Magellan Flagship Fund and Merrill Lynch commit securities fraud

Listed investment companies issue and buy back shares, equivalent to how other types of funds issue and redeem units, with the difference that LICs can issue shares priced at above asset backing, yielding great profits for the scheme operators during periods of net investor inflows. The potential for such profits is the main reason for the existence of LICs, with most LICs entirely dependent on such income to remain viable. Over the last decade, hundreds of millions of dollars in hidden profits have been extracted by Australian LIC operators in this way. LICs ramp their share price above NTA, then issue shares at the inflated price, which everyone pretends is an efficient "market" price, no questions asked.

Of course, in an efficient market an LIC would never trade above NTA, but would trade at a discount to its NTA proportional to the LIC's operating costs. Perversely, trading at a premium to assets is trumpeted as a sign of strength by the shills, since this shows a successfully working scam, with these metrics openly marketed on ASX. The October 2013 data cheerfully shows how Australian LICs have outstanding securities with a value exceeding asset backing by more than $3bn. For these funds, marketed to pension savers, $3bn out of $24bn is not backed by any assets, and would not be recoverable if the scheme were to be stopped today, as openly admitted by the criminals themselves.

http://www.asx.com.au/products/managed-funds/market-update.htm

However, this significantly understates the scam, as LICs routinely and fraudulently overstate their assets. Crossholdings within the LIC sector mean actual net tangible assets are lower than reported, as does accounting fraud regarding dividends receivable and derivatives. Moreover, the table only lists institutions that are considered LICs for accounting purposes, whereas the list of de facto listed investment companies on the ASX is much longer.

Magellan Flagship Fund (MFF.AX) is a new strongly growing and fraudulent listed investment company, the share price of which has recently been ramped to 33% above its NTA. An investment of $10,000 dollars in MFF gives the investor a security backed by assets worth $7,500, for an immediate fair value loss of $2,500. There is no reasonable outcome in which this hidden $2,500 fee can be justified, it is a virtual guarantee that the investment will eventually turn out poorly for the average investor. According to MFF's 2013 annual report, the company collected $9.4m in dividends and interest during FY13 from its assets, and had operating expenses of $9.8m, largely paid to management.

http://www.asx.com.au/asxpdf/20130913/pdf/42jc45xb9zp75s.pdf

The annual report uses fraudulent accounting to purposefully obscure the debts of the company. The balance sheet for MFF shows no debt, yet buried in the notes MFF reveals a $120m loan from Merrill Lynch, which MFF ludicrously offsets against cash held with Merrill Lynch "at the balance date". The loan and the cash is in different currencies, making the scheme an undisclosed currency bet. Of course the loan could be used for anything on the days prior to "the balance date", as listed investment companies can sidestep disclosure requirements by temporarily shifting out of assets. Merrill Lynch is assisting MFF with its securities fraud, and is no doubt aware that MFF is a purposefully ramped and underfunded fraud of granny investors.