Mobile tax-credit generators The simplest scam is, you tell people that you will invest their money for them and make them more money, they give you their money, and you steal it. They tend to notice this eventually, though, and get mad about it. There are ways to delay or mitigate that. You send them fake account statements, you tell a compelling story about how their money disappeared, you do a Ponzi scheme where you steal later investors' money to pay back earlier investors, etc. You can make it work, at least for a while, but there is always that central difficulty, which is that your investors want their money back and you have stolen it. So it is tempting to design a scam where they don't want their money back, a scam where getting an investment return is not the investor's main purpose. Fake charity (they give you money, you say you will spend it on some unobservable charitable endeavor, you steal it) is one obvious approach, but has some difficulties: You need to find marks who are motivated by charitable purposes, and for many scammers it is easier to inhabit the character of a successful businessman than that of a philanthropist. The better approach is a scam where investors do expect to get something of value for themselves, but not from you. It's even better if they actually get it. So for instance there is EB-5 visa fraud. The EB-5 program is meant to stimulate foreign investment and job creation in the U.S., and the way it works is that if a foreigner invests enough money in a qualifying U.S. commercial project, she can get a visa to live in the U.S. The obvious trick is to certify that you have such a project, take money from investors, and pocket it. The investor won't get her money back, but she'll get her visa, which is what she really wanted. Her investment returns will be negative, but she'll be happy anyway and won't complain much. In fact, if she complains too much—if she goes to the authorities and accuses you of fraud, for instance—then the authorities will find out that she didn't invest in a real project and she will lose her visa. So her incentives are aligned with yours, which is what you really want in a victim of your scam. Or here is a profile of "The Couple Who Feds Say Scammed Berkshire Hathaway For Millions." Here is the essential fact of that alleged scam: Warren Buffett's Berkshire Hathaway invested $340 million in it, and in exchange claimed $377 million of income tax benefits.[1] Never mind the mechanics: Isn't that weird? If you can pay a dollar for $1.10 of tax credits, you should do it; if you can create $1.10 of tax credits for a dollar, you should do that all day long, and keep the dollar. So here are the mechanics. A company called DC Solar supposedly built mobile solar generators, "which supply power at sporting events and other outdoor venues." The U.S. government offers tax credits for this sort of thing, and DC Solar basically sold those tax credits to investors like Berkshire, Progressive Corp., and "a half-dozen or so regional banks." Overall, DC Solar attracted at least a dozen investors in complex deals that raised money through what's known as tax-equity funds, according to the government's allegations. In a typical DC Solar deal, filings show, investors bought each mobile unit for $150,000 but paid in cash only $45,000 -- the maximum amount of the tax credit they could claim. They were told that the company would then lease the equipment to end-users such as telecom companies. The lease money would pay down the remainder of the $150,000 cost plus provide any profit to the investor. Except, DC Solar didn't usually lease the generators to third parties as described by the company, the filings say. Instead, about 90% of the money one of its affiliated companies claimed as lease revenue was actually new investors' money. "Thereafter, the investors also can claim depreciation with respect to each of the MSGs for a five-year period," an FBI agent explained in a court filing, meaning that in addition to an immediate tax credit for the full amount of their investment, the investors also got tax deductions for the mobile solar generators' depreciation. That's how they could get a tax benefit that was bigger than their investment. Also, of course, the investors supposedly owned these generators and stood to profit if they could be leased for more than their cost, but that is distinctly secondary. If you invest $45,000 and get back your $45,000, or $90,000, or even $10,000, from leasing generators, then that's great, but the important thing is that you already definitely got back $50,000 in taxes so any investing returns are pure bonus. Whether or not the Ponzi allegations are true—Berkshire now says that, "as a result of our investigation into these allegations, we now believe that it is more likely than not that the income tax benefits that we recognized are not valid," but a lawyer for DC Solar's founder denies it was a Ponzi and says that "it manufactured thousands of mobile solar generators, which were examined and physically delivered"—they are definitely the sort of thing that you would expect to happen. The incentives are aligned, you know? Investors get an immediate positive return on their money, even if it is all immediately stolen, because the tax benefits are bigger than the investment. The only downside for the investors is if the Feds find out: Once people know it's a fraud, then you can no longer claim that it's a solar-energy project, and you lose the tax credits, as Berkshire expects to.