Investment Fraud

Washington, D.C., Jan. 18, 2012 — The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of St. Louis-based private investment funds and management firms after suing them and their principal for a scheme to defraud investors.

The SEC alleges that Burton Douglas Morriss diverted more than $9 million of investors’ money to himself without their knowledge or consent, and he mischaracterized the transfers as ‘loans” in his companies’ books. Morriss misused the money for alimony payments, interest on personal loans, and costly vacations including an African safari.

“Morriss attempted to hide his illegal transfers of investor funds by calling them ‘loans’ when in reality he had no intention of paying back the money and instead went on a spending spree,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “It is fraud, pure and simple.”

The SEC’s complaint filed Tuesday in federal court in St. Louis charges Morriss, his two private investment funds MIC VII LLC and Acartha Technology Partners LP, and his management firms, Gryphon Investments III LLC and Acartha Group LLC. Morriss Holdings LLC, an entity to which Morriss transferred some of the investor funds, is named as a relief defendant.

The SEC alleges that Morriss raised $88 million from investors who were told their funds would be invested in emerging financial services and technology companies. Instead, the SEC said Morriss transferred millions to himself and Morriss Holdings and used them for personal expenses. In an attempt to conceal his scheme, the fraudulent transfers that Morriss made to himself were recorded as “loans” on the books of Morriss’s companies. However, the transfers were never truly loans because Morriss did not intend to repay them. Morriss also recruited new investors for one of his funds without the unanimous consent of existing investors as required, thereby diluting their holdings.

On Tuesday, the Honorable Carol E. Jackson granted the SEC’s request for asset freezes, the appointment of a receiver, and other emergency relief to prevent further dissipation of investor assets. The SEC seeks to bar Morriss from serving as a public company officer or director; it also seeks permanent injunctive relief and financial penalties against Morriss and the entity defendants, and disgorgement of all ill-gotten gains from them and relief defendant Morriss Holdings.

The SEC’s investigation was conducted by Brian T. James, Trisha D. Sindler, and Michelle Lama under the supervision of Chedly C. Dumornay in the Miami Regional Office. Adam Schwartz and Robert K. Levenson will litigate the case.

Donald Trump Oil Agenda – A Fundamental Flaw

I watched an interview of Donald Trump this evening:

I’m all for his ambition but I believe he is pandering, to a degree, to the general public that have little knowledge of economics. He makes the statement in the above video that he “thinks it could go, with proper leadership, down to $40 a barrel”.

The problem with this is that, according to Harold Hamm (America’s richest oil man and CEO of Continental Resources), oil needs to be at least $50 per barrel in order to earn a 20% return on his capital investment. In other words, he’s not interested in anything less than 20% which is, in my opinion, reasonable.

State and Federal taxation on oil production is the main issue that needs to be changed in the U.S. before America can even think of being self sustainable. Two years ago (2009) you were hard pressed to find any oil production going on to any great degree and the reason was, oil was $53 per barrel and under. When oil hit $70, companies such as Continental Resources started a large buying campaign of leaseholders interests and, in regards to the Bakken Shale (one of the largest oil reserves in the Unites States), an oil boom started to take formation.

As Donald Trump states, an important issue is OPEC’s price fixing and that issue needs to be addressed – but if the U.S. wants to be self sustaining, state and federal taxation that restrict companies from having an economic interest in commencing production at anything less than $50 per barrel needs to be addressed. You could always ask the land owner’s to accept less than $25 per acre for lease-rights…but don’t hold your breath. It’s impossible for America to be oil independent without the consent of the leaseholders. For me, $25 per barrel, which is roughly what a leaseholder would receive if oil was at $40 per barrel,  just isn’t going to cut it.

Cost of Debt

Here’s a good video regarding the cost of debt in valuation.

 

MMPIQ Asset Valuation

I’ve compiled the latest data from the L.A. County Assessor’s Office. The following is that information. It is important to note that this information is not “assessed values” but rather “market values” as of the record date. I will be compiling a viewable data sheet this week which I will include within this posting that will list ALL their properties. Currently, time restraints don’t permit me to publish all my findings, therefore, I am only listing a few for the short time being.

Property #1: 3rd & Omar Street

Record Date: 08/10/2005

Market Value: $5,083,182 / $272.63 per sqft.

Description: 18,645 sqft., 0.50 acres. Industrial/Distribution space. This section of town is often referred to as “Little Tokyo, Los Angeles – the beginnings of Skid Row”.

The tan building on the far right is owned by Meruelo Maddux Properties, Inc.

