Saturday, April 6, 2013

Fisker Automotive Firing as Much as 75% of Workforce

Reminds me of the dot com hype and many failures, as the electric subsidized vehicle business goes through sackings. Aivars Lode

Fisker Automotive Inc.’s mass firings after receiving federal loans to build luxury plug-in cars is adding to the political debate over the U.S. government’s funding of clean-energy programs.
Most of the assets of Fisker’s battery supplier that received a $249.1 million federal grant, the former A123 Systems Inc. (AONEQ), were acquired last year by a Chinese company. Now Fisker, awarded $529 million in U.S. loans, is firing 75 percent of its workforce after failing to secure a deal with an automotive partner to fund operations.

“The Department of Energy has never owned up to its mistakes and acknowledged it didn’t do a good job of choosing Fisker and A123 as worthy of taxpayer investment,” Senator Chuck Grassley, an Iowa Republican, said in an e-mailed statement.
The debacle is reviving questions over whether the government should be funding makers of alternative energy ventures. Fisker and A123, whose bankruptcy halted Fisker’s output, have drawn Republican criticism of President Barack Obama’s support of green-energy programs intended to spur more fuel-efficient cars.
Another Republican, Senator John Thune of South Dakota, predicted “the company could go bankrupt and cost millions of taxpayer dollars.”
Fisker, the maker of rechargeable $103,000 Karma sedans, told a “core group of employees in Southern California” this week of the plan and expects about 25 percent of workers to stay, the Anaheim, California-based company said in an e-mailed statement. Fisker said last week it had about 200 employees.

Seeking Help

“Our efforts to secure a strategic alliance or partnership are continuing in earnest, but unfortunately we have reached a point where a significant reduction in our workforce has become necessary,” the carmaker said in the statement. The cuts are a “strategic step in our efforts to maximize the value of Fisker’s core assets,” the company said.
Fisker has struggled since stopping assembly of Karma sedans last year when A123, the supplier of the car’s lithium- ion batteries, filed for bankruptcy. Fisker’s access to U.S. loans was blocked in 2011. Henrik Fisker, the auto designer who co-founded the company, quit last month over unspecified disagreements with other executives.
Henrik Fisker declined to comment about the job cuts. Two telephone messages left for Chief Executive Officer Tony Posawatz weren’t returned. The firings come after Fisker instituted one-week furloughs in March.
About 160 people at the company were told yesterday that they were being fired, said two people familiar with the matter who were not authorized to discuss it publicly. Fisker, in its statement, said it met with discharged employees, without providing a number.

Talks Collapse

Last week, China’s Dongfeng Motor Group Co. (489), a carmaker that had considered buying a stake in Fisker, said those discussions were over. Fisker has repeatedly declined to identify specific companies it’s talking to.
The closely held carmaker retained restructuring lawyers from Kirkland & Ellis LLP, said a person familiar with the matter who declined to be identified because the move isn’t public. The law firm’s corporate bankruptcy and restructuring practice is one of the biggest in the U.S.
Fisker, founded in 2007, has sold about 2,500 Karma plug-in cars. The company has said it was seeking investors to raise funds for a second model, the Atlantic, to be priced lower than the Karma.

Celebrity Customers

Fisker, with celebrity customers including singer Justin Bieber and actor Leonardo DiCaprio, has raised more than $1 billion from private sources, including Silicon Valley investor Kleiner Perkins Caufield & Byers, and was awarded $529 million in low-interest federal loans in 2009 to develop and build its plug-in hybrid cars.
That hasn’t been enough to sustain operations after a slow startup, technical flaws that led to two Karma recalls and the bankruptcy of A123, also a recipient of federal funds. The Waltham, Massachusetts-based battery supplier, bought last year by China’s Wanxiang Group Co., said last week in a U.S. regulatory filing that it changed its name to B456 Systems Inc.
Fisker reached a settlement this week with B456 that reduced its claims by 89 percent to $15 million.
Fisker said last year that the Energy Department blocked access to its loans after the carmaker failed to meet an initial timetable for Karma deliveries.

Funding Halted

“The Department of Energy stopped payment on the federal loan in 2011 after Fisker stopped meeting their milestones, and is committed to the best outcome for taxpayers,” Aoife McCarthy, an Energy Department spokeswoman in Washington, said in an e-mailed statement.
“Despite Fisker’s difficulties, our overall loan portfolio of more than 30 projects continues to perform very well, and more than 90 percent of the $10 billion loan loss reserve that Congress set aside for these programs remains intact,” McCarthy said.
Fisker’s Karma goes as far as 40 miles (64 kilometers) on electricity before a gasoline engine kicks in. The company’s U.S. loans came from the Advanced Technology Vehicle Manufacturing program created under President George W. Bush to help automakers build more fuel-efficient cars and trucks.
The Obama administration approved Fisker in 2009 for loans of $169 million for engineering of the Karma and $359 million for production of the lower-priced Atlantic, to be built at a U.S. factory. Karma was designed in the U.S. and built under contract by Valmet Automotive Oy inFinland, an arrangement set before it got the loans.
Fisker said it had drawn down $193 million from its low- interest loans when access to the remaining portion was blocked. Work on a Wilmington, Delaware, plant where Fisker wanted to build the Atlantic stopped more than a year ago as a result.

