Slouching Towards Wall Street… Notes for the Week Ending Friday, February 18, 2011
Moammar Gadhafi — An Investor’s Best Friend
While nothing on Wall Street — not even Jamie Dimon’s bonus — can match the level of tension and excitement pouring forth from our television screens these past few weeks, there are nonetheless goings on in the world of Wall Street as regulators and other predators slouch about looking for the fabled pot of gold. Here are a few items that caught our interest this week.
SharesPost, of San Bruno, CA, has a Facebook page where it describes itself as “The online marketplace for private investments.” It claims that its platform connects “more that 45,000 institutional and individual investors with more than a billion dollars worth of private company securities.” SharesPost says it offers real-time pricing in its illiquid private market, as well as company-provided, and independent investment research. SharesPost doesn’t just advertise itself on Facebook, it also trades Facebook shares. According to an item in the Wall Street Journal technology blog (wsj.com, 23 February, “Private-Share Trade Is Probed”) SharesPost, which is not a registered broker dealer, facilitates transactions for a fee of between 2%-5% and posts the price of its most recent transactions as a “valuation” of the private companies in which it arranges transactions. The SEC is reportedly looking into this valuation practice. (We remind you of Marx’ observation that the English language tends to take secular concepts from German, and spiritual or philosophical ones from Latin; hence the difference between German-derived “Price” and Latin-based “Value.”) According to the WSJ, December’s Goldman / Digital Sky Technologies combined $500 million investment pegged Facebook’s value at $50 billion, yet SharesPost’s most recent quoted transaction was reported at a valuation of $87 billion. It is not clear how many shares this price represents — you may recall stories this week about a single trader who executed a single contract purchase of oil futures at the $100 price. The Commission is asking about this pricing discrepancy.
Speaking of Facebook, the SEC is drawing a bead on social networking. Saying there is “no doubt that people are misusing” social networks, SEC examiners are reportedly writing up firms that do not have a written policy regarding use of social networks. (Note to compliance directors: presumably “No” is not going to be sufficient.)
The world of social networking is still in relatively early stages, yet already there is a mind-numbing panoply of styles and technologies for communication, all of which will have to be overseen by firms under their own written supervisory procedures. Reports of recent SEC exams say there have been requests for documentation to show firm employees’ level of use of sites such as Facebook, Twitter and LinkedIn, as well as record-retention policies and records of disciplinary actions taken involving use of social media by employees. The SEC has so far issued no rules governing social networks. In other words, the SEC has come up against a knotty problem. They don’t know the answer — but you’d better have it!
In what we consider much more positive news, the SEC has decided it is time investors got a Cost Of Living Adjustment. Or maybe, in this case, we should call it a Cost Of Losing Money Adjustment. The Accredited Investor designation applies to individuals with net worth of one million dollars — or to individuals who earn over $200,000 a year, or $300,000 jointly with their spouse. The problem is that this definition was put in place when a million dollars was worth… well, about a million dollars, and has not changed since. Under the rule writing provisions of Dodd Frankenstein, the SEC is proposing to remove from the net worth calculation the value of equity held in the investor’s primary residence. This means that, unlike current practice, in the future an investor in a private placement may be precluded from taking a home equity loan to meet a cash call. A review of the comments on the SEC website is instructive — many of the comments complain that it’s difficult enough to raise risk capital nowadays without the government stepping in an preventing us from taking someone’s home as collateral. Some of the comments are highly articulate, but many seem to come down on the side of continuing to permit some exposure to homeowners’ primary residence in the cause of future capital formation. One of our favorite comments is herewith offered in its entirety. We like it because it is brief and to the point — not to mention because we agree with it: “I have been an accredited investor for decades. My academic and business background is in finance. TO include the value of an investor’s residence in the calculation of their net worth for the purpose of being qualified as an investor has always struck me as troublesome. We have vividly established in the last few years the consequences of viewing a home as an investment to be leveraged and put at risk. I strongly support the proposed change and feel that the denial of inclusion of the value of home equity is a good step forward in protecting casual investors from inappropriate investments.” The whole debate is available on the SEC’s website under proposed new rule release 33-9177, “Net Worth Standard For Accredited Investors.”
