Citigroup Australia involved in multibillion dollar fraud

Citigroup has created products specifically for the Australian Foundation Investment Company scam, designing the products to the specifications of the criminals, fully aware that the products were to be used for securities fraud. Citigroup provides leverage for the scam, further deferring liabilities of these already catastrophically underfunded schemes, increasing losses to granny investors that already run into the billions. Citigroup has created a series of warrants for these companies, while being aware of their deliberate overvaluations, accounting fraud and ramped share prices. These warrants are not widely advertised by Citigroup, which understandably does not flaunt its involvement in multibillion dollar asset-backed securities fraud.

Used by the criminals and pushed by associated advisors, these products are often sold on the basis of ongoing tax minimization.

http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCodes=afijoh
http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCodes=afiszb
http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCodes=djwjoh
http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCodes=mltjoh

AFI and its associate criminal listed investment companies have fraudulently inflated their NTAs with ramped assets, crossholdings and accounting fraud doublecounting investments. They have then manipulated their share prices to up to 30% over even these fraudulent NTAs, issuing millions of shares to granny investors at the purposefully inflated prices. Pension savers think that they can cash out at the prevalent 'market' price at any time, while the scam in aggregate actually is underfunded by billions of dollars, granny investor funds that are lost forever, something which will be discovered the moment people try to cash out. The criminal LICs rationalize this by predicting eternal fund inflows, in which scenario their schemes actually do work, like any ponzi.

Citigroup has helped with this fraud of asset-backed securities, knowing the securities were fraudulent, but still designing and selling derivatives based on them, adding a derivatives bubble to an existing ponzi. Citigroup obviously is entirely fearless of the prospect of multibillion class action lawsuits when grannies find a quarter of their funds in these schemes were missing the entire time. As a mathematical fact, the AFI/DJW/MLT scam depends on continued net fund inflows, from granny suckers or debt, otherwise the price could not be held manipulated 30% above NTA. The question is how far this goes up Citigroup management. Is it only Citigroup Australia which is complicit, or is the head office aware of this securities fraud?

The precedent: 'Invalid' section 249D notices

Given the vast value of control in the Australian listed investment company sector, incumbents have strong incentives to do whatever necessary to avert attempts to wrest control away, including openly illegal acts (usually lacking repercussions anyway). BCC and ELI were among the pioneers of simply refusing lawful requests under section 249D of the Corporations Act. On 13 March 2013 ELI disclosed it had received a s249D notice requesting a general meeting. On 2 April ELI claimed the request was 'invalid', for no apparent reason, and that ELI directors therefore were above following the law and would not comply. 

ELI directors refusal to comply with the Corporations Act was seemingly completely groundless, but since they could do so to great advantage and without repercussion, and at the very least delay the request, they did. Section 249D seems simple enough and would not at first glance be expected to have much leeway for creative interpretation:

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s249d.html

But never underestimate the creativity of desperate criminals. At the time, ELI's openly unlawful behaviour was expected to set a precedent for this method of retaining control of other peoples' money:

http://s1144.photobucket.com/user/_DrBenway/media/Otherpeoplesmoney.png.html

As expected, other directors receiving s249D notices have started claiming they are 'invalid'. The latest example is Liberty Resources (LBY). On 23 July LBY claimed the s249D notice they had received was 'invalid', due to unspecified 'irregularites, inconsistencies and uncertainties', and that directors thus would ignore this 'invalid' request. What this means is, they make the rules.

Losing control: ELI pays greenmail to WAM

If an LIC's management is able to abscond with 20% of the cash inflows generated by the LIC's assets, year after year, the value of control to management is 20% of the value of held assets (value which is transferred directly from shareholders). The overall value of control in the Australian LIC sector thus amounts to several billion dollars. The fraudulent ecosystem of the LICs teems with activity around the central issue of control. LIC managers predate other LICs by acquisition, and defend themselves by various poison pills. This criminal underworld is both cooperative and ruthlessly competitive. ELI recently experienced this first hand, as WAM bought a substantial stake, threatened to wind up the company to realize the gap to NTA, and demanded greenmail. 

Like all LICs, ELI is worth more wound up than as a going concern, due to management fees. WAM successfully extracted greenmail from ELI, with ELI management offering a selective cash buyout, hoping to retain unwitting granny investors to continue leeching off in an unlisted vehicle. The 'reorganization' proposed by ELI on 19 July also included a $464,000 fee from shareholders to management as compensation for loss of control.

http://asx.com.au/asxpdf/20130719/pdf/42h4dyknzj0m8s.pdf

So everyone wins, except for shareholders that is, but that's the entire point of these schemes; transferring wealth from granny investors to management, from fools to criminals.