All Eyes on the World: A Look Back at NASA’s Best Views of Earth Read more:

Nasa satellite view of 2012, very cool. Aivars Lode

Friday, April 5, 2013

4 lessons for Apple in the Facebook phone

BOOM: face book socks it to APPLE and cements Samsung! Aivars Lode

As Apple prepares iOS 7, it could stand to learn a few things from Facebook Home.

Facebook Home will be available to download starting April 12 for select Android phones. The HTC First will come pre-loaded with it. Credit: Facebook
FORTUNE -- Now we know: The Facebook Phone is neither a phone, nor an operating system. Instead, Zuckerberg unveiled a downloadable collection of apps, available April 12, that will be supported on select Android phones to start, including the $99 HTC First, the first device to come pre-loaded with it. Home, as the whole kit of software is called, doesn't replace Android but modifies parts of the operating system like the phone's lock screen and home screen so users can more readily check Facebook updates and notifications, and communicate with other users by way of a new unified messaging feature combining Messenger and text called "Chat heads."
"We wanted to start off trying to rethink some of those core things," CEO Mark Zuckerberg said inan interview with Fortune, talking about Android features. "How could these be better if, instead of the current system you have, they were people-centric in all the themes that Facebook stands for."
Of course, rethinking the way people communicate is standard for the social network. And whether Facebook Home winds up in the hands of a significant number of Facebook's (FB) 1 billion-plus members, or becomes another failed experiment, there's no denying Zuck's app offers an unprecedented degree of social on the smartphone.
MORE: Android: Facebook's new weapon against Google
That's something even a successful company like Apple (AAPL) has yet to manage. According to John Gruber, writer of the Apple-centric blog Daring Fireball, the company's latest version of its mobile software, iOS 7, is allegedly running behind schedule but will sport a systemwide overhaul of the its interface. Ive knows what he's doing. But just in case, here are five things Cupertino can learn from Facebook this week:
Don't force the marriage of desktop and mobile. As Zuckerberg told Fortune, Facebook on mobile doesn't closely resemble the desktop experience -- a strategy that seems to be working as the social network continues to expand its footprint on smartphones and tablets. (Indeed, 157 million Facebook users checked the social network daily via mobile devices as of last January.) That's a different approach from Apple's, which as of the release of Mac OS X "Mountain Lion" last July, saw a serious infusion of features once found solely in iOS. Some of those features feel organic, but others, like a separate screen for apps called Launchpad, seem superfluous.
If it's not your strong suit, look elsewhere. Apple is master of many things -- industrial design, elegant interfaces, tablets -- but let's face it: Social has never been one of them. One need look no further than the failed, awkwardly named iTunes social networking service Ping for proof. Although Apple now allows some degree of Twitter and Facebook integration, the company was slow to embrace the two companies -- particularly Facebook -- and Zuckerberg hints the Home experience on Android will eventually come to iOS. We think Apple could do with leaning on Facebook even further. A unified messaging system like the one Home sports is a novel idea, at least for avid Messenger users.
MORE: Mark Zuckerberg: Why we don't want to build a phone
Relax -- just a little bit. A Home-like experience for iOS would likely be great for users who want it, but why the hold-up? Apple's tight reigns over iOS development is likely the culprit. Though Zuckerberg told Fortune Facebook has a good relationship with Apple, he also suggested when it comes to iOS development, you really need to work with them. "We'd love to offer this on iPhone, and we just can't today," he explained. "We will work with Apple to do the best experience that we can within what they want, but I think that a lot of people who really like Facebook -- and just judging from the numbers, people are spending a fifth of their time in phones on Facebook. That's a lot of people."
Don't commodify the hardware. With Home, the social network is front and center. That's understandable -- it wants to get on as many Android smartphones as possible. But the HTC handset that will launch with the app pre-loaded hardly looks cutting edge. (Very telling: No hardware features were given during the announcement.) And let's face it, it's hard to get excited over a piece of software running on ho-hum hardware. Our point being this: As Apple explores new revenue streams, particularly in areas like China, and mulls over more inexpensive iPhone models, it shouldn't treat its hardware with any less emphasis than it already does. Because for Facebook, HTC's average-seeming handset sounds to us like a missed opportunity

This 1998 Paul Krugman Column Perfectly Explains The Design Flaw At The Heart Of Bitcoin