Industry groups representing the nation’s money managers have come out against a proposal to create a self regulatory body for hedge funds — or especially to place hedge funds under the oversight of FINRA. An SEC study recommends that a SRO be established to oversee money managers, as the SEC acknowledges they are clearly under-resourced to regulate its more than 11,000 registered money managers. The industry strongly favors keeping the SEC as its sole overseer, and one lobbying group even said their members would pay higher fees to keep the SEC as their regulator, rather than move to an SRO. Calling SEC oversight “more efficient and comprehensive”, another association head warned of the unintended consequences of shifting regulation to a new body. (Like, maybe examiners would actually find stuff when they performed their audits?) Investors should be troubled that money managers so vocally prefer having the hamstrung SEC examine them. If you need further clarification, see Brer Rabbit’s expressed horror at being pitched into the briar patch. On the other hand, one alternative raised was to have money managers overseen by FINRA, which used to be the NASD… when Mary Schapiro was its CEO… when it was the regulator overseeing the activities of Bernie Madoff… which was right before Schapiro left to become chairman of the SEC… which is now the preferred overseer of the managed money industry…
It’s a combination right out of a low-budget political thriller: two of the worst human beings ever to walk the face of the earth sitting together, plotting the doom of the human race. This scenario was evoked last week when it was reported that Libya had considered investing money with Bernie Madoff (OpenChannel/MSNBC, 24 February, “Gadhafi Controls $32 Billion, Turned Down Madoff”). Reporting on a diplomatic cable made public by WikiLeaks, several media sources have told how both Madoff and Allen Stanford approached Mohamed Layas, head of the Libyan Investment Authority (LIA) and invited him to invest his country’s sovereign wealth fund with them.
Among the telling comments in the leaked cable is the revelation that, while the LIA has placed several hundred million dollars with US banks (preferring liquidity and safety to the growth prospects touted by the managers of riskier investments) Layas told US Ambassador Gene A. Cretz the LIA “has an office in London and preferred doing business there rather than in the United States due to the ‘ease of doing business’ in the UK.” We assume this congenial business atmosphere includes such perks as tax breaks on London real estate, and Her Majesty’ famous Get Out Of Jail Free card that Libya played last year.
The full text of the cable, entitled “Technology to Tourism,” is still available, even if WikiLeaks founder and chief Assange may not be. The executive summary says Ambassador Cretz pressed the Libyan government for greater flexibility in awarding visas to Americans; the Libyans countered that they manage some $32 billion in the global financial markets, including several unnamed US banks, each of whom manages $300-500 million. We would be fascinated to know which banks this covers, and what special arrangements exist. Call us conspiracy theorists, but we do not believe this information will be readily forthcoming.
To his credit, Libyan sovereign banker Layas previously visited Washington, where he spoke of opportunities to invest in Libya’s “unique market,” cautioning that doing business in Libya would expose foreigners to “red tape and corruption.” Layas cited America’s technology edge and the weakness of the dollar, versus the euro, as a competitive advantage for US firms in Libya and urged American companies to make inroads in Libya’s hydrocarbon sector by bidding on contracts in the electric power, health care and tourism sectors. Layas said Libya is keenly interested in building lasting relationships with key US firms and strongly hinted that some attractive contracts which had already been awarded might be subject to renegotiation to force other foreign firms to withdraw in favor of American bidders.
The Wiki-leaked cable quotes US Ambassador Cretz stressing “the US commitment to the bilateral relationship, including trade and investment” (this was January of last year), then goes on as Layas describes his encounters with Allen Stanford and Bernard Madoff, both of whom were turned down. The Libyan fund is allegedly controlled directly by Moammar Gadhafi, with Layas in the role of an intelligent patsy. This would give the Libyan dictator the rare distinction of being one of the richest people in the world who was not taken in by financial fraud. Even Goldman Sachs lost a billion dollars on the alleged improper dealings of Fabulous Fab Tourre. Gadhafi turns out to be a shrewd investor. Not just a pretty face.
Exactly one year ago, pole dancing hit the headlines as its advocates clamored to move out of the dingy strip clubs and onto the global stage. As reported, for example, by the Associated Press (23 February 2010, “Are The Olympics Ready For Pole Dancing?”), and the Daily News (22 February 2010, “Pole Dancing Could Be Recognized As A Sport”) practitioners of the highly demanding activity are clamoring for world recognition, saying pole dancing should be recognized as an Olympic event.
