Monday, May 2, 2016

May Days: Female Madoff

"Boston hedge fund is largest in world run by a woman" by Sabrina Willmer and Tom Moroney Bloomberg News  February 04, 2016

In a year when titans Bill Ackman and David Einhorn each lost more than 20 percent for their investors, David Swensen’s bet on a little-known hedge fund kept making him money.

Nancy Zimmerman’s Bracebridge Capital has gone from $5.8 billion in assets four years ago to $10.3 billion today, with a return of about 10 percent a year since its inception. That makes it the largest hedge fund in the world run by a woman. Zimmerman, who survived a 1990s scandal involving Russia, her husband, and Harvard University, is so successful at avoiding the limelight that Leda Braga’s $9.5 billion Systematica Investments Ltd. is often cited as the top woman-led firm by assets.

Swensen, who runs Yale University’s $25.6 billion endowment, and Thomas Steyer of Farallon Capital Management originally staked Zimmerman in 1994 with about $50 million. Yale’s investment now is valued at around $1 billion, making it one of the endowment’s most profitable.

“She’s employing this leveraged strategy to exploit pricing differentials in the fixed-income world with an obsessive focus on risk,” Swensen said.

Bracebridge has had only eight losing months since 2009. The fund’s 2 percent gain last year eclipsed the industry, which was up 0.6 percent, on average, according to data compiled by Bloomberg. Hedge funds had trouble navigating unexpected market events, including a devaluation in the Chinese currency in August, a rally in European government bonds, and a steep drop in oil prices.

Ackman’s Pershing Square Holdings, the publicly traded part of his activist hedge fund, lost 20.5 percent last year, hurt in part by a drop in the shares of drug maker Valeant Pharmaceuticals International Inc. Einhorn’s Greenlight Capital suffered the second losing year in its history, with its main fund falling 20.4 percent due to wrong-way stock picks.

“There were a lot of gopher holes that you could step in,” said Gabriel Sunshine, Zimmerman’s partner at Bracebridge. “We managed to miss most of them.’’

Like Bernie!

Zimmerman, 52, has a powerful network of allies, including former New Jersey Governor Jon Corzine, who was Zimmerman’s boss at Goldman Sachs Group, where he was co-chief executive. Among her top investors is Princeton University’s endowment, run by Swensen protege Andrew Golden.

Corzine said he remembers Zimmerman as a brilliant trader who attracted the brightest of co-workers.

What I remember is scandal.

Bracebridge is a relative-value fixed-income fund that exploits small pricing differences in the credit market and hedges against those bets.

Zimmerman offered a typical scenario: Bracebridge buys a corporate bond it considers cheap while at the same time purchasing a credit-default swap on the bond in order to make money even if the company goes bankrupt. Leverage boosts returns.

The strategy hasn’t always come up roses. Long-Term Capital Management, a highly leveraged hedge fund run by John Meriwether, pursued a similar investment approach. In 1998, after Russia stiffed lenders including LTCM, the fund failed and was bailed out by its Wall Street competitors. The demise of LTCM hit other hedge funds, including Bracebridge, which held some of the same assets. Bracebridge lost about 26 percent, making it the worst year in its history.

A few years prior, in 1992, Zimmerman’s husband, Harvard economist Andrei Shleifer, signed on to help privatize the Russian economy under the auspices of the university and the US government. Zimmerman bought up beleaguered Russian debt, betting its value would rise, court filings show.

Complaints arose about Shleifer and his business partner allegedly using their position and influence for personal gain, according to court documents. Harvard, Shleifer, and the US Department of Justice eventually reached an agreement in which the university paid $26.5 million to settle a civil lawsuit and Shleifer paid $2 million. Zimmerman’s company paid $1.5 million to resolve civil claims that it improperly used resources and staff from the government-funded project.

Government got its kickback so it dropped it.

Neither Zimmerman nor her husband admitted wrongdoing in connection with their Russia dealings.