[2] So there is no particularly good reason for the investors to inquire too closely. "The DC Solar tale now stands as a warning sign of how investors, perhaps too hungry for the credits, may be lax in scrutinizing the health of the underlying business," but of course they are! The health of the underlying business is irrelevant. Investors don't need to go to the factories and sporting events to see if the generators are good, because they are not really buying the generators. They are buying the tax benefits, and those are mostly not manufactured in a factory; they are manufactured in spreadsheets and legal documents. Still, the investors do want the tax benefits to be real, which does, at the end of the day, require the generators to be real. It's a lovely scam because it gives investors what they want, rendering them indifferent to whether their money is stolen, but the downside, and it's a big one, is that it is really a scam not on the investors but on the federal government. Sometimes the government notices that sort of thing, and when it does it tends to get mad. More bad news for Warren Buffett Imagine: Cryptocurrency pioneer Justin Sun bid a record $4.57 million to have lunch with Warren Buffett, who famously referred to Bitcoin as "probably rat poison squared." … The 28-year-old Chinese entrepreneur said he hopes to educate the Oracle of Omaha on cryptocurrency and the underlying technology, called blockchain. … Sun, who can invite as many as seven people to join him, said he'll choose among his most-persuasive friends as well as the most influential people in the crypto community as it's likely to be a tough sell to get the 88-year-old billionaire investor to change his mind. I can't believe he paid 580 Bitcoins to have lunch with Warren Buffett! I mean, 400 Bitcoins is a lot of money! Though he can bring seven guests, and if you divide 900 Bitcoins eight ways it is only 80 Bitcoins each.[3] Sun, as you'd expect of a 28-year-old crypto millionaire, is being pretty condescending about the whole thing: "Even one of the most successful investors of all times can sometimes miss a coming wave," Sun wrote in an open letter to the crypto community. "Buffett has admitted he overpaid for big investment food giant Kraft Heinz Co., while failing to realize the potential of the likes of Amazon.com Inc.; Alphabet, the parent of Google; and even Apple." I find myself in the very unusual situation of feeling sorry for Warren Buffett. Sure he has lived a long, happy and successful life in which he has accumulated vast wealth and nearly universal admiration, but oh man, he has to go to this lunch and I don't. I am tempted to say "if you and seven of your influential friends want to take me to lunch and explain blockchain and crypto to me for two hours, it will cost you a lot more than $4.57 million," but the sad reality is that that's not true. It will cost you $4.57 million. Wire me the $4.57 million—dollars, not Bitcoins—and I'll do it. But I won't enjoy it. Blockchain blockchain blockchain I tell you what, if you told Warren Buffett, over lunch, a few years ago, that the promise of cryptocurrency was that a group of large international banks would be able to post U.S. dollar collateral for derivative transactions in minutes rather than a day, would he have believed you? Would he have cared? Would you have cared? Is that a thing? I don't know. Here is the latest on crypto and blockchain for banking: Thirteen of the world's biggest banks are preparing to launch digital versions of major global currencies in 2020 after years of research convinced them that the technology underpinning cryptocurrencies could be used to make trading less risky and cheaper. The UBS-led research on a "utility settlement coin" (USC) has been in the ether since 2015, when banks decided to investigate whether wholesale banking could be made more efficient by deploying distributed ledger technology (DLT). ... The USC will begin life with 14 owners and members, and will be denominated in major global currencies including the US dollar, yen, euro and sterling. Every unit of a dollar-denominated USC will be backed by a traditional dollar at the Federal Reserve, and the same model will be used with other currencies, ensuring the value of the coin is stable. Its initial