Lots of talk about bit coin it has caused quite a controversy. Aivars Lode

Bitcoin is garnering a lot of hype, to the point where some people are wondering whether Bitcoin can be not just an interesting experiment, but a real, functioning currency.
The verdict is in, and you don’t have to look at Bitcoin today to know the answer. You just have to read a simple column written in 1998, more than a decade before Bitcoin was created. And the answer is no.
Before looking at the column, we have to understand a key point about the design of Bitcoin. Most commentary has focused on the fact that it’s an entirely decentralized and cryptographic currency, which is certainly interesting. But here’s the key thing: Bitcoin’s algorithm states that at some point the total supply of Bitcoin will be capped at around 21 million. Bitcoin users create more bitcoin by “mining” it (running software on their computer), but Bitcoin’s algorithm states that the rate at which Bitcoin can grow will slow down asymptotically to close to zero, such that the supply of Bitcoin will essentially be fixed.
English: Total Bitcoin supply over time. Start...
Total Bitcoin supply over time. Starting in 2009, the Bitcoin supply is created at a rate of approximately 50 bitcoins every 10 minutes. Every 210,000 generations (about every four years), the creation rate is cut in half (i.e. 50, 25, 12.5, 6.25, etc.) and tends to zero, such that there will never be more than 21 million total coins created. (Photo credit: Wikipedia)
Why is that a problem?
To understand that, you just have to read what may be the most famous column by Nobel-prize winning economist Paul Krugman: the baby-sitting co-op.
The story of the baby-sitting co-op is that a bunch of people agree to baby-sit for one another, so that they don’t have to pay cash for adolescents. To make sure everyone does their fair share, the co-op uses coupons equivalent to an hour of baby-sitting time–sort of like an alternative currency.
A problem arose when people tried to hoard coupons to build a reserve and then run it down. The more people tried to hoard coupons, the less people were willing to go out and get their babies sat. And since there were less coupons in circulation, there were less babies sat. The baby co-op, in other words, had entered a recession. It was in a classic liquidity trap.
The co-op decided to issue more coupons, and all was well again.
As Krugman writes:
If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year’s worth of Wall Street Journal editorials. And if you are willing to really wrap your mind around the co-op’s story, to play with it and draw out its implications, it will change the way you think about the world.
Krugman is right: if you really understand the baby-sitting co-op, you really understand monetary policy. And if you understand the baby-sitting co-op, you understand why Bitcoin’s design is fatally flawed. (The column is also worth reading because, even though Krugman is now mostly known as a left-wing firebrand, arch-libertarian Milton Friedman almost certainly would have signed up to every word of Krugman’s column.)
Once the supply of Bitcoin is fixed, at some point the Bitcoinomy will run into the same problem as the baby-sitting co-op: there won’t be enough currency, and there will be a recession, and there will be a liquidity trap.
There are some objections to this: for example, that since each bitcoin can be infinitely divided into components, the money supply can keep growing. But that’s not related. If you have a $10 bill and I replace it with ten $1 bills, do you feel richer?
I’ve also been told that this is only valid if the entire world is on Bitcoin, but if you think about the world today, that’s not true. There are plenty of currencies out there, and the supply of some of them is too low, and that hurts the people who use that currency. The fact that the dollar exists doesn’t prevent the yen from being too strong.
All the talk about the science fiction-like aspects of Bitcoin–the design, the cryptography, the sophisticated algorithms–obscures what a column from 15 years ago about a humble baby-sitting co-op tells you and allows you to understand why Bitcoin isn’t viable.

If Bitcoin keeps growing, at some point the money supply will be too low, and “Bitcoinomy” will experience a recession, which will turn into a deflationary depression as the money supply never expands. Just like the baby-sitting co-op (or the world under the gold standard in the 1930s).
Now, it’s worth noting that this fatal flaw of Bitcoin is not a fatal flaw for all cryptocurrencies or algorithmic currencies. One can imagine a Bitcoin-like currency with a smart algorithmic central bank (indeed, Bitcoin does have an algorithmic central bank–just an economically illiterate one).
In fact–and this is where things get really interesting–you don’t have to imagine just one. As Quartz’s Christopher Mims said on Twitter, “Imagine a future in which a handful of cryptocurrencies, each headed by a different monetary philosophy, compete.” We would, if nothing else, certainly learn a lot about human nature, technology and economics.
In this world of multiple, competing cryptocurrencies, Bitcoin would be a pioneer–and, ultimately, a loser.

Thursday, April 4, 2013

Secret Files Expose Offshore's Global Impact

A historic day for investigative journalism, with the release of the offshore tax haven story. As I have said before, pay the tax; they will find you as they have in other parts of the world. See my blogs from three years ago. Aivars Lode

