The SEC just published a litigation release today, announcing a large settlement with Investools, a company that runs investment workshops. The release makes for some juicy reading. The SEC’s complaint is available online.
Investools agreed to a civil injunction and to pay a $3 million civil penalty. Drew and Miller agreed, respectively, to pay civil penalties of $380,000 and $130,000, and to be enjoined from violating the antifraud provisions of the federal securities laws. Drew and Miller additionally agreed to be enjoined, for five years, from receiving compensation for their participation in, among other related activities, the sale of classes, workshops, or seminars given to actual or prospective securities investors concerning securities trading. In settling the matter, Investools, Drew and Miller neither admitted nor denied the allegations in the Commission’s complaint.
Perhaps the funniest part is that while the Investools salesmen claimed they were great traders, they were allegedly poor traders who lost money.
The Commission’s complaint alleges that from 2004 to approximately June 2007 at Investools how-to-trade-securities workshops former Investools employees Drew and Miller misleadingly portrayed themselves as expert investors who made their living trading securities. They did so to mislead investors into believing that they too would make extraordinary profits trading securities if they purchased expensive Investools instructional courses and other products and followed Investools’ securities trading strategies. The complaint further alleges that in reality, neither Drew nor Miller made the trading profits they claimed. For example, in 2005 and 2006, while Drew was portraying himself as a successful investor, he had hundreds of thousands of dollars in net trading losses. In 2006 and 2007, while Miller was portraying himself as a successful investor, he had tens of thousands of dollars in net trading losses.
The SEC also states in the release that the investigation of Investools is ongoing.
Investools Ad
What is the moral of the story? Don’t trust anyone. If someone says they are a good trader and have a good trading system, ask for verification. If their results are audited, check out the auditor.
Disclosure: I have no positions and I have no connection to anyone involved. I have a disclosure policy.
The SEC has a habit of belatedly suing those that Andrew Left of Citron Research has criticized. This time the company is Home Solutions of America, a company that I have writtenabouta few times. I have written about Left many times before. Definitely make sure to see my “Can you trust the StockLemon” series, Part 1,Part 2,Part 3, Part 4.
The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company’s stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company’s public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.
The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots.
Unlike most SEC complaints, just about every executive at HSOA was named, and four of the lesser executives have already consented to the SEC’s findings, without acknowledging guilt of course
Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint.
Former Home Solutions CFO and COO Rick O’Brien agreed to pay a $130,000 penalty.
Former Fireline controller Stephen Gingrich agreed to pay a $25,000 penalty and to an administrative order barring him from practicing before the Commission as an accountant for at least three years.
Former Fireline COO Thomas Davis agreed to pay a $25,000 penalty and to pay disgorgement and interest of $32,850.
In addition, O’Brien, Gingrich and Davis each consented to final judgments permanently enjoining them from violating Sections 17(a)(2) and (3) of the Securities Act and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
Finally, Jeff Craft, a business partner of Marshall, consented to a final judgment permanently enjoining him from violating Rule 13b2-2 under the Exchange Act.
So it turns out that once again the short seller was right, the executives were (allegedly) crooked, and the SEC was slow.
Disclosure: I have no positions and I have no connection to anyone involved besides reading Left’s blog.
A merger-arbitrage ETF is coming to town, ticker MNA. It should start trading in a month or so. With expenses of 0.75%, this looks like a nice addition to portfolios.
IndexIQ, a pioneer in the area of hedge fund and inflation hedge ETFs, is preparing to launch another fund, the IQ ARB Merger Arbitrage ETF. The fund is scheduled to begin trading later this month under the clever ticker MNA. The proposed ETF will track the IQ ARB Merger Arbitrage Index, a strategy that involves investing in global companies for which there has been a public announcement of a takeover. The index also includes short exposure to global equities as a partial equity market hedge.
Okay, just needed to get this off my chest. I can’t stand the idiocy on all sides of the healthcare debate. Here are a small portion of the lies I have recently read about healthcare, with my refutations. I don’t link all the facts I’ve seen to refute these lies; look them up yourself.
1. The current bill will be revenue neutral. No it won’t. The assumptions in the bill are absurd. It will increase the deficit significantly.
2. Government death panels will ration care under proposed health bills. Under the bills most likely to pass, this is not the case. The death panels will be outsourced to the private insurers, who already have death panels. Sorry, but resources are not infinite. People will always die under every health system because their treatment is not cost effective. Someone will always make that decision.