applications will be in relatively niche areas, such as creating a market infrastructure that allows the coins to be used to meet margin requirements in derivatives trades. Mr Ram said while at present it took at least a day for such requirements to be satisfied, using the USC the process could become almost instantaneous. It's a cryptocurrency that is a U.S. dollar maintained in a central ledger at the Federal Reserve! I keep writing about this stuff because it keeps amazing me. Like here you have a centralized electronic ledger maintained by a trusted party (the Federal Reserve) that keeps track of, and in fact embodies, who owns how many dollars. Not everyone can access that ledger or keep dollars at the Fed—you and I can't—but the big U.S. banks can. The Fed keeps a list of how many dollars they each have. On a computer. When one sends dollars to another, the Fed, on its computer, subtracts dollars from the sender's account and adds them to the recipient's. That's what dollars are, that's what it means to move dollars, the Fed ledger just is the list of who has dollars. And the question posed to the banks is: How can the Fed update its list a little faster? And the answer is, never mind the Fed's list, let's keep a distributed ledger maintained cryptographically by a consensus of a bunch of banks that will keep track of how many phantom dollars we all have, because that will somehow be faster. It is just … on first principles … sort of weird, you know? Like the appeal of Bitcoin is that there is a truly decentralized ledger, open to everyone, that keeps track of an entirely new decentralized currency. The appeal of USC is that there is a ledger open to the big banks that will keep track of dollars. But there is already a ledger open to the big banks that keeps track of dollars! It is called the Fed. I genuinely believe that the banks have found real operational advantages in doing it this way, I do, I do, but it is still weird. A quorum It is proxy season in corporate America, which means that it is also the season for weird technicalities in proxy fights. We talked yesterday about a proxy fight at Texas Pacific Land Trust, in which the board of directors canceled a shareholder meeting to avoid losing a proxy fight, and the shareholders went ahead and held the meeting anyway and elected a director, and now no one is quite sure if the meeting happened or who the directors are. In that vein, a reader pointed me to a proxy fight at Legacy Reserves Inc., a tiny ($50 million market capitalization) oil and gas company. Or, well, "proxy fight" isn't quite right. There's no proxy fight. An investor called Baines Creek Capital LLC, which is Legacy's biggest shareholder, with about 23% of its stock, tried to start a proxy fight: It nominated three candidates for Legacy's board of directors, and made plans to try to get them elected at Legacy's annual meeting of shareholders. But Legacy rejected the candidates on a technicality. The technicality is that only shareholders of Legacy are allowed to nominate candidates for the board, and Baines Creek is not a shareholder. I know that this doesn't sound like a technicality, but it is: Most of the time, most people aren't "shareholders of record" of the companies where they are shareholders; instead, they own their shares through brokers, who own them through depositories. Baines Creek really does own 23% of the stock, but as a beneficial owner, not a record owner. Those shares are not officially recorded in its own name; instead, they are recorded as belong to its broker or to Cede & Co., the "nominee" that technically owns most U.S. stock. This is the sort of technicality that is normally easy to fix: You just go to your broker and ask to move your shares out of "street name"; some paperwork gets filled out and you end up the record owner of the shares. You do this well before sending your nomination notice, certainly well before the nomination deadline. Baines Creek did not manage to do this, for reasons that are obscure to me but also to them. They wrote to their fellow shareholders on Friday: Baines Creek had, in fact, previously initiated the transfer of certain of its shares into record name with ample time to complete the process. To our surprise, however, the Company's transfer agent rejected our broker's repeated attempts to effect this transfer on three separate occasions leading up to the Company's April 1, 2019 nomination deadline for the Annual Meeting. We have some questions and concerns surrounding what may have gone wrong in this transfer process, since we cannot imagine how a large and reputable broker such as ours could receive errors when attempting to effectuate this routine transfer on three separate occasions. Sure, I dunno. No nominations, so no proxy fight. But Baines Creek does have one more trick up its sleeve, sort of. From that same letter: Baines Creek has therefore decided NOT