible). You could try asking them and VBS. I know TOS has good support.
michael said,
April 24, 2008 at 8:19 am
Your best bet for getting shares of really hard to borrow stocks would be to get an account with Merrill Lynch, although they probably wouldn’t give you the time of day unless your account was really big.
Great Dane said,
April 24, 2008 at 11:47 am
thinkorswim has great IM-based support, but they only (quickly) confirmed that they won’t accept GTC short orders. Strange that IB does, but no one else. Anyway, I’ve created a macro using imacros in Firefox to place the orders in thinkorswim and Vanguard every night. Hopefully, they or IB will locate some shares before the stock collapses.
michael said,
April 24, 2008 at 11:53 am
That’s an innovative solution. Anyway, who knows when MXFD’s stock price will collapse: I’ve been waiting for two months now. It could take another six.
Douglas Miller said,
April 29, 2008 at 1:09 pm
Mr. Goode:
I understand you are short on MaxLife Fund Corp Common Stock and you certainly have that right. I also understand the First Amendment of the Bill of Rights and your right to free speech. However, your right to free speech is not unfettered and it does not give you the right to make disparaging false statements and misrepresentations in a commercial/business context, especially where such false and statements lead to your personal financial gain.
I am the CEO of Capital Growth Planning, Inc. Upon reading your April 09, 2008 posting about MaxLife Fund Corp. and its joint venture with Capital Growth Planning, Inc., it was obvious to me that you are not a sophisticated investor and do not have much of a legal background or a background in the life settlement industry. Consequently, I’ve decided to educate you and your readers as to who Capital Growth Planning, Inc. is and what we do, and thereby set the record straight as to your erroneous statements about us.
First, the Desist and Refrain Order (“DRO” and not a “cease and desist order”) issued by the State of California, DOES NOT PREVENT Capital Growth Planning, Inc. (“CGP”) from “issuing securities in California,” contrary to your blog statement and your article published on http://www.seekingalpha.com. The order clearly provides: “Capital Growth Planning, Inc. . . . [is] hereby ordered to desist and refrain from the further offer or sale of securities in California unless and until qualification has been made under the law or unless exempt.” (Emphasis added.) Upon receiving the DRO, CGP inquired, through outside counsel, as to the factual basis and importance of the DRO. It appears the DRO was issued in relation to Capital Growth Planning, Inc.’s 2003 Series B 10% Note Offering and in particular regarding an investor(s), who was telephonically contacted by a CGP representative who qualified the investor as being accredited, then sent the investor offering materials, with the investor thereafter making an investment in the Note Offering. The subject offering was intended to be a Regulation D private offering exempt from Securities and Exchange Commission (”SEC”) registration and State of California qualification. Regulation D provides: “Limitation on manner of Offering. Except as provided in section 230.504 (b)(1), neither the issuer nor any person acting on its behalf shall offer or sell securities by any form of general solicitation or general advertising. . . .” “No Action Letters” issued by the SEC provide clarification as to what makes a “general solicitation.” These “No Action Letters” establish that an issuer or broker-dealer acting as a placement agent must have a “substantive pre-existing relationship” with all prospective investors. It appears the Department of Corporations determined that since CGP did not have a “substantive pre-existing relationship” with the investor, the telephone solicitation resulted in a “general solicitation” and, therefore, the offering was not exempt under Regulation D and needed to be qualified with the State of California. To reiterate, the DRO does not preclude CGP from “issuing securities in California.” It only requires that CGP comply with all rules and regulations with respect to any such issuance, including the “know your investor” rule for exempt and non-qualified offerings.
Second, you state that CGP “misled investors about the collateral and returns available to investors on the debt securities it had issued” and imply that this was an explicit finding by the Department of Corporations. This is patently false and probably actionable at law as defamatory. I defy you to quote anything in the DRO that states CGP misled prospective (or actual) investors about “the collateral and returns available to investors.” Apparently you simply made this one up to further your goal of profiting from shorting MXFD stock. On this topic, the DRO does state the Commissioner’s opinion that: “the securities were offered and sold in the state by means of written or oral communications which included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, in violation of section 25401 of the Corporations Code.” From inquiring with the Department of Corporations, it appears the subject opinion regarding “an untrue statement or omission to state a material fact…” arose from representations that the Note Offering was exempt from registration and qualification, when, for the reasons noted above, it was not. In fact, from the original principal balance of $2,526,500, CGP has retired all but $763,560 of the note principal. The pledged collateral was and is exactly as described and the obligation to pay interest was and is valid and enforceable.
Third, you draw conclusions about the lack of experience CGP and its management team have with respect to the Life Settlement business. While the number of policies and amount of settled policies may not be large by industry standards, management has been very active over the last two years in designing proprietary financial programs and instruments involving niche segments of the Life Settlement, life insurance, and securities industries. In fact, on February 1, 2008, it filed a provisional business process patent for its program known as LIBACSM. I question how you would know what experience we have, as a company or personally, in the life settlement business, or any other business for that matter? Furthermore, the 55 cases to which you refer were life settlements and were specifically stated as being life settlements and not “viatical settlements,” per the erroneous reference in your blog and in your seekingalpha.com article. Perhaps if you had read the Wikipedia article on Viatical Settlements you reference and then bothered to read the Wikipedia article on Life Settlements, you would have understood the difference and would not have appeared as such a rube.
Fourth, regarding the MaxLife – CGP Partners, LLC Joint Venture, we never stated anywhere that we were forecasting “$1 billion of Sales.” We stated it was our goal to “develop life settlement policy transactions “exceeding $1 billion in TOTAL FACE VALUE.” (Emphasis added.)
Lastly, in your opening paragraph you accuse MaxLife Fund Corp., and implicitly CGP, of providing “press releases . . . [that have] strayed so far from reality as to be not just misleading but fraudulent.” Falsely accusing a publicly reporting company of providing fraudulent press releases is defamatory, and you have painted CGP with the same defamatory brush. Perhaps you will heed my advice to print a retraction to correct the record on your self-serving defamatory statements. At the very least, I strongly recommend you properly research all the facts before making such blatantly false and misleading statements about companies for whom you have a vested interest in seeing fail, like a piranha hoping to draw first blood.
Douglas Miller, Chief Executive Officer of Capital Growth Planning, Inc.
michael said,
April 29, 2008 at 2:11 pm
I have corrected the link to Wikipedia and have changed the reference to life settlements (in my blog, and have asked SeekingAlpha to correct it in their syndicated version). Also, while I did correctly state twice that the $1 billion was a face value figure, I did also mention it in terms of sales. That was of course incorrect. I regret these errors and they have been corrected.
In response to the legal issue, I am quite familiar with securities laws and what they mean. The order was a DRO and not a CDO, and I regret mis-characterizing that. I did not intend to insinuate the CGP was prevented from selling any securities, only the ones referenced.
However, my statement that your company misrepresented the securities is an adequate characterization of the DRO. The DRO stated (page 2, lines 15-18): “Respondents represented to investors that these note units would earn ‘10% simple interest backed by US Treasury Bonds’ and that the ‘note is due and payable in 24 months.’ California investors did not receive 10% interest on their investments, and their investments did not become payable in 24 months as promised.” The company promised one thing and investors did not receive that. That sounds like misrepresentation to me.
Great Dane said,
April 30, 2008 at 12:22 pm
Michael, I’d like to reiterate my complaint to you about how frustrating it is for you to do this kind of innovative investigative blog journalism, but then to have the subject be impossible to short! It’s so frustrating, I may sue.