3. Preventative care saves money. No, it usually doesn’t. Consider high blood pressure. Giving blood pressure medications to everyone who has high blood pressure reduces the number of heart attacks, but because the medications are given to many people who would never have had a heart attack, money is not saved. Preventative care is still usually cost effective, though, and that is what matters, saving life-years at as small a cost as possible.
4. We need single-payer healthcare (ie, government-funded care like Canada has). No we don’t. There are many different systems used in OECD countries, and plans (such as that of Switzerland) that do not have single-payer at all but require private health insurance have similar costs and outcomes to single-payer plans. Furthermore, there are many different hybrid systems, such as in France.
5. Surveys show people in America/England/Canada like their healthcare. This is irrelevant. 90% of people are fairly healthy; for them they will likely be satisfied anywhere. I for one have had the opportunity to see radiologists in both France and the United States. In both cases the diagnosis was quick and cheap. I paid maybe $300 out of pocket for multiple wrist x-rays and a consultation with a hand surgeon in the USA (and this is with a high-deductible health plan), and I was seen three days after calling for an appointment. In France I was seen in about the same time and paid maybe 40 Euros out of pocket for a consultation with a radiologist and a back x-ray.
6. A single-payer system will keep costs down. No, not really. Single payer or hybrid systems in England and France are having cost troubles just like here. The cost problems in the American system will not be cured by single-payer. See this great article in the New Yorker.
7. It is only because of greedy profiteering companies that our healthcare costs are so high. Actually, there are a decent number of health insurance companies and hospitals that are non-profits. Look at car insurance for a comparison: a non-profit mutual insurance company like Amica competes well with for-profit companies like Geico and Allstate, but the for-profit companies are on par in cost and service with the non-profits. With hospitals, for-profit hospitals often provide more charity care than non-profit hospitals.
8. The problems with our system can be fixed by reducing government interference and regulation. I am as much of a free-market ideologue as anyone (in fact, I consider myself to be an anarcho-capitalist rather than a libertarian, and I am definitely not a conservative), but there are problems with health insurance that are structural. The main problem is that many diseases are chronic, but health insurance is renewed annually. This is the pre-existing condition problem. One legitimate way around this problem is to force everyone to hold insurance. A free-market way around this problem would be for insurance companies to offer pre-existing condition insurance, separate from health insurance, such that if a person acquired a chronic disease during a 30-year term the insurance would pay for all future costs of the disease. This is a very risky kind of insurance to offer, though, and is unlikely to come into existence on its own. What is certain is that the present system of forcing insurance companies to cover pre-existing conditions, but only under certain conditions, is quite flawed.
9. Low American life expectancy (relative to other OECD countries) is proof that our health care system is flawed. I have blogged about this before. Life expectancy is driven by all sorts of things, and the US has higher violent death rates and accidental death rates than other countries. Furthermore, the quickest way to reduce life expectancy at birth is to have plenty of babies die. The US has more pre-term babies and babies to teen mothers than other OECD countries. Despite heroic neonatal ICU expenditures, many of those babies die. Rather than look at life expectancy, it makes more sense to compare disease rates and cure rates of diseases.
10. We should keep our current system of employer-provided health insurance. Even Obama tells people that the health care bills won’t take away their insurance. No matter what system you believe in, it makes no sense to tie health insurance to employment. This makes the labor force less mobile and reduces entrepreneurship.
11. Everybody has a right to good healthcare. Nobody should die because they can’t afford healthcare. These statements sound noble but when you apply them to other situations you will realize that they are absurd outside of a socialist utopia. People die every day in Detroit and Gary and Cleveland because they cannot afford to live in the suburbs and thus avoid crime. Tens of thousands of poor people die every year because they acquire disease from a poor diet or lead poisoning from living in a poorly kept-up building. Or they die of heat stroke because they cannot afford air conditioning or they die of diabetes or a heart attack because they do not have time to exercise due to working multiple jobs. The one thing that people consider most important is their health. As long as we are not living in a socialist utopia the rich will live longer and healthier lives because they can spend money on healthcare, personal care, safety, and quality food.
12. Single-payer healthcare will at least ensure access to decent basic care for the poor. Here in Michigan we have single-payer education: almost every school district receives the same amount of money from the state per capita. The poor students still get far worse education than the rich students, and for many school districts the education is truly horrendous.
13. Obamacare will be socialized medicine. Yes, it will be slightly more socialized than our current system, but Medicare, Medicaid, SCHIP, and the VA already spend a large chunk of our health dollars. In other words, our health are system is already quite socialized.