Surrounding Properties Comparison:

1020 Wilde St., Los Angeles, CA.

Location: Within 1 mile radius.

Market Value at time of sale: $2,814,321

Record Date: 06/28/2005

23,100 sqft. Sold on: 10/14/2009 for $2,500,025 / $108.23 per sqft.; 11.17% discount to its market value.

1020 Wilde St. Los Angeles, CA

500 Mateo Street. Owned by Meruelo Maddux Properties, Inc. until recently. This building is also within a 1 mile radius.

Market Value at time of sale:$2,387,718

Record Date: 01/11/2006

12,948 sqft. – 0.75 acres. Sold on 04/30/2009 for $1,900,019 / $146.74 per sqft.  MMPIQ owned 99.6% of the property. Sold at a 20.43% discount to its market value.

500 Mateo Street

I’ve presented a strong argument for why I believe the assets of MMPIQ aren’t the type of quality that some people think they are. I’ve only presented one scenario here but have found this correlation throughout a large majority of their properties. Currently, many value investor’s are diving knee deep into this one. I’ve taken a pass. I don’t believe a margin of safety exists. Conversely, I believe the business is insolvent. Currently, the Southern California Commercial Real Estate market is down approximately 27% from its 2005 market valuations. Knowing this, it’s interesting to see the 2009 sales aren’t far off from that. As I compile my complete list and make that public, you’ll see that one particular property of theirs sold in 2009 at approximately 30% discount to its 2005 market valuation.

Skipping ahead, my findings are:

Total combined properties market Value: $574,490,410.

Approximately $91 Million of the market value is 100% owned by MMPIQ and the rest is 99.6% owned by the company.

($574,490,410 – $91,000,000) = ($483,390,410 x 99.6%) = ($481,556,448.40 + $91,000,000) = $572,556,448.40

Southern California Commercial Real Estate Decline since 2005 (my findings): 27% – apply as discount.

$572,556,448.40 – 27% = $417,966,207.30

Cash: $9.15 M

Receivables: $1.41 M x 0.85 discount = $1.20 M

Total Liabilities: $415.94 M

Shares Out: 88.05 M

($417,966,207.30 + $9,150,000 + $1,200,000 – $415,940,000)  / 88,050,000

= $0.14 per share.

[Note: The above valuation is incorrect. Rather than post the correct data, I've decided to leave my mistake posted and will be submitting a new valuation in the coming days as I find the available time to do so.]

Therefore, I’m not on board with many concerning the $0.20 “floor”. It hasn’t been approved and I’d be highly surprised if it did get approved.

Stock is currently trading for $0.18 per share. No margin of safety exists. Furthermore, during a bankruptcy proceeding, attorney’s costs millions. Ironing out the details in court could easily eat up any of the excess $12.33 M cash. If nothing else remember this – attorney’s don’t work for free.

Lastly, but maybe most importantly, Seth Klarman reminds us that we should value a bankruptcy no different than as we would any other business. Recognition of the events is the only difference between any other investment. I subscribe to this same logic therefore I propose this important warning sign. A conversation that took place between the company and its investors. Read carefully.

August 2008 earnings call:

Jack Ripstein – Potrero Capital Research Hi. Good morning. Thanks for taking my call. Question on the debt side, are there any properties or any changes in the debt associated with the new financing that are recoursed back to the company? Or is it all still projects and – either projects or land specific?

Andrew Murray All our debt is non-recourse.

Jack Ripstein – Potrero Capital Research Okay. So each piece that we can go through, the supplemental is attached to the actual project proposal next to it and nothing else?

Andrew Murray As you know, our construction loan is recourse, but that’s normal with a construction loan. But all the loans that we refinanced are secured by first trustees. We have one of our acquisition loans that we’re going to be doing with Overland terminal is a recourse loan, but that’s primarily because it’s a bridge loan.

Jack Ripstein – Potrero Capital Research Okay. You would replace that when possible?

Andrew Murray Yes.

Jack Ripstein – Potrero Capital Research Okay. Great.

Andrew Murray Generally speaking, we’re still in a non-recourse marketplace.

Jack Ripstein – Potrero Capital Research And that hasn’t started to change with some of the changing landscape out there?

Andrew Murray No.

Jack Ripstein – Potrero Capital Research Okay. Great. Appreciate it. Thank you.