Zimmerman was born and raised in Skokie, Ill., the youngest of two girls. While attending Brown University in Providence, she worked summers at O’Connor & Associates, a Chicago derivatives-trading firm. She stayed with them for three years after graduation, on the raucous floor of the Chicago Mercantile Exchange. Her first job was buying Japanese yen options, she said.

Though her roots are in the Midwest, she’s a Bostonian now, relishing Red Sox games and working behind the scenes for a number of the city’s philanthropies.

No wonder John Henry's paper gave her a glowing profile.

Zimmerman downplays the challenges faced by women in a male-dominated industry: “The bonds don’t know who owns them.” 

And the bombs don't know whom they hit.

Zimmerman owns most of Bracebridge, according to a 2015 filing with the Securities and Exchange Commission. As for the value, the document says only that she and Sunshine control 12.6 percent of the assets. Of the $10.3 billion, that’s about $1.3 billion. It’s split between her and Sunshine and their partners, Zimmerman said, declining to be more specific.

Zimmerman credited her more than 100 employees for the firm’s success. “I’m very proud of the people who come to work here,” she said. “They are focused, intellectually honest, and they love to collaborate.”


Whole school of 'em now:

"Business gets serious inside ‘Shark Tank’" by Scott Kirsner Globe Columnist  March 25, 2016

At Harvard’s Innovation Lab, they concocted a ruse.

In fact, her company, Unshrinkit, had landed a coveted invitation to appear on the ABC reality show “Shark Tank,” and a confidentiality agreement prevented them from telling anyone.

It wasn’t until the episode featuring Unshrinkit aired in November that Desiree Stolar could divulge the secret.

The premise of the show is simple. The “sharks,” as the panelists are known, evaluate a handful of deals on each episode, deciding either to put money in or pass.

Think groveling, readers.

But there’s much more happening than most viewers realize, both before and after entrepreneurs step onto the show’s famous red Persian rug to pitch the sharks.

Time to change channel.

The first is just how tough it is to get on the show.

Though it began airing in 2009, the hourlong show has begun attracting more serious entrepreneurs in recent years. In part, that’s because of a change that took place around 2012, when the sharks persuaded the companies that produce the show, including ABC and Mark Burnett Productions, to nix a condition that required everyone appearing on the show to give them 5 percent of the company’s equity or 2 percent of future profits— regardless of whether they landed a deal.

“All we were getting were people with ideas on a piece of paper,” says Kevin O’Leary, one of the sharks, mentioning an entrepreneur who appeared on an early episode with a battery-powered turkey baster. Once that contractual change was made, the show “exploded from there,” O’Leary says.

Rob Go, a Boston venture capitalist, says that with more than 6 million people watching each episode of the show, according to Nielsen ratings, “Shark Tank” offers companies trying to target consumers a great launch pad. The value of the show to entrepreneurs “has almost nothing to do with the actual financing deals that get discussed on the show, but the reach of their audience.”

Not surprisingly, Lovepop saw a huge boost to its business after its episode aired in December.

Kevin O’Leary, one of the sharks, says the show’s producers have gotten good at sniffing out entrepreneurs who are only looking for publicity and don’t actually want to land a deal.

Ryan Moore, a venture capitalist at the Cambridge firm Accomplice, concurs. “My hunch is the producers have improved [the] vetting and selection process,” Moore says. His firm put money into Lovepop before its “Shark Tank” episode aired.

Of course, some entrepreneurs appear on the show only to walk off without a deal.

John Radosta, an alumnus of Northeastern University who lives in Florida, spent seven months last year preparing for “Shark Tank.” He felt, he says, supremely prepared.

“I had watched every episode and seen what entrepreneurs had done right, what they’d done wrong, and how to negotiate.”

His pitch was for a franchising business built on the game of bubble soccer, which involves playing soccer while each player is protected by a large inflatable plastic sphere. (Bumping one another is a big part of the strategy.)