Stocks in the S&P 500 with the highest short interest as a percentage of their stock-market float have soared 13.2% since Sept. 2, well above the 6.9% gain for the S&P 500. These stocks include Advanced Micro Devices, MBIA, Wynn Resorts, Gannett and American International Group, all companies with significant business or balance-sheet risk.
See the rest of this article on the Wall Street Journal’s website. When highly-shorted stocks lead the market it is usually a sign of froth and panic buying. I believe that the current market action presages significant market declines. Of course, I am not a market speculator: I am a daytrader (see my day-trading blog ReaperTrades) for whom the direction of the market is not that important, so this will not affect my decisions significantly.
In terms of the health care debate, one reason reformers use to push change is that the USA has a low life expectancy for a developed country. That may be so, but the reason has nothing to do with our health care system. Read this great letter from Professor Philip Coelho to the Financial Times today.
Medical insurance debate is not advanced by prejudice From Prof Philip R.P. Coelho.
Sir, Philip Stephens’ article is misleading. Quoting raw data may energise argument but it is not a substitute for reasoned analysis. After adjusting for murder, suicide and other popular American forms of mayhem, Americans have the longest life expectancy of any developed nation (Robert Ohsfeldt John Schneider, 2008). It would be a surrealistic stretch to blame the American health system for our high rates of self-destruction and murder relative to other countries.
Similarly, infant mortality has to be adjusted for low birth weights and the definitions of live births. In a 2007 study June and David O’Neil found that the infant mortality rate of Canada would be above that of the US if Canada had the same incidence of low birth weight babies as the US. Low birth weight babies are much more common in teenage mothers than in older women, and teenage motherhood is very common in the US relative to Canada. Again, teenage motherhood may not be desirable, but it is not symptomatic of what is wrong with US healthcare.
Nor does Mr Stephens seem to be aware that much employer-provided healthcare is actually self-insurance by the employing company. “Insurance” companies manage the plan for employers and they are the gatekeepers that deflect criticism away from the employers and on to the “insurance” companies. Demonising insurance companies for their lack of coverage or their denial of care is misguided. If the US forces companies to provide greater health benefits to employees, this will disproportionately affect low-income workers (a mandated benefit of $2,000 per worker is a 10 per cent increase in the cost of employing a worker whose annual income is $20,000, while it is only a 2 per cent increase in the cost of employing a worker whose annual income is $100,000).
US healthcare is expensive and perhaps we should be spending less, but any critique of the system has to be based on accurate assessments, not on prejudice and “conventional wisdom”.
Philip R.P. Coelho,
Professor of Economics,
Ball State University,
Muncie, IN, US
The “mileage” figure, as it’s presented, is really meaningless – because it’s being presented for a situation in which the gasoline engine almost never runs at all.
They compute it by basically saying: “If I fully charge the car battery every night, how far will I drive the car in typical city commuting conditions before it’s consumed a gallon of gas”.
What if you drive your volt around the city all day? Your mileage will drop to around 50 miles per gallon once you’ve driven more than 40 miles. If you drive your car 100 miles in a day, you’ll consume a bit over a gallon of gas. That’s very impressive. But it’s absolutely not what you’d expect after being told that it gets 230 miles per gallon.
The method that GM used to produce that mileage figure is extremely dishonest and completely uninformative. The “real” effective mileage (excluding the cost of charging the car – which will be significant!) varies depending on the length of your commute.
This paper develops a simple technique that controls for “false discoveries,” or mutual funds that exhibit significant alphas by luck alone. Our approach precisely separates funds into (1) unskilled, (2) zero-alpha, and (3) skilled funds, even with dependencies in cross-fund estimated alphas. We find that 75% of funds exhibit a zero alpha (net of expenses), consistent with the Berk and Green (2004) equilibrium. Further, we find a significant proportion of skilled (positive alpha) funds prior to 1996, but almost none by 2006. We also show that controlling for false discoveries substantially improves the ability to find funds with persistent performance.
For long-term performance, the authors found 1565 funds with zero alpha (net of fees), 499 with negative alpha (net of fees), and only 12 funds with positive alpha (net of fees; data from Table 2 on page 37).
It is always fun to observe the actions that executives of listed shell corporations (excuse me, I mean development-stage companies) will engage in as they try to pretend that they run real companies. They will put out press releases about the most mundane and inconsequential things; they will project absurd revenues when they do not even have the money to develop let alone manufacture products.
