Favorite postings?

Having posted a list of this blog’s five most popular postings in 2013 (here,) I received a couple of inquiries as to which of the 2013 postings were my favorites.

So, without further ado, here is my list of this blog’s eight most interesting postings in 2013 (yes, I suffer from Perfect Child Syndrome and, am, therefore, unable to limit myself to five postings):

  • A $350,000 house for a nickel down — FORTY does it again. A posting that, among other things, discusses the liquidity issue inherent in FORTY, the equity of Formula Systems, and points out how ridiculous the trades in the equity by offering the reader the opportunity to for a payment of only less than $1,000 buy either the new One World Trade Center in Manhattan or a Nimitz class carrier (find it here)
  • Grundsaudaag — It is happening again. A posting that discusses the effect of a (badly written, badly researched, and pretty much wrong on all points) SeekingAlpha article on the per share price of MTSL, the equity of MER Telemanagement Solutions (find it here)
  • Fabergé egg in the rubble. A posting that illustrates how careful reading of filings with the Securities and Exchange Commission is not a waste of time (find it here)
  • Terminal endings — murder and suicide. A posting that discusses a murder at AOL’s Patch subsidiary and a meticulously planned, executed, and documented suicide in Kansas City (find it here)
  • Question of the week — Busyness in business. A posting that discusses the true level of executive busyness (including that of Ms. Sheryl Sandberg, as of this week a billionaire,) which may, in fact, be an urban myth (find it here)
  • Handguns, amputation, and silence. A posting about powerful revolvers, ballistics, and the power of escaping gas (find it here)
  • Pushing that button… — The bigger picture of the 2013 ClickSoftware proxy. A posting about the apathy of investors and the considerable potential power that they have, but refuse to wield (find it here)
  • Violence and overwhelming rapid force — Heinz Guderian. A posting about General Heinz Guderian, Apple, and the power of the schwerpunktprinzip (find it here)

All right… For the sake of completeness is my list of this blog’s six most interesting postings in 2012 (“why six?” you ask? “I don’t know,” I say):

  • Fiscal Cliff and NASCAR? A posting about the disgraceful American Taxpayer Relief Act of 2012 (H.R. 8) (find it here)
  • Pearl Harbor and 9-11 — Teaching your enemy how to fight. A posting about how Pearl Harbor, kantai kessen, 9-11, and the education of your enemies (find it here)
  • Pursuit to the Point of Failure — Catastrophic turning points in war and business. A posting about Napoleon, Moscow, Boridono, Stalingrad, and IBM (find it here)
  • Web-sites Getting 12 Billion Hits in Three Months — No, it is not Yahoo, Facebook, or Google. A posting about the National Weather Service, a mission-critical government agency under constant lobby assault (find it here)
  • Adlertag — Meritocracy be damned. A posting about the Battle of Britain and the colossal blunder of the hapless Colonel Joseph Schmid, Luftwaffe’s chief intelligence officer (find it here)
  • Olympic$ — Chasing the gold. A posting about the pursuit of gold and dollars at the Olympics (find it here)

Time to top up your contributions.

With the new year rolling around (and new subscription expenses emerging!) I want to encourage you to support the blog. $20 is a good amount, but if you are strapped after the holidays, you may want to consider something less. Any donations are welcome, and, as usual, you can contribute via PayPal:


Veramark is back from the grave — Who benefits and what happened?

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

In a recent posting (here) I wrote about the announced sale of Veramark Technologies, a North American based Telecommunications Expense Management (TEM) provider, to Varsity Acquisition LLC and All Big Ten Holdings, Inc. at a per share price of $0.98 per share.

With reference to my gain and under the heading “Financial Hijacking,” I wrote:

A gain of $13,224.15 is, of course, not shabby — particularly when we consider the time-line, but it is a far cry from what I think that my investment in the company is worth, and although the $0.98 per share price does constitute a significant premium over the market price for the VERA equity, I think that the sale of the company at this price, although probably legal, constitutes financial hijacking, a phenomenon that I wrote about in a recent posting about Click Software (here).

As I have written about in the past, my investment paradigm has many challenges, including the need for an infinite time-horizon and the ability to stand alone. The risk of financial hijacking is also a challenge — and a particularly distinct one at that, since, under the investment paradigm, a key requirement for the decision to invest in a company’s equity is that the equity is substantially undervalued, and since no one will be more keenly aware that a company is undervalued — and be in a position to capitalize on such undervaluing — than the company’s management and Board of Directors (in Forensic Fraud terminology, the company’s management and Board of Directors possess all three components of the Fraud Triangle (read more about the Fraud Triangle here): Pressure, Opportunity, and Rationalization.)