WAM executed the same strategy with SGI, buying a stake at sub-NTA and then negotiating a deal with the incumbent criminals. In other cases WAM has not been as successful in extracting greenmail. When it tried to make a move on MEF it was outsmarted, as MEF management performed a series of blocking sham transactions with Aurora. WAM also had a longrunning lovers' tiff with the Contango crew. These disagreements, as well as ELI's disagreement with Solhurst, have their root in the unenforceability of criminal contracts. For example, if a group of rampers secretly agree not to sell a ramped share, such an agreement is only based on the honour of thieves, and there will be an incentive to defect (and to do so first). Repeated interaction among the criminals make cooperation a likelier outcome of this dilemma.

The flying hairpiece: WIG "soars" on vapor

The Australian stock market is at all time highs. This means the economy has never looked brighter, or alternatively the market has never been more manipulated. Which explanation you choose to believe in is up to you. The regulator simply assumes the market efficiency it is tasked to ensure. According to ASIC, share ramping does not exist, indeed cannot exist since the market is efficient. So even if a share is owned to 95% by a cartel, with next to no trading, and shows price movements that are inconsistent with an efficient market but benefit insiders, ASIC will still assume it trades at a 'market' price. This is why ASIC allows the LICs to commit securities fraud, it just assumes such fraud is impossible due to efficient markets.

Financial media and other market commentators also assume that manipulation does not exist, ascribing fanciful explanations to manipulated price movements in order to reconcile them with concepts of market efficiency. When WIG announced a buyout and performed the obligatory share price ramp, the 'soaring' price of this very illiquid stock was heralded by SMH on 3 July:

http://www.smh.com.au/business/wilson-htm-soars-on-buyout-talk-20130703-2pbd4.html

In reality, the WIG share price 'soared' from 18.5c to 22c because of the trading of exactly 8,236 shares on the ASX on 3 July, worth at most $1,800. Trades worth less than two thousand dollars moved the market cap of WIG by millions. WIG's share price didn't "soar on investor confidence", or any such ludicrous notion, it was purposefully moved.

URF ponzi ramped to minimize DRP

A ponzi scheme can be based on anything from ostrich eggs to herbal extracts. In the case of URF the ostensible asset is American slum housing. URF claims to pay its dividends out of rent collected from this high-yielding U.S. real estate, but in reality URF has paid dividends straight out of capital raisings. URF also offers a dividend reinvestment plan, ramping its share price to minimize the number of shares paid under the DRP.




Following the lead of the LIC securities fraud, URF has ramped its share price beyond NTA. ASIC and sundry shills alike as usual pretend this is not manipulation at all, but totally natural. It is just a coincidence all this market-abhorrent price action happens to benefit the scheme managers, just a big multimillion dollar coincidence at the expense of granny investors, and not ASIC's fault. 

URF has now announced a July 2013 DRP priced at $1.85, accomplished by the criminals ramping URF in a low-to-no-volume 'market'. Anyone issued shares at $1.85 is the victim of securities fraud supported by ASIC. All of these fraudulent schemes absolutely require ASIC sign-off before they can scam a single dollar from granny investors. And every single time ASIC is only too happy to comply.

AFI has defrauded investors of $1.1 billion

Australian Foundation Investment Company (AFI) is a criminal organization that depends on share price fixing and net investor inflows for its viability. The criminals responsible for 'managing' the share prices of AFI, DJW and MIR have manipulated the prices of these securities up to 30% higher than the assets purportedly backing these schemes. In the case of AFI, this securities fraud now exceeds $1.1bn. That AFI has managed to openly steal $1.1bn, without being challenged by a single person, is testament to the power of these criminals.


Even according to its fraudulent 2013 accounts, AFI only has assets per share of $4.46, yet its share price has now been ramped to $5.56. With over a billion shares outstanding, and with new shares issued continuously, the entire AFI scheme would immediately collapse if the criminals were no longer able to manipulate prices and issue shares.