TO VOTE its shares at LGCY's upcoming Annual Meeting to prevent the Company from obtaining the quorum required to duly hold the meeting. It is therefore critical that we do not vote our LGCY shares at all, rather than casting a "NO" vote or abstaining, since the Board is running unopposed as a result of its denial of our rights as stockholders to nominate director candidates. Additionally, the Company's use of a plurality voting standard, an outdated corporate governance practice, allows for each and every Company nominee to be elected upon receiving just one vote, since this election is uncontested. As a result, if LGCY achieves a quorum at the Annual Meeting, the incumbent Board members will automatically be re-elected for another year, and stockholders will be denied the right to voice their opinion by voting their shares for the candidates that they believe will create the most value. … If we take no action, then our broker may submit a proxy on our behalf and our shares will be counted towards quorum. We intend to go to http://www.proxyvote.com and sign up to vote in person at the meeting. However, we do not plan to attend the Annual Meeting because doing so would count towards quorum. We believe that the only way for our voice to be heard as a stockholder is to NOT VOTE at the Annual Meeting. This will ensure that our shares are not counted as present and prevent the Company from obtaining a quorum to duly hold its Annual Meeting and elect the incumbent director candidates. "The only way for our voice to be heard as a stockholder is to NOT VOTE" is a pretty good sentence about shareholder democracy. (One assumes that the "we" here encompasses not only Baines Creek but also other shareholders; you'd need more than their shares to prevent a quorum.) To hold a valid shareholder meeting, Legacy needs a quorum, meaning that a majority of the shares need to attend the meeting. But "attend" is a pretty loose standard: Showing up, or sending in a proxy, or having your broker send in a proxy for you, all count; the only safe way to not count towards a quorum seems to be to sign up to attend in person and then not show up. Baines Creek can't get their candidates elected at the annual meeting, but if they can get another 27% of the shareholders to agree with them then at least they can prevent the board from getting their candidates elected either. I am not sure what that gets them; the old board stays in power until a new one is elected, and if no new one is elected then I guess they just sort of continue along? Keeping Legacy from holding a valid meeting doesn't really accomplish the goal of getting rid of its directors, and it certainly doesn't accomplish the goal of electing new ones. It does annoy the directors, though, I guess, which seems to be a frequent second-best goal of shareholder democracy. Things happen Artist, Icon, Billionaire: How Jay-Z Created His $1 Billion Fortune. Bond traders swap phones for new technology as market catches up. The Buy-Side Trader Is Latest Job to Be Outsourced as Costs Rise. Google, Facebook and Apple Fall on Antitrust Scrutiny. Uber Under Tax Investigation by IRS, Foreign Authorities. Tesla Faces Skepticism About Depth of Demand. ESG Ratings Face Skepticism Even as Loan-Market Importance Grows. Woodford Confronts Career Crisis After Freezing Fund Withdrawals. Quest Diagnostics Says 11.9 Million Patients May Have Been Affected by Breach. Square Sends Millions of Digital Receipts, Sometimes to the Wrong Person. James Holzhauer's 'Jeopardy!' Streak Ends Just Shy of a Record. Eccentric Spec Mansions for Billionaires Is Not As Good a Business As It Seemed Like. "Since then, Mr. Edison has created a form letter he uses to threaten to sue companies over noise." Alligator ambushes couple's picnic, eats entire bowl of guac. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Not $377 million of *deductions*, mind you, but $377 million of reduced tax expense. From the description in the text it seems like the basic point of this program was a tax *credit*, in which your taxes are reduced by $1 for every $1 you invest; you also got depreciation deductions which reduced your taxes even more. [2] I suppose you can still deduct the amount that was stolen, but that's not nearly as good. [3] You know this joke, right? (A son asks his Bitcoin-investing father to borrow $10; the father replies "$9.67? What do you need $10.32 for?") Also, by the way, there is a well-known history of people spending Bitcoins on meals and then years later being like "turns out that was a really expensive meal." "On May 22, 2010, a programmer purchased two large Papa John's pizzas for 10,000 bitcoins, worth about $30 at the time," in what was "widely believed to be the first purchase of a product with bitcoin"; now those Bitcoins would buy at least a decade worth of annual Buffett lunches. |
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