Naturally, Veramark Technologies’ management and Board of Directors have taken great care in ensuring that its process for the sale followed the customary process, including even a go-shop period, and ensuring that the offering price appear fair by framing as a significant premium to the ridiculous market price …

Today, Veramark Technologies announced in a press release that the deal has been cancelled by the company itself, who has secured another offer during the go-shop period. In the press-release the company said:

… that it has entered into a merger agreement with Hubspoke Holdings, Inc. …. and TEM Holdings, Inc. …, pursuant to which [TEM Holdings, Inc.] has agreed to offer to purchase all of the outstanding shares of Veramark Common Stock and in-the-money options for $1.18 per share …

The announcement confirms, of course, my view that the per share price of $0.98 did not reflect the value of of the company, since, in a free market economy, subsequent to the submission of a bid, the presence of another, higher bid indicates that the first bid was for less than the value of the object being sold. Moreover, the enormous difference between the per share price in the first and the second bid, $0.20, or a staggering near doubling of the premium of the first bid (the premium of the first bid, 29% over the closing price of the company’s shares on April 30, 2013, the day of the announcement of the sale to Varsity Acquisition LLC and All Big Ten Holdings, Inc., is dwarfed by the premium of the second bid, 55%.)

“Hooray,” I hear… But wait… who, exactly, is the hooray for?

Wait, who?

Who is Hubspoke Holdings, you ask. Go here to find out.

Varsity Acquisition LLC

The cancelled sale has a direct penalty, with Varsity Acquisition LLC and All Big Ten Holdings, Inc. being entitled to a $500,000 breakup fee, payable within five days.

The number of outstanding number of shares on March 31st, 2013, was 10,879,499. On May 9th, 2013, Varsity Acquisition LLC filed an SC 13D filing stating that effective as of April 30th, 2013, it held 255,023 shares (more than 2.3% of the 10,879,499 outstanding shares.)

In its filings, Varsity Acquisition LLC, furthermore, attested that “[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days,” and, so, assuming that these 255,023 was acquired at an average per share price of $0.60 (the average per share price from January 1st, 2013, through February 28th, 2013 — a period where, according to the information available from Yahoo Finance, the number of shares traded was 318,900,) then the expenditure amounted to $153,014.

Between the announcement of the first sale, on April 30th, 2013, and the announcement today, June 17th, 2013, of the second sale, 1,608,700 shares have been traded at an average per share price of $0.97, for a total transaction value of $1,560,439. Over the last two days, the number of shares traded has been zero.

If we make a broad assumption that the entire volume traded between April 30th, 2013, and today constituted purchases by Varsity Acquisition LLC and we make an assumption that Varsity Acquisition LLC’s expenses in relation to the sale were $250,000 or less, then today’s announcement by Veramark Technologies yields net gain of almost $750,000 (computed as the break-up fee plus the assumed profit on the acquired shares (ignoring, of course, transaction costs) less the estimated expenses.)

For a quite modest deployment of capital over a relatively short period, that is arguably a handsome return.

Note, that the broad assumption about the volume is just that… an assumption. However, as an assumption goes, this is, I think, a pretty good one.

The insiders

In a recent 8-K filing, Veramark Technologies wrote:

Prior to Varsity being obligated to launch the tender offer after the go-shop period, certain officers and directors of the Company holding, beneficially or of record, approximately 787,905 shares of Company Common Stock in the aggregate, which represents approximately 7.1% of the shares of Company Common Stock presently issued and outstanding, will enter into Tender and Voting Agreements ….

Assuming that these 787,905 shares constitutes the shares held by the insiders, then with today’s announcement the insiders, as a group, realized an additional $157,581 in profit on the sale of the company when the second buyer stepped in.

This, however, is probably only a partial amount since the shares in questions are those that can be voted, most likely excluding non-exercised options. From the DEF14-A filed on April 4th, 2012, we can quantify the total number of shares for Board of Directors members and the Executive Officers as being at least 1,025,675, with 461,000 shares of these shares being common stock these members and executives have the right to acquire pursuant to options issued under the company’s incentive plan, and 297,667 shares of restricted common stock issued to named executives. And, so, the insiders, as a group, might actually have realized an additional $205,135 or more in profit on the sale of the company when the second buyer stepped in

In a related 8-K filing, the company announced that it, on April 30th, 2013, had entered into:

… Change in Control Bonus Agreements (the “CIC Bonus Agreements”) with certain of its executive officers, including: Anthony C. Mazzullo, President and Chief Executive Officer, Ronald C. Lundy, Senior Vice President of Finance and Chief Financial Officer, Joshua B. Bouk, Senior Vice President of Strategic Services, and Thomas W. McAlees, Senior Vice President of Engineering and Operations.

Each of the CIC Bonus Agreements is effective from April 30, 2013 until the earlier of a Change in Control, as such term is defined in the CIC Bonus Agreements, or December 31, 2013. Each CIC Bonus Agreement provides that, subject to the continued employment of the executive with the Company through the occurrence of a Change in Control, the Company will pay such executive a lump sum cash payment within five days following the Change in Control, as follows: Mr. Mazzullo – $40,000; Mr. Lundy – $20,000; Mr. Bouk – $20,000; and Mr. McAlees – $25,000.