“I still don’t understand what happened. I had a ton of sales, was profitable, and the business was all bootstrapped,” he says. But no one offered a deal, and the sharks criticized him for not being clear enough about his business model and financials.

Radosta says he booked an additional $16,000 in sales from the publicity he got from appearing on the show, “but it didn’t send us on a rocket ship.”

And even some of the deals that seem to get sealed on the show don’t lead to money in the company’s bank account. A lengthy due-diligence process follows the agreement you see on the show. “It is intensive,” says O’Leary, the shark known for his cutting questions and his competitiveness with the other investors. “We want to know more about the people, know more about the business, what the company owns and what its intellectual property is. Very often, they leave out some critical facts around ownership or debt.”

Mark Cuban, perhaps the best-known investor on the show, says via e-mail that 25 to 30 percent of his deals “don’t pass due diligence for any number of reasons.”

That was the case with Unshrinkit.

Since her segment aired, Stolar says, the company has gotten its product into several retail chains, including Bed, Bath & Beyond, and her plan is to begin meeting with investors again this summer....

That's when I shrunk the rest.


RelatedA kinder, gentler ‘Shark Tank’

Look who they took a bite out of:

"Madoff victims dealt blow in effort to keep $875 million" by Erik Larson Bloomberg News  April 28, 2016

More than a thousand former Bernard Madoff customers were dealt a blow in their fight to keep $875 million in fake profit from the con man’s Ponzi scheme out of the hands of a trustee unwinding his firm.

US Bankruptcy Judge Stuart Bernstein in New York said this week that Andrew H. Cohen, a former trader in Madoff’s market-making business, should return $1.14 million he withdrew from his personal account in Madoff’s bogus investment advisory unit in the two years before the fraud collapsed.

The victory for trustee Irving Picard, a lawyer at Baker & Hostetler LLP in New York, should set a precedent for the 394 remaining cases against more than 1,400 defendants who fall into the same category as Cohen, his spokeswoman, Amanda Remus, said in a statement.

Resolving the batch of cases would give a sizable boost to Picard, who has already recovered more than $11.1 billion for victims through hundreds of lawsuits against Madoff’s biggest customers, banks, and offshore feeder funds. The trustee’s recoveries amount to nearly 64 percent of the $17.5 billion of lost principal.

Madoff pleaded guilty to fraud charges in 2009 and is serving a 150-year sentence. A jury in 2014 convicted five of his top aides for their roles in the swindle, a verdict upheld by a federal appeals court on April 20.

Picard was hired by the Securities Investor Protection Corp., an industry-financed group that seeks to make investors whole after frauds. His payouts have been made to “net losers” — those who withdrew less from Madoff’s firm than they deposited. The distinction between the two types of victims has been at the center of the biggest court battles stemming from the eight-year-old liquidation, with lawyers for hundreds of victims arguing — unsuccessfully — that they should be allowed to keep fake profit.

Cohen and the other customers in his category are “good faith” victims who didn’t know about the fraud but who withdrew more money than they deposited over a two-year period before Madoff’s arrest.

Or they were in on the scam and cashed out before the house of cards came crumbs;ing down.

Picard previously settled 384 “good faith” cases, and dropped 217 others as part of his hardship program that helped victims made destitute by the scam, according to Remus. US bankruptcy law limits such claw-back suits to a two-year period.

Gregory Goett, Cohen’s lawyer, didn’t immediately return a call for comment.

Cohen had argued for years against returning the money on the grounds that he received the cash “for value” on a debt Madoff owed — a defense pulled from provisions of the US Bankruptcy Code. Cohen also argued he was entitled to recover $773,869 in taxes he paid on the fake profit. Those arguments were ultimately shot down by Bernstein in post-trial findings on April 25, in which the judge recommended that the district court enter a judgment in Picard’s favor.

Cohen worked for Madoff’s company as a trader from 1991 to 2000. Over the years, Cohen deposited $2.92 million into his account and withdrew $4.06 million, a windfall made possible through Madoff’s returns on fake securities transactions, according to the trustee.