Dozens of journalists sifted through millions of leaked records and thousands of names to produce ICIJ’s investigation into offshore secrecy
By Gerard Ryle, Marina Walker Guevara, Michael Hudson, Nicky Hager, Duncan Campbell and Stefan Candea
A cache of 2.5 million files has cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and the mega-rich the world over.
The secret records obtained by the International Consortium of Investigative Journalists lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.
They include American doctors and dentists and middle-class Greek villagers as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labeled as a cog in Iran’s nuclear-development program.
The leaked files provide facts and figures — cash transfers, incorporation dates, links between companies and individuals — that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike. The records detail the offshore holdings of people and companies in more than 170 countries and territories.
The hoard of documents represents the biggest stockpile of inside information about the offshore system ever obtained by a media organization. The total size of the files, measured in gigabytes, is more than 160 times larger than the leak of U.S. State Department documents by Wikileaks in 2010.
To analyze the documents, ICIJ collaborated with reporters from The Guardian and the BBC in the U.K., Le Monde in France, Süddeutsche Zeitung and Norddeutscher Rundfunk in Germany, The Washington Post, the Canadian Broadcasting Corporation (CBC) and 31 other media partners around the world.
Eighty-six journalists from 46 countries used high-tech data crunching and shoe-leather reporting to sift through emails, account ledgers and other files covering nearly 30 years.
“I’ve never seen anything like this. This secret world has finally been revealed,” saidArthur Cockfield, a law professor and tax expert at Queen’s University in Canada, who reviewed some of the documents during an interview with the CBC. He said the documents remind him of the scene in the movie classic The Wizard of Oz in which “they pull back the curtain and you see the wizard operating this secret machine.”
Mobsters and Oligarchs
The vast flow of offshore money — legal and illegal, personal and corporate — can roil economies and pit nations against each other. Europe’s continuing financial crisis has been fueled by a Greek fiscal disaster exacerbated by offshore tax cheating and by a banking meltdown in the tiny tax haven of Cyprus, where local banks’ assets have been inflated by waves of cash from Russia.
Anti-corruption campaigners argue that offshore secrecy undermines law and order and forces average citizens to pay higher taxes to make up for revenues that vanish offshore. Studies have estimated that cross-border flows of global proceeds of financial crimes total between $1 trillion and $1.6 trillion a year.
ICIJ’s 15-month investigation found that, alongside perfectly legal transactions, the secrecy and lax oversight offered by the offshore world allows fraud, tax dodging and political corruption to thrive.
Offshore patrons identified in the documents include:
• Individuals and companies linked to Russia’s Magnitsky Affair, a tax fraud scandal that has strained U.S.-Russia relations and led to a ban on Americans adopting Russian orphans.
• A Venezuelan deal maker accused of using offshore entities to bankroll a U.S.-based Ponzi scheme and funneling millions of dollars in bribes to a Venezuelan government official.
• A corporate mogul who won billions of dollars in contracts amid Azerbaijani President Ilham Aliyev’s massive construction boom even as he served as a director of secrecy-shrouded offshore companies owned by the president’s daughters.
• Indonesian billionaires with ties to the late dictator Suharto, who enriched a circle of elites during his decades in power.
The documents also provide possible new clues to crimes and money trails that have gone cold.
After learning ICIJ had identified the eldest daughter of the late dictator Ferdinand Marcos, Maria Imelda Marcos Manotoc, as a beneficiary of a British Virgin Islands (BVI) trust, Philippine officials said they were eager to find out whether any assets in the trust are part of the estimated $5 billion her father amassed through corruption.
Manotoc, a provincial governor in the Philippines, declined to answer a series of questions about the trust.
Politically connected wealth
The files obtained by ICIJ shine a light on the day-to-day tactics that offshore services firms and their clients use to keep offshore companies, trusts and their owners under cover.
Tony Merchant, one of Canada’s top class-action lawyers, took extra steps to maintain the privacy of a Cook Islands trust that he’d stocked with more than $1 million in 1998, the documents show.
In a filing to Canadian tax authorities, Merchant checked “no” when asked if he had foreign assets of more than $100,000 in 1999, court records show.
Between 2002 and 2009, he often paid his fees to maintain the trust by sending thousands of dollars in cash and traveler’s checks stuffed into envelopes rather than using easier-to-trace bank checks or wire transfers, according to documents from the offshore services firm that oversaw the trust for him.
One file note warned the firm’s staffers that Merchant would “have a st[r]oke” if they tried to communicate with him by fax.
It is unclear whether his wife, Pana Merchant, a Canadian senator, declared her personal interest in the trust on annual financial disclosure forms. Under legislative rules, she had to disclose every year to the Senate’s ethics commissioner that she was a beneficiary of the trust, but the information was confidential.
The Merchants declined requests for comment.
Other high profile names identified in the offshore data include the wife of Russia’s deputy prime minister, Igor Shuvalov, and two top executives with Gazprom, the Russian government-owned corporate behemoth that is the world’s largest extractor of natural gas.
Shuvalov’s wife and the Gazprom officials had stakes in BVI companies, documents show. All three declined comment.
In a neighboring land, the deputy speaker of Mongolia’s Parliament said he was considering resigning from office after ICIJ questioned him about records showing he has an offshore company and a secret Swiss bank account.
“I shouldn’t have opened that account,” Bayartsogt Sangajav, who has also served as his country’s finance minister, said. “I probably should consider resigning from my position.”
Bayartsogt said his Swiss account at one point contained more than $1 million, but most of the money belonged to what he described as “business friends” he had joined in investing in international stocks.
He acknowledged that he hasn’t officially declared his BVI company or the Swiss account in Mongolia, but he said he didn’t avoid taxes because the investments didn’t produce income.