In aggregate, therefore, this change of control bonus agreement provides for earnings of $105,000 to the insiders, and, accordingly, with the new sale, the insiders, as a group, appear to have netted at least an additional $310,135. Not a bad return for what I would think is really very little work — in particular if the executives get to keep their jobs and perhaps even get a new set of incentive options.

The common shareholder

Some common shareholders will benefit from the $0.20 increase in the per share price, but shareholders holding the estimated 1,608,700 million shares that we assume went to Varsity Acquisition LLC between April 30th, 2013, and today certainly will not.

I am one of these shareholders, and the net impact to me is a shadow loss of $8,365 on 41,825 shares.

As I wrote in my previous posting, I understand that there is the risk of selling of early, rather than waiting for the dust to settle:

Generally, although in these situations there might be a crime hidden in all the smoke and mirrors and tenacious litigation may be able to flush such crime out and although it is possible that the first offer will be replaced by a later, better offer, it is my experience that the best thing to do is to capture whatever gain one can and move on to other pastures as quickly as possible. Therefore, I take my $0.95 per share, rather than waiting for the $0.98 that I may be able to collect over the next month — or even a hypothetical higher bid.

The fact that I understand that there is this risk, however, does not mean that I do not feel irritated by what went down here. As I wrote in the above, it was very clear to me that Veramark Technologies is worth far more than the $0.98 per share that was offered in the first sale (and, in fact, is worth more than the $1.18 that is now offered,) and, so, the fact that I do not achieve a higher return than I did (whether is was an additional $8,365 or and additional $63,574, reflecting the $2.50 per share price that I think the company is worth) is, in my view, the fault of the Board of Directors, who did not do a good enough job at, from the outset, getting the best purchase price from the outset (and, therefore, are incompetent and not qualified to be members of a Board of Directors.)

With respect to the executives they can to a certain extent be excused because they, apparently, were not subject to sufficient oversight by the Board of Directors. In spite of the the fact that I think that the Board of Directors are at fault, however, does not completely relieve the executives of the management team of responsibility, since, for sure, they have significant ability to influence decisions. Moreover, in this specific case, the executives may, I think, have gotten confused about whose interests they were expected to primarily protect — their own or that of the shareholders.

Irritation aside, my notion of this kind of thing is that, as a shareholder and co-owner, the one thing that one could — and should — do is to make a note of the executives and the Board of Directors members for future references.

So, for the purpose of common shareholders’ evaluation of future performance by management teams, here are the Executive Officers of Veramark Technologies: Mr. Anthony C. Mazzullo, President and CEO; Mr. Ronald C. Lundy, Senior Vice President and CFO; Mr. Joshua B. Bouk, Senior Vice President; and Mr. Thomas W. McAlees, Senior Vice President.

And here are the Board of Directors members of Veramark Technologies: Mr. Ronald J. Casciano, Mr. Seth J. Collins, Mr. Charles A. Constantino, Mr. John E. Gould, Mr. Anthony C. Mazzullo, and Mr. Steve M. Dubnik

Was there a leak?

With the revelation coming out of the prosecution of the Magellan fund and employees of SAC (read more about this here,) it is becoming more and more clear that the financial industry is driven to a substantial degree by insider tipping and insider trading.

I was reminded of this fact, when I read the previously discussed disclosure by Varsity Acquisition LLC, that:

[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days

In my earlier posting I had referenced a substantial activities in the days before April 30th, 2013:

The second, much more acute opportunity came this week, when I discovered that there was a massive Bid position in VERA, at 500,000 shares for $0.70 per share, with a corresponding massive Ask position, at 100,000 shares at $0.75 per share. This, of course, was a clear indication of what was to come.

I had originally assumed that the bid for 500,000 shares was some sort of preemptive buy by Varsity Acquisition LLC, but in view of the disclosure, this appear to not be the case, which raises the question of who put in this massive order in the days before April 30th, 2013, and why they did so immediately before the announcement the acquisition. This question becomes even more pertinent if we review the trading in the 60 days before April 30th, 2013:

(c) Per Jacobsen, 2013. All rights reserved

(c) Per Jacobsen, 2013. All rights reserved

The 70,000, or so, shares traded during the 5 trading days before May 1st, 2013, which were traded at a price of around $0.75 (I paint with a broad brush here,) in themselves would give rise to a profit of $30 thousand, or so, and, of course, a remarkable stroke of luck in timing — easily the envy of lucky Stevie Cohen, I think.

Participate, please….

If you have enjoyed this posting or any of the earlier postings about Veramark Technologies, you can express your appreciation through donation via PayPal right now.   For this type of posting an on-going donation of $50 per three months or a one-off donation of $20 is suggested.


Is a gain of $14,478.90 enough?