The AP story focused on Japan’s Mai Sato, a 29-year old who has been dancing since age three. Sato now devotes five hours a day to training as a pole dancer, and her devotion paid off last year when she was crowned world champion at the International Pole Dancing Fitness Championship. Last year’s competition was the second annual IPDFA (International Pole Dancing Fitness Association) event, and while the 2011 event has yet to be scheduled, it is clear that these women are taking this sport seriously.
Pole dancing is in the news again this week as the wife of convicted Ponzi-scammer Kenneth Starr had to go back into the work force to make ends meet. Starr pleaded guilty last year to a $60 million scam that took in the likes of director Martin Scorsese and actress Uma Thurman. His wife, Diane Passage, is also a performer, though not on the silver screen. Passage, a former Scores stripper, is up for a leading role in a new reality show based on the lives of pole dancers. With Starr facing 12 years in prison, and all their joint assets frozen, she has dusted off her old portfolio.
We notice other names cropping up in this week’s headlines in connection with Ponzi schemes, as Madoff bankruptcy trustee Irving Picard sued outgoing SEC general counsel David Becker to claw back $1.5 million in profits from an account Becker’s mother held with Bernie Madoff. Becker joined the Commission in 2009, shortly after the Madoff scandal broke, signing on for a two-year stint that ended last week. He disclosed his family connection to Madoff and was reportedly told by the SEC’s ethics committee that he would not need to recuse himself from Madoff-related matters. Now Republicans on the House Financial Services Committee have fired off a letter to SEC chairman Schapiro demanding to know the details of Becker’s profiting from the Madoff fraud.
We think this action is self serving and will come to nothing. Many of the people who lost seven figures in the Madoff disaster were average Janes and Joes, and we suspect Becker had no improper tie to Madoff or the SEC’s mishandling of the matter. Of course, there is Harry Markopolos’ assertion in his book No One Would Listen that Becker became angry when Markopolos suggested Becker had a conflict of interest in another case they were discussing. In that meeting, at which SEC chair Schapiro was also reportedly present, Markopolos says he told Becker he would no longer bring whistleblower actions to the SEC’s attention because the Agency wasn’t able to handle them. Markopolos says he shook hands with Schapiro when the meeting ended, but not with Becker.
To return to a more interesting topic, we wonder whether Passage’s high-profile return to the stage could be the push pole dancing fitness to emerge from the shadows. If cage fighting can creep out of the alleyways to become a multi-million dollar sport, why can’t pole dancing head to the Olympics? Indeed, we think the 2016 Olympics, to be hosted by the city of Rio de Janeiro, is the perfect venue to bring this activity out of the tawdry world of the strip joints and into the mainstream.
Pole dancing fitness, as we understand it wants to be called, appears to be an attraction ideally suited for Rio, and may be the boost the city needs. Earlier this month a massive blaze consumed most of the section of Rio known as “Samba City,” a neighborhood of warehouses where the floats and costumes for Rio’s annual Carnival are created and stored. Residents, many of whom are devoted members or fans of the city’s numerous samba schools, were devastated by the loss. The samba schools have vowed to overcome the losses in time to compete in the forthcoming Carnival.
The mainstay of Carnaval — the annual pre-Lenten festival — is the Samba, a music and dance form that originated among the poor Afro-Brazilians in Rio’s waterfront slums. Like pole dancing, it is highly demanding, requiring a combination of dance technique, stamina, and a finely tuned ability to move with the flow of the music. Also like pole dancing, Samba is a highly sexualized form of expression. The women who parade in the Carnival processions wear elaborate costumes that include great arching headdresses, full body-sized sunbursts strapped on their backs, and wing-like projections. These costumes can protrude several meters above, to the side and behind the wearer, but for all the work and material that goes into the costumes, they provide scant coverage for the wearer’s body. Indeed, women have been known to wear great sunbursts and plumed headdresses, but to have covered their bodies with nothing more than trompe l’oeil daubs of makeup strategically — and minimally — applied.