“I should have included the company in my declarations,” he said.
Wealthy Clients
The documents also show how the mega-rich use complex offshore structures to own mansions, art and other assets, gaining tax advantages and anonymity not available to average people.
Spanish names include a baroness and famed art patron, Carmen Thyssen-Bornemisza, who is identified in the documents using a company in the Cook Islands to buy artwork through auction houses such as Sotheby’s and Christie’s, including Van Gogh’s Water Mill at Gennep. Her attorney acknowledged that she gains tax benefits by holding ownership of her art offshore, but stressed that she uses tax havens primarily because they give her “maximum flexibility” when she moves art from country to country.
Among nearly 4,000 American names is Denise Rich, a Grammy-nominated songwriter whose ex-husband was at the center of an American pardon scandal that erupted as President Bill Clinton left office.
A Congressional investigation found that Rich, who raised millions of dollars for Democratic politicians, played a key role in the campaign that persuaded Clinton to pardon her ex-spouse, Marc Rich, an oil trader who had been wanted in the U.S. on tax evasion and racketeering charges.
Records obtained by ICIJ show she had $144 million in April 2006 in a trust in the Cook Islands, a chain of coral atolls and volcanic outcroppings nearly 7,000 miles from her home at the time in Manhattan. The trust’s holdings included a yacht called the Lady Joy, where Rich often entertained celebrities and raised money for charity.
Rich, who gave up her U.S. citizenship in 2011 and now maintains citizenship in Austria, did not reply to questions about her offshore trust.
Another prominent American in the files who gave up his citizenship is a member of the Mellon dynasty, which started landmark companies such as Gulf Oil and Mellon Bank. James R. Mellon – an author of books about Abraham Lincoln and his family’s founding patriarch, Thomas Mellon – used four companies in the BVI and Lichtenstein to trade securities and transfer tens of millions of dollars among offshore bank accounts he controlled.
Like many offshore players, Mellon appears to have taken steps to distance himself from his offshore interests, the documents show. He often used third parties’ names as directors and shareholders of his companies rather than his own, a legal tool that owners of offshore entities often use to preserve anonymity.
Reached in Italy where lives part of the year, Mellon told ICIJ that, in fact, he used to own “a whole bunch” of offshore companies but has disposed of all of them. He said he set up the firms for “tax advantage” and liability reasons, as advised by his lawyer. “But I have never broken the tax law.”
Of the use of nominees Mellon said that “that’s the way these firms are set up,” and added that it’s useful for people like him who travel a lot to have somebody else in charge of his businesses. “I just heard of a presidential candidate who had a lot of money in the Cayman Islands,” Mellon, now a British national, said alluding to former U.S. presidential candidate Mitt Romney. “Not everyone who owns offshores is a crook.”
Offshore growth
The anonymity of the offshore world makes it difficult to track the flow of money. Astudy by James S. Henry, former chief economist at McKinsey & Company, estimates that wealthy individuals have $21 trillion to $32 trillion in private financial wealth tucked away in offshore havens — roughly equivalent to the size of the U.S. and Japanese economies combined.
Even as the world economy has stumbled, the offshore world has continued to grow, said Henry, who is a board member of the Tax Justice Network, an international research and advocacy group that is critical of offshore havens. His research shows, for example, that assets managed by the world’s 50 largest “private banks” — which often use offshore havens to serve their “high net worth” customers — grew from $5.4 trillion in 2005 to more than $12 trillion in 2010.
Henry and other critics argue that offshore secrecy has a corrosive effect on governments and legal systems, allowing crooked officials to loot national treasuries and providing cover to human smugglers, mobsters, animal poachers and other exploiters.
Offshore’s defenders counter that most offshore patrons are engaged in legitimate transactions. Offshore centers, they say, allow companies and individuals to diversify their investments, forge commercial alliances across national borders and do business in entrepreneur-friendly zones that eschew the heavy rules and red tape of the onshore world.
“Everything is much more geared toward business,” David Marchant, publisher ofOffshoreAlert, an online news journal, said. “If you’re dishonest you can take advantage of that in a bad way. But if you’re honest you can take advantage of that in a good way.”
Much of ICIJ’s reporting focused on the work of two offshore firms, Singapore-based Portcullis TrustNet and BVI-based Commonwealth Trust Limited (CTL), which have helped tens of thousands of people set up offshore companies and trusts and hard-to-trace bank accounts.
Regulators in the BVI found that CTL repeatedly violated the islands’ anti-money-laundering laws between 2003 and 2008 by failing to verify and record its clients’ identities and backgrounds. “This particular firm had systemic money laundering issues within their organization,” an official with the BVI’s Financial Services Commission said last year.
The documents show, for example, that CTL set up 31 companies in 2006 and 2007 for an individual later identified in U.K. court claims as a front man for Mukhtar Ablyazov, a Kazakh banking tycoon who has been accused of stealing $5 billion from one of the former Russian republic’s largest banks. Ablyazov denies wrongdoing.
Thomas Ward, a Canadian who co-founded CTL in 1994 and continues to work as a consultant to the firm, said CTL’s client-vetting procedures have been consistent with industry standards in the BVI, but that no amount of screening can ensure that firms such as CTL won’t be “duped by dishonest clients” or sign on “someone who appears, to all historical examination, to be honest” but “later turns to something dishonest.”
“It is wrong, though perhaps convenient, to demonize CTL as by far the major problem area,” Ward said in a written response to questions. “Rather I believe that CTL’s problems were, by and large, directly proportional to its market share.”
ICIJ’s review of TrustNet documents identified 30 American clients accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct. They include ex-Wall Street titans Paul Bilzerian, a corporate raider who was convicted of tax fraud and securities violations in 1989, and Raj Rajaratnam, a billionaire hedge fund manager who was sent to prison in 2011 in one of the biggest insider trading scandals in U.S. history.