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

Exiting Veramark

3641567660_081338508f_oToday Veramark Technologies, a United States based Telecommunications Expense Management (TEM) services provider, announced that it has entered into a definitive agreement to be sold for $0.98 per share in cash, representing a 38% premium over the 90-day average price of the company’s shares and a 29% premium to the closing price of the company’s shares on April 30th, 2013.

I have followed Veramark Technologies and its equity for a long time, and I have written about the company in two postings on this blog.

In the first posting (here,) published on February 5th, 2013, I noted that the company probably was strongly undervalued, writing that:

In fact, at this stage, it would, I think, take a macro-economic event, malfeasance, or near-criminal stupidity on behalf of the company’s management for Veramark Technologies to not be able to record significant progress for the 2012 fiscal year, and the company should be well positioned for an ascent in revenues, earnings, and market capitalization throughout fiscal year 2013.

Assuming that the net income for the fourth quarter of fiscal year 2012 turns out to be $0.03, a $0.01 improvement over the third quarter, for earnings per share of $0.07 for the fiscal year, and assuming an average per share price of $0.55, then trailing twelve months’ P/E will be approximately 8. If the per share price holds at the $0.55 level and the company achieves $0.03 in EPS per quarter for the next fiscal year, the P/E for the 2013 fiscal year will be approximately 4.5, a bargain by any measure.

In the second posting (here,) published on February 20th, 2013, I commented on the company’s earnings and the recent taking of a significant position by an institutional investor, noting that the earnings results were excellent:

Excellent news in itself, but almost insignificant compared to what it means for investor sentiment. With these earnings figures the company’s trailing twelve months’ (TTM) P/E ratio is restored to a meaningful number, rather than the N/A limbo that it has been in for almost two years, through calendar year 2011 and most of calendar year 2012, and with a rare exception in calendar 2010, for almost three years before then (year-end earnings for fiscal years 2008 through 2011 were -$0.05, -$0.06, $0.02, and -$0.12, with cumulative losses for this period being $2.07 million, bringing the company’s liquidity into crisis territory and increasing the accumulated deficit from $24.1 million to $22 million.

For VERA, the fact that Veramark Technologies’ TTM P/E is definable will be a first step to restoring liquidity and, in turn, grow the per share price.

Excellent news… but — as they say in infomercials — wait.. there is more. Over a very short period Peter H. Kamin, an institutional investor, has gobbled up 1.02 million VERA shares, representing almost 10% of the outstanding shares and handily stabilizing the equity. A decision he will probably not regret given the approximately 15% increase in the per share price between yesterday’s announcement and today.

The press release announcing that Veramark Technologies was being sold was certainly news, but not totally unexpected (more about this, below.)

Over the last months I had accumulated 41,825 VERA shares at a cost of $26,352. With a locked in per share price of $0.98 my back of the envelope calculations point to unrealized gains of $14,478.90 (for the sake of simplicity I ignore sales cost and fees,) or 34.9%.

In reality my realized gains ended up being slightly less, $13,224.15 or 33.9%, because I was not willing to wait for the price equilibrium at $0.98 per share, but, rather, liquidated the position at $0.95 per share (more about this, too, below.)

Financial Hijacking

A gain of $13,224.15 is, of course, not shabby — particularly when we consider the time-line, but it is a far cry from what I think that my investment in the company is worth, and although the $0.98 per share price does constitute a significant premium over the market price for the VERA equity, I think that the sale of the company at this price, although probably legal, constitutes financial hijacking, a phenomenon that I wrote about in a recent posting about Click Software (here).

As I have written about in the past, my investment paradigm has many challenges, including the need for an infinite time-horizon and the ability to stand alone. The risk of financial hijacking is also a challenge — and a particularly distinct one at that, since, under the investment paradigm, a key requirement for the decision to invest in a company’s equity is that the equity is substantially undervalued, and since no one will be more keenly aware that a company is undervalued — and be in a position to capitalize on such undervaluing — than the company’s management and Board of Directors (in Forensic Fraud terminology, the company’s management and Board of Directors possess all three components of the Fraud Triangle (read more about the Fraud Triangle here): Pressure, Opportunity, and Rationalization.)

Naturally, Veramark Technologies’ management and Board of Directors have taken great care in ensuring that its process for the sale followed the customary process, including even a go-shop period, and ensuring that the offering price appear fair by framing as a significant premium to the ridiculous market price, as detailed in this morning’s press release:

A special committee of the Company’s Board of Directors, consisting solely of independent directors, and the Company’s Board of Directors have both unanimously approved the transaction. The Special Committee undertook deliberate and comprehensive negotiations with Varsity to obtain an attractive cash offer for the Company’s shareholders. In determining whether to approve the transaction, the Special Committee also obtained and considered a fairness opinion from an independent third-party advisor. The Special Committee ultimately concluded that Varsity’s offer is fair to, and in the best interest of, the Company’s shareholders.

Under the terms of the agreement, Merger Sub will commence a tender offer to purchase all outstanding shares of the Company on the fifth business day following the end of a 45-day “go-shop” period. 