If an analyst gives a HOLD recommendation on AFI, or if an adviser contributes to funds being placed in this scam, they are guilty of criminal negligence and should be held accountable. Anyone with a mandate of preserving a client's capital has a duty to advise exiting a blatantly overvalued investment. When the "intelligent investor" at Sydney Morning Herald advises clients to hold AFI, despite acknowledging it is catastrophically underfunded, this shill is not only committing an immoral act, it is committing a criminal act. Would it do the same for other investment types? So if a hypothetical ETF were to reveal that a third of the assets backing its issued units had disappeared, the "intelligent investor" would not regard that as problematic or relevant to pricing?

But let's say preservation of capital is of no interest to our "intelligent investor", let's say this gung-ho analyst focuses on greed rather than fear, then what of returns? The holder of AFI could create an immediate and assured 30% return on investment by selling AFI and immediately rebuying a portfolio approximating AFI's (easily accomplished by investing in blue chips). This hypothetical investor would be performing 100% risk-free arbitrage. This is only possible because AFI trades at a non-market and manipulated price, in an efficient market there are no such persisting arbitrage opportunities for a billion dollars.

As always, ASIC is happy to give its guarantee that AFI is actually not manipulated at all, that AFI/DJW/MIR are not underfunded fraud schemes, but actually trade at market prices. According to ASIC, it is one big $1.1bn market oddity, it is all just a marvelous mystery.

NTA and the securitization chain

The LICs package questionable assets, inflate their price, and sell them to unsuspecting granny investors. The packaged securities in turn are sometimes repackaged and resold at even more inflated prices. The analogies to the financial crisis's problematic mortgage backed securities are obvious. At each step of the securitization chain, the fraudulent asset is revalued at a more inflated price, with the most common overvaluation being to remove the effect of fees and taxes, leaving a fantasy number to be used in company books and as asset-backing for other schemes, and as justification for price fixing. Such chains are also commonly used to obscure the risk profile of indirectly held assets.


LICs most prominently present so-called 'pre-tax NTA' in their fraudulent marketing. This is the NTA in a world without taxes, a fantasy NTA for shilling and not the actual market value of the assets backing the LIC. LIC criminals justify using this deceptive measure because they never plan to sell. But if they never plan to sell an investment, it makes no sense to take advantage of its unrealized untaxed profits. In effect they want to have the cake, eat it, and sell it to grannies. This measure is completely irrelevant, as is 'portfolio return', and since these metrics are used exclusively for securities fraud they have no place in honest disclosure documents.

An LIC's fair value equals its NTA only if the LIC has zero percent costs. This is fact and not opinion, and if the LIC criminals or their 'analyst' shills pretend otherwise, it is a demonstrable lie. An asset's fair value is defined by its net discounted cashflows. An LIC's fair value as proportion of its NTA inversely follows its costs as proportion of its cashflows. If an LIC burns an average 20% of the cashflows produced by its assets, its fair value is 80% of NTA. That costs matter to fair value would seem an obvious conclusion, even for mentally deficient analysts that swallow any fraudulent number submitted by one of the goodfellas.

The most criminal LICs manipulate their prices even beyond an NTA assuming no taxes or fees. These LICs hold stakes in each other, and are used by other financial institutions as collateral and proxies for market exposure, when in reality the LICs do not own purported assets, creating billions of dollars effectively 'loaned' out of nowhere. In effect, this is a form of shadow banking, with similarities to China's euphemistically named 'wealth management products', as new funds for 'investment' can be created at will along the chain.

30X your money with no effort or risk

The market is a magic mystery box the vested-interest shills encourage everyone to put their pension money into, promising to turn $10,000 into $300,000 over 30 years. But if everyone does this, where will all that money come from in the end? The shills never answer that question. Their best attempt is that the increase in mandatory superannuation contributions from 9% to 12% will allow this, like a chain letter works. Everyone liked the fantasy of an assured 30 times their money with no effort or risk. Investors could save less and spend more, the financial sector could charge huge fees from this sure thing, governments and corporations need not plan for pensions, everyone could just rely on the magic mystery box. And since everyone was all in, when the market did not meet the required return, it was forced to do so. 


The current consensus is that higher share prices, even when not accompanied by higher productive capability or cash flow, always are a good thing, and everyone should be happy if the market goes upward, regardless of why. It is certainly possible to force nominal prices to whatever level is desired. But if a nation's wealth on paper grows faster than its actual stuff, what happens when people eventually try to convert wealth into stuff? Higher prices unbacked by fundamentals are not a good thing, inflated prices are actually an extremely bad thing. This concept that would astound (and potentially exceed the admittedly limited cognitive ability of) most Australian sharemarket commentators that unconditionally equate 'up' with 'good'.