Samba is a quintessential part of Brazil’s culture and a source of pride for those who participate, as well as for their supporters. Neighborhoods center around their own samba schools, where devotees spend the entire year choreographing and practicing their own sambas, preparing costumes, making their floats for the Carnival procession, and rehearsing for the annual event culminating in the samba championships. Carnival, starting the Friday before Ash Wednesday, used to be a time when the poor could celebrate the pleasures of the flesh — famously, the only pleasures routinely available to the poor — in a period reserved for excess and abandon. As Carnival became a focus for tourism and a magnet for world interest, Brazil’s major corporations took note, and soon there were corporate sponsorships for what was traditionally an activity of the poor. According to some observers, the traditional funding for the samba schools came from neighborhood interests, necessarily including the parallel economy and criminal elements. As corporations vied to associate their names with Brazil’s most visible exports — music and sexuality societal — these elements found themselves shunted aside. This is not an unmitigated benefit. The shady hangers-on at the periphery of the samba world are not interlopers, but an integral part of the society. The underworld element is firmly entrenched in Rio’s neighborhoods, and their web of influence and mutual back-scratching extends to the highest reaches of government and the military, and if they feel their toes being trod on they will seek other ways to make up their losses.
Samba traditionalists also fear losing the purity of the art form, the thrill of the competition from neighborhood to neighborhood, and samba’s unique place as an art that belongs to the people — one of the few things Brazil’s poorest can say is truly theirs.
The samba schools come together for two days of intense competition that mark the high point of Carnival. A special stadium called the Sambodrome sits on the edge of the city of Rio. There, the samba schools come to compete before a panel of judges who rank them in ten categories including the beauty of their costumes, the performance of their musicians and percussionists, and the beauty, originality and execution of their choreography. The Sambodrome seats seventy thousand spectators and the competition is also broadcast live nationwide. The results of the competition are announced on Ash Wednesday and are as eagerly awaited as any major global competition. Observers say the competition is every bit as intense, and the wait for the judges’ rulings every bit as agonizing as anything at the Olympic Games. And as with the global event, competitors do not feel a sense of elation in taking the silver medal. In samba, as at the Olympics, there’s first place, and then there are the losers.
Samba is traditionally owned by Rio’s poor and working class, but it is not considered low culture. The professionals — Carnavalescos — who oversee the samba presentations include serious students of dance and music, of folklore and traditional arts. Many of them have risen to national prominence through their success in samba. Joaozinho Trinta, one of the most famous carnavalescos, is famous for his response to criticism that Carnival wastes money that could otherwise be used for education, housing and other social services for Rio’s poor. “The poor like luxury,” said Trinta. “It’s the intellectuals who like poverty.”
In this environment we imagine that pole dancing fitness has a strong chance of acceptance as a sport. Observers caution that even squash and cricket have yet to make it into the Olympics. But let’s face it, unless you are a cricket player, the game is not merely not riveting to watch, but completely incomprehensible. And while practically the entire English-speaking world outside of the US plays cricket, the rest of the world does not. Squash may be more multicultural, but for our money it happens so darned fast, there’s not much to watch. Pole dancing fitness, on the other hand, besides being an extremely demanding sport, is also television friendly, at least to the half of the Olympic Games’ viewers at whom the beer commercials are aimed. We would not be surprised to see Brazil invoke the traditional right of the host country to nominate a new event for the Games — pole dancing fitness may be a natural crossover for the country’s top samba competitors.
With any luck, the next few years will see pole dancers having wreathes placed on their heads and medals around their necks, instead of having grubby strangers shoving hundred dollar bills in their underwear in front of a roomful of other equally grubby strangers.
While Starr’s wife has proved there is life after Ponzi, it was not immediately clear to us what SEC counsel Becker’s wife would do should her husband end up on the wrong end of a Congressional ethics probe over his Madoff connection. One thing is for sure, though: Ponzi-schemer Starr sets a high bar for Ponzi-victim Becker. Passage crowed on Twitter about the Valentine’s Day flowers her hubby sent from prison. (Presumably his one phone call was to 1-800-FLOWERS.) Quoted on the website gothamis.com, Passage tweeted “More roses from Ken just arrived!! Even from behind bars he continues to make other husbands look like a$$holes.”
All right, so the world’s Fitness Pole Dancing elite will have to find a different spokesperson. But hey, ain’t love grand?
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