Varsity refers to Varsity Acquisition LLC, the buyer, and Merger Sub refers to All Big Ten Holdings, Inc., a subsidiary that appears to have been set up by Varsity Capital Acquisitions for the purpose of executing the transaction.

This sort of thing happens all the time and, generally, is an unavoidable risk or side-effect of executing under an investment paradigm that focuses on capitalizing on under-valued properties. Generally, although in these situations there might be a crime hidden in all the smoke and mirrors and tenacious litigation may be able to flush such crime out and although it is possible that the first offer will be replaced by a later, better offer, it is my experience that the best thing to do is to capture whatever gain one can and move on to other pastures as quickly as possible. Therefore, I take my $0.95 per share, rather than waiting for the $0.98 that I may be able to collect over the next month — or even a hypothetical higher bid.

And so we move on to the next thing….

Moving on …. Wait, not so fast

But before we go it is worth reflecting on two points in time where I appear to have missed out on capitalizing further on today’s events.

First, although I knew that the company was significantly undervalued, I committed only $26,352. The principal reason for this low level of commitment was not a doubt about the company’s prospect or the undervaluing of the company, but, rather, a simultaneous commitment of capital elsewhere. Specifically, I have over the last months had to decide on whether to invest a floating reserve in Unitek Global Services, MER Telemanagement Solutions, and Veramark Technologies, each company satisfying the criteria in my investment paradigm. Unfortunately, Veramark Technologies lost out to Unitek Global and MER Telemanagement. My conservative estimate is that if I had decided differently, my total realized gain would have exceeded $50,000.

The second, much more acute opportunity came this week, when I discovered that there was a massive Bid position in VERA, at 500,000 shares for $0.70 per share, with a corresponding massive Ask position, at 100,000 shares at $0.75 per share. This, of course, was a clear indication of what was to come. Had I at this point in time, shifted $75,000 worth of my position from MER Telemanagement Systems’s equity to VERA, my realized (and highly transactional) gain would have been $20,000 for a few days position holding (in fact, the time span would have been so short that the first trade, securing the 100,000 VERA shares, probably would not have settled before the second trade, selling the acquired shares, kicked in.)

So, you ask, do I regret not taking a larger initial position and/or not jumping on the opportunity to take on an additional 100,000 shares in Veramark Technologies? No, not really. My investments in MER Telemanagement and Unitek Global still appear sound to me, and I am convinced that at least one of these investments will lead to a significant gain. Shifting some of my position in MTSL, MER Telemanagement’s equity, into VERA appears on the surface to be a no-brainer, but such decision is understood in retrospect and investments, unfortunately, are conducted in a forward manner.

In fact, being a perpetual optimist, these two missed opportunities to increase my gains have mostly served to increase my expectation for return on my investments in Unitek Global and MER Telemanagement — and probably more so for MER Telemanagement (you can read about the opportunity that I see with MER Telemanagement here) than for Unitek Global, since a large part of the MER Telemanagement’s business is TEM centric, and, so, the sale of Veramark serves to validate the business of MER Telemanagement.

So, I will pay my taxes on the gain and then, probably, apply the balance of the gain plus the original investment to buying more MTSL and UNTK.

Onwards and up!

Participate, please….

If you have enjoyed this posting or any of the earlier postings about Veramark Technologies, you can express your appreciation through donation via PayPal right now.   For this type of posting an on-going donation of $50 per three months or a one-off donation of $20 is suggested.


This is London Calling…. — This is Nigeria listening

One of the interesting things about running a blog is the totally unexpected things that you learn from site statistics.

In a previous blog posting, for instance, I tested a hypothesis that a blog posting with a heading along the line of “I want to die” would generate significant hits from search engines, and I was surprised to find that it did, in fact, do just that.

In another — later — blog posting I tested a hypothesis that a blog posting with a heading along the the line of “Kill me” would generate significant hits from search engines — possibly more than did the blog posting with the heading along the lines of “I want to die,” and I was suprised — again, because it did not (in fact this blog posting generated very few hits, which was really surprising to me since Reddit, for instance, yield a number of web-sites and blogs with headings along the line of “kill me” (I will write more about this fact later — stay tuned.)

In another example, I created a blog posting about balance sheets and goodwill, which got a tremendous amount of traffic, but, oddly, most of the traffic was generated from google searches with the search term “lazy balance sheet.” This was interesting, because it reflects that there is an extensive interest in lazy balance sheets — something that I did not know. It is also odd, since the heading of my posting was clearly talking about goodwill, distinctly different than what make up lazy balance sheets. Regardless, since there is an interest, and since I, as a quasi-value investor, find lazy balance sheets very interesting, the searches did stimulate me to decide to write a posting about the problems related to lazy balance sheets (there are many,) and, accordingly, to add an entry to the Upcomming Posts column on the right side of this blog.

