RAPA: Incubating Martingale monkeys

Purveyors of zero-sum games sometimes run amusing promotions for the public, to spread the idea that everyone can be a successful options trader or poker player. But if everyone can win trading, who exactly would they be trading with? The latest example is the utterly hilarious blog "Incubating Joeys", penned by a "journalist" from the Australian Financial Review, who is part of a group learning to trade options from the geniuses at RAPA Cap Intro.

http://incubatingjoeys.com/

The business idea of RAPA and its main backer, the mysterious Gleneagle Securities, is that aspiring day traders will "prove" themselves on RAPA rankings, thereby attracting outside capital to play with. RAPA and Gleneagle will then charge significant fees for carrying no risk and performing no trading. The operators spruiked this scheme, in all likelihood illegally, on internet forums.

But separating performance from randomness is tricky, as pure gambling can account for strong and steady multi-year returns. This can be easily shown using the most basic maths. Many of the strategies used by the current RAPA geniuses, such as naked option selling, have the risk/return characteristics of a Martingale strategy (i.e. doubling your bets until winning or going bankrupt). Imagine a monkey starting with $100 and making coin-toss type bets. The monkey's strategy is to start with betting 1/7 of its capital each year. If it wins the monkey takes the 14.3% profit, and if it loses the monkey doubles its bet. Cumulatively this strategy has a 0.875 probability of winning 14.3%, with a 0.125 probability of losing 100%.

What is the outcome of this strategy for our monkey over five years? With greater than 50% probability, the monkey will have five straight years of wins, with a steady 14.3% return per year, and a compounded balance of $195 at the end. It can then brag to its fellow monkeys about its mad skills.

Now imagine we have a room full of incubated monkeys, a hundred bright-eyed little simians doing the Martingale, pausing only occasionally to masturbate and fling poo. Of the hundred, more than half would be expected to make it past five years. Ten of the monkeys would become masterful traders, boasting a 17 year run returning 14.3% every single year. One special monkey, let's call him Kevin, would be hailed as a genius after 34 straight years of profit. Other monkeys would flock to him, to learn his magic secret of trading.

Gleneagle Securities helps Avestra embezzle pension funds

The mysterious Gleneagle Securities is a one-stop shop for financial crime, providing a front for pesky disclosure documents, performing sham transactions, ramping shares with algo trading, and circumventing laws designed to protect minority shareholders. The fraudulent activities of the Gleneagle criminals span decades, with its management involved in the sham transactions of Tricom in the Opes Prime debacle. These sham "special crossings" were later, astoundingly, deemed not criminal on appeal. Hilariously, the court opined that even if the sham transactions were criminal, a ban on the criminals would just be so "disproportionate".

http://www.smh.com.au/business/i-was-in-no-position-to-do-anything-20100920-15jqf.html
http://www.theaustralian.com.au/business/tricom-boss-in-from-the-cold-after-four-year-ban-is-overturned/story-e6frg8zx-1225913015411

Gleneagle then "underwrote" AJ Lucas's (AJL.AX) catastrophic capital raising in 2011, reaping a fee from the company's shareholders, despite not actually committing to underwrite any shares. In an open breach of fiduciary duty the criminal management of AJL did nothing to protect minority shareholder rights during this fraud. Naturally, there were no repercussions whatsoever for the well-connected criminals who perpetrated these crimes in plain view, because 'fiduciary duty' is treated like an absolute joke in Australia.

http://www.pierpont.com.au/article.php?From-Underwritten-to-Under-Water-552

The journalist in the article above is not the only person with difficulty finding information about this enigmatic organization. The Gleneagle website is remarkably terse concerning who actually backs the company, and Gleneagle seems consistently unenthusiastic to discuss its "deals" in public.

http://www.biotechdaily.com.au/media/backissues/2013/03%20Mar/BD%20Biotech%20Daily%20Mar%2021.pdf

This reticence is perhaps understandable given that Gleneagle is involved in some of the most egregious frauds in Australia. Gleneagle is associated with the circular investment scam Avestra Asset Management, that has recently embezzled millions from granny investors by moving entrusted money into "investments" in related party funds.

http://www.avestraassetmanagement.com.au/funds/module-portfolios/mis-portfolios/

Crossholding fraud Hudson Resources (HRS.AX) recently hired Gleneagle to conduct its share buyback. Gleneagle also acts as a front in numerous other vehicles of securities fraud, many of which have no operational activities. Needless to say, every single enterprise that associates with Gleneagle experiences subsequent catastrophic shareholder value destruction.