Higher prices are easily accomplished in a market where intermediaries control the entry price for granny investors. In the short term, the Australian sharemarket is controlled by an oligopoly of major banks and fund managers, that accounts for the majority of shares outstanding and trading. The oligopoly has a strong net interest in increasing daily prices, since higher prices translate into higher fees and lures new investor inflows, and are supported in this by sundry government policies. Most intermediaries in the finance industry, its regulators, analysts and financial media shares this implicit interest in gradually higher prices, and so there is a constant upward pressure on share prices. This explains some of the more ridiculous price action on the ASX.

In the long term, the oligopoly's ability to push the sharemarket upward is constrained by net cash outflows and the availability of debt. Prices are manipulated upward as far as it is possible, until outflows force the oligopoly to set a lower level. In periods of net pension fund inflows to the market, when total salary contributions are greater than pensioner cashouts, not only can prices easily be driven upward, but there are enormous profits to be made doing so. Increasing debt is the second main driver of the sharemarket, with the performance of the underlying businesses now completely irrelevant to the performance of the magic mystery box.

Macquarie and the Aurora price-fix

Macquarie, Perpetual and Suncorp currently control VBP's share price. These three institutions own 95% of outstanding shares of this very illiquid 'asset'. VBP is a vehicle of securities fraud, as the cartel keeps the share price at a level far above its true market value. As per usual, ASIC cooperates by pretending that VBP trades at a 'market' price and not an oligopoly price. Some of the same players are involved with price-fixing other companies associated with Aurora, such as for example LTN.

According to its annual reports, VBP burns all its operating income on management costs, and then resorts to various accounting tricks - including the perennial unrealized profit - to fake performance. VBP precedes its annual report with the farcical caveat that the "method of valuation" used can have "significant impact". Well OK then.

Between June 21 and June 30, ASIC showed its awesome powers of enforcement, effecting a magnificent improvement to transparency. Instead of reporting "final unaudited Net Tangible Asset Value", VBP now reports "final unaudited estimated Net Tangible Asset Value". Behold the difference!

http://asx.com.au/asxpdf/20130702/pdf/42gt7613sm363q.pdf
http://asx.com.au/asxpdf/20130715/pdf/42h1g1t7kmwskh.pdf

This obviously solves everything, since VBP now includes the word estimated in its disclosure documents, and in bold-text no less.

Sydney Morning Herald shills the LICs

The Sydney Morning Herald's business and property sections have been overrun by shills with various vested interests. The business section is arguably the most important part of a newspaper to ensure independence for, given the importance financial matters have in people's lives, and given the damage a fraudster can cause by coopting content read by millions. This makes the rise of the shills in SMH all the more deplorable, with coopted content from WAM, Patersons Securities, Yellow Brick Road, Intelligent Investor and The Motley Fool, to name but a few.


The latest SMH "article" to tout the LICs is particularly egregious. This hagiography from Intelligent Investor lauds the fraudsters as "conservative", "wise", "having a sense of duty", performing "admirably" while managing "low-cost" and "hassle-free" investments. The shill then slaps a capitalized HOLD rating on all the LICs the piece had "analyzed" - namely AFI, ARG and MLT - even after acknowledging that these LICs now trade at premiums of 11% to 30% to their NTA.

http://www.smh.com.au/money/banking-on-listed-investment-companies-20130718-2q5su.html

The shill casually acknowledges how a quarter of AFI's $5.7bn market cap is now backed by nothing. The shill then immediately and for unclear reason concludes it is not a problem that a quarter of the company is vapor. An investment of $10,000 in AFI gives an indirect claim to $7,500 worth of shares (the operating income of which the investor keeps 80% for a fair value of $6,000). The shill acknowledges this, yet apparently sees no problem with a scheme featuring a de facto $2,500 brokerage fee on a $10,000 investment, with an ongoing 20% fee.

The shill also pretends it is no big deal that upwards of a billion and a half dollars of granny investor money at AFI is gone but not yet discovered missing. Is the shill complicit with the LIC scam, or is it just a moron? In the end it does not really matter. Every evil machine is built up of small cogs, each doing its minor part, and with its atrocious article the despicable piece of shill played its small part in The Great Australian Investment Ponzi.