Six months later, March 2009 earnings call:

Analyst for Jordan Sadler – Keybanc Capital Markets I just want to try to better understand your process and strategy and so what exactly would be the benefit in declaring Chapter 11? I see several properties that are 100% occupied or about six or seven that are over 90% occupied and so I guess first, what loans exactly are recourse to the company? And then second, why wouldn’t you essentially hand the keys back to the lender on the vacant buildings or under performing assets, reduce your expense load and just continue operating the remaining assets?

Richard Meruelo The great majority of our loans are either directly or indirectly recourse to the operating partnership or the company and so handing back keys is not enough of a solution.

Analyst for Jordan Sadler – Keybanc Capital Markets So most of the loans are recourse in some form or another? Were they non-recourse and now because of non-payment or a trigger of some sort of default they are recourse?

Richard Meruelo No but, many of them from the beginning had some form of recourse and as they’ve been modified over the last year it’s continued to increase the level of recourse. We’ve been modifying these loans now for over a year in short term extensions and recourse issue has become most prevalent in all of our loans except in just a few.

Analyst for Jordan Sadler – Keybanc Capital Markets On the non-recourse loans, when you say a few, can you just give a better sense of maybe what the NOI on those are which ones?

Richard Meruelo We have amount of non-recourse debt is how much Andrew?

Andrew Murray $74 million.

Richard Meruelo $74 million of our debt is non-recourse.

Andrew Murray We haven’t calculated the NOI on those properties but our overall strategy though is to continue to work with four of our lenders again, as we mentioned in our press release and in our comments to come up with an agreement with these four lenders that should deal with our cash flow matter, the cash flow issues we have in the company. We’re in advanced discussions with these four lenders. We’ve been having conversations with them daily now for several weeks and we continue to work towards a solution with them. That’s our primary focus right now.

Analyst for Jordan Sadler – Keybanc Capital Markets So the properties that are 100% occupied or in the 90% range, those are likely recourse or have some form of recourse to the company?

Andrew Murray If we have a performing property and it has recourse we want the relationship with that particular lender on that property to be in good standing.

Until next time.

[Disclosure: this is neither a buy or sell recommendation. As of July 19th, I own a shareholder interest in MMPIQ.]

CPI Incorporated (NYSE:CPY) – One year ago

I was the first person to give a buy recommendation of CPY on a public message board (to my knowledge), by I can’t take all the credit because I learned about the company from a well known value investor who purchased the company when it was trading for around $14 per share and sold it at approximately $12 per share when the recession occurred; incidentally, he recently took a position on March of 2010 at $13.xx per share. At that particular time, before my knowledge of that investors position, I was in Wal-Mart doing some shopping and noticed the utterly HUGE line at the photo division. I wanted to know who ran it. Was it Wal-Mart or was it a sub-contractor? I did some investigating and found out the company was called CPI Corp. That evening, I did a scan of the SEC.GOV website to see who owned shares of CPY. I didn’t find much info so I wandered over to GURUFOCUS.COM and typed in the ticker. I found that the renowned, but little known to many, value investor  Arnold Van Den Berg held a position in the company a few months prior but had sold out during the “mid-recession” point. I grabbed a copy of the 10Q and 10K filings and went to work because, in my mind, the company couldn’t be that bad..just look at the huge line at Wal-Mart. I found many things about the company including a very large moat. After my thorough research, I took a position at $1.xx (don’t remember precisely and don’t have time to look it up) and valued the business to be worth at least $25.00 Per share. Today, the stock closed at $26.xx per share so I felt inclined to talk about it here. When I purchased it, it was offering a 50% annual dividend yield that, I found, very few people believed would be sustainable. I’m not writing about this so much as to brag (although I kind of am) but to make the “investor” aware (Benjamin Grahams definition – not Wall Streets) that he will come up against much unfortunate adversity over the internet community but if he adheres to a strict discipline and not allow himself to get confused and second guess himself, he’ll do just fine. 50% of investing is to know what you’re doing and the other 50% is to control what you’re doing. With that, here are excerpts of my conversation with other investors during the time CPY was trading for a little over a buck per share.

