If you think that the Securities and Exchange Commission
extrudes those volumes of regulations to protect you the consumer, then I have
a bridge to sell you; Quite the opposite. Those regulations that the SEC
mandates actually make it nearly impossible for you to dream the big American
dream. The chances of the ordinary investor getting a chance to invest in that
little startup that will become the next Microsoft, IBM or CISCO Systems are
slim to impossible, especially if the SEC has anything to do with it!
Don�t feel alone, however; smaller companies are also being
converted into cash through the machinations of the SEC�s familiars.
That is why your chances of living out a comfortable
retirement, or having the luxuries you see enjoyed by others, or participating
in the wealth reserved for the elite few; those "qualified" to invest
in a Hedge Fund are null.
The SEC wants you exactly where you are: a working
"John" who makes a day�s wages for two days� work, worrying about
whether your 401K will be enough, and whether the corporation you spent your
life working for will go through down-sizing, or worse, "bankruptcy,"
and thus default on your retirement benefits.
It is ugly, but it is the reality faced by most Americans
today.
Government carefully couches the text in terms both esoteric
and bland, designed to firmly close the door on your real participation in the
wealth produced by America. This happens in ways you never even imagined, all
the while simulating a system they proclaim to be for your protection. But the
only ones protected are the "Good Ole Boys." You scrape by with
pennies, they make trillions. Hedge Funds are at present their favorite form of
thievery.
Welcome to Plantation America, where ownership is more
subtle but as sure as any experienced by a shackled slave in the Old South.
Here are a few terms you need to understand before we get
started.
Hedge Fund. This is an investment pool where a
limited number of elite investors, usually 100 or less, invest usually one
million or more dollars each. Many Hedge Funds are so exclusive that their
minimums are 100 million for each investor. Hedge Funds are often described as
"a managed portfolio that targets a specific return goal regardless of
market conditions." Translation: To do whatever is required to bring in
the money. Those "strategies" include several sophisticated
strategies such as: short selling, arbitrage, hedging, and leverage. These are
few words that disguise the meaning of "steal it" with more taste.
Short selling. This is selling stock or another
commodity whose value is expected to decline. It has two flavors -- naked and
covered. Naked means to sell what you do not really own. Covered means you own
it and you sell it, repurchasing for less after its price has declined..
Remember this because it�s an important part of the rest of the story! I should
point out that this is illegal in every other aspect of life, but was declared
legal by those closely associated with the Fed, the securities industry, and
U.S. Treasury, which makes perfect sense if you understand what they really do.
Arbitrage means trying to profit by exploiting price
differences of otherwise identical or similar "financial
instruments." You move around to find different values placed on these.
Financial Instruments are things that are paper, but valuable, like mortgages,
notes, bonds, and securities. They like this best when they can simultaneously
buy and sell the same item, making money instantaneously through a spread. A
simple analogy of arbitrage is . . . ever notice that when you buy a stock you
always seem to pay the highest ask, and when you sell it you always get the
lowest bid! You have just been arbitraged!
Hedging. This is like betting on both horses in a
two-horse race. One horse is the favorite and you bet enough there to cover the
whole amount of both bets if Dobbin wins. But you collect really big if the
other horse comes in first. You risk nothing! Brokerage firms lend out your
stock that you have in the street name, and do this all day long with your
assets and don�t have to pay you a dime! To prevent this, simply take delivery
of all your long-term stock investments. Otherwise know that the firm will use
your stock to make them money. They will not tell you this or share the profit.
Leveraging is when you borrow money from someone else
and use that money to buy something at a lower price than you can sell it for.
You will already have it sold before it arrives. In other words, if you are a
brokerage firm this means you borrow money from your clients, without their
knowledge, to lend to a company issuing the stock that you are helping go
public. The brokerage company sells you the stock for 50 percent less than it
will be priced on the street at the IPO. Now you get commitments from clients
who are agreeing to buy that same stock in the underwriting syndicate with a 5
percent markup over the IPO price or 55 percent more than you are paying. The
price charged here is referred to as a premium, for whom you can see. From this
is deducted the kickbacks, reimbursements of expenses, and that vacation to
Hawaii on the private jet for the firm�s major executives.
If you have kept track of the profit the firm made, here�s
how it works. They used your money (no firm capital at risk), they lent it to a
private company they are taking public to buy stock at 50 percent or less of
the market value, and they sell it to you for 5 percent more than the IPO --
that�s a 105 percent profit on your money for the firm, and all you get as Joe
Paycheck investor is to own the stock that has now been fully diluted. This is
the protection racket run by those friendly folks we call the SEC and its
network of crony brokerage firms and political watchdogs.
They don�t pay you interest on the money most of the time;
the subject is never mentioned. When the market turns south you wonder how you
could lose so much money so quickly!