TrustNet declined to answer a series of questions for this article.
The records obtained by ICIJ expose how offshore operatives help their customers weave elaborate financial structures that span countries, continents and hemispheres.
A Thai government official with links to an infamous African dictator used Singapore-based TrustNet to set up a secret company for herself in the BVI, the records show.
The Thai official, Nalinee “Joy” Taveesin, is currently Thailand’s international trade representative. She served as a cabinet minister for Prime Minister Yingluck Shinawatra before stepping down last year.
Taveesin acquired her BVI company in August 2008. That was seven months after she’d been appointed an advisor to Thailand’s commerce minister — and three months before the U.S. Department of Treasury blacklisted her as a “crony” of Zimbabwean dictator Robert Mugabe.
The Treasury Department froze her U.S. assets, accusing her of “secretly supporting the kleptocratic practices of one of Africa’s most corrupt regimes” through gem trafficking and other deals made on behalf of Mugabe’s wife, Grace, and other powerful Zimbabweans.
Taveesin has said her relationship with the Mugabes is “strictly social” and that the U.S. blacklisting is a case of guilt by association. Through her secretary, Taveesin flatly denied that she owns the BVI company. ICIJ verified her ownership using TrustNet records that listed her and her brother as shareholders of the company and include the main address in Bangkok for her onshore business ventures.
Records obtained by ICIJ also reveal a secret company belonging to Muller Conrad “Billy” Rautenbach, a Zimbabwean businessman who was blacklisted by the U.S. for his ties to the Mugabe regime at the same time as Taveesin. The Treasury Department said Rautenbach has helped organize huge mining projects in Zimbabwe that “benefit a small number of corrupt senior officials.”
When CTL set Rautenbach up with a BVI company in 2006 he was a fugitive, fleeing fraud allegations in South Africa. The charges lodged personally against him were dismissed, but a South African company he controlled pleaded guilty to criminal charges and paid a fine of roughly $4 million.
Rautenbach denies U.S. authorities’ allegations, contending that they made “significant factual and legal errors” in their blacklisting decision, his attorney, Ian Small Smith, said. Smith said Rautenbach’s BVI company was set up as “special purpose vehicle for investment in Moscow” and that it complied with all disclosure regulations. The company is no longer active.
‘One Stop Shop’
Offshore’s customers are served by a well-paid industry of middlemen, accountants, lawyers and banks that provide cover, set up financial structures and shuffle assets on their clients’ behalf.
Documents obtained by ICIJ show how two top Swiss banks, UBS and Clariden, worked with TrustNet to provide their customers with secrecy-shielded companies in the BVI and other offshore centers.
Clariden, owned by Credit Suisse, sought such high levels of confidentiality for some clients, the records show, that a TrustNet official described the bank’s request as the “the Holy Grail” of offshore entities — a company so anonymous that police and regulators would be “met with a blank wall” if they tried to discover the owners’ identities.
Clariden declined to answer questions about its relationship with TrustNet.
“Because of Swiss banking secrecy laws, we are not allowed to provide any information about existing or supposed accountholders,” the bank said. “As a general rule, Credit Suisse and its related companies respect all the laws and regulations in the countries in which they are involved.”
A spokesperson for UBS said the bank applies “the highest international standards” to fight money laundering, and that TrustNet “is one of over 800 service providers globally which UBS clients choose to work with to provide for their wealth and succession planning needs. These service providers are also used by clients of other banks.”
TrustNet describes itself as a “one-stop shop” — its staff includes lawyers, accountants and other experts who can shape secrecy packages to fit the needs and net worths of its clients. These packages can be simple and cheap, such as a company chartered in the BVI. Or they can be sophisticated structures that weave together multiple layers of trusts, companies, foundations, insurance products and so-called “nominee” directors and shareholders.
When they create companies for their clients, offshore services firms often appoint faux directors and shareholders — proxies who serve as stand-ins when the real owners of companies don’t want their identities known. Thanks to the proliferation of proxy directors and shareholders, investigators tracking money laundering and other crimes often hit dead ends when they try to uncover who is really behind offshore companies.
An analysis by ICIJ, the BBC and The Guardian identified a cluster of 28 “sham directors” who served as the on-paper representatives of more than 21,000 companies between them, with individual directors representing as many 4,000 companies each.
Among the front men identified in the documents obtained by ICIJ is a U.K.-based operative who served as a director for a BVI company, Tamalaris Consolidated Limited, which the European Union has labeled as a front company for the Islamic Republic of Iran Shipping Line. The E.U., the U.N. and the U.S. have accused IRISL of aiding Iran’s nuclear-development program.
‘Zone of Impunity’
International groups have been working for decades to limit tax cheating and corruption in the offshore world.
In the 1990s, the Organization for Economic Cooperation and Development began pushing offshore centers to reduce secrecy and get tougher on money laundering, but the effort ebbed in the 2000s. Another push against tax havens began when U.S. authorities took on UBS, forcing the Swiss bank to pay $780 million in 2009 to settle allegations that it had helped Americans dodge taxes. U.S. and German authorities have pressured banks and governments to share information about offshore clients and accounts and UK Prime Minister David Cameron has vowed to use his leadership of the G8, a forum of the world’s richest nations, to help crack down on tax evasion and money laundering.
Promises like those have been met with skepticism, given the role played by key G8 members — the U.S., the U.K. and Russia — as sources and destinations of dirty money. Despite the new efforts, offshore remains a “zone of impunity” for anyone determined to commit financial crimes, said Jack Blum, a former U.S. Senate investigator who is now a lawyer specializing in money laundering and tax fraud cases.
“Periodically, the stench gets so bad somebody has to get out there and clap the lid on the garbage can and sit on it for a while,” Blum said. “There’s been some progress, but there’s a bloody long way to go.”