These are not accidents or magical market mysteries. Facilitating this wealth transfer (a.k.a. theft) from shareholders to insiders is exactly what Gleneagle gets paid for. Gleneagle is also involved with RAPA Cap Intro, a hare-brained scheme whereby Gleneagle wants an ongoing cut for "introducing" mysterious capital to amateur daytraders. Gleneagle associates spruiked this scheme on trading forums, in the process eating some truly epic smackdowns, in a manner redolent of the Formosa Auto-Trade scam.

http://www.elitetrader.com/vb/showthread.php?t=253413&pp=6&page=41

RAPA was next heard of in August 2013, on a blog started by a "journalist" at Australian Financial Review, who disconcertingly seemed unable to use even basic punctuation while pumping the RAPA scheme.

http://incubatingjoeys.com/2013/08/

The most hilarious part of this blog? The "journalist" learning to be a millionaire trader from the RAPA geniuses had to pay a "commitment fee". RAPA made AFR pay to pump their scheme. But if the RAPA geniuses make such fantastic returns, why would they share their invaluable secrets for a "commitment fee"?

Thorney Opportunities (TOP.AX) insiders frontrun

Thorney Opportunities (TOP.AX) is a newly launched revaluation fraud and part of a circular investment cartel. The fund "invests" in securities the cartel can directly move the price of, fraudulently manufacturing unrealized profits, with its wealthy backers given insider information of the cartel's ramps. The cartel also "invests" in the businesses of its wealthy backers, with this quid pro quo flagrantly breaching fund fiduciary duty. This is what passes for successful "investing" in Australia, having a "Gentlemen's Club" with ability to manipulate chosen investments temporarily higher. When such cartels ramp illiquid related party smallcaps by buying 30% of outstanding shares, this is euphemistically referred to as "shareholder activism" by the shills. TOP used its connections to set the Sydney Morning Herald shills into overdrive, with the practitioners of this most ancient profession writing several articles a day pumping the scam on the newspaper's front page.

http://www.smh.com.au/business/highprofile-investors-buy-into-new-alex-waislitz-fund-20140119-312oz.html
http://www.smh.com.au/business/activist-fund-dives-into-nbn-service-stream-20140123-31bqf.html
http://www.smh.com.au/business/first-investment-for-newly-listed-alex-waislitz-cash-box-is-service-stream-20140124-31e9n.html

The poorest investments, illiquid shares with years of losses and previous shareholder value destruction, are the best targets for ramping. The same amount of money spent by the cartel to ramp a large liquid stock by 0.1% could be used to ramp a small failed illiquid stock by 100%, yielding commensurately larger unrealized profits. Even before the TOP cartel officially took over Wentworth Holdings (WWM.AX), the cartel and WWM were criminally engaged in attempts to inflate WWM's asset base by ramping its main "investment" in Australian Renewable Fuels (ARW.AX), in the process breaching the Corporations Act.

http://www.asx.com.au/asxpdf/20131121/pdf/42l0pt8pk1c088.pdf

Naturally, ARW follows the standard Australian pattern of manipulated stocks, namely long-term shareholder value destruction interspersed with temporary sharp ramps engineered to benefit insiders.

Both TOP and its "investments" currently have their share prices set by the cartel, and not by the "market". Until the next time TOP approaches granny investors for more money, its "performance" will be entirely engineered by the cartel. TOP will then issue shares based on fraudulent performance metrics and inflated book assets.

The first official "investment" and share ramp for the cartel was troubled telecom Service Stream (SSM.AX). Having tipped off newspaper shills and insiders in advance, on 24 January 2014 the TOP cartel announced an investment of up to $20m in SSM and immediately ramped its share price 24%, creating instant unrealized profits out of which the scheme operators can charge real cash fees.

Cartel insiders frontran the SSM investment by making prior purchases, as is the custom for such criminal enterprises. A cartel associate and major TOP backer built up a 5.8% stake in SSM, with 10m shares purchased on 25 October 2013 by Rubi Holdings Pty for $1.8m. This October 2013 purchase was, purely coincidentally of course, five times a large as any previous SSM purchase made by Rubi Holdings.

http://www.asx.com.au/asxpdf/20131028/pdf/42kc0g41c7xpl2.pdf

After the TOP cartel ramped SSM's share price, the cartel associate made an instant 24% gain by this frontrunning, yielding a risk-free $750,000 return.

Related party fraud continues to spread

Running a profitable company is hard. Running a succesful related party fraud and falsifying positive results is easy, which is why such cartels have proliferated in Australia. By using related party transactions cartels can manufacture profits and inflate their balance sheets, with the ultimate aim of using the falsified data to issue shares to the public at deliberately inflated prices. These cartels commonly feature a maze of crossholdings, sometimes partly disguised, "loans" and "write-offs" between related entities, sham transactions and bloated related party receivables. Cartel directors and their friends loot controlled companies with "consulting fees" and use inside information to frontrun the ramps.