PIPES - Private Investment in Public Enterprise is
also a type of Hedge Fund.
Brace yourself, this one will be a shock. Ever notice how
certain things always have innocuous names that disguise what is really going
on? This is just one of those things, PIPES, a type of hedge fund where
millionaires or billionaires use the exclusive unregulated domain of private
equity investment funds to manipulate the markets of thousands of small
companies. Now, I will go slow, because I want to make this very clear and easy
to understand. You remember Joe Paycheck. He has been wondering how he will
retire on his present savings rate, so he begins looking for an investment he
could buy that will present a better-than-average return on investment.
His friend John Doe tells him he was reading an article that
recommended looking at small cap, micro-cap or penny stocks as potential
opportunities. These are stocks just like the NYSE stocks but the share prices
are much lower per share, and the SEC regulates these companies just like the
big ones.
Joe never really knew much about the stock market and so had
always played it safe with mutual funds. Those, however, didn�t make much. When
he asked about buying stock he was told he needed to buy a round lot (100
shares), or he would pay a premium. One hundred shares made the cost too high.
With companies like IBM selling at $58 per share (or $5,800) or, say, Microsoft
at $24 per share (or $2,400) that represented more money than Joe had at the
time, and he had always heard it was best to diversify by owning at least a
half-dozen companies or so to spread the risk around in case one company went
south. It was impossible to do this when he had to buy 100 shares of each.
But Joe is worried about that retirement and so he decided
to look around. After a few weeks of looking, Joe decides he will start
watching the subscription services like PR Newswire, Business Wire, and
Reuters. One day he reads a press release about a small startup company that
has gotten a patent on the next big thing, and, low and behold, they just
received $100 million dollars in equity funding from a venture capital fund
that struck a private equity deal with the company and its principals. But they
are only going to take a draw against it right now of $100,000. And can you
believe it, those guys at the venture firm are even willing to take stock in
return for the money they loaned! This has got to be a winner! More
importantly, they are willing to wait on registering the stock they are getting
until the company does its next stock offering! Joe assumes that these venture
guys must have done their homework or they would never have agreed to loan $100
million to a small startup company.
Going back a bit, a few
weeks earlier, Joe had received a gift from his mom and dad for $11,000 and he
had gone to DATEK and opened a self-directed investment account in anticipation
of doing something.
So with all this new found courage Joe logs onto DATEK and
places an order for 100,000 shares of this stock in Big Thing Enterprises
trading at .011 cents per share or $1,100 total. Wow that�s just over a penny a
share! A penny is nothing! I will own 100,000 shares of the Next Big Thing! I�m
rich . . . and, low and behold, the next day the stock is trading at 3 cents
and Joe has tripled his money.
So he decides he has to have more of this before it gets
away from him and everybody else finds out about the Next Big Thing! He decides
he will buy another 100,000 shares at .03 and spends another $3,000 of his
parents� gift.
The next day he gets home from work and checks the market, and
the damn thing is 8 cents per share. He has nearly a 400 percent total
investment return and there are still three trading days left in the week.
So he says, well I am way "in the money," so he
decides what the hell, he takes the entire remaining $6,900 in his account and
buys 90,000 more shares at 8 cents a share, and for the next few weeks the
company issues even more press releases and the stock goes as high as 18 cents
a share on low volume but rather thin trading (more buyers than sellers). Then
the company announces that they have spent all the money on research and
development and needs to take another advance against the equity line of credit
for another $100,000. The venture firm says okay and another big spurt in the
stock occurs with heavier volume (more sellers than buyers). All the company
had to give up for the $200,000 it borrowed was 30 million shares of stock (or
.007 cents a share) and they still have 40 million shares in treasury and the
principals have the rest (20 million). The company had a float of 10 million
shares before this all started. That makes a 100,000 million share
capitalization.
Then, all of a sudden, news stops coming out, and the
company freezes its borrowing from the venture firm, and things go very quiet.
The stock continues to fall in price all the way down to 3 cents a share. Then
it hits 2 cents a share and them 1 cent a share the next week. Joe decides he�s
just going to hold onto his stock and wait for it to come back. Then the
company decides it isn�t going to borrow any more of the $99,800,000 left on
its equity line of credit with the venture firm, because the cost of capital is
just too high and they would have to give up the company and still never have
borrowed all the money on the equity line. Joe and the company have both
received the same news, the light bulb has gone on.
Through manipulation of the rules, Chris Cox and his
predecessors have made it possible for the most potentially lucrative
investments to be driven, like cattle through holding pens, into the slaughter
yards we learned about above called, "Hedge Funds."
