Prospect Capital: The Enemy Within

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John F. Barry III, the founder, chairman and chief executive of Prospect Capital, a Manhattan-based business development company, can’t seem to get any respect. In June 2015 Prospect took out an advertisement in Barron’s that sought to attract more investors by touting its then 12.4% dividend yield and the share price promptly dropped.  A shareholder wrote a tongue-in-cheek essay calling Prospect “The most hated stock on Wall Street.” Over the past six months both the Wall Street Journal and New York Times have written critically–to varying degrees–about the company’s portfolio valuation and dividend payment practices. Not to be outdone, short-sellers, who have had the company in their sights for nearly five-years, are broadcasting their own list of grievances about Prospect’s operational and accounting disclosures. Posts about the company or its prospects go up on Seeking Alpha nearly weekly and attract dozens of commenters who weigh in with full-throat for days at a time.

Barry Zyskind’s High Stakes Three Card Monte Game

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A tiny footnote buried in a pair of corporate filings suggests AmTrust Financial Services’ chief executive officer has a great deal of explaining to do about who owns almost seven percent of the company’s shares. Barry Zyskind, according to an early January Securities and Exchange Commission Form 4 filing, transferred 12,020,000 million shares of AmTrust–then worth more than $378.2 million–to a “charitable organization” called Gevurah from Teferes, a tax-exempt personal foundation he set up in 2006. (The number of shares reflects a February 15 2-for-1 stock split.) According to the filing, he serves as a trustee and officer for the entity, with voting and investment authority. The company’s proxy, filed on March 29, also mentions this transfer. Oddly, those two footnotes are the only mentions of Gevurah seemingly anywhere.

The Enabler and the Lifeline: Diamond Resorts and Quorum FCU

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Purchase, New York is a woodsy, suburban hamlet on the Connecticut state line that’s known as much for its residents’ extraordinary wealth as it is for being the headquarters address for corporate heavyweights like MBIA, PepsiCo and MasterCard. The town is also home to Quorum Federal Credit Union, a small member-owned and tax-free cooperative whose website suggests it’s still the type of plain vanilla alternative to big banks that it was set up to be 82 years ago, where profits reduce the cost of loans and boost the interest-rate paid on savings accounts. What can’t be easily seen, however, is the fact that Quorum has become a major lender to the vacation ownership interest business, i.e. the new iteration of time-share sales, the controversial–if long-standing–vacation concept. Loans made to customers of Diamond Resorts International are the biggest part of this portfolio and it’s no embellishment to say that without Quorum, Diamond wouldn’t be where it is today. (Southern Investigative Reporting Foundation Readers will recall our March investigation into Diamond’s financial filings, revealing a picture that’s entirely at odds with the growth juggernaut that management touts.

Bear Stearns and the Bodyguard of Lies

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More than seven years after Bear Stearns’ collapse, its former senior leadership has pushed a narrative centering on the once-proud firm’s collapse having been unforseeable. In the telling, the metastisizing subprime crisis suddenly slipped free from fixed-income portfolios, and the only response the globe’s biggest financial institutions could muster was to cease lending, birthing a maelstrom wholly apart from any other market cycle. Cut off from vital short-term credit markets, and buffeted on all sides by self-serving rumor and the raw panic of their counter-parties and clients, Bear Stearns was forced into a fire sale. It was “a run on the bank,” a five-word phrase stopping just short of “Act of God” in explaining the inexplicable and diffusing blame. Two weeks ago the Southern Investigative Reporting Foundation obtained a just-unsealed lawsuit arguing the contrary: Bear’s financial health was in full-bore decline months before the June 2007 multi-billion dollar implosion of its asset management unit’s two massively levered hedge funds.