One of my favorite whipping boys (although in its defense it is not nearly as bad as many OTC BB listed companies) in this respect has of course been the amazingly overvalued Maxlife Fund Corp (OTC BB: MXFD). When the company in early 2008 formed a joint venture with a private California insurer (Capital Growth Planning Inc. or CGP), it said in an 8k filing: “The goal of the Joint Venture is to develop life settlement policy transactions exceeding $1 billion in total face value through the remainder of 2008, using several of CGP’s specialized life settlement products and strategies.”
I was of course dubious, writing, “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.” My blog post attracted the ire of Douglas Miller, CEO of CGP, who wrote a not very nice comment on my blog post, mostly focusing on a few misstatements I made regarding his company (that I immediately corrected). Oddly enough, he had little to say about the main point of the post, which was my belief that the joint venture was unlikely to ever lead to material revenues for Maxlife.
Of course, my main point was correct. Maxlife and CGP just formally dissolved their joint venture and as of Maxlife’s most recent 10Q the joint venture had apparently produced $0 in profits. So while Mr. Miller was correct to point out to me that “yourright 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,” I remind him and all my readers that truth is an absolute defense against defamation; in other words, I have an unfettered right to make disparaging true statements and make known my negative opinions about Maxlife or any company.
Now that all is said and done I do have a question for Maxlife Fund Corp: how was it that an outsider such as myself accurately predicted the outcome of the joint venture while Maxlife Fund Corp’s prediction was so incredibly wrong?
Disclosure: I have no position (long or short) in MXFD (or CGP for that matter). I confess to a visceral hatred of everyone who has ever come into contact with the company except for Victor DeLaet (remember him?). I have a disclosure policy.
Most people are ignorant of basic statistical facts. While this is fine for much of ordinary life, a lack of understanding of statistics will quickly lead investors and stock traders to lose money. So while an inability to understand statistics on the part of both Republicans and Democrats means we get plenty of stupid editorials instead of the acknowledgment that we can never know whether Al Franken or Norm Coleman won the election in Minnesota (the error in counting votes was greater than the margin of victory and different and equally plausible / legal methods for validating ballots led to different outcomes), in investing and trading, misunderstanding statistics leads to quick and painful losses.
This ongoing series will focus on selection bias (also called selection effect) and how it leads to inappropriate conclusions. I will not concentrate solely on trading and investing but rather will highlight selection effects in many different fields. Selection effects arise when conclusions are made from sampled data that are not representative of the population of data as a whole. An example from my field (psychology) is the use of college students in most memory research. A researcher who ran experiments only on college students and tried to say the results exemplified people in general would be making false statements because of a selection effect. To make generalizations about the population as a whole, the sample needs to be randomly drawn from that population.
Today’s selection effect comes from Allstate. On their website they proudly announce, “People who switched from Geico to Allstate saved $473 a year on average.” This statement can be interpreted in two ways. The first interpretation is that Allstate insurance is on average cheaper than GEICO. That is an incorrect interpretation; it not supported by the data and it is probably not true for the majority of car insurance customers. The second and correct interpretation is that Allstate and GEICO have different underwriting standards, and for some subset of GEICO customers, Allstate will be cheaper. Those people will likely switch to Allstate if they check out Allstate’s prices. For the most part, people who switch insurance companies do so because they can get insurance cheaper elsewhere. Those who cannot get cheaper insurance do not switch. Therefore, the people who switch from GEICO to Allstate will by definition be those who can get insurance cheaper with Allstate. Furthermore, people generally do not switch insurance unless they can save a significant amount of money; this makes the the average savings from switching seem higher. This type of change in observed average as a result of a selection effect is one of the more insidious types of selection effects; I will give further examples of this in future posts.
Allstate’s statistic would look even dumber if we had the same statistic from every insurance company. We would likely find that 90% of people who switch insurance companies save money when they switch. On average, the switchers would save hundreds of dollars no matter what company they switched to. This tells us nothing about which insurance is the cheapest. So if you are searching for insurance, check out many different insurance companies; depending upon your special circumstances it is hard to predict which one will be cheapest. I recently switched to GEICO from Farmer’s (and saved hundreds of dollars on auto insurance); but back when I had a house and rental real estate, Farmer’s was the cheapest.
Disclosure: I am just about to switch from Farmer’s to GEICO for all my property/casualty insurance needs. I am currently long 30 shares of Berkshire Hathaway B stock and short 1 share of Berkshire Hathaway A stock (in an arbitrage trade leaving me with no significant net position). GEICO is a wholly-owned subsidiary of Berkshire Hathaway. My disclosure policy suffers occasional bouts of selection effects itself.