Monday, April 1, 2013

The market is still thirsty for junk bonds… The coming stock boom… Gold stocks are cheap and about to rally… The latest from Japan… Jim Rogers is terrified of Cyprus… Making money in real estate…

What can I say... dividends, dividends, and more dividends. Aivars Lode

Global high-yield (aka "junk") bond issuances hit $148.6 billion in the first quarter of 2013… That's 25% higher from the same period a year ago. And the U.S., U.K., and China are leading the activity, according to data provider Dealogic. The combination of record-low interest rates and excess capital sloshing through economies is driving up the price of risky assets (and driving down the yield).

Still, there's more demand for high-yield bonds than companies can meet… On March 19, Owens-Illinois, a glass- and plastic-packaging company, sold 330 million euros of high-yield bonds in Europe… Demand was 3 billion euros – so the issue was nearly 10 times oversubscribed.

 And all of this is occurring with junk-bond yields at record lows… According to a Merrill Lynch index, the average U.S. junk bond yields a little more than 5.6%. Junk-bond yields in Europe are less than 5.2%.

 Take a look at this chart showing the spread between junk bonds and 10-year Treasurys:

 Dr. David Eifrig addressed junk bonds' popularity in his latest issue of Retirement Millionaire
Investors spent much of 2012 "stampeding" into bond funds. This is a classic sign of risk aversion and fear of a volatile and uncertain stock market. And yet with interest rates still near all-time lows, people are still moving gobs of money into bonds and bond funds. But as the chart below shows, people are finally starting to put money back into stocks… and at the same rate they're putting money into bond funds…

This spike higher in equity flows is the critical difference between 2013 and previous times of low interest rates and muted inflation… like last August, when I wrote that investors' love affair with bonds represented the "worst investment deal on Earth."

Once folks realize that dividend yields on stocks are higher than the interest rates on bonds and that stocks have the potential to grow their payments over time (which bonds can't)… stocks could be in for a "Very Good Year"…

 Steve Sjuggerud has a similar outlook. In the March issue of True Wealth, Steve told readers we'd see a "great migration" into equities that could send the market soaring nearly 100% from today's levels. He listed the reasons he believes this migration will take place…
1) U.S. stocks are the best value they've ever been during my investing lifetime. The upside potential in U.S. stocks over the next three years could be the biggest in my near-20-year career. And all stocks have to do is return to their average.

2) Zero-percent interest rates are here to stay. Low interest rates are the real "rocket fuel" to this boom. The good news is there's no chance the government will raise interest rates over the next two years. Meanwhile, we have perfect "Goldilocks" conditions for investing… not too hot, not too cold – JUST RIGHT. THIS is the investing sweet spot… This is where the biggest gains happen over the longest stretches.

3) Lastly, today's zero-percent rates will force Mom and Pop America to "migrate" into the U.S. stock market… pushing the stock boom into "bubble" territory, possibly in 2015.

 And in Digest Premium last weekPorter said he's still bullish, despite record-high stock prices:
Even though the S&P 500 is trading at all-time highs, I am still bullish.

I became bullish on the global equity markets in late 2011 when the European Union turned on the printing presses and began to match the Federal Reserve's money printing (aka quantitative easing). When global central banks are printing tons of money, you're going to have a huge initial feel-good rally…

People believe their money is still sound. So they go out and buy companies and build new infrastructure and start new businesses. Economies all over the globe heat up.

 Porter argues this new money is "a mirage" created by the Federal Reserve. And the rally will eventually end. However, now is the time to be invested and enjoy big gains.

 The global flight into riskier assets will send sectors across the board soaring. But we think you'll see some of the biggest gains in gold stocks – one of the most beaten-down sectors in the market today.

We discussed gold stocks in the March 27 Digest. Both Jeff Clark and Porter are bullish on the sector. Jeff is buying based on technical signals. (Several of his "buy signals" are going off.) And Porter likes gold stocks based on fundamental analysis. As he wrote in the latest issue of his Investment Advisory
Compared with the value of their gold production, gold stocks, as a whole, are as cheap today as they were at the bottom of the gold-stock market during the crisis of 2008. Back then, we recommended buying a basket of gold-mining stocks (GDX) to take advantage of this very unusual situation… That recommendation doubled speculators' money in about a year. (We eventually closed the position in May 2011 for a 91% gain.)

Right now, the market cap [of the gold stock I recommended] is 32% less than the value of its assets… discounts this steep in the share price have happened only seven other times since 1994. The average return 12 months later if you bought in these dips is more than 50%.

 If you're interested in buying gold stocks, we recommend you read Gold Stock Analyst, written by our friend John Doody.

John is one of the best gold-stock investors we know. He's made a fortune for himself using his proprietary techniques. And he's produced huge returns for his readers. From 2000 through the end of 2012, John's method for investing in gold stocks has returned 1,239%… crushing the gains from the S&P 500 (13%), gold (515%), and an index of gold stocks (222%).

 Steve Sjuggerud is not only bullish on the U.S. stock market… He has also named Japanese equities his "No. 1 opportunity for 2013."

In the December issue of True Wealth, Steve explained how newly elected Prime Minister Shinzo Abe would want to do in Japan what Federal Reserve Chairman Ben Bernanke was doing here in the U.S… but multiplied by a factor of 10. Abe is bent on kick-starting Japan's economy with a slate of inflationary policies (like zero-percent interest rates). Steve says Abe will do whatever it takes to bust Japan's 30-year deflation bout.

And to date, Steve's Japan investment thesis is playing out according to plan…

 The Bank of Japan (BOJ) – the nation's central bank – says business sentiment in Japan is improving.