Let's say related parties iScam and iFraud feel like adding $4m to their profit statements and balance sheets through a series of sham transactions. iScam sells something it paid next to nothing for, say a website domain name, to iFraud for $1m. This gives iScam a profit of $1m and iFraud a $1m asset. iFraud then sells it back to iScam for $2m, giving iFraud a $1m profit and iScam a $2m asset. After two more sham transactions iScam has the asset back on its books at $4m, with an aggregate "profit" of $2m created for each company.

Website domain names are popular vehicles for sham transaction fraud between related parties, as they can be bought cheaply and booked at high values. For example, iProperty (IPP.AX) used sham transactions involving a website domain to create "profits" and crossholdings with related party iCar (ICQ.AX) and associates, with IPP subsequently ramped 3X by a cartel including Australian Foundation Investment Company (AFI.AX). Freelancer (FLN.AX) used a website domain sale to provide a pay-off to an insider. Other newly launched revaluation frauds, such as My ATM Holdings (MYA.AX), DGI Holdings (DGI.AX), 99 Wuxian (NNW.AX) and Applabs Technologies (ALA.AX) involve the "purchase" of online businesses by related parties, followed by share price ramps.

Share price performance and average investor returns

Criminal listed investment companies create deliberately deceptive marketing materials that are used to attract more victim investors, using ridiculous metrics such as "pre-tax net assets" and "portfolio returns", and inflating assets with ramped investments, boosted receivables and fraudulent accounting treatment of options. However, even the most basic share performance metrics used in financial analysis have serious drawbacks and are useless for evaluating historic return to the average investor.

To evaluate historic performance, shill analysts typically look at total shareholder return, comparing beginning share price with the ending share price while factoring in dividends. However, shareholder return over a period is not necessarily correlated with the return realized by the average investor. Counterintuitively, an investment can have strongly positive shareholder returns over a period of time during which the average shareholder suffered catastrophic losses.

To understand this, consider the hypothetical Company A, which at year 0 issues 1m shares at $1 each to founding investors, for a market cap of $1m. Company A's share price rises to $10 in year 1, at which time Company A issues 99m shares at $10 each. Subsequently, between year 2 and 5 the share price declines to $6.

How should this company's share performance over the period be evaluated? Your friendly local share shill will tell you the share increased by 500% over the period, for a compound annual growth rate of (6/1)^(1/5) - 1 = 43%. The shill will tell you that, all things considered, over the period the investment performed very strongly, returning 43% per year on average. However, this great total shareholder return of 500% will be deeply misleading, and does not equate to positive returns for the average investor during the period.

During the period, the average price paid for Company A shares was 991/100=$9.91, since 99m shares were issued at $10 and 1m shares were issued at $1, with all other purchases and sales netting to zero. With an ending price of $6, for the average investor, Company A thus yielded a return of -39% during the period. This -39% return is the more accurate metric. 

The exact same analysis can be applied to indices. When shills tell you how the index has risen over the last thirty years, while neglecting to mention when shares were issued, they are giving you a CAGR but not an indication of the return experienced by the average investor. Moreover, the most moronic shills will tell you that superannuation contribution increases somehow imply a future rising market. These shills assume that no new shares will be issued to soak up the inflows, and that their information is not already reflected in prices. Even more idiotically, they implicitly assume that a $6t stock market can produce the same returns as a $1.5t market, i.e. will magically have four times as high aggregate profits and dividends. They implicitly assume that BHP would magically report four times as high profits if only its price was quadrupled first. This of course shows a serious mental deficiency.

Avestra hires self-confessed criminal Michael Featherstone to threaten this blog

After receiving groundless legal threats, on 16 January Google removed a blog post detailing Avestra Asset Management's involvement in the Formosa Auto-Trade scam. Using flyers handed out on the street, this scam involved the sale of "auto-trading" laptops for $30,000 to gullible investors, who were promised extravagant annual returns on forex markets, "no knowledge or effort required". All you had to do was buy a $30,000 auto-trading laptop, sit back, and your return would be $5,000 a month in perpetuity.

http://www.aussiestockforums.com/forums/showthread.php?t=21337
http://www.forexpeacearmy.com/forex-forum/scam-alerts-folder/13119-formosa-auto-trade-system-paycheck-autotrade-scam.html

Avestra has now gained control of listed funds manager AG Financial (AHA.AX), moving controlled funds to related parties while ASIC twiddles itself, and is loath to have its past exposed. The scamsters hired a company run by self-confessed criminal Michael Featherstone to launch legal threats against this blog.

http://www.chillingeffects.org/notice.cgi?sID=1352952

Michael Featherstone is a former police officer who runs the Gold Coast private investigation and risk advisory firm Phoenix Global. In a 2008 article, "Mick" Featherstone openly admitted to being a criminal, routinely breaking Australian privacy laws and trespassing during his "investigations". But as Mick put it, his victims "rarely take the matter to police".