November 25th, 2008 ME: “Woops, I almost forgot one of the most important aspects to buying this stock. For the last 28 years CPI has increased its quarterly dividends from $0.10 – $0.12, $0.12 – $0.14, & $0.14 – $0.16 per share. Not once have they stopped paying a dividend nor have they decreased a dividend in the last 28 years. I’m using 28 years because that’s as far back as I have information on the company. The catalyst and the icing on the cake is that you can safeguard your return through their dividend by receiving more than 50% per year on every dollar you invest in this company through their dividend payout. So, if the stock doesn’t go to at least $20 per share like I believe it will, you still wouldn’t lose anything because the dividend pays 50% per year on the dollar. This is not a stock you trade. This is a stock
you hold forever and become very wealthy.“

November 25th, 2008 jimmygoa…: “wow mr., you so smart.  you sell fortune cookies too?  you must be very wealthy with all your wisdom.  i be sure to follow you on all your posts, you so smart”

November 25th, 2008 cfren…: jimmygoa :  “Following him will ultimately lead to being broke!!!
Follow his posts… He has never made a profit ever since I started
posting… He is a wise ass with a quick response to everything.. He
says he is a value investor but only buys stock that are crap… CROX
for example.  I got pretty tired of debating with him .. Read his
posts and then mock him…. I must say however he is pretty funny with
all his virtual millions thinking he is superior to Warren Buffett..”

November 26th, 2008 jimmygoa…: ” Just following you with your witty sacarism.  If you can’t help others, I’ll just follow you where ever you go so others can see you know nothing about nothing!  Not as transparent as you think you are………….  ;-)  BTW, nice info you posted here on CPI this week.  Really kickin tail, huh?  Loser”

November 26th, 2008 ME: “I bought CPY at $1.26 p/s. I’m receiving a 50.79% dividend from a company who has never lowered or not payed a dividend in 28+ years on top of free cash flows that currently are worth $29 per share. I don’t get paid d to give advice to people so the fact that you follow me around does nothing for me. Follow all you like but it says allot about who and what you are.”

The conversation went on for a few more days until I got tired of it and started ignoring them. Shorty after on December 9th, 2008 these two posters left the conversation entirely (due to an “unusual” circumstance in which the stock rose sharply) and other posters came online. This is what one of those posters said and the rest is, as they say, history.

December 9th, 2008 adrian97ma…: “Wow WTF just happen I miss out again! Is there anything in particular that causes this jumps?”

On November 25th, 2008, when the ridicule from these “genius” online investors (day traders) took place, CPY was trading for $1.09 per share. Shortly after, on December 9th, 2008, CPY was trading for $2.65 per share; enough for the day traders to stop posting altogether.

Over a year later, today the stock is trading for $26 per share. If you had invested $10,000 on November 25th, 2008, today it would be worth $243,394.50 + an additional amount of approximately $26,200 in dividend payments for a total of $269,594.50. $41,100 would have made you a Millionaire and $41 Million would have turned you into a Billionaire. I’d put that investment record up against any day trader alive or dead.

Lesson: Don’t be discouraged. The majority knows a lot about lip service and very little about business.

Investment Periodic Tables

Here are some links to periodic tables for your investment research purposes.

S&P Global Sector Index

Callan Periodic Table of Investment Returns

Crowe Wealth Management Periodic Table

10-Year Sector Periodic Table

Dow Jones Asset Classes Periodic Table

This is just a small list of some of the charts that interest me. If you Google Search “Periodic Table of Investment Returns”, you should be able to find others that may interest you.

Goldman Sachs vs. Kangaroo Court

I watched the hearings the other day and am watching it a second time online at cspan.org. Here’s my two cents: The U.S. Government took a regulated industry and deregulated it. Then, when a company such as Goldman Sachs works well within the new rules that the Government created, the Government wants to prosecute them because the now deregulated industry helped to create the recession. If that isn’t a case of the U.S. Government trying to find a patsy – I don’t know what is.

My Best Stock Picks

The last few years have presented tremendous opportunities in the equities market. Here is a list (not complete but close) of some of my most memorable stock picks; most of them, more than 95% of the online investing world thought I was crazy for purchasing.

CAL – Paid $13.89, today trading for $22.99

CROX – Paid $4.15, today trading for $10.66

HANS – Paid $27.48, today trading for $43.04

CMG – Paid $57.00, today trading for $141.98

CPY – Paid $1.20, today trading for $27.30 (My dividend yield is approximately 48% per year)

SIG – Paid $13.05, today trading for $33.78

AN – Paid $6.51, today trading for $21.10

VVTV – Paid $0.51, today trading for $3.25

ACLS – Paid $0.49, today trading for $2.51

VNDA – Paid $1.02, today trading for $10.04

GCI – Paid $4.48, today trading for $18.67

State Tax Conspiracy

I’m not much for conspiracy theories and this quick message doesn’t have very much to do with investing but rather the issue of money.

If you owe taxes in the State I reside in, your payment must be postmarked by the 15th (today). You also have the option of paying your tax bill online or via phone.