The BOJ interviews businesses of all sizes in manufacturing and nonmanufacturing sectors each quarter. It compiles the results in a survey called the Tankan report, which measures business confidence across key industries.

The first-quarter 2013 survey released today shows the outlook from large manufacturers has improved. A Financial Times article on the report credited the improvement on a weaker yen helping bump up profits (by making exports cheaper). Confidence among nonmanufacturers also improved.

The Financial Times says companies expect further improvements following Abe's aggressive efforts to push Japan's economy into overdrive… While the survey shows business in Japan is getting better, the index still languishes in negative territory, indicating Japan's executives remain cautious. The index has not registered a positive (optimistic) outlook since December 2007.

Now, in the wake of the positive Tankan report, the BOJ will meet this week for the first time since Haruhiko Kuroda took over as the central bank's chief. Kuroda said he would "do whatever it takes" to end deflation. He told parliament last week, "Achieving the 2% inflation target in two years is something that I have in my mind."

Since Steve's December issue, Japan's benchmark Nikkei 225 stock index is up around 20%. The True Wealth model portfolio holds two positions that will benefit from a rising Nikkei – the WisdomTree Japan SmallCap Dividend Fund (DFJ) and the WisdomTree Japan Hedged Equity Fund (DXJ), which hedges currency risk. True Wealth subscribers are up 33% on the small-cap fund, DFJ, since Steve recommended it in February 2010. They're up 19% on DXJ since December.

 Over the weekend, Cyprus announced large-account holders in the nation's banks could lose as much as 60% of their money. We won't rehash all the details of Cyprus' situation today. (You can read our write-up from a week ago here.)

However, at heart, the failure of Cyprus' banking system underscores how socialist thinking and policies have corrupted allegedly "capitalist" economies around the world.

 Jim Rogers, the outspoken investment guru who co-founded the Quantum fund with George Soros, says Cyprus' actions were the last straw for him…

"What more do you need to know? Please, you better hurry, you better run for the hills," Rogers said last Thursday on CNBC. "Think of all the poor souls that just thought they had a simple bank account. Now they find out that they are making a 'contribution to the stability of Cyprus.'"

Like Porter, Rogers believes the decision to "tax" deposits of more than 100,000 euros in Cypriot banks is out-and-out theft that might be duplicated whenever it seems expedient. Rogers is also concerned the move sets a dangerous precedent to be used elsewhere.

"The IMF has said, 'Sure, loot the bank accounts.' The EU has said, 'Loot the bank accounts,'" Rogers said. "So you can be sure that other countries, when problems come, are going to say, 'Well, it's condoned by the EU; it's condoned by the IMF. So let's do it, too.'"

Rogers said he's reducing the size of his European accounts to ensure they're within the balance guaranteed by central banks.

 In the U.S., the Federal Deposit Insurance Corp. (FDIC) guarantees deposits up to $250,000. But should we encounter a similar situation, it will be messy… The FDIC is broke. And the only avenue to repay depositors in the U.S. is to print even more money. All the more reason we hope you own some gold

 New 52-week highs (as of 3/29/13): None, the market was closed for Good Friday.

 "I'm a small investor I started with 100,000. In 2008 I bought my first foreclosure. I bought a triplex with a new roof for 70,000. Cleaned and rented one unit at a time. I did as much as I could myself. I rented each unit for 700 per [month]. At the end of 5 weeks as I rented the last unit, I also signed a contract to sell. I made 22,000, plus a small amount of rent.

"It was a cash closing in 10 days. That got me started. I bought 7 foreclosures in one and a half years. After I bought and sold 4, I made enough to buy 2. I kept the last 2 duplexes for rental income. I stopped buying because I had my 3rd back surgery and a knee replaced. I just started looking again there is nothing for sale left at the good prices. I know that my income now is so much better than what I was getting on a 100,000 cd. I was getting 1%, now I am getting 2,800 a month. A lot of work pays off. Happy hunting." – Anonymous

 "My wife and I began buying rental property in 1985 and soon had 18 homes we were managing, in addition to our full-time jobs. We sold the last of them in 2002 when we felt the market was getting crazy.

"We started looking again this past summer based on S&A recommendations. The first one we looked at was $85K, but we passed on it due to a nonconforming basement. After many offers on bank REOs and short sales in the $120K-145K range, we got our first unit in Nov. for $171K. It had a finished basement, 4BR, 2 Baths and about 2K finished square feet. We had 10 renters interested the first day we posted our ad on Craigslist and rented it for $1275 before our first payment was due.

"We put a backup offer on a short sale in Feb. for $173K and when the first buyer backed out we got it. It was 1200 sq ft 3BR, 2Baths and appraised for $192K. We rented it for $1300 to a couple with 3 kids moving in from out of state, who just missed renting the first house we bought. They moved their stuff into the garage 4 hours after we closed and took possession a week later after we had it painted and the carpets cleaned. Our first payment is not due until April 1st so we had 1 1/2 months of rent to build a safety cushion.

"These are both in Berthoud, CO about a block from each other. We decided on Berthoud because of the good schools and because there were only 4 houses listed for rent in the whole town. Last week, we made an offer of $173K on another 3 BR house that was only 1K sq ft and listed for $186K. It sold the first day of showings and had 3 other offers. I'd say the market is heating up dramatically in the last 6 months. We're glad we got in when we did and thank you for your advice." – Paid-up subscriber Bob A.


Sean Goldsmith