Most interesting though is the fact that my recent posting about Nigerian Scams and other related items, caused the blog to start getting hits from — wait for it … Nigeria.

Nigerian flag

In the past my blog had received hits from obscure countries in remote parts of the world, including countries in South America, Asia, and Africa, and, typically, hits from these locations were followed near-immediately by spam comments being posted on the blog, which are just as immediately deleted by Akismet, WordPress’ spam comment filtering software. None, however, had originated from Nigeria.

Phoney Western Union Form

Without fail, the Nigerian hits come courtesy of Google’s image search and — yes, you guessed it! — are centered around the terms “Western Union,” “form,” and “sheet” which appear to result in search results that include the phoney Western Union form included in my Nigerian Scam related posting and reproduced on the right.

In the forties, it may have been London calling, but today it is Nigeria listening…. Globalization once again, rears its ugly head.

Oh yeah, just a heads up… The second most common point of origination for hits leading to the phoney Western Union form in my blog posting was — drum-roll, please — the Czech Republic.

There may be an early warning here…  Let me get on the horn with the Federal Bureau of Investigations……  I am sure they will dispatch a team to Prague to investigate right away.

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My Sister is Stupid — Nigerian Scams, not-so-victim-less crimes, and the Western Union memorandum

CrimeI have just received definite proof that my sister is stupid.  She has told me that she paid some unidentified, unknown person, alleging to be an American house builder, stuck somewhere in Nigeria, about $10,000 in aggregate.

Moreover, she has accumulated only god knows how much in phone charges, talking to this mystery man on the phone (say after me:  “mobile-to-mobile international charges,”) and traveled to the local airport multiple times to pick up the mystery man, who had just escaped Nigeria, but — yes, you guessed it — continued to be detained on his journey — and, yes, you guessed it, again — continued to need yet more money to make the journey from captivity to my sister, his newly found sweetheart and savior.   As one would expect this entire thing involves Nigeria, meeting on the internet, a stock photo of a model, a promise of marriage and immediate relocation to some exotic locale, and, of course, Western Union.

I don’t mean to be breezy about this, but, frankly, the details are hazy — partly because they are hazy by design and partly because I don’t really have the patience for this kind of stupidity and, therefore, did not ask any questions when the sordid story was communicated to me.    Suffice it to say that the money is gone, as is the mystery man.

My sister had fallen victim to what is called the Boyfriend Scam, an up-and-coming variation on the Nigerian Scam.   At this time, I would expect that absolutely everyone who has access to the Internet knows what constitutes a Nigerian Scam or, as it is formally called, a 419 Advance Free Fraud. If there is anyone out there who does not, their access to any communication device should immediately be taken away, their finances should be put under guardianship, and they should be isolated from the rest of man-kind — and possibly put in some totalitarian style indoctrination camp.

Actually, I am being unfair.  The reason why this scam can exist in the first place is a consistent lack of meaningful enforcement. While the tendency is to say that the victims should have been more careful, the answer, of course, is that the victims are entitled to have some level of expectation that they will not be scammed, and this expectation can come only through aggressive enforcement. However, unfortunately, consumer-to-consumer and company-to-consumer scams, particularly those conducted via phone or internet, are increasingly being treated like a victim-less crime, which, of course, it is not — far from it.

Victim-less Crimes? — Not so, and, in fact, you, too, is a victim

Generally, there is an alarming, explosive increase in the volume and scope of crimes that are considered victim-less, including shoplifting, identity theft, credit card fraud, telemarketing scams (including the currently popular refinance and credit card department scams,) burglaries, and virus software scams, and as the volume of this type of crime is increasing, the pace and follow-through of enforcement appears to be declining.

The lack of swift and consistent enforcement is frustrating to the consumer, but, more importantly, it encourages individuals or companies that may otherwise not have done so, to engage in criminal activities, and, moreover, in accordance with the law of broken windows, unchecked criminal activities will always escalate in nature. In crime prevention, velocity and follow-through really does matter.

It’s the Lawless Wild West here. Every day I am exposed to fraud or attempted fraud and, also, a victim of the so-called victim-less crimes.  This morning, for instance, I got yet another phone call from a telemarketer masquerading as my credit card company.  This particular company has, believe it or not, called every day for close to half a year, in spite of the fact that I am on the Do-Not-Call Registry (or, perhaps, precisely because I am on it!) and have consistently reported the company using the Do-Not-Call Registry’s abuse reporting function.  As of noon, I had received seven phishing or Nigerian Scam electronic mails, including an electronic mails purporting to be from PayPal, urging action.  On the victim-less crime side, my local grocery store has a non-intervention policy with shoplifting and instead off-sets shoplifting through higher prices, neatly making me a victim of a victim-less crime.   In a similar vein, my local gas-station owner do not report gas-up-and-drive crimes although the criminals are captured on surveillance cameras, because, you guessed it, the police do no follow-up when he reports the crime, and instead he now charges more per gallon.  You get the gist of what I am talking about, I am sure.