http://www.goldcoastcomputers.com.au/gold-coast-computers-articles/2008/6/8/hightech-spy-business-booms/

According to Crikey, Mick Featherstone was involved with the illegal pyramid scheme 1CellNet a decade ago, as well as with a melange of similar "predictive software scams", with names such as Ezyshoppe, Cyber Wall St, Cell Wireless, World Games Inc, Virtual Games Global, Global Stock Game, 1GlobalVillage Club and Aspiritus. In 2008 Featherstone headed a class action lawsuit against consumer advocate Neil Jenman, at the behest of property investment scammers.

http://www.crikey.com.au/2008/12/09/white-shoe-brigade-kicks-back/

These scams go on for decades, in the open, without Australian police or regulators taking any action whatsoever.

Using crossholdings to inflate assets

By using crossholdings criminal companies inflate reported assets, in order to issue shares to the public based on deliberate misrepresentations of NTA. The figure below illustrates how crossholdings conjure assets out of thin air. Let's say a criminal fund manager has $10m in real assets to engineer and sell to granny investors. The fund manager can put the $10m in fund A, giving it an NTA of $10m and a $10m market cap at par. However, if the criminal instead creates two funds, B1 and B2, each with $5m in real assets and a 50% mutual crossholding valued at $5m, total NTA and market cap would be $20m, if share prices are maintained at par to NTA. (Note that funds can perfectly legally offer buybacks/redemptions at par to NTA, even if this NTA is fraudulently inflated by crossholdings, thus creating an artificial floor far above fair value.) This arrangement thus magically doubles assets and market cap, artificially boosting fund manager fees. When issuing shares at this ramped price, half of investors money would be stolen by the scheme operators.

But why stop there? The $10m could instead be split into ten different funds, funds C1 to C10, each with $1m in real assets and $9m in conjured crossholdings with each other. Each of these funds would have a reported NTA of $10m, and at par would have a market cap of $10m, despite having only $1m in real assets. In aggregate these funds would report assets of $100m, and be assigned a market value of $100m, magically conjured from $10m in real assets. ASIC incredibly would consider none of this fraudulent, but instead fully endorses and protects such fraud.

When fraud is tolerated, it spreads. Crossholdings now form a massive dead weight in the Australian financial system, inflating reported assets by billions of dollars. Entire industries have emerged to take advantage of such securities fraud. The crossholdings generate no net cash flows, have zero net value for investors, and by creating crossholdings the criminal directors of such schemes have committed fraud. The simple analysis above does not even take into consideration the running costs of the funds, nor how share prices are being ramped beyond par to NTA. Both these factors serve to exacerbate crossholding fraud overvaluations exponentially.

The Hudson Investment Group circular investment fraud

ASIC has for years allowed revaluation fraud and circular investment scams, whereby a cartel of related companies uses crossholdings to inflate the reported assets based on which shares are issued to granny investors. The cartel manipulates the share prices of its members and performs internal circular sham transactions, loans and write-offs. By having cartel members trade at artificial prices with each other, false profits can be engineered and fraudulent balance sheets created. Nothing new under the sun; Ivar Kreuger used the same basic modus operandi in 1930.

One such circular investment scheme has been formed by Hudson Investment Group (HGL.AX), Hudson Resources (HRS.AX), Raffles Capital (RAF.AX), Sovereign Gold Company (SOC.AX), Precious Metals Resources (PMR.AX) and various associated unlisted entities such as Pacific Portfolio Investments. These parties have formed a criminal organization, the aim of which is to issue shares to granny investors based on fraudulent valuations. Crossholdings serve both to inflate NTA and to separate control from ownership, while internal sham transactions and revaluations create fake profits. The annual reports for the cartel members are all fraudulent, signed off on by auditor and cartel associate KS Black & Co.

http://www.asx.com.au/asxpdf/20130327/pdf/42dxsx707l7qm6.pdf
http://www.asx.com.au/asxpdf/20130327/pdf/42dxs97k57mjsn.pdf
http://www.asx.com.au/asxpdf/20130327/pdf/42dxt17ly8xrn1.pdf
http://www.asx.com.au/asxpdf/20130327/pdf/42dxqh5rtl622y.pdf
http://www.asx.com.au/asxpdf/20130327/pdf/42dxqq38164t3g.pdf

The above figure shows crossholdings as disclosed in the cartel's latest fraudulent annual reports. True crossholdings are likely to be substantially higher, given hidden holdings through shell companies. These crossholdings are in and of themselves prima facie evidence of securities fraud, as directors using shareholders funds to build crossholdings with related parties are breaching their fiduciary duty, irrespective of whether such fraud is disclosed or not.