Globus Medical’s Inside Job

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Last February spinal orthopedic device maker Globus Medical purchased Branch Medical Group, a key supplier and contract manufacturing operation based just three miles away from its Audubon, Pa. headquarters. The BMG deal was announced on the same day Globus released fourth quarter and 2014 earnings and little attention was paid to what looked like another instance of a high-profile, larger company merging with a small, privately-held one. But with a $52.9 million all cash price tag, the purchase of BMG was not so small for Globus, which had just reported $474 million in sales for the prior year. Moreover, it was no ordinary deal: in the bloodless language of business law the BMG purchase was known as a related party transaction.

The Cost of Standing in the Gap

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The Southern Investigative Reporting Foundation needs your help. Launched in 2012, at every step of the way the board of directors and myself have sought to adhere to our mission statement:

“Our investigative foundation will produce substantive reporting infused with valuable information and a perspective quite distinct from the glossy outlook spun inside Wall Street’s promotion machine. We will mine corporations’ legal and financial documents and perform old fashioned shoe leather reporting to frame investigations that many media organizations are simply no longer equipped to pursue.” I argue that we are meeting that goal. Moreover, the slate of coming investigations is sure to be the most high-profile work yet — trust me on that.

perpetual

Diamond Resorts and Its Perpetual Mortgage Machine

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Since 2007 the website of Diamond Resorts International has made people think their personal six-night stay in heaven is only a few clicks away. Online the company’s resorts, full of beaches and golf courses, still beckon. But Diamond is a 21st-century time-share operation and investors ought to be wary of any company using the controversial vacation concept that has provided decades of fodder for comedy writers while troubling state and federal regulators. Indeed what Las Vegas-based Diamond is selling is a sleeker, more expensive iteration called a vacation-ownership interest or VOI. And it seems to have proved successful for Diamond, at least thus far.

Valeant Pharmaceuticals: The Great Wellbutrin Channel Mystery

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In Valeant Pharmaceuticals’ evolution from battleground stock to full-bore Wall Street circus it is easy to forget that underneath the competing valuation narratives and regulatory drama is a real operating company. The odd thing is that down at the operating level–where drugs are made, shipped to market and sold–things don’t get very much clearer. One of Valeant’s more enduring riddles is the continued vitality of Wellbutrin XL, a drug that has been off-patent since 2006. A January Bloomberg News article ably laid out Valeant’s strategy of constantly raising prices on the drug–11 times since 2014–that underscores how revenue jumped. But looking at Wellbutrin XL’s prescription count data from the second and third quarters last year–specifically the reported revenues–some unanswered questions remain.

Valeant Pharmaceuticals: Howard Schiller, Up in the Air

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Shortly before 11 p.m. on February 4, Valeant Pharmaceuticals chief executive officer Howard Schiller took off from Dulles International Airport for home. It had been a long, tiring day of preparation, congressional testimony with plenty of blunt questioning and afterwards, the inevitable debriefing with his legal and public relations advisory team. It was not a lost day though: speculators in Valeant’s shares perceived Schiller as having done well and the stock price closed up $3.87, an unexpected development when a CEO is called to account for his company’s business model. He certainly helped his cause when he flatly admitted the company made mistakes and understood the pain its drug pricing policies had caused. To be sure, it did not go flawlessly — there were several broadsides landed from the likes of Congressman Elijah Cummings, the head of the House Committee on Government Oversight and Reform panel that subpoenaed him.

Mr. Schiller’s $9 million reasons to work cheaply

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Valeant Pharmaceuticals is the type of company that tends to make even the simplest things complex. The contract of Howard Schiller, its new chief executive officer, is evidence the first. On January 6 Valeant’s board of directors gave Schiller the role of Interim CEO; the company previously had an hoc, three-man “office of the chief executive” created on December 28 in the wake of the disclosure that founder and then-CEO Michael Pearson had taken a medical leave of absence of indefinite duration. Notwithstanding the fact that Valeant has become the most closely followed company in the capital markets–attributable in part to the Southern Investigative Reporting Foundation’s revelations of its hidden ownership of Philidor–it was reasonable to have expected a filing several days after Schiller’s appointment that disclosed relevant compensation package details. But that announcement only came on February 1, three weeks after Schiller assumed control.