Interestingly, today, all phone lines are down to the State Tax office as well as no Internet connection. Since the U.S. Postal Service is closed in my area, I called my local tax branch office to see what could be done. They informed me that a 2% penalty would apply if I didn’t have my payment post marked by the 15th or paid via phone or internet. Obviously paying by phone, internet, and post office (since its closed) is out of the question.

Although I’m not a presumptuous person and NEVER speculate, my initial thought is of a mathematical one. The State in which I reside is going through a financial hardship and I’m personally surprised it hasn’t bankrupted itself. There are over 13,000,000 tax paying citizens. If each payed just $1 in taxes (very conservative estimate) the State would gain financially by $260,000 by shutting down their phone lines and internet connectivity – assuming all 13 Million citizens waited until the 15th to pay their tax bill.

Just a thought.

Century Casinos, Inc. (Nasdaq: CNTY)

Century Casinos, Inc. is a new holding for me. Following is a condensed version of how I valued the business’ assets and was able to find the existence of significant value after a margin of safety was applied without the need of adding its positive “owner earnings” year over year.

Much of the value of Century Casinos, Inc. is tangible in the form of Cash and their Property. I first valued their Property by obtaining the most recent Property Assessments of where each of their Properties reside. Incidentally, these Properties are 100% owned by Century.

Property #1: Central City, CO

Market Value: $28,289,378

Assessment Date: 2009

Property #2: Calgary, Alberta, Canada

Market Value in U.S.: $15,366,479.84

Assessment Date: December 26th, 2009

Property #3: Edmonton, Alberta, Canada

Market Value in U.S.: $28,485,487.12

Assessment Date: December  31st, 2009

Property #4: Cripple Creek, CO

Market Value: $7,811,715

Assessment Date: 2009

Total Assessed Market Value Of Properties: $79,953,059.96

At this point, a few questions need to be asked concerning the justification of the Properties values.

Q: How do we know these prices are relevant to the value that could be realized on the open market?

A: A quick scan of various real-estate websites reveal that, in every location of these properties, similar buildings are being offered for sale in excess of their Assessed values and nearly every relative property that sold did so for at least its assessed value.

Note: It would be impossible to make available this information due to its length, therefore I’m leaving it up to the individual investor to come to his own conclusion. The providing of the source is sufficient for you to carry on your research.

Q: What does the Assessed Value include?

A: The structural building and land. It does not include property such as slot machines and gaming tables that are within the casino.

Q: What is not included in this Valuation?

A: Century Casinos, Inc. 33% ownership in a Polish Casino chain. It was nearly impossible for me to value those assets because the Polish commercial real-estate market is not within my circle of competence. However, I did come to the conclusion that the value Century places on their books concerning this property is most likely correct. That value represents an additional $2+ Million. I also did not add the value of the 4 luxury cruise ships in which Century does not directly own the cruise ships itself but does own the rights to have an operating casino on those cruise ships. All of the cruise ships are very similar and I found through discovery that until recently they had operations on 5 cruise ships. They recently sold their rights on one of the cruise ships for more than $1 Million. These items are all “sugar on top of it” and I’ve elected to not include their values regarding this write up for simplicity sake.

Back to the Properties of this discussion:

The four casinos own, collectively, 2,150 Slot Machines. A new casino grade slot machine costs between $9,000 – $12,000 per slot machine. They have a lifespan on average of 7 years before they need to be upgraded, repaired, or completely replaced. On the open market, the average price of a repaired used casino grade slot machine sells for $1,000.

2,150 Slot Machines x $1,000 = $2,150,000

In addition, Century owns all 154 of the slot machines used for their luxury liner casino operations but to keep with my condensed valuation, I am not adding their appraisals to this valuation nor have I included the 90 table games that Century owns.

Property Asset Value:  $82,103,059.96

Q: Is the reported Book Value ($88.24 Million)of Century Casinos PPE reliable?

A: It certainly seems so.

Other Assets: Century Casino has $25.49M of Cash on hand ($11.5M not deducted on recent 10-K for the acquisition in Calgary.

Property + Cash Value: $107,595,060

Not taking into account the value of Inventory, Recievables, or any other tangible assets that could be readily liquidated and turned into cash – we can form our decision from this basis alone.

Century Casino currently owes $27.02 Million in Total Liabilities.

$107,595,060 – $27,020,000 = $80,575,060

As of today, April 13th, 2010, Century Casinos, Inc. is selling for $59.52 Million.

Not taking into consideration the excess cash Century generates or the additional asset values, I believe an investment in Century Casino is more than justified.

[Full Disclosure:  I currently own a position in CNTY. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]