The list goes on and on, and the amounts involved are staggering.  The notion of reporting business or individuals to government agencies is, of course, a complete joke — if you doubt me, try to (1) report a telemarketer using the Do-Not-Call Registry’s abuse reporting function, (2) report a Nigerian Scam or an attempted Nigerian Scam to the Federal Bureau of Investigation or the Federal Trade Commission — or any other government agency, and (3) report an attempted credit card scam to either the Department of Justice or your local consumer protection agency. You may be able to work through it once, but since you will n-e-v-e-r hear back in any meaningful way and will spend infinitely more time on the reporting than the criminal did perpetrating the crime or the government agency ever will on investigating and prosecuting the crime, you will probably never attempt to do it again. I do not know exactly where the reported information goes, but I suspect that it ends up being part of a statistics in some $25 million, tax payer funded Oracle database, never to be accessed again.

CrimeClosing the Barn-door after the Neighborhood has been Nuked

Don’t get me wrong… Once in a while government agencies will act, but it is just too slow and too erratic to stem the tide.

This morning, for instance, David Migoya of the Denver Post, reported that the Federal Trade Commission had received a temporary restraining orders against six companies to halt scams where tens of thousands of consumers were duped into paying for online technical support for nonexistent computer viruses at a per-incident rate of up to $450. Moreover, Bloomberg BusinessWeek reported that the amount involved was $163 million — a mind-boggling sum.

Over the last five to ten years or so you have probably seen exactly this kind of scam — whereby a pop-up window, looking very Windows like and official, warns you about imminent danger when you are browsing and urge you to take some sort of action.  I certainly have seen lots of variations on this scam.

The Federal Trade Commission noted that the scammers eluded detection by operating via 80 separate domain names and 130 phone numbers, but that is, of course, not the full story. Without a doubt, this thing started with one domain and one phone number — and inevitably — near immediate reporting by a concerned or defrauded citizen to the Federal Trade Commission followed by…  nothing.   And it is exactly the nothing piece that encouraged the scammers to expand their operation, and other scammers to follow in their foot-prints. Had the Federal Trade Commission immediately clamped down on the first offender, the criminals would have been discouraged, rather than encouraged, and the vicious cycle would have been broken.

I think it is fair to say that in order for the Federal Trade Commission to act today, the matter has to be of a certain size (probably, to not put to fine a point on it, it has to be headline worthy, involving hundreds of million of dollars,) and that is exactly the wrong way to go about it if you want to protect the most vulnerable consumers — the elderly, for instance.  Rather swift enforcement and harsh punishment is needed. Now and on an ongoing basis!

Nigerian Scams and Victim-less Crimes as a Contagion

It is easy to discount Nigerian Scam victims, claiming that there has to be some sort of penalty for this level of stupidity, but, ultimately this thinking is shortsighted. The Nigerian Scams creates a direct victim out of the sucker who falls for the scam. However, it also creates a seperate string of victims in a chain of events that I like to think of as collateral damage, since most direct victims of Nigerian Scams cannot handle the economic loss that is inflicted upon them, and, therefore, they lean on their support network, including family, inadvertently creating secondary victims. Moreover, by transferring money out of local societies, the Nigerian Scams, creates tertiary, quaternary, quinary, senary, septenary, octonary, nonary, and denary victims. In this way, Nigerian Scams are like a contagion, and, in my view, should be treated as such by the government.

Let me draw a simple parallel. If the Center for Disease Control, the CDC, applied a similar approach to deal with an outbreak of the Ebola virus, a generavirus with an average case-lethality rate above 65% and a contagion rate, R0 of between 1.34 and 1.83, in St. Louis in Missouri, then the agency would urge anyone dying from the disease to fill out a form on a web-page, and would dutifully collect this information in an Oracle database that it had bought from Oracle specifically for this purpose for $10 million or so, and meanwhile send out regular bulletins advising the population that the best way to deal with the problem is to avoid contact with other humans.

After two years, and an estimated casualty rate of 45 million citizen in the United States, the CDC in conjunction with Michigan State would isolate a 100 unit sub-division in Kalamazoo and vaccinate the residents using shots acquired for $25,000 per piece from a pharmaceutical company who had developed the vaccine in the 1990ies using grants at a cost to the United States tax payers of hundreds of millions of dollars. Six months later the CDC and Michigan State would issue a joint, self-congratulatory press-release, announcing the initiative in Kalamazoo and exclaiming that it had taught the virus cluster in the Kalamazoo sub-division a lesson, and now, all the other pesky Ebola virus cluster should consider themselves put on notice that if they continued to scores of citizens then they, too, risked that the CDC would come after them.

Then, the CDC would wait another year, carefully recording the ongoing fatality rates. Menwhile, encouraged by the lack of enforcement, the Ebola virus rages on, killing another 10 million citizen, and, finally, the CDC realizes that it has to identify another cluster to prosecute and make an example of.