The wet T-shirt: DJW's accidental transparency

On 4 April 2013, DJW was to submit its March NTA disclosure filings to the ASX. Showing its customary clouseauesque level of incompetence, DJW accidentally shared the wrong document, baring substantially more than was required or requested by anyone. The submitted twenty page document disclosed information not usually included in their public filings, detailed portfolio breakdowns and internal metrics. ASX soon deleted this more comprehensive document from their platform, replacing it with the correct and less revealing report, without giving any indication that there had been a inadvertent public exposure. By letting some investors, but not all, take part of this information, and then sweeping the whole thing under the rug, ASX and DJW probably breached disclosure laws. In this particular case, this is among the least of DJW's transgressions. For those with a morbid interest in DJW, the full report is included after the jump. 

DJW and the missing quarter billion

DJW had a reported NTA of $3.46 at the end of June 2013, with its share price ramped to $4.50 by the same criminals that manipulate MIR's share price. The criminals have thus ramped the share 30% beyond its asset backing, and at least 60% beyond fair value (with an NTA of $3.46 and costs averaging 20% of operating income, DJW's fair value is at most $2.77). 

The MIR scam continues

In June 2013 MIR had a reported NTA of $1.92 and a share price ramped to $2.50. MIR's criminal associates had ramped the company's share price to 30% above its asset backing while ASIC watched impotently. According to ASIC, MIR traded at $2.50 not because of manipulation by entities that stood to gain from issuing shares and booking unrealized profits, but rather due to entirely natural market movements, one of those ubiquitous harmless oddities and not fraud. ASIC gave its guarantee that $2.50 was a market price and not a blatantly manipulated price, and should therefore reimburse granny investors when this scheme and similar ones blow up.

According to its latest annual report, in the 2013 financial year MIR collected $10m from its investments in dividends and interest, with management burning $2m (20%), for a net operating profit of $8m on its net assets of $265m. MIR then declared dividends of $21m to lure new victims. To pay out dividends in excess of its operating income year after year, MIR must either sell assets or issue shares. Since no LIC ever wants to sell assets, preferring unrealized profit to actual profit and an expanding feeding trough to a contracting one, dividends are financed by capital raisings. Over the last decade MIR has issued 50m shares, increasing shares outstanding by 50%.

MIR's share price is ramped by the same criminals running the AFI and DJW scams. With a June reported NTA of around $1.92, given costs averaging 20% of operating income, the fair value of MIR was $1.54, disregarding the accounting fraud in MIR's books. MIR was ramped to $2.50, a much more profitable price at which to issue shares, scam granny investors and book unrealized profits for AFI and DJW. MIR can then claim successful long term performance based on this grossly fraudulently 'market' price, which together with the ponzi dividends can be used to lure new victims.

Additionally, MIR's reported NTA of $1.92 is overstated and its annual report fraudulent. MIR doublecounts dividends receivable that are already incorporated in NTA, while not making allowance for its announced dividends payable, in a perverse inversion of the conservatism accounting principle. MIR deceptively measures performance and valuation assuming a world with no fees or taxes. Moreover, several of the shares owned by MIR, such as BKW and LSX, are ramped and cannot actually be sold at book value.

ASIC refuses to admit ramping even exists, and has not once intervened against ramping fraud, allowing criminals such as MIR to freely inflate investments sold to granny investors at purported market prices. At most, ASIC's response to such fraud involves more disclosure. But if the fraud is of a kind where the connect between disclosure and asset price has been deliberately broken, what good does more disclosure do? In terms of results, nothing. In terms of results, ASIC is a miserable joke. According to MIR's own documentation, were MIR investors to actually try and cash out their investment, a quarter of their funds would be missing with no asset backing, with the scheme only working as long as scammed investors do not try to realize their fake 'profits'.

The Great Australian Investment Ponzi

The Australian listed investment company (LIC) sector has degenerated into outright fraud, with the LICs manipulating their share prices through a web of crossholdings and circular trading, in order to issue shares at inflated prices and create fake unrealized book profits.

1. The LICs use funds under management to ramp their own share price and each other.
2. The LICs pay dividends out of capital raisings, in a ponzi of new investors paying old.
3. The LICs use fraudulent accounting to inflate assets, hide losses and create opacity.
4. The LICs cooperate to ramp chosen illiquid shares and other manipulable assets.

The following presentation provides details of the longrunning Australian LIC scam:

http://s1144.photobucket.com/user/_DrBenway/library/The%20Great%20Australian%20Investment%20Ponzi

This blog will provide updates on the largest Australian scam ever. Usually scams can only be analyzed in the rearview mirror, but thanks to ASIC's truly astounding incompetence and impotence, this instance provides the opportunity to observe massive securities fraud as it unfolds in real-time.