Imagine for a moment you are an eager, intelligent,
hardworking young American who has come up with a Great Idea. You patent that
idea at not inconsiderable cost to yourself. You even do market analysis that
proves that this idea is gold plated. Eyes shining with belief in the American
dream you start looking around for capital. You are surprised to find that none
of your local banks will back you. Doing an Initial Public Offering costs more
than you can afford and still bring your product to market. What good would
that do, you�d be forced to do business like all other small public companies
and sacrifice the company to the vultures because you can�t sell to small
investors; the brokerage forms won�t back you because they have all been scared
off by the ugly, nasty SEC after the 9/11 debacle. You are puzzled and
surprised.
The banks and others you contact, for instance the Small
Business Administration, your local bank, say they can�t deal with you and that
you need sophisticated financing and point you to places like the Venture
Capital Vultures and hedge funds. There, you learn that to get the capital to
take your invention into the market you will need to "cut an inside deal"
that they tell you is the standard practice. That, at least, is true. But
"the deal" makes it possible for the Vulture Capitalist to end up
owning your business.
At first you will probably be excited. The deal means you
can get all you need to secure your success -- $20 million is no problem. But
then you learn that you never GET all that money at one time. You have to get
it in smaller increments that always leave you underfunded and returning for
more -- and on increasingly bad terms. Because the Vultures now have reduced
price stock available to them, they can "short" the stock, because
the company is actually giving them shares for cash, which they get as part of
the loan the company signed, meaning they can sell it (even if it is restricted
or unregistered) thus making the stock sooner or later worthless. And so it
goes.
This is one of the reasons so many companies fail. It seems
like this would be bad for the Vultures, but surprise, the SEC and the wealthy
owners in those Hedge Funds can even write off their profits as �losses.� Most
of them pay no taxes of any kind. And when they ultimately end up with the
company, the loss carry-forwards allow them to reap all those profits and
reduce their taxable income by applying the loss carry-forwards.
Like I said, these things can make really big money. They
make even more money if you have a powerful friend who muscles people around
like the SEC, leaving them few other options. This is how the wealthy turn �the
market� into their own personal playground and sock billions away in the piggy
bank.
Christopher Cox, the 28th head of the Securities and Exchange Commission, knows that
most Americans trust the government and believe that their rules are
constructed to protect them, the small investors.
Sad misconception.
Cox knows exactly what is happening. That is why he is where
he is.
He was appointed by that paragon of free markets, George W.
Bush, on June 2, 2005, and unanimously confirmed by the Senate on July 29,
2005. (Most congressmen are millionaires, not when they arrived in D.C., but
soon afterwards, and so have a use for Hedge Funds.) He was sworn in on Aug. 3,
2005. If you go to their website you will find that the focus under Cox is on,
"the needs of
individual investors."
For "individual investor," think over $1 million.
You can keep your measly little savings in the ol� mustard
jar.
As we noticed with George W., his "core
constituency" is not the little old Republican lady living on her Social
Security who worked, believed, and voted for him. The "Core" folks
are those who can afford to become Pioneers ($250,000) or Rangers ($100,000).
However, that does not mean you need to feel left out.
George and Chris have plans for you, plans that include having you continue
into slavery.
We have an alternative plan that we think you will prefer.
While Bush and his friend Chris call this
"investment," what it actually should be called is racketeering, and
it�s being carried out as a conspiracy to defraud the public at large. That
makes it a felony, a multi-count felony. So our plan is to sort of clean up the
marketplace so that honest people can return America to a very different model
for business.
We have begun writing a bill and are now looking for a
sponsor to carry it through Congress. You are probably thinking, "Yeah,
right! Those crooks?" But right now Bush is teetering with everyone; more
than 50 percent of Americans now favor impeachment, so this is the perfect time
to get legislation passed. The bill includes the removal of Chris, demands true
business transparency, and new rules for stock trading, hedge funds, PIPES, and
opening up real investments that could earn the blessing of Mother Theresa
instead of the envy of Al Capone.
See, we knew you would like it. Soon, you, an American who
can�t afford to join a Hedge Fund will be free from the plantation of GREED,
having ridden the Underground Railroad to a very different America. Welcome
home.
You have always been puzzled about Hedge Funds; you wonder
how it always is that you lose money while insiders seem to get richer every
day. You wonder but continue to invest. You aren't crazy. They are out to get
you.
Melinda
Pillsbury-Foster is the granddaughter of Arthur C. Pillsbury. AC invented the
first circuit panorama camera as his senior project at Stanford in 1896 while
majoring in Mechanical Engineering. She has been studying the market and
economics through the filter of politics and anthropology for twenty years. Her
political blog is How
the NeoCons Stole Freedom. She is presently working on a book titled, �Off
the Grids to Freedom in One Easy Lesson.