Western UnionThe Western Union Memorandum

An interesting fact about that Nigerian Scams — in all their variants — is that they require the transfer of funds from the victim to the scammer to be untraceable and irreversible, so as to prevent the victims from retrieving their money and alerting officials who can track the scammers.

This is, of course, a significant twist from the rules of traditional cons, which mandates that cons, whether long or short, have to be conducted in such a way that the victims either never conclude that they have been duped or are so embarrassed by their own stupidity — or, as it may be, greed — that they do not report the crimes.

International Western Union style wire transfers are ideal for this purpose, since they cannot be cancelled or reversed and the recipient cannot be tracked — and since they are fast and global, unlike, say, postal orders or cashier’s checks.

This raises the interesting point that an organization such as Western Union clearly has the power to prevent or — at least complicate — the crime by simply changing their product offerings and processes.

Since, without a doubt, Nigerian Scams are well understood by Western Union, the above point raises the questions of whether or not Western Union could in principle be considered a willing participant in the crime — a paid accomplice, if you will, in the same way that a fence is a paid accomplice in burglary and a getaway driver is a paid accomplice in bank-robberies — and what kind of cost/benefit analysis Western Union has conducted with respect to Nigerian Scams and how its leadership and owners rationalizes being accomplices.

In much the same manner as the discovery part of the Cipollone vs. Liggett matter in the 1980ies uncovered some of the tobacco industry’s internal documents through discovery, revealing a hidden face of the tobacco industry, leading to a veritable tsunami of revealed secret documents through the 1990ies, and culminating with  the release of more than six million secret tobacco industry  documents in 1998, I suspect that Western Union or some other wire transfer companies will one day be subject to a critical mass of litigation scrutiny, resulting in classified and extra-ordinarily damaging memorandums coming to light — ultimately forcing radical changes in  product offerings and processes.

Western Union, a publicly traded company with revenues of $5,491 billions and operating income of $1,385 billions in it fiscal 2011 year (that’s b-i-l-l-i-o-n-s, people!) acknowledges in its annual report for its fiscal year 2011 that:

“[the] … majority of our revenue comes from fees that consumers pay when they send money or make payments. In certain money transfer and payment services transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer or business and the rate at which we or our agents are able to acquire the currency.”

The company has finally come under some assault, and now, in a not too subtle way has issued an early warning to its investors, by way of an entry in its annual report for its fiscal year 2011:

“Western Union has received Civil Investigative Demands from certain state attorneys general who have initiated an investigation into whether the Company took adequate steps to help prevent consumer fraud from 2010 to 2011. The Civil Investigative Demands seek information and documents relating to consumer fraud complaints that the Company has received and the Company’s procedures to help identify and prevent fraudulent transfers. Due to the stage of the investigation, the Company is unable to predict the outcome of the investigation, or the possible loss or range of loss, if any, which could be associated with any possible civil claims that might be brought by one or more of the states. Should such claims be brought, we could face significant fines, damage awards, or regulatory consequences, or compulsory changes in our business practices, that could have a material adverse effect on our business, financial condition, and results of operations.”

Given the scope of the Nigerian Scams and their disproportionate impact on the weaker groups in our society, I, for one, cannot wait to see such top-secret Western Union memorandums come to light.   With a little luck the disclosure, the reveal in magician parlance, will cause governments to act as it was the case with the tobacco industry debacle, where the ball started rolling with the issuance of the Meehan Memorandum in 1994 from United States Congressman Marty Meehan to United States Attorney General Janet Reno, in which Mr. Meehan requested that the Department of Justice initiate a formal criminal investigation and wrote that:

“… more hearings have been held and investigative reports published. The additional evidence uncovered through these activities strongly suggests that tobacco company witnesses committed perjury while giving sworn testimony before Congress on April 14, 1994. The evidence further indicates that other Federal crimes may also have been committed by the individuals and corporations named above.  …

The enormity of the harm perpetrated by tobacco companies and their agents on American consumers is difficult to comprehend. It is apparent, however, that the crimes alleged here, committed over decades. have contributed profoundly to the serious illness and early death experienced by tens of millions of Americans, as well as to literally trillions of dollars in health care costs and lost productivity borne by the economy of this nation and the individual States.”

In my view, the most cost-effective way to combat crime is to penalize the third-parties that benefit from the crime. I touched upon this subject in a recent posting on this blog. The illegal immigration problem, for instance, is not cost-effectively stopped at the border or in nationwide traffic stops, but, rather, in raids of companies (or individuals) that use illegal labor and disproportionate fines. If you want to stop the meat-packing plants from using illegal labor, for instance, simply fine the corporations that owns meat-packing plants $1,000,000 per illegal laborer caught in a raids on the plants, and — just to make sure the message comes across loud and clear — put the executive team and the entire Board of Directors in jail for one year. I guarantee you that you would see an immediate change in the hiring processes in meat-packing plants.

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